Bank Guarantee Rates Require Functional Comparability Before Transfer Pricing Adjustment: ITAT Mumbai

Cooperatieve Rabobank U.A. Vs ACIT (ITAT Mumbai)

Summary: The Mumbai Bench of the Income Tax Appellate Tribunal partly allowed for statistical purposes the appeal of Cooperatieve Rabobank U.A. for Assessment Year 2022-23. The assessee, an Indian branch of the Netherlands-based bank, challenged the final assessment order dated 25 September 2025 passed pursuant to directions of the Dispute Resolution Panel. Against returned income of ₹68,40,98,230, the assessment determined income of ₹111,36,40,430 after incorporating net transfer pricing adjustments of ₹30,19,43,962 and disallowing investment valuation loss of ₹12,75,98,241. The Tribunal directed deletion of the substantive adjustments and disallowance, while requiring verification of the TDS credit and tax computation claims.

The counter-guarantee dispute concerned an adjustment of ₹64,55,610. The assessee maintained that it merely performed intermediary and support functions for guarantees issued by overseas branches, without issuing the guarantees or assuming the risks ordinarily borne by a guarantor bank. The TPO nevertheless applied third-party bank guarantee rates collected under section 133(6). The Tribunal held that such rates could not be applied without establishing comparability by reference to the functions performed, assets employed and risks assumed. It also required proper disclosure of the third-party material and an effective opportunity to rebut it. Since a reliable comparable uncontrolled transaction and an adequate FAR analysis were absent, the adjustment was deleted.

On loan support services and the ECB net interest share, the assessee explained that the overseas associated enterprise supplied the funds and undertook substantive lending functions, including credit approval, pricing, disbursement and portfolio management. It also bore the credit, liquidity and interest-rate risks, while the Indian branch performed origination and support functions. The assessee had already attributed 25% of the net interest income and fee income to itself, whereas the TPO sought a 50% attribution. The Tribunal found no comparable uncontrolled transaction or properly applied prescribed method supporting an equal allocation. Referring to the authorities cited by the assessee, including Credit Lyonnais, Calyon Bank and RBS Financial Services, it held that remuneration must reflect the Indian entity’s actual functions. The adjustment of ₹22,57,20,161 was therefore deleted.

The regional support services and head office expenses dispute involved a proposed adjustment of ₹16,56,04,696. After accounting for the assessee’s suo motu disallowance of ₹9,58,36,505, the net adjustment was ₹6,97,68,191. The assessee furnished contemporaneous correspondence concerning IT, finance, human resources, audit, compliance, credit administration and corporate platform support, together with cost details, allocation keys and an Agreed Upon Procedures report. The Tribunal found that this material demonstrated actual receipt of services, business nexus and benefits derived. It held that rejection of TNMM did not permit the TPO to substitute an ad hoc or nil valuation without properly applying a method prescribed under section 92C. It deleted the residual transfer pricing adjustment and the consequential alternative disallowance under section 37(1).

The Tribunal also allowed the claim of ₹12,75,98,241 for diminution in the value of investments classified as Held for Trading and Available for Sale. The assessee submitted that these investments constituted stock-in-trade and were consistently valued at cost or market value, whichever was lower, in accordance with applicable RBI guidelines. The Tribunal accepted that the claim represented an investment valuation loss rather than a provision for an unascertained liability. It accordingly directed deletion of the disallowance of the loss on investments held as stock-in-trade.

The challenge to initiation of penalty proceedings under section 270A was dismissed as premature. The AO was directed to verify the claim for TDS credit of ₹70,000 against Form 26AS and supporting records and grant the credit due in accordance with law. The alleged addition of ₹1,64,08,650 to net tax liability was also referred to the AO for verification and correction if found erroneous. Since the substantive grounds were decided in the assessee’s favour, the limitation ground concerning section 153 became academic and was left open. The appeal was thus partly allowed for statistical purposes.

