Synthite Industries (P) Limited vs The Deputy Commissioner Of Income Tax
2025 Latest Caselaw 3469 Ker

Kerala High Court

Synthite Industries (P) Limited vs The Deputy Commissioner Of Income Tax on 14 August, 2025

Author: A.Muhamed Mustaque

Bench: A.Muhamed Mustaque

                                    1

    ITA No.41 of 2024                                  2025:KER:61180


                 IN THE HIGH COURT OF KERALA AT ERNAKULAM

                                 PRESENT

              THE HONOURABLE MR. JUSTICE A.MUHAMED MUSTAQUE

                                    &

              THE HONOURABLE MR. JUSTICE HARISANKAR V. MENON

     THURSDAY, THE 14TH DAY OF AUGUST 2025 / 23RD SRAVANA, 1947

                            ITA NO. 41 OF 2024


APPELLANT:

              SYNTHITE INDUSTRIES (P) LIMITED,
              KADAYIRUPPU P.O., KOLENCHERY,
              KERALA PAN - AADCS5616E, PIN - 682311.


              BY ADVS.
              SRI.ISAAC THOMAS
              SRI.V.ABRAHAM MARKOS
              SHRI.ALEXANDER JOSEPH MARKOS
              SHRI.JOHN VITHAYATHIL
              SHRI.SHARAD JOSEPH KODANTHARA




RESPONDENT:

              THE DEPUTY COMMISSIONER OF INCOME TAX,
              CORPORATE CIRCLE 2(1), KOCHI, PIN - 682018.

              BY SRI.JOSE JOSEPH, STANDING COUNSEL


THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 11.08.2025, THE
COURT ON 14.08.2025 DELIVERED THE FOLLOWING:
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ITA No.41 of 2024                            2025:KER:61180


                      JUDGMENT

Harisankar V. Menon, J.

This appeal, at the instance of the assessee, seeks to

challenge the order of the Income Tax Appellate Tribunal with

reference to the assessment year 2018-19 relevant to the

financial year 2017-18.

2. Admittedly, the appellant-assessee had some

international transactions on account of which the Transfer

Pricing Officer (TPO) passed an order under Section 92CA of

the Income Tax Act, 1961 (hereinafter referred to as "Act"),

noticing that the appellant had provided a corporate

guarantee to an Associated Enterprise (AE). The appellant

assessee took up the contention that it had only recovered

an amount of Rs.44,63,740/- from its subsidiary,

representing the guarantee commission paid to Axis Bank,

which provided the guarantee. However, the TPO by his order

made reference to the bank guarantee rates for the financial

year 2017-18 from five different banks and the average of

ITA No.41 of 2024 2025:KER:61180

the same - 2.56% - was adopted for computing the Arms

Length Price (ALP) and thereby arrived at the ALP at

Rs.3,93,38,672/- and after deducting the fee charged as

noticed above at Rs.44,63,740/- arrived at the short fall on

account of corporate guarantee at Rs.3,48,74,932/-.

Similarly, an amount of Rs.78,297/- was also found to be the

interest to be charged on trade receivables, which was

required to be added even though the appellant had

contended that it had not charged any interest on belated

receivables. On the basis of the order issued as above by the

TPO, since the provisions of Section 144C of the Act was

applicable, the draft order thereunder was issued by the

National Faceless Assessment Centre (NFAC). Apart from the

afore two amounts, the draft order also made reference to

the provisions of Section 14A of the Act seeking to disallow

Rs.3,51,55,880/-, since the appellant-assessee had various

income, which were exempted from taxation, requiring the

application of the provisions of Section 14A of the Act and

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the disallowance of expenditure incurred in relation to

income not includible in total income. As against the three

additions/variations proposed under the draft order under

Section 144C of the Act, the appellant-assessee filed an

objection before the Dispute Resolution Panel (DRP), and by

Annexure D order dated 21.06.2022, the DRP issued various

directions, on the basis of which assessment had also been

finalised pursuant to Annexure E order dated 25.07.2022.

3. As against the assessment order dated 25.07.2022,

pursuant to the proceedings of the DRP, the appellant filed

an appeal before the Income Tax Appellate Tribunal as

IT(TP)A No. 05/Coch/2022. Before the Tribunal, the

appellant challenged the findings on the three points, noticed

earlier, as also the disallowance under Section 35(2AB) of the

Act. As regards the disallowance under Section 35(2AB) of

the Act, the Tribunal, by the impugned order, directed a re-

examination at the hands of the assessing authority. As

regards the other three issues, the Tribunal refused to

ITA No.41 of 2024 2025:KER:61180

interfere, but for the slight modification of the determination

of the transfer pricing addition, by reducing the same to

2.45% as against 2.56%.

4. It is against the afore findings that the captioned

appeal is preferred by the appellant - assessee.

5. Heard Sri.Joseph Markos, learned senior counsel for

the appellant-assessee, as well as Sri.Jose Joseph, learned

Standing Counsel for the respondent - Revenue.

