Corporate Guarantee Fee Reduced to Half Percent, TP

Corporate Guarantee Fee Reduced to Half Percent, TP Segmental Verification Remanded, and Belated Return Restrictions Excluded for Brought-Forward Loss and Unabsorbed Depreciation

Issue

Whether corporate guarantee rates can be benchmarked against bank guarantee rates, whether internal TNMM should be evaluated via certified segmental accounts, and whether belated filing of a return under Section 139(4) disentitles an assessee from carrying forward/setting off brought-forward capital loss and unabsorbed depreciation.

Facts

Corporate Guarantee Benchmarking: The assessee provided a corporate guarantee to its wholly-owned US subsidiary without charging a fee. The TPO fixed the rate at 1% by taking a median bank guarantee rate of 1.50% and granting an ad hoc deduction of 0.50%, while the DRP upheld the 1% rate and rejected the assessee’s netting claim against received corporate guarantees.
Transfer Pricing on Finished Goods: The assessee exported metal castings to its US subsidiary applying CPM as the Most Appropriate Method (MAM). The TPO rejected CPM and applied entity-level external TNMM (₹73.38 crore adjustment), while the DRP rejected internal TNMM due to unverified segmental data. Additional CA-certified AE/non-AE segmental accounts were submitted during appeal.
Brought-Forward Capital Loss: The assessee claimed carry-forward of a long-term capital loss of ₹58,938 from AY 2021-22 in AY 2022-23 (filed on time under Section 139(1) in AY 2021-22). The AO denied the carry-forward on the grounds that the return for AY 2022-23 was filed belatedly under Section 139(4).
Unabsorbed Depreciation Carry-Forward: The assessee claimed set-off/carry-forward of unabsorbed depreciation of ₹5.90 crores pertaining to AY 2021-22. The AO denied the claim solely due to the belated filing of the AY 2022-23 return under Section 139(4).

Decision

Corporate Guarantee Rate: Held that bank guarantee rates cannot be compared to corporate guarantees. In the absence of comparable corporate guarantee data, the arm’s length rate was set at 0.50%. Netting against received guarantees was rejected for lack of demonstrated nexus and proof of arm’s length pricing.
Internal TNMM Remand: Restored the transfer pricing benchmarking issue to the TPO for de novo consideration after examining the CA-certified segmental accounts and assessing the applicability of internal TNMM.
Brought-Forward Capital Loss: Held that Section 80 restricts carry-forward only for the assessment year in which the return of loss is filed belatedly, and does not extinguish a loss already validly brought forward from an earlier year. Allowed subject to verification of timely filing for AY 2021-22.
Unabsorbed Depreciation: Held that Section 32(2) governs unabsorbed depreciation through a statutory fiction, keeping it outside the scope of Section 80 and Section 139(3) restrictions. Directed the AO to verify and allow set-off/carry-forward despite the belated AY 2022-23 return.

Key Takeaways

Corporate vs. Bank Guarantees: Bank guarantee rates cannot serve as a benchmark for corporate guarantees due to structural and risk differences; absent specific comparables, a standard 0.50% rate applies.
Brought-Forward Loss Survival: Belated filing under Section 139(4) in a subsequent year does not cause the lapse of eligible brought-forward losses properly declared under Section 139(1) in an earlier year.
Independent Operation of Section 32(2): Unabsorbed depreciation is independently governed by Section 32(2) and is not restricted by Section 80 or Section 139(3) return-filing deadlines.

IN THE ITAT MUMBAI BENCH ‘K’

Gluhend India (P.) Ltd.

DCIT

Siddhartha Nautiyal, Judicial Member
and Vikram Singh Yadav, Accountant Member

IT Appeal No. 271 (Mum.) of 2026
[Assessment year 2022-23]

AUGUST 27, 2026

Anish Thacker and Pranay Gandhi for the Appellant. Ashish Kumar, CIT DR for the Respondent.

ORDER

Siddhartha Nautiyal, Judicial Member.- This appeal is filed by the Assessee against the order of Ld. Assessment Unit, Income Tax Department vide DIN: ITBA/AST/S/143(3)/2025-26/1083126186(1) dated 28-Nov-2025 for the Assessment Year 2022-23. The Assessee has raised the following grounds of appeal:

Based on the facts and circumstances of the case, the Appellant respectfully craves leave to prefer an appeal against the order dated 28 November 2025 passed under section 143(3) read with section 144C(13) read with section 1448 of the Act by the Assessment Unit, Income-Tax Department (‘learned assessing officer’) in pursuance to the directions of the Hon’ble Dispute Resolution Panel – 1, Mumbai [‘Hon’ble DRP’] dated 21 November 2025 passed under section 144C(5) of the Act and the order under passed by the learned Additional Commissioner of Income-Tax (Transfer Pricing)-2(2), Mumbai (‘the learned transfer pricing officer), on the following grounds which are without prejudice to and independent of the others:

Based on the facts and circumstances of the case, the leamed assessing officer/ learned transfer pricing officer/ Hon’ble DRP has:

A. General:

1. erred in determining the total income at Rs. 74,11,20,996 as against the returned income of Nil under normal provisions of the Act,

B. Grounds challenging validity of impugned proceedings:

Assessment proceedings are barred by limitation:

2 erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act which is the outer time limit for passing the final assessment order and hence. the proceedings are barred by limitation and liable to be quashed;

Notice issued under section 143(2) of the Act not being as per the format prescribed by CBDT Instruction (F. No. 225/157/2017/ITA. II) dated 23 June 2017 is invalid

3. erred in issuing notice the notice under section 143(2) of the Act dated 2 June 2023 without complying with the CBDT Instruction F.NO.225/157/2017/ITA-II dated 23 June 2017 vitiating the impugned proceedings and thereby, making it bad in law and liable to be quashed;

Irregularity in Issuance of notice of demand before finalization of the assessment order.

