An Indian company that provides a bank guarantee (BG) against a loan taken by a subsidiary abroad will now have to pay tax here for standing guarantee for its associate, irrespective of whether or not it has received a commission from the latter for the BG. Seven companies which have provided bank guarantees against loans taken by their subsidiaries abroad are already under the tax net of India’s transfer pricing administration, a senior income-tax official said.
However, from the current fiscal (FY10), the TP orders are subject to approval of the recently instituted Dispute Resolution Panel (DRP), a collegium of three members, two commissioners and a director, International Taxation. An aggrieved taxpayer can appeal before DRP, whose order (if at variance with the TP regime) becomes binding on the department.
The international practice is to charge the associate parties abroad a rate ranging from 0.5 % to 3 % of the bank loans advanced to them, for which the Indian parent stood guarantee. The TP administration took a stand that since the Indian companies were taking huge risks by standing guarantee to the loans taken by their subsidiaries abroad, the latter are obliged to pay a service charge to the parent company in India. Therefore,transfer pricing officers in India found it reasonable to levy a tax on the Indian company which provided the bank guarantee. Tax regimes in other countries also levy a tax on such transactions, informed the official.
At present, the TP administration directs companies here to pay tax if they had arranged to give bank guarantees to their subsidiaries abroad, irrespective of whether or not the associates had actually made payments to them.
“This is the common practice of TP regimes in other countries too,” said TP Ostwal, member of the erstwhile Transfer Pricing Committee, which drafted India’s transfer pricing rules. “But such a practice requires application of mind. In many cases, the parent companies do not charge the associate companies purely on account of the bank guarantee arranged for their them.”
Samir Gandhi, partner of Deloitte & Haskins, said, “Each case should be treated separately. It is not correct to presume that associates pay a service charge to every guarantee given by the Indian parent company. Most of the guarantees are given for financing mergers and acquisitions abroad. In such cases associates do not pay a service charge to the parent company which stood guarantee for the bank loans.”
Vispi T Patel, independent consultant on transfer pricing, agreed. “The Organisation for Economic Cooperation and Development (OECD) levies a tax on such guarantees. But conditions in India are different. We cannot be harsh on Indian companies trying to go global,” he said.
Transfer Pricing Rules took effect in India in 2001 for the purpose of checking loss of revenue arising from cross-border transactions between related parties. The actual value of transactions may get suppressed if they not at arm’s length. TP Rules have been put in place to ensure that the taxpayer furnishes enough documentary proof in support of the declared value of these transactions.