MUFG Bank Ltd. Vs ACIT (ITAT Delhi)
ITAT Delhi held that counter guarantee with negligible risks can not per se be compared with guarantee offered by independent parties/ banks shouldering very high risk parameters as also observed by the co-ordinate bench in other assessment years.
Facts- The assessee is a foreign company incorporated under the laws of Japan and is a tax resident of Japan. The assessee operates its banking business in India under the license from RBI and is primarily engaged in wholesale banking operations in distinction to retail banking.
AO while framing the assessment order under 144C(13) r.w. Section 143(3) of the Act dated 31st October 2017 inter alia continued with the transfer pricing adjustments of INR 13,66,36,735/- made to the returned income of the assessee in respect of international transactions aboutthe receipt of counter-guarantee commission (impugned international transaction) from its Associated Enterprises. The AO in terms of TPO/DRP directions made an upward adjustment to the income of the Assessee about impugned transactions by using bank guarantee rates (average 2.63%) quoted by third-party banks as comparable uncontrolled data to determine the arms’ length price (ALP) of such impugned transaction.
Conclusion- We find rationale in the plea of the assessee that the counter guarantee with negligible risks can not per se be compared with guarantee offered by independent parties/ banks shouldering very high risk parameters as also observed by the co-ordinate bench in other assessment years. The Transfer Pricing Adjustment made in the impugned assessment order towards counter guarantee commission is thus grossly at odds with the factual position enunciated by the co-ordinate benches and hence such adjustment is totally uncalled for.
The Assessee in any case, would not be in a position to defend its case for TNMM method as MAM unless data collected is provided for its examination and rebuttal. It is manifest that the observations made by the Co-ordinate Bench in the first round had kept the issue entirely open to be decided denovo. We are thus not impressed by such counter argument on behalf of the Revenue.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed by the Assessee against the final order dated 29.04.2022 passed by the Assessing Officer for the Assessment Year 2013-14, in pursuance of direction given by the Dispute Resolution Panel-1 vide order dated 31.08.2021.
2. The grounds of appeal raised by the assessee read as under:
“ Transfer Pricing adjustment of INR 13,66,36,735.
1.1 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/TPO erred in making an adjustment of INR 13,66,36,734 to the returned income of the Appellant in respect of the international transaction pertaining to “receipt of counter guarantee commission from Associated Enterprises (‘AEs’)” (‘impugned transaction’).
1.2 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/TPO erred in rejecting the primary as well as corroborative analysis undertaken by the Appellant for determining the arm’s length price (‘ALP’) of the impugned transaction and conducting a fresh economic analysis for the determination of ALP of the Appellant’s impugned transaction and holding that the impugned transaction is not at arm’s length.
1.3 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/TPO erred in de-linking the impugned transaction from other international, transactions which are closely-linked to the overall banking business of the Appellant and have been benchmarked using Transactional Net Margin Method (‘TNMM’) as the most appropriate method applying a combined transaction approach, and have been accepted by the Hon’ble DRP and Ld. AO/TPO to be at arm’s length.
1.4 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/ TPO erred in characterizing the impugned transaction as corporate/ bank guarantee without appreciating the distinction in functions performed, asset utilized and risks assumed (‘FAR’) between the impugned transaction and corporate/ bank guarantee transaction undertaken by independent third-party banks.
1.5 That on the facts and circumstances of the case and in law and without prejudice to other grounds, with regard to the Comparable Uncontrolled Price (‘CUP’) analysis undertaken, the Hon’ble DRP and Ld. AO/TPO erred in not making any economic adjustments as provided under Rule 10B(1)(a) of the Income Tax Rules, 1962, to account for differences in the FAR of the impugned transaction vis-a-vis the c ompa ra b les.
1.6 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/TPO erred in determining the ALP of the impugned transaction by:
(a) Erroneously using CUP data, obtained by issuance of notices under Section 133(6) of the Act;
(b) Resorting to cherry picking of comparable banks without adopting any scientific methodology in identifying such comparables;
(c) Not providing an opportunity to cross-examine the third-party banks from whom data under Section 133(6) has been obtained for determining the ALP of the impugned transaction, thereby, violating the principles of natural justice; and
(d) Not issuing the show cause notice proposing transfer pricing adjustment during remand back transfer pricing assessment proceedings, thereby, violating the principles of natural justice.