4. erred in issuing the notice of demand under section 156 of the Act prior to the passing of the impugned order, resulting in a demand being computed without an underlying final assessment order and therefore, the assessment order not following the demand computation renders bad in law and liable to be quashed;

Transfer Pricing Grounds:

5. erred in making transfer pricing adjustments of Rs. 74,11,20,996 in respect of international transactions of (a) Corporate Guarantee and (b) Sale of Finished Goods entered into with the AE, by rejecting the economic analysis undertaken by the Appellant and therefore, the impugned transfer pricing adjustments ought to be deleted;

Transfer pricing adjustment in relation to Corporate Guarantee commission – Rs. 72.80.996:

6 erred in making transfer pricing adjustment of Rs. 72,80,996 in respect of noncharge of corporate guarantee commission in relation to loan availed by its wholly owned subsidiary.

7. erred in not appreciating the fact that the corporate guarantee has been provided in the capacity of a shareholder for a loan availed by a wholly owned subsidiary and is thus a shareholder activity and hence, no guarantee fee ought to be charged on the same;

8. erred in not appreciating the fact that the guarantee is given by the Appellant owing to the significant economic, strategic business relationship with the AEs for protection of goodwill, reputation and investment as well as development of the business of Appellant company,

9. erred in applying the commission rate of 1.5% on the corporate guarantee after considering the rate at which banks gave bank guarantees, without appreciating the fact that bank guarantee cannot be compared with corporate guarantee;

10. erred in making the transfer pricing adjustment after granting ad-hoc downward adjustment @0.5% and therefore, the impugned transfer pricing adjustment made on an ad-hoc basis aught to be deleted,

11. erred in not appreciating that where the Appellant has availed benefit of corporate guarantee from its holding company without any cost, then no adjustment is warranted in respect of corporate guarantee given to its wholly owned subsidiary;

12. without prejudice, ought to have restricted the impugned transfer pricing adjustment to 0.5% of the amount of the corporate guarantee provided;

Transfer pricing adjustment in relation to sale of finished goods – Rs. 73.38,40,000

13. erred in making transfer pricing adjustment of Rs. 73,38,40,000 in relation to sale of finished goods;

14. erred in benchmarking the impugned transaction by arbitrarily applying the Transaction Net Margin Method (TNMM’) as against the Cost Plus Method (‘CPM’) applied by the Appellant;

15. erred in not appreciating that even if the gross margins of the learned transfer pricing officer’s comparables are taken into account, the impugned transaction would be at arm’s length;

16. erred in rejecting two of the Appellant’s comparables viz. Super Tech Castings Pvt. Ltd. and Nitin Castings Ltd. without any cogent reason and selecting functionally different comparables;

17. erred in incorrectly re-computing the Appellant’s margins at (0.24%) by treating certain items of income and expense as operating in nature;

18. without prejudice, failed to appreciate that even if TNMM is to be selected as the most appropriate method for benchmarking the transaction of sale of finished goods to the AE, then also, internal TNMM ought to be preferred over external TNMM;

19. without prejudice, erred in making the transfer pricing adjustment at an entity level and failed to restrict the same to the internation transaction of sale of finished goods to AE on a proportionate basis,

20. without prejudice, ought to have computed the impugned transfer pricing adjustment after allowing benefit of working capital adjustment to the Appellant,

21. without prejudice, ought to have restricted the impugned transfer pricing adjustment to the profits of the AE from sale of goods purchased from the Appellant to third parties,

D. Corporate Tax Grounds:

detail of set-off of unabsorbed depreciation against assessed income.

22. erred in not granting set-off of unabsorbed depreciation amounting to Rs. 5.90,18,372 available to the Appellant while computing the taxable income for the year under consideration;

Dental of Appellant’s claim for carry forward of unabsorbed depreciation (Rs. 5.90,18,372) and long term capital loss (Rs. 58,938):

23. erred in not allowing the Appellant’s claim for carry forward of unabsorbed depreciation amounting to Rs. 5,90,18,372 on the basis that the return of income for the captioned assessment year was first filed under section 139(4) of the Act without appreciating that the losses arose in AY 2021-22 for which the return of income was filed within the due date provided under section 139(1) of the Act itself and therefore, the Appellant’s claim ought to be allowed:

24. erred in not allowing the Appellant’s claim for carry forward of long-term capital loss amounting to Rs. 58,938 on the basis that the return of income for the captioned assessment year was first filed under section 139(4) of the Act without appreciating that the losses arose in AY 2021- 22 for which the return of income was filed within the due date provided under section 139(1) of the Act itself and therefore, the Appellant’s claim ought to be allowed;

E. Other Grounds:

25. erred in levying interest under section 234A of the Act amounting to Rs. 16,55,514;

26. erred in levying interest under section 234B of the Act amounting to Rs. 8,16,42,616,

27. erred in initiating pernal proceedings under section 270A(2) of the Act alleging under-reporting of income;

The Appellant submits that each of the objections filed above are without prejudice to any of the other objections.

