Transfer pricing on guarantee fees: TNMM accepted over CUP where an Indian branch only provided support and bore no credit risk.

An Indian branch that issued guarantees only against back-to-back overseas counter-guarantees, and whose role was limited to processing and administrative support, was not shown to bear the underlying credit risk. In that setting, a CUP benchmark based on third-party data collected under section 133(6) was rejected because the functional and factual differences could not be reliably adjusted. Following the assessee's own earlier year decision, and finding no change in facts or law, the ITAT Mumbai held that TNMM remained the appropriate method and deleted the transfer pricing adjustment on guarantee fee.

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Issues: Whether the transfer pricing adjustment on guarantee fee received for issuing guarantees backed by overseas counter-guarantees was sustainable, and whether Transactional Net Margin Method or Comparable Uncontrolled Price was the appropriate method for benchmarking the transaction.

Analysis: The assessee's Indian branch issued guarantees to Indian beneficiaries only on the strength of back-to-back counter-guarantees from overseas branches, so the branch did not bear the underlying credit risk. Its role was limited to processing and administrative support in connection with the guarantees. In these circumstances, CUP based on information collected from third parties under section 133(6) was not a reliable benchmark, because the factual and functional differences could not be properly adjusted. The earlier decision in the assessee's own case, which had accepted TNMM and deleted a similar adjustment, was followed as there was no shown change in facts or law. The transfer pricing adjustment was therefore not justified.

Conclusion: The adjustment was deleted and the assessee succeeded on the transfer pricing issue.

Ratio Decidendi: Where an Indian branch merely performs support functions and is fully protected by an overseas counter-guarantee, TNMM may be the appropriate method and CUP based on third-party market data may be rejected if reliable comparability adjustments are not possible.

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