Guarantee costs paid to the holding company for a loan given to a third party are deductible under U.S. tax law. 37

Fact and issue of the case

This appeal is recalled vide Miscellaneous Application No. 160/Mum/2022 by observing that the issue raised in Ground Nos. 3 & 4 of ITA.No. 1584/Mum/2014 for the A.Y. 2006-07 have certain mistakes and needs rectification vide order dated 22.11.2022. Since the mistake was apparent on record this Miscellaneous Application was allowed and recalled the issue under consideration for fresh adjudication.

Limited Grounds were recalled by the Tribunal for denovo adjudication are Ground No. 3 and 4 raised by the revenue, the same are reproduced below: –

“Whether in the facts and in the circumstanc-es of the case and in Law, the Ld. DRP erred in deleting the addition made in draft assessment order on account of interest on external commercia l borrowing?”

“Whether in the facts and in the circumstances of the case and in Law, the Ld.DRP erred in deleting the addition made in draft assessment order on ac-count of Guarantee fee paid-Rs. 5,63,600/-, Service fee paid-Rs. 5,63,600/- and Interest on ECB- Rs. 3,90,69,364/- paid to its holding company even though no substantial/specific service have been ren-dered by the holding company?”

At the time of hearing, Ld. DR brought to our notice relevant facts and submitted that Ld. DRP erred in deleting the addition made in draft assessment order on account of interest on external commercial borrowing. Further, Ld. DR submitted that Ld. DRP erred in deleting addition made in draft assessment order on account of Guarantee fee paid of ₹.5,63,600/-, Service fee paid of ₹.5,63,600/- and Interest on ECB of ₹.3,90,69,364/- paid to its holding company even though no substantial/specific service have been rendered by the holding company. Ld. DR relied on the findings of the TPO/Assessing Officer.

On the other hand, Ld. AR of the assessee objected to the submissions made by the Ld. DR and he relied on the order of Ld. DRP. He filed its submissions vide letter dated 29.05.2023, the same are reproduced below: –

“Brief facts of the case

The Miscellaneous Application was filed by the Department arising out of the order passed by the Hon’ble Income-tax Appellate Tribunal in Department’s Appeal ITA No. 1584/Mum/ 2014 dated 26th March 2021 only with respect to Ground No. 3 and 4 of the said order

The contention of the Department in the Mis-cellaneous Application was that Hon’ble ITAT has wrongly attributed the disallowance in ground No. 3 and 4 of Department’s Appeal ITA No. 1584/Mum/ 2014 under section 37(1) of the In-come-tax Act, 1961 (‘Act) to the Transfer Pricing Officer

The said Miscellaneous Application filed by the Department was allowed and the ground no. 3 and 4 of the appeal were recalled for fresh adjudication. The matter was freshly heard on 24 May 2023.

Observation of the court

After considering the submissions of the assessee, Assessing Officer observed that, it was admitted that no analyses was done as to the payment which would have been made to an independent person for such services. The facts in the present case shows that whether or not assessee needed these services or whether or not such services were mainly for its direct benefit or whether or not such services were actually availed by it, assessee had to share the costs on the basis of some allocation of keys. No independent person in similar circumstances would pay such amount. Accordingly, he proceeded to make the disallowance u/s. 37 of the Act.

Aggrieved assessee filed objection before Ld. DRP and submitted the relevant documentation relating to external commercial borrowing borrowed from the Hong Kong Branch of Rabo bank for the purpose of its own working capital and also details of Exter-nal Commercial Borrowing [ECB] by the overseas entity and details of guarantee fees paid to the Rabo bank Hong Kong Branch for the loans advanced by the assessee to third parties. After considering the submissions of the assessee, Ld. DRP deleted the addition with the following observations: –

It is observed that the only reason cited by the Assessing Officer to deny the deduction in respect of these three amounts is that assessee has not received commensurate services. However it is observed that these payments are not for any service but are in fact in the nature of fees for issue of guarantee and interest on external commercial borrowings. The Assessing Officer has not disputed the agreement for guaranteeing the loan or the external com-mercial borrowing made by the assessee. Once these transactions are not disputed by the AO, then the guaranty fees and the interest on ECB’s should necessarily be allowed as deduction. As stated by the as-sessee, these two amounts are for the purposes of assessee’s business. Under the circumstances this objection of the assessee is allowed and the Assessing Officer is directed not to make this disallowance as proposed in the draft order in respect of guaranty fees, service charges and interest on ECB’s. ”

Aggrieved with the above order revenue is in appeal before us raising Ground No. 3 and 4 before us.

Considered the rival submissions and material placed on record, we observe from the record that Ld. DRP has considered the issue of interest of ECB, Ld. DRP has given benefit to the assessee based on the fact that assessee has availed the ECB from Rabo Bank, Hong Kong Branch under automatic route and it has availed the above loan to finance working capital requirement in India. Therefore, it is a genuine transaction to finance the business carried by it in India. Therefore, the interest paid by ECB is a genuine business transaction.

With regard to guarantee fees, assessee has given a loan to third parity and Rabo Bank, Hong Kong Branch had provided the guarantee that in case of de-fault by the borrower entity, assessee would recover the amount from Rabo Bank, Hong Kong Branch. Accordingly, it has paid the guarantee fees in order to protect its interest in case of default by the re-spective borrowers. In this regard assessee has submitted various documents before Ld. DRP and Ld. DRP has convinced with documentation submitted by the assessee.

With regard to fees for services, assessee has availed advisory services from Rabobank International, Netherlands and paid the relevant fees. There-fore, assessee has availed the services of Rabobank International, Netherlands and paid the relevant ad-visory fees to them during the course of the business. Accordingly, the Ld. DRP has allowed the claim of the assessee u/s. 37 of the Act. Therefore, the decision of the Ld. DRP is binding on the Assessing Officer.

From the above, we observe that Ld. DRP has con-sidered the issues with the various documents submitted before them and issues were properly directed to be part of the business operation of the assessee carried on by them in India and it is part of the Indi-an operation. Therefore, we do not see any reason to disturb their findings and nothing on record shows that the expenditure claimed by the assessee is not relating to the business carried on by it in In-dia. Therefore, the ground raised by the revenue is accordingly, dismissed.

In the result, Ground Nos. 3 & 4 raised by the revenue are dismissed.

Order pronounced in the open court on 18th August, 2023.