The Appellant craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds of objections or add a new ground or grounds of objections at any time before or at the time of hearing the application so as to enable your Honours to decide this filing of objections according to law.

1.1 Ground No. 1 raised by the assessee is general in nature and does not required any specific adjudication.

1.2 Before us, the Ld. Counsel for the assessee submitted that the assessee shall not be pressing Ground No. 2 and accordingly, the same is being dismissed as not pressed.

1.3 With respect to ground No. 3 of the assessee appeal, the Ld. Counsel for the assessee submitted that Ground No. 3 may be decided against the assesse in light of the decision of Hon’ble Special Bench of ITAT in the case of M.D Sons v. ITO [IT Appeal No. 1413 (Ban) of 2025, dated 7-9-2026].

1.4 In Ground No. 3 the assessee has challenged the validity of the assessment on the ground that the notice issued under section 143(2) of the Act was not in the format prescribed by the CBDT Instruction dated 23.06.2017.

1.5 We have heard the rival contentions and perused the material on record. We find that this issue now stands squarely covered against the assessee by the decision of the Special Bench of the Tribunal in M.D. Sons (supra), order pronounced on 13.07.2026. The Special Bench was specifically constituted to decide whether notices issued under section 143(2) on or after 23.06.2017, which were not in the format prescribed by the CBDT Instruction dated 23.06.2017, would render the consequential assessment invalid despite section 292B of the Act.

1.6 The Special Bench held that neither section 143(2) nor the Income-tax Rules prescribe any statutory format for such notice. The essential statutory requirement is that a notice should be issued within the prescribed time informing the assessee that its return has been selected for scrutiny and requiring the assessee to participate in the assessment proceedings. The expressions “Limited Scrutiny”, “Complete Scrutiny” and “Manual Scrutiny” do not find place in section 143(2) and are administrative classifications evolved by the Department. Therefore, non-mention of the category of scrutiny in the notice does not, by itself, affect the jurisdiction of the Assessing Officer.

1.7 The Special Bench has also clarified that although CBDT instructions are binding upon the Departmental authorities, every departure from such an instruction does not automatically render the proceedings void. Non-adherence to the prescribed format would not invalidate a notice otherwise satisfying section 143(2), unless the defect affects a statutory condition for assumption of jurisdiction or prejudice is demonstrated.

1.8 Respectfully following the aforesaid decision of the Special Bench in M.D. Sons v. ITO (supra), we hold that the assessment cannot be held invalid merely because the notice issued under section 143(2) was not in the format prescribed by the CBDT Instruction dated 23.06.2017. Accordingly, Ground No. 3 raised by the assessee is dismissed.

1.9 With respect to the Ground of appeal No. 4 the Ld. Counsel for the assessee submitted that he shall not be pressing for this ground and accordingly the same is being dismissed as ‘not pressed’.

Ground Numbers 5 to 12:

2. The brief facts of the case are that the assessee, Gluhend India Private Limited, is a company engaged in the business of manufacturing sand/die- casted, investment cast, stamped and machined components from ferrous and non-ferrous metals using pressure die casting, sand casting and investment casting processes. For Assessment Year 2022-23, the assessee filed its return of income declaring Nil income. The case was selected for scrutiny through CASS and, since the assessee had entered into international transactions with its Associated Enterprise (“AE”), the matter was referred to the Transfer Pricing Officer (“TPO”) for computation of the Arm’s Length Price (“ALP”). The TPO passed an order under section 92CA(3) and made total transfer pricing adjustments of Rs. 74,11,20,996, comprising of an adjustment of Rs. 73,38,40,000 in respect of sale of finished goods to its AE, Sage International Inc., USA, and an adjustment of Rs. 72,80,996 in respect of corporate guarantee provided to the AE. The Assessing Officer also did not allow carry forward of Long-Term Capital Loss toof ARs.se5s8s,m93e8ntaYndeaurn2a0b2s1o-r2b2ed. depreciation of Rs. 5,90,18,372 pertaining

3. During the transfer pricing proceedings, the main issue was with respect to the benchmarking of the international transaction of sale of finished goods by the assessee to Sage International Inc., its wholly owned subsidiary in the USA. According to the assessee, Sage International Inc. essentially functioned as a limited-risk distributor of the products manufactured by the assessee. It received the goods exported by the assessee, stored the goods, marketing and distribution in the USA and retained only a modest margin for meeting its operating expenses. The assessee had benchmarked the transaction by applying the Cost Plus Method (“CPM”) as the Most Appropriate Method (“MAM”). The TPO, however, rejected CPM and applied the Transactional Net Margin Method (“TNMM”). The TPO also rejected the comparables selected by the assessee, TPO carried out a fresh search, selected a new set of comparables and computed the assessee’s operating margin at the entity level. On this basis, the TPO made an upward adjustment of Rs. 73,38,40,000 in respect of sale of finished goods.

