ITAT deletes transfer pricing addition as no subsisting corporate guarantee existed during assessment year

The ITAT Delhi held that no international transaction existed for corporate guarantee benchmarking purposes in the assessment year. The assessee had previously provided corporate guarantees for step-down subsidiaries' loans totaling USD 95 million from EXIM bank. However, when the subsidiaries defaulted and loans became NPAs, the bank initiated recovery proceedings against the assessee as guarantor in May 2016. The tribunal found that since the assessee was aware of the default situation and the guarantee crystallized into actual liability at the beginning of the assessment year, no subsisting guarantee existed during the relevant period. Consequently, the TPO erred in initiating transfer pricing proceedings, and the proposed addition was directed to be deleted.

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Issues Involved:

1. Whether the provision of a corporate guarantee constitutes a separate international transaction.
2. Whether the corporate guarantee is a shareholder service and not subject to arm's length pricing.
3. The appropriateness of the method used by the Transfer Pricing Officer (TPO) for benchmarking the corporate guarantee.
4. The initiation of penalty proceedings under section 270A.
5. The computation of interest under sections 234A, 234B, 234C, and 234D.

Detailed Analysis:

1. Corporate Guarantee as an International Transaction:

The core issue is whether providing a corporate guarantee falls under the definition of an international transaction as per Section 92B of the Income Tax Act. The Tribunal noted that the issue of corporate guarantee as an international transaction is settled by the retrospective amendment to the IT Act effective from 01/04/2002. This position is supported by various judicial precedents, including the decision of the Hon'ble Madras High Court in the case of PCIT vs. Redington (India) Ltd., which upheld the retrospective validity of the provision. Thus, the Tribunal rejected the assessee's argument that the provision of a corporate guarantee does not constitute an international transaction.

2. Corporate Guarantee as Shareholder Service:

The assessee contended that the corporate guarantee was a shareholder activity, not warranting arm's length compensation. However, the Tribunal referred to previous decisions, including the assessee's own case for AY 2013-14, where it was held that providing corporate guarantees involves risk and should be compensated at arm's length. The Tribunal emphasized that the notion of providing corporate guarantees as a shareholder activity was not accepted, and the assessee's approach of treating the guarantee as a non-chargeable service was rejected.

3. Methodology for Benchmarking Corporate Guarantee:

The TPO applied the Hull-White model to determine the arm's length price of the corporate guarantee, which the assessee contested. The Tribunal noted that the facts for the current assessment year were different due to the default of the step-down subsidiaries, leading to the classification of the loans as non-performing assets (NPA) by EXIM Bank. Consequently, the Tribunal held that the corporate guarantee ceased to exist at the beginning of the assessment year, rendering the TPO's benchmarking exercise irrelevant for the year in question. Therefore, the Tribunal directed the deletion of the addition proposed by the TPO.

4. Penalty Proceedings under Section 270A:

The Tribunal found the ground regarding the initiation of penalty proceedings under section 270A to be premature. As such, this ground was dismissed.

5. Computation of Interest under Sections 234A, 234B, 234C, and 234D:

The issue of computing interest under the aforementioned sections was deemed consequential and not adjudicated at this stage. The Tribunal remitted this matter to the file of the assessee for further consideration.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the deletion of the addition related to the corporate guarantee for the assessment year under consideration, acknowledging that no international transaction existed due to the default and subsequent NPA classification of the loans. The Tribunal also dismissed the grounds related to penalty proceedings and interest computation as either premature or consequential.

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