Tribunal upholds Arm's Length Price adjustments for corporate guarantees as international transactions

The tribunal dismissed the assessee's appeals for AYs 2012-13, 2013-14, and 2014-15, upholding the Arm's Length Price adjustments for corporate guarantees. The provision of corporate guarantees was deemed an international transaction under Section 92B of the Income Tax Act, rejecting the argument that it was a shareholder activity. The tribunal emphasized that providing guarantees involves risk and constitutes a financial service requiring appropriate compensation. The decision was pronounced on 19th August 2021.

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Issues Involved:
1. Delay in filing the appeal for AY 2014-15.
2. Arm’s Length Price (ALP) adjustments for corporate guarantees in AYs 2012-13, 2013-14, and 2014-15.
3. Whether the provision of corporate guarantees constitutes an international transaction under Section 92B of the Income Tax Act, 1961.
4. Whether the provision of corporate guarantees is a shareholder activity excluded from transfer pricing regulations.

Detailed Analysis:

1. Delay in Filing the Appeal for AY 2014-15:
The appeal for AY 2014-15 was delayed by 24 days. The delay was attributed to reasons beyond the assessee's control, as stated in the condonation petition/affidavit. Since there was no rebuttal from the departmental side, the delay was condoned.

2. Arm’s Length Price (ALP) Adjustments for Corporate Guarantees:
The assessee challenged the correctness of the ALP adjustments made by the lower authorities for the corporate guarantees provided to its overseas subsidiaries. The adjustments were Rs. 26,76,17,306, Rs. 18,77,00,000, and Rs. 21,35,60,000 for AYs 2012-13, 2013-14, and 2014-15, respectively. The Transfer Pricing Officer (TPO) had added a TP adjustment of 0.53% of the corporate guarantees provided to the subsidiaries, which was corrected by the Dispute Resolution Panel (DRP) for AY 2012-13.

3. Provision of Corporate Guarantees as an International Transaction:
The assessee contended that the provision of corporate guarantees is a shareholder activity and does not constitute an international transaction under Section 92B of the Act. The legislative amendment by the Finance Act, effective from 01-04-2002, was argued to be applicable only prospectively from AY 2013-14 onwards. The assessee argued that the corporate guarantees were provided to enable subsidiaries to raise loan funds for their working capital requirements and did not involve any cost or risk to the parent company.

4. Provision of Corporate Guarantees as a Shareholder Activity:
The assessee argued that providing corporate guarantees is a shareholder activity, which should be excluded from the purview of transfer pricing regulations. The parent company, as a shareholder, is obliged to provide necessary capital or enable a line of credit for its subsidiaries. The OECD transfer pricing guidelines recognize that a shareholder activity does not justify a charge to the recipient companies.

Tribunal’s Findings:

1. Delay in Filing:
The tribunal condoned the delay in filing the appeal for AY 2014-15 as there was no rebuttal from the departmental side.

2. ALP Adjustments:
The tribunal found no merit in the assessee's contentions against the ALP adjustments. It referred to various earlier decisions where corporate guarantees were held to be an international transaction under Section 92B of the Act, thus requiring appropriate remuneration for the financial service provided.

3. Corporate Guarantees as International Transactions:
The tribunal referred to the decision in PCIT Vs. M/s. Redington (India) Limited, which held that the legislative amendment to Section 92B by the Finance Act 2012 has a retrospective effect. The provision of corporate guarantees was considered a financial service that should be remunerated appropriately. The tribunal adopted this detailed discussion and held that the lower authorities rightly treated the corporate guarantees as international transactions falling under Section 92B of the Act.

4. Shareholder Activity Argument:
The tribunal rejected the argument that providing corporate guarantees is a shareholder activity. It emphasized that the provision of guarantees involves inherent risk and constitutes a financial service that must be compensated.

Conclusion:
The tribunal dismissed the assessee’s appeals for AYs 2012-13, 2013-14, and 2014-15, upholding the ALP adjustments made by the lower authorities for the corporate guarantees. The provision of corporate guarantees was affirmed as an international transaction under Section 92B of the Act, and the argument of it being a shareholder activity was not accepted. The tribunal's order was pronounced in the open court on 19th August 2021.

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