Transfer Pricing

Case Law
Corporate Guarantee
• M/s Four Soft Ltd v DCIT ITA No 1495/Hyd/2010.

where the Hyderabad Bench of ITAT held that “We find that
the TP legislation provides for computation of income from
international transaction as per Section 92B of the Act. The
corporate guarantee provided by the assessee company does
not fall within the definition of international transaction. The
TP legislation does not stipulate any guidelines in respect to
guarantee transactions. In the absence of any charging
provision, the lower authorities are not correct in bringing
aforesaid transaction in the TP study.”
Finance Act of 2014 added Explanation to Section 92B[2] which were clarificatory in nature to add the
following categories of transactions within the ambit of  international transactions: [With retrospective
effect from 1.4.2002]

- Purchase, sale, transfer or lease of tangible property includes building, transportation vehicle,
machinery, equipment plant, tools, furniture or any other product, article or thing.
- Purchase, sale, transfer or lease of intangible property includes the transfer of ownership or the
provision of use of copyrights, trademarks, licenses, franchises, industrial property right, brand or any
other business or commercial right of similar nature.
- Capital financing, including any type of short-term or long-term borrowing, lending or guarantee,
purchase or sale of marketable securities or any type of advance or any other debt during the course of
business.
- Provision of services, including provision of market research, market development, administration,
legal or accounting service.
- A transaction of business restructuring or reorganization, entered into by an enterprise with an
associated enterprise, irrespective of the fact that it has bearing on the profit, income, assets and
losses of such enterprise at the time of transaction.
The Hyderabad Bench of ITAT in the case of the same assessee for a different assessment year
after the amendment held that, “Having considered the submissions of the parties, we are
unable to accept the contention of the learned AR that corporate guarantee of the nature
provided by the assessee will not come within the meaning of international transaction in
terms with section 92B of the Act. A reading the clause from the Explanation would make it
clear that the corporate guarantee provided by the assessee comes within the scope and
ambit of ‘international transaction’ as per the aforesaid clause. Therefore, the contention of
the learned AR that the issue is covered in favour of the assessee by virtue of the order passed
in assessee’s own case for AY 2006-07 no longer holds good since the order passed by the
coordinate bench is prior to the amendment made to provision of section 92B of the Act.”
[ITA No 1903/Hyd/2011]

Mahindra & Mahindra v DCIT, ITA No 8597/Mum/2010, Infotech Enterprises v ACIT, [2014] 41
Taxmann 364(Hyb).
Bharti Airtel Limited v ADIT, ITA 5816/Del/2012.

The Hon’ble ITAT Delhi held that “after the amendment in Section 92
B, by amending Explanation to Section 92 B, a corporate guarantee
issued for the benefit of the AEs, which does not involve any costs to
the assessee, does not have any bearing on profits, income, losses or
assets of the enterprise and, therefore, it is outside the ambit of
‘international transaction’ to which ALP adjustment can be made.”
The Tribunal came to the conclusion after analyzing the provisions
contained under Chapter X of Income Tax, OECD Guidelines on
Transfer Pricing and the factual scenario. The thrust of the reasoning
in the case was that any corporate guarantee advanced by Indian
company to its associated enterprise resident outside India must entail
some costs to the enterprise. If it does not entail any cost, then there
would not be any impact on the profits and losses of the enterprise
and hence, the same would not be an international transaction. The
Tribunal held that the Explanation derives its existence from the main
section and in the main section the wording used is ‘any other
transaction having a bearing on the profits, income, losses or assets of
such enterprises’; unless corporate guarantee impacts either of the
above, the provisions of Transfer Pricing Regulations becomes
redundant from the departmental perspective.
• Following the same rationale, the Mumbai Bench of ITAT in the case
of Siro Clinpharm Private Limited v DCIT[ITA 2618/Mum/2014]

