ITAT Dirests ALP Computation Towards Guarantee Commission @ 0.3523% In Case Of Macrotech Developers

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has directed the ALP Computation Towards Guarantee Commission at a rate of 0.3523% in the case of Macrotech Developers.

The bench of Kuldip Singh (Judicial Member) and Padmavathy S. (Accountant Member) has observed that the rate of guarantee commission is required to be determined on the basis of the credit rating of the issuer company and the comparison of interest rates without guarantee and with guarantee.

The respondent/assessee had an associated enterprise (AE) in Mauritius, Lodha Developers (LDIL). LDIL had raised USD 200 million by way of the issuance of 12% Senior Notes Due 2020(bonds) listed on the Singapore Exchange to be used for the purpose of the construction and development of real estate projects in the UK.

The assessee submitted before the TPO that for the issue of bonds, the assessee, along with a few other group companies, had given corporate guarantees as shareholders or direct subsidiaries. The TPO noticed that, in lieu of the financial guarantee given by the assessee, no commission or guarantee fee was charged by the assessee to the AE.

The assessee initially submitted that the guarantee is given as part of shareholder activity and, therefore, not within the purview of transfer pricing provisions. The assessee, based on the benchmarking, submitted that a margin of 0.35% is at ALP.

The TPO rejected the benchmarking done by the assessee and proceeded to make a TP adjustment of Rs. 4,14,84,664 by applying the guarantee commission rate of 1.25%, i.e., USD 200 x Rs. 66.33 x 1.25% x 365/1459.

The TPO noticed that the AE of the assessee has taken office premises on lease in the UK for a period of 9 years, with a total rental of GBP 25,89,307 payable on a quarterly basis. The TPO noticed that the assessee had given a guarantee to the landlord in this regard.

The assessee submitted that the guarantee given is in the nature of additional security to the rental to the insurer in case of recovery of unpaid rent over the lease period of 9 years, and therefore, the assessee has not charged any amount towards the same. However, the TPO proceeded to make a TP adjustment towards the guarantee given by the assessee.

On appeal, the CIT (A) held that rejecting the TP analysis without giving any specific reasons was not justified. The CIT(A) further held that the assessee has followed ‘other method’ that is, the interest-saving approach, and, therefore, there was no need to provide comparables.

The CIT(A) also held that the assessee, when submitting the TP report, has discharged its onus. Accordingly, the CIT (A) directed the AO or TPO to accept the assessee’s TP report and compute the ALP towards guarantee commission at 0.3523%.

The department contended that the assessee has not done any TP study, and the benchmarking as reproduced by CIT (A) does not pertain to the year under consideration. The CIT (A) in the order has mentioned that the guarantee fee of 0.2% to 0.53% is reasonable without any basis. It is also argued that the CIT(A) mentioned 50:50 is the ratio in which the economic benefit is shared between the assessee and its AE, and there is no reason for this being mentioned in the order of CIT(A). The CIT(A), before holding that 0.3523% is reasonable, did not do any factual analysis of the terms of the deal. There is no basis for the findings given by the CIT (A).

The tribunal upheld the order of the CIT (A), by which the AO/TPO was directed to accept the assessee’s TP report and compute the ALP towards guarantee commission at 0.3523%.

Counsel For Appellant: Niraj Sheth

Counsel For Respondent: Samuel Pitta

Case Title: Deputy Commissioner of Income-Tax Versus M/s Macrotech Developers Limited

Case No.: I.T.A. No.2382 /Mum/2022

Click Here To Read The Order