The ITAT Hyderabad case involved a taxpayer that provided corporate guarantees to its overseas subsidiary without receiving any remuneration. The tax officer determined this constituted an international transaction requiring arm's length pricing and imposed a transfer pricing adjustment, treating the bank commission rate as the appropriate guarantee fee. The taxpayer argued guarantees do not involve costs or risk. The court held corporate guarantees are international transactions that require remuneration and benchmarking, and cannot be equated to bank guarantees. The case was remanded to determine an appropriate guarantee fee rate.

1. Weekly
1st
-6th
April 2014
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Four Soft Pvt. Ltd: ITAT- Hyderabad
Decision Outcome: Against the Taxpayer
Category: Receipt of Guarantee fees
 The Taxpayer is engaged in providing services in enterprise solutions by operating software products
and services in ITES sector for the logistics industry
 The Taxpayer is a parent company of subsidiaries in Denmark, Singapore, Netherland and Malaysia
 During the Financial Year (FY) 2006-07, the taxpayer has entered in to international transaction of
provision and receipt of services from its Associated Enterprises (AEs), provision of loans and other
reimbursements
 Further, for the relevant FY, the taxpayer also provided Corporate Guarantee on behalf of its Overseas
Subsidiary based out of Netherland i.e. AE
 No remuneration for provision of such Corporate Guarantee was received from the AE
 The Tax Officer following the order of previous year i.e. FY 2005-06 treated the commission charged
by ICICI Bank at 3.75% as an arm’s length remuneration for Corporate Guarantees and proposed a
Transfer Pricing adjustment of Rs. 2.62 crores
 Taxpayer submitted that the corporate guarantee is nothing but an additional guarantee provided by
the parent company and it does not involve any cost or risk to the shareholders
 It was further submitted that the retrospective amendment effected to definition of International
Transaction has not enlarged the scope to include Corporate Guarantees
 The Tax Court held as follows:
 Corporate Guarantee comes within the scope of amended definition of International Transaction
and hence needs to be remunerated, reported and benchmarked
 A Corporate Guarantee cannot be equated to a bank guarantee and hence the rate applied by
the tax officer of 3.75%, which is a bank guarantee rate needs to be re-visited
 Relying on the decision of Infotech Enterprise, the case has been remanded back to the files of
tax officer to ascertain appropriate rate of Guarantee fees for such transaction