Amendment to Section 92B on Guarantees Is a Specific Anti-Abuse Rule, Applies Only from April 1, 2012

The ITAT Mumbai held that the amendment to the transfer pricing provision concerning guarantees issued on behalf of overseas subsidiaries is a specific anti-abuse rule (SAAR) and applies only prospectively from April 1, 2012. Since the assessment year in question predates this effective date, the amended Section 92B does not apply. Consequently, the transfer pricing adjustment related to corporate guarantees was deleted. The tribunal emphasized that anti-abuse provisions require compliant conduct going forward and cannot be applied retrospectively to levy taxes. The decision was in favor of the assessee.

---

---

Issues Involved:

1. Transfer Pricing Adjustment for Guarantees
2. Deduction under Section 80IB(8A)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Guarantees:

The primary issue revolves around the addition of Rs. 40,64,424 as a transfer pricing adjustment related to guarantees given by the assessee to bankers on behalf of its overseas subsidiaries. The assessee argued that the transfer pricing proceedings initiated under section 92CA(1) were without jurisdiction and should be quashed. Additionally, the assessee contended that the granting of guarantees is not an international transaction under Transfer Pricing regulations and that the bank guarantee commission charged by the banks (1.75%) was reimbursed by the subsidiaries to the appellant. Therefore, the additional guarantee commission imputed by the AO/TPO should be deleted.

The Transfer Pricing Officer (TPO) noted that the assessee did not charge any fees or commission for issuing these guarantees. The TPO required the assessee to show cause why an arm’s length price adjustment @ 3% should not be made. The TPO concluded that the corporate guarantees are covered by the definition of 'international transaction' under section 92B and that the assessee should have charged fees at an arm’s length price. The TPO adopted 3% as an arm’s length price for issuance of the guarantee, resulting in an ALP adjustment of Rs. 1,13,40,000.

The CIT(A) upheld the TPO's decision, stating that the furnishing of corporate guarantees is an international transaction as per the amended provisions of section 92B, effective retrospectively from 01.04.2002. The CIT(A) also rejected the appellant's contention that the reference made by the AO to the TPO was without proper jurisdiction. The CIT(A) further noted that the appellant did not benchmark this international transaction and upheld the 3% rate applied by the TPO.

The Tribunal, however, disagreed with the CIT(A) and TPO. It observed that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity, does not amount to a service for which arm's length adjustment can be done. The Tribunal referenced the decision in Micro Ink vs ACIT, which emphasized that the determination of arm's length price can only be done in respect of an 'international transaction' as defined under section 92B. The Tribunal concluded that the issuance of corporate guarantees by the assessee was not in the nature of 'provision for services' and should be treated as shareholder participation in the subsidiaries.

2. Deduction under Section 80IB(8A):

The second issue pertains to the deduction of Rs. 18,64,72,586 under section 80IB(8A) of the Income Tax Act. The Assessing Officer (AO) contended that the assessee did not fulfill the statutory conditions required under section 80IB(8A)-II & IV of the Act and Rule 18DA of the I.T. Rules, 1962. The AO argued that mere approval from the prescribed authority does not exempt the assessee from fulfilling the statutory conditions for claiming the deduction.

The CIT(A) allowed the deduction, and the Tribunal upheld this decision, noting that the issue was covered in favor of the assessee by decisions of the coordinate benches in the assessee’s own case for the assessment years 2003-04 to 2008-09. The Tribunal found no reason to deviate from these earlier decisions and upheld the order of the CIT(A).

Conclusion:

- The appeal filed by the assessee was allowed, resulting in the deletion of the transfer pricing adjustment related to corporate guarantees.
- The appeal filed by the Assessing Officer was dismissed, upholding the deduction under section 80IB(8A) as allowed by the CIT(A).

---