Corporate Guarantee Commission Rate Restricted to 0.60 Percent Following Consistency Rule, and TDS Reconciliation Remanded for Re-Verification

ORDER

Siddhartha Nautiyal, Judicial Member. – This appeal is filed by the Assessee against the order of Ld. Joint Commissioner of Income Tax, Transfer Pricing-ADDL/JCIT TP 2(3), Mumbai, dated 28-Jan-2025 for the Assessment Year 2022-23.

The Assessee has raised the following grounds of appeal:

2. The brief facts of the case are that the assessee, KEC International Limited, is engaged in the Engineering, Procurement and Construction (“EPC”) business in India as well as overseas.

3. For A.Y. 2022-23, the Assessing Officer referred the assessee’s international transactions to the Transfer Pricing Officer (“TPO”) for computation of the arm’s length price.

4. During the transfer pricing proceedings, the assessee explained that it had given corporate guarantees to banks on behalf of its overseas Associated Enterprises (“AEs”) to enable them to obtain fund-based and non-fund-based banking facilities. The assessee also gave performance guarantees to customers in respect of contracts awarded to its overseas AEs. The assessee contended that it had given these guarantees to protect and promote the business interests of the group and the guarantees were essentially a shareholder activity. The assessee further submitted that it did not incur any cost by issuing these guarantees and, therefore, the guarantees did not affect its profits, income, losses or assets. On this basis, the assessee contended that the guarantees did not constitute an “international transaction” under section 92B and no transfer pricing adjustment was required. The assessee, however, reported the transactions out of abundant caution and charged guarantee commission at 0.60% per annum on a suo motu basis.

5. The assessee submitted that it had adopted the rate of 0.60% on the basis of the facility letter issued by its own bank. According to the assessee, the rate charged by an independent bank to the assessee provided an internal Comparable Uncontrolled Price (“CUP”) and the same rate benchmarked the guarantee commission charged by the assessee to its AEs.

6. The TPO did not accept the assessee’s contention. The TPO treated the corporate and performance guarantees as international transactions under section 92B of the Act. The TPO placed reliance on Explanation (i)(c) to section 92B, inserted by the Finance Act, 2012 with retrospective effect from 01.04.2002, which specifically includes a “guarantee” within capital financing. The TPO also held that by providing a guarantee, the assessee provided a service to the AE because the guarantee enabled the AE to obtain banking or financing facilities and could also enable the AE to obtain funds at a lower rate of interest. The TPO therefore held that the guarantee gave an economic benefit to the AE and also involved assumption of risk by the assessee.

7. For benchmarking the transaction, the TPO did not accept the rate of 0.60% taken by the assessee. The TPO obtained guarantee commission rates charged by different banks and found that such rates ranged from about 0.45% to 2.64% per annum. The TPO arrived at a median bank rate of about 1.50%. However, after considering the difference between a bank guarantee and a corporate guarantee, the TPO applied a lower rate of 1% per annum. The TPO accordingly computed an aggregate transfer pricing adjustment of Rs. 5,08,31,722/- in respect of the corporate and performance guarantees.

8. As regards to the issue relating to short credit of TDS, during the assessment proceedings the assessee claimed additional TDS credit of Rs. 14,08,212/- and additional TCS credit of Rs. 2,23,305/-. The Assessing Officer, however, did not examine this claim or gave any finding with respect to the same in the assessment order. In the final assessment order, the Assessing Officer granted aggregate TDS/TCS credit of Rs. 1,19,51,43,845/-. The assessee contended that it was entitled to total TDS/TCS credit of Rs. 1,20,64,73,408/- and, therefore, the Assessing Officer granted short credit. The assessee had claimed the additional TDS credit during the assessment proceedings through its letter dated 05.02.2025, but the Assessing Officer did not specifically deal with this claim while passing the final assessment order.

9. The assessee raised objections before the Dispute Resolution Panel (“DRP”).

10. The assessee reiterated that issuance of the guarantees was not an international transaction because the assessee incurred no cost and the guarantees did not affect its profits, income, losses or assets. The assessee further contended that it had given the guarantees as a shareholder obligation and as a matter of commercial prudence to protect its investment and the business interests of the group.

11. Without prejudice to its main contention, the assessee submitted that the guarantee commission should not exceed 0.60%, which it had already charged on the basis of its bank facility letter. The assessee also relied upon the orders passed in its own cases for A.Ys. 2013-14 to 2018-19, where the CIT(A) had accepted a rate of 0.60% and the ITAT had also upheld that rate.

