This article discusses the case ITA No.524/Del./2021 where Sona BLW Precision Forgings Ltd., Gurgaon contested transfer pricing adjustments and cess deductions made by the Assessing Officer under the direction of the Dispute Resolution Panel (DRP) for the assessment year 2016-17.
The appellant, Sona BLW Precision Forgings Ltd., engaged in the manufacturing of precision forged automotive components, appealed against the upward adjustment of transfer pricing related to corporate guarantee fees and standby letter of credit fees charged to its associated enterprises. The Assessing Officer had applied an average of two Indian bank guarantee rates to compute the arm’s length price, which was disputed by the appellant.
The main issues revolved around the applicability of bank guarantee rates for computing corporate guarantee rates and the non-consideration of comparables provided by the appellant to justify a lower rate charged. Additionally, the case also discussed the deductibility of Education Cess and Secondary & Higher Education Cess as per section 40(a)(ii) of the Income Tax Act.
The Income Tax Appellate Tribunal, after considering the submissions, directed the case back to the Assessing Officer for a fresh evaluation of the transfer pricing adjustments, specifically instructing to use the LIBOR rate as a benchmark for transactions invoiced in foreign currency. The issue regarding the deductibility of education cesses was not pressed by the appellant and thus dismissed.
The Tribunal’s decision to remand the case back for a fresh assessment highlights the complexities involved in transfer pricing cases and the importance of selecting appropriate benchmarks. This case sets a precedent for how corporate guarantees and related financial instruments should be evaluated in the context of transfer pricing in India.
Order pronounced in the open court on 9th June, 2023.
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