2025 (7) TMI 1890 - AT - Income Tax

Decision upholds ALP 0.5% on foreign guarantee commission; deletes Sec.14A disallowance; DSIR Form 3CL binds Sec.35(2AB)/Rule 6(7A). &D

ITAT upheld that corporate guarantees to foreign AE are international transactions; ALP for guarantee commission fixed at 0.5% (partial allowance of TP ... TP adjustment - corporate guarantee(s) issued by the assessee to its foreign AE(s) - HELD THAT:- We hold that the transaction of corporate guarantee is an international transaction subject to transfer pricing provisions. Accordingly, the first plea of the assessee is hereby rejected. ALP value of the guarantee commission - We find that in the case of Everest Kanto Cylinders Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] has observed that bank guarantees cannot be equated with corporate guarantees and accordingly discarded the rates provided by Banks. Following the same, the assessee’s reliance on bank quote of 0.325% is rejected. In the same decision (supra), the Hon'ble Bombay High Court had ascertained the ALP guarantee commission at 0.5%, which was followed by the Hon'ble jurisdictional High Court in the case of Redington (India) Ltd. [2020 (12) TMI 516 - MADRAS HIGH COURT] wherein also the ALP corporate guarantee commission was fixed at 0.5%. Following the same, we direct the AO to restrict adjustment to 0.5% of the guarantee value. This ground is therefore partly allowed. Disallowance u/s 14A of the Act in accordance with Rule 8D - We find that this issue is no longer res integra and the jurisdictional High Court in Avantha Realty Ltd. [2024 (6) TMI 987 - CALCUTTA HIGH COURT] after considering the CBDT Circular No.5/2014, is noted to have consistently held that, where there is no exempt income; the provisions of Sec.14A read with Rule 8D cannot be applied. There cannot be any disallowance u/s.14A in the present case, as the assessee did not earn any exempt income. The AO is accordingly directed to delete the impugned disallowance made u/s 14A of the Act. This ground of appeal of the assessee is allowed. Disallowance of deduction claimed in respect of both revenue & capital expenditure incurred towards scientific research u/s 35(2AB) - whether once the assessee is covered under approval granted by DSIR, then does the AO or CIT(A) has any power to question the same, when the approval granted by DSIR is in terms of the power vested under the provisions of section 35(2AB) of the Act read with Rule 6(7A) of the Income-tax Rules, 1962? - HELD THAT:- In our considered opinion, the provisions of Section 35(2AB) r.w. Rule 6(7A) does not give the lower authorities the power to question the veracity of the expenses quantified and approved by DSIR for weighted deduction. Our view finds support from the decision of Tejas Networks Ltd. [2015 (4) TMI 1064 - KARNATAKA HIGH COURT] wherein it has been held that, once a certificate has been issued by the DSIR, the AO is prohibited from looking into the amount of admissibility of deduction. Thus, we hold that, the assessee is legally entitled to weighted deduction @ 150% in respect of the revenue expenditure & capital expenditure as approved by DSIR in Form 3CL issued by them and that the lower authorities cannot sit in judgment over the quantification of the expenditure. Excess revenue expenditure claimed by the assessee - We are in agreement with the assessee that, the actual quantum of revenue expenses incurred during the year was Rs.538,76,62,852/- out of which Rs.304,48,15,892/- was debited to P&L A/c and therefore rightly considered and reduced while computing the further deduction u/s 35(2AB) of the Act in the return of income. Since the balance revenue expenditure of Rs.234,28,46,960/- was not charged to P&L A/c, in our considered opinion, the assessee had rightly considered the entire sum separately in the computation of income. We therefore do not find any excess claim having been made by the assessee, as alleged by the Ld. CIT(A) and thus direct the AO to delete the same. According to us, irrespective whether the total revenue expenditure of Rs.538,76,62,852/- was debited to P&L A/c or not, since the amount to the extent of Rs.529,78,40,000/- has been approved by DSIR for weighted deduction u/s 35(2AB), the assessee is legally entitled to corresponding weighted deduction of Rs.794,67,60,000/- [529,78,40,000 X 150%]. The remaining expenditure of Rs.8,98,22,852/- [538,76,62,852 - 529,78,40,000], which was not approved by DSIR, in our considered opinion, is otherwise eligible for normal deduction u/s 35(1) . As having regard to the Form 3CL issued by DSIR, we accordingly direct the AO to allow weighted deduction for the remaining