TaxTMI 
TaxTMI 
2026 (9) TMI 1060
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....al, Mauritius ("LMI"), which in turn had provided guarantees to HSBC Bank Middle East Ltd., Dubai and National Bank of Dubai in respect of loans availed by the assessee's step-down subsidiary, Right Angle Media FZ LLC ("RAM"), Dubai. The assessee had initially extended corporate guarantee of AED 53 million and the same was subsequently reduced to AED 51 million. Though the guarantee was initially carrying a commission at 0.5%, the assessee waived the guarantee commission on account of the weak financial position of LMI (Mauritius.). The assessee did not benchmark the transaction in its transfer pricing study on the ground that issuance of corporate guarantee was not an "international transaction" within the meaning of section 92B of the Act. 4. The TPO did not accept the above position. He treated the provision of corporate guarantee as an international transaction and computated arm's length price on this transaction. For this purpose, the TPO obtained information regarding yields on debt instruments from CRISIL under section 133(6) of the Act. The TPO assigned a credit rating of BB+ to the assessee and B+ to the Associated Enterprise and, on that basis, took an annualised yiel....
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.... computation of the arm's length price of an international transaction under the transfer pricing provisions. As regards the decision in Bharti Airtel Ltd. [2014] 43 taxmann.com 50 (Delhi - Trib.), the DRP distinguished the same on facts and observed that the guarantee in the present case created an encumbrance and additional leverage upon the assets of the assessee and, therefore, could not be regarded as having no bearing on its assets. The DRP further accepted the TPO's order that the credit standing of the assessee and the AE could not be regarded as identical and observed that, had their credit standing been the same, there would have been no requirement for the assessee to furnish an additional guarantee. The DRP accordingly approved the TPO's order and upheld both the characterization of the transaction and the adjustment of Rs. 1,71,18,150. 7. The assessee is in appeal before us against the order passed by DRP dismissing the objections of the assessee. 8. At the time of hearing, the learned Counsel for the assessee confined his arguments only to the grounds relating to the transfer pricing adjustment made on account of the corporate guarantee given by the assessee in ....
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....12. The Hon'ble High Court further clarified that the decision of the Hon'ble Supreme Court in SAP Labs India (P.) Ltd. does not mean that comparable transactions considered in other cases cannot be taken into account. What is necessary is that the Tribunal must first satisfy itself regarding comparability. The Hon'ble High Court observed that "there can be no absolute proposition that the range of corporate guaranteed fees or determining the arm's length price should follow a particular range or formula." 13. We have, therefore, examined the facts of the present case and compared them with the facts before the Hon'ble Bombay High Court in Everest Kento Cylinders Ltd. (supra) instead of merely applying the rate of 0.5% on the basis of that decision. 14. In Everest Kento Cylinders Ltd., the assessee had an overseas subsidiary in Dubai which required funds for its working capital and capital expenditure. The subsidiary obtained loans from ICICI Bank, Bahrain and the Indian parent company furnished a corporate guarantee for such borrowing. The assessee charged guarantee commission at 0.5%. The TPO rejected this rate and took a rate of 3% by relying mainly upon rates charged ....
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....ial banks as against a corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company." 18. The above distinction is important in the present case. A commercial bank issues guarantees in the ordinary course of its banking business with the object of earning income. Its pricing takes into account several factors viz capital requirements, credit risk, regulatory requirements and the return expected from its banking operations. A parent company furnishing a corporate guarantee for its subsidiary or step-down subsidiary stands on a different footing. Therefore, the pricing of an independent bank guarantee cannot be routinely adopted as the arm's length price of a corporate guarantee. 19. We also find that the TPO in the present case has computed the rate of 2.74% by assigning notional credit ratings of BB+ to the assessee and B+ to the AE and thereafter comparing yields of five-year unsecured bonds. However, the actual transaction before us is not an issue of unsecured bonds either by the assessee or by the AE. Further, the guarantee in the present case was opportunity for about 40 months, whereas the TPO took the yield of five-year unsecured bonds.....