PCIT-10 Vs Laqshya Media Pvt Ltd (Bombay High Court)
Summary: Bombay High Court partly allowed the Revenue’s appeal in the case of Laqshya Media Pvt Ltd and remanded the corporate guarantee transfer pricing issue to the ITAT for fresh consideration. The Tribunal had restricted the corporate guarantee fee adjustment to 0.50%, relying on CIT Vs Everest Kento Cylinders Ltd. and observing that corporate guarantees had been benchmarked in various decisions in the range of 0.20% to 0.50%. The High Court held that the Tribunal had neither explained why the facts of the assessee’s case were comparable with Everest Kento Cylinders Ltd. nor discussed the method adopted for determining the arm’s length price.
Relying on the Supreme Court decision in Sap Labs India (P.) Ltd. Vs ITO, the High Court held that there can be no straitjacket formula or absolute proposition fixing corporate guarantee fees or ALP within a particular range. Each case must be examined on its own facts and the statutory guidelines under Chapter X of the Income Tax Act and Rules 10A to 10E must be followed. Accordingly, the substantial question concerning the 0.50% corporate guarantee commission was answered in favour of the Revenue and the issue was remanded to the Tribunal without expressing any view on merits.
However, on the separate issue of deduction of interest expenditure under Section 36(1)(iii), the High Court ruled in favour of the assessee, relying upon South Indian Bank Limited Vs CIT, which had expressly approved the Bombay High Court decision in HDFC Bank Limited Vs DCIT.
Cases Discussed
- Sap Labs India (P.) Ltd. Vs Income-tax Officer, [2023] 149 taxmann.com 327 (SC) — Relied upon. Supreme Court held that ALP must be determined by following Chapter X of the Income Tax Act and the applicable Rules; there can be no universal or straitjacket formula, and comparability and methodology remain open to judicial scrutiny.
- Commissioner of Income-tax Vs Everest Kento Cylinders Ltd., (2015) 378 ITR 57 (Bombay High Court) — ITAT relied upon this decision while restricting the corporate guarantee fee to 0.50%; Bombay High Court held that the Tribunal had failed to establish factual comparability before applying that benchmark.
- South Indian Bank Limited Vs Commissioner of Income Tax, [2021] 130 taxmann.com 178 (SC) — Followed for deciding the Section 36(1)(iii) interest expenditure question in favour of the assessee and against the Revenue.
- HDFC Bank Limited Vs Deputy Commissioner of Income Tax-2(3), Mumbai & Ors., [2016] 67 taxmann.com 42 (Bombay High Court) — The Tribunal relied upon this decision on the interest expenditure issue; the High Court noted that it had been expressly approved by the Supreme Court in South Indian Bank Limited.
- S.A. Builders Vs CIT (Supreme Court) — Referred to in the substantial question of law concerning allowance of interest expenditure under Section 36(1)(iii) and commercial expediency.
- Softbrands India (P.) Ltd. (Karnataka High Court) — Its absolute proposition that determination of ALP by the Tribunal is final and cannot be scrutinised under Section 260A was expressly noted as not acceptable in the Supreme Court passage reproduced by the High Court.
FULL TEXT OF THE JUDGMENT BOMBAY HIGH COURT
1. Heard learned counsel for the parties.
2. This Appeal is admitted on the following substantial questions of law today pressed before us by Mr Sharma, the learned counsel for the Appellant :-
SUBSTANTIAL QUESTIONS OF LAW
(a) “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to restrict the charging of commission for corporate guarantee at 0.5%, relying on the decision of Hon’ble ITAT in the case of Everest Kanto, without discussing & appreciating the facts brought on record by TPO?”
(b) “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was correct in allowing interest expenditure/s 36(1)(iii) of the I T Act, 1961 relying on the decision of the Hon’ble Apex Court in S.A. Builders Vs. CIT, Without appreciating the fact that commercial expediency in advancing interest free loans to sister concern will depend on ultimate utilization of expenditure and hence cannot be used too widely to inhibit effective interpretation?”
3. In so far as question (b) is concerned, we are satisfied that it must be decided against the Revenue and in favour of the assessee, given the decision of the Hon’ble Supreme Court in the case of South Indian Bank Limited vs. Commissioner of Income Tax1.
4. In deciding the second question in favour of the assessee, the Tribunal relied on this Court’s decision in HDFC Bank Limited vs. The Deputy Commissioner of Income Tax-2(3), Mumbai & Ors2. The Hon’ble Supreme Court has expressly approved this decision in the case of South Indian Bank Limited (supra). Therefore, question (b) is answered favouring the assessee and against the Revenue.
5. In so far as question (a) is concerned, we find that the Tribunal, after referring to this Court’s decision in Commissioner of Income-tax vs. Everest Kento Cylinders Ltd3. has held that the charges for issuing the corporate guarantee by a parent to its subsidiary should be within the range of 0.20% to 0.50%. Based on such a reading of this Court’s decision, the Tribunal has taken the fees at 0.50%.
