ITAT rules on Corporate Guarantee

ITAT rules on Corporate Guarantee

The bench relied on its verdict in the assessees' case for earlier Assessment Year

The Bangalore bench of Income Tax Appellate Tribunal (ITAT) has held that corporate guarantee falls within the scope and ambit of international transactions and Arm's Length Price (ALP) applicable at 0.5 percent.

The assessee, Sami–Sabinsa Group Ltd., is an Indian multinational company engaged in the export of standardized herbal extracts, fine chemicals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics.

The assessee filed a Transfer Pricing (TP) analysis and justified the ALP it received for the sale of its products to its Associated Enterprise (AE). For determining the ALP, it chose the Cost Plus Method (CPM) as the Most Appropriate Method (MAM).

The assessing officer (AO) made a reference to the Transfer Pricing Officer (TPO) for the determination of the ALP, but the TPO rejected it and chose the Transaction Net Margin Method (TNMM) as the most appropriate method.

The assessee objected before the Dispute Resolution Panel (DRP), which gave certain directions that resulted in the addition made to the total income on account of the determination of the ALP. Though it was at a much lesser sum, the appellant approached ITAT to determine the ALP with respect to the international transaction of the sale of herbal products.

The appellant submitted that the corporate guarantee provided by the assessee could not be equated to the bank guarantee. As a result, the commission rate could also not be applied to the corporate guarantee. It submitted that it was only an additional guarantee provided by the parent company. It was given keeping in mind the paramount business interest of the parent company, allowing it as a business expenditure.

The Coram of Vice President NV Vasudevan and Accountant Member BR Baskaran partly allowed the appeal.

Relying on its own order in the previous assessment year, ITAT observed, "The ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to Section 92B. However, it appears that the TPO/AO applied the rate of 3.75 percent, which is applicable to the bank guarantee issued by the bank."

It further stated, "As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to the bank guarantee provided by the bank cannot be applied to corporate guarantee, which is provided by a group company."