Cases Discussed

• Pr. CIT-8 Vs RBS Financial Services (India) (P.) Ltd., Income Tax Appeal (IT) No. 1417 of 2017 (Bombay High Court; 2020). Cited by the assessee in support of its challenge to attribution of lending income; the Tribunal collectively referred to the cited authorities when examining remuneration for the Indian branch’s actual functions.
• DIT Vs Calyon Bank, Income Tax Appeal No. 1781 of 2014, judgment dated 23 March 2017 (Bombay High Court). Relied upon by the assessee regarding attribution of income where the overseas entity provides funds and assumes lending risks.
• CIT Vs Merck Ltd., 389 ITR 70 (Bombay High Court; 2016). Cited in connection with the requirement to determine arm’s length price through a prescribed transfer pricing method rather than an ad hoc valuation.
• Credit Lyonnais Vs ADIT (International Taxation), [2014] 61 SOT 75, order dated 30 September 2013 (ITAT Mumbai). Relied upon by the assessee regarding the distinction between overseas lending functions and Indian origination or support functions.
• United Commercial Bank Vs CIT, [1999] 240 ITR 355 (Supreme Court). Referred to in connection with consistent valuation of banking stock-in-trade at cost or market value, whichever is lower, and the resulting diminution in value.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee against the final assessment order dated 25/09/2025 passed by the Ld. Assistant Commissioner of Income-tax, International Tax Circle 2(1)(1), Mumbai (for brevity, the “Ld. AO”), u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (“the Act”), pursuant to directions dated 21/08/2025 issued by the Hon’ble Dispute Resolution Panel-1, Mumbai (for brevity, the “Ld. DRP”), for A.Y. 2022-23.

2. The assessee has raised the following grounds of appeal:

“General

1. Whether on the facts and circumstances of the case and in law, the learned Additional Commissioner of Income-tax, Transfer Pricing – 1(3), Mumbai (‘TPO’) and the learned AO, under the directions of the Hon’ble DRP, erred in assessing the Appellant’s income as Rs. 111,36,40,430 as against the returned income of Rs. 68,40,98,230.

Guarantee commission earned on back-to-back guarantees (64,55,610)

2. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 64,55,610 in respect of services rendered in connection with guarantees given by overseas branches where the Appellant only acted as an intermediary, without appreciating the functions performed, assets employed, and risks assumed (‘FAR’) and the benchmarking study of the Appellant?

3. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in using third-party bank guarantee rates obtained under section 133(6) of the Act as comparable instances without appreciating that (i) this information was not available in the public domain and was not available with the Appellant during the relevant financial year, (ii) that this information was not concerning any actual transactions and (iii) there is a difference in the nature of the two guarantees?

Fees for Loan Support Services (Rs. 22,57,20,161)

4. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 22,57,20,161 in respect of the Loan Support Services transaction without appreciating the FAR and the benchmarking study of the Appellant?

5. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have failed to appreciate the Appellant’s FAR and have instead attributed certain functions, assets and risks to it which are factually incorrect and also impermissible in the legal framework as applicable to this case and undertaking a contribution analysis based on their perception of how the Appellant ought to have conducted its affairs?

6. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in rejecting supplementary benchmarking analysis undertaken by the Appellant?

Payment for Regional Support Services (Rs. 6,97,68,191)

7. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 6,97,68,191 in respect of Payment for Regional Support Services without appreciating the FAR and the benchmarking study of the Appellant?

8. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in not appreciating the (i) voluminous documentary evidence, (ii) details of cost incurred by the AEs, (iii) details of allocation keys used by AEs and (iv) certificate of independent consultant, etc. filed by the Appellant and proceeding on surmises and conjectures?

9. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in not considering the benefits derived by the Appellant and disregarding the commercial expediency of the Appellant?

10. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in rejecting the Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) for the determination of the Arm’s Length Price (‘ALP’)?

11. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in going beyond their jurisdiction in determining ALP on an ad-hoc basis without applying any of the prescribed methods as per section 92C(1) of the Act. They have erred in justifying the ad-hoc approach of determining the ALP by terming it as use of Comparable Uncontrolled Price (‘CUP’) Method?

12. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in undertaking an alternative disallowance by holding that the Appellant has failed to fulfil the ingredients of section 37 of the Act?

Disallowance of Mark to Market Loss on Investments (Rs. 12,75,98,241)

13. Whether on the facts and circumstances of the case an in law, the learned AO under the directions of the Hon’ble DRP has erred in disallowing Mark to Market Loss of Rs. 12,75,98,241 on Investments Held for Trading (‘HFT’) and Investments Available for Sale (‘AFS’)?

Initiation of penalty under section 270A

14. Whether on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 270A of the Act.

Short grant of credit of Tax Deducted at Source (‘TDS’) (Rs. 70,000)

15. Whether on the facts and circumstances of the case and in law, the learned AO has erred in not granting credit of TDS of Rs. 70,000?

Error in Computation Sheet (Rs. 1,64,08,650)

16. Whether on the facts and circumstances of the case and in law, the learned AO in the computation sheet enclosed with the final assessment order dated 25 September 2025 has erred in arbitrarily adding Rs. 1,64,08,650 to the net tax liability of the Appellant?

Order barred by limitation

17. Whether on the facts and circumstances of the case and in law, the final assessment order dated 25 September 2025 passed under section 143(3) read with section 144C(13) of the Act for AY 2022-23 is void and bad in law as it has been passed beyond the time limit prescribed under section 153 of the Act?”

3. Brief facts are that the assessee is a branch of Cooperatieve Rabobank U.A., Netherlands, engaged in banking operations in India. The assessee filed its return of income on 30/11/2022 declaring total income at Rs. 68,40,98,230/-. The case was selected for scrutiny under CASS and notices u/s. 142(1) of the Act were issued from time to time. In response, the assessee filed details, explanations and documentary evidence. During the assessment proceedings, the Ld. AO made a reference to the Ld. TPO after obtaining the approval of the competent authority. The Ld. TPO passed an order u/s. 92CA(3) dated 28/01/2025 proposing transfer pricing adjustments in respect of counter guarantee, ECB net interest share and regional support services/head office expenses. Thereafter, the Ld. AO passed the draft assessment order dated 20/03/2025.

3.1. From the final assessment order, it is observed that the following transfer pricing adjustments were proposed by the Ld. TPO:

4. The assessee had suomotu disallowed an amount of Rs. 9,58,36,505/-out of the regional support services/head office expenses. Accordingly, while giving effect to the transfer pricing order, the Ld. AO made a net adjustment of Rs. 6,97,68,191/- under this head. The aggregate transfer pricing adjustment incorporated in the final assessment order was thus Rs. 30,19,43,962/-.The Ld. AO also disallowed Rs. 12,75,98,241/- being provision for depreciation/mark-to-market loss on investments. Consequently, the total income was assessed at Rs. 111,36,40,430/-.

5. Aggrieved by the draft assessment order, the assessee filed objections before the Hon’ble DRP on 17/04/2025. The assessee filed paper book and documentary evidence in support of its objections. The Hon’ble DRP issued directions u/s. 144C(5) of the Act on 21/08/2025, substantially affirming the transfer pricing adjustments. In respect of regional support services, the Hon’ble DRP further directed the Ld. AO to make an alternate disallowance u/s. 37(1) of the Act on the basis that the assessee had failed to establish the receipt and rendition of services.

Pursuant to the directions of the Hon’ble DRP, the Ld. AO passed the impugned final assessment order dated 25/09/2025.

Aggrieved by the aforesaid order, the assessee is in appeal before us.

6. Grounds No. 2 and 3 – Counter guarantee

The Ld. AR submitted that the assessee did not issue the underlying guarantees and only performed intermediary/support functions in respect of guarantees issued by overseas branches. It was submitted that the Ld. TPO erroneously applied third-party bank guarantee rates obtained u/s. 133(6) of the Act, without establishing functional comparability. The Ld. AR submitted that the data did not pertain to comparable actual transactions and was not available in the public domain during the relevant year.

