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TP adjustment on Corporate guarantee

1. [TS-208-ITAT-2014(CHNY)-TP]

Transfer of shares in subsidiary, by way of 'gift', to an overseas step down subsidiary (in Cayman Island), not taxable as capital gains u/s 45; Such transfer 'without any consideration', a gift and eligible for exemption u/s 47(iii); Sec 47(iv) or (vi) deal with situations arising out 'contractual' obligations, not applicable to 'gift', thus, transferee company being non-Indian irrelevant; Company entitled to make 'gift' and law doesn't prescribe that only natural persons can make gift on the ground of “love and affection”; Invokes B.C. Srinivasa Setty principle, Sec 48 computation mechanism fails in share transfer without consideration; Arm's length price (ALP) computation u/s 92 dependent on income arising from international transaction; ALP computation doesn't extent to gift of shares since no income arises to assessee; Deletes TP adjustment on corporate guarantees considering facts & Delhi ITAT ruling in Bharti Airtel Ltd.; Guarantee provided by assessee does not have any bearing on profits, income, loss or assets of the assessee & not an international transaction post amendment by Finance Act, 2012 : Chennai ITAT

2. [TS-309-ITAT-2014(Mum)-TP]

ITAT holds corporate guarantee as ‘international transaction’ having impact on assessee's income and expenses; Distinguishes Bharti Airtel ruling, Delhi ITAT excluded gurantee transaction from purview of international transaction on finding that such transaction has no effect on profits, income, losses or assets, which was different from assessee's facts; Assessee had charged 0.5% commission to Dubai based AE, and under an independent ‘letter of credit’ arrangement paid 0.6% commission to ICICI Bank; Restores ALP computation of guaranteecommission in light of earlier ITAT directions in assessee’s own case; Deletes TP addition on interest charged on loan advanced to AEs, LIBOR appropriate for benchmarking loans denominated in foreign currency : Mumbai ITAT

3. [TS-224-ITAT-2014(DEL)

Quashes Revenue's re-assessment appeal, assessment for AY 2002-03, 2003-04 and 2004-05 framed prior to conducting search u/s 132 of the Act; In absence of any incriminating material brought on record, TPO wholly unjustified to review his own acceptance of assessee's TP report; Corporate guarantee rate of 1% as charged by assessee fair & reasonable, reliance placed on ITAT rulings in Nimbus Communication & Reliance Industries; TPO erred in summarily applying interest rate of 13.49% from CRISIL, a hardcore financial institution, whose primary purpose is to advance funds with commercial consideration to earn interest; Holds LIBOR as reasonable and scientific uncontrolled comparable to assessee's loan transaction : Delhi ITAT

4. [TS-167-ITAT-2013(Mum)-TP]

Confirms guarantee commission adjustment for providing guarantee for bank loans granted to AE; Guarantee provides clear benefit to AE, thus assessee required to be compensated at ALP; ALP determined @ 0.5% against TPO's determination of 1.5%; Mumbai ITAT ruling in Everest Kanto Cylinder preferred over French Court ruling in Societe Carrefour; TP adjustment on interest on overdue balance with AE deleted; Reliance placed on ruling in own case : Mumbai ITAT

5. [TS-260-ITAT-2013(Mum)-TP]

Confirms guarantee commission adjustment at 0.38%; Providing guarantee to bank for loan to AE falls within definition of “international transaction”; Cost of interest on advance received from AE considered for determining ALP of commission paid to AE ; Upheld export commission adjustment considering average commission paid to third parties as CUP; Follows earlier ITAT order in assessee's own case; Deleted adjustment on account of consultancy services and restored matter on charter hire charges to AO : Mumbai ITAT

6. [TS-76-ITAT-2014(DEL)-TP]

