The Mumbai Bench of the Income-tax Appellate Tribunal held that bank guarantee rates cannot be mechanically applied in determining the arm’s length price. The tribunal explained the difference between corporate guarantee and bank guarantee, and noted that if the bank guarantee rates were to be used, they must be adjusted for various differences including risk profiles of those involved in the guarantee; the financial position of the loan applicant; the terms and periods of the guarantee; any security involved; and the loan history of the applicant, among other factors.
In this case, the tribunal upheld the guarantee rates changed on the related-party loans and letter of credit of 0.53% and 1.47%, respectively, determined by the taxpayer to be at arm’s length using the Comparable Uncontrolled Price (CUP) method in its transfer pricing study.