6.1. The Ld. DR, on the other hand, relied upon the orders of the revenue authorities.

7. We have heard the rival submissions and perused the material available on record. The Ld. TPO has applied third-party bank guarantee rates for determining the ALP of the impugned transaction. However, the assessee’s consistent submission is that it acted only as an intermediary and neither issued the guarantee nor assumed the risks ordinarily borne by a guarantor bank.

7.1. In our considered view, before applying a third-party bank guarantee rate, the Ld. TPO was required to demonstrate that the uncontrolled transactions were comparable having regard to the functions performed, assets employed and risks assumed by the assessee. No such exercise has been demonstrated from the orders of the revenue authorities. Further, the data obtained u/s. 133(6) of the Act cannot be used against the assessee without properly confronting the same and allowing an effective opportunity to rebut it.

8. In the absence of a reliable comparable uncontrolled transaction and a proper FAR analysis, the adjustment of Rs. 64,55,610/- cannot be sustained.

We therefore direct the Ld. AO to delete the same. Grounds No. 2 and 3 are allowed.

9. Grounds No. 4 to 6 – Loan support services/ECB net interest share

9.1 The Ld. AR submitted that the overseas AE provided the funds and carried out the substantive lending functions, including credit approval, pricing, disbursement and portfolio management. It was submitted that the overseas AE assumed the credit, liquidity and interest-rate risks. The assessee, on the other hand, performed loan origination and support functions in India.

9.1. The Ld. AR further submitted that the assessee had already attributed 25% of the net interest income and fee income to itself. It was submitted that the Ld. TPO erred in attributing 50% of the net interest income and fee income to the assessee without any reliable comparable or proper application of a prescribed transfer pricing method. Reliance was placed on Credit Lyonnais v. ADIT (International Taxation) [2014] 61 SOT 75 (Mumbai – Trib.) order dated 30/09/2013; DIT v. Calyon Bank [Income Tax Appeal No. 1781 of 2014, dated 23-3-2017] (Bombay High Court); Pr. CIT-8 v. RBS Financial Services (India) (P.) Ltd. [2020] 122 (Bombay)/Income Tax Appeal (IT) No. 1417 of 2017.

9.2. The Ld. DR relied upon the orders of the Ld. AO/TPO and the directions of the Hon’ble DRP.

10. We have heard the rival submissions and perused the material available on record. It is undisputed that the overseas AE provided the funds and carried out the substantive lending functions. The Ld. TPO has not brought on record any comparable uncontrolled transaction to justify equal allocation of the net interest income and fee income between the assessee and the overseas AE.

11. The authorities cited by the assessee in the written submissions support the proposition that where the overseas entity provides the funds and assumes the lending risks, interest income from lending activity cannot be attributed to the Indian entity merely because it performs borrower analysis, market analysis or origination-related functions. The remuneration of the Indian entity has to be determined with reference to the actual functions performed by it. The assessee has already attributed 25% of the net interest income and fee income to itself. The Revenue has not established, on the basis of a reliable comparable or a prescribed method that the said attribution is not at arm’s length. The assessee has also demonstrated that its transfer pricing analysis in respect of the subject transaction was not disturbed in the earlier years referred to in the written submissions. We, therefore, direct the Ld. AO to delete the adjustment of Rs. 22,57,20,161/-. Grounds No. 4 to 6 are allowed.

12. Grounds No. 7 to 12 – Regional support services and head office expenses

The Ld. AR submitted that the assessee had furnished voluminous evidence to establish receipt of services, business need, benefits derived, underlying cost base and allocation keys. It was submitted that the evidence included contemporaneous e-mail correspondence in respect of IT support, finance, human resource, audit, compliance, credit administration and market/corporate platform services. The Ld. AR submitted that the assessee had also furnished an Agreed Upon Procedures report to substantiate the underlying cost base. It was submitted that the assessee had already made a suomotu disallowance of Rs. 9,58,36,505/- and, therefore, the residual adjustment of Rs. 6,97,68,191/- was unwarranted. Reliance was placed only on the decisions cited in the written submissions, including CIT v. Merck Ltd. [2016] 73 (Mumbai – Trib.)/ITA No. 902/Mum/2016, dated 03/02/2020 (Mumbai–Trib.).