12. The assessee also challenged the use of bank guarantee rates as comparables. The assessee submitted that the functions performed, assets employed and risks assumed by a commercial bank were different from those of a parent company providing a corporate guarantee to its subsidiary. The assessee relied upon the decision of the Hon’ble Bombay High Court in CIT v. Everest Kento Cylinders Ltd. [2015] 58  378 ITR 57 (Bombay), judgment dated 08.05.2015, and contended that a bank guarantee and a corporate guarantee could not be treated at par. The assessee further contended that the TPO had adopted the rate of 1% on an ad hoc basis by merely considering bank guarantee rates ranging from 0.45% to 2.64% without carrying out a proper comparability analysis.

13. The DRP did not accept the assessee’s objections. The DRP held that Explanation (i)(c) to section 92B specifically included a guarantee within the meaning of an international transaction. The DRP also relied upon the decision of the Hon’ble Bombay High Court in Everest Kanto Cylinders Ltd. (supra), and held that a corporate guarantee given to an AE was within the scope of transfer pricing provisions.

14. The DRP also rejected the assessee’s contention that absence of an immediate cost took the transaction outside section 92B of the Act. The DRP held that issuance of a guarantee created a contingent liability for the guarantor and gave a financial benefit to the AE by improving its access to finance and by enabling it to borrow at a lower rate. The DRP therefore held that the guarantee had an economic effect and could not be treated merely as a shareholder activity. The DRP further held that providing a financial guarantee amounted to providing a financial service to the AE and was merely a shareholder or stewardship function. The DRP observed that an independent person providing such a guarantee would normally charge consideration. The DRP therefore rejected the assessee’s contention that no guarantee commission was required merely because the assessee had given the guarantee to protect its investment in its subsidiaries.

15. On the alternative issue regarding the rate of guarantee commission, the DRP also rejected the assessee’s internal CUP of 0.60%. The DRP held that the 0.60% charged by the assessee’s bank was the bank’s facility or intermediation charge, whereas the assessee itself took the substantive default risk in respect of the AE. The DRP therefore held that the bank’s charge of 0.60% and the risk assumed by the assessee while guaranteeing the obligations of its AE were not comparable transactions.

16. The DRP noted that the TPO had taken a median bank guarantee rate of about 1.50% but had reduced the same to 1% after considering the difference between a bank guarantee and a corporate guarantee. The DRP therefore held that the rate of 1% was reasonable.

17. As regards the assessee’s reliance upon its own cases for earlier assessment years, where the CIT(A) and the ITAT had accepted a rate of 0.60%, the DRP held that each assessment year constituted a separate unit and the principle of res judicata did not strictly apply to income-tax proceedings. The DRP observed that the credit profile of the AEs, market rates and economic conditions could change from year to year and that the TPO had carried out a fresh exercise for A.Y. 202223. The DRP therefore declined to apply the rate accepted for A.Ys. 2013-14 to 2018-19 and confirmed the TPO’s rate of 1%. The DRP accordingly sustained the transfer pricing adjustment of Rs. 5,08,31,722/-.

18. The assessee had also raised an objection before the DRP that the Assessing Officer had not considered additional TDS credit of Rs. 14,08,212/- and additional TCS credit of Rs. 2,23,305/-. The assessee explained that certain customers and vendors had revised their TDS/TCS returns after the assessee had filed its return of income and, therefore, the additional credit became available subsequently to the assessee.

19. The DRP did not reject this claim on merits. The DRP held that correction or updation of TDS/TCS credit required verification by the Assessing Officer and could also be dealt with under section 154 of the Act. The DRP therefore directed the Assessing Officer to verify the assessee’s TDS/TCS claim and permitted the assessee to furnish the necessary facts and supporting evidence before the Assessing Officer.

20. The assessee is in appeal before us against the order passed by Ld. DRP.

21. We have heard the rival submissions and perused the material available on record.

22. As regards Ground No.1 relating to the transfer pricing adjustment on account of corporate guarantee, the assessee has primarily contended that issuance of a corporate guarantee on behalf of an AE does not constitute an “international transaction” under section 92B of the Act. We find that this issue is no longer res integra in the assessee’s own case. In KEC International Limited v. DCIT [IT Appeal Nos. 17 & 115/Mum/2018 for A.Y. 2012-13, order dated 14.09.2020], the Coordinate Bench has held that the corporate guarantee transaction is required to be benchmarked under the arm’s length principle. The Coordinate Bench thereafter followed this view in the assessee’s own cases for subsequent assessment years. In KEC International Ltd. v. Dy. CIT  207 ITD 193/[2026] 133 ITR(T) 141 (Mumbai – Trib.)/ITA Nos. 4021 & 4022/Mum/2023 and ITA Nos. 4076 & 4078/Mum/2023 for A.Ys. 2015-16 and 2016-17, order dated 03.05.2024, the Coordinate Bench specifically noted that the contention that a corporate guarantee is not an international transaction has already been decided against the assessee. We therefore reject the assessee’s primary contention that the corporate guarantee does not constitute an international transaction under section 92B of the Act.

