Corporate guarantee with EXIM Bank not international transaction under transfer pricing provisions after invocation

The ITAT Delhi held that a corporate guarantee transaction with EXIM Bank did not constitute an international transaction under transfer pricing provisions. The tribunal ruled that once the guarantee was invoked, the transaction remained between the assessee and EXIM Bank (unrelated parties), not with the associated enterprise. The court distinguished that while subrogation creates rights against the principal debtor, it does not create a new debt that would transform the guarantee into a deemed loan to the associated enterprise requiring arm's length interest charges. The assessee's appeal was allowed.

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Issues:
1. Whether the invocation of a corporate guarantee by the EXIM Bank constitutes an international transaction for transfer pricing analysis under section 92A of the Income Tax Act, 1961.
2. Whether the liability arising from the invoked corporate guarantee should be treated as a loan to the associated enterprise (AE) and subjected to arm's length interest rate determination.
3. Whether the principles of subrogation under Sections 140 and 141 of the Indian Contract Act, 1872 apply to the guarantor's rights and liabilities after the invocation of a corporate guarantee.

Analysis:
1. The appeal involved a dispute regarding the invocation of corporate guarantees provided by the assessee to its associated enterprises (AEs) and whether it constitutes an international transaction subject to transfer pricing analysis. The assessee argued that the guarantee invocation with the EXIM Bank was a transaction with an unrelated entity and not covered under section 92A. The tribunal considered the nature of the transaction and concluded that once the international transaction arising from the guarantee ceased, the subsequent dealings were between unrelated parties, thus not falling under the ambit of associated enterprises.

2. The tax authorities contended that the invoked corporate guarantee should be treated as a loan to the AE, attracting arm's length interest determination. However, the tribunal examined the guarantee deeds and noted that the liability of the assessee was contingent on the discharge of debt by the AE to the EXIM Bank. As no payment or recovery had been made, the tribunal held that there was no crystallized liability for the assessee, and no reduction in income or increase in loss should be attributed to the invoked guarantee.

3. The tribunal delved into the principles of subrogation under Sections 140 and 141 of the Indian Contract Act, 1872, which govern the rights of a guarantor upon payment of the guaranteed debt. It clarified that while the guarantor gains the rights of the creditor against the principal debtor, it does not create a new debt for the guarantor. The tribunal emphasized that the tax authorities erred in treating the invoked guarantee as a debt towards the EXIM Bank and applying arm's length interest, ultimately ruling in favor of the assessee and quashing the enhancement.

In conclusion, the tribunal's decision revolved around the interpretation of international transactions, the treatment of invoked guarantees as loans, and the application of subrogation principles in determining the tax implications of corporate guarantees. The judgment provided clarity on the tax treatment of such transactions and upheld the assessee's position in this case.

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