The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that extending corporate guarantee to Associated Enterprise would constitute an international transaction.
The assessee, Mastek Ltd was engaged in providing services in the life and annuity which was a vertical of the insurance sector. In order to expand its business in another vertical, the assessee decided to acquire STG (USA). Accordingly, it was decided to undertake the acquisition through Majesco Mastek, US (MMUS), a wholly owned US subsidiary of the assessee and acting as a distributor of software services capabilities of the assessee.
The assessee issued a guarantee to ICICI bank, Canada, which in turn gave a loan to MMUS, which enabled the latter to pay the purchase consideration for the acquisition of STG (USA). Further, the assessee also decided to make an equity investment of USD 26 million in MMUS over a period of three years, which would be used for repayment of loan, availed for payment of acquisition of STG (USA).
During the course of assessment proceedings, the TPO/Assessing Officer observed that the assessee had not benchmarked the provision for guarantee given by it on behalf of its AE. However, the Assessing Officer held that providing guarantee to another company represents a service rendered on behalf of the other company. It involved shifting a considerable burden/risk on the guarantee provider and such service would be required to be compensated on arm’s length basis.
Accordingly, the Assessing Officer/TPO made an upward adjustment of Rs. 65.08 lakhs by adopting a rate of 2.12% (being the average difference in coupon rate in respect of AA rated bonds and BBB rated bonds.
S.N. Soparkar, who appeared on behalf of the assessee submitted that the financial guarantee was the nature of shareholder activity as it was to enable the AE to pay purchase consideration of acquisition, the decision in relation to which was made by the assessee.
It was further, submitted that financial guarantee was quasi equity in nature as the loan availed by the AE of the assessee company through financial guarantee had been repaid back to the assessee company through equity infusion made by the assessee company into its subsidiary and the provision of guarantee was not covered under transfer pricing regulations.
Sanjeev Kumar, appeared on behalf of the revenue.
The two-member Bench of Waseem Ahmed, (Accountant Member) and Siddhartha Nautiyal, (Judicial Member) observed that the ITAT in assessee’s own case for preceding assessment year had held that providing of corporate/financial guarantee would not tantamount to an international transaction, and hence there was no requirement for benchmarking the same.
The Bench partly allowed the appeal filed by the assessee holding that extending of corporate guarantee to AE would constitute an “international transaction” and the Assessing Officer was directed to adopt 0.5% as an arm’s length consideration for the corporate guarantee issued by the assessee in favour of its AE.
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