Section 92 – Notwithstanding the amendment to the ITA, issuance of corporate guarantee that does not have a bearing on the profits or losses or assets of enterprise does not amount to “international transaction” for transfer pricing provisions.
Facts:
The Taxpayer is an Indian company engaged in the provision of telecommunication services. The Taxpayer had during the financial year issued a corporate guarantee on behalf of its associated enterprise (AE) and also contributed to the share capital in its foreign subsidiaries.
With respect to the corporate guarantee issued by the Taxpayer on behalf of its AE guaranteeing the repayment of a working capital facility advanced by a bank, the Taxpayer contended that it had not incurred any costs or expenses on account of issue of such guarantee and the guarantee was issued as a part of the shareholder activity. Accordingly, there was no requirement to charge a guarantee fee under the TP provisions.
The Taxpayer, however, in its TP documentation study determined an arm’s length (AL) guarantee fee and offered this income to tax.
During the Transfer Pricing Audit, the Tax Authority observed that by issuing the corporate guarantee, the AE’s credit rating benefited from association to the Taxpayer and the Taxpayer, was therefore, required to receive AL consideration and accordingly estimated the AL fee and a TP adjustment was made with respect to the differential guarantee fee.
For the contribution to the share capital of its foreign subsidiaries, the Taxpayer did not benchmark the said transaction as the payments were in the nature of capital contributions. However, during the course of the audit proceedings, the Tax Authority noted there was a significant delay in the allotment of shares to the Taxpayer and treated the contributions as interest free loans for the period between the date of payment and the date on which shares were actually allotted and imputed an AL interest on the amounts deemed as an interest free loan.
The issue before the Tribunal was whether a corporate guarantee issued without a charge is to be considered as “international transaction” and whether transfer pricing provisions apply to such transaction. Further the Tribunal was required to decide on whether the share application money can be treated as interest free loan to AE’s
Held:
On issue of corporate guarantee to its AE
Reviewing the definition of the term “international transaction”, the Tribunal held that in order for the transaction to be an “international transaction” subject to TP, the transaction should be such as to have a bearing on profits, income, losses or assets of such enterprise.
Accordingly, the Tribunal held that a corporate guarantee issued without a charge is outside the ambit of ‘international transaction’ and transfer pricing provisions do not apply to such arrangements, even after the amendment introduced by the Finance Act, 2012.
On Capital contribution to AEs
The Tribunal held that the characterisation of the payment made by the Taxpayer to its AEs as capital contribution was not in dispute and were in the nature of payments for share application money.
The Tribunal noted there was no provision enabling deeming fiction under the Indian transfer pricing regulations to regard share application money as interest free loan.
Further, the Tribunal observed there is no finding about what is the reasonable and permissible time period for allotment of shares. Even if one was to assume there was an unreasonable delay in the allotment of shares, the capital contribution could have, at best, been treated as an interest free loan only for such period of “inordinate delay” and not the entire period from the date of making the payment to date of allotment of shares.
This aspect of the matter is determined by the relevant statute, which is different than that of an interest free loan on a commercial basis between the share applicant and the company to which the capital contribution is being made.
Since the Tax Authority did not bring any evidence on the payment of interest to an unrelated share applicant for the period between making the share application payment and allotment of shares, the Tribunal held it was unreasonable and inappropriate to treat the transaction as partly in the nature of an interest free loan to the AE.