ITAT says issuance of corporate guarantees by Bharti Airtel to lender bank for its AE did not constitute ‘international transaction’ u/s 92B; Corporate guarantee issued for AE's benefit, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of enterprise; Where transaction has no bearing on profits, incomes, losses or assets of such enterprise, it will be outside ambit of expression ‘international transaction’; Explanation to Sec 92B as amended by Finance Act, 2012 does not alter basic character of definition of ‘international transaction’ u/s 92 B; Pre-condition about impact on profits, income, losses or assets of such enterprises embedded in Sec 92B(1); Deeming fiction cannot be read into "share capital subscription transactions", when character as such not in dispute; Rejects TPO's contention that the same be treated as partly of nature of interest free loan on ground that there has been a delay in allotment of shares; Also, deletes addition of Rs 5700 crores on account of accounting adjustments arising on transfer of infrastructure business under High Court scheme; Tribunal expresses deep dis-satisfaction with assessment proceedings, observes case before us " appears to be in the category of a wholly frivolous, and simply indefensible, addition to the income returned by the assessee" : Delhi ITAT

7. [TS-68-ITAT-2014(Mum)-TP]

ITAT directs AO to re-compute ALP of guarantee commission @ 0.5%; Allocation of expenses between 80-IB unit & non-eligible units based on turnover held reasonable; Reliance placed on ITAT ruling in assessee’s own case : Mumbai ITAT

8. [TS-3-ITAT-2014(Mum)-TP]

TP adjustment on account of guarantee commission fee upheld; ALP of guarantee fee calculated based on comparable figures provided by the assessee itself; Rejects assessee’s contention that only HSBC India’s rate of 0.75% should be considered; Assessee failed to point out any defect with respect to rate adopted by the TPO; Additions were made for disallowance of guarantee charges paid to bank towards loan availed by AE, interest on such amount not recovered from AE and consideration for extending guarantee @ 2.08% of guarantee amount : Mumbai ITAT

9. [TS-297-ITAT-2013(Mum)-TP]

ITAT deletes TP adjustment for guarantee commission; Commission charged to AE @ 0.20% is at arm's length, considering internal CUP based on rates charged by banks to assessee of 0.20% to 0.35%;When internal CUP is available, it is to be first analysed and examined; Rate obtained by mere relying on market data without carrying out any comparability analysis of actual transactions, can't be applied in a blanket manner; Reliance placed on earlier ruling in assessee's own case : Mumbai ITAT

10. [TS-128-ITAT-2014(HYD)-TP]

ITAT directs AO to recompute adjustment by adhering to directions of DRP; Every direction issued by DRP binding on AO u/s 144(10); DRP directed AO to restrict TP addition to global profits earned by the Group; TPO had proposed adjustment on assessee's international transaction with its subsidiary, which exceeded consolidated profit of Group; ITAT admits additional ground raised by assessee claiming that Group's consolidated financial result was loss & AO had failed to give effect to DRP direction : Hyderabad ITAT

11. [TS-104-ITAT-2014(HYD)-TP]

Corporate guarantee within scope & ambit of international transaction, post retrospective amendment to Sec. 92B; Earlier order in assessee’ s case passed prior to amendment to Sec.92B, no longer holds good, follows Mahindra & Mahindra ruling; Rate of 3.75% applicable to bank guarantee, cannot be applied to corporate guarantee, directs fresh ALP determination; Loan to AE being international loan, ALP to be determined on LIBOR + percentage point basis; Infosys & Wipro not comparable to assessee's software development service owing to their size, turnover, brand value, scale of operation, diversified activities & ownership of intangibles : Hyderabad ITAT

12. [TS-351-ITAT-2013(Mum)-TP] 

Subsidiary set-up outside India for raw material procurement, using off-shore funding model, not a mere 'raw material supplier'; Subsidiary a body and soul of assessee abroad functionally and financially; TP disallowance for reimbursement by assessee of finance expenses incurred by overseas subsidiary for raising low-cost funding, set-aside & matter remanded back to TPO; Assessee and TPO should demonstrate if final price of raw material imported by assessee (via subsidiary) including reimbursement for funding cost is competitive vis-a-vis procurement in open market . ITAT rejected TPO's approach in accepting international transactions involving payment of cost for import of raw materials, rejecting reimbursement of finance cost of Rs 17.81 Cr and no non-charging of corporate guarantee commission’ on MKR. : Mumbai ITAT