1.7 That on the facts and circumstances of the case and in law and without prejudice to any other ground, the Hon’ble DRP and Ld. AO/TPO erred in using non-comparable guarantee rates from the data obtained under Section 133(6) of the Act, thereby, resorting to cherry picking of prices to determine the ALP of the impugned transaction.
1.8 That on the facts and circumstances of the case and in law, the Hon’ble DRP and Ld. AO/TPO erred in not following the decisions of the Hon’ble Tribunal in the Appellant’s own case for earlier years.
2 Taxability of interest on income-tax refund of INK 8,00,57,085
2.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in applying tax rate of 42.024% while computing the tax demand for interest on income-tax refund despite holding in the impugned order that interest on income-tax refund is to be taxed @ 10% under Article 11 of India-Japan tax treaty.
2.2 That on the facts and circumstances of the case and in law, the Ld. AO has failed to appreciate that interest on income-tax refund earned by the Appellant is taxable @ 10% under Article 11 of India-Japan tax treaty.
3. Non-reduction of interest of INR 8,46,996 received by Indian benches from Head Office (‘HO’)/other overseas branches .
That on the facts and circumstances of the case and in law, the Ld. AO erred in not reducing interest of INR 8,46,996 received by the Indian branches of the Appellant from its HO/other overseas branches from the assessed income of the Appellant.
4. Short grant of TDS credit of INR 2,26,026.
That on the facts and circumstances of the case and in law, the ld. AO erred in not granting credit for tax deducted at source of INR 2,26,026.
5. Excess withdrawal of interest under section 244A(3) of the Act.
That on the facts and circumstances of the case and in law, the Ld. AO erred in withdrawing excess interest under section 244A(3) of the Act.
6 Initiation of penalty proceedings
That on the facts and in the circumstances of the case and in law, the ld. AO erred in initiating penalty proceedings under section 271(l)(c) of the Act, being against the provisions of the Act.
7. General
7.1 Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
7.2 The Appellant crave leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to law.”
3. Ground No.1 and sub-grounds thereof concerns transfer pricing adjustment of Rs.13,66,36,735/- pertaining to ‘receipt of counter guarantee commission’ by the Assessee from Associated Enterprises (AE) for providing counter guarantee at the instance of its overseas AE.
4. To set the context, the facts as borne out from records are that the assessee is a foreign company incorporated under the laws of Japan and is a tax resident of Japan. The assessee operates its banking business in India under the license from RBI and is primarily engaged in wholesale banking operations in distinction to retail banking. For the assessment year 2013-14 in question, giving effect to DRP directions, the Assessing Officer while framing the assessment order under 144C(13) r.w. Section 143(3) of the Act dated 31st October, 2017 inter alia continued with the transfer pricing adjustments of INR 13,66,36,735/- made to the returned income of the assessee in respect of international transactions pertaining to receipt of counter guarantee commission (impugned international transaction) from its Associated Enterprises. The AO in terms of TPO/DRP directions in the instant case, made an upward adjustment to the income of the Assessee pertaining to impugned transaction by using bank guarantee rates ( average 2.63%) quoted by third party banks as comparable uncontrolled data for the purpose of determining the arms’ length price (ALP) of such impugned transaction. The dispute travelled upto the ITAT. The Co-ordinate Bench of Tribunal vide order dated 11.06.2018 in ITA No.7212/Del/2017 made certain observations and remanded the issue back to the Assessing Officer for fresh adjudication in accordance with law. The relevant paragraphs dealing with the issue in the first round of proceedings before ITAT, as noted above, is reproduced herein for ready reference:
“Ground Nos. 9 to 9.6 relates to the issue on transfer pricing adjustment. The main grievance of the assessee in these grounds is that the Id. DRP/AO/TPO used the erroneous comparable uncontrolled price (CUP) data obtained by issuing the notices u/s 133(6) of the Act but without providing any opportunity to assessee, while determining the arm’s length price of the international transaction.
30. The Id. Counsel for the assessee submitted that the Id. DRP decided, the similar issue in the assessment years 2010-11 and 2011-12 in favour of the assessee and the department had not preferred any appeal against the directions of the Id. DRP. Therefore, by keeping in view the principles of consistency, this issue is required to be decided in favour of the assessee and no addition could have been made on account of receipt of ‘Counter Guarantee Commission. The reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam ltd. and Another Vs Union of India and Others reported at (2006) 2 SCC 1.
