Corporate Guarantee: Computation of Guarantee Fees at Arm’s Length Price

The most recent controversy surrounding Indian tax courts, pertains to the issue of international transactions with respect to intra-group financing. It includes short as well as long term borrowing and lending, guarantees etc. The debate centres around transfer pricing (herein after referred to 'TP') provisions and how the computation of arm’s length price is to be done. The article has focussed on one aspect of intra group financing, that is, the provision of corporate guarantee. The paper first describes the meaning of guarantee and then highlights various provisions relating to corporate guarantee, under the Companies Act, 2013 and the Foreign Exchange Management Act, 1999. The article then describes various legislative provisions relating to the transfer pricing issue and how guarantees fit into such provisions. It is ambiguous, as courts have not provided for a settled principle, in this regard. The author, thus, highlights various approaches the Indian tax courts have adopted when the issue of corporate guarantee came before them. The paper provides an answer to the issue of whether the guarantee fee can be computed at arm’s length price, using compared uncontrolled price as the method for computation. The author concludes by stating that while the courts have attempted to resolve these ambiguities, there is still scope for further reform