13. [TS-329-ITAT-2013(Mum)-TP]

Bank guarantee Rates (BGR) vs corporate guarantee Rates (CGR) - Differ substantially to effect the price -Adjustments are called for under section 10B(1) ITAT approves guarantee commission fee @ 0.53% and 1.47% charged by assessee (Glenmark Pharmaceuticals Limited) in connection with bank loans and L/C facilities; Bank guarantee rates adopted by TPO are IUPs (i.e. Incomparable Uncontrolled Prices) and cannot be used to benchmark corporate guarantee prices; ITAT explains distinction between corporate guarantee and bank guarantee; Naked bank guarantee quotes given on public websites not good external CUPs unless they are adjusted as per Rule 10B to factors like risk profile of respondents for guarantee, financial position of applicants, quantum of amount, terms of guarantee, etc; Rejects use of guarantee commission rates available on websites of Bank of India, Allahabad Bank, HSBC, EXIM Bank-USA and Rabo India Finance P Ltd; ITAT notes various rulings on guarantee commission and concludes that assessee's rates are competent vis-a-vis facts of present case; Technimont ICB ruling an aberration and background facts distinguishable : Mumbai ITAT

14. [TS-241-ITAT-2014(CHANDI)-TP]

Rejects assessee’s combined TNMM for all transactions, “service fee” paid by assessee to AE is different “class of transaction”; Role of TPO only to determine ALP, cannot reject entire payment under provisions of Sec 92CA, follows Delhi HC's EKL Appliances ruling; Upholds assessee’s benchmarking of intra-group services as a whole relying on OECD guidelines, no requirement to separately identify each service; Accepts assessee's formula of cost allocation based on gross value added and invested capital; Assessee also received financial benefits like saving in interest cost, better terms of finance due to guarantee, letter of credit issued by AE; Assessee not right in transferring 100% of benefit to AE, directs AO/TPO to disallow 50% of benefit after providing opportunity to assessee for determination of total financial benefit arising in respective years : Chandigarh ITAT

15. [TS-251-HC-2014(AP)-TP]

HC allows deduction for 'guarantee commission' u/s 37 paid by State Financial Corporation to the State Government; Guarantor exposed to the liability in case of default by borrowers; HC equates guarantee commission with insurance premium to cover risk; Also, reverses Tribunal's conclusion that such payment was against the provisions of State Financial Corporations Act, 1951 : Andhra Pradesh HC

16. [TS-229-ITAT-2013(Mum)-TP] Confirms guarantee commission adjustment for providing bank guarantee for loans to AE; Relies on earlier Tribunal decision in assessee's own case; AO to restrict the TP adjustment by re-computing the guarantee commission, considering 0.5% as ALP; Deletes addition on account of notional interest on outstanding trade balances from AE's, based on earlier ITAT ruling : Mumbai ITAT

17. [TS-167-ITAT-2013(Mum)-TP]

Confirms guarantee commission adjustment for providing guarantee for bank loans granted to AE; Guarantee provides clear benefit to AE, thus assessee required to be compensated at ALP; ALP determined @ 0.5% against TPO's determination of 1.5%; Mumbai ITAT ruling in Everest Kanto Cylinder preferred over French Court ruling in Societe Carrefour; TP adjustment on interest on overdue balance with AE deleted; Reliance placed on ruling in own case : Mumbai ITAT

18. [TS-737-ITAT-2012(DEL)]

Discharge of corporate guarantee by directly remitting money to the bankers, non-taxable capital receipt for assessee (Luxor); Guarantee advanced by US parent of JV shareholder; However, amount directly credited to assessee’s P&L a/c for repayment of other loans taxable as revenue receipt; Waiver of loan advanced by US parent of JV shareholder under the External Commercial Borrowing scheme to be re-examined by AO, purpose of loan taken to determine taxability of waiver amount : Delhi ITAT

Rupesh Srivastava
Email: ropsrivastava@gmail.com


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Rupesh Srivastava
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