capital expenditure. Disallowance of deduction claimed u/s 80IC - profits derived by the eligible unit at Pantnagar - HELD THAT:-Tribunal in assessee’s own case for AY 2018-19. It is noted that this Tribunal had dealt with this issue in detail in assessee’s own case [2025 (3) TMI 1153 - ITAT CHENNAI] for AY 2018-19 and held that, the profits reported by the assessee in its stand-alone audited financials of the eligible unit, as certified in Form 10CCB, was based on sound accounting principles which did not warrant any interference. We accordingly hold that the lower authorities were unjustified in rejecting the audited stand-alone financials of the eligible unit of the assessee at Pantnagar and direct the AO to allow the deduction u/s 80IC of the Act as claimed by the assessee in the return of income. Accordingly the AO is directed to delete the impugned disallowance. Disallowance of deduction u/s 80G - HELD THAT:- No infirmity in the order of the CIT(A) in allowing the deduction under section 80G to the assessee towards donations made by placing reliance on the decision of the coordinate bench in the case of M/s. Naik Seafoods Pvt. Ltd. [2021 (11) TMI 1168 - ITAT MUMBA] ISSUES PRESENTED AND CONSIDERED 1. Whether issuance of corporate guarantees to foreign associated enterprises constitutes an 'international transaction' within the meaning of Section 92B and is amenable to transfer pricing adjustment. 2. If so, the appropriate arm's length rate for guarantee commission - whether bank-quoted rates are determinative or a different benchmark (0.5%) is appropriate. 3. Whether Section 14A read with Rule 8D can be invoked to disallow expenditure where no exempt income was earned in the assessment year, and whether the 2022 amendment (non-obstante clause/explanation) has retrospective effect. 4. Whether weighted deduction under Section 35(2AB) (150%) is allowable as per DSIR certification (Form 3CL) for approved in-house R&D expenditure, and whether tax authorities may question the quantum certified by DSIR; also whether amounts capitalised in books but treated as revenue for tax purposes may be claimed. 5. Whether additional/omitted claims for weighted deduction under Section 35(2AB) can be entertained on appeal even if not specifically claimed in the original return. 6. Whether profits of an eligible industrial unit for the purpose of Section 80-IC may be disregarded/reduced by the assessing authority/appellate authority by adopting a lower ad hoc margin (3% / 6.09%) instead of accepting audited standalone unit results certified in Form 10CCB. 7. Whether Corporate Social Responsibility (CSR) expenditures, though disallowed under Section 37(1) by Explanation 2, can nevertheless qualify for deduction under Section 80G if otherwise meeting conditions of Section 80G. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Corporate guarantees as international transactions (Section 92B) Legal framework: Section 92B defines 'international transaction.' Finance Act 2012 inserted an Explanation to Section 92B clarifying that guarantees issued by an assessee may fall within the definition. Precedent Treatment: Higher courts/tribunals have held that corporate guarantees to AEs involve inherent risk and enhance creditworthiness of the AE, thereby constituting international transactions (decisions of coordinate benches and jurisdictional High Court considered). Interpretation and reasoning: The Court applies the amended statutory language and follows jurisdictional and persuasive precedents holding that a guarantor faces contingent liability and risk, and that providing a guarantee confers an economic benefit / service to the AE which is properly characterised as an international transaction for transfer pricing. Ratio vs. Obiter: Ratio - guarantees to AEs are international transactions subject to transfer pricing under Section 92B as so interpreted. Conclusion: The plea that guarantees do not fall within transfer pricing is rejected and adjustments can be made under transfer pricing provisions. Issue 2 - Arm's length rate for guarantee commission Legal framework: Transfer pricing requires benchmarking international transactions to ALP. No fixed statutory rate; courts/tribunals may adopt appropriate comparable or judicially established proxies. Precedent Treatment: Jurisdictional High Court and Bombay High Court decisions recognized that bank guarantee rates are not directly comparable to corporate guarantees; prior judicial determinations fixed ALP for corporate guarantees at 0.5% in analogous factual matrices. Interpretation and reasoning: The Court distinguishes bank guarantees from corporate guarantees (different