Corporate Guarantee Fee Restricted to 0.5% and Non-Taxable Sales Commission Disallowance Deleted

By | November 4, 2026
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Corporate Guarantee Fee Restricted to 0.5% and Non-Taxable Sales Commission Disallowance Deleted

Issue

  1. Transfer Pricing (Corporate Guarantee): Whether a corporate guarantee provided by the assessee to a bank for its foreign Associated Enterprise (AE) constitutes an international transaction under Section 92B, and if so, whether the guarantee commission rate of 1% determined by the TPO/DRP should be reduced.
  2. TDS under Section 195 / Section 40(a)(i): Whether sales commission paid to a US-based AE for overseas marketing services is taxable in India under the Income-tax Act / India-USA DTAA, attracting TDS under Section 195 and disallowance under Section 40(a)(i).
  3. Section 10AA Deduction: Whether the Assessing Officer was justified in reallocating common expenses between STPI and SEZ units on a turnover basis while disregarding the Chartered Accountant’s certificate in Form 56F and the assessee’s actual cost allocation.

Facts

  • AY: 2012-13.
  • Corporate Guarantee: The assessee-company provided a corporate guarantee to ICICI Bank Canada to facilitate borrowing by its US-based AE. The TPO treated this as an international transaction and applied a 1% guarantee fee on the guaranteed amount. The DRP upheld the 1% rate but restricted the adjustment to the actual period the guarantee was in force during the year.
  • Sales Commission: The assessee debited ~₹8.81 crores as sales commission paid to its US AE for marketing and support services provided in the USA. The AO disallowed the sum under Section 40(a)(i) for failure to deduct tax at source (TDS) under Section 195.
  • SEZ Unit Expense Allocation (Sec 10AA): The assessee operated an STPI unit and an SEZ unit, claiming Section 10AA deduction on the SEZ unit’s profits by allocating common expenses on actuals, supported by an independent CA certificate in Form 56F. The AO rejected this computation and reallocated common expenses based on turnover ratio, thereby reducing the eligible deduction.

Decision

  • Corporate Guarantee Fee: Held, the corporate guarantee is an international transaction under Section 92B. However, the benchmarked guarantee commission rate is restricted to 0.5% instead of 1% for the period in force. (Partly in favour of assessee)
  • Sales Commission & TDS Disallowance: Held, since the sales commission paid to the US AE for services rendered overseas is not income deemed to accrue or arise in India under the Act or Article 12 of the India-USA DTAA, no TDS was deductible under Section 195. Consequently, the disallowance under Section 40(a)(i) is unsustainable and deleted. (In favour of assessee)
  • Section 10AA Deduction: Held, the issue is remanded back to the file of the Assessing Officer to re-adjudicate the deduction after considering the Form 56F CA certificate, bifurcated P&L statement, and detailed expense computation submitted by the assessee. (Matter remanded)

