2025 (1) TMI 1411 - HC - Income Tax

TP adjustment - charging of commission for corporate guarantee at 0.5% - HELD THAT - Issue decided in favour of revenue we set aside the Tribunal s impugned order to the extent that it concerns a substantial question of law (a) and remand the matter to the Tribunal for fresh consideration given our above observations and the observations of the Hon ble Supreme Court in the case of Sap Labs India (P.) Ltd. 2023 (4) TMI 859 - SUPREME COURT as held that each case must be examined to determine whether the guidelines laid down in the Act and the Rules were followed by determining the arm s length price. There can be no absolute proposition that the range of corporate guaranteed fees or determining the arm s length price should follow a particular range or formula. Addition of interest expenditure/s 36(1)(iii) - commercial expediency in advancing interest free loans to sister concern - HELD THAT - We are satisfied that it must be decided against the Revenue and in favour of the assessee given the decision of South Indian Bank Limited 2021 (9) TMI 566 - SUPREME COURT

ISSUES PRESENTED and CONSIDERED

The judgment addresses two substantial questions of law:

(a) Whether the Income Tax Appellate Tribunal (ITAT) was justified in directing the restriction of the charging of commission for a corporate guarantee at 0.5%, relying on a previous decision without adequately discussing the facts brought on record by the Transfer Pricing Officer (TPO).

(b) Whether the ITAT was correct in allowing interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961, relying on a Supreme Court decision, without considering the fact that commercial expediency in advancing interest-free loans to sister concerns depends on the ultimate utilization of expenditure.

ISSUE-WISE DETAILED ANALYSIS

Issue (a): Charging of Commission for Corporate Guarantee

Relevant Legal Framework and Precedents: The issue revolves around the determination of the arm's length price for corporate guarantee fees. The Tribunal relied on the decision in Commissioner of Income-tax vs. Everest Kento Cylinders Ltd., which set a benchmark for corporate guarantee fees between 0.20% to 0.50%. The Supreme Court decision in Sap Labs India (P.) Ltd. emphasized the need for a case-by-case analysis rather than a fixed formula for determining arm's length prices.

Court's Interpretation and Reasoning: The Court noted that the Tribunal did not sufficiently compare the facts of the current case with those in Everest Kento Cylinders Ltd. and failed to discuss the method for determining the arm's length price. The Court emphasized the need for a detailed analysis of comparability and the application of guidelines under the Income Tax Act and Rules.

Key Evidence and Findings: The Tribunal had observed that the assessee proposed a 0.5% guarantee fee but waived it due to the poor financial health of the associated enterprise (AE). The Tribunal justified the 0.5% fee based on similar judicial pronouncements.

Application of Law to Facts: The Court found that the Tribunal did not adequately apply the legal guidelines to the facts of the case, particularly in terms of comparability and the method for determining the arm's length price.

Treatment of Competing Arguments: The Court acknowledged the Tribunal's reliance on previous decisions but pointed out the lack of a detailed analysis of the facts and comparability in the present case.

Conclusions: The Court favored the Revenue on this issue, setting aside the Tribunal's order and remanding the matter for reconsideration in light of the Supreme Court's observations in Sap Labs India (P.) Ltd.

Issue (b): Allowing Interest Expenditure

Relevant Legal Framework and Precedents: The issue concerns the allowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act. The Tribunal relied on the Supreme Court decision in S.A. Builders vs. CIT and the Bombay High Court decision in HDFC Bank Limited, both of which were approved by the Supreme Court in South Indian Bank Limited vs. Commissioner of Income Tax.

Court's Interpretation and Reasoning: The Court agreed with the Tribunal's reliance on these precedents, noting that the Supreme Court had expressly approved the decisions, which supported the allowance of interest expenditure.

Key Evidence and Findings: The Court found that the Tribunal's decision was consistent with the legal framework and precedents, which justified the allowance of interest expenditure based on commercial expediency.

Application of Law to Facts: The Court applied the legal principles established in the cited cases to the facts of the present case, concluding that the Tribunal's decision was correct.

Treatment of Competing Arguments: The Court did not find any compelling arguments from the Revenue to counter the established legal precedents.

Conclusions: The Court decided this issue in favor of the assessee, affirming the Tribunal's decision to allow interest expenditure.

SIGNIFICANT HOLDINGS

Core Principles Established: The judgment reinforces the principle that the determination of arm's length price in transfer pricing matters requires a detailed analysis of comparability and adherence to the guidelines under the Income Tax Act and Rules. It also reaffirms the allowance of interest expenditure based on commercial expediency, as supported by Supreme Court precedents.

Final Determinations on Each Issue:

For issue (a), the Court favored the Revenue, setting aside the Tribunal's order and remanding the matter for fresh consideration. For issue (b), the Court favored the assessee, affirming the Tribunal's decision to allow interest expenditure.

The Court directed the parties to file an authenticated copy of the order with the Tribunal and requested the Tribunal to expedite the disposal of the appeal. There was no order for costs.

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