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