Transfer Pricing Adjustment Limits Corporate Guarantee Fee to 0.50% Under Section 36(1)(iii) Interest Deduction Reversed

ITAT Mumbai upheld a transfer pricing adjustment limiting the corporate guarantee fee to 0.50% of the gross guarantee value, aligning with Bombay HC precedent. The disallowance of interest under section 36(1)(iii) was reversed, as the tribunal found the expenditure commercially expedient and connected to business purposes, emphasizing a prudent businessman's perspective rather than revenue's viewpoint. The tribunal also directed the grant of full TDS credit and refund after verifying physical TDS certificates, following established HC rulings. Both grounds of the assessee's appeal were allowed for statistical purposes.

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Issues Involved:
1. Transfer Pricing Adjustment regarding Corporate Guarantee (CG)
2. Disallowance of Interest under Section 36(1)(iii)
3. Grant of TDS Credit and Refund
4. Initiation of Penalty under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment regarding Corporate Guarantee (CG):
The assessee provided a corporate guarantee of AED 53 million to its Mauritius AE, which was reduced to AED 51 million. The TPO considered this an international transaction due to the amendment in the Finance Act, 2012. The TPO used the External 'CUP' method and determined a TP adjustment of 2.74%, amounting to Rs. 1,71,18,150/-. The assessee argued that the corporate guarantee was provided as part of an overall financing arrangement and that both entities had similar credit ratings, thus no adjustment was necessary. However, the Tribunal found that the assessee initially proposed a 0.5% guarantee fee, indicating a benefit to the AE. The Tribunal restricted the TP adjustment to 0.50% on the gross value of the CG provided, aligning with judicial precedents.

2. Disallowance of Interest under Section 36(1)(iii):
The DCIT disallowed Rs. 492.15 Lacs of interest, noting that the assessee had advanced interest-free loans to its subsidiaries while claiming interest expenditure. The DRP provided partial relief, but the assessee contended that these loans were out of commercial expediency and sufficient interest-free funds were available. The Tribunal observed that the assessee's own funds were sufficient to cover the interest-free loans and that the loans were for business purposes. Citing various judicial pronouncements, the Tribunal concluded that the disallowance was not justified and deleted the impugned additions.

3. Grant of TDS Credit and Refund:
The assessee claimed TDS credit of Rs. 1,57,53,775/- in its return, later revised to Rs. 1,64,11,584/- based on physical TDS certificates. The DRP directed the DCIT to grant full TDS credit based on physical certificates, but the DCIT only granted credit for the amount reflected in Form 26AS. The Tribunal directed the DCIT to grant full TDS credit of Rs. 1,64,11,584/- after verifying the physical TDS certificates, in line with the DRP's directions and relevant judicial precedents.

4. Initiation of Penalty under Section 271(1)(c):
The assessee challenged the initiation of penalty under Section 271(1)(c). The Tribunal found this issue premature and dismissed the ground, indicating no interference was necessary at this stage.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on the TP adjustment for CG and the disallowance of interest under Section 36(1)(iii), and directed the DCIT to grant full TDS credit and refund. The initiation of penalty under Section 271(1)(c) was dismissed as premature. The order was pronounced in the open court on 04th January 2017.

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