Section 80IB, section 14A and corporate guarantee pricing were resolved through consistency, own-funds presumption and realistic benchmarking.

A consistently accepted and scientifically reasonable method of apportioning common head office and selling expenses was upheld for section 80IB deduction, with the Revenue's challenge failing on consistency grounds. Section 14A read with Rule 8D disallowance was held unsustainable where own funds exceeded investments and no cogent nexus with borrowed funds was shown, so the disallowance was deleted. Scrap generated in the manufacturing process was treated as having a direct nexus with the eligible undertaking and remained deductible under section 80IB. Corporate guarantee to subsidiaries was treated as an international transaction, but the arm's length commission had to be benchmarked realistically and confined to the effective period of the guarantee.

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Issues: (i) Whether the assessee was entitled to deduction under section 80IB on common head office and selling expenses apportioned by the assessee's method; (ii) whether disallowance under section 14A read with Rule 8D was justified where the assessee had sufficient own funds; (iii) whether sale of scrap arising from the manufacturing process qualified for deduction under section 80IB; and (iv) whether furnishing of corporate guarantee to subsidiaries constituted an international transaction warranting transfer pricing adjustment, and if so, at what arm's length rate.

Issue (i): Whether the assessee was entitled to deduction under section 80IB on common head office and selling expenses apportioned by the assessee's method.

Analysis: The apportionment method had been accepted in earlier years in the assessee's own case as a scientific and reasonable basis for allocation of common expenses. The facts and legal position for the years under consideration were found to be identical, and the matter was treated as settled by the earlier decisions followed on principles of consistency.

Conclusion: The issue was decided in favour of the assessee and the Revenue's challenge failed.

Issue (ii): Whether disallowance under section 14A read with Rule 8D was justified where the assessee had sufficient own funds.

Analysis: The assessee's own funds exceeded the investments, and no cogent nexus between borrowed funds and exempt-income investments was established. The invocation of Rule 8D without a satisfactory foundation was found unsustainable, and support was drawn from binding precedent on the presumption that investments are made out of own funds where such funds are sufficient.

Conclusion: The issue was decided in favour of the assessee and the disallowance was deleted.

Issue (iii): Whether sale of scrap arising from the manufacturing process qualified for deduction under section 80IB.

Analysis: Scrap generated in the manufacturing process was treated as having a direct nexus with the eligible industrial undertaking. The issue had already been answered in the assessee's favour in earlier years and was followed here on the same factual matrix and settled legal position.

Conclusion: The issue was decided in favour of the assessee and the Revenue's objection was rejected.

Issue (iv): Whether furnishing of corporate guarantee to subsidiaries constituted an international transaction warranting transfer pricing adjustment, and if so, at what arm's length rate.

Analysis: Corporate guarantee was held to fall within the scope of an international transaction under the transfer pricing regime. However, the rate adopted by the Revenue was not accepted. The arm's length commission was held to be far lower on the facts, and the guarantee charge was also required to be proportionately confined to the period for which the guarantee actually remained effective.

Conclusion: The issue was decided partly in favour of the assessee and partly in favour of the Revenue, with the adjustment restricted accordingly.

Final Conclusion: The assessee succeeded on the core deduction and disallowance issues, while the Revenue obtained only a limited transfer pricing relief on corporate guarantee commission; the Revenue's appeals were therefore only partly successful.

Ratio Decidendi: A consistently accepted and scientifically reasonable method of allocating common expenses cannot be displaced without a cogent basis; where own funds exceed investments, section 14A disallowance is not warranted in the absence of proved nexus with borrowed funds; and corporate guarantee is an international transaction but its arm's length charge must be determined on a realistic benchmarking basis.

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