2025 (10) TMI 655 - AT - Income Tax

Negative lien, pledge/mortgage on oil and gas blocks not 'international transaction' under section 92B; interest treatment per 234A-234D

JOGPL Pvt. Ltd. Versus DCIT, Circle-13 (1), Delhi

ITAT, DELHI held that the negative lien on receivables and pledge/mortgage on oil and gas blocks do not constitute a corporate guarantee and therefore ... TP addition - corporate guarantee - HELD THAT:- The negative lien on receivables and PI on the oil and gas blocks given by the assessee cannot be equated with corporate guarantee and hence would be outside the ambit of definition of international transaction u/s 92B of the Act thereby warranting no benchmarking at all. Since no benchmarking of the said transaction is required, the other grounds raised by the assessee on the validity of adopting the interest rate of 2.677 % need not be gone into and it is left open. Hence the Ground raised by the assessee becomes consequential to Ground No. 3. Interest u/s 234A AO is directed to verify whether the return has been filed by the assessee within the due date prescribed under the Act read with extension given by the CBDT from time to time for the year under consideration. Accordingly, the interest under section 234A of the Act is to be decided. Chargeability of interest u/s 234B and 234D of the Act is consequential in nature. Interest under section 234C the law is well settled that the same shall be charged only on the returned income and not on the assessed income. ISSUES PRESENTED AND CONSIDERED 1. Whether the provision of a negative lien on receivables and participating interest (PI) by an Indian subsidiary constitutes a corporate guarantee or an 'international transaction' within the meaning of section 92B of the Income Tax Act, 1961, thereby attracting transfer pricing (benchmarking) under Chapter X. 2. If treated as an international transaction, whether the Comparable Uncontrolled Price (CUP) method and the interest rate applied by the Transfer Pricing Officer (TPO) (6-month LIBOR plus specified basis points totaling 2.677%) is the appropriate arm's-length benchmark for the alleged guarantee/negative lien. 3. Whether invocation of a guarantee by the lender and any subsequent payment by the guarantor converts the resulting relationship into a deemed loan or international transaction between the guarantor and the associated enterprise (deemed loan/subrogation issue). 4. Whether initiation of penalty proceedings under section 270A is premature and fit for adjudication at the appellate stage. 5. Adjudication approach on interest liability under sections 234A, 234B, 234C and 234D when transfer pricing adjustments are under challenge. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation: Negative Lien v. Corporate Guarantee; applicability of section 92B Legal framework: Section 92B defines 'international transaction'; Explanation to section 92B includes certain guarantees within the envelope of international transactions. Transfer pricing obligations under Chapter X require benchmarking of international transactions between associated enterprises. Precedent treatment: The Tribunal's coordinate decisions in appeals concerning the group (sister concerns) were considered and followed. Guidance on the concept of negative lien was taken from domestic judicial authority on negative lien (Bank of India v. Rustom Fakirji Cowasjee - interpretation that negative lien does not give lender right to sell assets). Interpretation and reasoning: The Court analysed the substance of a negative lien vis-à-vis an explicit corporate guarantee. The negative lien was found to be a negative covenant (an undertaking not to create charges or dispose assets without lender consent) that does not itself create a primary liability to pay the borrower's debt. The arrangement provided the lender additional comfort that no further encumbrances would be created, but did not confer on the lender rights to sell assets nor impose reimbursement liability on the subsidiary in case of borrower default. The lender had in fact considered consolidated financial strength (including the assets indirectly held by the subsidiary) at the time of loan sanction. The Court emphasised that a guarantee implies an undertaking to make good the borrower's obligation; a negative lien does not. Ratio vs. Obiter: Ratio - where the negative lien merely restrains creation of encumbrances and does not impose payment obligations, it does not amount to a corporate guarantee and therefore falls outside the definition of an international transaction under section 92B. Obiter - observations on policy (built and brace securities) and commercial rationale of bank practices. Conclusion: The negative lien and the PI undertaking by the subsidiary cannot be equated with a corporate guarantee; consequently there was no international transaction under section 92B to be benchmarked for the assessment year in question. (Cross-ref: Issues 2 and 3; holding renders benchmarking inapplicable and methodological issues moot.) Issue 2 - Benchmarking and MAM (CUP) and adopted interest rate (2.677%) Legal framework: If an international transaction exists, ALP is to be determined by the Most Appropriate Method (MAM) under transfer pricing rules (Chapter X), with methods including CUP. Precedent treatment: The TPO applied CUP and, after DRP proceedings and reliance on a High Court decision in a different context, revised benchmarking to LIBOR plus basis points. The Tribunal, however, declined