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Tribunal reaches conclusion on applicability of TP provisions to corporate guarantees
The debate on whether a corporate guarantee issued to associated enterprises (AEs) is subject to transfer pricing took a new turn recently. The Delhi Bench of the Tax Tribunal, in the case of Bharti Airtel Limited, ruled that guarantee transactions do not fall within the scope of international transactions as defined under section 92B of the Income-tax Act, 1961. Taxand India explores these recent developments and their implications for multinationals.
Prior to this ruling the Hyderabad Bench of the Tribunal in Four Soft Private Limited held that guarantees do not fall within the meaning of an international transaction. Subsequently, however, the definition of international transaction under section 92B of the Income Tax Act 1961 was retrospectively amended by the Finance Act of 2012, which provided an explanation that included ‘capital financing, including any type of long-term or short-term borrowing, lending or guarantee’ within the meaning of an international transaction.
However when a similar issue in the case of Four Soft Private Limited came up before the Hyderabad Bench of the Tribunal it considered the retrospective amendment to the definition of ‘international transaction’ under section 92B of the Act and held that an issuance of guarantee also falls within the ambit of the said section.
Apart from the issues concerning corporate guarantees, the Delhi Bench of the Tribunal in the case of Bharti Airtel also held that interest cannot be imputed in respect of share application paid to AEs, which remained pending conversion for a long period unless a comparable transaction between third parties is brought out, where similar interest is charged. Further on the question whether interest imputed on loans to AEs should be benchmarked with reference to domestic lending rates, the Tribunal referred to the past rulings and held that loans advanced in foreign currency should be benchmarked only with reference to the LIBOR.
Also published in Thomson Reuters' Taxnet Pro, 25 April 2014
The Tribunal’s ruling on the issues of corporate guarantee and investment / loan to associated enterprises (AEs) are significant to taxpayers with overseas subsidiaries. While the Tribunal has held that corporate guarantee is an international transaction, considering the retrospective amendment to section 92B of the Act, the view taken by the Delhi Bench in Bharti Airtel is of great interest to taxpayers. With the divergent rulings and the onerous penal provisions for non-reporting of transactions apart from the possibility of an amendment to the Act, it would be prudent to report and benchmark the transactions including guarantees issued to AEs.