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Facts
The Revenue appealed the CIT(A) order which deleted an Arm's Length Price (ALP) adjustment of ₹3,97,99,637 related to interest on a loan to an associated enterprise. The assessee claimed interest at LIBOR + 3.5%, while the TPO proposed an adjustment. Additionally, issues arose regarding the SBLC fee and R&D expenditure deduction.
Held
The Tribunal upheld the CIT(A)'s decision, finding that the interest charged by the assessee on the loan was at arm's length, as it exceeded comparable international rates like LIBOR. The Tribunal also agreed with the CIT(A)'s determination of the SBLC fee at 0.5% and allowed the R&D expenditure deduction as claimed by the assessee, relying on judicial precedents.
Key Issues
Whether ALP adjustments for interest on loans to AEs are justified, the appropriate rate for SBLC fees, and the allowability of R&D expenditure deduction beyond DSIR-quantified amounts.
Sections Cited
92CA, 35(2AB)
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Income Tax Appellate Tribunal, “C” BENCH, KOLKATA
Before: SHRI RAJESH KUMAR, AM & SHRIPRADIP KUMAR CHOUBEY, JM
This is an appeal preferred by the Revenue against the order of the Commissioner of Income-tax (Appeals), Kolkata-22(hereinafter referred to as the “Ld. CIT(A)”] dated 08.01.2025 for the AY 2011-12.
At the outset, we observe from the appeal folder that there is a delay of 147 days in filing the appeal by the department in support of which a condonation petition was filed. It was stated in the condonation petition that the delay has occurred due to obtaining the administrative approvals from the competent authorities, which took quite a long time and accordingly, the delay may be condoned. The ld. AR, on the other hand, did not oppose the condonation of delay.
The issue raised in ground no.1 to 4 and 8 is against the order of ld. CIT (A) deleting the Arm’s Length Price adjustment of ₹3,97,99,637 as made by the ld. AO/Transfer Pricing Officer on account interest on loan.
3.1. The facts in brief are that the assessee is a public limited company engaged in processing of coal tar & coal tar pitch to produce various products of coal tar pitch and valuable products like Oil, Naphthalene, etc. The company filed the return of income on 30.11.2012, declaring total income at ₹ nil under normal provisions and book profit of ₹80,89,27,608/- u/s 115JB of the Act. The case of the assessee was selected for scrutiny and the notices along with questionnaire duly issued and served upon the assessee. The assessee company has also two Windmills in Maharashtra having capacity to produce wind energy of 2.5 MW. The assessee entered into international transactions with its associated enterprise M/s Himadri Global Industries Ltd. (HGIL) and accordingly, the matter was referred to the ld. Transfer Pricing Officer for determining the Arm’s Length Price (ALP), who computed the adjustment of interest component charged by the assessee company by making upper adjudgment on account of interest on loan to HGIL by the assessee company at ₹3,97,99,637/-. Based on the said Transfer Pricing Officer report, the ld. AO added back the total upward adjustment of interest loan of ₹3,97,99,637/- to the income of the assessee.
3.2. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee on this ground by taking into consideration and submissions of the assessee by observing and holding as under:-
“7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra).
8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law. ” b). In case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 5 ITR-OL 1 (Delhi), wherein it has held as under:-
“14. We note that the comparable uncontrolled price method is the most appropriate method in order to ascertain the Arm’s Length Price of the international transaction as that of the assessee. We agree with the assessee's contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency tended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being Libor should be taken as the benchmark rate for international transactions.
