Corporate guarantees have often been examined for transfer pricing adjustment. While there are number of judgements on how to determine the ALP and that bank rates are not to be applied, whether the transaction is an international transaction is always intriguing.
ITAT, Hyderabad in its decision in Four Soft P Ltd v. DCIT, ITA No.1903/Hyd/11 (28-3-2014), held that corporate guarantee falls within the ambit of international transaction though ALP is not be calculated on basis of the rate for bank guarantee. The Hyderabad tribunal was not convinced by the assessee’s argument that corporate guarantee is nothing but an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders.
In a recent decision dated 30-6-2015, in Advanta India Limited v. ACIT, IT (TP) A No.: 1643/Ban/12 the Income Tax Appellate Tribunal (ITAT), Bangalore distinguished the decision in Bharti and held that corporate guarantee issued to the AE which involved a cost to the assessee would fall within the ambit of international transaction.
The assessee issued a guarantee on behalf of its subsidiary in Argentina, which as per facts was a loss making entity. The assessee claimed the guarantee was incidental to business and in any case the expense incurred by the Indian AE by way of commission was the Arm’s Length Price (ALP) of the transaction. Revenue Authorities argued that banks would have charged a commission of at 14% and as such the amount of commission was not the ALP.
International Transaction - Section 92 B(1) and Explanation
As per clause (c) of Explanation to Section 92B international transaction will include ‘capital financing, including any type of long -term or short-term borrowing, lending or guarantee ‘. In Bharti Airtel Limited v. ACIT [(2014) 161 TTJ 283 (Del)], the Tribunal reasoned that transaction of corporate guarantee can only be covered in the residual clause of definition in international transactions, in Section 92B(1), which covers ‘any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises’ .
The assessee sought support from the decision in Bharti wherein the Tribunal had held that since the guarantee - in form of a comfort letter did not entail any cost to the company and did not have any bearing on the profits, it could not be an international transaction.
The Tribunal’s decision in Advanta
The tribunal observed that the transaction in Bharti was different from the present transaction. In the former, the AE did not bear any cost for the guarantee which in this case the assessee had paid commission for the guarantee. However, it was of the view that ALP adjustment at 2% was not founded on any reasonable basis and directed the Revenue authorities to arrive at the correct ALP.