Corporate guarantee as an international transaction, with arm's length commission reduced and interest receivables adjustment deleted.

Corporate guarantee provided to an associated enterprise is treated as an international transaction under Chapter X transfer pricing provisions, with retrospective support under the statutory explanation to section 92B. The arm's length commission for the guarantee was benchmarked by reference to comparable guarantee pricing and moderated from 2% to 0.875%, while the assessee's plea for 0.5% was rejected. The adjustment on interest receivables was deleted because it was based on a domestic deposit rate rather than a proper transfer pricing benchmark, and no comparable uncontrolled transaction supported the addition.

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Issues: (i) Whether corporate guarantee given to an associated enterprise is an international transaction liable to transfer pricing adjustment; (ii) Whether the commission rate for corporate guarantee should be sustained at 2% or restricted to 0.875%; (iii) Whether the adjustment on interest receivables was sustainable.

Issue (i): Whether corporate guarantee given to an associated enterprise is an international transaction liable to transfer pricing adjustment.

Analysis: The dispute arose in the framework of Chapter X transfer pricing provisions, which operate as special provisions and are not dependent on actual income being derived from the guarantee. The corporate guarantee was treated as falling within the definition of an international transaction under the statutory explanation to section 92B, and retrospective application was recognised in support of that position.

Conclusion: The corporate guarantee was held to be an international transaction and the adjustment in principle was upheld, against the assessee.

Issue (ii): Whether the commission rate for corporate guarantee should be sustained at 2% or restricted to 0.875%.

Analysis: For quantification, the rate was examined with reference to prior tribunal treatment and comparable commission levels. Judicial consistency was applied, and the record reflected a comparable guarantee commission of 0.875%, which was taken as the appropriate rate in preference to the higher 2% adopted by the lower authorities. The assessee's contention for a lower 0.5% rate was not accepted.

Conclusion: The commission rate was restricted to 0.875%, partly in favour of the assessee and partly in favour of the Revenue.

Issue (iii): Whether the adjustment on interest receivables was sustainable.

Analysis: The impugned adjustment was found unsustainable because it had been made by applying a domestic deposit rate instead of a proper transfer pricing benchmark, and no comparable uncontrolled transaction was shown to justify the addition. The reasoning accepted that the adjustment could not stand on the record available.

Conclusion: The adjustment on interest receivables was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with the corporate guarantee transaction upheld in principle, the guarantee commission rate moderated, and the adjustment on interest receivables deleted.

Ratio Decidendi: A corporate guarantee to an associated enterprise can constitute an international transaction under transfer pricing law, while the arm's length quantification must be supported by appropriate benchmarking and comparable uncontrolled data.

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