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Issues: (i) Whether the corporate guarantee (CG) provided to associated enterprises is to be benchmarked for transfer pricing and, if so, at what percentage; (ii) Whether disallowance under section 14A read with Rule 8D(2) should be computed with reference to fair value of investments as per Ind-AS or with reference to cost/acquisition value in accordance with ICDS.
Issue (i): Whether the corporate guarantee qualifies as an international transaction attractable to transfer pricing and the appropriate method/percentage for estimating the arm's length charge for the guarantee.
Analysis: The statutory amendment and subsequent judicial pronouncements treat corporate guarantees as international transactions within the scope of transfer pricing. Prior tribunal orders in earlier years placed a band for CG commission and directed adoption of specified percentages. Evidence in the record shows that in the absence of guarantee certain banks charge an incremental interest (1.25% and 1.5%); the interest savings approach can be used to estimate the arm's length benefit and such benefit is a matter of apportionment between guarantor and borrower. The estimation of CG percentage is inherently an evaluative exercise guided by comparable authorities and facts of the year.
Conclusion: In favour of Assessee. The arm's length rate for the corporate guarantee is reduced from the rate adopted in the impugned order and recomputed by applying the interest savings approach, apportioned equally, resulting in values of 0.625% and 0.75% for the two bank transactions instead of 1%.
Issue (ii): Whether the value of investments for computing disallowance under section 14A read with Rule 8D(2) must be taken as fair value reflected under Ind-AS or as cost/acquisition value consistent with ICDS.
Analysis: ICDS has been notified under section 145(2) and takes precedence over accounting standards where conflict exists. Ind-AS requires fair value measurement for certain investments, while ICDS principles treat mark-to-market gains/losses differently. CBDT Circular No. 10/2017 addresses recognition of MTM gains/losses in the context of ICDS. The assessee has asserted cost-based computation in line with ICDS and filed revised figures; the correctness of those cost figures requires examination at fact level by the assessing officer.
Conclusion: In favour of Assessee. The principle of computing disallowance under Rule 8D(2) in accordance with ICDS (i.e., adopting cost/acquisition where ICDS applies) is accepted in principle, but the matter is remanded to the assessing officer for verification and recomputation based on audited/corroborated cost figures.
Final Conclusion: The appeal is partly allowed by reducing the transfer pricing adjustment for corporate guarantee using the interest savings method and by remanding the section 14A/Rule 8D(2) disallowance to the assessing officer for factual verification and recomputation in accordance with ICDS principles.
Ratio Decidendi: Where accounting treatment under Ind-AS conflicts with ICDS notified under section 145(2) of the Income-tax Act, 1961, ICDS prevails for tax computation; corporate guarantees are includible within transfer pricing as international transactions and their arm's length charge may be estimated by interest savings apportionment subject to case-specific factual verification.
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