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

  • News|Blog|Transfer Pricing|
  • 2 Min Read
  • By Taxmann
  • |
  • Last Updated on 24 November, 2021

Transfer pricing - Computation of arm’s length price (Adjustments - Guarantee Commission)

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

List of Cases Referred to

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Leave a Reply

Your email address will not be published. Required fields are marked *

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied