Скачать или смотреть What should be appropriate adjustment rate of corporate guarantee for transfer pricing adjustment?

[2025] 131 ITR (Trib.) 15 (#Hyderabad) A – Bench
#Aurobindo #Pharma Ltd.
V.
Assistant Commissioner of Income-Tax
27.04.2023
Playlist: #92B, #92CA, #Corporate #Guarantee, #35(2AB)
92B: Meaning of international transaction
92CA: Reference to Transfer Pricing Officer
35: Expenditure of scientific research
A.Y: 2018-19/Assessee/Department
Question: What should be appropriate adjustment rate of corporate guarantee for #transfer #pricing #adjustment?
1. The assessee had given a corporate guarantee on behalf of its wholly owned subsidiaries A and H.
2. For the A.Y. 2018-19, in the return filed, the assessee had made a suo moto adjustment at 0.10% on the guarantee amount.
3. However, the T.P.O. proposed a much higher adjustment adopting the average rate of 1.8% based on the rate fixed by Indian bankers for financial guarantees.
4. The D.R.P., however observed that guarantee transaction constituted an international transaction as defined in the explanation to section 92B of the Income-Tax Act, 1961 and required to be bench marked.
5. The Panel considered it appropriate to adopt 1% on the amount guaranteed as corporate guarantee commission.
6. The assessee had outstanding receivables which arose in the course of business on sale of its products.
7. As a common business practice prevailing in the market, the assessee did not charge any interest for delayed realisation.
8. However, in the draft assessment order, the TPO allowed a credit period of 60 days and computed interest at 6.75% on delayed receivables leading to an upward adjustment to the arm’s length price.
9. The DRP observed that the deferred receivables constituted a separate international transaction and had to be bench marked with regard to the delay beyond reasonable credit period and therefore, the assessee’s contention that TPO had recharacterized the transaction as a loan transaction was to be rejected.
10. The assessee’s plea that a period of 9 months to be allowed as a reasonable credit period as provided by the Reserve Bank of India regulations for export realisation was also brushed aside by the DRP on ground that the regulations did not contemplate determination of arm’s length price.
11. Further, the A.O. proposed a disallowance of the weighted deduction weighted at 50% of the actual research and development expenditure in respect of clinical trials and in house research and development expenditure of both revenue and capital expenditure.
12. The DRP observed that in terms of the Department of Scientific and Industrial Research guidelines, one of the conditions for granting approval of the research and development facility was that the company should not claim expenses incurred on clinical trials conducted outside the approved research and development facilities since weighted deduction was given to encourage research in house facilities.
13. Accordingly, the DRP upheld the view of the A.O. on the ground that the expenditure was not quantified by the prescribed authority and accordingly not allowable in view of amendment to rule 6(67A) of the Income-Tax Rule, 1962 with effect from 01.07.2016.
14. On appeal by the assessee and the revenue, held partly allowing the appeal that the corporate guarantee given by the assessee was an international transaction and therefore was rightly held so by the lower authorities.
15. The assessee submitted that it was availing of the financial facilities from SBI and is paying 0.10% as schedule of fees and charges to the bank.
16. However, these charges could not be compared for the purpose of determining the arm’s length price of corporate guarantee commission.
17. No third party would provide a similar type of service on behalf of its associate enterprise and expose itself to the risk of giving corporate guarantee.
18. The addition was to be restricted to 0.5% on the amount guaranteed as corporate guarantee commission.
19. That in an earlier case on similar facts, this Tribunal held that the very purpose of bench marking the transaction was to ascertain whether the assessee would render the same kind of service at a similar price to a third party, that it would be clear that the assessee would charge bank interest or any other interest as compensation for delay in securing payment and that no prudent businessman would permit a third party to his working capital and earn profit therefrom.
20. Pursuant to this decision, the A.O. was directed to compute the arm’s length price by adding a notional interest of 6% to receivables beyond a credit period of 60 days.