The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that guarantee fees paid to the holding company for loan advanced by assessee company to third party is business expediency. Therefore the bench allowed the deduction claimed under Section 37 of the Income Tax Act .
Assessee, Rabo India Finance Ltd’ had given a loan to third party ‘Noble Grain/Sidharth Soya’ and for the said loan, Rabobank Hong Kong had provided a guarantee that in case of default by the borrower entity. RIFL would recover the amount from Rabo Hong Kong RIFL had taken such a guarantee in order to protect its interest in case of default by borrower for which it paid guarantee fees. After filing the return AO observed that assessee was claimed deduction under Section 37 of the Income Tax Act in respect of guarantee fee paid to their holding company
During the assessment proceedings AO referred to this before the Transfer Pricing officer (TPO) without making any adjustment in guarantee fee paid to assesse holding Company TPO passed order under Section 92CA(1) of the Income Tax Act while passing the draft Assessment Order Assessing Officer AO disallowed the claim under Section 37 of the Income Tax Act and made addition .
Aggrieved by the order, the assessee filed an objection before . 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 External 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, DRP deleted the addition .
Aggrieved by the order, revenue filed another appeal before the tribunal.
During the appeal proceedings Nitesh Joshi counsel for assessee submitted that RIFL has borrowed funds from Rabobank Hong Kong to finance its working capital requirement,The guarantee fees are paid for business expediency of the assessee company.
Gaurav Batham , Counsel for the revenue, supported the order of the Assessing officer.
It was observed by the tribunal that the assessee has given a loan to third parity and RaboBank, Hong Kong Branch had provided the guarantee that in case of default by the borrower entity, assessee would recover the amount from RaboBank, Hong Kong Branch. Thus guarantee fees in order to protect its interest in case of default by the respective borrowers.
After considering the facts submitted by both parties, the two member bench of S. Rifaur Rahman,(Accountant Member ) and Rahul Chaudhary, (Judicial Member) held that guarantee fees paid to the holding company for loan advanced by assessee company to third party is business expediency thusIt should be allowable as deduction under Section 37 of the Income Tax Act.
Keywords: Guarantee fee, holding company, loan, advanced , third party , business expediency, ITAT, deduction, Income Tax Act
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