Corporate guarantee qualifies as an international transaction, and arm's length commission may be based on average exposure.

A corporate guarantee furnished to an associated enterprise is treated as an international transaction under section 92B because the statutory explanation includes guarantees within capital financing arrangements. The guarantee's role in enabling credit facilities and affecting the associated enterprise's financial position supports that characterisation. For benchmarking the arm's length commission, where the guarantee secured a term loan repaid in instalments and the exposure fluctuated during the year, the average of the opening and closing outstanding exposure is a more reasonable measure than the year-end balance alone. The commission is accordingly quantified on average exposure at 0.50%.

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Issues: (i) whether a corporate guarantee furnished by an assessee to its associated enterprise constitutes an international transaction within the meaning of section 92B of the Income-tax Act, 1961; and (ii) whether the arm's length commission on such guarantee is to be computed on the closing outstanding loan balance or on the average of the opening and closing outstanding exposure during the relevant year.

Issue (i): whether a corporate guarantee furnished by an assessee to its associated enterprise constitutes an international transaction within the meaning of section 92B of the Income-tax Act, 1961.

Analysis: The Explanation to section 92B specifically brings transactions in the nature of capital financing, including guarantees, within the ambit of international transactions. The corporate guarantee enabled the associated enterprise to obtain credit facilities and had a direct bearing on its financial position. The assessee did not demonstrate any distinguishing facts or binding precedent warranting departure from the reasoning adopted by the lower appellate authority.

Conclusion: The corporate guarantee is an international transaction under section 92B of the Income-tax Act, 1961, and the assessee's challenge on this issue fails.

Issue (ii): whether the arm's length commission on such guarantee is to be computed on the closing outstanding loan balance or on the average of the opening and closing outstanding exposure during the relevant year.

Analysis: The guarantee was furnished for a term loan repaid in instalments, so the exposure under the guarantee fluctuated through the year. The actual risk assumed by the assessee was therefore not fully reflected by adopting only the year-end balance. The approach of considering the average opening and closing outstanding exposure was treated as a more reasonable measure of the actual exposure for benchmarking the guarantee commission.

Conclusion: The commission is to be computed at 0.50% on the average outstanding exposure, and the assessee's alternative method based only on the closing balance is rejected.

Final Conclusion: The transfer pricing adjustment on corporate guarantee survives, and the assessee receives no relief on either the characterisation of the guarantee or the method of quantification.

Ratio Decidendi: A corporate guarantee that facilitates credit to an associated enterprise falls within section 92B, and where the guarantee exposure reduces over the year through repayments, arm's length commission may be benchmarked on the average outstanding exposure rather than solely on the year-end balance.

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