6. The first issue arising for consideration is the fixing

of ALP at 2.56% which is reduced to 2.45% by the Tribunal.

The Tribunal, after noticing that the TPO has adopted the

average of the guarantee fee charged by the five different

banks, found that the guarantee provided in the case at hand

can be "compared to a bank guarantee" with reference to the

findings in the order issued by the DRP. In other words, the

average applied, as noticed earlier, is with reference to the

guarantee fee charged by the banks as against the "bank

guarantee" extended by the banks. There is no dispute with

ITA No.41 of 2024 2025:KER:61180

respect to the fact that in the case at hand, what was

extended by the assessee was only a corporate guarantee.

The appellant-assessee has specifically pointed out that it

has provided the corporate guarantee to Axis Bank, and the

said bank provided a guarantee on behalf of the AE, as

noticed earlier. There cannot be any comparison with the

commission charged by the bank while issuing the bank

guarantee, while arriving at the ALP with reference to the

corporate guarantee provided by the appellant- assessee. It

is on that basis that the appellant-assessee had relied on the

Safe Harbour Rules (SHR), as per which the corporate

guarantee commission was prescribed only at 1%. True, the

Tribunal has found that the appellant-assessee had not opted

for the SHR. However, the Tribunal ought to have taken cue

from the afore while proceeding to uphold the fixing of the

rate with reference to the fee being charged by five different

banks. We also notice the judgment of the Bombay High

Court in Commissioner of Income Tax v. Everest Kento

ITA No.41 of 2024 2025:KER:61180

Cylinders Ltd. [(2015) 378 ITR 57], wherein the Court

considered a transfer pricing adjustment on guarantee

commission on almost similar circumstances. The assessee

in that case had also provided a corporate guarantee, with

respect to a loan availed by AE, charging a commission at

the rate of 0.5%. The TPO found the guarantee fee to be on

the lower rate and hence made reference to the fee being

charged by similar banks and estimated ALP at 3%.

Considering this situation, the Bombay High Court has found

as:-

"10. ..... In the matter of guarantee commission, the adjustment made by the Transfer Pricing Officer were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee - company that is issuing Corporate Guarantee to the effect that if the subsidiary Associated Enterprise does not repay

ITA No.41 of 2024 2025:KER:61180

loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner Transfer Pricing Officer has done. ...'

Thus, it is categorically held that there cannot be any

comparison between corporate guarantee and bank

guarantee. In the light of the afore, we are of the opinion

that the Tribunal was not justified in deciding the issue

against the appellant-assessee. We notice that the Tribunal

has not adverted to the principles laid down in the afore

judgment while deciding the issue as noticed earlier. This is

especially so when the appellant-assessee has specifically

pointed out that it had only offered a corporate guarantee,

as noticed earlier. In the light of the above, we are of the

opinion that the matter requires a revisit at the hands of the

Tribunal.

ITA No.41 of 2024 2025:KER:61180

7. The second issue arising for consideration is the

charging of interest on belated trade receivables. The

contention of the appellant-assessee is to the effect that it

has never charged any interest, and therefore, there is no

requirement for carrying any transfer pricing adjustment. It

was specifically pointed out that interest was not being

charged as against the export receivable from non-

subsidiaries also. However, we notice that by virtue of the

provisions of Section 92B of the Act, as amended by the

Finance Act, 2002, even "deferred payment or receivables"

have been roped in. In such circumstances, we find no

reason to interfere with the findings of the Tribunal on the

afore aspect.

8. The third issue arising for consideration is with

reference to the disallowance carried out under the

provisions of Section 14A of the Act. Section 14A, true,

provides for the disallowance of expenditure incurred by an

assessee in relation to income, which does not form part of

ITA No.41 of 2024 2025:KER:61180

its total income. Therefore, in a situation where an assessee

expends any amount for earning tax-free income in the form

of funds obtained from loans, etc., the assessee becomes

disentitled for claiming a deduction on income/expenditure

paid for earning the tax-free income. Therefore, ultimately,

it is only in a situation where the department is in a position

to show that borrowed funds were used for earning income,

the application of Section 14A of the Act arises. In the case

at hand, the appellant-assessee has specifically claimed

before the authorities under the statute that it had more

than sufficient funds with it - in excess of Rs.1,110 Crores,

as against the investment of hardly Rs.250 Crores - to

contend that Section 14A of the Act was not attracted. The

appellant-assessee has also relied on the judgment of the

Apex Court in South Indian Bank Ltd. v. Commission of

Income Tax [2021 438 ITR 1] and Commission of

Income Tax v. Reliance Industries Ltd. [(2019) 410

ITR 0466].

ITA No.41 of 2024 2025:KER:61180

9. The Tribunal has, however, held that the afore

judgements were in respect of "apportionment of interest

expenditure" and on account of the provisions of Rule 8D of

the Income Tax Rules, 1962 (hereinafter referred to as

"Rules") as substituted with effect from 02.06.2016, not

providing for any such apportionment, the assessment is

justified.

