Corporate guarantee pricing and transfer pricing costs must be benchmarked on real transaction terms, revised return figures, and AE-only adjustments.

Corporate guarantee furnished to associated enterprises is treated as an international transaction under section 92B, and purported performance guarantees with the same financial exposure are also covered. For arm's length pricing, bank guarantee rates were rejected as an unsuitable benchmark; a 0.5% corporate guarantee commission plus actual out-of-pocket expenses was accepted, and the higher 2% fee was not sustained. In TNMM operating-cost computation, the depreciation figure from the accepted revised return had to be used, while brokerage, commission on fixed deposits, bank charges, loan processing fee and SBLC commission were treated as non-operating finance costs. Transfer pricing adjustment was confined to transactions with associated enterprises only.

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Issues: (i) whether furnishing of corporate guarantee to associated enterprises is an international transaction, and whether the so-called performance guarantees could be treated differently; (ii) what is the arm's length price of the guarantee transactions; (iii) whether the revised return depreciation should replace the original depreciation for operating-cost computation in transfer pricing; (iv) whether bank charges, commission, brokerage and similar finance costs are non-operating costs; and (v) whether the transfer pricing adjustment must be restricted to transactions with associated enterprises.

Issue (i): whether furnishing of corporate guarantee to associated enterprises is an international transaction, and whether the so-called performance guarantees could be treated differently.

Analysis: The statutory definition of international transaction under section 92B, especially the Explanation inserted by the Finance Act, 2012, expressly includes capital financing, including guarantee. The later safe-harbour framework also reinforces the legislative understanding that guarantee is a covered transaction. The contention that the activity was only a shareholder function was rejected because the guarantees were not given merely by reason of ownership, but to secure obligations of the associated enterprises. The two transactions described as performance guarantees were also found to involve financial consequences on default and, on their substance, to be indistinguishable from corporate guarantees.

Conclusion: The guarantee transactions were international transactions, and the alleged performance guarantees were also to be treated as corporate guarantees.

Issue (ii): what is the arm's length price of the guarantee transactions.

Analysis: The safe-harbour rate under Rule 10TD was held inapplicable because no option under the safe-harbour regime had been exercised. Charges paid by commercial banks were not accepted as a proper benchmark for corporate guarantees, since bank guarantees and corporate guarantees are commercially different. Applying the jurisdictional precedent on corporate guarantee commission, the Court accepted 0.5% as the base arm's length rate. Actual out-of-pocket expenditure incurred by the assessee in relation to the guarantee was directed to be added to that base rate.

Conclusion: The uniform 2% guarantee fee was set aside, and the arm's length price was held to be 0.5% plus actual out-of-pocket expenses incurred by the assessee.

Issue (iii): whether the revised return depreciation should replace the original depreciation for operating-cost computation in transfer pricing.

Analysis: In TNMM computation, only operating costs actually forming part of the assessee's accepted taxable computation can be used. Where the assessee had suo motu disallowed depreciation in the revised return and the return was accepted, the original higher depreciation claim could not be resurrected only for transfer pricing purposes. A foregone claim cannot be treated as alive for ALP computation after having been given up in the revised return.

Conclusion: Only the reduced depreciation claim in the revised return was to be included in the operating-cost base.

Issue (iv): whether bank charges, commission, brokerage and similar finance costs are non-operating costs.

Analysis: The disputed amounts comprised brokerage and commission on fixed deposits, bank charges, loan processing fee and SBLC commission. These items were treated as part of the broader finance cost and not as independent operating expenses. The exclusion made by the first appellate authority was therefore upheld.

Conclusion: The amounts were rightly excluded from the operating-cost base as non-operating in nature.

Issue (v): whether the transfer pricing adjustment must be restricted to transactions with associated enterprises.

Analysis: The adjustment cannot be made on an entity-level basis when the dispute concerns only international transactions with associated enterprises. The Court applied the settled principle that transfer pricing adjustment must be confined to the controlled transactions alone.

Conclusion: The adjustment was to be restricted to transactions with associated enterprises only.

Final Conclusion: The assessee succeeded on the treatment of guarantee commission and the operating-cost computation issue, while the Revenue failed on its objections to exclusion of finance-cost items and to restriction of adjustment to AE transactions.

Ratio Decidendi: A corporate guarantee given for an associated enterprise is an international transaction under section 92B, its ALP must be determined on a realistic corporate-guarantee benchmark rather than bank-guarantee rates, and transfer pricing computation must proceed on the basis of the revised taxable position and only the controlled transactions.

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