4. Before the DRP, the assessee challenged the rejection of CPM and submitted that CPM was appropriate in the assessee’s set of facts because the transaction involved sale of manufactured goods and the direct and indirect costs connected with production had been duly considered. The assessee submitted that expenses such as freight, legal and professional expenses and travelling expenses, which the TPO considered while rejecting CPM, were administrative expenses and were not required to be included in the cost base for computing the gross margin under CPM. The assessee also contended that even if TNMM were adopted, its own comparables ought not to have been rejected and the new comparables selected by the TPO were functionally and product-wise different. The assessee further challenged the TPO’s search process and filters, the computation of its OP/OC margin, TPO’s refusal to grant working capital adjustment and the application of TNMM at the entity level rather than restricting the adjustment to the international transactions with the AE.

5. The assessee further contended that the transfer pricing adjustment could not exceed the profit actually earned by the AE. In this connection, the assessee produced the management-certified financial statements of Sage International Inc. and stated that the AE had actually suffered a net loss of approximately Rs. 11.55 crore on the subsequent sale of the goods purchased from the assessee. According to the assessee, therefore, no adjustment could survive if it were capped with reference to the AE’s actual profit. Alternatively, the assessee contended that the TPO could not make the adjustment on the assessee’s entire operating revenue when international transactions were only a part thereof. The assessee worked out the proportion of international transactions at about 66.35% of total operating revenue and contended that, even under TNMM, the adjustment ought to be restricted proportionately to the AE transactions.

6. At the stage of proceedings before the DRP, the assessee also filed additional evidence and submitted that sufficient opportunity had not been granted during the transfer pricing proceedings and the additional material should be considered for computing the ALP. The DRP called for an enquiry report from the TPO and examined the additional evidence as well as the objections of the assessee.

7. On the issue of the sale of finished goods, the DRP upheld TPO’s rejection of CPM. According to the DRP, the assessee had failed to accurately identify direct and indirect costs forming part of the cost base. The DRP held TNMM was more reliable because it operates at the net-margin level and is comparatively less sensitive to product and functional differences. The DRP accordingly upheld TNMM as the MAM for benchmarking the sale of finished goods. The DRP also upheld the TPO’s search process, filters and database as being both scientific and unbiased. The DRP upheld the exclusion of the assessee’s comparables viz. Nitin Casting Ltd. and Super Tech Castings Pvt. Ltd., and held that the comparables selected by the TPO could not be rejected merely because of differences in their precise product profiles, since broad functional comparability was sufficient for application of TNMM.

8. As regards the assessee’s alternative plea that the adjustment should be restricted to the profit earned by Sage International Inc., the DRP rejected the contention. The DRP held that transfer pricing provisions operate on the separate entity and transaction-by-transaction principle and the purpose of section 92C is to assess whether the particular controlled transaction is at arm’s length, rather than to protect or equalise the overall profitability of the AE or the multinational group. The DRP further observed that the assessee itself characterised Sage International Inc. as a limited-risk distributor who was expected to earn a modest and stable return; therefore, the substantial loss suffered by the AE did not justify capping the adjustment but, according to the DRP, this itself shows that the inter-company pricing was not consistent with the limited-risk characterization stated to be undertaken by the AE.

9. With regard to the assessee’s request for proportionate adjustment, the DRP accepted the principle that a transfer pricing adjustment should normally relate to international transactions and not uncontrolled (non AE) transactions. However, DRP held that the principle could not be applied in the present case because reliable segmental information was not available. The segmental accounts filed by the assessee before the DRP were management-prepared and unaudited; there was no proper allocation basis for common expenses, no reconciliation with audited financial statements and no segregation of costs, revenues, assets and risks between AE and non-AE segments. The DRP therefore considered the suggestion by the assessee of the 66.35% ratio to the entity-level adjustment to be arbitrary and upheld the entity-level computation. For the same reason, DRP rejected the assessee’s alternative plea for application of internal TNMM on the basis of AE and non-AE segments.

10. The DRP also rejected the working capital adjustment. It observed that such an adjustment although it is permissible in principle where differences in working capital affect profitability, but the assessee must support by it documentary data. According to the DRP, year-end figures of inventories, debtors and creditors were not sufficient because they did not reflect movements during the year; there was no segregation of trade and non-trade balances; segmental working-capital details were not available; and the assessee had not demonstrated the corresponding cost of capital or the actual effect of the differences upon the margins of the comparables. The DRP therefore held that the claim was based on broad estimates rather than a reasonably accurate computation and rejected the same. Consequently, the DRP sustained in full the transfer pricing adjustment of Rs. 73,38,40,000 relating to sale of finished goods.

11. The second major transfer pricing issue related to the corporate guarantee furnished by the assessee in connection with borrowing by Sage International Inc. The assessee submitted that it had not actually charged any guarantee commission from its AE. The amount of Rs. 72,80,996 was only a notional income recorded in the books to comply with the accounting requirements under Ind-AS and was not an amount actually received or charged from the AE. The assessee submitted that there was no international transaction which necessitated an adjustment. Alternatively, the assessee contended that if the guarantee given by it was treated as an international transaction, corresponding treatment should be given to the corporate guarantee received by it, in respect of which a notional expense of Rs. 3,51,35,944 had been recognised. It accordingly sought either deletion/reduction of the adjustment or aggregation/netting of the guarantee income and guarantee expense.