- held that corporate guarantee issued without any incidental cost to

Associated Enterprise shall be outside the purview of international
transaction and hence Transfer Pricing Regulations.
However, another view can be that any corporate guarantee
transaction will come with an associated cost as an enterprise will
never give such guarantee to an unrelated enterprise without any
security for the guarantee so provided. Thus, certain cost is always
inherent in the transaction. Certain benefit or facility is always present
in such transactions which are a two way thing.
The law as of now is that a factual analysis is to be done to see the
impact of corporate guarantee on a case to case basis. The
retrospective amendment does not help much to the tax authorities in
light of these decisions. The only way Explanation (c) to Section 92B can
be made subject to Transfer Pricing Regulations is to show and bring on
record that certain associated costs are inherent with the advance of
the guarantee by the Indian taxpayer to its associated enterprise.
The United States of America
Columbian Rope Co v Commissioner[42 TC 800 (1964)]
Tax Advisory Memorandum issued in 1987 evolved the test of
‘proximate and direct benefit’ to ascertain the impact of intra group
financing. The thrust of the test is to see what benefit if at all is entailed
to the parent company and whether the service recipient would pay for
it in a transaction with an unrelated party. If the service recipient does
not pay for it, then the same is not an intra group service and hence
outside the ambit arm’s length pricing.
 No TP adjustment if the amount received in advance has
far outweighed the amount received late from AE
 PCIT v. Mckinsey Knowledge Centre India (P.) Ltd. Citation: [2021] 131 taxmann.com 253
(Delhi)
• The Delhi High Court held that under no transfer pricing norm, principle, or evaluation of any
“benefit” could there be a one-sided adjustment taking into account delayed invoices while
at the same time ignoring invoices/payment received in advance. Consequently, factually
there can be no notional computation of ‘delayed receivables’ only ignoring the receivables
received in advance.
• A perusal of the paper book has revealed that most of the invoices/receivables had been paid
significantly in advance. When the period for which the amounts of receivables received in
advance enjoyed by the assessee were seen vis-a-vis the amount receivable beyond sixty
days, it was apparent that the assessee had received significantly more advance rather than
outstanding receivable beyond sixty days.
• Accordingly, the notional interest relating to alleged delayed payments in collecting
receivables from the AEs was uncalled for as, in fact, there were no outstanding receivables
as the amount received in advance far outweighed the amount received late.
No ALP adjustment on interest-free debt funding to overseas-SPV
 Bennett Coleman & Co. Ltd. v. DCIT [2021] 129 taxmann.com 397
(Mumbai – Trib.)

‘Whether an interest-free debt funding of an overseas company in the

nature of a special purpose vehicle (SPV), with a corresponding obligation
to use it for the purpose of acquisition of a target company abroad, can be
compared with a loan simpliciter, and be, subjected to an arm’s length price
adjustment?’
• The Mumbai Tribunal held that its difficult to visualize an SPV in isolation with the
owner of that structure. These SPVs carry no financial and other risks, and the owner
of that structure assumes such risks. There is a dichotomy in the SPV structure
business model in the sense that while risks of SPV investments are assumed by the
owner of the SPV, all the rewards, in whatever form, go to the SPV itself.
• Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018 throws
important light on this aspect. What this rule holds is that an SPV, which does not
control the financial risks associated with its funding activities, shall not be allocated
the profits associated with those risks. The profits or losses associated with such risks
would be allocated to the owner(s) of the SPV.
• Thus, interest-free debt funding of an overseas company in the nature of a SPV, with a
corresponding obligation to use it to acquire a target company abroad, can not be
compared with a loan simpliciter. Thus same cannot be subject to arm’s length price
adjustment based on the Comparable Uncontrolled Price (CUP) method.
TP adjustment is not required for ‘performance guarantee’ as
contractual revenue would belong to the guarantor if the
guarantee was invoked
 DCIT v. KEC International Ltd. [2021] 132 taxmann.com 75 (Mumbai – Trib.)
• It was noted that as per terms of the agreement, in the event of AE failing in
execution of the contract, performance guarantee issued by the assessee
would get invoked, and thereupon, the assessee would be obligated to
execute the contract on its own by using its own infrastructure.
• This would, in turn, result in the assessee deriving entire contractual revenue
and huge profits from there. Thus, there was absolutely no risk involved for
the assessee in issuing a performance guarantee on behalf of its AE,
warranting charging of any commission to mitigate that risk. Therefore, the
Mumbai Tribunal deleted the addition made by TPO.
No TP adjustment if the assessee was availing more credit period vis-a-vis
credit period it granted to its AEs: ITAT
 Coim India (P.) Ltd. v. DCIT [2021] 132 taxmann.com 207 (Delhi – Trib.)
• The assessee did not charge any interest receivable by them from the
AEs, and it was their policy not to charge so in respect of interest both
payable and receivable. Further, the interest payable by the assessee was
more than the interest receivable, and such interest on receivables was
ingrained in the sales itself.
• The Delhi Tribunal held that the AO considered only the interest
chargeable but did not consider the interest payable. If both the interest
chargeable and interest payable were taken into consideration, and set-
off was allowed, that would lead to no adjustment at all. Therefore,
adjustment on account of interest receivable was to be deleted.
• Introduction
• Review of literatures
• Statement of Problem
• Hypothesis
• Research Questions
• Research Objectives
• Research Methodology
Last Chapter – Conclusions and Suggestions
Bibliography