The above view is duly supported by the following case law relied upon by the assessee's counsel. In Siva Industries and Holding Ltd. v. Asst. CIT (supra) it was held by the Income-tax Appellate Tribunal that the assessee had given “13………. 13… …..… 8. On appeal by the assessee the CIT(A) deleted the addition made by the AO by following the decision of ITAT Chennai in the case of Siva Industries & Holdings Limited v. The Assistant Commissioner of Income- tax (supra). The following were the relevant observations of CIT(A): "4.2 I have considered the facts of the case. The assessee had advanced a loan in foreign currency to its subsidiary ZAO Classic, Russia on which it was charged interest at the rate of 8% p.a. The TPO was of the view that price of the loan i.e. the interest charged has to be worked out on the basis of taking two parties as separate and bench-marking the price of the loan on the basis of what an independent third party would charge from ZAO Classic, Russia based on its analysis of risk associated with the loan. The assessee stated in reply to show cause notice issued by the TPO, that foreign currency loans are given by banks bearing UBOR based rate as a global practice. The average of LIBOR based rate for the year under consideration was 4.68%. Thus the rate of 8% charged by the assessee was higher than the LIBOR rate. The assessee also relied upon a number of decisions, in particular the decision of ITAT, Chennai in the case of Siva Industries and Holdings Ltd. v. ACIT, Central Circle-6(1) Chennai 46 SOT 112. In the appellate proceedings the assessee has cited some more decisions such as Four Soft Ltd. v. DCIT in 12010, Cotton Natural (I) Pvt Ltd. v. DCIT in ITA No. 5855/De1/2012. In the case of Siva Industries and Holdings Ltd. (supra), it has been held by the Hon'ble tribunal that once the transaction is between the assessee and the AEs is in foreign currency, the transaction would have to be looked upon by applying commercial principle in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate
The issue raised in ground nos.5,6 and 7 is against the order of ld. CIT (A) restricting the SBLC fees rate to 0.5%, which is much lower than the SBLC rate of 1.62% determined by the ld. Transfer Pricing Officer.
4.1. The facts in brief are that the for the purpose of establishing the greenfield project by Shandong, HGIL obtained external loans from HSBC bank in Hong Kong at an interest rate of LIBOR plus 275 basis points. This loan was secured through a standby Letter of Credit (SBLC) issued by the State Bank of India, which utilized the sanctioned limit of Himadri India. The guarantee provided by the assessee in favour of HGIL was intended to support its own business objective of expanding operations in coal tar pitch and was not intended to benefit the associated enterprise. The ld. Transfer Pricing Officer computed the Arm’s Length Price of SBLC issued by the SBI at the rate of 1.62% which comes to ₹9,92,126/-. While, the ld. CIT (A)
“4.6 Furthermore, the assessee emphasized that the guarantee transaction was not specifically designed to confer any advantage upon the AE to the detriment of the appellant. Instead, it served the appellant's interests, with any benefit to the AE being merely an ancillary consequence. In support of its position, the assessée referred to judicial precedents, which established that for a corporate guarantee to qualify as an international transaction under Section 928 of the Income Tax Act, 1961, it must be issued primarily for the benefit of the AE, incur a cost to the assessee and have a direct impact on the profits, income, losses, or assets of the enterprise. 4.7 The Ld. TPO, however, held that the guarantee was given by SBI out of the sanction limit of Himadri India and thus, the assessee had incurred certain cost in creation of liability with SBI. Accordingly, arm's length price of SBLC fee was computed @ 1.62% by the learned Ld. TPO at Rs.9,92,126. 4.8 In the case of Tega Industries Ltd. the hon'ble Kolkata ITAT vide order dated 08-04-2024 held that corporate guarantee fee constitutes an international transaction subject to ALP and 0.5% as the appropriate rate for the same. The relevant extract is as follows: "so far as the Ground relating to calculation of corporate guarantee fee is concerned, we find that this issue has come up before various judicial forums and corporate guarantee fee range of 0.2% to 0.5% has been found to be justified. We find support from the judgment of the Hon'ble Bombay High Court in the case of CIT v. Everest Kento Cylinders reported in (2015) 378 ITR 57 (Bom), and are inclined to give part relief to the assessee directing the TPO to compute corporate guarantee fee @ 0.5% and delete excess amount added in the hands of the assessee." 4.9 Keeping in view of the above decision the Ld. AO/TPO is directed to compute the quantum of fee at 0.5% instead of 1,62%. Thus, the disallowance on this count is restricted to 0.5%. This ground of appeal is therefore partly allowed.” 4.2. After hearing the rival contentions and perusing the materials available on record, we find that the ld. CIT (A) while restricting the disallowance to 0.5% followed by the decision of the co-odinite Bench in case of M/s. Tega Industries Limited vs DCIT in vide order dated 08.04.2024, wherein it has been held that corporate guarantee fee constitute an international transaction subject to LLP and 0.5% is the appropriate rate for the same. The co-ordinate bench followed the decision of Hon'ble
5. The issue raised in ground no.9, is against the order of ld. CIT (A) in allowing higher deduction u/s 35(2AB) of the Act in respect of expenditure incurred on house research and development, which is higher than the DSIR guidelines.
