ITAT Delhi Restricts Corporate Guarantee ALP to 0.5% — Key Transfer Pricing Rulings in Luminous Power Technologies Case

Background and Overview

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, delivered a significant ruling in the case of Luminous Power Technologies Pvt. Ltd Vs ACIT (ITAT Delhi), partly allowing the assessee's appeals spanning Assessment Years 2013-14 through 2016-17. The disputes encompassed a range of contentious issues including transfer pricing adjustments on corporate guarantees, specified domestic transactions, head office cost allocations, interest-free advances extended to Associated Enterprises (AEs), and the revenue versus capital characterisation of advertisement expenditure.

The assessee, Luminous Power Technologies Private Limited (LPTPL), is a manufacturer of inverters, batteries, and Uninterrupted Power Supply (UPS) equipment. Its manufacturing operations are conducted through eligible and non-eligible units, each functioning as distinct undertakings. The eligible units availed income-linked deductions under Section 80-IC of the Income Tax Act, 1961, while the non-eligible segment was engaged in trading of Home Electrical (HE) and related products. The company's broader business portfolio encompassed power backup systems, energy storage, renewable energy solutions, and physical infrastructure services for IT and Telecom sectors.

LPTPL also had a wholly owned subsidiary — Luminous TeleInfra Limited (LTL) — incorporated in 2008, engaged in manufacturing batteries for inverters, DG Sets, and inverter components. LTL operated two manufacturing units located at Gagret in Himachal Pradesh, both eligible for Section 80-IC deductions. LTL was subsequently merged with the assessee.

Assessment Year 2013-14 — ITA No. 6996/Del/2017

Issue 1: Transfer Pricing Adjustment on Corporate Guarantee

Facts and Assessee's Position

During the Financial Year 2008-09, the assessee issued a corporate guarantee of USD 21 lakhs in favour of HSBC Bank to facilitate credit and overdraft facilities for its wholly owned step-down subsidiary, Lang Ming Power Technologies (Shenzhen) Ltd (Lang Ming China). This guarantee remained operative until 30.09.2013. The assessee did not levy any guarantee commission upon Lang Ming China, treating the transaction as a shareholder activity undertaken to promote and protect its investment interest in the AE. The transaction was duly disclosed in the audit report filed in Form 3CEB.

The assessee's primary arguments for exclusion from the ambit of international transaction were:

  • The corporate guarantee was extended as an act of shareholding and no income was expected or earned from the transaction.
  • Since the assessee itself did not incur any guarantee fee or charges for issuing the guarantee, the transaction bore no impact on its own profit or loss.
  • Section 92 of the Income Tax Act, 1961 presupposes the existence of income before any Arm's Length Price (ALP) determination becomes relevant — since there was no income, benchmarking was inapplicable.
  • Reliance was placed on Commissioner of CGST, Central Excise Vs. Edelweiss Financial Service Centre, Civil Appeal Diary No. 5258/2023 dated 17.03.2023, wherein the Hon'ble Supreme Court held that corporate guarantee provided without consideration did not constitute a taxable service under service tax law.
  • Further reliance was placed on DP Jain and Co. Infrastructure Pvt Ltd Vs. Union of India and others, Writ Petition No. 2087 of 2025 dated 06.05.2026, where the Bombay High Court (Nagpur Bench) ruled that a no-consideration corporate guarantee falls outside the scope of taxable supply under CGST Act, 2017.
  • The guarantee having been issued in FY 2008-09 was a continuing one, and no transfer pricing adjustment had been proposed for the intervening years from AY 2008-09 to AY 2012-13.

Additionally, the assessee relied upon CIT Vs. Vaibhav Gems Ltd., 88 taxmann.com 12 (with the Revenue's SLP dismissed, reported at 99 taxmann.com 2) and the decision of the Kolkata ITAT in Tega Industries Ltd. Vs. DCIT, 76 taxmann.com 24, where it was held that guarantees issued to a lender on behalf of an AE, forming part of shareholder functions, did not require recovery of commission.

Revenue's Contentions

The Revenue countered by relying upon the retrospective amendment introduced through the Finance Act, 2012, which inserted Explanation 1(c) to Section 92B of the Income Tax Act, 1961, with effect from 01.04.2002. This Explanation explicitly brought capital financing, including guarantees, within the definition of "international transaction."

Explanation.—For the removal of doubts, it is hereby clarified that—
(i) the expression "international transaction" shall include—
(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;"