31. In her rival submissions, the ld. CIT-DR supported the order of the AP/TPO.
32. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it appears that the AO/TPO collected comparable uncontrolled price (CUP) data by issuing the notices u/s 133(6) of the Act and used the said data for the purpose of determining the ALP of the international transactions entered into by the assessee with its AE. It is well settled that nobody should be condemned unheard. In the present case, it is alleged that the AO/TPO did not confront the assessee with the data obtained by issuing the notices u/s 133(6) of the Act while determining the arm’s length price. We, therefore, deem it appropriate to set aside this issue back to the file of the AO/TPO to be decided afresh after confronting the data obtained by issuing the notices u/s. 133(6) of the Act to the assessee. The AO is also directed to keep in mind the directions of the Id. DRP given in subsequent years i.e. assessment years 2010-11 and 2011-12 on the same issue and decide it afresh in accordance with law.”
5. The matter was thus remitted back to the AO for deciding the issue afresh in accordance with law having regard to the observations made by the co-ordinate bench.
6. In the second round of proceedings, the DRP, however, upheld the order of TPO following its own order for Assessment Year 2015-16 and passed the directions under Section 144C(5) of the Act vide order dated 23.02.2022 confirming the action of the TPO without any relief. The AO, in turn, its final order in pursuance of directions of DRP passed order dated 29.04.2022 and reiterated the additions of Rs.13,66,36,734/- towards transfer pricing adjustment on account of counter guarantee commission received from AE, applying arm length principles.
7. Aggrieved, the assessee has yet again filed the appeal before the Tribunal.
8. When the matter was called for hearing, the ld. counsel for the assessee broadly reiterated the submissions made before lower authorities.
8.1 The Ld. Counsel submitted that BTMU Japan (AE of the assessee) along with its overseas branches caters to many multinational corporations which operate across the globe and require the service of BTMU India (the assessee) to facilitate the operations in different countries. The customers of BTMU overseas branches may need a guarantee from a bank in India to participate in a tender, performance guarantee, etc. in India whereby BTMU Japan, by virtue of its nature of transaction that it enters into with the beneficiary, needs to arrange for a guarantee from a financial institution in favour of the beneficiary ensuring that its liabilities will be duly met, i.e., if the third party fails to settle a debt that it owes to the beneficiary, BTMU India will cover it. In such a case, the customer of BTMU overseas branches approach BTMU overseas branches (AEs) to arrange for a guarantee in India. BTMU overseas branches issue a counter guarantee in favour of BTMU branches in India for issuing a further guarantee in favour of a beneficiary in India. It has further been submitted that BTMU overseas branch evaluates the credit worthiness of the applicant and sets credit limits. For the guarantee provided by BTMU India to the beneficiary, BTMU Overseas branches (AEs) provides guarantee to BTMU India. This guarantee provided by BTMU Overseas branches to BTMU India is termed as “counter-guarantee”. On receipt of counter guarantee from BTMU Overseas branch, BTMU India prepares and issues a guarantee letter in favour of the beneficiary. BTMU Overseas branch regulates the terms and conditions of the guarantee services as well. The procedure followed is as under:
Step 1 – Initially, a SWIFT message is received by BTMU India from BTMU overseas branch for issuance of the guarantee in favour of the beneficiary. The SWIFT message clearly states that BTMU India needs to issue a guarantee against the counter guarantee provided by overseas branches.
Step 2 – An application is prepared by BTMU India for internal approval to ensure that the instructions received in the SWIFT message are strictly adhered to before issuance of guarantee.
Step 3 – The guarantee is issued on behalf of BTMU overseas branch by BTMU India basis the instructions received through the SWIFT message under Step 1.
Step 4 – Once the guarantee is issued, a SWIFT / telex is then sent by BTMU India to the respective BTMU overseas branch confirming the issuance of guarantee as per the received instructions as well as requesting for crediting BTMU India’s account with the amount of guarantee commission plus additional charges, if any, incurred by BTMU India.
For rendering services by way of issue of such counter guarantee to the customers of overseas branches, the Assessee earns counter guarantee commission. Thus, in essence, issuance of guarantee by the Assessee is backed by counter guarantee and thus fully protected and such act is nearly risk free.
