ITAT Hyderabad: Corporate Guarantee is not an International Transaction

Important observation made by Hon'ble Income Tax Appellate Tribunal of Hyderabad in case of Four Soft Ltd. dated September 9, 2011, for your reference;

• For computing the net margin of the taxpayer for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly segmented financials is to be considered for the purpose of arriving at the net margin on the international transaction. 
• Exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss on account of exchange rate fluctuation arises in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the associated enterprises of the taxpayer.
• TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the taxpayer company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In considered view of Hon'ble ITAT, the corporate guarantee is very much incidental to the business of the taxpayer and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution.

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Gaurav Garg

JGarg Economic Advisors

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