ITAT provides relief to Serum Institute on corporate guarantees

ITAT provides relief to Serum Institute on corporate guarantees

Upholds the order of the Commissioner of Income Tax (Appeals)

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has ruled that corporate guarantees cannot be treated on par with bank guarantees.

Providing relief to the assessee, Serum Institute of India, the tribunal upheld the order of the Commissioner of Income Tax (Appeals). The respondent-assessee had provided a corporate guarantee for borrowings made by its foreign subsidiaries without charging any commission.

The assessee had also given a corporate guarantee in favor of its subsidiaries Serum International BV and Bilthoven Biologicals BV, Netherlands.

To benchmark international transactions, it was contented before the Transfer Pricing Officer (TPO) that the corporate guarantee was given to the lenders for the loan taken by its Associated Enterprise (AE). It was for the benefit of the respondent-assessee and not a service provided to the AE.

The assessee contended that providing a corporate guarantee was a shareholder activity and not an international transaction under the Finance Act, 2012.

However, the TPO, while rejecting the contentions, proposed a Transfer Pricing (TP) adjustment of Rs.1,20,29,793 at the rate of 2 percent. Thereafter, the assessing officer (AO) passed a draft assessment order, making the TP adjustments.

Aggrieved by the order, the assessee appealed before the CIT(A), who deleted the addition on account of TP adjustment of corporate guarantee commission of Rs.91,03,879.

The tribunal observed that it was indisputable that the transaction of furnishing a bank guarantee to a subsidiary constituted an international transaction, given the retrospective amendment to the provisions of the Finance Act.

The Coram of S S Viswanethra Ravi (judicial member) and JM Inturi Rama Rao (accountant member) observed that there could not be a universal application of any rate of commission. It depended on the terms and conditions on which the loan was given, the risk undertaken and the relationship between the bank and the client. Also, economic and business interests were some of the major factors to be taken into consideration to decide the appropriate rate of commission.

The tribunal, thus, upheld the order of the CIT(A) and dismissed the appeal for consideration by the revenue department.