2022 (6) TMI 660 - AT - Income Tax

Tribunal Decision on Corporate Guarantee as International Transaction under Income Tax Act

The Tribunal upheld the Transfer Pricing Officer's decision that providing a corporate guarantee to an Associated Enterprise qualifies as an international ... Provision of corporate guarantee as an international transaction - arm's length guarantee commission fixed at 0.5% - interest on delayed realisation of receivables treated as an international transaction - remand for fresh consideration - disallowance under section 14A read with Rule 8D - set-off of brought forward business loss and unabsorbed depreciation - deduction under section 10AA to be computed on assessed income - consequential adjustment of interest under section 234BProvision of corporate guarantee as an international transaction - arm's length guarantee commission fixed at 0.5% - Whether providing a corporate guarantee to an Associated Enterprise is an international transaction and the appropriate arm's length guarantee commission. - HELD THAT: - The Tribunal accepted that providing a corporate bank guarantee to an AE falls within the scope of an international transaction for transfer pricing purposes. While the TPO had determined an ALP-based addition computed at 2% of the loan amount, the Tribunal followed precedents of the Bengaluru Benches (notably United Spirits Ltd.) and, rejecting reliance on an unrelated decision where the assessee had itself offered a rate, directed that the TP addition be restricted to 0.5% of the loan amount as the appropriate arm's length guarantee commission.Provision of corporate guarantee held to be an international transaction; guarantee commission restricted to 0.5% of the guaranteed loan amount.Interest on delayed realisation of receivables treated as an international transaction - remand for fresh consideration - Treatment and computation of interest on delayed realisation of receivables from AEs and the method for benchmarking such interest. - HELD THAT: - The TPO considered delayed realisation beyond agreed credit period to be an international transaction and applied a benchmarking rate (LIBOR-based), while the DRP substituted domestic SBI short-term deposit rates. The parties agreed that identical facts arose in AY 2015-16 where the Tribunal had remanded the issue for the TPO/AO to recompute interest invoice-wise as directed by the DRP. Given the identical factual matrix, the Tribunal set aside the issue for fresh consideration by the TPO/AO in accordance with the earlier order, thereby requiring reworking of the interest computation on individual-invoice delay and appropriate benchmarking.Issue remanded to the TPO/AO for fresh consideration and recomputation of interest on delayed receivables in accordance with the Tribunal's directions in the assessee's AY 2015-16 order.Disallowance under section 14A read with Rule 8D - Validity of invoking section 14A disallowance given the assessee's claimed absence of exempt income. - HELD THAT: - The assessee contended no exempt income was earned and relied on the Tribunal's AY 2015-16 decision. However, the assessment records showed dividend income and there was no specific ground contesting the existence of exempt income in the present grounds. In these circumstances the Tribunal did not adjudicate the merits but concluded it would be appropriate to set aside the matter to the AO for fresh consideration after affording the assessee an opportunity of being heard.Issue remanded to the AO for fresh adjudication on section 14A disallowance with opportunity to the assessee to be heard.Set-off of brought forward business loss and unabsorbed depreciation - Whether brought forward business losses and unabsorbed depreciation should be given effect against assessed income. - HELD THAT: - The Tribunal directed that the AO give effect to brought forward business loss and unabsorbed depreciation in accordance with law after due verification, thereby requiring the AO to apply statutory provisions and verify entitlement before adjusting the assessed income.AO directed to give effect to brought forward business loss and unabsorbed depreciation after due verification in accordance with law.Deduction under section 10AA to be computed on assessed income - Whether deduction under section 10AA should be computed on the assessed income or on the returned income. - HELD THAT: - Following the Tribunal's earlier decision in the assessee's AY 2015-16 and authoritative high court reasoning, the Tribunal held that deduction under section 10AA is to be allowed on the assessed income (i.e., after adjustments made in assessment) and not merely on the returned income, and directed the AO to compute the