ITAT Kolkata Grants Partial Relief: Corporate Guarantee Fee Limited to 0.5% and CSR Donations Allowed Under Section 80G

Introduction

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) delivered a significant judgment in the matter of Tega Industries Limited vs DCIT, granting partial relief to the appellant for Assessment Year 2020-21. The Tribunal addressed critical issues concerning transfer pricing adjustments on corporate guarantees, eligibility of Corporate Social Responsibility (CSR) donations for deduction under Section 80G, and the applicability of Section 80-IA deductions for steam generation used captively.

This landmark ruling clarifies the arm's length pricing methodology for guarantees extended to overseas Associated Enterprises (AEs) and reiterates that CSR expenditure does not automatically disqualify donations from tax benefits under Section 80G of the Income Tax Act, 1961.

Case Background and Factual Matrix

Assessee Profile

Tega Industries Limited is a prominent company specializing in manufacturing, distributing, and managing the lifecycle of wear-resistant lining components. These components are crucial for grinding, sizing, and beneficiation of minerals, along with downstream equipment utilized in mining, mineral beneficiation, bulk material handling, environmental applications, and slurry transportation industries.

Assessment Proceedings

For Assessment Year 2020-21, the assessee filed its return on 18th February 2021, declaring a total income of Rs. 39,52,07,070/-. The case was selected for comprehensive scrutiny through the Computer Aided Scrutiny Selection System (CASS). A notice under Section 143(2) was issued on 29th June 2021, seeking compliance by 14th July 2021.

Due to transfer pricing concerns, the matter was referred to the Transfer Pricing Officer (TPO) with appropriate authorization. After detailed examination and issuance of a draft assessment order under Section 144C(1), the assessee filed objections before the Dispute Resolution Panel (DRP). Following the DRP's directions, the Assessing Officer finalized the assessment, computing total income at Rs. 47,73,28,802/-.

Aggrieved by this determination, Tega Industries Limited approached the Tribunal.

Key Issues Adjudicated

The appeal raised multiple substantive grounds, primarily concerning:

Transfer pricing adjustments on corporate guarantee commission charged to overseas AEs
Denial of deduction under Section 80G for CSR-related donations
Disallowance of deduction claimed under Section 80-IA for steam generation
Levy of interest under Section 234A and Section 234B

Issue 1: Transfer Pricing Adjustment on Corporate Guarantees

Appellant's Contentions

The assessee challenged the transfer pricing adjustment of Rs. 21,88,906/- made concerning corporate guarantees extended to two overseas AEs:

Tega Holdings Pte. Ltd (Tega Singapore)
Tega Industries Chile SpA (Tega Chile)

The primary arguments advanced were:

Nature of Transaction: The provision of corporate guarantees constituted shareholder activity rather than a service transaction, representing passive support to subsidiaries.
Consistency Principle: Earlier orders by the Commissioner of Income Tax (Appeals) for AY 2011-12 and ITAT Kolkata for AYs 2008-09 to 2013-14 had treated similar guarantees as shareholder functions.
Methodology Challenge: The TPO erroneously applied the Comparable Uncontrolled Price (CUP) method arbitrarily, without adhering to the first proviso to Section 92C(2) and Rule 10B(1)(a) of the Income Tax Rules, 1962.
Excessive Rate: The guarantee commission rates applied were disproportionately high compared to judicial precedents, which typically approved rates ranging from 0.20% to 0.53%.

Revenue's Position

The TPO determined the Arm's Length Price (ALP) by:

For Tega Chile: Applying an effective interest rate of 6.385% on the loan amount of USD 20 lakh, computing total guarantee fee at Rs. 24,88,849/-, and making an adjustment of Rs. 9,88,849/- after considering Rs. 15,00,000/- already offered.
For Tega Singapore: Adopting an effective interest rate of 7.25%, resulting in an adjustment of Rs. 12,00,057/-.

The DRP upheld these adjustments, citing consistency with findings for AY 2018-19 and observing that the agreement had been revised in 2014, rendering earlier ITAT orders inapplicable.

Tribunal's Analysis and Decision

The Tribunal undertook a comprehensive analysis:

Classification as International Transaction

Examining the definition under Section 92B of the Income Tax Act, 1961, which provides:

"92B. (1) 'international transaction' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises..."

The Tribunal noted that the Explanation to Section 92B(2) includes within its ambit:

"capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business"

Since the statutory Explanation explicitly covers guarantees within the inclusive definition of international transactions, the Tribunal held that corporate guarantees extended to AEs constitute international transactions regardless of whether they primarily serve shareholder interests.

This view was fortified by:

The judgment of the Hon'ble Madras High Court in Principal Commissioner of Income Tax 5 vs. M/s. Redington (India) Limited in T.C.A.Nos.590 & 591 of 2019
The Tribunal's own precedent in the assessee's case for AY 2018-19

Determination of Arm's Length Rate

While accepting that corporate guarantees are international transactions, the Tribunal was not convinced with the methodology and quantum applied by the TPO.

The Tribunal referred to:

Tata Consumer Products Limited (erstwhile Tata Global Beverages Ltd.) vs. DCIT, ITA No. 372/KOL/2021 for AY 2014-15, where the Kolkata ITAT restricted corporate guarantee commission to 0.5% of the outstanding loan amount.
Greenply Industries Limited vs. ACIT, ITA No. 232/GAU/2019, where the Guwahati Bench adopted a similar rate.
The assessee's own case for AY 2018-19 in ITA No. 539/Kol/2022 and AY 2021-22 in ITA No. 2597/KOL/2024, where consistent application of 0.5% was directed.

The Tribunal emphasized the principle of consistency, observing:

"Following consistency & binding precedents in Assessee's own earlier years, ITAT restricted the arm's length corporate guarantee commission to 0.5% of the outstanding loan amount."

Final Directions

The Tribunal directed the Assessing Officer to:

Recompute the transfer pricing adjustment by applying 0.5% of the outstanding loan amount at the year-end as the arm's length corporate guarantee commission
Delete the excess adjustment made by applying higher rates under the CUP method
Compute the adjustment over and above amounts already admitted by the assessee for both Tega Chile and Tega Singapore

Ground Nos. 2 and 3 were partly allowed.

Issue 2: Deduction Under Section 80G for CSR Donations

Denial by Assessing Officer

The Assessing Officer disallowed a deduction of Rs. 52,91,000/- claimed under Section 80G on the following grounds:

CSR expenditure under Section 135 of the Companies Act, 2013 is a statutory obligation, not a voluntary donation
The element of charity inherent in Section 80G deductions is absent when donations are made in discharge of mandatory CSR obligations
Allowing Section 80G deduction for CSR expenses would amount to double benefit—fulfilling statutory obligation while claiming tax deduction
Such allowance would be contrary to the legislative intent behind CSR provisions

The DRP upheld this view, rejecting the assessee's objections.

Assessee's Arguments

The appellant contended:

Legislative Intent: If the Legislature intended to prohibit Section 80G deductions for all CSR donations, specific exclusions would have been incorporated broadly, not limited to two specific funds.

ITAT Kolkata: Corporate Guarantee Commission Restricted to 0.5% | CSR Donations Qualify for Section 80G Deduction | Tega Industries Secures Partial Tax Relief