ITAT Quashes ₹16.48 Cr TP Adjustment on Negative Lien vs. Guarantee

JOGPL Pvt. Ltd Vs DCIT (ITAT Delhi)

ITAT: Holds negative lien, on receivables and participating interest on oil-&-gas blocks, not corporate guarantee

Facts:

• JOGPL Pvt. Ltd. (“the assessee”) is an Indian company engaged in oil and gas exploration and production. It is a wholly owned subsidiary of JEE Energy Ventures Pvt. Ltd. (“JEEVPL”), a holding company that, along with its group entities, is engaged in a wide range of energy and natural resources businesses across India and abroad.
• During the relevant assessment year (AY 2017–18), two of the assessee’s associated enterprises (AEs) — Jubilant Energy BV (“JEBV”) and Jubilant Energy Holdings BV (“JEHBV”) — obtained substantial loan facilities from the Export-Import Bank of India (Exim Bank) to finance their oil and gas exploration and development projects. The details of the loans were as follows:

1. USD 50 million granted in August 2011 to JEBV.

2. USD 45 million granted in January 2014 to JEHBV.

• These loans were intended to fund exploration and production activities in oil and gas blocks located both in India and overseas. As part of the financing arrangement, the parent company, JEEVPL, provided a corporate guarantee to Exim Bank, undertaking to repay the loan in case the borrowing entities defaulted.
• Additionally, JOGPL (the assessee) was required to provide a negative lien over its receivables and participating interest (PI) in the oil and gas blocks. A negative lien is essentially a contractual commitment not to sell, transfer, mortgage, or otherwise encumber certain specified assets without the lender’s prior consent. It does not involve any legal or financial obligation to repay the debt if the borrower defaults — it merely restricts the owner’s ability to dispose of or encumber those assets.
• Importantly, JOGPL did not charge any fee to its AEs for providing the negative lien. However, the Transfer Pricing Officer (TPO) held that this negative lien amounted to a corporate guarantee under transfer pricing law and, therefore, constituted an “international transaction” within the meaning of Section 92B of the Income Tax Act, 1961. Applying the Comparable Uncontrolled Price (CUP) method, the TPO determined a notional guarantee fee of 677% (6-month LIBOR plus 143 basis points), leading to a transfer pricing adjustment of Rs.16.48 crore.
• The assessee argued that the TPO’s characterisation of the negative lien as a corporate guarantee was incorrect in law and fact. It explained that a negative lien is not a financial instrument and does not create any liability or obligation on the part of the assessee. It is simply a contractual undertaking that restricts the sale or encumbrance of assets without the lender’s consent. Even if the associated enterprises defaulted on their repayment obligations, JOGPL would not be required to make any payment to Exim Bank.
• The assessee further argued that such a negative lien does not provide any financial service or measurable economic benefit to the associated enterprises. It merely provides comfort to the lender that the borrower’s assets will not be disposed of or encumbered without consent. Since there was no benefit or service provided, there was no “transaction” that could be characterised as an international transaction for transfer pricing purposes.
• The assessee relied on judicial precedents, most notably the Bombay High Court decision in Bank of India v. Rustom Fakirji Cowasjee (AIR 1955 BOM 419), which held that a negative lien does not grant a lender the right to sell or dispose of property and therefore cannot be equated with a security interest or guarantee. It also referred to earlier ITAT decisions where negative liens were held not to constitute corporate guarantees.
• The TPO, however, rejected the assessee’s arguments. He observed that the negative lien provided tangible benefits to the associated enterprises by helping them obtain loans on more favourable terms and reducing the lender’s risk exposure. In the TPO’s view, this economic benefit was sufficient to treat the negative lien as a corporate guarantee.
• By equating the negative lien to a guarantee, the TPO held that the transaction fell within the ambit of Section 92B. Using the CUP method, the TPO benchmarked the transaction by applying a guarantee fee of 2.677% and proposed a transfer pricing adjustment of Rs.16.48 crore. The Dispute Resolution Panel (DRP) agreed with the TPO’s reasoning and upheld the adjustment, rejecting the assessee’s contentions.

Issues:

• Whether the negative lien provided by the assessee to Exim Bank could be treated as equivalent to a corporate guarantee and, therefore, classified as an international transaction under Section 92B of the Income Tax Act.
• Whether the transfer pricing adjustment made by the TPO was justified and whether benchmarking under the CUP method was appropriate.

