ACIT v Nimbus Comunications Ltd [2013] 34 taxmann.com 298 (Mumbai – Trib.)

Facts

• The assessee had given corporate guarantee of US $ 30,00,000 through ICICI Bank, U.K. for a term loan given to its AE namely Nimbus Communication Worldwide Ltd.

• Another guarantee of US $ 1,50,00,000 was given by the assessee to the same Bank for the financial facility given to another AE namely Nimbus Sports International Pte Limited.

• Both these guarantees were given by the assessee without charging any commission on the ground of commercial expediency which, according to the assessee, was to go long way in efficient conduct of business of the said AE thereby resulting in other direct and indirect benefits to the assessee.

• It was also submitted that there was no cost incurred by the assessee for giving the said bank guarantee.

• This stand of the assessee was not found acceptable by the TPO.

• According to him, the assessee was providing a guarantee to the AEs which had a benevolent advantage to the said AEs in obtaining credit facility from bank on better terms and in an arm’s length situation, commission would have been charged for providing a similar guarantee to the bank for the credit facility.

• He accordingly proceeded to determine the arm’s length value of the international transaction involving the provision of guarantee by the assessee to its AEs by applying the Comparable Uncontrolled Price (CUP) method which was considered the most appropriate method.

• In this regard, he found that the HSBC bank was charging commission/fees in the range of 0.15 to 3 of the value of guarantee given to its customer depending upon the risk involved.

• Since the assessee had not given any details of the creditworthiness of the AEs, the arm’s length rate of commission for providing guarantee was taken by the TPO at 1.5% and applying the said rate, he worked out the arm’s length value of commission/fees for providing guarantee by the assessee to its AEs and held that the transfer price adjustment to thatextent was required to be made on account of guarantee commission/fees.

• CIT(A) relying on French Court ruling reduced addition to 0.25% instead of 1.5% by TPO.

• Both assessee and Revenue in appeal to ITAT.

Held

• Commercial expediency cannot be equated with business strategy, which is specific and well laid out.

• A financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which “price” has to be charged.

• Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise.

• There was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm’s length price.

• The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm’s length price.

• The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm’s length price relying on the decision of French Court in the case of Societe Carrefour.

• In the case of M/s Everest Kanto Cylinder Ltd., ITAT while accepting the CUP method as the most appropriate method for benchmarking the guarantee fee, accepted 0.5% guarantee fee/commission to be at arm’s length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSBC Bank in the range of 0.15% to 3%.

• Since the facts involved in the present case are materially similar to the facts involved in the case of Everest Kanto Cylinder Ltd., decision rendered by the co-ordinate Bench in the said case followed in preference to the decision of French Court in the case of Societe Carrefour.

• Accordingly the impugned order of the ld. CIT(A) modified on this issue and the A.O. directed to recompute the commission for guarantee given the assessee to its Associated Enterprises @ 0.5% being the arm’s length

• Revenue’s appeal thus partly allowed whereas assessee’s appeal is dismissed.

Source:taxmann.com