Transfer pricing issues remanded for fresh determination on corporate guarantees, interest benchmarking, and Section 14A disallowance

ITAT Mumbai remanded three transfer pricing issues back to lower authorities for fresh determination. First, regarding corporate guarantee transactions to banks on behalf of associated enterprises, the tribunal directed the A.O. to determine arm's length price using interest saving approach following previous tribunal decisions. Second, for interest on loans advanced to AE, the tribunal found neither assessee nor authorities properly benchmarked the transaction - assessee charged 2% while A.O./TPO applied 10.68% and CIT(A) restricted to 5%. The matter was remanded to CIT(A) for proper benchmarking. Third, concerning Section 14A disallowance, the tribunal remanded to A.O. to restrict disallowance only to investments yielding exempt income and verify availability of interest-free funds, noting assessee had interest-free funds exceeding borrowed funds during the relevant year.

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Issues Involved:

1. Treating giving of corporate guarantee as an international transaction u/s 92B of the Act.
2. Addition on account of arm's length adjustment to income from guarantee commission.
3. Addition on account of arm's length adjustment to income from interest on loans advanced to associated enterprise.
4. Disallowance u/s 14A of the Act r.w. Rule 8D of the Rules.

Summary:

Issue 1: Treating Giving of Corporate Guarantee as an International Transaction u/s 92B of the Act

The assessee contested the CIT(A)'s decision upholding the AO and TPO's treatment of a corporate guarantee given to a bank on behalf of the assessee's subsidiary as an "international transaction" u/s 92B of the Act. The Tribunal observed that this issue had been previously dealt with by the Tribunal in the assessee's case for A.Ys. 2012-13 and 2013-14, where it was remitted back to the AO/TPO for benchmarking. The Tribunal directed the AO/TPO to determine the ALP on the basis of the interest saving approach of the said transaction. Thus, the issue was remanded back to the AO for re-evaluation.

Issue 2: Addition on Account of Arm's Length Adjustment to Income from Guarantee Commission

The assessee challenged the arm's length adjustment to income from guarantee commission, arguing that the transaction was for its own benefit and no commission was charged. The lower authorities held that the amendment to section 92B(2) applied retrospectively. The CIT(A) directed the AO to apply a rate of 0.7% instead of 4.03% on the guarantee commission. The Tribunal remanded the issue back to the AO/TPO to determine the ALP on the basis of the interest saving approach, following the decision in the assessee's earlier cases.

Issue 3: Addition on Account of Arm's Length Adjustment to Income from Interest on Loans Advanced to Associated Enterprise

The assessee contested the CIT(A)'s decision to uphold a 5% interest rate on loans advanced to its AE, arguing that it had charged 2% interest, which was more than the prevailing Libor rate. The lower authorities failed to benchmark the transaction, leading to an adjustment of Rs. 1,19,60,216/-. The Tribunal remanded the issue back to the CIT(A) for benchmarking the transaction and determining the ALP appropriately.

Issue 4: Disallowance u/s 14A of the Act r.w. Rule 8D of the Rules

The assessee challenged the disallowance of Rs. 1,00,31,857/- made by the AO and upheld by the CIT(A) u/s 14A r.w. Rule 8D. The Tribunal observed that the assessee had sufficient interest-free funds and relied on judicial precedents that when own funds are more than borrowed funds, no interest disallowance is warranted. The Tribunal remanded the issue back to the AO to restrict the disallowance to the extent of the investment which yielded exempt income during the year and verify the sufficiency of interest-free funds.

Conclusion:

The appeals filed by both the assessee and the Revenue were allowed for statistical purposes, with directions to the AO and CIT(A) to re-evaluate and benchmark the transactions as per the Tribunal's observations. Order pronounced in the open court on 20.03.2024.

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