The Ahmedabad Income-tax Appellate Tribunal held that a corporate guarantee made by a parent company for a subsidiary is not in the nature of a “provision for service” (but was more in the nature of “shareholder activities / quasi capital”) and thus could not be defined as an “international transaction” under India’s tax law. Accordingly, the tribunal rejected a transfer pricing adjustment determined with respect to the guarantee, by further distinguishing a corporate guarantee from a bank guarantee.
The case is: Micro Ink Ltd. v. ACIT (ITA No. 2873/Ahd/10)
The taxpayer issued various corporate guarantees on behalf of its subsidiaries for no consideration. The taxpayer’s position was that these guarantees did not cost the taxpayer anything; no charges were recovered with respect to the guarantees; and the guarantees were in the nature of corporate guarantees / quasi capital and not in the nature of any services.
On audit, the Transfer Pricing Officer made an adjustment by computing the arm’s length price of the corporate guarantee at a rate of 2%. The taxpayer sought administrative review, but the Dispute Resolution Panel upheld the transfer pricing assessment, relying in part on the OECD Transfer Pricing Guidelines for Multinational Permanent Establishments. The taxpayer filed for judicial review by the tribunal.
The tribunal concluded that when a taxpayer extends a guarantee as financial assistance to a related entity, and the guarantee costs the taxpayer nothing, such assistance does not have a bearing on the taxpayer’s profits, income, losses or assets. Accordingly, the guarantee is outside the definition of “international transaction” under section 92B(1) and is not subject to the transfer pricing provisions.
Read a December 2015 report [PDF 374 KB] prepared by the KPMG member firm in India: Issue of corporate guarantee is in the nature of ‘shareholder activities’ / ‘quasi capital’ and thus, could not be include within the ambit of ‘provision for services’ under the definition of ‘international transaction’ under Section 92B of the Income-tax Act, 1961
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.