No TP adjustment for ‘performance guarantee’ as contractual revenue would belong to guarantor if guarantee was invoked

Case Details: DCIT v. KEC International Ltd. - [2021] 132 taxmann.com 75 (Mumbai - Trib.)

Judiciary and Counsel Details

• • Vikas Awasthy, Judicial Member and N.K. Pradhan, Accountant Member
  • Sushil Kumar Mishra, DR for the Appellant. 
  • Anuj Kisnadwala, AR for the Respondent.

Facts of the Case

Assessee-company was engaged in the business of design, fabrication, galvanizing, and testing of transmission line towers and telecom towers. The assessee provided a performance guarantee for its AE during the relevant year, but it did not charge any commission from its AE for providing said performance guarantee.

The Transfer Pricing Officer (TPO) treated the performance guarantee transaction as an international transaction and proceeded to benchmark the same by taking 1.04 percent per annum bank guarantee commission rate. Accordingly, certain addition was made to the assessee’s ALP.

The CIT(A) held that there was no cost element in the case of guarantee given by the assessee. Hence, the transaction of issuance of guarantee was out of the ambit of Indian Transfer Pricing Regulations. Aggrieved revenue filed the appeal before the Mumbai Tribunal.

ITAT Held

The Mumbai Tribunal held that it was noted that as per terms of the agreement, in the event of AE failing in execution of the contract, performance guarantee issued by the assessee would get invoked, and thereupon, the assessee would be obligated to execute the contract on its own by using its own infrastructure.

This would, in turn, result in the assessee deriving entire contractual revenue and huge profits from there. Thus, there was absolutely no risk involved for the assessee in issuing performance guarantee on behalf of its AE, warranting charging of any commission to mitigate that risk. Therefore, the impugned addition made by TPO was to be deleted.

Case Review

• • Asstt. CIT v. KEC International Ltd. [2019] 108 taxmann.com 172 (Mum.) (para 14) followed.

List of Cases Referred to

• • Asstt. CIT v. KEC International Ltd. [2019] 108 taxmann.com 172 (Mum.) (para 6)
  • Manugraph India Ltd. v. Dy. CIT [2016] 69 taxmann.com 400 (Mum. – Trib.) (para 16)
  • Micro Ink Ltd. v. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 (Ahd. – Trib.) (para 16)
  • Bharti Airtel Ltd. v. Addl. CIT [2014] 43 taxmann.com 150/63 SOT 113 (Delhi – Trib.) (URO) (para 16)
  • Videocon Industries Ltd. v. Addl. CIT [2015] 55 taxmann.com 263 (Mum. – Trib) (para 16)
  • CIT v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254/232 Taxman 307/378 ITR 57 (Bom.) (para 23)
  • CIT v. Glenmark Pharmaceuticals Ltd. [2017] 85 taxmann.com 349/398 ITR 439 (Bom.) (para 25)
  • Glenmark Pharmaceuticals Ltd. v. Addl. CIT [2014] 43 taxmann.com 191/62 SOT 79 (URO) (Mum. – Trib.) (para 25)
  • CIT v. Glenmark Pharmaceuticals Ltd. [2019] 107 taxmann.com 445/265Taxman 237 (SC) (para 25)
  • KEC International Ltd. v. DCIT [IT Appeal Nos. 17 & 115 (Mum.) of 2018, dated 14-9-2020] (para 25.2).