Bombay HC upholds 0.5% Corporate Guarantee Fee for Transfer Pricing, Grants Relief to Zee Entertainment [Read Order]

TheBombay High Court, recently has restricted the arm’s length corporate guarantee commission to 0.5% on corporate guarantees extended by Zee Entertainment Enterprises Limited to its associated enterprises (AEs).

Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla, viewing the decision of Commissioner of Income Tax v. Everest Kanto Cylinders Ltd, rejected the income tax department imposition of 3%.

In the Assessment Year 2010-11, the Transfer Pricing Officer (TPO) had determined that Zee Entertainment, the assessee should have charged a corporate guarantee commission at the rate of 3% for guarantees provided to its overseas associated enterprises in connection with loans availed by them.

The TPO accordingly proposed a transfer pricing adjustment on the ground that the guarantee commission charged by the assessee was not at arm’s length.

The matter was challenged and eventually reached the Income Tax Appellate Tribunal. However the tribunal restricted the guarantee commission rate to 0.5% by relying on the Bombay High Court’s earlier decision in Everest Kanto Cylinders Ltd.

Aggrieved by the Tribunal’s order, the Revenue challenged the decision before the High Court.

As per the department, the Tribunal had erred in applying the 0.5% benchmark without considering factors such as country-specific risks, currency differences, creditworthiness of the associated enterprises and other risk parameters. It said the tribunal mechanically adopted the rate approved in Everest Kanto Cylinders’ decision.

It was further contended that a corporate guarantee rate cannot be standardized across cases because guarantee commissions vary depending on the credit profile of the borrower, geographical location, currency exposure and other commercial considerations.

“one cannot equate giving of a bank guarantee to giving a corporate guarantee. This Court held that if a bank guarantee is obtained from Commercial Banks, a higher commission may be justified. However, if the Assessee Company is issuing a corporate guarantee to the effect that if the subsidiary AE does not repay the loan availed of, then in such event, the Assessee would repay the loan, the consideration for issuance of such a guarantee are separate and distinct from that of a bank guarantee” noted the division bench observing Everest Kanto Cylinders’ decision.

The bench decided that “0.5% is appropriate for charging commission to provide a corporate guarantee for discharging the loans of its associated enterprises as against the rate of 3% determined by the Transfer Pricing Officer.”

Thus, the issue of the department was not entertained.

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