Case Law Details
Asian Paints Ltd. Vs ACIT (ITAT Mumbai)
Conclusion: Issuance Of Letters Of Comfort/Support will Construe As International Transaction U/s 92B considering corporate guarantee issued by assessee could not be compared with the letters of comfort and therefore agreed with the computation of arm’s length rate of 0.04%.
Held: Assessee-company was engaged in the business of manufacturing paints and enamels. During the assessment proceedings, AO made reference under section 92CA(1) to the Transfer Pricing Officer (“TPO”) for the determination of the arm’s length price (“ALP”) of the international transactions entered into by assessee. Apart from the international transactions reported by assessee in Form No.3CEB, TPO noted that assessee had issued non-contractual letters of comfort/support to banks on behalf of some of its subsidiaries from time to time and had not charged any thing from its associated enterprises. It was observed that the associated enterprises had availed loans amounting to Rs.123.46 crore (approx.) based on the letters of comfort issued by assessee. During the transfer pricing assessment proceedings, assessee submitted that the loans had been granted by the banks to the associated enterprises against the security of debts/receivables by associated enterprises. Accordingly, it was submitted that issuance of non-contractual letters of comfort could not be said to be a transaction per se and it could not be said to be covered within the scope of transfer pricing provisions. Thus, the ALP of the same was not required to be computed on there was no need to recover any charges/fees from overseas associated enterprises in whose favour assessee had issued the letter of comfort. TPO vide order dated 22/01/2016 passed under section 92CA(3) did not agree with the submissions of assessee and held that the letter of comfort was to be regarded as an international transaction, as an intergroup service had been rendered by assessee to its associated enterprise. Considering the similarity in the facts and circumstances of the case vis-a-vis the issuance of corporate guarantee, the arm’s length rate of the letter of comfort was determined at 0.50% (being 50% of 1% fee for guarantee commision). Accordingly, TPO computed the transfer pricing adjustment of Rs.61,72,873 (i.e. 0.50% of Rs.123.46 crore) in respect of the letter of comfort issued by assessee. It was held that assessee, vide letters of comfort, not only undertook to use its best endeavour to see that the obligations of the subsidiary were met as and when they fall due but also treated the liability as a contingent liability in its financial statement. Therefore, the facts of the present case were different from the facts that were under consideration before the coordinate bench in the preceding years, and thus, the findings of the coordinate bench were not applicable to the present case. As regards the ALP of the letters of comfort, TPO considered 0.50% as the arm’s length rate (being 50% of 1% fee for guarantee commission). While CIT(A) reduced the arm’s length corporate guarantee commission to 0.20%, and the arm’s length rate for letters of comfort was also reduced to 0.04% (being 20% of 0.20%). Without prejudice to the main submission that the letters of comfort issued by assessee were not an international transaction submitted that the corporate guarantee issued by assessee could not be compared with the letters of comfort and therefore agreed with the computation of arm’s length rate of 0.04%. Agreeing with the submissions of assessee, the findings of CIT(A) was upheld in computing the arm’s length rate of the letter of comfort to be @0.04%, finding the same to be reasonable in the peculiar facts and circumstances of the present case.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present cross-appeal has been filed challenging the impugned order dated 30/06/2017, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–55, Mumbai, [“learned CIT(A)”], for the assessment year 2012–13.
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