12. The DRP rejected these submissions. The DRP held that after insertion of the Explanation to section 92B by the Finance Act, 2012 with retrospective effect from 01.04.2002, a guarantee falls expressly within the definition of an international transaction and therefore it was required to be benchmarked. The DRP reliedupon the decisions in Pr. CIT-5, Chennai v. Redington (India) Ltd. 136/[2021] 430 ITR 298 (Madras)andJubilant Pharmova Ltd. v. Jt. CIT 458 ITR 170 (Allahabad), noting that the SLP in the latter matter had been dismissed by the Supreme Court. The DRP further held that a corporate guarantee puts the guarantor at a real contingent financial risk and confers an economic benefit upon the AE by improving its ability to obtain finance, and therefore even as there is an absence of an immediate cash outflow or an actual guarantee fee did not take the transaction outside transfer pricing provisions. The DRP also rejected the assessee’s request for netting the guarantee given with the guarantee received, by holding that each international transaction has to be benchmarked separately.

13. As regards the quantum, the DRP noted that the TPO had obtained external bank guarantee rates under section 133(6) of the Act, which ranged from 0.45% to 2.64% with a median of 1.50%, and thereafter allowed a downward adjustment of 0.50% looking into the distinction between bank guarantees and corporate guarantees. The DRP accordingly upheld the arm’s length corporate guarantee commission at 1% and sustained the adjustment of Rs. 72,80,996. The DRP also rejected the contention that the guarantee fee should be calculated only on the amount actually utilised, and held that the guarantor’s exposure extends to the entire amount committed under the guarantee. The adjustment of Rs. 72,80,996 was therefore sustained in full by DRP.

14. The other issue before the DRP was the Long-Term Capital Loss of Rs. 58,938 and unabsorbed depreciation of Rs. 5,90,18,372 pertaining to Assessment Year 2021-22. The assessee submitted that the return for Assessment Year 2021-22, being the year in which the loss and unabsorbed depreciation had arisen, had been filed on 04.03.2022 within the extended due date of 15.03.2022 under section 139(1) of the Act. The assessee contended that the right to carry forward the loss had already crystallised and could not be denied because the return for the subsequent Assessment Year 2022-23 had been filed under section 139(4) of the Act. The assessee relied upon section 32(2) of the Act to contend that unabsorbed depreciation was eligible for carry forward.

15. The DRP did not accept this contention. The DRP held that although the loss may have originated in Assessment Year 2021-22 and the return for that year may have been filed within time, the procedural claim for utilisation/carry forward of such brought-forward loss in Assessment Year 2022-23 was adversely affected because the return for Assessment Year 2022-23 itself had been filed belatedly under section 139(4) of the Act. The DRP upheld the non- allowance / carry forward of the Long-Term Capital Loss of Rs. 58,938 and unabsorbed depreciation of Rs. 5,90,18,372.

16. The assessee is in appeal before us against the order passed by DRP dismissing the objections of the assessee.

17. Grounds of Appeal Nos. 5 to 12 are with respect to the transfer pricing adjustment of Rs. 72,80,996 made on account of corporate guarantee provided by the assessee to its wholly owned subsidiary, Sage International Inc., USA.

18. Before us, the learned Counsel for the assessee submitted that the guarantee was given to its wholly owned subsidiary as a shareholder activity and for commercial expediency and no actual consideration was charged or received by the assessee. Without prejudice to the said contention, the Counsel for the assessee submitted that the rate taken by the TPO was itself highly excessive since it was derived mainly from bank guarantee rates. It was contended that a bank guarantee and a corporate guarantee are different transactions and cannot be compared without taking into consideration their different commercial features and risk profiles. The Counsel for the assessee placed reliance on the judgment of the Hon’ble jurisdictional Bombay High Court in CIT v. Everest Kento Cylinders Ltd. 378 ITR 57 (Bombay) wherein the Hon’ble High Court upheld a corporate guarantee commission of 0.50% and specifically held that the considerations applicable to a corporate guarantee are distinct and separate from those applicable to a bank guarantee.

19. We find force in the alternative contention of the assessee. The issue before us is not merely whether a corporate guarantee is required to be benchmarked, but whether the rate of 1% adopted by the TPO on the basis of bank guarantee quotations can be sustained. On this aspect, the judgment of the Hon’ble jurisdictional High Court in Everest Kento Cylinders Ltd. (supra) is of importance. The Hon’ble High Court has specifically held that a proper comparison cannot be made between guarantees issued by commercial banks and a corporate guarantee issued by a holding company for the benefit of its subsidiary. The Court observed that although both are contracts of guarantee, commercial banks issue guarantees in the ordinary course of their banking business and charge commission with respect to their commercial operations and risk exposure, whereas a corporate guarantee given by a parent company for its subsidiary stands on a different commercial footing. The considerations relevant for issuance of a corporate guarantee are, therefore, distinct from those governing the issuance of a bank guarantee.

