ITAT allows partial relief in transfer pricing dispute involving interest-free loans and corporate guarantee benchmarking

ITAT Chennai partly allowed the appeal in a transfer pricing case. For interest-free loans to AE, the matter was remitted to AO to verify surplus funds and nexus between borrowed loans and advances. Corporate guarantee fees were benchmarked at 0.5% instead of TPO's 2.55%. Depreciation on leasehold rights was remitted for fresh consideration. Section 80G deduction for CSR expenses was remitted for de novo adjudication. Section 14A disallowance was directed to consider only investments yielding exempt income. Interest on debentures was to be benchmarked using international comparable transactions rather than domestic rates.

---

---

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Depreciation on the right to use leasehold property.
• Claim of deduction under Section 80G of the Income Tax Act.
• Disallowance under Section 14A of the Income Tax Act.
• Transfer Pricing (TP) adjustment on interest receivable on loans given to Associated Enterprises (AE).
• TP adjustment on corporate guarantee provided to AE.
• TP adjustment on interest on debentures for Assessment Year 2021-22.

2. ISSUE-WISE DETAILED ANALYSIS

Depreciation on Right to Use Leasehold Property

• Legal Framework and Precedents: The appellant claimed depreciation on leasehold property as an intangible asset eligible for depreciation under the Income Tax Act. The Karnataka High Court decision in DCIT vs. Bangalore International Airport Ltd was referenced.
• Court's Interpretation and Reasoning: The Tribunal referred to its previous orders and the High Court's decision, remitting the matter back to the Assessing Officer (AO) for reconsideration.
• Key Evidence and Findings: The appellant argued that the leasehold right constituted an intangible right eligible for depreciation.
• Application of Law to Facts: The Tribunal directed the AO to re-evaluate the claim based on the factual matrix and judicial precedents.
• Treatment of Competing Arguments: The Tribunal considered both the appellant's reliance on judicial precedents and the AO's disallowance.
• Conclusions: The issue was remitted back to the AO for fresh adjudication.

Claim of Deduction under Section 80G

• Legal Framework and Precedents: The appellant claimed deductions for donations under Section 80G, arguing that part of the CSR expenditure was eligible for such deductions.
• Court's Interpretation and Reasoning: The Tribunal remitted the issue back to the AO for de novo adjudication, considering the nature of donations and subsequent legal amendments.
• Key Evidence and Findings: The appellant differentiated between CSR and non-CSR contributions, claiming only the latter under Section 80G.
• Application of Law to Facts: The Tribunal directed the AO to assess the eligibility of deductions based on the nature of donations and relevant legal provisions.
• Treatment of Competing Arguments: The Tribunal weighed the appellant's claims against the AO's interpretation of legislative intent.
• Conclusions: The matter was remitted for further examination by the AO.

Disallowance under Section 14A

• Legal Framework and Precedents: The AO disallowed expenses related to exempt income under Section 14A, applying Rule 8D.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to consider only investments yielding exempt income for disallowance computation.
• Key Evidence and Findings: The appellant argued that investments were made from self-generated funds, not borrowed funds.
• Application of Law to Facts: The Tribunal emphasized that disallowance should be based on actual income-generating investments.
• Treatment of Competing Arguments: The Tribunal considered the appellant's self-funding argument against the AO's broader disallowance approach.
• Conclusions: Directions were issued to the AO for recalculating disallowance.

TP Adjustment on Interest Receivable on Loans

• Legal Framework and Precedents: The TPO benchmarked interest on loans to AE using LIBOR+200 bps.
• Court's Interpretation and Reasoning: The Tribunal referred to earlier decisions, directing the AO to verify surplus funds and the nexus between borrowed funds and advances.
• Key Evidence and Findings: The appellant contended that loans were granted from surplus funds.
• Application of Law to Facts: The Tribunal instructed the AO to reassess based on actual financial conditions.
• Treatment of Competing Arguments: The Tribunal balanced the TPO's benchmarking against the appellant's financial position argument.
• Conclusions: The issue was remitted for statistical purposes.

TP Adjustment on Corporate Guarantee

• Legal Framework and Precedents: The TPO applied a 2.55% rate for corporate guarantee fees.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to benchmark at 0.5%, aligning with previous decisions.
• Key Evidence and Findings: The appellant argued that corporate guarantees were provided as a commercial necessity.
• Application of Law to Facts: The Tribunal instructed the AO to apply a lower benchmarking rate.
• Treatment of Competing Arguments: The Tribunal considered the appellant's commercial expediency argument against the TPO's rate.
• Conclusions: The AO was directed to adjust the rate to 0.5%.

TP Adjustment on Interest on Debentures (AY 2021-22)

• Legal Framework and Precedents: The TPO benchmarked interest on debentures using domestic rates.
• Court's Interpretation and Reasoning: The Tribunal directed the TPO to use international rates for benchmarking.
• Key Evidence and Findings: The appellant highlighted the lower interest rate applicable to its AE in the UK.
• Application of Law to Facts: The Tribunal instructed the TPO to consider international comparables for ALP determination.
• Treatment of Competing Arguments: The Tribunal weighed the appellant's international rate argument against the TPO's domestic rate application.
• Conclusions: The issue was remitted for further examination using international benchmarks.

3. SIGNIFICANT HOLDINGS

• Depreciation on Leasehold Property: "The corresponding grounds stand allowed for statistical purposes."
• Deduction under Section 80G: "The corresponding grounds stand allowed for statistical purposes."
• Disallowance under Section 14A: "The corresponding ground stand allowed for statistical purposes."
• TP Adjustment on Loans: "The corresponding grounds as raised by the assessee stand allowed for statistical purposes."
• TP Adjustment on Corporate Guarantee: "The corresponding grounds stand partly allowed."
• TP Adjustment on Interest on Debentures: "The corresponding grounds stand allowed for statistical purposes."

The Tribunal's judgment remitted several issues back to the AO for reconsideration, emphasizing the need for detailed examination of facts and application of appropriate legal standards. The judgment reflects adherence to established precedents and careful consideration of both the appellant's and the revenue's arguments.

---