12.1. The Ld. AR further submitted that the Ld. TPO rejected TNMM and determined the ALP at Nil/ad hoc without applying any prescribed method. It was submitted that the alternate disallowance u/s. 37(1) of the Act, as directed by the Ld. DRP, was also not justified in the light of the documentary evidence furnished by the assessee.

12.2. The Ld. DR relied upon the findings of the Ld. TPO and the directions of the Ld. DRP.

13. We have heard the rival submissions and perused the material available on record. The assessee has placed on record extensive contemporaneous documentation demonstrating the receipt of regional support services. The material referred to in the written submissions includes evidence of IT, finance, HR, audit, compliance, credit core and corporate platform support.

13.1. We note that the Ld. TPO has rejected the assessee’s TNMM analysis and has effectively determined the ALP on an ad hoc basis. No comparable uncontrolled transaction has been identified and no prescribed method has been applied in the manner contemplated u/s. 92C of the Act. An ALP cannot be determined on an ad hoc basis without identifying a proper comparable or applying a prescribed method.

13.2. The alternate disallowance u/s. 37(1) of the Act is also not sustainable. The evidence placed on record demonstrates business nexus, receipt of services and benefits derived by the assessee. The assessee has further furnished supporting details of the cost base and allocation mechanism and has already made suomotu disallowance of Rs. 9,58,36,505/-.

13.3. In view of the above, we direct the Ld. AO to delete the adjustment of Rs. 6,97,68,191/- and the consequential alternate disallowance u/s. 37(1) of the Act. Grounds No. 7 to 12 are allowed.

14. Ground No. 13 – Mark-to-market loss on investments

14.1. The Ld. AR submitted that the assessee is a banking company regulated by the RBI and is required to value investments classified as AFS and HFT in accordance with the applicable RBI guidelines. It was submitted that the investments are held as stock-in-trade and are valued at cost or market value, whichever is lower. The diminution in value was recognised in the profit and loss account consistently and in accordance with the applicable prudential norms.

14.2. The Ld. DR relied upon the orders of the Ld. AO and the directions of the Ld. DRP.

14.3. We have heard the rival submissions and perused the material available on record. The loss claimed by the assessee is not a provision for an unascertained liability. It represents diminution in the value of investments held as stock-in-trade and valued in accordance with RBI guidelines. The decisions relied upon by the assessee in United Commercial Bank v. CIT 368 ITR 377 (Bombay), support the allowability of such loss where investments are consistently valued at cost or market value, whichever is lower, in accordance with the applicable banking guidelines. We therefore direct the Ld. AO to delete the disallowance of Rs. 12,75,98,241/-. Ground No. 13 is allowed.

15. Ground No. 14 – Initiation of penalty proceedings

Ground No. 14 challenging initiation of penalty proceedings u/s. 270A of the Act is premature. The same is dismissed.

16. Ground No. 15 – Short grant of TDS credit

The Ld. AR submitted that the Ld. AO had not granted TDS credit of Rs. 70,000/-. The Ld. DR submitted that the claim may be verified. We direct the Ld. AO to verify the claim from Form 26AS and other supporting material and grant due credit in accordance with law. Ground No. 15 is allowed for statistical purposes.

17. Ground No. 16 – Error in computation

The Ld. AR submitted that Rs. 1,64,08,650/- was wrongly added to the assessee’s net tax liability. The Ld. DR submitted that the issue may be verified by the Ld. AO. We direct the Ld. AO to verify the computation and rectify the same, if found incorrect, in accordance with law. Ground No. 16 is allowed for statistical purposes.

18. Ground No. 17 – Limitation

In view of our decision on the substantive grounds, this ground becomes academic and is left open.

19. In the result, the appeal filed by the assessee bearing ITA No. 8084/Mum/2025 is partly allowed for statistical purposes.

Order pronounced in the open court on 30th day of September 2026.