20. In the present case, the TPO has obtained guarantee commission rates from commercial banks and taken the median bank guarantee rate of 1.50%. Thereafter, Ld. TPO allowed an ad hoc reduction of 0.50% and the balance rate of 1% was treated as the arm’s length corporate guarantee commission. In our considered view, this methodology does not really take case of the fundamental comparability difference pointed out by the Hon’ble jurisdictional High Court in Everest Kento Cylinders Ltd. (supra). Once it is accepted that a bank guarantee and a corporate guarantee are not comparable transactions, the bank guarantee rate cannot become the starting point for determining the ALP by granting an estimated or ad hoc reduction therefrom. The difference between the two transactions is not a difference in rate which can be cured by reducing the bank rate by a fixed percentage; rather, the nature of the transaction, commercial circumstances, functions performed and risks assumed are different.

21. We also note that in Everest Kento Cylinders Ltd. (supra), the assessee had charged corporate guarantee commission at the rate of 0.50%, whereas the TPO sought to determine the ALP at 3% primarily by relying upon rates applicable to bank and other commercial guarantees. The Tribunal deleted the adjustment and the Hon’ble Bombay High Court affirmed the decision by observing that the comparison made by the TPO was not between like transactions and the considerations which apply to a corporate guarantee were different from those applicable to a bank guarantee. The ratio of the aforesaid judgment of the Hon’ble jurisdictional High Court is binding upon us and applies to the methodology adopted by the TPO in the present case.

22. The Revenue has not brought before us any comparable uncontrolled corporate guarantee transaction to demonstrate that an independent enterprise would have charged commission at 1% for a corporate guarantee of the nature furnished by the assessee. The 1% rate has been derived from the bank guarantee rate of 1.50% by allowing an estimated reduction of 0.50%. Such methodology, in our view, cannot be sustained in the light of the principle laid down by the Hon’ble jurisdictional High Court.

23. At the same time, we are unable to accept the assessee’s principal contention that no arm’s length compensation whatsoever is required because no actual commission was charged, no immediate expenditure was incurred and the guarantee had not been invoked during the year. Once the corporate guarantee is treated as an international transaction which was required to be benchmarked under the transfer pricing provisions, the fact that the AE did not default or the liability remained contingent does not by itself establish that its arm’s length price must necessarily be Nil. The relevant aspect is to determine the arm’s length compensation for the transaction and not merely to examine whether there was an actual cash outflow during the year.

24. As regards the assessee’s further contention that the notional income from the corporate guarantee given should be set off against the notional expense of Rs. 3,51,35,944 relating to the corporate guarantee received, we are unable to accept the same. The guarantee given by the assessee and the guarantee received by it are two separate transactions. Merely because both amounts have been recorded in the books under Ind-AS does not mean that they must be combined for transfer pricing purposes. In the absence of material showing that the two guarantees are closely connected and the guarantee received was also at arm’s length, the adjustment relating to the guarantee given cannot be reduced merely by setting off the notional expense against the notional income.

25. However, in view of the judgment of the Hon’ble jurisdictional Bombay High Court in CIT v. Everest Kento Cylinders Ltd. (supra), we find that the rate of 1% adopted by the TPO cannot be upheld, since it has been computed mainly on the basis of bank guarantee rates, whereas a bank guarantee and a corporate guarantee are not directly comparable. We therefore direct the Ld.AO to adopt 0.50% as the arm’s length rate for the corporate guarantee.

Accordingly, Grounds of Appeal Nos. 6 to 12 are partly allowed.

26. Grounds of Appeal Nos. 13 to 21 are with respect to the transfer pricing adjustment of Rs. 73,38,40,000 made in respect of sale of finished goods by the assessee to its wholly owned subsidiary, Sage International Inc., USA (“SII”).

The assessee is engaged in the manufacture of metal castings, machine components and electrical hardware products in India, which are also sold to SII for further distribution in the USA. During the year under consideration, the assessee sold finished goods amounting to Rs. 350,40,23,486 to SII. In its transfer pricing study, the assessee applied the Cost Plus Method (“CPM”) as the Most Appropriate Method and submitted that its gross profit margin of 41.45% was higher than the arithmetic mean margin of 31.13% of the selected comparables and, therefore, the transaction was at arm’s length.

27. The TPO rejected the Cost Plus Method (CPM) mainly because the assessee had not included certain expenses such as freight, insurance, legal and professional charges and travelling expenses while working out the cost. The TPO thereafter applied the Transactional Net Margin Method (“TNMM”), rejected certain comparables selected by the assessee, carried out a fresh search and computed the assessee’s operating margin at (-)0.24% at the entity level. The TPO also rejected the assessee’s claim for working capital adjustment and assessee’s contention that the transfer pricing adjustment should be restricted only to the international transactions with the AE. On this basis, the TPO made an adjustment of Rs. 73,38,40,000, which was subsequently upheld by the DRP.

