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Judgment
The aforesaid appeal has been filed by the assessee against the final assessment order dated 31.07.2017, passed under section 144C(3) read with section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) in pursuance of the direction given by the ld. Dispute Resolution Panel (DRP)-2, New Delhi for the assessment year 2013-14.
In various grounds of appeal, the effective issue which has been raised is with regard to firstly, the DRP has erred on law and fact in upholding the action of the TPO for enhancing the income of the assessee by Rs.72,54,000/- by making transfer pricing adjustment on guarantee commission @ 4.65% as against ‘nil’ shown by the assessee; and secondly, TP adjustment of Rs.63,31,572/- on account of interest receivables on loan given to AE by applying the rate of LIBOR + 550 BPS on interest free loans advances to Associated Enterprises (AES). The other grounds have not been pressed or argued.
Facts in brief are that the assessee company is engaged in the business of international freight forwarding by air freight services, sea freight services, international railway services and transportation. The main dispute regarding the transfer pricing adjustment in the international transaction with AE was with regard to providing guarantee to AE, Transpole Logistics, Singapore which was as under :-
AE
Nature of Business Transaction
Amount as shown in the TP analysis
(Rs.)
Amount reflected in the Books of
Accounts (Rs.)
Transpole Logistics, Singapore
Stand By
Letter of
Credit (Guarantee)
60,00,000
15,60,00,000
The assessee has provided guarantee to enable SBI Singapore to lend working capital loan to subsidiary, Transpole Logistics Pte Ltd., Singapore, for which it was stated that it has not incurred any cost for issuing guarantee nor has charged any commission from its subsidiary. In the TP analysis, it was stated that there was no impact on the profit, income, loss or assets of either of the company on account of providing guarantee. However, ld. TPO, after detailed discussion, called for corporate guarantee external CUP and called for data from various banks u/s 133(6) which are as under :-
Sl.No.
Name of Bank
Bank Guarantee rates
1
Syndicate Bank
2.50%
2
SBI
1.30%
3
Punjab & Sind Bank
3%
4
Indusland Bank
2%
5
South Indian Bank
3.40%
6
Federal Bank
3%
7
PNB
3%
8
Karur Vysya Bank
3%
Average
2.65%
Accordingly, he made adjustment by taking arm’s length of computation of commission of the corporate guarantee fee in the following manner :-
AE
Nature of Business Transaction
Amount reflected in the Books of Accounts
(Rs.)
Rates of Commission/ Charge/Fee earned by the
assessee
Arms Length Rate of
Commission/ Charge/Fee
Adjustment (Rs.)
Transpole Logistics, Singapore.
Stand By
Letter of Credit provided (Guarantee)
15,60,00,000
Nil
4.65%
72,54,000
Thereafter, ld. TPO noted that assessee has provided loans to various AEs in the previous years but no interest has been charged, the details of which are as under :-
Transpole Container Lines
Ltd., India
Loan
Advanced
Opening –
5,93,72,229
Closing –
5,09,93,554
39,93,500
5,53,78,729
Transpole Logistics, Singapore
-
2,22,36,500
2,22,36,500
Transpole Logistics, Malaysia
-
Opening –
1,24,26,000
1,24,26,000
Transpole Logistics, Malaysia
-
Opening
91,74,600
Closing – Nil
91,74,600
Transpole Logistics, Malaysia
-
Opening – Nil
Closing –
1,31,68,100
1,31,68,100
Transpole Logistics
Holdings, Hongkong
-
Opening
1,26,50,000
Closing –
4,85,21,000
4,85,21,000
The ld. TPO had taken US LIBOR + 550 basis points for benchmarking the interest and applied 6% interest rate to make the adjustment and computed in the following manner :-
AE
Nature of Business Transaction
Amount as shown in
the TP
analysis (Rs.)
Amount reflected in the Books of Accounts
Difference
Rate of interest
Amount in (Rs.)
Transpole Logistics, Singapore
Stand By
Letter of
Credit (Guarantee)
60,00,000
156000000
9600000
4.65%
7254000
Transpole Container Lines Ltd.
Loan advanced
Opening 5,93,72,229
Closing –
5,09,93,554
39,93,500
55182892
12.86%
7096519.8
Transpole
Logistics, Singapore
-
2,22,36,500
22236500
6%
1334190
Transpole
Logistics,
Hongkong
-
Opening –
1,24,26,000
Closing Nil
12426000
6%
745560
Transpole
Logistics,
Malaysia
-
Opening –
91,74,600
Closing-Nil
9174600
6%
550476
Transpole
Logistics,
Korea
-
Opening-Nil
Closing –
1,31,68,100
13168100
6%
790086
Transpole
Logistics
Holdings,
Hongkong
-
Opening –
1,26,50,000
Closing –
4,85,21,000
48521000
6%
2911260
Total
2,06,82,092
Before us, ld. Counsel for the assessee on the issue of guarantee commission, apart from stating that it was not an international transaction and there is not an impact on the profit, income, loss or assets of either of the company due to this transaction based on certain judgments cited before us, ultimately agreed that commission on corporate guarantee as charged by the TPO is much higher. It was stated that, now there are umpteen numbers of judgments wherein it has been held that bank rates cannot be considered as a comparable arm’s length rate to corporate guarantee rate, for which reliance was placed on the following decisions where 0.5% guarantee commission has been held to be reasonable :-
S.