risk profiles and market practices). Reliance on bank-quoted lower rates is inappropriate for corporate-guarantee benchmarking. In view of persuasive precedent fixing 0.5%, and absent better comparables, the Court directs adjustment at 0.5% of guarantee value. Ratio vs. Obiter: Ratio - bank guarantee quotes are not a safe proxy for corporate-guarantee ALP; 0.5% is an appropriate benchmark on the facts. Conclusion: ALP adjustment restricted to 0.5% of guarantee value (ground partly allowed to that extent). Issue 3 - Section 14A read with Rule 8D where no exempt income earned; effect of 2022 amendment Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; Rule 8D prescribes computation. Finance Act 2022 inserted a non-obstante clause/explanation to Section 14A with prospective effect from 01.04.2022. Precedent Treatment: Jurisdictional High Court decisions (multiple) and coordinate bench decisions have held that prior to the 2022 amendment, Section 14A/Rule 8D cannot be applied in vacuum where no exempt income was actually earned in the year; Rule 8D merely supplies a computation method and cannot extend the scope of Section 14A to years with no exempt income. The 2022 amendment was held prospective. Interpretation and reasoning: The Court follows jurisdictional High Court authority and doctrinal reasoning that Section 14A is triggered by actual earning or claim of exempt income against which expenditure is sought; Rule 8D cannot create a notional basis to disallow expenditure if exempt income is nil. The 2022 amendment does not apply to the assessment year under consideration. Ratio vs. Obiter: Ratio - where no exempt income is earned in the year, no disallowance under Section 14A/Rule 8D is warranted for pre-2022 years; the 2022 amendment is prospective and not retroactive. Conclusion: Disallowance under Section 14A/Rule 8D deleted; assessee's ground allowed. Issue 4 - Allowability of weighted deduction under Section 35(2AB) based on DSIR certification; treatment of capitalised amounts and quantification by tax authorities Legal framework: Section 35(2AB) grants weighted deduction at 150% for specified in-house R&D expenditure approved by the prescribed authority (DSIR); Rule 6(7A) and Forms 3CL/3CM govern certification process. Section 35 scheme bars AO from re-evaluating DSIR's certification - matters referable to prescribed authority (see Section 35(3) mechanism). Precedent Treatment: Karnataka High Court and other authorities held that once DSIR certifies the quantum, AO cannot reassess the admissibility/quantum of expenditure certified by DSIR; the certificate is binding on assessing authorities absent referral under statutory mechanism. Interpretation and reasoning: The Court affirms that DSIR is the expert prescribed authority; its Form 3CL quantification is final for the purposes of Section 35(2AB) and not open to reassessment by AO/CIT(A) except via statutory referral channels. Regarding amounts capitalised in books of account but constituting revenue nature for tax, the Court accepts that Ind-AS capitalization for accounting does not preclude tax treatment as revenue when DSIR/assessment position and Form 3CL reflect such treatment; where DSIR certified revenue and capital expenditure totals, weighted deduction must follow DSIR quantum. The Court examines documentary evidence (Form 3CL) and finds DSIR-approved figures entitling assessee to weighted deduction accordingly. Ratio vs. Obiter: Ratio - DSIR certification in Form 3CL is conclusive for quantification under Section 35(2AB) and trumps AO's unilateral re-quantification; capitalisation in accounting records does not prevent tax recognition as revenue expenditure where certification and law permit. Conclusion: Weighted deduction of 150% allowed as per DSIR-approved amounts; AO directed to recompute. Excess or non-approved portions get treatment under Section 35(1) as applicable. Remaining certified capital expenditure not claimed in return may be entertained on appeal and allowed. Issue 5 - Entertaining additional/omitted claims on appeal (fresh claims for weighted deduction) Legal framework: Appellate authorities possess jurisdiction to entertain claims not specifically made in original return where claim is otherwise available in law and factual matrix shows inadvertent omission or raised in assessment proceedings; Supreme Court and High Court jurisprudence permits appellate allowance of genuine claims under Section 254/appeal powers. Precedent Treatment: Apex Court and jurisdictional High Court decisions recognize tribunal/appeal authority powers to admit and decide additional claims not in original return where not a fresh/new claim