Tribunal directs re-assessment of loan price & deletion of corporate guarantee addition

The Tribunal partly allowed the assessee's appeal, directing the Transfer Pricing Officer (TPO) and Assessing Officer (AO) to re-assess the arm's length price of the loan and delete the addition for the corporate guarantee. The Tribunal found that the loan provided to Tega Bahamas was quasi-equity and should be benchmarked using the Comparable Uncontrolled Price (CUP) method, rejecting the TPO's methodology. Additionally, the Tribunal determined that the corporate guarantee was a shareholder activity aimed at protecting the assessee's investment, not subject to transfer pricing adjustments.

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Issues Involved:
1. Inter-Corporate Loan
2. Corporate Guarantee

Issue-wise Detailed Analysis:

1. Inter-Corporate Loan:

The facts of the case reveal that Tega Industries Ltd. (the assessee) set up Tega Investment Ltd., Bahamas (Tega Bahamas) as a special purpose vehicle (SPV) to acquire two South African companies. To facilitate this acquisition, the assessee provided a shareholder loan to Tega Bahamas and a corporate guarantee to ICICI Bank UK. The TPO proposed an upward adjustment for the corporate guarantee and interest-free loan provided by the assessee.

The assessee argued that the shareholder loan and guarantee were provided as a substitute for equity funding and thus should not warrant any charges. However, the TPO computed an additional charge for interest-free loans at Rs. 2,883,461, based on a higher risk spread.

The assessee conducted a Transfer Pricing Study (TP-Study Report) and selected the Comparable Uncontrolled Price (CUP) method as the most appropriate method to determine the arm's length rate of interest. The study identified 20 comparable borrowings with an average rate of LIBOR plus 87 basis points. The assessee offered LIBOR plus 100 bps as interest income to tax.

The TPO, however, disregarded the assessee's contention and computed the arm's length price of the loan advanced to Tega Bahamas at 13.75%, resulting in an upward adjustment. The DRP confirmed the TPO's order but directed that interest should be charged for the actual period the loan was outstanding.

The Tribunal found merit in the assessee's submissions, noting that the loan was quasi-equity and should be benchmarked using the CUP method. The Tribunal also observed that the TPO's methodology was flawed and required fresh examination. The issue was restored to the TPO/AO for re-assessment of the arm's length price of the loan.

2. Corporate Guarantee:

The assessee provided a corporate guarantee to ICICI Bank UK for a loan taken by Tega Bahamas. The TPO made a transfer pricing adjustment for the corporate guarantee at 2.5%, resulting in an additional charge of Rs. 9,00,979. The TPO argued that the corporate guarantee provided by the assessee was a service and had a bearing on the profits or losses of the entities involved.

The assessee contended that the corporate guarantee was a shareholder activity and should not be subject to transfer pricing adjustments. The assessee cited various guidelines and judicial precedents to support its claim that the guarantee was quasi-equity in nature and merited no consideration.

The DRP confirmed the TPO's adjustment, stating that the guarantee provided a benefit to the AE and should be charged at arm's length. The DRP rejected the assessee's argument that the guarantee was a shareholder service.

The Tribunal agreed with the assessee's submissions, noting that the guarantee was provided to protect the assessee's investment and facilitate the acquisition of the South African companies. The Tribunal observed that no third party would have granted the loan to Tega Bahamas given its skewed debt-equity ratio. The Tribunal concluded that the guarantee was a shareholder activity and directed the DRP/AO to delete the addition.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes. The Tribunal directed the TPO/AO to re-assess the arm's length price of the loan and delete the addition for the corporate guarantee.

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