Transfer pricing for guarantee commissions turned on adequate security and year-specific evidence, leading to deletion and partial adjustment.

Transfer pricing for guarantee services was examined on year-specific facts and prior-year comparables. For corporate guarantee commission, the Tribunal found that the vessels continued to secure the borrowing adequately and deleted the adjustment, accepting that no higher arm's length fee was justified on the record. For performance guarantee commission, it held that nil consideration was unsupported by material for the relevant year and adopted 0.5% as the arm's length rate. The challenge to initiation of penalty proceedings was rejected as premature.

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Issues: (i) Whether the arm's length price of corporate guarantee commission should be determined at 2% or deleted, and (ii) whether the arm's length price of performance guarantee commission should be determined at 0.5% instead of nil.

Issue (i): Whether the arm's length price of corporate guarantee commission should be determined at 2% or deleted.

Analysis: The assessee had charged corporate guarantee commission at 0.5%. The Tribunal noted that in earlier assessment years, the assessee's own case had accepted 0.25% as arm's length where the vessels offered as security were worth substantially more than the loan liability. On the facts for the year under appeal, the material showed that the market value of the vessels continued to exceed the loan liability, indicating that the borrowing remained adequately secured.

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

Issue (ii): Whether the arm's length price of performance guarantee commission should be determined at 0.5% instead of nil.

Analysis: The Tribunal relied on its earlier view that 0.25% was reasonable for performance guarantee in the assessee's own case, but found that no material had been produced for the year under appeal to justify nil consideration. Taking guidance from the corporate guarantee rate, the Tribunal fixed the arm's length rate at 0.5%.

Conclusion: The performance guarantee adjustment was modified by adopting 0.5% as the arm's length rate, partly in favour of the assessee.

Final Conclusion: The appeal succeeded on the transfer pricing grounds in part, while the challenge to initiation of penalty proceedings was rejected as premature.

Ratio Decidendi: Where comparable facts show that the underlying assets adequately secure the borrowing, a guarantee fee adjusted beyond the assessee's charged rate cannot be sustained without cogent year-specific justification; similarly, the arm's length price for guarantee services must be supported by material for the relevant year.

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