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Payment of guarantee commission and recovery of the same from subsidiary is an international transaction; Bharti Airtel decision distinguished.
Facts:
The Taxpayer, an Indian company, set up subsidiary in Dubai (F Co) for expanding its business in Dubai region. F Co obtained term loan for its working capital requirements and for capital expenditure from the foreign branch of an Indian bank.
Taxpayer provided corporate guarantee to the bank in India in respect of such loans by way of deed of guarantee. In return 0.5% guarantee commission was charged by the Taxpayer from its F Co. Guarantee commission collected from F Co was held to be at arm’s length by the Tribunal in the Taxpayer’s own case for the immediately preceding year.
The Taxpayer had an independent sanction “letter of Credit arrangement” between the bank in India in respect of Inland and foreign letter of credit, where 0.6% guarantee commission was to be paid by the Taxpayer to the bank in India for the bank guarantee provided. The schematic presentation of the facts is as below.
The Tax Authority computed the arm’s length price of corporate guarantee @3% (as against 0.5% made by the Taxpayer) and made certain additions in this regard. Such addition was also affirmed by the dispute resolution panel (DRP).
Taxpayer alternatively contended that the transaction of giving corporate guarantee to bank on behalf of F Co, is not an international transaction, and even if it is regarded as an international transaction, since the Taxpayer has recovered from F Co the comparable cost of guarantee commission charged, the transaction is at arm’s length.
Held:
The decision of Delhi Tribunal in case of Bharti Airtel Ltd (ITA No.5816/DeI/2012) is distinguishable on facts as no guarantee commission was charged in that case. The Delhi Tribunal excluded the transaction of giving corporate guarantee from the purview of international transaction on the plea that transaction of such a nature was not having any bearing on the profits, income or loss or assets of the enterprise.
However, in the present case Taxpayer has incurred cost for providing bank guarantee and has also recovered guarantee commission from its subsidiary. Both these transactions, have impact on the income as well as expenditure of the Taxpayer. Thus the transaction of corporate guarantee is an international transaction subject to TP provisions.