8.2 For the purpose of computation of ALP of the impugned transaction i.e. the counter-guarantee commission, the assessee considered Transactional Net Margin Method (‘TNMM’) as the most appropriate method (MAM) by using combined transaction approach, wherein, the impugned transaction along with other international transactions was aggregated and benchmarked using aggregated approach. The operating profit/total assets (‘OP/TA’) of the assessee was compared with the arithmetic mean of OP/TA of comparable uncontrolled companies. Since, the assessee’s OP/TA of 4.17 percent was higher than the OP/TA of comparable uncontrolled companies of 1.08 percent (update single year margin of 0.93 percent for FY 2012-13), these international transactions were considered to be at arm’s length from an Indian TP perspective. For benchmarking the aforesaid guarantee commission, the TPO rejected the economics analysis conducted and the TNMM approach resorted by the assessee and obtained information from different banks u/s 133(6) of the Act and proposed to apply CUP. The TPO also held that the assessee has provided services in the shape of bank guarantee to clients of its AEs and these transactions are within the ambit of ‘international transaction’ and proceeded to compute the arm’s length price of the said transaction using CUP as the most appropriate method for determination of ALP.
8.3 In this factual backdrop, the ld. counsel contended that the Revenue Authorities have committed error in treating the impugned transaction as corporate/bank guarantee of independent nature without appreciating the distinction in function performed, assets utilized and risk assumed (FAR Analysis) between impugned transaction and the corporate/bank guarantee transaction undertaken by independent third party banks. It was asserted that the revenue failed to notice the negligible risk parameters in the instant case where the risk of the assessee was protected and secured by back to back counter-guarantee given by the AE and the assessee was essentially a mere facilitator unlike other guarantees where the guarantor ordinarily agrees to take responsibilities for debt repayment in case of default.
8.4 The ld. counsel next submitted that the identical issue has cropped up in Assessment Year 2009-10 as well where the Coordinate Bench of Tribunal in ITA No.1162/Del/2014 order dated 24.05.2020 appreciated the facts in correct prospective and accepted the TNMM method adopted by the assessee for benchmarking the international transaction in relation to receipt of guarantee commissions having regard to the fact that the assessee has acted as a facilitator only without assuming underlying risks associated with such guarantees unlike other banks providing independent guarantee and shoulders the inherent risks of providing such guarantee.
8.5 The ld. Counsel also submitted that similar issue has been tested in other assessment years also and adjudicated in favour of the assessee. It was pointed that even DRP in other assessment years have accepted the position taken by the assessee and assessment was carried out without any adjustment.
8.6 The ld. Counsel thus urged for reversal of action of revenue authorities and restoration of position taken by the assessee.
9. The CIT(DR) on the other hand, strongly defended the position taken by the revenue authorities. The Ld. CIT(DR) adverted to the decision of the co-ordinate bench dated 11.06.2018 in first round of proceedings and submitted that the ITAT set aside the issue to the file of AO in the wake of the fact that the comparables collected under S. 133(6) namely data obtained from third party banks were not confronted to assessee. It was submitted that such data are of use only when CUP method is applied and is redundant it TNMM method is endorsed. It was thus asserted the directions of the ITAT implies that CUP method adopted by AO has been endorsed by the ITAT. It was next submitted that the decisions and actions of other years relied upon by the Assessee is of no consequence in such a scenario where in those years, the proceedings were completed on the basis of TNMM method in contrast to the CUP method as vetoed by co-ordinate bench in AY 2013-14 in question. The Ld. CIT(DR) thus backed the action of the AO to be in terms of directions of ITAT in first round of proceedings and submitted that no interference therewith is called for.
10. In rejoinder, the ld. counsel submitted that ITAT in its order dated 11.06.2018 has not decided the issue of application of CUP method at all and on the contrary, the Tribunal has directed the TPO to provide CUP data to assessee as collected by him under Section 133(6) of the Act to enable the Assessee to place its response and defend its stance on application of MAM. It was thus submitted that ITAT, in first round, has not adjudicated the application of CUP as MAM to benchmark the impugned transactions.
