HCL's Corporate Guarantees For Overseas Subsidiaries Attract Transfer Pricing Provisions: Delhi ITAT

The Delhi Bench of the Income Tax Appellate Tribunal has held that corporate guarantees issued by HCL Technologies Ltd. to its step-down overseas subsidiaries amount to indirect financing and therefore qualify as international transactions requiring transfer pricing benchmarking.

Rejecting the Transfer Pricing Officer's reliance on commercial bank guarantee rates with an additional 200-basis-point mark-up, the tribunal held that an arm's length guarantee commission of 0.50% was appropriate.

A bench of Judicial Member Raj Kumar Chauhan and Accountant Member S. Rifaur Rahman observed, "Extending corporate guarantee is nothing but indirect financing. Therefore, in our view, the deeming provision applies in this case and as held in the case of Everest Kento Cylinders Ltd and other cases where the courts have held that corporate guarantee should be levied 0.50% on the outstanding corporate guarantees. In this case, the TPO had levied on the basis of notional commission plus markup of 200 basis points, in our view, which is not proper. Therefore, we are inclined to direct AO to sustain disallowance to the extent of 0.50% of the total outstanding guarantee at the end of each year under consideration, accordingly, partly allow relevant grounds on the basis of above observations"

The appeals arose from transfer pricing adjustments made for Assessment Years 2009-10, 2010-11 and 2011-12. HCL had furnished corporate guarantees on behalf of its overseas associated enterprises. The TPO treated the guarantees as international transactions and benchmarked them using commercial bank guarantee commission rates with an additional 200-basis-point mark-up. This resulted in guarantee commission rates of 2% for AY 2009-10 and 1.75% for AYs 2010-11 and 2011-12.

HCL argued that the guarantees were shareholder activities undertaken to protect its investments in its subsidiaries and therefore did not warrant any guarantee commission. Alternatively, it submitted that even if the guarantees were benchmarked, the TPO had wrongly relied on commercial bank guarantee rates. The company argued that judicial precedents consistently accepted a guarantee commission of 0.50%. The revenue supported the orders passed by the lower authorities.

The tribunal rejected HCL's primary contention. It held that corporate guarantees extended to step-down subsidiaries amounted to indirect financing and therefore fell within the deeming provision under the Explanation to Section 92B of the Income Tax Act.

However, it held that the TPO's adoption of commercial bank guarantee commission rates with a 200-basis-point mark-up was not proper. It directed the assessing officer to restrict the guarantee commission to 0.50% of the outstanding guarantees for all three assessment years.

Following earlier decisions in HCL's own case, the tribunal allowed the company's claim for deduction on profits earned by export-oriented units under Section 10A of the Income Tax Act, ESOP expenditure, and mark-to-market losses on forward contracts.

It restored the issue relating to software licence fees to the assessing officer for fresh examination. The tribunal also restored HCL's claim relating to foreign exchange losses for assessment years 2010-11 and 2011-12 to the assessing officer for fresh consideration in light of the Supreme Court's decision in Woodward Governor India Pvt. Ltd.

For Assessee: Advocate Ajay Vohra, Senior Advocate with Ms. Kavita Jha,

For Revenue: G.S. Rana, CIT-DR