5.1. The facts in brief are that the assessee has an in house R&D facility which is approved u/s 35(2AB) of the Act, by Department of Scientific & Industrial Research (DSIR). The ld. AO on perusal of the computation of the income observed that the assessee has claimed deduction u/s 35(2AB) of the Act of ₹2,08,72,702/- being 200% of expenses incurred on research and development expenses of ₹1,04,36,101/-, which was claimed in the profit and loss account. The ld. AO called upon the assessee to furnish the details of expenses and copy of the order issued by the competent authority as per Section 35(2AB)of the Act. The assessee furnished before the ld. AO the copy of 3CM and 3CL issued by the competent authority i.e. DSIR under the Ministry of Science and Technology, Govt. of India. The assessee also produced the copy of audited report in respect of claim of expenses of Scientific Research and Development. The ld. AO noted that in the said report the auditor had indicated that deduction u/s 35(2AB) of the Act on in-house Research and Development expenditure was ₹258.44 lacs as per DSIR, guidelines. The ld. AO noted that the assessee had claimed deduction on account 5.2. During the appellate proceedings, the ld. CIT (A), allowed the appeal of the assessee on this issue by observing and holding as under:-
“4.10 The appellant-company Incurred certain expenditure on In-House Research & Development at Mahistikry Unit, Haripal, Dist. Hooghly, which has been recognized by Department of Scientific and Industrial Research, Govt. of India (DSIR) vide letter dated 29/03/2011 and claimed weighted deduction u/s.35(2AB) of the Act. In the reconciliation statement of R & D Expenditure drawn by the appellant for tax computation purposes, the appellant had shown item-wise expenditure on revenue account as well as on capital account certified by the Auditor and taken in the income- tax computation, a brief description of which was as under :-
Particulars As per Auditor Taken in Income Tax Certificate (In Rs.Lacs) Computation (In ₹Lacs) Revenue Expenditure 156.64 156.64 Capital Expenditure 760.59 728.36 Total of Revenue & Capital Expenditure 917.23 885.00 In the computation of income for the assessment year under appeal, the appellant added the revenue expenditure of Rs.1,56,64,009/- in relation to research & development and separately claimed deduction 200% of such expenditure u/s 35(2AB) of the Act amounting to Rs.3,13,28,018/. The AO allowed the same. 4.11 In respect of capital expenditure of Rs.7,28,36,886/-, the appellant-company claimed deduction u/s. 35(2AB) of the Act amounting to Rs. 14,56,73,732/-, which was 200% of the expenditure of Rs.728.36 lakhs to arrive at the business income. The A.O. observed that as per certificate issued by the DSIR, the expenditure considered for the purpose of sec. 35(2AB) of the Act was to the tune of Rs.101.80 lakhs and not Rs.728.36 lakhs as claimed by the appellant in the computation of income and therefore disallowed the deduction of 200% on Rs.626.56 lacs totaling Rs. 12,53,12,000. 4.12 The appellant submitted that capital expenditure of Rs.7,28,36,886 was incurred and once the research and development facility was approved by DSIR, the entire
The Ground no.10 is general in nature and does not require any specific adjudication.
In the result, the appeal of the Revenue is dismissed.
Order pronounced on 17.02.2026.