Counter guarantee pricing must reflect limited risk and functions; ordinary bank guarantee rates were not reliable comparables.

A counter guarantee arrangement was held materially different from an ordinary independent bank guarantee because the Indian entity performed only limited facilitative functions, while the overseas associated enterprises handled the substantive commercial functions, including credit assessment and arranging the guarantee. Back-to-back protection meant the Indian entity did not bear the default and credit risks normally associated with bank guarantees, so third-party bank guarantee rates obtained under section 133(6) were not reliable comparables for the impugned transaction. Where the assessee's bundled international transactions had already been accepted at arm's length under TNMM in earlier years on identical facts, the transfer pricing adjustment on counter guarantee commission could not be sustained.

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Issues: Whether the transfer pricing adjustment made on account of receipt of counter guarantee commission from associated enterprises was sustainable.

Analysis: The counter guarantee arrangement was found to be materially different from an independent bank guarantee. The assessee performed only limited facilitative functions, while the overseas associated enterprises undertook the substantive commercial functions, including evaluation of creditworthiness and arrangement of the guarantee. The assessee also operated under back-to-back counter guarantee protection and did not bear the default and credit risks ordinarily associated with bank guarantees. In earlier assessment years on identical facts, the bundled international transactions had been benchmarked under the transactional net margin method on a combined basis, and that approach had been accepted. The third-party bank guarantee rates obtained by the transfer pricing authorities under section 133(6) were held not to be reliable comparables for the impugned transaction. The earlier remand in the assessee's case did not amount to approval of the comparable uncontrolled price method on merits, but only required confrontation of the material collected.

Conclusion: The transfer pricing adjustment on counter guarantee commission was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The substantive addition made on the transfer pricing issue could not be sustained, and the remaining grounds were disposed of by consequential directions.

Ratio Decidendi: A counter guarantee transaction, where the Indian branch performs only limited facilitative functions and bears no substantial risk due to back-to-back protection, cannot be benchmarked with ordinary independent bank guarantee rates when the assessee's bundled transactions have been accepted at arm's length under TNMM.

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