No Arm's Length Addition Is Warranted On Account Of Corporate Guarantee If Guarantee Fee Is Lower Than Bank's Quoted Interest Rate: Ahmedabad ITAT
Pankaj Bajpai
18 July 2024 5:45 PM IST
Finding that the TPO did not present compelling evidence to establish that the guarantee fee was unwarranted, the Ahmedabad ITAT held that benefits derived, as seen in lower interest rates and favorable operating margins, substantiate the transaction's arm's length nature. The ITAT added that the effective borrowing cost, including the guarantee fee, was lower than the bank's...
Finding that the TPO did not present compelling evidence to establish that the guarantee fee was unwarranted, the Ahmedabad ITAT held that benefits derived, as seen in lower interest rates and favorable operating margins, substantiate the transaction's arm's length nature.
The ITAT added that the effective borrowing cost, including the guarantee fee, was lower than the bank's quoted interest rate, thus justifying the economic rationale for the guarantee fee.
The Bench of Suchitra Kamble (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that “the operating margin of the assessee company is at 18.21% which is much better as compared to the average margin of 10.36% of the other comparable. On this account also, the payment of guarantee commission is justifiable”.
Facts of the case:
The assessee has availed Rs.100 crores borrowing from its group company after charging interest at rate of 11%. For such purpose, one of the AEs of the assessee acted as guarantor and charged guarantee fee at the rate of 0.75% per annum. The assessee accordingly paid guarantee charges of Rs.52,91,667/-. During assessment, the TPO found that no services for guarantee had been rendered and no distinct benefit had accrued to the assessee in form of reduction in the interest rate on account of guarantee and the transaction sought to be propagated by the assessee as comparable adopting CUP method was not comparable. Accordingly, the transaction of the AE giving guarantee on behalf of the assessee company was benchmarked at NIL, and upward adjustment to the extent of Rs.52,91,667/- was proposed to be made by the TPO.
Observation of the Tribunal:
The Bench observed that all the three entities, i.e., the assessee, the lender company, as well as the guarantor company are Associated Enterprises.
The Bench also accepted that the assessee has borrowed the money on interest of 12.25% per annum as against interest of 15% quoted by the Bank.
Considering the guarantee commission of 0.75% paid by the assessee, the Bench noted that the total cost of borrowing comes to 13% which is still lower than the rate of 15% quoted by the Bank.
Further, the Bench found that the First Appellate Authority has given a categorical finding in relation to similar transactions in earlier assessment year, where no adjustment was made by the TPO in respect of guarantee commission.
Considering the previous history of assessee, the ITAT refused to interfere with the findings of the CIT(A) in deleting the ALP addition of guarantee fee and allowed Assessee's appeal.
Counsel for Appellant/ Assessee: S.N. Soparkar
Counsel for Respondent/ Revenue: Samir Tekriwal
Case Title: Bosch Rexroth (India) Ltd. verses ITO
Case Number: ITA No.930/Ahd/2015
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