Sunday, December 13, 2015

No TP adjustment for corporate guarantee issued by parent co. on behalf of its subsidiary co.

The ITAT Ahmedabad Bench 'D' held that the issuance of corporate guarantees by holding company on behalf of its subsidiary where it is done to provide or compensate for lack of subsidiary's core strength to raise bank finances is in the nature of quasi capital or shareholder activity and does not amount to a service in respect of which arm's length adjustment can be done. This is a transaction which cannot happen in an arm's length situation. This is because no bank will ever issue a guarantee in favour of an entity which lacks creditworthiness to raise a loan. It is inherently impossible to decide arm's length price of a transaction which cannot take place in an arm's length situation.

Micro Ink Ltd. v. Additional Commissioner of Income-tax [2015] 63 taxmann.com 353

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