28. During the proceedings before the DRP, the assessee furnished additional evidence in the form of management-certified segmental accounts showing the separate results of transactions with the AE and non-AEs. On the basis of these accounts, the Counsel for the assessee submitted that the margin from the AE segment was 6.72% as against (-)7.22% from the non-AE segment and, therefore, sought that internal TNMM may be applied. The DRP accepted the proposition that internal TNMM is generally preferable where reliable segmental information is available, but rejected the assessee’s claim on the ground that the segmental accounts produced before it were management-certified and did not provide a proper segregation of functions, assets, risks, costs and revenues between the AE and non-AE segments. The DRP accordingly upheld the external TNMM applied by the TPO at the entity level.

29. Before us, the learned Counsel for the assessee submitted that the difficulty pointed out by the DRP has now been sorted. Our attention was drawn to the additional evidence filed before us vide letter dated 06.03.2026, comprising of segmental accounts relating to AE and non-AE sales duly verified and certified by an external Chartered Accountant. The Counsel for the assessee submitted that these certified segmental accounts contain the necessary details for computing the profitability of the AE and non-AE segments. The assessee therefore submitted that internal TNMM should be applied and the matter may, if considered necessary, be restored to the TPO only for verification of these segmental accounts.

30. We have considered the submissions. In our view, the additional evidences produced by the assessee go to the root of the controversy. The principal reason for rejecting the internal TNMM by the DRP in the present case was not that the method was inherently unsuitable, but the segmental accounts produced by the assessee were not reliable. The assessee has now placed on record segmental accounts certified by an external Chartered Accountant, which were not available before the TPO or the DRP. The correctness of these accounts and, particularly, the manner in which common revenues and expenses have been allocated between the AE and non-AE segments require factual verification by the TPO.

31. We also find merit in the assessee’s contention that, where reliable internal comparable transactions are available, they deserve examination before resorting to external comparables. The non-AE transactions of the assessee arise from the same business of manufacture and sale of finished goods. Therefore, if the AE and non-AE segments are comparable and their respective revenues and costs can be identified, internal TNMM may provide a more direct basis for benchmarking the international transaction.

32. However, whether the two segments are in fact comparable and whether the segmental results now furnished by the assessee correctly reflect their respective profitability are matters which require verification of the underlying documents placed on record. These factual aspects cannot be examined for the first time at the appellate stage by us.

33. We therefore consider it appropriate, in the interest of justice, to restore this issue to the file of the TPO for de novo consideration, for examining the certified segmental accounts and the assessee’s claim that internal TNMM may be applied in the present facts. The TPO shall verify the segmental accounts with the books of account and audited financial statements and examine the basis adopted for allocation of common revenues and expenses between the AE and non-AE segments. The TPO shall also examine whether the transactions constituting the AE and non-AE segments are comparable with respect to their functions performed, assets employed and risks assumed.

34. The assessee is directed to furnish all books of account, invoices, workings, allocation keys and other supporting material required for verification of the segmental accounts. The TPO shall afford reasonable opportunity of being heard to the assessee and thereafter determine the ALP afresh in accordance with law and in light of the above directions.

35. Accordingly, the adjustment of Rs. 73,38,40,000 is set aside for fresh determination and Grounds of Appeal Nos. 13 to 21 are allowed for statistical purposes.

36. Grounds of Appeal Nos. 22 to 24 – Carry Forward of Long-Term Capital Loss and Unabsorbed Depreciation

37. We have heard the rival contentions and perused the material available on record. Grounds of Appeal Nos. 22 to 24 relate to the non-allowability of carry forward of Long-Term Capital Loss of Rs. 58,938 and unabsorbed depreciation of Rs. 5,90,18,372, both pertaining to Assessment Year 2021-22. The Assessing Officer denied the claim on the ground that the return of income for the year under consideration, i.e. Assessment Year 2022-23, was filed on 30.12.2022 under section 139(4) of the Act. The DRP upheld the action of the Assessing Officer.

38. Before us, the learned Counsel for the assessee submitted that the authorities have failed to appreciate an important distinction. The losses in question did not arise during Assessment Year 2022-23. They pertain to Assessment Year 2021-22, for which the assessee had filed its return of income within the due date prescribed under section 139(1). It was submitted that once the loss of Assessment Year 2021-22 was eligible for carry forward, the same could not lapse merely because the return for the subsequent Assessment Year 2022-23 was filed belatedly. The Counsel for the assessee further submitted that, in any case, unabsorbed depreciation is governed independently by section 32(2) of the Act and is not subject to the restriction contained in section 80 read with section 139(3).

39. We have considered the rival submissions. In our view, it is necessary to distinguish between a loss arising during the year for which the return itself is filed belatedly and a loss which had already arisen in an earlier year for which the return was filed within the prescribed time. The two situations are, in our view, different.

40. Section 139(3), read with section 80 of the Act, lays down the requirement for carrying forward specified losses, including capital loss. In substance, where an assessee sustains a loss which it seeks to carry forward under section 74, such loss has to be computed pursuant to a return furnished in accordance with section 139(3), within the time prescribed under section 139(1) of the Act. Thus, the requirement of filing of return of income in time is attached to the assessment year in which the loss is incurred. Where the return for that year is filed belatedly, the statutory restriction operates and the loss cannot be carried forward.

