Income Tax Appellate Tribunal - Mumbai
Il & Fs Technologies Ltd, Mumbai vs Asst Cit Cir 14(2)(1), Mumbai on 27 February, 2019
आयकर अपील य अ धकरण, मंब ु ई यायपीठ, 'के',मंब ु ई।
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "K", MUMBAI Before Shri G. MANJUNATHA, Accountant Member and Shri RAVISH SOOD, Judicial Member, ITA Nos.4469 & 1551/Mum/2016 Assessment Year: 2010-11 & 2011-12 IL & FS Technologies Limited, Addl. CIT The IL & FS Financial Centre Range-10(1), Plot No.C-22, G-Block, Bandra बनाम/ Mumbai Kurla Complex, Bandra (East), Vs. Mumbai-400051 ( नधा रती /Assessee) (राज व /Revenue) P.A. No.AAACD2042C नधा रती क ओर से / Assessee by Shri Atul Ninawat & Shri Anil Mandowara राज व क ओर से / Revenue by Shri Rajneesh Yadav ु वाई क तार ख / Date of Hearing :
सन 06/12/2018
27/02/2019
आदे श क तार ख /Date of Order:
आदे श / O R D E R
Per G. Manjunatha, (Accountant Member)
The assessee has filed appeal for AY 2010-11 against order of the Ld. CIT(A) -56, Mumbai, dated 22/03/2016, challenging the findings of the Ld. CIT(A) in confirming the additions made by the AO towards corporate guarantee. The assessee also filed another appeal against the direction of the DRP-1, Mumbai, u/s 144 C of the Act for AY 2011-12, challenging the findings of the Ld. DRP in confirming the action of the AO in making 2 IL & FS Technology Limited addition towards commission on corporate guarantee. Since, both appeals pertains to single assessee and also issues involved in both appeal are common, for the sake of convenience, these appeal were heard together and are disposed of by a consolidated order. The assessee, has taken more less common grounds of appeal for both assessment years. For the sake of brevity, grounds of appeal taken for the AY 2010-11 in ITA No. 4469/Mum/2016 are reproduced hereunder:-
1. The order of the Learned Assessing Officer is bad in law and on the facts and circumstances of the case.
2. That the Ld. Assessing officer (AO) erred on facts and in Law in proposing an aggregate addition/adjustments of Rs. 31,41,729/- to the arm's length price of the 'international transactions' pertaining to providing of performance guarantee/ bond/standby letter of credit on behalf of the Associated Enterprise in Philippines on the basis of the order passed under section 92CA(3) of the Act by the Ld. Transfer Pricing Officer (TPO)
3. The Ld. AO/TPO erred on facts and in law in disregarding that:
a) The issue of corporate/performance guarantee to AE does not qualify to be an international transaction under the TP regulations.
b) Provision of corporate/performance guarantee on behalf of the Associated Enterprise was not having any bearing on profits, income, losses or assets of the assessee company. The impact on the profits has to be on the real basis whether in the present or future and not on contingent or hypothetical basis.
c) In the provision of guarantee on behalf of the Associated Enterprise, no substantial costs have been incurred and moreover, the guarantee is a type of zero cost, strategic investment for the ultimate sole business interests of the assessee which were duly compensated in the form of high profit margins of the assessee company.
d) That the guarantee provided is incidental to the business of the assessee company and hence cannot be compared to the transaction of providing guarantee by the bank. The factors/consideration which applies for the issuance of a corporate/performance guarantee is distinct and separate from that of bank guarantee.
e) By assuming that credit worthiness of the AEs was highly inadequate and the loan was advanced owing to the guarantee given by assessee. As already stated, the guarantee was issued as part of shareholder's function and in no way implies inadequacy of credit worthiness on behalf of its AEs.3
IL & FS Technology Limited
4. The Ld. AO/TPO erred on facts and in law by segregating the Iumpsum amount of guarantee arid disallowing a part of it based on some presumptions without giving any reasonable justification.
5. The Ld. AO/TPO erred on facts and in law in imputing commission @ 1.04% on the basis of data allegedly obtained from various banks under section 133(6) of the Act without appreciating that the same did not constitute valid CUP data and without providing any adequate opportunity of being heard on the same.
