Your SlideShare is downloading. ×
Mumbai Tribunal upheld guarantee commission charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Mumbai Tribunal upheld guarantee commission charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length

292
views

Published on

The Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Glenmark Pharmaceuticals Limited (the taxpayer), explained the difference between corporate guarantee and bank …

The Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Glenmark Pharmaceuticals Limited (the taxpayer), explained the difference between corporate guarantee and bank guarantee, and held that bank guarantee rates available in the public domain cannot be mechanically applied in determining the arm’s length price. If proposed to be used, the bank guarantee rates should be adjusted for various differences, such as (i) risk profiles of the respondents for the guarantee, (ii) financial position of the loan applicants, (iii) term of the guarantee, (iv) security involved, (v) quantum of guarantee, (vii) period of guarantee, (viii) past history of the customers, etc. in accordance with Rule 10B of the Income-tax Rules, 1962 (the Rules).

The Tribunal analysed co-ordinate bench rulings in case of Asian Paints, Reliance Industries, Everest Kanto, etc., and upheld guarantee commission rates charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length.


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
292
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
3
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. KPMG FLASH NEWS KPMG IN INDIA The Mumbai Tribunal upheld guarantee commission charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length 11 December 2013 Background Facts of the case Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Glenmark 1 Pharmaceuticals Limited (the taxpayer), explained the difference between corporate guarantee and bank guarantee, and held that bank guarantee rates available in the public domain cannot be mechanically applied in determining the arm’s length price. If proposed to be used, the bank guarantee rates should be adjusted for various differences, such as (i) risk profiles of the respondents for the guarantee, (ii) financial position of the loan applicants, (iii) term of the guarantee, (iv) security involved, (v) quantum of guarantee, (vii) period of guarantee, (viii) past history of the customers, etc. in accordance with Rule 10B of the Income-tax Rules, 1962 (the Rules).  The taxpayer is engaged in the business of manufacturing and marketing of pharmaceutical products and related Research and Development activities.  During the year under consideration, the taxpayer had charged guarantee commission of 0.53 percent and 1.47 percent in respect of guarantee provided in connection with bank loans and LC facilities availed by its Associated Enterprises (AEs); Glenmark Holding SA, Switzerland and Glenmark Generics SA, Argentina respectively. In the Transfer Pricing study (TP study) undertaken by the taxpayer, the guarantee commission charged of 0.53 percent for loan guaranteed and 1.47 percent for LC facility was determined to be at arm’s length applying the Comparable Uncontrolled Price (CUP) method. The Tribunal analysed co-ordinate bench rulings in case of Asian Paints, Reliance Industries, Everest Kanto, etc., and upheld guarantee commission rates charged on loans and letter of credit facility at 0.53 percent and 1.47 percent respectively as arm’s length. _________________ 1 Glenmark Pharmaceuticals Limited v. ACIT (ITA No. 5031/M/2012) – Taxsutra.com © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 2.    - EXIM Bank of USA (3 percent per annum): The Transfer Pricing Officer (TPO) rejected the TP study stating that the taxpayer failed to discharge its primary onus of benchmarking the transaction and determined arm’s length guarantee commission at three percent of the guaranteed amount based on guarantee commission rates charged by various banks, i.e. Allahabad Bank (3 percent per annum); Dutch State, FMO (2.5 percent per annum); HSBC Ltd (0.15 percent to 3 percent per annum); and EXIM Bank of USA (3 percent per annum) resulting in an adjustment of INR 115.1 million. The taxpayer filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)] against the above adjustment and submitted that following points should be considered while determining arm’s length price of the taxpayer’s guarantee commission: (a) Interest saving, (b) Adjustments towards negotiations, (c) risk undertaken by the taxpayer while providing guarantee to the AEs, etc. The CIT(A) however, upheld the adjustment made by the TPO and determined the guarantee commission at 3 percent as arm’s length.   - Allahabad Bank (3 percent per annum): The taxpayer highlighted that the above rates were rejected by the Tribunal in various rulings, i.e. M/s Asian Paints Ltd. (ITA No. 1937/Mum/2010) and M/s Everest Kanto Cylinder Ltd. (ITA No. 542/Mum/2012) and M/s Reliance Industries Limited (ITA No. 4475/ Mum/2011).  