My indian company request to Indian HDFC bank to issue SBLC of 25 Cr.to Dubai HDFC Bank for Loan funding to our 100%subsidiary Bank
it is requested
is this transaction will come under transfer pricing under safe harbour rule
and is taxable as an income of indian company by calculating arm length price of 2%Of amount of SBLC p.a
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Applicability of transfer pricing on SBLC issued to 100 foreign sunsidiary company
Replies (1)
| Yes, Transfer Pricing provisions apply to SBLC issued by an Indian parent to its foreign subsidiary. Here is the analysis: 1. Associated Enterprise: An Indian company and its 100% foreign subsidiary are 'associated enterprises' under Section 92A of the IT Act. 2. SBLC as International Transaction: Issuance of an SBLC is a financial service/guarantee. Section 92B defines 'international transaction' to include 'provision of services' and 'financial transactions' between associated enterprises. An SBLC/guarantee issued by parent to support subsidiary's credit qualifies as an international transaction. 3. Arm's Length Price for SBLC: The parent should charge a guarantee fee (commission) from the subsidiary for issuing the SBLC. The arm's length rate for such guarantees is typically 1–3% per annum of the SBLC value, depending on the creditworthiness of the subsidiary and prevailing market rates. The CUP (Comparable Uncontrolled Price) method is generally used. 4. Consequence of Not Charging: If the Indian parent issues the SBLC free of cost (no guarantee fee charged), the IT department can impute an arm's length fee as income in the parent's hands and make a TP adjustment — resulting in additional taxable income and penalty. 5. Documentation: Maintain TP documentation including: SBLC agreement, guarantee fee arrangement, comparability analysis showing arm's length rate. Include in Form 3CEB filed by CA under Section 92E. 6. FEMA Angle: Issuing SBLC for a foreign subsidiary also has FEMA implications — check RBI guidelines on financial commitments to overseas subsidiaries (ODI regulations). |
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