6. The Ld. AO has erred in law and on the facts of the case in initiating penalty proceedings for concealment of income/ furnishing inaccurate particulars of income u/s 271(1)(c) of the Income Tax Act, 1961; whereas the appellant has truly and fully disclosed all material facts and documents during the assessment proceedings.
7. That the above grounds are without prejudice to each other.
2. The brief, facts of the case are that the assessee is a part of M/s Infrastructure Leasing & Financial Services Ltd. (IL & FS) Group. The assessee is an end to end technology solutions provider offering consulting, software development and facilities management services to global customers. The assessee has a subsidiary M/s Land Registration Systems, Inc Philippines (LARES), wherein, the assessee held 67% of the equity shares. LARES was established primarily to design, develop, construct and finance the Land Titling Computerization Project of the Land Registration Authority (LRA) of Philipines. LARES subcontracted work from the project to the assessee by entering into integration and software development services agreement dated 04/08/2007 for total consideration of USD 41.4 millions (41,40,00,000/- ). Since, the assessee was vender to LARES, it was required to provide performance bond of PHP 32.45 million under clause 10(c) of the aforementioned integration and software development service agreement. LARES obtained a loan for PHP 2900 million equivalent to INR Rs.319 crores and entered into the omnibus loan and security agreement on June 18, 20018. Under subsequent 4 IL & FS Technology Limited amendment to the aforesaid loan agreement, LARES was required by the lenders to provide good and sufficient performance bond to ensure completion of the project. The required performance bond was arranged by the LARES from Asia United Bank and PNB General Insurance Co. Inc. Philipines for PHP 294.5 Million and 105.5 million respectively. In turn, the assessee issued corporate guarantee in favour of Asia United Bank and PNB General Insurance Co. Inc. for an amount equivalent to performance bond issued by Asia United Bank and PNB General Insurance Co. Inc.
3. During the relevant years, the assessee has reported following international transactions with its AEs:-
For the AY 2010-11 (TABLE-1) S. Associated Description of Method(s) used Transaction No. Enterprise transaction Value (INR) 1 LARES Providing TNMM 69,93,33,976 technical services to LARES 2 IL & FS Reimbursement Since reimbursement 1,327,802 Technologies of expenses is on actual cost basis, Philipines Inc. the same is on Arm's Length Price
3. IL & FS Interest income CUP 4,48,11,465 Technologies Philipines Inc. For the AY 2011-12 (TABLE-2) S. Associated Description of Method(s) used Transaction No. Enterprise transaction Value (INR) 1 Land Providing TNMM 38,77,54,360 Registration technical Systems, Inc. services by appellant co.
2 IL & FS Providing TNMM 3,01,51,019
Technologies technical
5
IL & FS Technology Limited
Philipines Inc. services by
appellant co.
3. Land Interest on TNMM 2,56,41,645
Registration delay payment
Systems, Inc. of services
4. IL & FS Interest income CUP 32,53,42,265
Technologies on loan
Philipines Inc. extended
5. Land Appellant Since reimbursement 68,32,706
Registration incurred is on actual cost basis,
Systems Inc. certain the same is on Arm's
expenses on Length Price
behalf of LARES
4. The TPO vide his order dated 30/11/2013 and 27/01/2015 for the AY 2010-11 and 2011-12 respectively accepted the international transactions, mentioned in Table No. 1 and 2above to be at Arm's Length Price but, he made additions amounting to Rs.31,41,729/- and Rs.38,22,437/- on account of guarantee given by the assessee to PNB General Insurance Co. and Asia United Bank on behalf of LARES for AY 2010-11 and 2011-12 respectively. While making additions, the TPO reduced the amount of performance guarantee that assessee was required to provide to LARES under clause 10(c) of the aforementioned integration and software development services agreement in order to determine ALP of the transactions for AY 2010-11. The Ld. TPO had collected the information regarding performance guarantee by making enquiry u/s 133(6) of the Act from various banks and arrived at a mean margin of 1.04% per annum and applied the said rate on total corporate guarantee given by the assessee and made addition of Rs.31,41,729/- for the AY 2011-12. The Ld. TPO adopted the same average guarantee commission rate as was determined in the order of TPO for AY 2010-11.6