Observations:

• Nature of Negative Lien: The Tribunal held that a negative lien is merely an agreement not to sell, transfer, or encumber certain assets without the lender’s consent. It does not impose any legal or financial obligation on the assessee to repay the loan or bear the borrower’s liabilities in case of default. There is no enforceable right for the lender to claim payment from the assessee under a negative lien.
• Absence of Economic Benefit: Since the negative lien does not involve the provision of a service or confer any measurable economic benefit on the associated enterprises, it cannot be characterised as an “international transaction” under Section 92B.
• Judicial Precedents: The Tribunal relied on the Bombay High Court decision in Bank of India v. Rustom Fakirji Cowasjee, which clearly held that a negative lien does not grant a lender the right to sell or dispose of the underlying property. It also referred to earlier ITAT rulings — including JE Energy Ventures Pvt. Ltd. — which held that negative liens do not amount to corporate guarantees.
• No Benchmarking Required: Once it was established that the transaction did not qualify as an international transaction, there was no need to benchmark it under the CUP method or make any transfer pricing adjustment. The Tribunal concluded that the Rs.16.48 crore adjustment proposed by the TPO was without legal basis and therefore unsustainable.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The assessee JOGPL Pvt. Ltd. (hereinafter referred to as ‘tax payer)by filing the present appeal sought to set aside the impugned order dated 31.05.2022 passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 31.03.2022 u/s 144C(5) of the Act dated 31.03.2022 and order passed by Transfer Pricing Officer (TPO) under section 92CA(3) dated 27.01.2021 under section 92CA(3) of the Income Tax Act, 1961 (for short ‘the Act’) qua the assessment year 2017-18.

2. The Ground No.1raised by the assessee is general in nature and does not require any specific adjudication.

3. The Ground Nos. 2 and 2.1 raised by the assessee were stated to be notpreseed by the Learned AR at the time of The same is reckoned as a statement made from the Bar and accordingly the Ground Nos. 2 & 2.1. raised by the assessee are hereby dismissed as not pressed.

4. The Ground Nos. 3 to 3.3. raised by the assessee are challenging the transfer pricing addition of Rs 16,48,31,724/- made by the Learned TPO on account of corporate guarantee.

5. We have heard the rival submissions and perused the materials available on record. The assessee is a subsidiary of JEE Energy Ventures Ltd. (JEEVPL) and engaged in the business of oil and gas exploration and production. The assessee has entered into production sharing contract jointly with various joint venture partners as one part and Ministry of Petroleum and Natural Gas, Government of India for blocks in India and with Myanmar and Oil and Gas Enterprise for the block in Myanmar as other part of exploration of oil and gas. During the year under consideration, the assessee entered into an international transaction of provision of negative lien on receivables and participating interest (PI) on the oil and gas blocks. The background of the arrangement is as under:-

6. Loan 1

In August 2011, Jubilent Energy BV (JEBV) entered into a loan arrangement with Export-Import Bank of India (Exim Bank) for USD 50 million loan facility. The above loan was provided by Exim Bank to the borrower for the purpose of part financing the borrower’s exploration, development and production expenses incurred / to be incurred in various oil and gas assets of the borrower or its subsidiary companies in India and overseas. In relation to this, the undermentioned guarantee / counter guarantee was provided by the group companies on behalf of JEBV.

Loan 2

In January 2014, Jubilant Energy Holdings BV (JEHBV) entered into a loan arrangement with Exim Bank for USD 45 million loan facility bearing interest rate of 6 month LIBOR plus 650 basis points. The above loan was provided by Exim Bank to JEHBV for the purpose of investments in / on lending to subsidiaries of JEHBV for exploration, development and related production activities incurred / to be incurred in various oil and gas assets . In relation to the above loans, corporate guarantee was also provided by JEEVPL in favour of Exim Bank guaranteeing in its corporate capacity the due repayment of the dollar loan and payment of interest thereon and all costs, charges, expenses and other monies payable by JEHBV to Exim Bank under the loan agreement. Pursuant to the corporate guarantee provided by JEEVPL, JOGPL (assessee herein) also provided a negative lien on all receivables and PI on all oil and gas blocks held by JOGPL. No fee was paid by the associated enterprises (AEs) to JOGPL for this arrangement . For the above mentioned loan agreements entered into by JEEBV and JEHBV with Exim Bank , JEEVPL i.e. the ultimate parent company has provided primary corporate guarantee on behalf of JEEBV and JEHBV.

