Corporate guarantee fee reduced from 2.5% to 0.5% for international transactions with associated enterprises upheld

The ITAT Mumbai upheld CIT(A)'s decision reducing corporate guarantee fee rate from 2.5% to 0.5% for international transactions with associated enterprises, following precedent from earlier assessment years. The Tribunal confirmed LIBOR plus 1% as arm's length interest rate for loans to AEs and rejected the assessee's claim for proportionate premium deduction on optionally convertible debentures, ruling that subsequent commercial arrangements cannot be applied retroactively. The Tribunal allowed deductions for interest expenses on subsidiary share acquisition and ESOP expenses under Section 37(1), and permitted mark-to-market losses on forward contracts as legitimate business expenses. However, delayed ESIC contributions were disallowed following Supreme Court precedent in Checkmate Services case.

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Issues Involved:
1. Corporate Guarantee as an International Transaction
2. Notional Interest on Loans to AEs
3. Disallowance under Section 35D
4. Disallowance of Premium on Repayment of Optionally Convertible Debentures
5. Disallowance of ESOP Expenses
6. Mark to Market Losses
7. Delayed Payments of Employees' Contribution to ESIC

Summary:

Corporate Guarantee as an International Transaction:
The Tribunal upheld the CIT(A)'s decision that providing a corporate guarantee to an AE constitutes an international transaction under Section 92B of the Act. The Tribunal followed its earlier decisions for Assessment Years 2007-08, 2008-09, and 2009-10, confirming the arm's length rate of guarantee fee at 0.5% despite the assessee's contention for a lower rate. The Revenue's appeal to adopt a 2.5% rate was dismissed based on the Tribunal's consistent stance and the Hon'ble Bombay High Court's affirmation.

Notional Interest on Loans to AEs:
The Tribunal upheld the CIT(A)'s decision to determine the arm's length rate of interest at LIBOR + 1% for loans given to AEs. The Tribunal followed its earlier decisions for Assessment Years 2007-08, 2008-09, and 2009-10, rejecting the assessee's contention that no transfer pricing adjustment was warranted.

Disallowance under Section 35D:
The Tribunal dismissed the assessee's ground regarding the disallowance of INR 4,65,200/- under Section 35D for stamping charges paid on further issue of shares, as the assessee did not wish to pursue this ground.

Disallowance of Premium on Repayment of Optionally Convertible Debentures:
The Tribunal upheld the CIT(A)'s decision to disallow the deduction for the proportionate premium paid on the redemption of optionally convertible debentures. The Tribunal found that the assessee had no obligation to pay premium during the relevant previous year, and the liability arose only upon conversion to OCDs and subsequent redemption.

Disallowance of ESOP Expenses:
The Tribunal upheld the CIT(A)'s decision to allow the deduction of ESOP expenses under Section 37 of the Act, following the Special Bench's decision in Biocon Ltd. and the Hon'ble Karnataka High Court's affirmation of the same. The Tribunal dismissed the Revenue's appeal against this allowance.

Mark to Market Losses:
The Tribunal upheld the CIT(A)'s decision to allow the deduction for Mark to Market losses, rejecting the Assessing Officer's reliance on CBDT Instruction No. 3 of 2010. The Tribunal followed precedents, including the Hon'ble Supreme Court's decision in Woodward Governor India Pvt. Ltd., and other Tribunal decisions affirming that such losses are not notional but accrued liabilities.

Delayed Payments of Employees' Contribution to ESIC:
The Tribunal overturned the CIT(A)'s decision to allow the deduction for delayed payments of employees' contribution to ESIC, following the Hon'ble Supreme Court's decision in Checkmate Services Private Ltd., which held that such deductions are not allowable if payments are made after the due date specified in the respective statutes.

Conclusion:
- Assessment Year 2011-12: Assessee's appeal dismissed; Revenue's cross-appeal dismissed.
- Assessment Year 2012-13: Assessee's appeal partly allowed; Revenue's cross-appeal partly allowed.
- Assessment Year 2013-14: Revenue's appeal partly allowed.

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