ITAT Mumbai Rules 0.60% Bank Rate as Valid Internal CUP for Corporate Guarantee Commission: KEC International Limited vs DCIT

Overview of the Dispute

The Income Tax Appellate Tribunal, Mumbai ("ITAT" or "Tribunal"), pronounced its order on 28th August 2026 in KEC International Limited Vs DCIT (ITAT Mumbai), bearing Appeal No. ITA 2157/MUM/2026, pertaining to Assessment Year 2022-23. The appeal arose from the directions issued by the Joint Commissioner of Income Tax, Transfer Pricing – ADDL/JCIT TP 2(3), Mumbai.

The case centrally revolved around three distinct issues:

  1. A transfer pricing adjustment in respect of corporate and performance guarantees extended by the assessee to its overseas Associated Enterprises ("AEs")
  2. Short grant of TDS/TCS credit during assessment
  3. Levy of interest under Section 234B and Section 234C of the Income Tax Act, 1961

The Tribunal's ruling on the arm's length rate for corporate guarantee commission is particularly significant, as it reaffirms a consistent line of precedent established in the assessee's own prior proceedings.

Background: Who Is KEC International Limited?

KEC International Limited is an entity engaged in the Engineering, Procurement and Construction ("EPC") business, with operations spanning both India and international markets. For Assessment Year 2022-23, the Assessing Officer referred the assessee's international transactions to the Transfer Pricing Officer ("TPO") for computation of the arm's length price ("ALP") in relation to various cross-border dealings with its AEs.

Ground No. 1 – Transfer Pricing Adjustment on Corporate Guarantee

The Assessee's Position Before the TPO

During the transfer pricing proceedings, the assessee explained that it had issued corporate guarantees to banks on behalf of its overseas AEs, enabling those AEs to obtain both fund-based and non-fund-based banking facilities. Additionally, the assessee had extended performance guarantees to customers in connection with contracts awarded to its overseas AEs.

The assessee advanced the following primary argument:

  • The guarantees were issued to protect and promote the group's business interests and amounted to shareholder activity
  • No cost was incurred by the assessee in issuing the guarantees, and therefore, the guarantees had no bearing on the assessee's profits, income, losses, or assets
  • Consequently, these guarantee transactions did not qualify as "international transactions" under Section 92B of the Income Tax Act, 1961, and no transfer pricing adjustment was warranted

Notwithstanding this primary stance, the assessee — acting out of abundant caution — did report the guarantee transactions and charged a guarantee commission of 0.60% per annum on a suo motu basis. This rate was derived from a facility letter issued by the assessee's own bank, which the assessee presented as an internal Comparable Uncontrolled Price ("CUP").

The TPO's Findings and Adjustment

The TPO rejected the assessee's contention and treated both the corporate and performance guarantees as international transactions under Section 92B. The TPO placed reliance on Explanation (i)(c) to Section 92B, inserted by the Finance Act, 2012, with retrospective effect from 01.04.2002, which expressly includes a "guarantee" within the ambit of capital financing transactions.

The TPO further reasoned that:

  • Providing a guarantee constituted a service rendered to the AE, since it enabled the AE to access banking or financing facilities and potentially borrow at a lower rate of interest
  • The guarantee conferred an economic benefit on the AE and simultaneously involved assumption of risk by the assessee

For benchmarking purposes, the TPO collected bank guarantee commission rates and found them ranging from approximately 0.45% to 2.64% per annum, with a median of approximately 1.50%. After acknowledging certain differences between a bank guarantee and a corporate guarantee, the TPO applied a lower rate of 1% per annum. This resulted in an aggregate transfer pricing adjustment of ₹5,08,31,722/-.

The Assessee's Objections Before the DRP

The assessee raised objections before the Dispute Resolution Panel ("DRP") reiterating its position that: