advocaterbl (Trainee) (96 Points)
01 July 2011corporate guarantee is given by a holding company on behalf of its foreign subsidiary.
will it come under transfer pricing and will the arm's length principle be applicable?
in this case, the holding company does not charge any guarantee fees for providing the corporate guarantee to its foreign subsidiary.
thank you.
Ankit Bansal
(Student, C.A. Final)
(43 Points)
Replied 03 July 2011
Yes, Indian transfer pricing provisions would apply to such corporate guarantee extended by Indian holding company to a foreign subsidiary. This transaction would be an "international transaction" under s.92B(1) of the Income-tax Act, 1961 and accordingly, it is necessary for the Indian holding company to ensure that arm's length standard is complied with.
As you said that no guarantee fee is charged from the subsidiary, this might be a concern to the Indian revenue authorities because they're at a loss of taxation revenue (that would have been paid upon receipt of guarantee fee income).
In order to ensure that arm's length principle is satisfied, it is first necessary to see whether such guarantee is explicit or implicit in nature. By implicit guarantee, we mean a guarantee that is not directly given, but the benefit of which arises due to association of that subsidiary with the group as a whole.
Implicit guarantee need not necessarily result in payment/receipt of guarantee fee - however, an explicit guarantee would ordinarily require flow of corporate guarantee fee.
This can be ascertained using guarantee rates obtained independently from banks or using interest rate differential.
Please let me know if it settles your query.
Thanks
Ankit
CAclubindia
