With increased globalization, there has been an increase in the financial transactions between Indian companies and their foreign counterparts - the grant of "corporate guarantees" being an important one.
The guarantees are extended by the Indian parent on behalf of its subsidiaries to facilitate working capital requirements. These transactions become an attention for tax authorities in determining the arm's length price on guarantee fees. Moreover, there has been a debate about whether corporate guarantees are the same as bank guarantees or not.
In view of this, a bank guarantee is provided by the bank in a normal course of business activity where the bank targets earning profit in the form of commission for providing such a guarantee, whereas a corporate guarantee is not a normal course of business activity and is solely provided to protect the interests of its foreign counterpart.
Further, the corporate guarantee was provided to its group companies after taking into consideration several commercial considerations like risk profile, financial position, quantum, terms, etc., and the bank applied a blank guarantee rate for benchmarking such transactions.
Hence, without detailed analysis, bank guarantees cannot be compared with corporate guarantees.
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