10. In this connection, the provisions of Section 14A

and Rule 8D of the Act and Rules require to be noticed, as

under:-

"Expenditure incurred in relation to income not includible in total income.

14A.(1)Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

........

Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied

ITA No.41 of 2024 2025:KER:61180

with-

(a) the correctness of the claim of expenditure made by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred, in relation to income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-

(i) the amount of expenditure directly relating to income which does not form part of total income; and

(ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income:

Provided that the amount referred to in clause (1) and clause (ii) shall not exceed the total expenditure claimed by the assessee."

As already noticed, provisions of Section 14A of the Act

provide for the disallowance of expenditure under the

circumstances prescribed therein. It is only in a situation

where the provisions of Section 14A of the Act gets

attracted, the question of applying the provision under Rule

8D of the Rules arises.

ITA No.41 of 2024 2025:KER:61180

11. In this connection, we notice the judgment of the

Apex Court in South Indian Bank (supra) wherein the

Apex Court with reference to the provision of Section 14A

of the Act, has laid down the following principles:-

"27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax free bonds/securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees."

With reference to the above, we notice the contention raised

by the assessee with specific reference to the audited

statements for the year under assessment that it had

sufficient own funds available with it and hence no

expenditure could be disallowed. We notice that, going by

the financials of the appellant-assessee, its own funds were

more than four times the investment effected. When that

ITA No.41 of 2024 2025:KER:61180

be so, we are of the opinion that it is for the assessing

authority to show the requirement to invoke the provision

of Section 14A of the Act in the case at hand. At this

juncture, we notice the contention raised by Sri. Jose

Joseph, the learned Standing Counsel for the respondent

with reference to the provisions of Rule 8D (2) after its

substitution with effect from 02.06.2016, which provide for

the determination of the expenditure in the manner

provided therein. However, we are of the opinion that the

provisions of Rule 8D (2) cannot have any independent

application without the assessing authority establishing that

the provisions of Section 14A of the Act are attracted to the

case at hand. Here, the appellant has specifically contended

with reference to its audited financials for the relevant

period; that it had sufficient "own funds" and hence Section

14A of the Act is not attracted. However, the Tribunal failed

to consider the afore contentions, specifically raised before

it, while deciding the issue.

ITA No.41 of 2024 2025:KER:61180

12. Therefore, we are of the opinion that the matter

requires a revisit at the hands of the Tribunal on the third

issue also.

Resultantly, this appeal would stand allowed by

remitting the matter to the Income Tax Appellate Tribunal,

Cochin Bench, for fresh consideration of the question

regarding the computation of the ALP as well as the

application of the provisions of Section 14A of the Act, in

the light of the observations contained hereinabove.

Sd/-

A. MUHAMED MUSTAQUE, JUDGE

Sd/-

                           HARISANKAR V. MENON, JUDGE
ln


    ITA No.41 of 2024                                2025:KER:61180





APPELLANT'S ANNEXURES:

ANNEXURE A      TRUE COPY OF THE ORDER DATED 23.07.2021 ISSUED

UNDER SECTION 92CA(3) OF THE INCOME TAX ACT 1961BY THE TRANSFER PRICING OFFICER.

ANNEXURE B TRUE COPY OF THE DRAFT ASSESSMENT ORDER DATED 16.09.2021 ISSUED UNDER SECTION 144C OF THE INCOME TAX ACT, 1961 BY THE RESPONDENT.

ANNEXURE C TRUE COPY OF THE STATEMENT OF FACTS AND GROUNDS OF OBJECTIONS FILED BY THE APPELLANT BEFORE THE DISPUTE RESOLUTION PANEL IN FORM 35A.

ANNEXURE D TRUE COPY OF THE DIRECTIONS ISSUED UNDER SECTION 144C(5) OF THE INCOME TAX ACT DATED 21.06.2022 BY THE DISPUTE RESOLUTION PANEL.

ANNEXURE E TRUE COPY OF THE FINAL ASSESSMENT ORDER DATED 25.07.2022 ISSUED BY THE ASSESSING OFFICER.

ANNEXURE F TRUE COPY OF THE APPEAL DATED 02.08.2022 FILED BY THE APPELLANT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN.

ANNEXURE G TRUE COPY OF THE WRITTEN SUBMISSIONS (WITHOUT ANNEXURES) DATED NIL FILED BY THE APPELLANT BEFORE HE INCOME TAX APPELLATE TRIBUNAL.

ANNEXURE H TRUE COPY OF THE INDEX OF THE DECISIONS AND ADDITIONAL DOCUMENTS FILED BY THE APPELLANT.

ANNEXURE I TRUE COPY OF THE ORDER DATED 05.12.2023 OF THE INCOME TAX APPELLATE TRIBUNAL IN IT(TP)A NO. 05/COCH/2022 FOR AY 2018-19.