IL & FS Technology Limited
5. Aggrieved by the order of the TPO, the assessee preferred an appeal for AY 2010- 11 before the Ld. CIT(A) and for the AY 2011-12, the assessee filed its objection before the Ld. DRP. The Ld. CIT(A) and DRP for AY 2010-11 and 2011-12 respectively sustained the additions made by the TPO towards guarantee commission @ 1.04% on corporate guarantee given to Asia United Bank and PNB General Insurance Co. Inc. on behalf of LARES. The observations of the Ld. CIT(A) for AY 2010-11 are as under:-
"8. Decision Since the grounds of appeal as raised by the appellant in Ground No. 01 to Ground No.06 are inter related they are taken up together. I have carefully considered the written submissions made by the appellant vis-à- vis the observations of the AO/TPO in this regard. The grounds of appeal are decided hereunder:-
The appellant in the above grounds have contested the action of the Assessing officer in making adjustments of Rs. 31,41,729/- to the arm's length price of the 'international transactions' pertaining to providing of performance guarantee/bond/ standby letter of credit on behalf of the Associated. Enterprise in Philippines on the basis of the order passed under section 92CA(3) of the Act by the 1,d. Transfer Pricing Officer (TPO). Such addition was made by the ITO by relying on the basis of the information obtained by him by issuing notice u/s 133(6) of the Act since the documents were not available in public domain.
* An upward adjusitnent is made at the rate of 1.04% on the basis of the data obtained, from various banks by him u/s 133(6) of the Act. The appellant however contested that TPO by applying any incomparable rate of 1.04% which is not only -too high but is applicable in the case of commercial banks whose functions, assets, risks (FAR) profile is significantly different from the FAR of the appellant without taking into account of the borrowing capacity or the benefit derived by the borrower.
The said objection is directed against adjustment of Rs. 31,41,729/- made by the TPO in respect of commission towards guarantee of Phillipine Peso 400 million (Rs. 383 .million) issued by the assessee on behalf of LARF,S (its AB).
It is now settled position of law that corporate guarantee provides a benefit to the AE and therefore guarantee fee is to be charged from the All As per the amended provision of Sec. 928(1) Explanation (c), any type of guarantee constitutes a international transaction. In the present case, the assessee had issued financial guarantee/ surety/ indemnity for not less than Phillipine Peso 400 million in aggregate to M/s PNB General Insurers Co. Inc. Phillipine Peso 105,5 million and M/s Asia United Bank Phillipine Peso 294.5, million in connection with the issue of combination of Performance Bond/ Surety Bond by/ on behalf of M/s Land 7 IL & FS Technology Limited Registration Systems Inc. Phillipines (LARES), a subsidiary of the assessee. The appellant claimed that the adjustment made by the TPO was not appropriate because issue of performance guarantee is not an International Transaction, therefore no guarantee is chargeable. Moreover, it is a part of contract obligation and shareholder activity along with an additional reason of commercial prudence. On the other hand, it has been pointed out by the TPO that performance guarantees issued by the assessee should not be-v4 compared with the bank guarantee because bank guarantee is secured against assets whereas a financial guarantee issued by the appellant is not. Thus, risk taken in issuing an unsecured financial guarantee by the appellant is much higher. Thus, the mean of guarantee rates charged by the bank cannot be taken as CUP but can be considered as a guide for benchrnarking the unsecured guarantees issued by the appellant. Looking into the mean of the secured guarantee rates and considering the fact that the appellant has issued unsecured performance guarantee, I am of the opinion that the guarantee commission of 1.04% as determined by the TPO is very much reasonable. On verifying the contention as made by the TPO, I find substance in the arguments as made by the TPO. Accordingly, the adjustment as made by the TPO is upheld. As a result of the above discussion, this ground of appeal is dismissed."