to decide method because it concluded no international transaction existed. Interpretation and reasoning: Given the primary conclusion that there was no international transaction (Issue 1), the Court held that adjudication on the appropriateness of CUP or the correctness of applying LIBOR+143 bps to arrive at 2.677% is unnecessary. The Tribunal followed coordinate-bench authority that, where no international transaction exists, choice of method is irrelevant. Ratio vs. Obiter: Ratio - methodological issues are irrelevant if the foundational question of existence of an international transaction is negatived. Obiter - criticisms of TPO's initial ad hoc rate selection and discussion of benchmarking in other fact patterns. Conclusion: Proceedings to benchmark the negative lien/PI were unwarranted; therefore the CUP application and the imposition of an ALP adjustment based on 2.677% are set aside as consequential to the finding on Issue 1. The question of proper method is left open for cases where an international transaction is established. Issue 3 - Deemed loan/subrogation on invocation of guarantee and treatment as international transaction Legal framework: Section 92B(2) (deemed associated enterprise transactions), principles of subrogation under Sections 140-141 of the Indian Contract Act concerning rights of surety/guarantor; transfer pricing treatment where a guarantee is invoked and payment occurs. Precedent treatment: Tribunal decisions of coordinate benches (appeals involving related entities in the group) were considered; one coordinate bench had held that guarantee invocation leading to payment might create a deemed loan/transaction, but subsequent coordinate decisions and analysis distinguished the factual matrix. Interpretation and reasoning: The Court noted that a deemed loan or international transaction could arise only if (a) there is a crystallised liability of the guarantor and (b) the guarantor's payment or enforcement gives rise to a transaction with the associated enterprise. In the facts, the associated enterprises had not been relieved of their debt (no discharge), there was no crystallised liability of the subsidiary as guarantor in the relevant year, and no apportionment of costs in books to suggest a deemed loan. Subrogation principles were discussed to show that only upon payment and discharge would the guarantor step into creditor's shoes; absent actual payment and discharge no subrogation-based deemed transaction arose. Thus the TPO's approach treating an invocation as converting into a loan to AE was incorrect on facts. Ratio vs. Obiter: Ratio - where guarantee has not been discharged by payment by the guarantor and no crystallised liability or subrogation has occurred, there is no deemed loan/international transaction between guarantor and AE for transfer pricing purposes. Obiter - general remarks on when subrogation would produce a tax consequence. Conclusion: On the facts, invocation/payment had not resulted in discharge and subrogation, so no deemed loan or international transaction existed; transfer pricing enhancement on that basis was quashed. (Cross-ref: Issues 1 and 2.) Issue 4 - Initiation of penalty proceedings under section 270A Legal framework: Section 270A permits levy of penalty for under-reporting/misreporting; penalty proceedings are subject to factual and legal adjudication post determination of tax/adjustments. Interpretation and reasoning: The Court found that initiation of penalty proceedings at this stage would be premature because principal liability and adjustments were being contested and partly set aside. Penal consequences are consequential and contingent on final tax determination; hence not ripe for adjudication in the present appeal. Ratio vs. Obiter: Ratio - penalty initiation disputed at appellate stage may be dismissed as premature where foundational tax adjustments are under challenge. Obiter - none. Conclusion: Ground challenging penalty initiation is dismissed as premature for adjudication at this stage. Issue 5 - Interest under sections 234A, 234B, 234C and 234D Legal framework: Sections 234A-234D prescribe interest for late filing and defaults in advance tax; settled position that interest under section 234C is computed on returned income, not assessed income. Interpretation and reasoning: The Tribunal directed the Assessing Officer to verify whether the return was filed within the due date (including extensions), to decide section 234A liability accordingly. Liability under sections 234B and 234D is consequential on final tax determination. Section 234C liability must be limited to returned income as per established law. Ratio vs. Obiter: Ratio - interest under 234A determined by timeliness of return; 234C charged on returned income only; 234B/234D are consequential. Obiter - none. Conclusion: Interest under section 234A to be determined after verifying filing date (including extensions); 234C to be computed only on returned income; 234B and 234D decisions are consequential upon final tax outcome. Final Disposition (consequential conclusions) Because the negative lien/PI was held not to be a corporate guarantee and thus not an international transaction under section 92B, the transfer pricing additions and benchmarking adjustments premised on that characterisation were deleted. Methodological and rate issues were left open as academic. Penalty challenge dismissed as premature; interest issues remitted as above. The appeal was partly allowed as detailed.