No.
Case law
Citation
Rate
1
Dabur India Ltd. vs. ACIT
TS-82-ITAT-2021(DEL)-TP
0.30%
2
Manugraph India Ltd. vs.
DCIT
TS-113-ITAT-2015(MUM)-TP
0.50%
3
Everest Kanto Cylinders vs.
DCIT
58 taxmann.com 254 (BOM HC)
0.50%
4
Asian Paints Ltd. (upheld by
TS-297-ITAT-2013(MUM)-TP
0.20%
Bombay HC)
5
Thomas Cook (India) Ltd.
(2016)
69 taxmann.com 443 (Mumbai
Trib.)
0.50%
6
Godrej Household Products
Ltd. (2014)
41 taxmann.com 386 (Mum.-
Trib.)
0.50%
7
Nimbus Communication Ltd.
42 taxmann.com 139 (Mum)
0.50%
8
M/s. Reliance Industries
Ltd.
TS-260-ITAT-2013 (MUM)-TP
0.38%
9
Prolifics Corporation Ltd.,
Hyderabad
ITA No.237/Hyd./2014
0.53%
On the issue of interest, ld. counsel for the assessee submitted that TPO/DRP has added higher rate of interest i.e. LIBOR + 550 BPS for calculating interest on loan to subsidiaries and stated that suitable benchmark is only to be taken as LIBOR as held by Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd. 55 taxmann.com 523. In any case, it is stated that if at all, in order to take risk adjustment, at best it would be added at 2% and not 5.5% as has been held in the case of Tata Autocomp Systems Ltd. 374 ITR 516. He further relied upon the following judgments wherein following rates have been applied :-
S.No.
Case Law
Citation
Rate
Established
1
Aithent Technologies Pvt. Ltd.
TS-8-ITAT-2021 (DEL)-TP
Libor + 1.7%
2
Aithent Technologies Pvt. Ltd.
ITA No.6076/Del/2016
Libor + 1.7%
3
Manugraph India Ltd. vs. DCIT
TS-113-ITAT-2015 (MUM)-TP
Libor + 2%
4
ACIT VS. CCL Products Ltd.
ITA 192 7 193/Vizag/2017
2% interest considered at
arm’s length
5
Siva Industries & Holdings Ltd. vs. ACIT
(2012) 145 TTJ 197 (Chennai)
Libor+ 1.58%
6
UFO Moviez India Ltd.
[TS-883-HC-2016 (DEL)-TP]
Libor+ 2.47%
7
Everest Kanto Cylinders vs. DCIT
ITA No.550/Mum/2014
Libor + 2%
8
PMP Auto Components P. Ltd.
ITA No.1484/Mum/2014
Libor + 2%
9
Tata Autocomp Systems Ltd.
374 ITR 516/56 taxmann.com 206
Euribor+0.8%
10
Kohinoor Foods Ltd.
(2014) ITA
Nos.3688-3691/Del/2012
Libor + 0%
On the other hand, ld. DR for the Revenue strongly relied upon the order of the DRP stating that detailed reasoning has been given for confirming the TPO action.
We have heard the rival submission and also perused the relevant finding given in the impugned orders. The controversy before us which has been argued by the parties is limited to, whether how much guarantee commission should be charged for providing guarantee to AE and how much interest should be charged on the loan given to AEs. Insofar as guarantee commission is concerned, admittedly assessee has not shown any commission, however the argument that guarantee commission of 4.56% charged by the TPO is on higher side and external CUP for using the data from the guarantee profit by the bank cannot be used in intra-group guarantees appears to be acceptable on the facts of the case. We find that there has been consistent view by various Benches of the Tribunal and
Hon’ble Bombay High Court in the case of Everest Kanto Cylinders 58 taxmann.com 254 and Glenmark Pharmaceuticals Ltd. 43 taxmann.com 191 (supra)wherein 0.5% of the guarantee commission has been held to be at arm’s length. Accordingly, respectfully following the aforesaid decisions which is also in consistent with various decision of the coordinate Benches of the Tribunal as cited supra, we hold that the guarantee commission of 0.5% will be at arm’s length and accordingly, TPO is directed to make the adjustment for taking the guarantee commission @ 0.5%. Accordingly, grounds no.1 & 2 are partly allowed.
Insofar as the issue of adjustment on account of interest, the TPO/DRP has held that LIBOR + 550 BPS on interest free loan advanced to AEs should be at arm’s length price. It is not in dispute that assessee has not charged any interest on loan given to foreign AEs. Application of LIBOR should be a suitable benchmark which also has been admitted by the TPO. However, he has added 5.5% over and above LIBOR which on the facts and circumstances of the case is much higher. Looking to the fact that in most the cases, the coordinate Benches of the Tribunal have held that 1 to 2% is sufficient over and above the LIBOR rate to meet the arm’s length price. Accordingly, we direct TPO to apply LIBOR + 2% for benchmarking the interest rate which should meet the arm’s length price. Accordingly, grounds no.3 & 5 are partly allowed.
Ground no.4 is not pressed, hence the same is dismissed as not pressed.
In the result, the appeal filed by the assessee is partly allowed.