deduction accordingly.Deduction under section 10AA to be computed on assessed income and AO directed to allow it accordingly.Consequential adjustment of interest under section 234B - Consequential computation of interest under section 234B arising from adjustments allowed or disallowed on appeal. - HELD THAT: - The Tribunal observed that issues relating to interest under section 234B are consequential to the primary grounds decided or remanded and therefore directed the AO to give consequential relief consistent with the Tribunal's determinations.AO directed to compute and adjust interest under section 234B consequentially after giving effect to the Tribunal's directions.Final Conclusion: The appeal is partly allowed: the transfer pricing addition for the corporate guarantee is restricted to 0.5% of the guaranteed loan; the issue of interest on delayed receivables and the question under section 14A are set aside to the AO/TPO for fresh consideration; the AO is directed to give effect to brought forward losses and unabsorbed depreciation after verification, to compute deduction under section 10AA on assessed income, and to make consequential adjustments (including interest under section 234B) in accordance with the Tribunal's directions. Issues Involved:1. Adjustment of transfer price related to international transactions.2. Corporate guarantee as an international transaction.3. Interest on delayed receivables.4. Disallowance under section 14A.5. Set-off of brought forward losses.6. Deduction under section 10AA.7. Levy of interest under section 234B.Detailed Analysis:1. Adjustment of Transfer Price Related to International Transactions:The Tribunal addressed the issue of whether the issuance of a corporate guarantee by the assessee to its AE qualifies as an international transaction under section 92B of the Income Tax Act, 1961. The Tribunal upheld the TPO's decision that providing a corporate guarantee is indeed an international transaction and must be benchmarked to determine the Arm's Length Price (ALP). The Tribunal referenced the United Spirits Ltd. case, concluding that a 0.5% guarantee commission is appropriate, rejecting the DR's reliance on the Synergies Castings Ltd. case where 0.875% was considered.2. Corporate Guarantee as an International Transaction:The Tribunal confirmed that providing a corporate guarantee to an AE is an international transaction. It directed the AO/TPO to restrict the TP addition to 0.5% of the loan amount, aligning with the United Spirits Ltd. precedent. The Tribunal dismissed the DR's argument based on the Synergies Castings Ltd. case, as it was not applicable as a precedent.3. Interest on Delayed Receivables:The Tribunal considered whether delayed realization of receivables constitutes an international transaction. The TPO had applied a 6-month LIBOR rate plus 400 basis points, resulting in an addition of Rs. 56,39,729/-. The DRP substituted the LIBOR rate with the SBI short-term deposit rate, enhancing the addition. The Tribunal remanded the issue to the AO/TPO for fresh consideration, following the precedent set in the assessee's case for AY 2015-16, directing a re-computation based on individual invoice delays.4. Disallowance Under Section 14A:The Tribunal addressed the quantum of disallowance under section 14A, considering the assessee's claim of not earning any exempt income during the relevant year. The Tribunal noted the absence of a specific ground asserting no exempt income and remanded the issue to the AO for fresh consideration, ensuring the assessee is given an opportunity to present its case.5. Set-off of Brought Forward Losses:The Tribunal directed the AO to give effect to the brought forward business loss and unabsorbed depreciation in accordance with the law after due verification.6. Deduction Under Section 10AA:The Tribunal ruled that deduction under section 10AA should be computed on the assessed income, not the returned income. This decision aligns with the Karnataka High Court's judgment in the M Pact Technology Services Pvt. Ltd. case, which stipulates that deductions should be based on the assessed income.7. Levy of Interest Under Section 234B:The Tribunal noted that the issue of interest levy under section 234B is consequential to the other grounds of appeal. The AO is directed to provide consequential relief based on the final outcomes of the other issues.Conclusion:The appeal was partly allowed, with the Tribunal providing specific directions for each issue, ensuring compliance with legal precedents and proper benchmarking analyses. The Tribunal emphasized the need for fresh consideration and accurate computations by the AO/TPO, ensuring the assessee's rights are adequately protected.