Corporate guarantee adjudged as shareholder service under exceptional circumstances; interest on outbound loans to be determined applying sophisticated manner of loan benchmarking (Oct 19, 2016)
The Chennai Bench of the Income-tax Appellate Tribunal issued a taxpayer-favorable decision concerning a corporate loan guarantee furnished by an Indian parent company with respect to a foreign subsidiary company. Another issue concerned interest on working capital loans made to related parties, with the tribunal finding that the arm’s length testing of interest on the loan was to be made by reference to credit ratings and by comparing third-party loan agreements.
The taxpayer, a closely held company engaged in the manufacture of water resistant rubber linings and other products, established a “special purpose vehicle” in the Bahamas for the aim of undertaking an acquisition of two South African operating companies. The taxpayer provided a shareholder loan and a corporate guarantee to a UK bank (these were provided as a substitute for equity funding to the Bahamian entity). The taxpayer, thus, classified the loan as performing a shareholder function. The taxpayer also provided working capital loans to its related parties for which it charged an arm’s length interest, and benchmarked with reference to credit ratings and comparability of third-party loan agreements.
The Transfer Pricing Officer, however, computed an assessment with respect to the loan guarantee.
The tribunal concluded that the loan was “quasi-equity” and guaranteed a shareholder service meriting no charge. The tribunal also in taking up the issue of the working capital loans advanced by the taxpayer to its related parties, set aside this issue for re-adjudication by the Transfer Pricing Officer.