LAQSHYA MEDIA P.LTD,MUMBAI vs. DCIT 10(2)(1), MUMBAI

The brief facts of the case are that the assessee, Laqshya Media Pvt. Ltd., was engaged in the advertising business and had entered into various international transactions with its Associated Enterprises.

During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer for computation of the arm’s length price of the international transactions. The TPO observed that the assessee had given a corporate guarantee in favour of its Associated Enterprise, Laqshya Media International, Mauritius (“LMI”), which in turn had provided guarantees to HSBC Bank Middle East Ltd., Dubai and National Bank of Dubai in respect of loans availed by the assessee’s step-down subsidiary, Right Angle Media FZ LLC (“RAM”), Dubai. The assessee had initially extended corporate guarantee of AED 53 million and the same was subsequently reduced to AED 51 million. Though the guarantee was initially carrying a commission at 0.5%, the assessee waived the guarantee commission on account of the weak financial position of LMI (Mauritius.). The assessee did not benchmark the transaction in its transfer pricing study on the ground that issuance of corporate guarantee was not an “international transaction” within the meaning of section 92B of the Act.

The TPO did not accept the above position. He treated the provision of corporate guarantee as an international transaction and computated arm’s length price on this transaction. For this purpose, the TPO obtained information regarding yields on debt instruments from CRISIL under section 133(6) of the Act. The TPO assigned a credit rating of BB+ to the assessee and B+ to the Associated Enterprise and, on that basis, took an annualised yield of 13.71% for the assessee and 16.46% for the AE in respect of five-year unsecured bonds. The Transfer Pricing Order treated the difference of 2.74% as the benefit arising to the AE from the guarantee given by the assessee. Applying this rate to the guarantee amount, the TPO made an adjustment of ₹1,71,18,150 under section 92CA(3) of the Act.

Before the DRP, the assessee objected to the characterization of the corporate guarantee as an international transaction and relied on the decision of the Delhi Bench of the Tribunal in Bharti Airtel Ltd. The assessee contended that the assessee had not incurred any cost in providing the guarantee and the guarantee had been provided as a shareholder and parent-company activity to protect its investment, goodwill and overseas business interests. The assessee further contended that the Explanation to section 92B inserted by the Finance Act, 2012 could not retrospectively enlarge the scope of the expression “international transaction”. Without prejudice to the above, the assessee also changed the benchmarking done by the TPO and contended that the credit ratings of the holding company and the subsidiary had not been correctly appreciated, a five-year unsecured bond yield was not comparable since the guarantee was effectively for about 40 months, the internal CUP ought to have been preferred over external CUP, and the adjustment, should have been restricted to the amount of loan actually availed and outstanding rather than being computed on the entire guarantee amount. The assessee also pointed out that the assessee had initially charged commission at 0.5%, which was subsequently waived because of the financial position of the AE.

The DRP rejected the objections of the assessee. It held that the Finance Act, 2012 had specifically clarified through the Explanation to section 92B that provision of a guarantee is an international transaction and, therefore, the assessee’s contention that the corporate guarantee was outside Chapter X could not be accepted. The DRP also held that the decision of the Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT (Appeals),[2007] 288 ITR 1 (SC), was not applicable to the issue of corporate guarantee, since that decision dealt with allowability of interest expenditure under section 36(1)(iii) of the Act on the ground of commercial expediency, whereas the present issue involved computation of the arm’s length price of an international transaction under the transfer pricing provisions.As regards the decision in Bharti Airtel Ltd[2014] 43 taxmann.com 50 (Delhi - Trib.), the DRP distinguished the same on facts and observed that the guarantee in the present case created an encumbrance and additional leverage upon the assets of the assessee and, therefore, could not be regarded as having no bearing on its assets. The DRP further accepted the TPO’s order that the credit standing of the assessee and the AE could not be regarded as identical and observed that, had their credit standing been the same, there would have been no requirement for the assessee to furnish an additional guarantee. The DRP accordingly approved the TPO’s order and upheld both the characterization of the transaction and the adjustment of ₹1,71,18,150.

The assessee is in appeal before us against the order passed by DRP dismissing the objections of the assessee.

At the time of hearing, the learned Counsel for the assessee confined his arguments only to the grounds relating to the transfer pricing adjustment made on account of the corporate guarantee given by the assessee in respect of its Associated Enterprise. No arguments were taken on the remaining grounds of appeal. We, therefore, restrict our adjudication to the grounds relating to the corporate guarantee and computation of its arm’s length price under the transfer pricing provisions of the Act. The other grounds of appeal, having not been argued before us, are not being adjudicated upon and no finding on their merits is being given in the present order.

We have heard the rival submissions and perused the material available on record. The issue for our consideration is the computation of the arm’s length price of commission in respect of the corporate guarantee furnished by the assessee for its Associated Enterprise. The TPO computation the arm’s length guarantee commission at 2.74% by adopting a yield-based approach. For this purpose, he assigned a credit rating of BB+ to the assessee and B+ to the AE and compared the annualised yields of five-year unsecured bonds commensurate with these ratings. The difference between the two yields was treated by the Ld.

We are examining this issue in the light of the judgment of the Hon’ble Bombay High Court in the assessee’s own case in PCIT v. Laqshya Media (P.) Ltd. [2025] 171 taxmann.com 462 (Bom.). The Hon’ble High Court noticed that, in the earlier round, the Tribunal had restricted the corporate guarantee commission to 0.5% by relying upon CIT v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 (Bom.); [2015] 232 Taxman 307 (Bom.); [2015] 378 ITR 57 (Bom.), but had not specifically examined the comparability of the facts of the two cases or the method adopted for computing the arm’s length price. The matter was, therefore, restored to the Tribunal for fresh consideration in the light of the decision of the Hon’ble Supreme Court in SAP Labs India (P.) Ltd. v. ITO [2023] 149 taxmann.com 327 (SC); [2023] 293 Taxman 263 (SC); [2023] 454 ITR 121 (SC).

The relevant observations of the Hon’ble Bombay High Court in the assessee’s own case are as under:

The Hon’ble High Court further clarified that the decision of the Hon’ble Supreme Court in SAP Labs India (P.) Ltd. does not mean that comparable transactions considered in other cases cannot be taken into account. What is necessary is that the Tribunal must first satisfy itself regarding comparability. The Hon’ble High Court observed that “there can be no absolute proposition that the range of corporate guaranteed fees or determining the arm's length price should follow a particular range or formula.”

We have, therefore, examined the facts of the present case and compared them with the facts before the Hon’ble Bombay High Court in Everest Kento Cylinders Ltd. (supra) instead of merely applying the rate of 0.5% on the basis of that decision.

In Everest Kento Cylinders Ltd., the assessee had an overseas subsidiary in Dubai which required funds for its working capital and capital expenditure. The subsidiary obtained loans from ICICI Bank, Bahrain and the Indian parent company furnished a corporate guarantee for such borrowing. The assessee charged guarantee commission at 0.5%. The TPO rejected this rate and took a rate of 3% by relying mainly upon rates charged by commercial banks for issuing bank guarantees.The facts in the case of the assessee are similar. In the present case also, the assessee is the Indian parent/group company and the guarantee was furnished in connection with bank borrowings of its overseas step-down subsidiary, RAM, Dubai. The assessee furnished the corporate guarantee to LMI, Mauritius, which in turn guaranteed the borrowing of RAM from HSBC Bank Middle East Ltd., Dubai and National Bank of Dubai. Further, the assessee itself had initially proposed charging guarantee commission at 0.5%, though the same was subsequently waived because of the weak financial position of LMI (Mauritius). Thus, in both cases the transaction is essentially a corporate guarantee arising from the parent-subsidiary relationship and given to facilitate the borrowing requirements of an overseas group entity. In both cases, the parent company was not carrying on the business of providing guarantees to unrelated parties for profit. Most importantly, the rate of 0.5% was also the rate actually adopted or contemplated by the Indian parent company in both cases.