5. The Ld. DRP has also confirmed the findings of the TPO for AY 2011-12 and relevant findings of the DRP are as under:-
2.3 Discussions and Directions of DRP:
We have considered the submission made by the assessee and the reasons recorded by the AO/TPO. Various grounds of objection raised by the assessee are decided as hereunder -
2.3.1 The first ground of objection is general in nature and does not require a separate decision 2.3.2 Grounds No. 2 to 6 are related to each other and they are directed against adjustment of Rs. 38,22,437/ made by the TPO in respect of commission towards guarantee of Phillipine Peso 400 million (Rs. 383 million) issued by the assessee on behalf of the Associated Enterprise in Phillipines (LARES). it is now settled position of law that corporate guarantee provides a benefit to the AE and therefore guarantee fee is to he charged from the AE. As per amended provision of Section 926(1) Explanation (c), any type of guarantee constitutes an international transaction. A reference is hereby made to the order of ITAT, Mumbai In the case of Mahindra & Mahindra Ltd. V ACIT(2013) 40 taxmarrn,com 522 (Mumbal-Trib.), in this case, the TPO had adopted 4.66 % as arm's length guarantee commission rate. The taxpayer submitted that 3 per cent may be adopted as arm's length guarantee commission rate. The [TAT accepted the contention of the taxpayer. Further in the case of Tecnimont ICB Pvt. Ltd. v DOT TS251-lTAT2013(Mum)TP, the ITAT upheld that addition made by the TPO for guarantee commission @ 3 per cent on the ground that the taxpayer has not submitted any contradictory evidence to suggest that the rate applied by the TPO was not appropriate. Similarly, in the case of Technocraft Industries (Ind) Ltd v Ad CIT TS- 3-ITAT-2014 (Mum)-TP, the TPO computed 8 IL & FS Technology Limited ALP of guarantee commission @ 2.08 per cent being average of rates charged by various banks. The average was as per details provided by the taxpayer.
The ITAT observed that the taxpayer has not pointed out any defect in the TPO's analysis for computation of ALP. Therefore, the addition of guarantee commission @ 2.08% was sustained.
2.3.3 In the present case also, the assessee had issued financial guarantee/ surety/indemnity for not less than Phillipine Peso 400 million (Rs. 383 million) in aggregate to MIs PNB General Insurers Co. Inc. Phillipine Peso 105.5 million and lvlis Asia United Bank Phillipine Peso 294.5 million in connection with the issue of a combination of Performance Bond/Surent Bond by /on behalf of M/s Land Registration Systems Inc. Phillipines(LARES), a subsidiary of the of the assessee. The assessee has claimed that the rate of 1.04% charged by the TPO is not appropriate because issue of performance Bond is not an international transaction, therefore, no guarantee is chargeable. Moreover, it is a part of contract obligation and shareholder activity. Performance guarantee has been issued on account of commercial prudence. On the other hand, it has been pointed out by the TPO that performance guarantees issued by the assessee should not be compared with the bank guarantee because the bank guarantee is secured against assets whereas a financial guarantee issued by the assessee is not. Thus, risks taken in issuing an unsecured financial guarantee issued by the assessee is much higher. We are in agreement with the TPO on this issue. Bombay High Court has also, in the case of Everest Kento Cylinders Ltd 119 DTR Born (0394), has held that a corporate guarantee cannot be compared with bank guarantee. Hence, mean of guarantee rates, charged by banks cannot be taken as CUP but can be taken as a guide for bench marking the unsecured guarantees issued by the assessee. Looking to the mean of secured guarantee rates and considering the fact that the financial position of other to AE is still weaker and also considering the fact that the assessee has issued unsecured performance guarantees we are of the opinion that charging guarantee commission at the rate of 1.04% by the TPO is very reasonable. Adjustment of Rs. 38,22,437/- made by the TPO is upheld. So far as use by the TPO of information collected under section 133(6) of the IT Act is concerned, there is no bar in use of such information. There is no obligation on TPO to consider data available in public domain only. It is the duty of the TPO to determine the ALP correctly, in accordance with the provisions of law and it can use all powers available to him for this purpose. Reliance is placed in this regard on the decisions of honourable tribunals in the cases of Centillium India (P.) Ltd and Genisys Integrated Systems (Bangalore)."
