The Hyderabad Income Tax Appellate Tribunal (ITAT) has issued a ruling that concerns certain transfer pricing issues from a corporate guarantee issued to a bank by associated enterprises of a borrower. The case is Four Soft Pvt Lrd. The case concerned an Indian company that guaranteed borrowing by a foreign subsidiary with a third party bank. No fee was charged for this and on audit the Transfer Pricing Officer deemed that an adjustment of 3.75% was appropriate to cover the arm’s length amount of a guarantee fee. This figure was arrived at by looking at a similar fee charged by an unrelated bank for granting a guarantee on behalf of its customers. The taxpayer however argued that a guarantee fee is not within the scope of the transfer pricing provisions as it is not within the definition of an international transaction.
The decided however that he guarantee is within the scope of the definition of an international transaction following the amendment to the definition in the Finance Act 2012. However the Tribunal did not agree with the use of the fee charged to customers by a third party bank as a comparable transaction to a guarantee given by a group company on behalf of an associated company. The issue was therefore referred back to the Transfer Pricing Officer to determine an arm’s length fee on a more appropriate basis.