The taxpayer contended that guarantee commission rates charged by its financier, Bank of India, to its customers may also be indicative of the arm’s length guarantee commission. However, the same would need to be adjusted for factors, such as interest rates, risk factors, guarantee amounts, nature of transactions, past history of customers, etc.  Bank guarantees are not comparable to the corporate guarantee provided by the taxpayer.  The Tribunal in various cases has upheld corporate guarantee commission prices/ rates in the range of 0.25 percent to 0.6 percent as arm’s length.  The DR relied on the order of TPO, and the Tribunal decision in case of M/s Technimont ICB Pvt. Ltd. (ITA No. 6394/Mum/ 2012) stating that bank guarantee commission rate of 3 percent was upheld in this case.  This is a case of bank guarantee offered to the customers and not a corporate guarantee  The rates are applicable to rupee loans and not foreign currency loans  The rates apply to guarantee upto INR 100 million vis-à-vis INR 4500 million guaranteed by the taxpayer. - FMO (Netherland Financier) (2.5 percent per annum):  Essential facts relating to this comparable are not available in the public domain. - HSBC (0.15 percent to 3 percent per annum):  The taxpayer’s contentions were in line with those for Allahabad Bank. Guarantee commission rate cannot be equal to LIBOR rate which is nearly 3 percent.  Aggrieved by the order of CIT(A), the taxpayer filed an appeal before the Tribunal. The taxpayer distinguished each of the comparables selected by the TPO on, inter alia, the following grounds: Details of negotiations were not available in the public domain  Proceedings before the Tribunal  The said transaction is not the case of corporate guarantee Tribunal’s ruling  There are conceptual differences between a bank guarantee and a corporate guarantee. In corporate guarantee, guarantee of payment is made by a corporation on behalf of another business entity. The guarantee is provided in consideration of a vendor providing credit to a business, on whose behalf the guarantee is made. Corporate guarantee operates not for business considerations, but to provide safeguards for the financial health of the AEs. Bank guarantee is a surety bond in finance, a promise by one party to assume responsibility for the debt obligation of a borrower if the borrower © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 3. defaults. Commercial considerations are paramount in fixing charges in case of a bank guarantee. Hence, a bank guarantee comparable may not clear the Functions, Assets and Risks (FAR) analysis test in case of a corporate guarantee.  Bank guarantee rates cannot be applied mechanically. These need to be adjusted for various factors, such as (i) risk profiles of the respondents for the guarantee, (ii) financial position of the loan applicants,(iii) terms of the guarantee, (iv) securities involved,(v) quantum of guarantee,(vi) amount involved, (vii) period of guarantee, (viii) past history of the customers, etc.  The ruling of Technimont ICB Ltd. is an aberration and the facts are distinguishable vis-à-vis taxpayer’s case. The Tribunal has analysed various rulings like Asian Paints Ltd, Everest Kanto Cylinder Ltd, and Reliance Industries Ltd on guarantee commission and concluded that the guarantee commission rates of 0.53 percent and 1.47 percent on loans and LC facility are at arm’s length. Our comments In recent assessments, the TPOs have determined the arm’s length guarantee commission either by applying guarantee commission rates charged by banks or by applying the interest savings method using Indian interest rates. The above ruling exhibits significant precedent value in the first case as the Tribunal has evaluated and clearly distinguished a corporate guarantee vis-à-vis a bank guarantee. Further, it also emphasises the need to make adjustments for various factors affecting the guarantee rates as highlighted above. Hence, in the absence of any specific guidance under the Indian TP Regulations, this ruling assumes notable importance and should prove to be useful from a taxpayer’s perspective. However, from a taxpayer’s perspective it would be important to ensure that there is robust documentation in relation to the guarantee transaction and that the same is appropriately benchmarked based on a complete understanding of the facts surrounding the transaction. Separately, it is relevant to note that recently the CBDT has issued Safe Harbour Rules wherein, a safe harbor guarantee commission of 2 percent (where the amount guaranteed does not exceed INR 1000 million) and 1.75 percent (where the amount guaranteed exceeds INR 1000 million) has been prescribed. In light of this, a guarantee commission of 0.53 percent and 1.47 percent accepted by the Tribunal is a positive development. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 4. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.