The negative lien on receivables and PI in the oil and gas blocks held by the subsidiary company i.e. assessee puts the assets of the operational subsidiary as security which are already owned and controlled by the borrower being the holding company. Thus, it is a typical example of built and brace policy where the bank has tried to cover a bundle of duplicative securities by this arrangement, but in essence has got access to the assets ultimately owned and controlled by the borrower company and has not got access to any additional assets over and above the assets owned by the borrower. Based on the above, no fee is warranted from the AEs by the assessee in relation to the above arrangement.

7. The Learned TPO disregarded the approach of the assessee and observed as under :-

a) Explicit guarantees are those where a direct assurance is given by an

b) The assessee has provided an explicit guarantee for its AEs for obtaining the credit facilities resulting in direct benefit to the AE.

c) Corporate guarantees fall under the envelope of international transactions as defined in Explanation to section 92B of the Act.

d) The Corporate guarantee was entered into to proactively influence the profits and incomes and even loans and assets of the AEs on future dates.

r) The assessee provided counter guarantee for the loans taken by the AEs.

With the above observations, the Learned TPO alleged that the negative lien given by the assessee is akin to the Corporate guarantee and proceeded to benchmark the same by applying Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM) for determining the Arm’s Length Price (ALP). The Learned TPO initially applied an average Indian bank rate of 2.23 percent on an ad hoc basis and proposed an adjustment of Rs 13,73,08,459/-. The assessee filed objections before the Learned DRP. During the course of DRP proceedings, the assessee placed reliance on the decision of Hon’ble Delhi High Court in the case of Cotton Naturals wherein the arm’s length price of the transaction was directed to be computed by applying LIBOR plus rate prevalent during the relevant period. Accordingly, in the final assessment order, the Learned TPO applied 6 months LIBOR which was 1.247 percent plus 143 basis points. Therefore, by applying the total interest rate of 2.677 percent, the Learned TPO made an adjustment of Rs 16,48,31,724/- which is worked out as under:-

8. The Learned AR stated that similar issue was subject matter of adjudication by this Tribunal in assessee’s sister concern case of JE Energy Ventures Private Limited vs DCIT for assessment year 2017-18 in ITA No. 513 / Del / 2022 dated 5-7-2024 wherein it was observed as under:-

“6. Considered the rival submissions and material placed on record. We observed from the record that the assessee has provided primary guarantee to its step down foreign subsidiaries against the loan taken by them and obligations towards servicing of the loan to EXIM Bank for first loan of USD 50 Million in the Financial Year 2011-12 and for second loan of USD 45 Million in the Financial Year 2013-14. It is fact on record that the assessee always classified the above guarantee as share holder activities, not provided any economic/commercial benefit to the lender as well as borrower and denied that this falls under the definition/category of corporate guarantee in the past. We observed that similar issue was considered by the coordinate bench in the AY 2013-14, in that AY, the assessee had received fee for providing corporate guarantee of Rs. 2.7 crores and with the similar facts on record, on appeal, the coordinate bench held that the services provided by the assessee to their step down subsidiary falls within the definition of Corporate Guarantee and remitted the issue back to the file of AO/TPO to bench mark the same as an international transaction. From the decision of coordinate bench, it is clear that the submissions of the assessee for performing shareholder services do not fall under corporate guarantee were rejected. Therefore, before us also, the assessee submitted the similar arguments and we are inclined to reject the same.