but an overlooked entitlement; department guidance encourages assessee-friendly approach. Interpretation and reasoning: The Court relies on precedent to permit acceptance of DSIR-certified additional capital expenditure claim that was not claimed in the return but covered in assessment/appeal material; the tribunal's discretion to entertain such claims is affirmed where claim is bona fide and supported by evidence (Form 3CL). Ratio vs. Obiter: Ratio - appellate authority may allow bona fide additional claims otherwise admissible in law even if not in original return, subject to verification; this power extends to weighted deduction under Section 35(2AB). Conclusion: Remaining certified capital expenditure allowed; AO directed to allow weighted deduction for omitted certified amount (directions to compute specified quantum granted). Issue 6 - Computation of eligible unit profits under Section 80-IC and impermissibility of ad hoc margin reduction Legal framework: Section 80-IC (read with Section 80-IA(8)) requires profits of eligible undertaking to be computed on the basis that transfers are recorded at market value; proviso allows AO to adopt a reasonable basis if computation presents exceptional difficulties. Section 80-IA(10) / 80-IC(6) address arrangements with associated parties. Precedent Treatment: Tribunals and High Courts have repeatedly held that assessing authority cannot disturb audited standalone profit figures of an eligible unit without pointing to specific defects, incorrect valuation, inter-unit non-market transfers, or an 'arrangement' under statutory deeming provisions; mere comparison with other units or overall company margins is insufficient. Interpretation and reasoning: The Court examines facts (standalone audited accounts, Form 10CCB certification, allocation keys for common costs, identification of unit production via chassis numbering, existence of government incentives and different product mix, automation etc.) and finds no cogent material by AO to justify scaling down profits. The Court emphasizes that ad hoc margins (3%/6.09%) were arbitrary, lacked factual basis and ignored statutory requirement to demonstrate either non-market pricing or an arrangement. The AO's reliance on prior-year ad hoc estimates is not a legitimate substitute for contemporaneous, specific findings challenging unit accounts. Ratio vs. Obiter: Ratio - assessing authority must identify and demonstrate specific infirmity (non-market transfer, arrangement under s.80-IA(10), or valid exercise under proviso with reasoned basis) before substituting audited standalone profits; absent such proof, audited standalone results stand. Conclusion: Disallowance under Section 80-IC deleted; deduction allowed as claimed in return; revenue's estimation denied. Issue 7 - Deductibility under Section 80G of CSR expenditures notwithstanding Explanation 2 to Section 37 Legal framework: Explanation 2 to Section 37 disallows CSR expenditure for business income computation (Chapter IV-C) but Section 80G (Chapter VI-A) provides independent concessional deduction for donations to approved institutions; Parliament created specific exclusions in Section 80G sub-clauses for particular funds. Precedent Treatment: Tribunals and High Courts have held that Explanation 2 to Section 37 operates in the computation of business income and does not ipso facto preclude claim under Section 80G; where donation otherwise fulfils statutory conditions of Section 80G, deduction under Chapter VI-A may be allowed, and specific legislative restrictions in Section 80G govern any disallowance. Interpretation and reasoning: The Court reasons that the legislative purpose behind Explanation 2 was to prevent CSR treatment as business deduction; it did not intend to bar the separate and independent Chapter VI-A relief where statutory conditions are satisfied. The absence of a general prohibition in Section 80G (save explicit sub-clauses) supports allowing Section 80G benefit for CSR donations to eligible donees; voluntariness is not a statutory precondition in Section 80G. The Court also reviews policy documents and administrative guidance to confirm that CSR donations may qualify under Section 80G depending on form and donee registration. Ratio vs. Obiter: Ratio - CSR expenditure disallowed under Section 37 does not automatically preclude independent deduction under Section 80G; if Section 80G conditions are met and no specific statutory bar applies, deduction under Section 80G may be allowed. Conclusion: Deletion of disallowance under Section 80G upheld; AO directed to allow deduction after verifying Section 80G conditions; revenue's challenge dismissed.