Corporate guarantee, tea leaf pricing, and USD loan interest were tested under transfer pricing principles; Revenue's adjustment failed.

Corporate guarantee to an associated enterprise falls within the scope of an international transaction after the statutory amendment to section 92B, and its arm's length commission may be benchmarked at 0.5% on the facts accepted by the Tribunal. Inter-unit transfer of tea leaves was held not to warrant adjustment where the assessee's annual weighted average price method was consistent and more reliable than selective monthly averaging. Interest on USD-denominated loans to an associated enterprise required benchmarking by reference to USD LIBOR, and the peak-balance domestic spread approach was rejected; no transfer pricing adjustment was therefore called for. The Revenue's appeal failed on all three issues.

---

---

Issues: (i) whether issuance of corporate guarantee to an associated enterprise constituted an international transaction and, if so, what was the arm's length rate of guarantee commission; (ii) whether transfer pricing adjustment on inter-unit transfer of tea leaves was justified by substituting monthly average price for annual weighted average price; and (iii) whether the interest charged on USD-denominated loans advanced to the associated enterprise warranted any transfer pricing adjustment.

Issue (i): Whether issuance of corporate guarantee to an associated enterprise constituted an international transaction and, if so, what was the arm's length rate of guarantee commission.

Analysis: The amended Explanation to section 92B of the Income-tax Act, 1961 brings guarantee and capital financing within the scope of an international transaction. Once covered by Chapter X, the transaction had to be benchmarked for arm's length price. On the facts, the assessee had itself offered guarantee commission at 0.5%, and the Tribunal followed the consistent view of coordinate Benches that guarantee commission in such cases was ordinarily benchmarked at 0.5% to 1%, with 0.5% being accepted on the facts of the case.

Conclusion: The corporate guarantee was an international transaction, but the addition was not sustainable beyond the assessee's 0.5% benchmark, so the Revenue's challenge failed.

Issue (ii): Whether transfer pricing adjustment on inter-unit transfer of tea leaves was justified by substituting monthly average price for annual weighted average price.

Analysis: The assessee had applied an annual weighted average price across inter-unit transfers to ensure uniformity and reliable stand-alone results for eligible units. The transfer pricing approach adopted by the TPO selectively substituted monthly averages only where they produced a higher figure, without displacing the assessee's overall method or showing any defect in it. A uniform annual method based on a larger data set was found to be more reliable than selective month-wise comparison.

Conclusion: The adjustment on inter-unit transfer of tea leaves was unsustainable and stood deleted.

Issue (iii): Whether the interest charged on USD-denominated loans advanced to the associated enterprise warranted any transfer pricing adjustment.

Analysis: The loan was denominated in foreign currency, so benchmarking had to be undertaken with reference to the relevant foreign currency borrowing rate, namely USD LIBOR, rather than by applying a peak-balance-based domestic spread approach. The interest charged at 9% was within the permissible tolerance when compared with the arm's length computation, and the TPO's method of applying the peak balance throughout the year was not accepted.

Conclusion: No transfer pricing adjustment was called for on the loan transaction.

Final Conclusion: The Tribunal upheld the relief granted by the first appellate authority on all three transfer pricing issues and dismissed the Revenue's appeal.

Ratio Decidendi: Corporate guarantee falls within the scope of an international transaction after the statutory amendment, but the arm's length commission must be determined on a reasonable benchmark accepted in comparable cases; inter-unit transfer pricing must be tested by a consistent and reliable method, and foreign currency loans should be benchmarked with reference to the relevant foreign currency LIBOR rather than an artificial peak-balance approach.

---