Bank Guarantee Rates Cannot Be Considered For Benchmarking Corporate Guarantee Fee: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that bank guarantee rates cannot be considered for benchmarking corporate guarantee fees.

The bench of Kavitha Rajagopal (Judicial Magistrate) and Prashant Maharishi (Accountant Member) has remanded the file back to the assessing officer with a direction to the assessee to show the benchmarking of corporate guarantee fees by either adopting an interest-saving approach, comparable corporate guarantee fee rates, the cost of providing the guarantee, or any other approach.

The appellant/assessee is a foreign company incorporated in Norway engaged in the business of distributing software licenses across various types of licensing programs offered by the vendors. The company also offers training, deployment, and associated consulting services, including software asset management services.

The assessee has issued a corporate guarantee amounting to Rs. 9.5 crore in favour of TATA Capital for a channel finance credit facility availed of by the AE amounting to Rs. 19.5 crores. The assessee did not charge any guarantee commission. The learned TPO and the learned dispute resolution panel have upheld the guarantee commission at 1%, considering the bank guarantee rates.

The assessee contended that the corporate guarantee is not an international transaction, and even if the corporate guarantee is required to be remunerated in the hands of the assessee, such a rate cannot exceed 0.5%.

The ITAT noted that on the introduction of explanation under Section 92B with retrospective effect from 1/4/2002 by The Finance Act 2012, the contention that corporate guarantee is not an international transaction is not sustainable.

The tribunal stated that the arm’s-length price of an international transaction cannot be decided on the basis of judicial precedents rendered in the case of other parties because economic factors, Timing factors, and commercial considerations differ. Similarly, bank guarantee rates cannot be considered for benchmarking corporate guarantee fees. It depends on the creditworthiness of the parties and the benefit arising out of the same in the hands of the parties to the transaction. The benefit is also required to be distributed between the issuer of the guarantee and the party in whose favour it is issued.

The tribunal finds that neither the assessee nor the TPO/DRP have employed any of the factors required to be considered for benchmarking as per the mandate of Section 92CA (3).

The ITAT directed the AO/TPO to examine the same and determine the arm's length price of the international Transaction.

Case Title: Crayon Group AS Versus ACIT

Case No.: ITA No. 1590/MUM/2022

Date: 05.07.2023

Counsel For Appellant: Bhavya Bansal Goyal

Counsel For Respondent: Samruddhi Hande

Click Here To Read The Order