41. However, the position before us is different. The Long-Term Capital Loss of Rs. 58,938 did not arise in Assessment Year 2022-23. It arose in Assessment Year 2021-22, and it is the case of the assessee that the return for Assessment Year 2021-22 was filed within the due date prescribed under section 139(1) of the Act. Once the conditions of section 139(3) read with section 80 were satisfied in the year in which the capital loss actually arose, the subsequent filing of a belated return for Assessment Year 2022-23 does not, by itself, extinguish the loss which had already become eligible for carry forward.

42. In other words, section 80 places a restriction on the carry forward of a loss arising in a year for which the required return of loss was not filed within time. It does not provide that a loss which was carried forward from an earlier assessment year should not be allowed to be carried forward merely because the return for a subsequent assessment year was filed belatedly under section 139(4) of the Act. Such an interpretation would amount to reading an additional condition into the provision which the Legislature has not provided.

43. In the case of Chandrashekar Hemanth v. ITO (Bangalore – Trib.)[06-01-2025], assessee incurred business losses in assessment years 2012-13 and 2013-14 and filed its return of income within time. The assessee earned income in assessment year 2017-18 and claimed set off of carried forward of such losses against said income for assessment year 2017-18.The Assessing Officer disallowed same on ground that return for assessment year 2016-17 was filed belatedly and, thus, losses pertaining to assessment years 2012-13 and 2013-14 could not be carried forward and set off against income of assessment year 2017-18.The ITAT held that since admittedly losses pertaining to assessment years 201213 and 2013-14 were properly assessed by Assessing Officer by considering returns filed for said year in time, as per section 80 of the Act, assessee was entitled to set off of carried forward losses against income of assessment year 2017-18.

44. In the present case, the loss sought to be carried forward did not arise in Assessment Year 2022-23. It arose in Assessment Year 2021-22, for which, according to the assessee, the return was filed within the prescribed time. Therefore, subject to verification of this factual position, the belated filing of the return for Assessment Year 2022-23 cannot result in the lapse of the Long-Term Capital Loss brought forward from Assessment Year 2021-22.

45. The position regarding unabsorbed depreciation of Rs. 5,90,18,372 stands on a stronger footing. Unabsorbed depreciation is specifically governed by section 32(2) of the Act. Where full effect cannot be given to depreciation in a particular year because of absence of profits or lack thereof the unabsorbed amount is carried forward and is deemed to form part of the depreciation allowance of the succeeding previous year. Thus, by virtue of the statutory fiction contained in section 32(2) of the Act, brought-forward unabsorbed depreciation takes the character of current depreciation of the succeeding year.

46. The scheme of unabsorbed depreciation is different from the scheme of ordinary business loss or capital loss. The restriction contained in section 80 read with section 139(3) does not apply to unabsorbed depreciation governed by section 32(2)of the Act. InAddl. CIT v. Nortel Networks India Pvt. Ltd. [IT Appeal No. 504 (Del) of 2017, dated 23-7-2020], the Tribunal held that unabsorbed depreciation can be carried forward even where the return of income for the relevant assessment year was filed after the due date prescribed under section 139(1). The Tribunal distinguished unabsorbed depreciation from business loss and observed that the restriction contained in section 80 read with section 139(3) of the Act, which requires filing of the return within time for carrying forward specified losses, does not apply to unabsorbed depreciation. The carry forward of unabsorbed depreciation is separately governed by section 32(2), which does not prescribe filing of the return within the time specified under section 139(1) as a condition for its carry forward. Accordingly, while a business loss may be denied carry forward on account of a belated return, unabsorbed depreciation cannot be denied merely for that reason.

47. In the present case, the unabsorbed depreciation of Rs. 5,90,18,372 admittedly pertains to Assessment Year 2021-22. Therefore, denying of its carry forward because the return for Assessment Year 2022-23 was filed under section 139(4) of the Act is not in accordance with the scheme of section 32(2)of the Act.

48. We therefore find merit in the contention of the assessee. The Assessing Officer and the DRP have held that since the return for Assessment Year 202223 was filed belatedly, the assessee automatically lost its right to carry forward the losses and unabsorbed depreciation pertaining to the preceding Assessment Year 2021-22.

49. Accordingly, as regards the Long-Term Capital Loss of Rs. 58,938, the Assessing Officer is directed to verify that the return of income for Assessment Year 2021-22, being the year in which the said capital loss was incurred, was filed within the time prescribed under section 139(1) of the Act and the loss was eligible for carry forward under section 74 of the Act. If these facts are found to be correct, the Long-Term Capital Loss of Rs. 58,938 shall be allowed to be carried forward in accordance with law, notwithstanding the fact that the return for Assessment Year 2022-23 was filed under section 139(4) of the Act.

50. As regards the unabsorbed depreciation of Rs. 5,90,18,372, we hold that its carry forward is governed by section 32(2) of the Act and cannot be denied merely because the return for the year under consideration was filed belatedly. The Assessing Officer is accordingly directed to verify the quantum of unabsorbed depreciation pertaining to Assessment Year 2021-22 and, upon such verification, allow its set-off and/or carry forward in accordance with section 32(2) of the Act.

51. Accordingly, Grounds of Appeal Nos. 22 to 24 raised by the assessee are allowed in the above terms.

52. In the combined result appeal of the assessee is partly allowed for statistical purposes