No adjustments for corporate guarantee, alleged notional interest

The Delhi bench of the Income-tax Appellate Tribunal held that a corporate guarantee issued by the taxpayer for the benefit of its related entities (and that did not involve any costs or have any bearing on profits) was not an “international transaction” for purposes of India’s transfer pricing rules.

The tribunal rejected a transfer pricing adjustment based on the corporate guarantee-asserted by the Transfer Pricing Officer to have benefited the taxpayer by providing an increased credit rating for its foreign related entities.

The tribunal also rejected an adjustment for notional interest. The Transfer Pricing Officer had re-characterized share application money advanced by the taxpayer to its foreign subsidiaries as an interest-free loan (because the amounts were not converted into equity for quite a long time, and the taxpayer had not earned any interest for this period). As the tribunal found, it is not appropriate for the tax authorities to re-characterize a transaction unless it is found to be a sham or bogus transaction.

Bharti Airtel Limited vs. ACIT (ITAT Delhi) March 19, 2014

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