By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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Counsel for assessee/revenue: Rajan Vora/ V. Srinivas Before Shri G. C. Gupta (VP) and Shri Akber Basha (AM)
Corporate guarantee provided in respect of an AE is not an international transaction in terms of section 92B of Income-tax Act.
Facts
The taxpayer was an Indian company engaged in providing IT and ITES Services. The taxpayer had several kinds of international transactions with its AEs. Among others, the taxpayer had issued corporate guarantee to banks in respect of loan taken by its Dutch subsidiary (which was an AE). The TPO determined ALP of corporate guarantee commission @ 3.75% of the guarantee amount taking commission charged by bank as a benchmark. In appeal, DRP confirmed the action of TPO.
The taxpayer contended that:
for transfer pricing purposes, income from international transactions is to be computed as per section 92B of Income-tax Act;
corporate guarantee transactions are not covered within the scope of section 92B;
transfer pricing provisions do not stipulate any guidelines in respect of guarantee transactions; and
in absence of any charging provision, such transaction would not be subject to transfer pricing provisions.
The taxpayer further contended that provision of corporate guarantees in respect of subsidiary company was a normal business practice and the Dutch subsidiary did not receive any benefit, such as reduction in rate of interest by virtue of corporate guarantee provided by the taxpayer.
The tax authority contended that a guarantee is an obligation which the guarantor is liable to honour if the principal debtor does not discharge the debt.
Held
The Tribunal observed and held as follows.
Corporate guarantee provided by the taxpayer is not covered within the definition of international transaction in section 92B. No guidelines are stipulated in respect of such transactions. Unlike a bank or a financial institution, provision of corporate guarantee is incidental to the business of the taxpayer. In the absence of any charging provision, such transaction cannot be subjected to transfer pricing.
