Transactions having contingent impact on profit/ losses are not international transactions

Brief of the case:

• The ITAT bench of Mumbai in the above cited case law held that any contingent impact on profit/loss would not take the transaction to fall within the purview of international transaction. In the present case , giving of corporate guarantee on behalf of loans given to overseas subsidiaries there can be a hypothetical situation in which a guarantee default takes place making  the enterprise liable to  pay  the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation
• Therefore, such transactions cannot be treated as having bearing on profit/losses and consequently cannot be included in the definition of international transaction.
  

Facts of the case:

• The assessee is a clinical research organization rendering clinical research services to its clients mainly conducting clinical trials in the pharmaceutical, biotechnology and medical devices related sectors. In the course of scrutiny assessment proceedings the Transfer Pricing Officer noted that while the assessee has given a guarantee, on behalf of its associated enterprises Sir Clinpharm Germany GMBH, Germany to ABN Amro Bank for Rs 19.44 crores, and on behalf of Sir Clinpahrm Singapore Pvt. Ltd, Singapore, to DBS Bank for Rs 16.20 crores.
• Assessee did not charge any fee or commission to subsidiaries (associated enterprises) for issuance of these guarantees in their favour and so far as the bank charges by levied by the lending banks the assessee was duly reimbursed the same by the associated enterprises concerned.
• It was in this backdrop that the Transfer Pricing Officer required the assessee to show cause as to why an arm’s length price adjustment @ 3% not be made for the guarantee issued by the assessee in favour of its associated enterprises. Transfer Pricing Officer(TPO) concluded that thus, in all respects, the guarantee provided by the assessee to the lenders of its associated enterprises is a ‘service’ provided by the assessee to its AE, and, hence, assessee should have charged fees at an arm’s length price.
• He noted that as per information gathered from the State Bank of India, the bank is charging a guarantee fees of 1.75% on guarantees above Rs 10 crore. Considering the cost , functional and geographical differences the TPO adopted 3% as an arm’s length price for issuance of the guarantee issued by the assessee. On this basis an ALP adjustment of Rs 1,13,40,000 was  proposed appropriate by the Transfer Pricing Officer.
• The CIT(A) also upheld the order of AO holding that whether or not it is the business of the assessee , the facts remains that the it has given corporate guarantee for the loan to be availed by the AEs which has benefited the AE and has effect on income, profit or assets of the assessee  and AE. Such activity on the part of the appellant being an international transaction has to be judged from the perspective of transfer pricing regulations and consequent income of this international transaction has to be determined having regard to arm’s length price.
• Aggrieved assessee is in appeal before tribunal.

Contention of the Assessee: