Corporate guarantee benchmarking under transfer pricing may be restricted to a 0.5% arm's length commission.

A corporate guarantee furnished to an associated enterprise is treated as an international transaction requiring arm's length benchmarking under transfer pricing principles. Where bank guarantee comparables are not reliable because the underlying banking arrangement is overseas, settled tribunal and jurisdictional precedent supports a lower commission benchmark. On that basis, the corporate guarantee commission is commonly restricted to 0.5% as a reasonable arm's length rate.

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Issues: Whether the corporate guarantee given by the assessee in favour of its associated enterprise constituted an international transaction requiring benchmarking and, if so, whether the transfer pricing adjustment should be restricted to 0.5%.

Analysis: The corporate guarantee was treated as an international transaction liable to be benchmarked under transfer pricing principles. The rate adopted by the transfer pricing authority on the basis of Indian bank guarantee comparables was not accepted, as the beneficiary banking arrangement was abroad and the tribunal relied on consistent coordinate bench and jurisdictional precedent that corporate guarantee commission is ordinarily benchmarked at a much lower rate. The judicial trend cited by the tribunal supported adoption of 0.5% as a reasonable arm's length commission for corporate guarantee transactions.

Conclusion: The corporate guarantee was required to be benchmarked, but the adjustment was confined to 0.5%, which is in favour of the assessee.

Final Conclusion: The assessee succeeded on the transfer pricing issue relating to corporate guarantee, with the addition reduced to the lower benchmark rate and the appeal otherwise allowed in part.

Ratio Decidendi: Corporate guarantee given to an associated enterprise is an international transaction requiring arm's length benchmarking, and in the absence of stronger comparable material, the benchmark commission may be restricted to 0.5% following settled precedent.

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