2022 (9) TMI 1455 - HC - Income Tax

TP Adjustment - ALP of corporate guarantee provided to the Overseas Associated Enterprises - Whether or not the ITAT was legally correct in holding that the corporate guarantee provided by the appellant to banks for providing loan to its AE without charging any fee or commission, is an international transaction under Section 92B when the transaction is of such a nature as to have no bearing on profits, income, losses or assets of enterprise? HELD THAT - While TPO, treating the corporate guarantee as an international transaction, charged guarantee commission at 4.86%. Commissioner(Appeals) accepted the assessee's submission and held that the provision of corporate guarantee in the assessee's own case for the assessment year 2009-10 and 2010-11 came up for consideration before the Tribunal and while deciding the assessment, the matter has been remitted to the Assessing Officer for de-novo adjudication after due and reasonable opportunity of hearing to the assessee. The issue referred for reconsideration has been made in the light of the observation of the Commissioner(Appeals) and it was noticed that the Commissioner(Appeals) did not deal with them, as he held that the provision of corporate guarantee is not an international transaction. The Tribunal, in the current case of 2011-12 of the assessee, having noted the above fact, decided to remit the issue to the Assessing Officer for deciding afresh with similar direction. As the substantial questions of law framed herein relates to the same issue, the Assessing Officer would decide the fate. No substantial questions of law.

Summary

Issues:
1. Interpretation of corporate guarantee as an international transaction under Section 92B of the Income Tax Act, 1961.
2. Retrospective application of the Explanation to Section 92B of the Income Tax Act, 1961.
3. Treatment of corporate guarantee provided to Associated Enterprises as an international transaction disregarding it as a shareholder activity.

Analysis:

1. The main issue in this case revolves around the interpretation of a corporate guarantee as an international transaction under Section 92B of the Income Tax Act, 1961. The Tribunal noted that the Transfer Pricing Officer treated the corporate guarantee as an international transaction and charged a guarantee commission at 4.86%. However, the Commissioner(Appeals) accepted the assessee's submission, stating that the provision of corporate guarantee is not an international transaction based on previous cases. The Tribunal decided to remit the issue to the Assessing Officer for fresh consideration, indicating that the Commissioner(Appeals) did not adequately address the matter.

2. The second issue concerns the retrospective application of the Explanation to Section 92B of the Income Tax Act, 1961. The Tribunal deliberated on whether the Explanation, inserted via the Finance Act, 2012, could be implemented retrospectively and applied to the Assessment Year 2011-12. While this question was framed for consideration, the Tribunal ultimately dismissed the appeal before reaching a conclusion on this issue as the matter was remitted to the Assessing Officer for a fresh decision.

3. The third issue involves the treatment of the corporate guarantee provided to Associated Enterprises as an international transaction despite it being characterized as a shareholder activity not necessitating arm's length compensation. The Tribunal highlighted that the provision of corporate guarantee to Associated Enterprises was akin to a shareholder activity, for which arm's length compensation was deemed unnecessary. The Tribunal's decision to remit the issue to the Assessing Officer for reconsideration implies that the treatment of the corporate guarantee as an international transaction needs further examination based on the specific circumstances of the case.

In conclusion, the Tribunal dismissed the appeal, emphasizing that the Assessing Officer would need to reevaluate the issues at hand, including the interpretation of the corporate guarantee as an international transaction and the application of relevant provisions under the Income Tax Act, 1961. The fate of the case hinges on the Assessing Officer's fresh decision, precluding the need to address the substantial questions of law at the current stage of proceedings.