India vs Cyient Limited, January 2025, Income Tax Appellate Tribunal, I.T.A. No.913/HYD/2024

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Category: Comparability Analysis, Financial Transactions, Services and Fees | Tag: , , , , , , , , , , ,
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Cyient Ltd had issued bank guarantees to various related parties, leading to a dispute over the appropriate arm’s length guarantee fee. The tax authorities applied a rate of 1.90%, based on rates charged by banks to customers, and made an assessment of additional taxable income. Cyient Ltd appealed the assessment to the Income Tax Appellate Tribunal (ITAT).

Decision

The Tribunal reduced the guarantee fee from 1.90% to 0.53%. For letters of comfort, the ITAT treated them as equivalent to corporate guarantees and applied the same 0.53% benchmark, rejecting the tax authorities’ higher rate. The Tribunal emphasized that corporate guarantee fees should be significantly lower than ECB rates (1.67%).

 
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Related Guidelines

TPG2022 Chapter I paragraph 1.187The facts relating to S’s credit standing and borrowing power are identical to those in the preceding example. S borrows EUR 50 million from Bank A. The functional analysis suggests that Bank A would lend to S at an interest rate applicable to A rated borrowers without any formal guarantee....
TPG2022 Chapter X paragraph 10.218The application of the CUP method to a transaction involving a captive insurance may encounter practical difficulties to determine the need for and quantification of comparability adjustments. In particular, account should be taken of potential differences between the controlled and uncontrolled transactions that may affect the reliability of the comparables....
TPG2022 Chapter X paragraph 10.187Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5%....
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TPG2022 Chapter X paragraph 10.172The difficulty with using the CUP method is that publicly available information about a sufficiently similar credit enhancing guarantee is unlikely to be found between unrelated parties given that unrelated party guarantees of bank loans are uncommon....
TPG2022 Chapter X paragraph 10.171In considering whether controlled and uncontrolled transactions are comparable, regard should be had to all the factors which may affect the guarantee fee including: the risk profile of the borrower, terms and conditions of the guarantee, term and conditions of the underlying loan (amount, currency, maturity, seniority etc.), credit rating...
TPG2022 Chapter X paragraph 10.170The CUP method could be used where there are external or internal comparables; independent guarantors providing guarantees in respect of comparable loans to other borrowers or where the same borrower has other comparable loans which are independently guaranteed....
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TPG2022 Chapter X paragraph 10.95Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the...

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