Dabur India Ltd Vs ACIT (ITAT Delhi)
In this case, the Delhi ITAT examined whether transfer pricing adjustment could be made on account of corporate guarantees issued by the assessee in favour of its associated enterprises in Nepal and Egypt. The TPO had adopted a 4% guarantee commission rate and made an adjustment on the ground that the assessee should have charged service fees for issuing corporate guarantees to its overseas AEs. The CIT(A) partly reduced the adjustment by holding that only 0.50% commission should be charged in respect of the guarantee issued to Dabur Egypt Ltd., while no guarantee commission was chargeable in respect of Dabur Nepal Pvt. Ltd.
Before the Tribunal, the assessee argued that no cost or expenditure had been incurred for issuing the corporate guarantees and that the loans obtained by the overseas AEs were independently secured through charges on their assets and other collateral. It was submitted that the guarantees were provided merely as additional support and did not materially influence the lending arrangements.
In relation to Dabur Nepal Pvt. Ltd., the Tribunal noted that the guarantee issued to NABIL Bank, Nepal remained operative only for four months and was released on 27 July 2006. The Tribunal further relied upon the bank’s letter dated 31 October 2013 confirming that the corporate guarantee had not influenced the interest rate charged to the borrower. Since there was no demonstrated interest saving or economic benefit arising from the guarantee, the Tribunal upheld the CIT(A)’s finding that no service fee could be attributed to the corporate guarantee issued on behalf of Dabur Nepal Pvt. Ltd.
With respect to Dabur Egypt Ltd., the Tribunal observed that HSBC Bank, Egypt had increased the interest rate from 11.90% to 12.50% after release of the corporate guarantee. Based on this evidence, the Tribunal concluded that the actual interest saving attributable to the corporate guarantee was 0.60%. The Tribunal accepted the assessee’s argument that the benefit arising from the guarantee accrued to both the borrower and the guarantor and therefore should be shared equally between them. Accordingly, while the CIT(A) had computed the guarantee commission at 0.50% by assuming a 1% benefit, the Tribunal held that only 50% of the actual 0.60% benefit could be attributed as service fee and restricted the guarantee commission to 0.30%. The Revenue’s ground was dismissed and the assessee received partial relief.
FULL TEXT OF THE ORDER OF ITAT DELHI
