In the major relief to Bennett Coleman, the Mumbai Bench of Income Tax Appellate Tribunal (ITAT) deletes Arm’s Length Pricing (ALP) adjustment made in respect of the alleged guarantee issued in favor of its Special Purpose Vehicle (SPV).
The assessee, Bennett Coleman & Co Ltd raised the issue in respect of ALP adjustment of Rs.75,06,520 was made in respect of the alleged guarantee issued by the assessee company in favor of its SPV.
The coram headed by thePresident Justice P P Bhatt and Vice President, Pramod Kumar noted that the entire transaction of acquiring Virgin Radios was in furtherance of the business interests of the assessee company, finalized by the assessee much before even the AE in question came into existence, and the assessee company was the de-facto beneficiary of this transaction. Under these circumstances, the assessee company cannot be treated as a guarantor but rather as a primary obligor for its own transaction undertaken through the SVP. Viewed in totality, the service is not by the assessee company to the SVP, but the other way round. That is quite unlike and incomparable to a performance guarantee issued by a third party that is issued for the benefit of the entity for which it is issued, and not for the benefit of the entity issuing the guarantee.
“Let us assume, for a minute, that such a guarantee can hypothetically be issued, by or for an independent enterprise. In that case, it cannot have an arm’s length price because the beneficiary and the issuer of the guarantee are the same entity. In any event, the CUP input is taken as the bank guarantee, which guarantees the performance of a commitment assumed under a contract in which the bank has no role to play. The bank, in such a case, is not only an independent enterprise but also a rank outsider so far as the transaction in respect of which performance guarantee is issued. That cannot be compared with a case in which the enterprise issuing the guarantee, whether an associated enterprise or an independent enterprise, is also a beneficiary of, and party to, the main transaction itself. The very comparison of this different genus of obligations is vitiated in law and on facts,” the ITAT explained.
The ITAT deleted the impugned ALP adjustment on the ground that the clause in question in the agreement dated 30th May 2008 does not constitute a third party guarantee- like a bank guarantee which is taken as a comparable, and, even if it is assumed that it does so constitute a guarantee, the arm’s length price of such a performance guarantee, if at all it can be so held to be in character, will not be ascertainable under the CUP method for want of a valid comparison of the similar nature of the guarantee. The very foundation and rationale of the impugned ALP adjustment, on the CUP basis, is thus devoid of any legally sustainable basis.
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