“corporate guarantee”
The decision most relied on for corporate guarantee is HDFC Bank Ltd. v. DCIT (383 ITR 529), cited in 408 judgments on BharatTax.
Leading authorities on corporate guarantee
Where an assessee has sufficient interest-free funds, investments yielding exempt income are presumed to be made out of such funds, precluding disallowance of related interest expenditure under section 14A.
The Revenue cannot substitute its judgment for that of a businessman regarding the necessity or reasonableness of an expenditure. If an expense is incurred wholly and exclusively for business purposes, it is deductible, and the Revenue cannot question its commercial expediency.
Corporate guarantee fees are subject to transfer pricing rules, and adjustments may be needed to account for differences between corporate guarantees and more liquid bank guarantees when determining arm's length price.
A corporate guarantee issued to Associated Enterprises (AEs) is an international transaction under Section 92B, requiring adjustments for guarantee commission due to inherent risk. The reasonable arm's length rate for benchmarking such corporate guarantees can be determined using internal or external comparable uncontrolled prices.
For reopening an assessment, the Assessing Officer needs a reason to believe that income has escaped assessment, supported by tangible material that is not illusory or conjectural; conclusive proof of escaped income is not required at this stage. Even if the assessee made full disclosure, a complete failure by the Assessing Officer to apply mind during the original assessment can constitute tangible material for reopening.
A transfer pricing adjustment for corporate guarantees provided by an Indian entity to its Associated Enterprises (AEs) where no fees are charged can be estimated at approximately 0.20%. The arm's length principle applies to such intra-group corporate guarantee transactions.
Issuance of corporate guarantees does not constitute an international transaction under section 92B, particularly for guarantees provided before the 2012 amendment. Such guarantees are considered shareholder activities or quasi-capital and do not impact enterprise profits, income, losses, or assets.
Corporate guarantee fees cannot be subject to adjustment under the corporate guarantee, as it does not constitute an international transaction. Therefore, any addition made on this score is directed to be deleted.
