Transfer pricing rate reduced from 2% to 0.5% for corporate guarantee commission following precedent

ITAT Chennai partly allowed appellant's appeal regarding multiple transfer pricing and tax issues. For corporate guarantee commission, tribunal reduced rate from 2% to 0.5% following precedent. On brand promotion expenses, matter was remanded to AO/TPO for fresh examination after Delhi HC held revenue must establish international transaction before benchmarking. Royalty adjustment was upheld as income under mercantile accounting. Section 14A disallowance was deleted where own funds exceeded investments, but partial disallowance under Rule 8D(2)(iii) was directed for dividend-yielding investments only. Export commission disallowance was deleted following earlier tribunal decision. Foreign exchange losses and forward contract premiums were allowed as revenue expenditure. Additional depreciation claim for balance amount was permitted in subsequent year.

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1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the corporate guarantee and letter of comfort provided by the appellant to its associated enterprises (AEs) constitute an international transaction under transfer pricing regulations.
• The determination of the arm's length price (ALP) for the guarantee commission related to the corporate guarantee and letter of comfort.
• Whether brand promotion expenses incurred by the assessee in Indonesia constitute an international transaction requiring transfer pricing adjustment.
• The appropriateness of transfer pricing adjustment on account of royalty not charged to the AE.
• The applicability of disallowance under Section 14A of the Act read with Rule 8D concerning interest and other expenses related to tax-exempt income.
• Disallowance under Section 40(a)(i) of the Act concerning export agency commission paid to non-residents without tax deduction at source.
• The nature and allowability of loss on actual repayment of External Commercial Borrowings (ECB) as revenue or capital expenditure.
• The entitlement to additional depreciation on assets put to use for less than 180 days in the preceding financial year.

2. ISSUE-WISE DETAILED ANALYSIS

Corporate Guarantee and Letter of Comfort

• Legal Framework and Precedents: The court considered Section 92B of the Income Tax Act, as amended by the Finance Act, 2012, which includes guarantees as international transactions. Relevant precedents include CIT vs. Everest Kanto Cylinders Ltd and PCIT v. Redington (India) Ltd.
• Court's Interpretation: The Tribunal held that corporate guarantees are international transactions, requiring benchmarking under transfer pricing provisions.
• Application of Law to Facts: The Tribunal directed the AO to adopt the guarantee commission at 0.5% instead of 2% in line with previous decisions.

Brand Promotion Expenses

• Legal Framework and Precedents: Section 92B and relevant case law, including decisions from the Delhi High Court, were considered.
• Court's Interpretation: The Tribunal found that the TPO's approach, including the bright line test, was not justified without establishing an international transaction.
• Application of Law to Facts: The Tribunal set aside the order on AMP expenses, remanding it for fresh examination with directions to consider relevant legal precedents.

Royalty Adjustment

• Legal Framework and Precedents: The Tribunal referred to its previous decision in the assessee's case for AY 2011-12.
• Court's Interpretation: The Tribunal upheld the TPO's adjustment, rejecting the assessee's argument about the amended royalty agreement.

Disallowance under Section 14A

• Legal Framework and Precedents: The Tribunal considered the Bombay High Court's decisions in HDFC Bank Ltd. and Reliance Utilities and Power Ltd.
• Court's Interpretation: The Tribunal held that disallowance under Rule 8D(2)(ii) was not warranted due to the availability of sufficient own funds.
• Application of Law to Facts: The Tribunal directed the AO to verify and recompute disallowance under Rule 8D(2)(iii) based on dividend-yielding investments.

Export Agency Commission

• Legal Framework and Precedents: The Tribunal relied on its previous decision and the jurisdictional High Court's ruling in CIT v. Faizan Shoes Pvt. Ltd.
• Court's Interpretation: The Tribunal allowed the assessee's contention, directing deletion of the addition.

Loss on ECB Repayment

• Legal Framework and Precedents: The Tribunal referred to the Supreme Court's decision in CIT v. Tata Iron & Steel Co. Ltd.
• Court's Interpretation: The Tribunal held that foreign exchange loss on ECB repayment was a revenue expenditure, not altering the cost of assets.
• Application of Law to Facts: The Tribunal directed the AO to allow the deduction for the amortized sum of forward premium claimed by way of hedging cost.

Additional Depreciation

• Legal Framework and Precedents: The Tribunal considered decisions from the Karnataka and Madras High Courts.
• Court's Interpretation: The Tribunal held that additional depreciation could be claimed in the subsequent assessment year.
• Application of Law to Facts: The Tribunal directed the AO to delete the disallowance and allow the claim for additional depreciation.

3. SIGNIFICANT HOLDINGS

• Corporate Guarantee: The Tribunal directed the AO to adopt a 0.5% guarantee commission, aligning with prior decisions.
• Brand Promotion Expenses: The Tribunal set aside the order on AMP expenses, remanding it for fresh examination.
• Royalty Adjustment: The Tribunal upheld the TPO's adjustment, rejecting the assessee's argument about the amended agreement.
• Disallowance under Section 14A: The Tribunal directed deletion of disallowance under Rule 8D(2)(ii) and recomputation under Rule 8D(2)(iii).
• Export Agency Commission: The Tribunal allowed the assessee's contention, directing deletion of the addition.
• Loss on ECB Repayment: The Tribunal held that foreign exchange loss on ECB repayment was a revenue expenditure.
• Additional Depreciation: The Tribunal directed the AO to allow the claim for additional depreciation in the subsequent year.

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