Key Takeaways

  • Corporate Guarantee Benchmarking: Provision of a corporate guarantee for an AE is an international transaction under Indian Transfer Pricing provisions, but standard market practice generally warrants a benchmarked rate around 0.5%.
  • No TDS on Overseas Commission: Sales commission paid to a non-resident AE for marketing services performed abroad does not constitute Fees for Technical Services (FTS) or royalty, nor does it accrue in India; hence, Section 195/40(a)(i) disallowances do not apply.
  • Proper Adjudication of CA Certificates: The Assessing Officer cannot arbitrarily discard an independent Chartered Accountant’s certificate (Form 56F) and factual cost allocations for SEZ deduction claims without properly examining the submitted financial statements and underlying records.
IN THE ITAT CHENNAI BENCH ‘D’
SPI Technologies India (P.) Ltd.
v.
Deputy Commissioner of Income-tax
ABY T. VARKEY, JUDICIAL MEMBER
and Ms. Padmavathy S., Accountant Member
IT Appeal No. 531 (Chny) OF 2017
[Assessment year 2012-13]
OCTOBER  12, 2026
Ashik Shah, CA for the Appellant. K. Jayaganesh, CIT for the Respondent.
ORDER
ABY T. Varkey, Judicial Member. – This is an appeal preferred by the assessee company against the order of the Assessing Officer dated 30.12.2016 for the Assessment Year (hereinafter referred to as ‘AY’) 2018-19 u/s. 143(3) read with Section 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) pursuant to the directions issued by the Ld. DRP-1.
2. Brief facts are that the assessee/appellant company, SPI Technology India Pvt. Ltd., formerly known as Laserwords Pvt. Ltd., is engaged in the business of data processing and related services, which primarily includes typesetting, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. The appellant filed its return of income (ITR) for AY 2012-13 declaring total income of 7.87 crores, after claiming deduction under Section 10AA of the Act amounting to ₹3.97 crores. The appellant’s ITR was selected for scrutiny assessment, pursuant to which the AO referred the appellant’s case to the TPO for determining the Arm’s Length Price (“ALP”) of the appellant’s international transactions. Pursuant to it, the TPO, vide TP order dated 25.01.2016 issued under Section 92(C)(A)(3) of the Act, proposed TP adjustment of ₹14,51,130 (TP adjustment on corporate guarantee). The AO passed draft assessment order dated 31.03.2016 under Section 143(3) read with Section 144(C)(1), making certain corporate tax adjustments after incorporating the TP adjustment proposed by the TPO (supra). The assessee/appellant filed objections before the Ld. Dispute Resolution Panel (DRP) and the DRP, vide order dated 9.11.2016, sustained variations proposed by the AO after providing certain relief with regard to the TP adjustment. Subsequently, the AO passed the final assessment order dated 30.12.2016 under Section 143 read with Section 144(C)(13) of the Act, making the following adjustments to the appellant’s total income:-
S.NO. NATURE OF DISALLOWANCE 2012-13
1. ALP adjustment u/s 92CA ₹9,47,420/-
2. Disallowance of sales commission paid under Section 40(a)(i) of the Act ₹8,81,07,468/-
3. Disallowance of excess claim under Section 10AA of the Act ₹55,70,000/-

 

