Transfer pricing and Section 10A principles upheld on corporate guarantee, share application money, and loss set-off issues

Corporate guarantee commission for an associated enterprise could not be benchmarked against bank guarantees, so the 0.5% arm's length rate was not disturbed on transfer pricing grounds. Share application money was not re-characterised as a loan merely because share issuance was delayed, since the delay was explained and there was no basis to treat the funds as debt. Section 10A deduction issues on set-off of non-STPI losses and carry forward questions were covered by binding precedent on computation, leaving no substantial question of law. The Revenue's challenge therefore failed on all grounds.

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Issues: (i) whether the Tribunal was justified in adopting 0.5% as the arm's length price for corporate guarantee commission charges; (ii) whether share application money given to an associated enterprise could be treated as a loan merely because shares were issued after a delay; and (iii) whether deduction under Section 10A could be allowed without first setting off losses of non-STPI units and whether the Tribunal was right in following the governing decision on that question.

Issue (i): whether the Tribunal was justified in adopting 0.5% as the arm's length price for corporate guarantee commission charges.

Analysis: The Court noted that the question was covered by its earlier decision distinguishing a corporate guarantee issued by a holding company for its associated enterprise from a bank guarantee issued by commercial banks. On that reasoning, the comparison made by the Transfer Pricing Officer with bank guarantees was held to be impermissible, and the commission charged for the corporate guarantee was not liable to be interfered with on transfer pricing grounds.

Conclusion: The issue was answered against the Revenue and in favour of the assessee.

Issue (ii): whether share application money given to an associated enterprise could be treated as a loan merely because shares were issued after a delay.

Analysis: The Court accepted that the issue had been remanded for limited verification of the share certificate and observed that the delay in issuance of shares was explained and was not shown to be a device for parking funds as a loan. It also noted the absence of any basis to re-characterise share application money as debt merely because of the time taken for approval and issuance of shares.

Conclusion: The issue was answered against the Revenue and in favour of the assessee.

Issue (iii): whether deduction under Section 10A could be allowed without first setting off losses of non-STPI units and whether the Tribunal was right in following the governing decision on that question.

Analysis: The Court held that the questions relating to set-off of losses, carry forward of losses, and the effect of the CBDT circular were covered by the Supreme Court's decision governing the computation of Section 10A relief. In view of that binding authority, no substantial question of law arose on those grounds.

Conclusion: The issue was answered against the Revenue and in favour of the assessee.

Final Conclusion: No substantial question of law arose from any of the issues pressed in the appeal, and the Revenue's challenge failed in full.

Ratio Decidendi: A corporate guarantee issued by a holding company to its associated enterprise cannot be equated with a bank guarantee for transfer pricing comparability, share application money is not to be re-characterised as a loan merely because there is delay in issuance of shares when the delay is explained and the transaction is substantiated, and binding precedent governing Section 10A computation precludes interference on the set-off questions raised.

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