Transfer Pricing on Corporate Guarantees: ITAT Delhi Restricts Guarantee Fee to 0.30% — Dabur India Ltd vs ACIT
Background and Overview
The Delhi Bench of the Income Tax Appellate Tribunal rendered a significant ruling in the matter of Dabur India Ltd Vs ACIT, addressing a fundamental transfer pricing question: whether a corporate guarantee issued by an Indian parent company in favour of its overseas Associated Enterprises (AEs) constitutes an international transaction, and if so, what arm's length commission rate should apply.
The dispute arose in the context of Assessment Years 2007-08 and 2008-09 and involved cross appeals filed by both the assessee and the Revenue. The Tribunal dealt with several contentious issues including guarantee fee, royalty adjustments, interest on loans, and deductions under Section 80IB and Section 80IC of the Income Tax Act, 1961. This article focuses specifically on the corporate guarantee fee aspect, which forms the most consequential part of the ruling from a transfer pricing perspective.
Profile of the Assessee
Dabur India Ltd is a well-known company engaged in manufacturing and trading of herbal health care products, personal care items, cosmetics, veterinary goods, and a range of FMCG products. The assessee filed its return of income for Assessment Year 2007-08 declaring nil income. The return was subsequently revised, and the book profit under Section 115JB was revised upward to Rs. 2,80,57,67,940/-.
Since the assessee had entered into international transactions with its associated enterprises, the Assessing Officer (AO) made a reference under Section 92CA of the Income Tax Act, 1961 to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of those transactions as reported in Form No. 3CEB under Section 92E.
Transfer Pricing Adjustment Proposed by the TPO
Corporate Guarantees Under Scrutiny
The TPO, during the course of transfer pricing assessment proceedings, identified that the assessee had issued the following corporate guarantees on behalf of its AEs without charging any fee:
- Guarantee of Rs. 312.50 lakhs on behalf of Dabur Nepal Pvt. Ltd.
- Guarantee of Rs. 489.90 lakhs on behalf of Dabur Egypt Ltd.
The assessee had benchmarked these transactions using the Transactional Net Margin Method (TNMM) by clubbing them with sale of finished goods transactions. The TPO rejected this approach, treating corporate guarantees as independent international transactions requiring separate benchmarking under the Comparable Uncontrolled Price (CUP) method.
How the TPO Computed the Guarantee Fee
The TPO gathered information from the State Bank of India under Section 133(6) and computed the ALP as follows:
| Particulars | Rate (%) |
|---|---|
| External CUP Rate (SBI Rate) | 2.75 |
| Internal CUP Rate (HSBC Rate) | 1.25 |
| Mean of CUP Rates | 2.00 |
| Add: Risk Adjustment | 2.00 |
| Final Rate Adopted | 4.00 |
Applying this 4% rate on the aggregate guarantee amount of Rs. 8.02 crore, the TPO proposed an upward adjustment of Rs. 32,09,600/-, on the ground that the assessee ought to have charged a service fee for extending these guarantees to its overseas AEs.
Note: The TPO's approach of comparing bank guarantee rates charged by Indian banks (SBI and HSBC India) with corporate guarantees extended by an Indian parent to overseas AEs was subsequently criticised for failing to satisfy strict comparability norms applicable under the CUP method.