6. The Ld. AR for the assessee submitted that the Ld. CIT(A) and the Ld. DRP were erred in confirming the addition made towards commission oncorporate guarantee without appreciating the fact that corporate guarantee does not qualify as international transaction. The Ld. AR for the assessee has made three fold arguments in the light of various decisions of Tribunal. The first and foremost arguments of the assessee is that the term guarantee was inserted in the definition of international transaction vide clause (c) of 9 IL & FS Technology Limited explanation inserted in section 92B by the Finance Act, 2012 is perspective in nature although the Finance Act, 2012 stated that the insertion of aforesaid explanation is with retrospective effect from 1st April 2002. In this regard, he relied upon plethora of judicial precedence including the decision of Mumbai ITAT Bench in the cases of Siro Clinpharma Private Ltd. vs DCIT (TS-144-ITAT-2016(Mumbai)-TP). The Ld. AR further submitted that the provisions of guarantee on behalf of the assessee did not have any bearing on profits, income, losses or assets of the assessee, therefore, as per the provisions of section 92B(1), if any international transaction does not have any bearing on profits, income, losses or assets shall not qualify as international transaction which needs to be benchmarked as per the provisions of section 92C of the Act. The Ld. AR further submitted that corporate guarantee was in the nature of share holder activity and the assessee did not incur any expenditure, therefore, benchmarking of inactivity of shareholder without any consideration is not in accordance with provisions of the Act, when the definition has been amended for the first time by the Finance Act, 2012. The Ld. AR further submitted that guarantee given by the assessee not as service to LARES, but to protect own interest because the assessee has derived revenue of 91% and 65% respectively for the AY 2010-11 and 2011-12 from its subsidiary LARES. Since, the majority of revenue is from its subsidiary to facilitate business of such a subsidiary is a paramount importance of the assessee, thus, the guarantee was given in a way to protect assessees own business interest in such subsidiary and any charge for the same would in a way where any charge to the sale for what ultimately arose to the sale which would be illogical. The ld. AR also distinguished the cases relied upon by the Ld. DR by referring to 10 IL & FS Technology Limited the decision of the Ahmedabad ITAT Bench in the case of Micro Inc. Ltd. (2015) 63 taxmann.com 353 to argue that the ITAT has considered various cases laws relied by the Ld. DR to arrive at conclusion that corporate guarantee is not an international transaction before insertion of explanation to section 92B of the Act, by the Finance Act, 2012. The Ld. AR for the assessee alternatively submitted that if at all corporate guarantee is to be considered as international transaction, then the ALP determined by the AO by taking comparable cases of bank guarantee commission charged by the banks as the bank guarantee as well as corporate guarantee are two different transactions and hence commission charged by bank for issuing bank guarantee cannot be the basis for benchmarking transactions in corporate guarantee. He further submitted that a suitable rate may be adopted to determine commission on corporate guarantee. In this regard, he relied upon following judgements:-
i. Siro Clinpharm Pvt. Ltd. V/s. Dy. CIT (TS-144-ITAT-2016(Mum)-TP) ii. EIH Ltd., v/s. CIT [TS-609-ITAT-2017(kol)-TP] iii. Vivimed Labs Ltd., v/s. DCT [TS-498-ITAT-2017(HYD)-TP] iv. Dr. Ready's Laboratories v/s. ACIT [TS-331-ITAT-2017(HYD)-TP] v. Bartronies India Ltd. v/s. DCIT (TS-814-ITAT-2017(HYD)-TP) vi. Autoline Industries Ltd. v/s. DCIT (TS-1000-ITAT-2017(PUN)-TP) vii. DCIT v/s. M/s. EIH Ltd. Ltd. (TS-426-ITAT-2018(Kol) viii. DCIT, Circle-7(1), Kolkata, v/s. M/s. Britannia Industries [TS-1279-ITAT-
2018(Kol)-TP] ix. Bharti Airtel Ltd. v/s. ACIT, Range-2, New Delhi [2014] 43 Taxmann.com 150 (Delhi-Trib.) x. Videocon Industries Ltd. [TS-37-ITAT-2015 (Mum)] 11 IL & FS Technology Limited xi. Redington India Ltd. v/s. JCIT [2014] 49 Taxmann.com 146 (Chennai Trib.) xii. M/s. Aban Offshore Ltd. v/s. DCIT [TS-877-ITAT-2016 (CHNY)-TP] xiii. Manugraph India Ltd. v/s. DCIT [TS-190-ITAT-2016 (Mum)-TP] xiv. Micro Ink Ltd. v/s. ACIT [2015] 63 taxmann.com 359 (Ahmadabad-Trib.) xv. M/s. Tega Industries Ltd. vs. DCIT [TS-780-ITAT-2016 (Kol)-TP] xvi. Suzlon Energy Ltd. vs. ACIT [TS-331-ITAT-2017 (Ahd)-TP] xvii. Suzlon Energy Ltd. vs. DCIT [TS-1089-ITAT-2017 (Ahd)-TP] xviii. DCIT vs. Spentex Industries Ltd. [(2018) 94 taxmann.com 419 (Delhi-Trib.] xix. Bombay Dyeing & Mfg. Co. Ltd., [2017] 87 taxmann.com 2013 (Mumbai-
trib.) xx. M/s. Everest Kanto Cylinder Ltd. vs. DCIT [(2013) 34 taxmann.com 19 (Mumbai-Trib.) xxi. ACIT vs. M/s. Nimbus Communication Ltd. [2013] 34 taxmann.com 298 (Mumbai-Trib.) xxii. Bombay Dyeing & Mfg. Co. Ltd. [2017] 87 taxmann.com 2013 (Mumbai-
Trib.)