23. We now come to the alternative contention of the assessee regarding the arm’s length rate of guarantee commission. The TPO has applied the rate of 1% after considering bank guarantee rates ranging from 0.45% to 2.64% and the DRP has upheld the same. The assessee, on the other hand, has already benchmarked the transaction at 0.60%, on the basis of the facility letter issued by its own bank.

24. We find force in this alternative contention. In the assessee’s own case for A.Y. 2010-11 in Asstt. CIT v. KEC International Ltd. [2019]   (Mumbai)/ITA No. 5611/Mum/2015, order dated 10.07.2019, the Coordinate Bench accepted the principle that where an internal CUP in the form of the rate charged by the assessee’s own bank is available, the same provides a more direct basis for benchmarking the guarantee commission than external bank guarantee rates. The Tribunal observed that bank guarantee rates vary depending upon the creditworthiness of the customer, security offered and several other commercial factors and, therefore, external bank rates cannot automatically be applied for benchmarking a corporate guarantee. The same principle was followed in the assessee’s own case for A.Y. 2011-12 inDy. CIT v. KEC International Ltd.  87 ITR(T) 587 (Mumbai – Trib.)/IT (TP)A No. 6447/Mum/2016, order dated 23.03.2021.

25. We also find that the Hon’ble Bombay High Court in Everest Kanto Cylinders Ltd. (supra), judgment dated 08.05.2015, has held that the considerations applicable to a bank guarantee and a corporate guarantee are different. The Coordinate Benches in the assessee’s own cases have consistently taken this principle into consideration while fixing an appropriate arm’s length rate for corporate guarantees.

26. Thereafter, in DCIT v. KEC International Limited [IT Appeal Nos. 33 and 502 (Mum) of 2022 and 2453 (Mum) of 2021, dated 31.05.2023] for A.Y. 2017-18, order dated 31.05.2023, the Coordinate Bench examined similar corporate guarantees given by the assessee on behalf of its overseas AEs. The Tribunal accepted 0.60% as the arm’s length rate of corporate guarantee commission in respect of the corporate guarantees where the assessee had taken such rate on the basis of the facility available from its bank. The Tribunal also accepted the alternative contention of the assessee that 0.60% was the closest internal CUP and directed the TPO/Assessing Officer to recompute the transfer pricing adjustment by adopting 0.60% for the corporate guarantees covered by that direction.

27. Thus, there is a consistent line of decisions in the assessee’s own case and, in the later assessment years, the Coordinate Benches have adopted 0.60% as the arm’s length rate for corporate guarantees. We do not find any particular difference in the facts of the year under consideration which would justify departure from the above view merely because the TPO has collected external bank guarantee rates ranging from 0.45% to 2.64%. The assessee has itself adopted 0.60% on the basis of its bank facility letter and the same rate has been accepted as a proper benchmark in its own cases.

28. Accordingly, following the decisions of the Coordinate Benches in the assessee’s own cases, referred to above, we direct the Assessing Officer/TPO to restrict the arm’s length rate of guarantee commission to 0.60% and recompute the transfer pricing adjustment accordingly, after giving due credit for the guarantee commission, if any, already charged/recovered by the assessee from its AEs. Ground No.1 is accordingly partly allowed.

29. Coming to Ground No.2 relating to short credit of TDS/TCS, we find that during the assessment proceedings the assessee claimed additional TDS credit of Rs. 14,08,212/- and additional TCS credit of Rs. 2,23,305/-. The Assessing Officer did not give any specific finding on this claim and granted aggregate TDS/TCS credit of Rs. 1,19,51,43,845/-. The DRP itself directed the Assessing Officer to verify the claim and observed that the assessee could furnish the necessary facts and evidence before the Assessing Officer. The assessee, however, contended that the correct credit has still not been granted.

30. We find that this issue is purely a matter of factual verification. We also note that in the assessee’s own case for A.Ys. 2015-16 and 2016-17, while dealing with a short grant of TDS credit, the Coordinate Bench restored the matter to the Assessing Officer with a direction to verify the relevant facts and allow the TDS credit in accordance with law. The Coordinate Bench followed the same direction for the subsequent year and allowed the ground for statistical purposes.

31. Accordingly, we restore Ground No.2 to the file of the Assessing Officer with a direction to verify the assessee’s claim of TDS/TCS credit, and grant relief, in accordance with law.

32. In the result, the appeal of the assessee is partly allowed in the terms indicated above.