ITAT Invalidates Addition made by way of Adjustment to ALP in respect of Transaction of Providing Guarantee to AE [Read Order]

The Income Tax Appellate Tribunal, Kolkata bench in its recent order ruled that Transaction of providing guarantee by the Assessee in respect of a loan taken by its AE constitute ‘International Transaction’ for the purpose of the Income Tax Act, 1961.

During the financial year one of the associated enterprises (LVSI) borrowed funds from Axis Bank for the purpose of growing its business and the Assessee provided corporate guarantee to Axis Bank, Singapore, on behalf of LVSI.

The purpose of the bank guarantee was clearly mentioned in the agreement for acquisition as well for the working capital facility for LVSI. The Assessee charged guarantee fee @1% based on an analysis of US industrial Bond yield for the relevant period. TPO determined an arm’s length guarantee rate of 2.34% and rejected the claim of assessee since provided guarantee to the AE was in the nature of a shareholder activity.

The CIT (A) in AY 2010-11 rejected the contention of the Assessee and re-determined the guarantee fee at 2.19%.finally the tribunal called for the decision taken in the Tribunal in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010- 11 dated 22.9.2017 wherein held that addition made by the AO ought to have been deleted by the CIT (A) as the Guarantee Commission charged by the Assessee has to be regarded as at Arm’s Length.

Finally, the Tribunal bench comprising of Judicial Member N.V.Vasudevan and Accountant Member Waseem Ahmed, in its final order ruled that the addition made by way of adjustment to ALP in respect of transaction of providing guarantee to AE cannot be sustained and the same is directed to the deleted.