6. The entire discussion on the above issue reads as follows:-
“We have heard rival contentions and perused material available on record. It is observed that the assessee company proposed to charge 0.5% guarantee fees from its AE but waived it subsequently on account of poor financial health of AE. Further, the assessee’s contention is that both entities enjoyed similar ratings and hence no TP adjustment thereof is called for, with which we are not convinced as had that been the position, there would have been no requirement to provide the said guarantee. The assessee considering the same to be a benefit to its AE, had proposed to charge guarantee fees of 0.5%. Hon’ble Bombay High Court in CIT Vs. Everest Kento Cylinders Ltd. (supra) has affirmed guarantee adjustment of 0.50% as upheld by the Tribunal. In various other judicial pronouncements, CG has been benchmarked in the range of 0.20% to 0.50%. Therefore, keeping in mind the overall facts and circumstances of the case, we restrict TP adjustment against bank guarantee to 0.50% on CG given by the assesee. Further, we are of the considered opinion that CG stood in force at all time and the assessee was contingently liable for the Gross amount of CG provided to its AE notwithstanding the amount of actual loan availed by the AE and further, AE, at all times, got insulated to the extent of guarantee provided by the assessee and therefore, the adjustment has to be calculated on Gross value of CG provided by the assessee. We direct so. This ground is partly allowed.”
(emphasis supplied)
7. The Tribunal has not discussed why the facts in the present case were comparable to those in Everest Kento Cylinders Ltd. (supra). The Tribunal has also not discussed the method, if any, adopted for determining the arm’s length price. The Tribunal did not benefit from the Hon’ble Supreme Court’s decision in Sap Labs India (P.) Ltd. vs. Income-tax Officer4. On these grounds, the Tribunal’s impugned order warrants interference followed by a remand for reconsidering the matter in the light of the decision in Sap Labs India (P.) Ltd. (supra). In Sap Labs India (P.) Ltd. (supra), the Hon’ble Supreme Court did not approve the adoption of some straitjacket formula in all cases. However, this does not mean that comparable instances in other cases should not be considered. The Tribunal can always consider such material after satisfying itself on the comparability issue. The Hon’ble Supreme Court 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.
8. The observations in paragraphs 7 and 8 of Sap Labs India (P.) Ltd. (supra) are relevant and are transcribed below for the convenience of reference.
“7. Therefore, while determining the arm’s length price, the Tribunal has to follow the guidelines stipulated under Chapter X of the IT Act, namely, Sections 92, 92A to 92CA, 92D, 92E and 92F of the Act and Rules 10A to 10E of the Rules. Any determination of the arm’s length price under Chapter X dehors the relevant provisions of the guidelines referred to hereinabove, can be considered as perverse, and it may be considered as a substantial question of law as perversity itself can be said to be a substantial question of law. Therefore, there cannot be any absolute proposition of law that in all cases where the Tribunal has determined the arm’s length price the same is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A of the IT Act. When the determination of the arm’s length price is challenged before the High Court, it is always open for the High Court to consider and examine whether the arm’s length price has been determined while taking into consideration the relevant guidelines under the Act and the Rules. Even the High Court can also examine the question of comparability of two companies or selection of filters and examine whether the same is done judiciously and on the basis of the relevant material/evidence on record. The High Court can also examine whether the comparable transactions have been taken into consideration properly or not, i.e., to the extent non-comparable transactions are considered as comparable transactions or not. Therefore, the view taken by the Karnataka High Court in the case of Softbrands India (P) Ltd. that in the transfer pricing matters, the determination of the arm’s length price by the Tribunal is final and cannot be subject matter of scrutiny under Section 260A of the IT Act cannot be accepted.
8. Thus, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm’s length price. Therefore, we are of the opinion that the absolute proposition of law laid down by the Karnataka High Court in the case of Softbrands India (P) ltd. (supra) that in the matter of transfer pricing, determination of the arm’s length price by the Tribunal shall be final and cannot be subject matter of scrutiny and the High Court is precluded from examining the correctness of the determination of the arm’s length price by the Tribunal in an appeal under Section 260A of the IT Act on the ground that it cannot be said to be raising a substantial question of law cannot be accepted. As observed hereinabove, within the parameters of Section 260A of the IT Act in an appeal challenging the determination of the arm’s length price, it is always open for the High Court to examine in each case whether while determining the arm’s length price, the guidelines laid down under the Act and the Rules, referred to hereinabove, are followed or not and whether the determination of the arm’s length price and the findings recorded by the Tribunal while determining the arm’s length price are perverse or not.”
9. For the above reasons, we answer substantial questions of law at (a) favouring the Revenue and against the assessee.
10. Further, 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. (supra). However, we clarify that we have not examined the merits of the matter. Therefore, all parties’ contentions are left open to be determined by the Tribunal afresh considering the above.
11. The Appeal is partly allowed in the above terms. There shall be no order for costs.
12. The parties must file an authenticated copy of this order and an application for fixing an early date before the Tribunal. The Tribunal is requested to act on an authenticated copy of this order and dispose of the Appeal as expeditiously as possible.