7. The Ld. DR on the other hand, strongly supported the order of the Ld. CIT(A) and DRP, and submitted that this issue is already subject matter of deliberations by the jurisdictional High Court Bombay in the case of CIT vs Everest Kentor Cyliders Ltd. 92015) 58 taxmann.com 254 (Bom.) where the Hon'ble High Court held that corporate guarantee issued by holding company for the benefit of its AE, a subsidiary company is international transaction, however, while benchmarking, the commission on guarantee issued by the commercial banks cannot be considered as basis for arriving at a rate. The DR further submitted that the Ld. CIT(A) as well as the Ld. DRP have brought out clear facts to the effect that corporate guarantee issued by the assessee to its subsidiary on AE 12 IL & FS Technology Limited is international transaction which needs to be benchmarked. Accordingly, there is no error in the findings recorded by the Ld. DRP as well as the AO in estimating commission on the corporate guarantee issued by the assessee on behalf of its AEs and their order should be upheld.
8. We have heard both parties, perused the material available on record and gone through the orders of the authorities below. The only solitary issue that needs to be resolved is whether corporate guarantee issued by entity on behalf of its AEs comes within the definition of international transactions before insertion of explanation to section 92B of Act, by the Finance Act, 2012. No doubt the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 01 April 2002 to include the term guarantee within the definition of international transaction. But various benches of the Tribunal have taken view that insertion of explanation to section 92B by the Finance Act, 2012 is considered to be prospective in nature therefore, held that corporate guarantee issued by an entity on behalf of its AEs is not an international transaction and accordingly no need to compute ALP of said transactions. However, we find that the jurisdictional High Court in the case of CIT vs Everest Kentor Cylinder Ltd. (supra) has considered identical issue in the light of provision of section 92B and explanation to come to the conclusion that guarantee issued by an entity on behalf of its AEs a subsidiary is international transactions. However, while benchmarking the rate of commission, no comparison can be made between guarantee issued by the commercial bank as against corporate guarantee 13 IL & FS Technology Limited issued by holding company for benefit for its AE subsidiary company for computing ALP of guarantee commission. The relevant observations of the court as under:-
"The adjustment made by the TPO was based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of corporate guarantee. No doubt, these are contracts of guarantee, however, when they are commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from commercial banks, the higher commission could have been justified. In the present case, it is assessee-company that is issuing corporate guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which apply for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and, accordingly, commission charged cannot be called in question, in the manner TPO has done. The comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion, appeal does not raise any substantial question of law and it is dismissed. [Para 10]"
9. The ITAT, Mumbai in the case of M/s CIT vs Everest Kanto Cylinder Ltd. vs CIT (2013) 34 taxmann.com 19 held that guarantee issued by an entity on behalf of its AEs a subsidiary company is international transaction. The relevant observations of the Tribunal are as under:-
■ While applying these external comparables of the Banks, the TPO has not brought anything on the record that under which terms and conditions and circumstances, the banks have been charging guarantee commission at the rate of 3 per cent.
■ The charging of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a particular client. ■ Even otherwise also the TPO himself has noted that guarantee commission ranges between 0.15 per cent to 3 per cent in case of HSBC. The universal application of rate of 14 IL & FS Technology Limited 3 per cent for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given. Risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration.