3. Aggrieved, the assessee is before this Tribunal assailing the aforesaid adjustments made by the AO in the final assessment order.
4. Ground No.3 is against the transfer pricing adjustment of ₹9,47,420 made by the TPO in relation to the corporate guarantee. The facts as noted are that the assessee extended corporate guarantee in favour of ICICI Bank Canada to facilitate a borrowing by its wholly owned subsidiary, Laserwords US Inc. (“LW US”). The TPO noted that the said borrowing was availed solely on account of the guarantee furnished by the appellant. During the TP proceedings, the TPO held that the provision of the corporate guarantee to the foreign AE constituted an international transaction and, accordingly, concluded that the Appellant ought to have charged an arm’s length guarantee commission from LW US. Considering the guarantee amount of ₹14.51 crores, the TPO adopted arm’s length guarantee fee of 1% and proposed a TP adjustment of ₹14,51,130/-.
5. The DRP upheld the adoption of 1% as the guarantee fee rate. However, it was specifically submitted before the DRP that the borrowing facility guaranteed by the Appellant had been fully repaid and closed in November 2011, remaining outstanding only for a period of 7 months and 8 days during the impugned AY. Accepting this contention, the DRP directed that the TP adjustment be restricted to the period for which the guarantee actually remained in force, i.e., 7 months and 8 days. Consequently, in the impugned order, the adjustment stands re-computed by the AO at ₹9,47,420. Still not satisfied, the assessee is before us.
6. Heard both parties. Ld. AR, Mr. Ashik Shah, CA of the assessee, contended that since the corporate guarantee and Letter of Comfort was provided without any cost to the AE, it did not have any bearing on profits, income, losses of the assessee and therefore could not be regarded as an international transaction and be benchmarked under the transfer pricing provisions. In this regard, the Ld. AR relied upon the decision rendered by this Tribunal in their own case for AY 2011-12. We, however, note that the provisions of Section 92B have been amended by the Finance Act, 2012, whereby, in terms of the Explanation to Section 92B, the guarantees issued by an assessee have been clarified to be in the nature of an international transaction. We note that the Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd. 378 ITR 57 (Bombay) has considered this identical issue in light of the provisions of Section 92B and the Explanation, and came to a conclusion that the corporate guarantee issued by an entity on behalf of its AE is an international transaction. We further note that this identical issue came up before the Hon’ble jurisdictional Madras High Court in the case of Pr. CIT v. Redington (India) Ltd. [2020]  [2021] 430 ITR 298 (Madras), wherein, the Hon’ble Madras High Court held that inherent risk cannot be ruled out in providing guarantees and hence the transaction involving issuance of corporate guarantee is covered by the definition of international transaction consequent to the retrospective amendment made by the Finance Act, 2012 and, accordingly, adjustments are required to be made for guarantee commission. The relevant findings taken note of by us are as follows:-
75. The concept of Bank Guarantees and Corporate Guarantees war explained in the decision of the Hyderabad Tribunal in the case of Prolifics Corporation Limited. In the said case, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise.
76. In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP.
7. Hence, in the light of the undisputed facts on the issue now (supra), we hold the transaction of corporate guarantee to be an international transaction now.
8. In this regard, the Ld. AR had brought to our notice the decision of the Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. (supra), which had ascertained the ALP guarantee commission at 0.5%, hence he submitted that DRP/TPO erred in adopting the guarantee commission @ 1% and accordingly want us to direct re-computing the transfer pricing adjustment. The Ld. AR relied upon the following case laws, which are as under:-
Ashok Leyland Ltd. v. DCIT [IT Appeal No.1402 (Chny) of 2024, dated 7-7-2025]/2025 (9) TMI 568, Sundram Fasteners Ltd. v. ACIT [IT (TP) A Nos. 32 & 33 (Chny) of 2021, dated 8-11-2024/2024 (11) TMI 1419, TVS Motor Co. Ltd. v. ACIT  (Chennai – Trib.).
9. Taking note of the decision of the Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. (supra), which had ascertained the ALP guarantee commission at 0.5%, and also other decisions cited supra, we respectfully follow the same and direct the AO to adopt the guarantee commission @ 0.50% as against 1% and accordingly re- compute the transfer pricing adjustment. Thus, this ground, therefore, stands partly allowed.
