Commercial expediency and joint guarantee risk justified limiting guarantee commission and allowing borrowed-capital interest deductions.

Arm's length guarantee commission on a corporate guarantee jointly extended with a subsidiary was rightly restricted to 0.25% in the assessee's hands, because the transfer pricing rate of 0.5% was found to reflect equal sharing of the guarantee risk between both guarantors. Proportionate interest on borrowings was also not disallowable in respect of loans advanced to group entities, as the advances were made in the course of the assessee's real estate business for commercial expediency, including project needs, group financial stress, litigation, and delay. The absence of interest income from those advances did not by itself justify disallowance. The appellate relief on both issues was sustained.

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Issues: (i) whether the arm's length guarantee commission for the corporate guarantee jointly extended to the foreign associated enterprise was correctly restricted to 0.25% in the assessee's hands; (ii) whether proportionate interest on borrowings could be disallowed in relation to loans advanced to AAIPL and SCA LLP.

Issue (i): whether the arm's length guarantee commission for the corporate guarantee jointly extended to the foreign associated enterprise was correctly restricted to 0.25% in the assessee's hands.

Analysis: The guarantee was extended jointly by the assessee and its subsidiary, and the transfer pricing rate determined by the TPO at 0.5% was treated by the appellate authority as requiring equal sharing between both guarantors. The Tribunal accepted that the risk arising from the guarantee was borne jointly and that half of the arm's length commission was attributable to the assessee.

Conclusion: The restriction of the guarantee commission to 0.25% in the assessee's hands was upheld.

Issue (ii): whether proportionate interest on borrowings could be disallowed in relation to loans advanced to AAIPL and SCA LLP.

Analysis: The loans were found to have been advanced in the course of the assessee's real estate business and for commercial reasons, including project requirements, financial stress in the group entities, litigation, delays, and the need to protect the business interest of the assessee. Applying the settled principle that interest on borrowed capital is allowable where the borrowing is for business purposes and commercial expediency is shown, the Tribunal held that the absence of interest income from the advances did not justify disallowance under the Act.

Conclusion: The deletion of the proportionate interest disallowance relating to AAIPL and SCA LLP was upheld.

Final Conclusion: The Revenue's challenge failed on both the transfer pricing issue and the interest disallowance issue, and the relief granted to the assessee by the appellate authority was sustained in full.

Ratio Decidendi: Where an advance or guarantee is shown to be made in the course of business and in commercial expediency, interest or guarantee commission consequences must be tested on that footing, and the Revenue cannot substitute its view for that of a prudent businessman absent material to the contrary.

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