7. The issue has to be analyzed based on the facts of each year, coming to the real issue in this year under consideration are, the assessee has given corporate guarantee to its step down subsidiaries while availing the loan by them in the past. In order to bench mark the transaction, it has to be evaluated every year and it cannot be held that once the guarantee is given in the past, it continued to have impact on every assessment year subsequently. In this case, the assessee has given guarantee towards the loan and primary obligation of servicing the loan to the bank when they granted loan to the step down subsidiaries. No doubt the assessee also collected fees for providing the guarantee in the past, as per records, the assessee has collected 2.7 crores in the AY 2013-14. It was adjudicated in AY 2013-14 that this transaction falls within definition of the international transaction. However, the facts are different in this AY considering the fact that the step down subsidiaries had not serviced the obligation towards the loan taken by them and the same were classified as non-performing assets (NPA) by EXIM bank. The same was intimated to the assessee on May 2016 and initiated the recovery proceedings from the assessee being the primary guarantor. The assessee being the holding company, it is aware of the situation prior to the intimation received from the bank ie., in the previous year itself. Once the situation is apparent and recovery proceedings are commenced, the guarantee seized to exist at the beginning of the year itself. It is not something happens over night. The banks classify the loan as NPA after providing several opportunities and discussions. This process must have commenced prior to the intimation of default by the bank in the month of May 2016. That being so, the corporate guarantee provided by the assessee seizes to exist in the beginning of the year itself. Therefore, in our considered view, in the beginning of the year, there was no existence of any guarantee to the EXIM bank and it is also relevant to notice that the assessee has not recovered any fees for guarantee, as in the past, during the year under consideration and the EXIM bank has initiated the recovery proceedings from the assessee. The liability of the assessee towards the guarantee are restricted to the extent of its investments in the subsidiaries and to the extent of recovery of the assets held by the subsidiaries. Therefore, the liabilities of the assessee was converted from guarantor to the actual liabilities to the extent of default by the step down subsidiaries, absolutely nothing left for the assessee itself to recover from its subsidiaries till the bank recovers their dues. Similar submissions were made by the Ld DR and are not in agreement of the views. Further, no doubt, as per the submissions of the Ld DR, the statutory provisions may cause hardship or inconvenience but court has no choice but to enfore it, irrespective of the situation, the transaction has to be bench marked. After considering the facts on record, what is relevance is whether the guarantee existed at the commencement of the impugned AY, in this case, in our opinion, the assessee was aware as well as the intimation received from the bank in the month of May itself, therefore, there was no guarantee existed as soon as the intimation of classification of NPA. It is crystallized/non- existence of the guarantor in the beginning of the year itself, therefore, we cannot presume that the corporate guarantee existed, hence, there is no possibility that the assessee has continued the guarantee, in our view for this AY, there is no international transaction. Therefore, the TPO was wrong in initiating proceedings to bench mark corporate guarantee as there is no international transaction at the first place.

8. Coming to the issue of method adopted by the TPO is proper or not, since we held that there is no international transaction existed relating to corporate guarantee in this assessment year, it is irrelevant at this stage to adjudicate on the issue of proper method adopted by the TPO or not. Accordingly, we direct the AO/TPO to delete the addition proposed in this AY. Accordingly, the ground no 1.2.3 raised by the assessee is allowed and all other grounds relating to the issue of corporate guarantee are dismissed.

9. The Learned AR before us sought to explain the meaning of negative lien to state that negative lien means an undertaking by the owner of assets to a lender not to sell these assets on which a charge or a lien without the prior permission of the It is an undertaking of convenience for not to sell the encumbered assets. It does not create any liability on the assessee. Whereas in case of corporate guarantee, the guarantor has to make good in case borrower defaults. Negative lien does not imply that in case of default by JEEBV or JEHBV on the loan taken from Exim Bank, the assessee shall reimburse Exim Bank. Negative lien is a negative covenant which restricts a person from creating any kind of encumbrance over his assets or otherwise disposing them without the prior consent of the other person in whose favor he has given such an undertaking. The rationale for negative lien was to provide additional comfort to the Exim Bank that the assets based on which loan was granted to JEEBV and JEHBV, which included oil blocks held by the assessee indirectly controlled by through their shareholding, no additional charge was created by the assessee. The operating subsidiaries of JEEBV and JEHBV allowed a negative lien on the PI and receivables thereof only to provide additional comfort to the lender. Accordingly, the negative lien by the assessee does not provide any financial benefit / service to JEEBV or JEHBV.

9.1 Exim Bank had considered the consolidated financial strength of JEEBV and JEHBV, which included the oil blocks owned by assessee, at the time of granting of loan. Further, the Hon’ble High Court has provided guidance on the definition of negative lien in the case of Bank of India vs Rustom Fakirji Cowasjee, reported in AIR 1955 BOM 419, wherein it has been held that negative lien does not give the right to the lender of selling the assets. Accordingly, the negative lien by assessee does not provide any financial benefit / service to JEEBV or JEHBV. Even if the borrowers default in payment of loan, there will be no liability on assessee for paying any amount since assessee is not a guarantor.

10. We also find that the issue in dispute is also covered by the decision of this Tribunal in the case of JE Energy Ventures Private Limited vs ACIT in ITA No. 1450 / Del / 2022 for assessment year 2018-19 dated 13-12-2024, wherein this Tribunal by following the decision of this Tribunal for assessment year 2017-18 referred supra had observed as under:-

8. Taking into consideration the foresaid conclusion of the coordinate bench we are of the considered view that certainly once the international transaction arising out of the guarantee given for the benefit of AE goes, then what is left is a transaction between the assessee and the EXIM Bank only, which are unrelated parties. The vital constituent of an international transaction is that the same should be between associated enterprises. However, Section 92B(2) of the Act outlines the circumstances under which a transaction between two persons would be deemed to be between the associated enterprises.

