Micro Ink Ltd. v. Addl. CIT

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPAdjustment for providing corporate guarantee--During the course of the proceedings before the TPO, it was noted that the assessee had issued various corporate guarantees on behalf of its associated enterprises, i.e., subsidiaries. It was also noted that guarantees were issued without charging the AEs any consideration for the same. The stand of the assessee was that these guarantees did not cost assessee anything nor any charges were recovered for the same, and that the “said guarantees were in the form of corporate guarantees/quasi-capital and not in the nature of any services. The TPO, however, proceeded to compute arm's length price for these guarantees @ 2 per cent. It was on this basis that an ALP adjustment was proposed on account of notional charges for corporate guarantees issued by the assessee. The assessee did raise an objection against this proposed adjustment by the TPO but without any success. The DRP confirmed the order of TPO. Held: The assessee's claim of the guarantees being in the nature of quasi-capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity was not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, cannot, therefore, amount to a “provision for services”. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. So far as arm's length test is concerned, it pre-supposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus, the MNE group as a whole. As a plain look at the details of corporate guarantees would show, that these guarantees were issued to various banks in respect of the credit facilities availed of by the subsidiaries from these banks. In the light of these discussions, which are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in respect of which arm's length adjustment can be done. Since such issuance of corporate guarantees, on the facts of the present case, did not have “bearing on profits, income, losses or assets”, it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment could be made. In this view of the matter, and for both these independent reasons, the impugned ALP adjustment had to be deleted.