■ In the present case, when the assessee has specifically stated that neither it has incurred any cost for providing the guarantee to the bank for loan taken by its subsidiary nor has undertaken any kind of risk, as it was the subsidiary company which has hypothecated its assets against the loan, the TPO has not brought anything on the record to controvert the same. He has proceeded on the premise that there is always a risk in providing the guarantee and some kind of security is needed for giving a guarantee.
■ Such a premise of the Assessing Officer is without basis or material on record. Thus, applying the rate of 3 per cent on the guarantee commission based on external comparables and that to be on naked quota given in the website, is uncalled for in the present case. [Para 20] ■ It was found that in an independent transaction, the assessee has paid 0.6 per cent guarantee commission to ICICI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5 per cent guarantee commission from the AE is quite near to 0.6 per cent, where the assessee has paid independently to the ICICI Bank and charging of guarantee commission at the rate of 0.5 per cent from its AE can be said to be at arms length. The difference of 0.1 per cent can be ignored as the rate of interest on which ICICI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary company) is at 5.5 per cent, whereas the assessee is paying interest rate of more than 10 per cent on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest.
■ Thus, on these facts, there is no reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition on account of TP adjustment on guarantee commission is hereby deleted and the order of the Commissioner (Appeals) is set aside. [Para 21]"
10. In another case, the ITAT, Mumbai Bench in the case of DCIT vs Rolta India Ltd. (101 taxmann.com 40) had taken a similar view in the light of jurisdictional High Court in 15 IL & FS Technology Limited the case of CIT vs Everest Kanto Cylinder Ltd. and held that guarantee issued on behalf of AE subsidiary is international transaction however no comparison can be made between issued by commercial bank and corporate guarantee issued by entity on behalf of its AE subsidiary company while benchmarking the ALP transaction, accordingly estimated 0.5% commission on corporate guarantee.
11. The sum and substance of the ratio laid down by the Hon'ble jurisdictional High Court and also various benches of Tribunal is that corporate guarantee is international transaction which needs to be benchmarked to determine the ALP of said transaction whether or not the assessee has charged any commission on such guarantee. Although, there are divergence view from various bench of Tribunal in the light of Explanation to section 92B of the Act, on corporate guarantee to be not international transaction, but the Hon'ble jurisdictional High Court has taken view that corporate guarantee is an international transaction and accordingly bound by the judicial decision and also to follow the jurisdictional High Court decision, we are of the considered view that corporate guarantee issued by the assessee on behalf of its AE subsidiary company is an international transaction. However, while arriving at rate the AO has taken comparables from commercial banks to at arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the assessee. Since, the jurisdictional High Court in the case of CIT vs Everest Kanto Cylinder Ltd. has considered the issue and upheld the findings of the Tribunal in estimating 0.5% commission on guarantee. We are of the considered view that the Ld. AO as well as the Ld. CIT(a)/DRP 16 IL & FS Technology Limited erred in adopting 1.04% commission on corporate guarantee issued by the assessee for both assessment years. Hence by following jurisdictional High Court decision, we direct the Ld. AO to adopt 0.5% commission on guarantee issued by the assessee on behalf of its AE a subsidiary company, in the result, appeals filed by the assessee for AY 2010-11 and 2011-12 are partly allowed.
Finally, the appeals filed by the assessee for both assessment years are partly allowed.
Order pronounced in the open Court on 27/02/2019
Sd/- Sd/-
(Ravish Sood) (G. Manjunatha)
या!यक सद"य /JUDICIAL MEMBER लेखा सद"य / ACCOUNTANT MEMBER
मब
ुं ई Mumbai; दनांक Dated : 27/02/2019
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f{x~{tÜ P.S //. न.स.
आदे श क $!त&ल'प अ(े'षत/Copy of the Order forwarded to :
1. अपीलाथ" / The Appellant (Respective assessee)
2. #$यथ" / The Respondent.
3. आयकर आय' ु त(अपील) / The CIT, Mumbai.
4. आयकर आय' ु त / CIT(A)- , Mumbai,
5. )वभागीय # त न,ध, आयकर अपील य अ,धकरण, मब ुं ई / DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मब ुं ई / ITAT, Mumbai