9. What is important is to be examined now is if for the purpose of section 92B(2) of the Act, the assessee’s transaction with EXIM Bank is an independent transaction or a prior agreement between the assessee and its AE, makes the assessee’s transaction with EXIM Bank a deemed international transaction.

10. In this context, if the copy of guarantee deeds are examined, copy of which is placed at pages 117 to 147 of the paper book, it is apparent that in the deed of guarantee the assessee is referred as guarantor and the AE as borrower. Thus without doubt the foundation to the deed of guarantee, between the assessee and EXIM Bank, is the loan agreement between the EXIM Bank and AE, who are referred as borrower in the deed of guarantee. Thus, for the purpose of section 92B(2), the assessee’s transaction with EXIM Bank is, no doubt, the outcome of a prior agreement in relation to the relevant transaction of guarantee between the assessee and the EXIM Bank.

11. Thus, the finding of a coordinate Bench in favour of the assessee holding that there is no more any international transaction left with regard to assessee providing guarantee to AE is actually not relevant to examine the alleged international transaction of loan, between the assessee and the AE, arising out of invocation of guarantee by the EXIM Bank. In this context we are of considered view that this question of deemed loan would be dependent on discharge of debt of AE towards EXIM Bank after any payment is made by assessee or any recovery is enforced by EXIM Bank by any other mode of recovery of the guarantee amount. As the AE for whom the assessee entered into bank guarantee has not been benefitted by discharge of its debt and liability and same still stands. Thus actually so far there is no crystallized liability of the assessee.

12. At the same time, no cost or expense has been allocated or apportioned by the assessee in the books by the assessee on account of invocation of guarantee, so to say that such cost or expense allocated or apportioned in any way has the effect of reducing the income chargeable to tax or increasing any loss as the case may be to be computed on the basis of entries made in the books of account in respect of the previous year in which this alleged international transaction of deemed loan was entered into.

13. In this context we would also like to mention that Section 140 and Section 141 of the Indian Contract Act, 1872 deals with the principle of subrogation with regard to the rights of a surety or It states that if the debt guaranteed by the surety becomes due or if the principal debtor fails to perform a guaranteed duty, the surety, upon payment or performance of the guaranteed debt, is entitled to all the rights that the creditor had against the principal debtor. In other words, once the surety has paid the guaranteed debt, they are subrogated to the rights of the creditor against the principal debtor. This means that the surety can exercise all the rights that the creditor had against the principal debtor, such as the right to recover the amount paid from the principal debtor, and any security held by the creditor for the debt. The surety can also guarantee amount. As the AE for whom the assessee entered into bank guarantee has not been benefitted by discharge of its debt and liability and same still stands. Thus actually so far there is no crystallized liability of the assessee.

14. Thus, we are of the considered view that Id. tax authorities below have fallen in error in proceeding with a proposition that the guarantee once invoked by the EXIM Bank became a debt towards the EXIM Bank on account of AE so as to treat the same as loan to AE and to charge an arm’s length interest on the same. Consequently, the grounds of the assessee are sustained. The appeal of assessee is allowed and the impugned enhancement is quashed.”

11. Respectfully following the same, we hold that the negative lien on receivablesand PI on the oil and gas blocks given by the assessee cannot be equated with corporate guarantee and hence would be outside the ambit of definition of international transaction under section 92B of the Act thereby warranting no benchmarking at all . Since no benchmarking of the said transaction is required, the other grounds raised by the assessee on the validity of adopting the interest rate of 2.677 % need not be gone into and it is left open. Hence the Ground No. 4 raised by the assessee becomes consequential to Ground No. 3 as stated supra.

12. The Ground No. 5 raised by the assessee is challenging the initiation of penalty proceedings under section 270A of the Act which would be premature for adjudication at this stage and hence dismissed.

13. The Ground No. 6 raised by the assessee is challenging the interest under section234A, 234B, 234C and 234D of the Act. With regard to interest under section 234A of the Act, the learned AO is directed to verify whether the return has been filed by the assessee within the due date prescribed under the Act read with extension given by the CBDT from time to time for the year under consideration. Accordingly, the interest under section 234A of the Act is to be decided. The chargeability of interest under section 234B and 234D of the Act is consequential in nature. With regard to interest under section 234C of the Act, the law is well settled that the same shall be charged only on the returned income and not on the assessed income.

14. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 08/10/2025.