India: Corporate guarantee made for subsidiary, transfer pricing adjustment rejected

India: No transfer pricing adjustment for guarantee

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.

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The case is:  Micro Ink Ltd. v. ACIT (ITA No. 2873/Ahd/10)

Summary

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

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