KEC International Limited Vs DCIT (ITAT Mumbai)
Summary: KEC International Limited, engaged in the Engineering, Procurement and Construction (EPC) business in India and overseas, appealed against the order of the Joint Commissioner of Income Tax, Transfer Pricing-ADDL/JCIT TP 2(3), Mumbai, for Assessment Year 2022-23. The appeal raised, among other matters, a transfer pricing adjustment concerning corporate and performance guarantees issued for overseas Associated Enterprises (AEs), short grant of TDS/TCS credit, and interest under sections 234B and 234C. During transfer pricing proceedings, the assessee contended that its guarantees were given to protect and promote group business interests and constituted shareholder activity, while also reporting the transactions out of abundant caution and charging guarantee commission at 0.60% per annum. The assessee relied on its own bank facility letter as an internal Comparable Uncontrolled Price (CUP). The TPO treated the guarantees as international transactions under section 92B, considered bank guarantee rates ranging from about 0.45% to 2.64%, and applied a rate of 1%, resulting in an adjustment of ₹5,08,31,722/-. The DRP sustained the adjustment and rejected the assessee’s 0.60% internal CUP.
The Tribunal first rejected the assessee’s primary contention that issuance of a corporate guarantee did not constitute an international transaction under section 92B. It noted that, in the assessee’s own case for A.Y. 2012-13, the Coordinate Bench had held that the corporate guarantee transaction was required to be benchmarked under the arm’s length principle, and that the same view had subsequently been followed for later years. The Tribunal also referred to the Bombay High Court decision in CIT v. Everest Kanto Cylinders Ltd., where the considerations applicable to bank guarantees and corporate guarantees were treated as different. On the alternative issue concerning the appropriate arm’s length rate, however, the Tribunal found force in the assessee’s reliance on its own bank facility rate of 0.60%. Referring to earlier decisions in the assessee’s own cases for A.Ys. 2010-11, 2011-12, 2013-14 and 2017-18, it noted that the internal CUP represented by the assessee’s own bank rate had previously been accepted. The Tribunal accordingly directed the Assessing Officer/TPO to restrict the arm’s length rate of guarantee commission to 0.60% and recompute the transfer pricing adjustment after giving due credit for guarantee commission, if any, already charged or recovered from the AEs. Ground No. 1 was therefore partly allowed.