10. Next issue is ground No.4, which is regarding the disallowance made u/s 40 (a) (ia) of Rs 8,81,07,468/- for non-deduction of tax at source for AY 2012-13 while making payment of sales commission to its AE. The AO noted that the assessee has debited a sum of ₹8,81,07,468/- towards sales commission. Hence the AO called for the details of the same, and assessee submitted that the amount was paid to Laserwords US Inc., an associated enterprise (AE) of the assessee. The AO asked the assessee to provide the nature of services done by Laserwords US Inc. along with any agreement entered into in this regard. In response, the assessee explained with the support of an agreement dated 1.4.2010 with Laserwords US Inc. that the latter provides marketing and support services to the appellant, which includes identifying prospective customers in USA, understanding customers’ requirements and expectations, liaising with the customers etc. The assessee, when confronted by the AO as to why the payments were made without deducting tax under Section 195 of the Act, the assessee submitted that the impugned amounts are not chargeable to tax in India both as per provisions of the Income Tax Act as well as DAA between India and USA. However, the AO not convinced disallowed Rs 8,81,07,468/- u/s 40 (a) (ia) for non-deduction of tax at source. Ld DRP confirmed the action of AO.
11. Before us, the Ld AR submitted that AO/DRP erred in disallowing the expenditure/sales commission paid to AE. According to him, TDS need not be deducted for the payment in question because the impugned amounts are not chargeable to tax in India both as per provisions of the Income Tax Act as well as DAA between India and USA. In support of its contentions, the assessee relied upon the decision of this Tribunal in the case of Laserwords US Inc. (being the payee of the similar amount for AY 2017-18 (refer Page No.118 of Paper-book). The Coordinate Bench in the referred case is noted to have held that pursuant to the agreement dated 01.04.2010 between assessee and Laserwords US Inc., sales commission received by the latter cannot be equated to Fees for Included Services (FIS). It was held that as the amount is not FIS in view of Article-12(4)(b) of DAA between India and USA, therefore, not liable for tax in India. And the appellant also placed reliance upon the decision of the Hon’ble Apex Court in the case of GE India Technology Cen. (P.) Ltd. v. CIT [2010] 7  327 ITR 456 (SC). The appellant further submitted that in AY 2014-15, the AO had raised a specific query u/s 142(1) dated 19.12.2016 on this account regarding withholding of taxes on similar sales commission and the AO being satisfied with the assessee’s stand supra, didn’t make any disallowance on this score. Hence, relying on the principles of consistency, he requires us to adopted the same view. In support of its contentions, the appellant invited our attention to relevant pages in its paper-book for AY 2014-15.
12. Further, he brought to our notice that the impugned disallowance under Section 40(a)(i) of the Act in respect of the sales commission paid to LW US is squarely covered in the Appellant’s favour by the decision of this Tribunal in the Appellant’s own case for AYs 2013-14 and 2014-15 [ITA Nos. 843 & 844/Chny/2023 for the AY 2013-14 & 2014-15 in the case of SPi Technologies India (P.) Ltd. v. Dy. CIT, order dated 27.09.2024]. In the said decision, the Tribunal held that the sales commission paid to LW US does not constitute income chargeable to tax in India. Consequently, in the absence of any income chargeable to tax under the Act, no obligation to deduct tax at source arises under Section 195 of the Act. The relevant portion of the decision of the Tribunal is extracted below:
“12.0 We have heard rival submissions in the light of material available on records. We are inclined to subscribe to the view of the appellant that as the impugned amounts in the hands of laser words US Incare not liable for tax as per the provisions of Indian Income Tax Act, there cannot be any case for withholding of any tax at the time of their payment to the payee. We have also seen the order of the Hon’ble Coordinate Bench in the case of the payee for AY-2017-18 Supra holding that within the meanings of Article 12(4)(b) of India US DAA, the amounts cannot be equated to FIS. Consequently, the action of the AO and the Ld. CIT(A) in confirming the disallowance cannot be sustained. Accordingly, the order of the Ld. CIT(A) is set aside and the Ld. AO is directed to delete the disallowance. The ground of appeal no.4 raised by the assesse is allowed.”
13. Since no change in facts or law could be pointed out, we respectfully follow the decision of the Tribunal in assessee’s own case in AY 2013-14 (supra) and hold that the DRP/AO erred in disallowing the sales commission paid by the assessee for non-deduction of tax at source. Hence, we direct the AO to delete the disallowance.
14. The next issue raised by the assessee is regarding ground No.5 (disallowance of Rs 55,70,000/- out of Rs 3,97,76,400/- claimed under Section 10AA of the Act). The brief facts are that during the impugned AY, the Appellant operated 2 undertakings, namely, a Software Technology Parks of India (“STPI”) unit and a Special Economic Zone (“SEZ”) unit. The profits derived from the SEZ unit were eligible for deduction under Section 10AA of the Act, and accordingly, the Appellant claimed a deduction of INR 3.97 Crores in respect thereof. For the purpose of computing the eligible profits of the SEZ unit, the Appellant allocated its common expenditure between the STPI and SEZ units based on the actual expenditure attributable to each respective unit. The computation of the eligible deduction was duly certified by an independent Chartered Accountant in Form 56F [refer pg. 49 of the convenience compilation], which confirmed that the profits derived from the SEZ unit amounted to INR 3.97 Crores and were accordingly eligible for a 100% deduction under Section 10AA of the Act.