11. We have heard the rival submission on the transfer pricing adjustment in issue.
11.1 As noted in the preceding paragraphs, it is the case of the assessee that the issue is squarely covered by the order of the Co-ordinate Bench of Tribunal in AY 2009-10, AY 2015-16 & AY 2010-11. The assessee contends that the ITAT in these assessment years, in similar facts, has essentially held that a bank guarantee transaction is not comparable to the impugned transaction on account functional and risk differences. Similar view has been acknowledged by the DRP itself in AY 2010-11 & 2011-12 as well.
11.2 As noted above, the Co-ordinate Bench of Tribunal in ITA No.1162/Del/2014 order dated 21.05.2020 relevant to Assessment Year 2009-10 has examined the impugned issue of transfer pricing adjustments on account of guarantee commission as under:
“We have heard the rival contentions and perused the record. The issue raised vide ground of appeal no.12 is against the transfer pricing adjustment made on account of Receipt of guarantee commission. The assessee while benchmarking its international transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm’s Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No. 12 is thus deleted.”
11.3 Likewise, the Co-ordinate Bench of Tribunal in ITA No.7 895/Del/2019 order dated 16.10.2020 concerning Assessment Year 2015-16 in assessee’s own case has followed the findings rendered in Assessment Year 2009-10 and yet again decided the issue in favour of the assessee.
“Ground number [9] is related to the transfer pricing adjustment proposed by the learned transfer pricing officer confirmed by the learned Dispute Resolution Panel of? 103,485,509 to the returned income of the appellant in respect of international transaction pertaining to receipt of counter guarantee commission from associated enterprises. The fact shows that during the year the assessee has entered into various international transactions with its associated enterprises. One of the international transactions is receipt of commission for issuance of guarantee to 3rd parties against the counter counter guarantees issued by the overseas branches. The assessee has already accounted for a commission of Rs. 31,066,225/- for issuance of guarantee against the counter guarantee issued by the associated enterprise. Issue is that the customers of the associated enterprise of the assessee may need a guarantee from a bank in India to participate in a tender, performance guarantee or in relation to its business in India. In such a case the customer of the associated enterprise approaches associated enterprise to arrange for a guarantee in India. Associated enterprises then issues counter guarantee in favour of the assessee for issuing a further guarantee in favour of a beneficiary in India. For the guarantee provided by the assessee to the beneficiaries, associated enterprise provides guarantee to assessee. This guarantee provided by associated enterprise to the assessee is termed as a counter guarantee. Further in this regard assessee performs very limited functions such as processing the request of guarantee from associated enterprise, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the associated enterprise for cancellation/extension of the guarantee. Therefore the claim of the assessee is that assessee does not perform any function apart from issuing the guarantee in favour of the beneficiary. The claim of the assessee is also that that it does not undertake any separate evaluation of the beneficiary and all background and creditworthiness checks are performed by the associated enterprise only. It is further stated that in case a guarantee is invoked, the assessee is fully protected by the counter guarantee issued by the associated enterprise and associated cost and risk is passed on back to back by the assessee to its associated enterprises. Therefore, the entire risk of default by the borrower is completely assumed by the associated enterprise and the assessee does not bear any risk in the entire arrangement or transaction. For issuance of guarantee the associated enterprises pay the assessee commission up to 1% of the guaranteed amount. Assessee aggregated the all transaction with other banking transactions with associated enterprise as according to it it is interlinked and since all the international transactions form part of the assessee ’s banking operation, the assessee benchmarked the transactions applying the Transactional Net Margin Method as the Most Appropriate Method and as according to the assessee as these transaction cannot be looked into isolation for benchmarking purposes. The learned transfer pricing officer has benchmarked the above transaction applying CUP method as the most appropriate method and used naked bank guarantee rates of other banks for the purpose of benchmarking the transaction. Accordingly the TPO held that the commission at the rate of 2.23 percentage on the value of the bank guarantees/standby letter of credit issued should have been charged by the assessee from its . associated enterprise . Therefore he computed the guarantee commission receivable by the assessee of Rs. 134,380,249/-, assessee has already been paid Rs. 30,894,740/-, therefore, the net adjustment of Rs. 103,485,509 was made. On objection before the learned Dispute Resolution Panel the order of the learned Transfer Pricing Officer was upheld. Therefore assessee is aggrieved with that adjustment and is in appeal as per this ground.
