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Transfer Pricing-Corporate Guarantee as International Transaction

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 6-9-2016 - Transfer Pricing - Corporate Guarantee as an International Transaction In Transfer pricing proceedings, corporate guarantee given by assessee to its foreign AE is almost always disputed by the department as an international transaction and adjustment determined on the basis of average bank guarantee rates. However, in number of judgements by tribunal and HC, the stand of the department is overruled and relief granted .....

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r assets or such enterprise'. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in section 92B(1) The guarantees do not have any impact on income, profits, losses or assets of the assessee. when an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its n .....

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ses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. That corporate guarantee Issuance of corporate guarantee by assessee on behalf of its subsidiary company is in nature of quasi capital or shareholder activity and not in nature of 'provisi .....

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corporate guarantee is given to Bank in India on behalf of foreign subsidiary, it is not a transaction between assessee and its foreign subsidiary but a transaction between assessee and Bank in India both of which are residents of India and, therefore, corporate guarantee in question cannot be regarded as an international transaction. Since the corporate guarantee is given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. There may b .....

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want of approval from RBI for pledge of shares. Pr. CIT vs. Adani Enterprises Limted (2016 (8) TMI 163 - GUJARAT HIGH COURT) Corporate bank guarantee given to AEs which does not involve any cost and which has no bearing on profits, income, losses or assets of AE will be outside purview of international transaction. (Videocon Industries Ltd. v. Addl. CIT 2015 (2) TMI 631 - ITAT MUMBAI ) Where TPO made addition to assessee s ALP in respect of commission on corporate guarantee given on behalf of su .....

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e of 'international transaction' under section 92B. Even otherwise, since issuance of corporate guarantee does not have bearing on profits, income, losses or assets , it does not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. (Micro Ink Ltd. 2015 (12) TMI 143 - ITAT AHMEDABAD ) Since corporate guarantee issued for benefit of AE does not involve any costs to assessee and it does not have any bearing on prof .....

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of a corporate guarantee may have an influence on profits, incomes, losses and assets of an entity, in whose favour guarantee is issued, but it has no impact on these factors as long as it is issued without a consideration and as long as guarantee is not invoked by beneficiary. The issuance of corporate guarantee by assessee on behalf of its subsidiary company is in nature of quasi capital or shareholder activity and not in nature of 'provision for services' and, therefore, said transac .....

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n favour of Department/TPO for treating CG as an international transaction include: That the guarantee in the form of support agreement, as given to the bank, provided a benevolent advantage to the AE in obtaining credit facilities from the bank. That the assessee may not have incurred any apparent cost but there was an inherent cost in this and that the overall risk exposure of the assessee company becomes high by the quantum of guarantee. Transaction of providing corporate guarantee involves s .....

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it making potential of that AE. There was a clear benefit accrued to the AEs by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said AEs, guarantee commission should have been charged at arm's length price. There may be lot of other arguments based on particular facts and circumstances of the case. Some of decisions where Corporate guarantee is treated as international transaction and transfer pricing adjustments upheld In this case, for the .....

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ed at arm's length price. (Nimbus Communications Ltd 2013 (9) TMI 204 - ITAT MUMBAI ) Assessee contended that corporate guarantee was part of business strategy for market penetration and hence no benefit to AE which was rightly rejected by tribunal. The assessee failed to provide good arguments as in Bharti Airtel case that no costs were incurred or arguments in case of Micro Ink Limited that issuance of corporate guarantee by assessee on behalf of its subsidiary company was in nature of qua .....

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ect of such a transaction (Prolifics Corporation Ltd. v. Dy. CIT 2015 (1) TMI 551 - ITAT HYDERABAD ITAT held that the assessee did incur costs on issuance of the guarantee to its subsidiary and, for that reason, the issuance of guarantee indeed had a bearing on the profits and income of such enterprise. And hence the issuance of guarantees, on the facts and in the circumstances of this case, constituted an 'international transaction' (Advanta India Ltd. 2015 (12) TMI 1406 - ITAT BANGALOR .....

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h immediate transaction was between assessee and CITI Bank of India, benefit of guarantee was for US Subsidiary and, hence, assessee had rendered a service to its US subsidiary for which it must charge fees at an arm's length. (Infotech Enterprises Ltd. v. Addl. CIT 2014 (1) TMI 1363 - ITAT HYDERABAD ) Assessee should have raised arguments of no costs or shareholder service or other arguments as mentioned above The tribunal held that the corporate guarantee provided by the assessee comes wit .....

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tion following decision of Four Soft Ltd.(supra). (Mylan Laboratories Ltd. 2015 (12) TMI 95 - ITAT HYDERABAD ) It is better to contest the case in High court and obtain relief. Tribunal rejected the argument of assessee that it is the responsibility of the parent company to provide guarantee to its subsidiaries / AEs, therefore, in principle, no commission is chargeable and held that CG is an international transaction. (Reliance Industries Ltd.v. Addl. CIT [ 2013 (9) TMI 567 - ITAT MUMBAI ] ) Tr .....

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the Rule 10B of the IT Rules, 1962. Therefore, applying the 'quote' available on the website of the banks without making adjustments, duly necessary, makes ALP studies erroneous In most of the cases, the TPOs are frequently using the BG rates, that to, the naked quotes for bench marking the CG Rates without making requisite downward adjustments to the said BG Rates by factoring the obvious differences. The Tribunal is consistently disapproving this trend as evident from the plethora of .....

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n case of default by the borrower, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. (Marico Ltd. Vs. ACIT [TS-411-ITAT-2016(Mum)-TP] Where assessee had given corporate guarantee to its AE without charging any commission, adjustment to be made at 0.5 per cent (Nimbus Communication Ltd. v. Addl. CIT 2014 (5) TMI 73 - ITAT MUMBAI ) ITAT held that the Bank Guarantee Commission Prices cannot be used as External CU .....

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3 per cent as the guarantee commission rate instead of 2 per cent adopted by him. (Mylan Laboratories Ltd. 2015 (12) TMI 95 - ITAT HYDERABAD ) ITAT held that TPO was not justified in determining ALP for bank guarantee at rate of 3 percent of amount of guarantee applying external comparables of banks without bringing into record that under which terms and conditions other banks were charging guarantee commission at rate of 3 per cent. Charging of 0.5 per cent guarantee commission from AE being qu .....

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mmercial banks as against a corporate guarantee issued by holding company for benefit of its AE, a subsidiary company. (Everest Kento Cylinders Ltd. ( 2015 (5) TMI 395 - BOMBAY HIGH COURT ) Rate of 0.5 per cent guarantee fee/commission would be at arm s length where rates of guarantee commission charged by various banks were found to be in range of 0.15 per cent to 3 per cent. (Godrej Household products Ltd. v. Addl. CIT 2014 (4) TMI 520 - ITAT MUMBAI ITAT held that arm's length rate of guar .....

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