Associated Capsules Pvt. Ltd. v ACIT [2020] 121 103 (Mumbai – Trib.)


The assessee is engaged in the business of manufacturing empty hard gelatine capsules. The assessee provided Corporate Guarantee of 2.4 million Euros (Equivalent to Rs. 15.19 crores) to its Croatian AE. The assessee did not make any adjustment on account of Corporate Guarantee facility provided to it’s AE. The TPO held that the Corporate Guarantee is an international transaction and computed ALP guarantee commission @3%.  The CIT(A) confirmed the addition but reduced the rate of commission from 3% to 2.5%.


FollowingJurisdictional High Court in the case of Everest Kento Cylinders Ltd. [2015] 58 254 / 378 ITR 57, the ITAT held that Corporate Guarantee facility provided to overseas AE by the assessee is an international transaction.

However, in so far as the rate of commission is concerned, applying Everest Kento (supra), the ITAT adopted ALP corporate guarantee commission at 0.5%. The assessee submitted that the ALP of the corporate guarantee commission should be restricted to the extent of facility availed by A.E.  It was submitted that as against the facility of Rs. 15.19 crores, the AE has availed benefit to the extent of Rs. 2.48 crores only.  The ITAT accepted the contention. The Tribunal observed that in catena of decisions it has been held that Bank Guarantee and Corporate Guarantee are at variance. In the case of Bank Guarantee financial and capital assets of the entity are taken as security by the Bank to cover the financial risk. Thus, the assets of the entity are blocked to meet the obligation in the case of default. As a consideration for extending guarantee facility, the Bank charges commission on the entire guarantee facility extended. Whereas, in the case of Corporate Guarantee there is no commitment of financial or capital assets of the entity. The guarantee is issued without any security or underlying asset. Corporate guarantee is extended by one corporate entity to a third party for or on behalf of its subsidiary/group entity/associated enterprise. It is in the nature of contingent liability.  The ITAT therefore held that keeping in view, the nature and extent of exposure and liability of guarantor in the case of corporate guarantee, it would be justified if guarantee commission is charged to the extent of actual exposure of facility availed instead of gross amount of facility extended.  The ITAT also relied on the Tribunal decision in the case of BS Ltd. v. Asstt. CIT [2018] 94 346 (Hyd. – Trib.) to support its decision.

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