30 The learned authorised representative submitted that the identical issue has been decided in favour of the assessee by the coordinate bench for assessment year 2009-10 in assessee ’s own case wherein it has been held that when the assessee has undertaken bundled of international transactions with its associated enterprise and the same has been benchmarked by applying combined approach and the method adopted is transactional net margin method where the margin shown by the assessee have been accepted, then there is no merit in segregation of the international transaction of the receipt of guarantee commission and benchmarking the same separately adopting CUP method.
37. Before us the learned authorised representative has also raised an issue that the transfer pricing officer in the order dated 31st of October 2018 has not disputed that the all international transactions carried out by the assessee are to be aggregated for the purpose of benchmarking PF* under the transactional net margin method. In fact the learned transfer pricing officer has accepted the aggregation of the transaction for the purpose of benchmarking of international PPE transactions; however, without giving any reason as to why the aggregation of the transaction is incorrect, he used the CUP method for benchmarking the impugned international transaction. Therefore the claim of the assessee is that once the aggregation of the transaction is accepted for the purpose of applying transactional net margin method, then, it is not open to the learned transfer pricing officer to delink one transaction and apply a different method. For this proposition he relied upon the decision of the honourable Delhi High Court in case of 389 ITR 469 in case of Magneti Marelli powertrain India private limited versus the Deputy Commissioner of Income Tax. He further submitted that even otherwise the external CUP in the form of guarantees issued by the local banks with hundred percent cash margin shall be considered is the local banks do not bear any risk on account of being secured by hundred percent cash margin which is similar to the risk profile of the assessee in case of the impugned international transaction where the assessee is completely secured by back-to-back counter guarantee of the associated enterprise. He submitted that the learned TPO has used the guarantee rate of risk bearing guarantees for the purpose of benchmarking, however, I’ve guarantee rates 400% cash margin guarantees are considered than the arm’s-length range comes to 0.50% to 0.60% with a median of 0.5433% which is lower than the average guarantee rate of 0.70% on by the assessee from its associated enterprise. Therefore, the transfer pricing adjustment is not warranted. He further submitted that even otherwise guarantee rates of the risk bearing guarantees issued by the assessee for its customers in India without any counter guarantee from associated enterprise shall be considered. He submitted that even in that case the median of 0.75% and the average guarantee fee rate of 0.70% received by the assessee from its associated enterprise for issuing completely risk-free guarantees is at arm’s-length. In view of this he submitted that, the issue is squarely covered in favour of the assessee that the international transaction of guarantee cannot be separately benchmark and further even if it is separately to be benchmarked it is at arm’s length.
The learned departmental representative vehemently supported the order of the learned transfer pricing officer and direction of the learned dispute resolution panel.
We have carefully considered the rival contention and perused the orders of the lower authority and the direction of the learned dispute resolution panel. As in the case of the assessee In ITA No. 1162/Del/2014 for Assessment Year: 2009-10 dated 21/5/2020 has considered the identical issue as Under:-
“53. We have heard the rival contentions and perused the record. The issue raised vide ground of appeal no. 12 is against the transfer pricing adjustment made on account of Receipt of guarantee commission. The assessee while benchmarking its international transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm’s Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No. 12 is thus deleted.”
40. As the facts and circumstances of the case are identical to the facts decided in case of the assessee for assessment year 2009 – 10, respectfully following the decision of the coordinate bench, we allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed.”
11.4 As observed earlier, the identical issue was also a subject matter of controversy in Assessment Year 2011-12. The Coordinate Bench in ITA No.238/Del/2016 order dated 27.05.2021 applied the same principles and adjudicated the issue in favour of assessee.
“30. The Revenue by raising ground no.6 challenged the deletion of addition of Rs. 10,43,55,168/- by the Id. DRP proposed to be made by the Id. TPO qua the ALP of corporate guarantee. At the same time, the taxpayer by filing cross objection also challenged inter alia that the rejection of primary analysis made by the Id. DRP by applying CUP method for benchmarking the ALP of international transactions qua receipt of guarantee commission for guarantees counter guaranteed by the AE; that the taxpayer also challenged rejection of secondary analysis made by the taxpayer to benchmark the international transactions qua receipt of guarantee commission by applying TNMM using operating profit/total assets as the PLI; and that the taxpayer also challenged rejection of acceptance of erroneous CUP data obtained by the Id. TPO/AO by issuance of notice u/s 133 (6) of the Act which was used for computing the ALP of impugned transaction.
31. During the year under assessment, the taxpayer reportedly entered into international transactions as under:-
