India: Transfer pricing adjustment, corporate guarantee | KPMG | GLOBAL

India: No transfer pricing adjustment warranted for corporate guarantee

India: Transfer pricing adjustment, corporate guarantee

The Chennai Bench of the Income-tax Appellate Tribunal found that an interest-free loan extended by the taxpayer to related parties was an attempt by the taxpayer to reduce its tax burden, and given this finding, interest was to be computed on notional basis by applying LIBOR rate.


Related content

The tribunal, however, determined that a corporate guarantee and a “letter of comfort” extended by the taxpayer to its related parties had no bearing on profits, income, loss or assets of the taxpayer and / or was not an international transaction, and as such, a transfer pricing adjustment was not warranted. 

The case is: TVS Logistics Services Ltd. v. DCIT (ITA No. 458/Mds/2016)


The taxpayer advanced funds, interest-free, to related parties for the purpose of expanding business outside of India. The funds were advanced not from any additional borrowings by the taxpayer, but from surplus funds (equity capital). The taxpayer described this as shareholder activity. During the same year, the taxpayer paid interest on amounts it had borrowed (loans). 

The Transfer Pricing Officer determined that the interest-free loan to the related parties and the payment of interest on the loan effective shifted profits outside of India. Accordingly, interest on the advanced funds was imputed using LIBOR. 

The taxpayer also extended a corporate guarantee for a related party, but did not charge any fee for the guarantee. Again, the Transfer Pricing Officer made a transfer pricing adjustment using the LIBOR rate of interest.

The taxpayer issued a “letter of comfort” to a related party, and this in turn allowed the related party to borrow funds. The Transfer Pricing Officer imputed a recovery charge at 1% for the taxpayer’s risk exposure. 

These findings were administratively upheld, and the taxpayer sought judicial review by the tribunal.

Tribunal’s findings

The tribunal concluded that:

  • The interest-free loan extended to the related parties was an attempt by the taxpayer to reduce its tax burden, and such, interest had to be computed on notional basis by applying LIBOR rate.
  • The corporate guarantee extended by the taxpayer to the related party had no bearing on the profits, income, loss or assets of the taxpayer. Thus, the tribunal found that the transfer pricing adjustment was not warranted. 
  • The letter of comfort was found by the tribunal to be similar to a guarantee, in that this did not involve any cost to the taxpayer and was not within the ambit of international transactions. Accordingly, there was no justification for the transfer pricing adjustment.


Read a June 2016 report [PDF 370 KB] prepared by the KPMG member firm in India: Transfer pricing adjustment on free of charge corporate guarantee and letter of comfort deleted, adjustment for interest-free advances upheld

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.

Connect with us


Request for proposal