We therefore find sufficient factual similarity between the present case and Everest Kento Cylinders Ltd. for the purpose of considering the said decision. The fact that in the present case the guarantee was routed through LMI for the borrowing of the step-down subsidiary RAM, whereas in Everest Kento Cylinders Ltd. the guarantee was furnished directly for the borrowing of the subsidiary, does not, in our view, change the economic character of the transaction. In both cases, the corporate guarantee was furnished by the Indian parent/group company to facilitate the overseas group entity in obtaining bank finance.

The Hon’ble Bombay High Court in CIT v. Everest Kento Cylinders Ltd. (supra) specifically held that a corporate guarantee furnished by a parent company cannot be compared with a bank guarantee issued by a commercial bank. The relevant observations are:

The Hon’ble High Court further held:

The above distinction is important in the present case. A commercial bank issues guarantees in the ordinary course of its banking business with the object of earning income. Its pricing takes into account several factors viz capital requirements, credit risk, regulatory requirements and the return expected from its banking operations. A parent company furnishing a corporate guarantee for its subsidiary or step-down subsidiary stands on a different footing. Therefore, the pricing of an independent bank guarantee cannot be routinely adopted as the arm’s length price of a corporate guarantee.

We also find that the TPO in the present case has computed the rate of 2.74% by assigning notional credit ratings of BB+ to the assessee and B+ to the AE and thereafter comparing yields of five-year unsecured bonds. However, the actual transaction before us is not an issue of unsecured bonds either by the assessee or by the AE. Further, the guarantee in the present case was opportunity for about 40 months, whereas the TPO took the yield of five-year unsecured bonds. The benchmarking therefore depends upon credit ratings and yields of instruments which are not the same as the corporate guarantee transaction under consideration. The assessee had specifically raised these objections before the DRP.

In this regard, the decision of the Mumbai Bench of the Tribunal in Everest Kanto Cylinder Ltd. v. DCIT [2013] 34 taxmann.com 19 (Mum.- Trib.), which was subsequently affirmed by the Hon’ble Bombay High Court, is also relevant. The Tribunal observed:

While considering the appropriate CUP, the Tribunal in Everest Kanto preferred the internal comparable available in that case and observed:

In the present case also and the assessee itself had initially proposed to charge its AE guarantee commission at 0.5% and subsequently waived the same only on account of the weak financial position of the AE. This shows that the assessee itself had placed an economic value of 0.5% on the corporate guarantee transaction. In our view, this rate arising from the very transaction under consideration is a more reliable indicator than the 2.74% rate taken by Transfer Pricing Officer by comparing credit ratings and yields of five-year unsecured bonds.

The Hon’ble Supreme Court in SAP Labs India (P.) Ltd. (supra) observed that the arm’s length price cannot be computed by applying a fixed formula irrespective of the facts of a particular case. The Hon’ble Supreme Court has stated that the provisions of Chapter X and Rules 10A to 10E must be followed and the comparability analysis must be based upon the relevant material on record. The Hon’ble Bombay High Court in the assessee’s own case has also made it clear that there can be no fixed range of corporate guarantee commission applicable to every case.

Accordingly, respectfully following the principles laid down by the Hon’ble jurisdictional High Court in CIT v. Everest Kento Cylinders Ltd. (supra) and after carrying out the comparability examination as specifically required by the Hon’ble Bombay High Court in the assessee’s own case in PCIT v. Laqshya Media (P.) Ltd. (supra), read with the principles laid down by the Hon’ble Supreme Court in SAP Labs India (P.) Ltd. (supra), we hold that, on the peculiar facts of the present case, 0.5% is an appropriate arm’s length rate for the corporate guarantee furnished by the assessee. We accordingly direct the Assessing Officer/TPO to restrict the corporate guarantee commission to 0.5% and recompute the transfer pricing adjustment accordingly. The grounds of appeal relating to the corporate guarantee are partly allowed.

In the result, the appeal filed by the assessee is partly allowed.