15. However, the AO disregarded both the computation furnished by the Appellant and the Chartered Accountant’s certificate in Form 56F and instead proceeded to reallocate certain common expenses between the two units on the basis of their respective turnover. Consequently, the AO recomputed the eligible deduction under Section 10AA of the Act and proposed a disallowance of ₹0.56 Crores (₹55,70,000/-), which was subsequently sustained by the Ld. DRP.
16. At the outset, Ld. AR of the assessee submitted that the issue is no longer res-integra and pointed out that the AO disregarded the profits declared in Form 56F and the relevant workings given by the assessee and instead proceeded to re-allocate certain common expenses between two units on the basis of the respective turnover. Consequently, the AO re-computed eligible deduction under Section 10AA of the Act and proposed disallowance of ₹55,70,000/-. It is the case of the assessee that the accountant report in Form-56F was based upon true facts of the case and had scientific basis. It duly certified that the deduction has been worked out as per the provisions of the Act. The Ld. AR for the assessee argued that the AO chose to make the disturbance on the premise that the assessee has failed to substantiate its claims that the expenses are apportioned on actual basis. It is the case of the assessee that the AO has concluded so without considering the relevant profit computation submitted by it during the course of assessment proceedings. In support of its contentions, the Ld. AR for the assessee invited our attention to page 49 of its convenience paper book for AY 2012-13. It was therefore prayed that, given the impugned omission of consideration of these details by the AO resulting in addition to the returned income, matter may be restored to the file of AO for considering the accountant’s report in Form-56F along with the detailed profit computation workings submitted and deciding the matter accordingly. For such a proposition, he relied on the decision of this Tribunal for AY 2013-14 and 2014-15 (supra), where on identical issue this Tribunal had restored the issue back to the file of AO to re-adjudicate the matter by considering the accountant’s report in Form 56F along with the detailed profit computation working during the assessment proceedings filed by the assessee during the original assessment proceedings. He also brought to our notice that pursuant to the direction of the Tribunal dated 27.09.2024 for AY 2013-14 and 2014-15 (supra), the AO examined Form 56, bifurcated profit and loss account and the detailed computation of profits submitted by the appellant and, being satisfied with the same, allowed the deduction claimed under Section 10AA of the Act in full and drew our attention to page Nos. 159 and 169 of the convenience compilation, wherein the AO is noted to have deleted the entire disallowance originally made and in that ITR to the tune of ₹1,13,09,801/- for AY 2014-15 and ₹3,67,28,299/- for AY 2013-14. Ld. DR did not object to the remand back to the file of AO for similar directions issued for AY 2013-14 and 2014-15 (supra).
17. Having considered the submissions noted (supra), it is noted that that for AY 2013-14 and 2014-15, similar issue had cropped and the AO had made similar disallowance in respect of the deduction claimed under Section 10AA of the Act; and the Tribunal is noted to have restored the issue back to the file of AO with a direction to re-adjudicate the matter by considering the accountant’s report in Form 56F along with the detailed profit computation working filed by the assessee during the original assessment proceedings. The directions of the Tribunal are noted as under:-
“14.0 We have considered the rival submissions in the light of material available on records. We have perused the documents identified by the appellant. Whereas the Ld. AO has opined that the assesse had not provided required details, the assesse has indicated that it did provide accountants report in Form-56F along with the detailed profit computation workings during assessment proceedings. Be that as it may be, we are of the view that ends of justice would be met if both the parties get a chance to revisit the issue for a judicious conclusion. Accordingly, we set aside the order of Ld.CIT(A) and we direct the Ld. AO to readjudicate the matter by considering accountants report in Form-56F along with the detailed profit computation workings during assessment proceedings filed by the assesse during the original assessment proceedings. For the purpose Ld. AO shall be required to provide necessary opportunity to the assesse and the assesse shall be bound to comply with notices of the Ld. AO. The ground of appeal no.5 is therefore allowed for statistical purposes.”
18. Respectfully following the decision of this Tribunal in assessee’s own case for the AY 2013-14 and 2014-15, we set aside the impugned order of the AO and restore the issue back to the file of AO to re-adjudicate the matter by considering the Chartered Accountant certificate in Form 56F, the bifurcated profit and loss statement and the detailed computation of eligible profits. The AO is directed to pass orders after giving opportunity to the assessee. Thus, grounds of appeal are allowed for statistical purpose.
19. In the result, appeal of the assessee is partly allowed.