ITAT Mumbai Rules on Corporate Guarantee TP Adjustments and MAT Book Profit Computation

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of ACG Associated Capsules Private Limited Vs DCIT, dealt with three interconnected appeals for AYs 2010-11, 2012-13 and 2013-14. The decision addresses three core issues:

  • Transfer pricing adjustment on corporate guarantee commission using the “interest saving” method and its allocation between guarantor and borrower
  • Computation of book profits under Section 115JB, particularly whether Section 14A disallowance can be directly imported into MAT
  • Correct recomputation of taxable income and consequential interest, including giving effect to earlier appellate reliefs

The Tribunal partly allowed all three appeals, laying down important clarifications that will guide corporate assessees, especially those extending guarantees to associated enterprises (AEs).

Background of the Appeals

Common Issues Across Three Assessment Years

The assessee had filed appeals for:

  • AY 2010-11 – ITA No. 1827/Mum/2026
  • AY 2012-13 – ITA No. 5846/Mum/2025
  • AY 2013-14 – ITA No. 9105/Mum/2025

All three appeals involved:

  1. Transfer pricing adjustment on account of corporate guarantee commission
  2. MAT computation under Section 115JB, particularly the treatment of Section 14A disallowance
  3. Recomputation of total income in set-aside/second round proceedings and the consequential levy of interest

The Tribunal passed a consolidated order since the legal and factual matrix across the three years substantially overlapped.

Transfer Pricing – Corporate Guarantee Commission and 50:50 Allocation

First Round vs Second Round for AY 2010-11

For AY 2010-11, the controversy focussed on the arm’s length price (ALP) of corporate guarantee commission charged by the assessee on guarantees issued in favour of its AE.

  • In the first round, the TPO fixed the ALP of the guarantee commission at 4.03%.
  • The first appellate authority (CIT(A)) scaled this down to 0.70%.
  • In an earlier order dated 04/12/2023, the Tribunal remanded the matter to the TPO with a specific direction to apply the “interest saving approach” to work out the ALP.

Approach Adopted in the Set-Aside Proceedings

In the second round, while giving effect to the earlier ITAT directions:

  • The TPO computed an interest saving of 1.10% (i.e., the benefit in interest cost resulting from the guarantee).
  • The TPO allocated the entire 1.10% interest saving to the guarantee, effectively attributing the whole benefit to the assessee as guarantor.
  • The assessee had argued that the reduction in interest rate arises for the benefit of both the guarantor and the borrower, and that the benefit should be shared in a 50:50 ratio between the two.
  • Despite this, the TPO held that all interest saving must be treated as consideration for the guarantee alone, and proposed a transfer pricing adjustment of Rs. 29,47,560/- in his order dated 26/06/2025 under Section 92CA(3).
  • The Draft Assessment Order dated 07/11/2025 incorporated the TP adjustment, and the Dispute Resolution Panel (DRP) rejected the assessee’s objections by order dated 09/01/2026.
  • The Assessing Officer then passed the Final Assessment Order on 20/01/2026 under Section 143(3) read with Section 254 and Section 144C(13).

The assessee again approached the Tribunal, contesting the basis of the allocation.

Assessee’s Argument: Shared Interest Savings

The assessee maintained that:

  • The benefit of reduced borrowing cost is not exclusively attributable to the guarantor.
  • Both the guarantor and the borrower participate in the economic benefit generated by the guarantee.
  • Therefore, only part of the interest savings should translate into guarantee commission; and in an arm’s length scenario, a 50:50 split between guarantor and borrower is reasonable.

Revenue’s Stand: No Automatic 50:50 Formula

The Departmental Representative opposed a mechanical 50:50 allocation and argued that: