Article on: Transfer Pricing provisions in case of provision of Loans and Bank Guarantee

Transfer Pricing provisions have been incorporated from Section 92 and onwards in the
Income Tax Act, 1961. Section 92 is the charging section for transactions taking place between
two or more Associated Enterprises [AE], their computation being considered as per Arms
Length computational methods as set out in the Income Tax Act. Section 92A defines
Associated Enterprises and enumerates situations/transactions where two entities may be
considered as Associated Enterprises.
Section 92B defines an International Transaction as For the purposes of this section
and sections 92, 92C, 92D and 92E, international transaction means a transaction between
two or more associated enterprises, either or both of whom are non-residents, in the nature of
purchase, sale or lease of tangible or intangible property, or provision of services, or lending or
borrowing money, or any other transaction having a bearing on the profits, income, losses or
assets of such enterprises, and shall include a mutual agreement or arrangement between two
or more associated enterprises for the allocation or apportionment of, or any contribution to, any
cost or expense incurred or to be incurred in connection with a benefit, service or facility
provided or to be provided to any one or more of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated
enterprise shall, for the purposes of sub-section (1), be entered into between two associated
enterprises, if there exists a prior agreement in relation to the relevant transaction between such
other person and the associated enterprise, or the terms of the relevant transaction are
determined in substance between such other person and the associated enterprise. However,
after the amendments brought out by the Finance Act, 2012 the scope of Section 92B has
widened and now includes transactions including Capital Financing, Long-Term Short Term
Borrowings, lending or guarantee
This amendment has been brought out to tax transactions where an Indian Entity would
finance and/or provide bank guarantee to its foreign subsidiary because of the problems faced
by Foreign Subsidiary in procuring adequate credit facilities and financing. Thus the speculation
existing regarding the scope of Arms Length Pricing on the bank guarantees given has now
been given a rest after the Amendment as discussed above.
This has been decided by various ITAT Benches, High Courts, etc vide the following
judgments:
1. Everest Kanto Cylinders Limited [ITA No. 542/Mum/2012]: where in the TPO applied
a rate of 3% on Corporate Guarantee provided by the Assessee instead of rate of 0.5%
provided by the tax payer. The ITAT, Mumbai bench held that the independent
transaction of the assessee under which it has paid 0.6 per cent guarantee commission
to ICICI Bank for its credit arrangement could be a very good parameter and a
comparable for taking it as internal CUP and comparing the same with the transaction
with the AE. The charging of 0.5 per cent guarantee commission from the AE is quite
near to 0.6 per cent. Therefore, charging of guarantee commission at the rate of 0.5 per
cent from its AE can be said to be at arms length
2. Glenmark Pharmaceuticals Ltd v. Addl. CIT [TS-329-ITAT-2013(Mum)]: ITAT, Mumbai
in this case has differentiated between a Bank Guarantee and a Corporate Guarantee
and held that rates available on public domains cannot be mechanically applied. If
proposed to be used, the bank guarantee has to be adjusted for differences such as i.)
risk profiles of the respondents for the guarantee (ii) financial position of the loan
applicants (iii) term of guarantee (iv) security involved (v) quantum of guarantee (vii)
period of guarantee (viii) past history with the customers and held that 0.53% and 1.47%
on loans and Letter of Credit was at Arms Length.

3. Prolifics Corporation Limited Vs DCIT, Circle 3(1) [ITA No. 237/Hyd/2014]: ITAT,
Hyderabad held that the provision of guarantee always involved a risk and there is a
provision of service in as much as increasing the creditworthiness of the AE for obtaining
loans in the market, be from Financial Institutions or from others. Thus, ITAT upheld the
adjustment made of guarantee commission but reduced the rate to 0.53% being the
Arms Length rate after considering ruling in the case of Glenmark Pharmaceuticals.
Thus, it has been very clearly settled that Guarantee provided to the AE would fall under
the purview of International Transaction subject to Arms Length Computation.
As far as the rate of commission is concerned, the comparable rates of the banks may
be used, but only after taking into consideration all the facts and circumstances. Internal
comparable, if available, may be a good indicator.
External rates or the rates available on the banks website should be used only after
carefully analyzing the circumstances under which particular rates have been applied.
The Honble Tribunal in an earlier decision in respect of guarantee commission had
rightly observed that there is no need for making any adjustment on the basis of the
naked quote available in the website of the bank where the rates vary from 0.15 per
cent to 3 per cent.