Guarantee fee transfer pricing: arm's length charge upheld where borrowing cost stayed below market rate.

Transfer pricing treatment of guarantee fee paid to an associated enterprise was examined on the basis of whether the borrowing cost, including the guarantee commission, was lower than the relevant bank rate and whether the arrangement conferred an economic benefit. On identical facts, the same adjustment had already been deleted for an earlier assessment year and that view had been upheld in further proceedings. Applying those facts, the guarantee commission was found to be at arm's length and the arm's length price could not be benchmarked at nil on a generalised objection to the need for a guarantee. The transfer pricing adjustment was therefore deleted.

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Issues: Whether the transfer pricing adjustment of guarantee fee paid to the associated enterprise was justified.

Analysis: The assessee had borrowed funds from a group company and paid guarantee commission to another associated enterprise for providing the guarantee. The effective borrowing cost, including guarantee fee, was lower than the bank rate relied upon for comparison, and the transaction yielded an economic benefit. A similar adjustment for an earlier assessment year had already been deleted on identical facts and that view had been upheld in further proceedings. On these facts, the arm's length nature of the guarantee fee was established and the adjustment made by the lower authorities was not sustainable.

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

Ratio Decidendi: Where the effective cost of borrowing, including guarantee commission, remains lower than the alternative market borrowing rate and the same transaction has been accepted on identical facts in an earlier year, the guarantee commission cannot be benchmarked at nil merely on a generalized objection to the need for guarantee.

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