2025 (2) TMI 193 - HC - Income Tax

Whether giving an undertaking creates an international transaction under Section 92B must be examined before transfer pricing adjustments

The HC held that whether incurring an obligation by giving an undertaking constitutes an international transaction under Section 92B is a matter for the ... Corporate guarantee - international transaction or not? - whether the AO could have independently examined the issue of whether the alleged guarantee was an international transaction and consequential transfer pricing adjustments could have been made? - HELD THAT:- Whether the incurring of an obligation by giving an undertaking would amount to an international transaction, as envisaged under Section 92B is an issue which would necessarily have to be examined and evaluated by the TPO. However, and as we view order of the Tribunal, we find that the same does not render any clarity on this aspect. A bare reading of order indicates that the Tribunal’s terms of remit are couched in extremely broad terms and evidently fail to clarify that the solitary question which remained for consideration was whether the obligation incurred by giving an undertaking would amount to an international transaction and if the answer to the above be in the affirmative the consequential transfer pricing adjustments that may be warranted. In our considered opinion, therefore, the end of justice would merit that the matter being remanded to the AO with the clarification that the remit shall be confined to examining whether the undertaking of the obligation in question amounts to an international transaction, to be answered first and at the outset. The judgment revolves around the appeal by New Delhi Television Limited (NDTV) challenging the decision of the Income Tax Appellate Tribunal (ITAT) regarding the treatment of a corporate guarantee allegedly provided by NDTV in connection with bonds issued by its UK subsidiary. The primary issues considered by the Delhi High Court are whether the ITAT erred in remanding the issue of the corporate guarantee to the Assessing Officer (AO) and whether it ignored a binding order by a Special Bench of the ITAT that had previously determined the nature of the transaction.Issues Presented and ConsideredThe core legal questions considered in this judgment are:(a) Whether the ITAT erred in restoring the issue of the alleged corporate guarantee to the AO.(b) Whether the ITAT ignored the binding order of the Special Bench, which had concluded that the transaction was not a corporate guarantee.Issue-Wise Detailed AnalysisRelevant Legal Framework and Precedents:The legal framework revolves around the provisions of the Income Tax Act, 1961, particularly Section 92B, which defines international transactions. The case also references the Supreme Court decision in Principal Commissioner of Income Tax vs. S.G. Asia Holdings (India) Pvt. Ltd., which clarifies the roles of the AO and Transfer Pricing Officer (TPO) in determining transfer pricing adjustments.Court's Interpretation and Reasoning:The Court examined whether the ITAT's decision to remand the issue to the AO was justified. It noted that the Special Bench had concluded that the transaction was not a corporate guarantee but an undertaking, which does not meet the criteria for an international transaction. The Court found that the ITAT's terms of remit were too broad and failed to address whether the undertaking constituted an international transaction.Key Evidence and Findings:The key evidence included the findings of the Special Bench, which determined that NDTV's action was an undertaking and not a corporate guarantee. This distinction was crucial in deciding whether the transaction fell under the purview of Section 92B.Application of Law to Facts:The Court applied the legal principles from the Income Tax Act and the Supreme Court's precedent to the facts, focusing on whether the undertaking could be classified as an international transaction. It concluded that this determination should be made by the AO, with an opportunity for NDTV to present its case.Treatment of Competing Arguments:NDTV argued that the Special Bench's decision should have been binding, and there was no need for remand. The respondents contended that the nature of the transaction required further examination by the TPO. The Court balanced these arguments by deciding that the AO should first determine if the undertaking is an international transaction.Conclusions:The Court concluded that the matter should be remanded to the AO with specific instructions to determine whether the undertaking constitutes an international transaction. If so, the AO could then refer the matter to the TPO for transfer pricing adjustments.Significant HoldingsCore Principles Established:The judgment emphasizes the need for clarity in determining the nature of transactions under transfer pricing laws. It underscores the requirement for the AO to first assess whether a transaction qualifies as an international transaction before involving the TPO.Final Determinations on Each Issue:The Court set aside the ITAT's order to the extent that it remanded the issue without clear instructions. It directed the AO to specifically address whether the undertaking is an international transaction and, if affirmative, proceed with the TPO's involvement. The Court also set aside the TPO's and AO's subsequent orders, necessitating a de novo examination.The judgment clarifies procedural aspects of handling transfer pricing issues, particularly the roles of the AO and TPO, and reinforces the binding nature of Special Bench decisions unless explicitly overturned or re-examined with a clear rationale.