KEC International Ltd (“the assessee”), engaged in the Engineering, Procurement and Construction business in India and overseas provided corporate and performance guarantees on behalf of its overseas AEs for AY 2022-23. The assessee contended that the guarantees did not constitute an international transaction. Alternatively, it had benchmarked the guarantee commission at 0.60% based on its own bank facility letter. However, the TPO applied a rate of 1% based on external bank guarantee rates, resulting in a TP adjustment of ₹5.08 crores, which was upheld by the DRP.
Assessee’s Contentions | Revenue’s Contentions | Court’s Judgment |
|---|---|---|
The assessee submitted the corporate guarantees provided to its AEs should not be regarded as international transactions under Section 92B, as they were provided in connection with its investment in overseas subsidiaries and did not involve any immediate cost or separate financial service. | The DRP held that the guarantees created a contingent liability and provided a financial benefit to the AEs by facilitating access to finance. | The ITAT rejected the assessee's contention and held that the issue was already settled in the assessee's own earlier cases. Corporate guarantees were therefore required to be benchmarked. |
The assessee submitted that the guarantee commission should be restricted to 0.60%, being the rate charged by its own bank accepted in earlier years. | The Revenue relied on external bank guarantee rates of 0.45% to 2.64% and supported the TPO’s adoption of 1%. The DRP rejected the 0.60% internal CUP on the ground that the bank and the assessee assumed different risks. | The Tribunal held that the assessee’s own bank rate of 0.60% constituted a more direct internal CUP than external bank guarantee rates. Following the assessee’s earlier cases, it directed the AO/TPO to apply 0.60% and recompute the TP adjustment after giving credit for commission. |
The ITAT directed the AO/TPO to restrict the arm's length guarantee commission to 0.60% instead of 1% and recompute the TP adjustment accordingly, after giving credit for any guarantee commission already charged or recovered from the AEs.
