Corporate guarantee provided to associated enterprises is not an international transaction

Four Soft Limited vs. DCIT (ITAT Hyderabad)

Interest rate for providing loans -Tribunal held that ALP as regards foreign currency loans is to be determined on international loan and not for the domestic loan and hence corporate bonds cannot be taken for comparability. The Tribunal further held that LIBOR is an internationally well recognized rate for benchmarking loans denominated in foreign currency. The Tribunal also relied on the case of Siva Industries and Holdings Limited.

Corporate Guarantee to banks on behalf of subsidiaries – The Tribunal held that corporate guarantee given by Indian company to its subsidiary outside India would not fall within the definition of ‘international transaction’. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction under the purview of transfer pricing. The Tribunal observed that corporate guarantee is very much incidental to the business of the taxpayer and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution.

Source: Four Soft Limited vs. Deputy Commissioner of Income Tax (ITA No. 1495/HYD/2010) Hyderabad Bench of the Tribunal dated 9 September 2011

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