The Punjab and Haryana High Court recently stayed the operation of GST applicability on guarantee commission given by a parent to its subsidiary. Such guarantees take different forms like letter of awareness/comfort, corporate/bank guarantees besides the fact that they may be issued with or without any consideration.
In case of guarantees without any consideration or inadequate consideration the challenge before law is in imputing an arm’s length price (ALP) or a market price as the notional consideration for fastening the tax on a transaction that was factually not priced/underpriced/ unpaid.
The same topic is mired in controversy but of a different texture in transfer pricing (TP) under income tax law as well. It has been held in many decisions that Chapter X enshrining TP provisions are anti-avoidance provisions where in the actual happening or non-happening of a transaction is not a sine qua non to trigger taxability. The concept of real income is thus not applicable to TP provisions. Legislative amendments were also done to scope guarantees and cross-border funding/capital transactions as an international transaction under TP provisions.
This being one side of the story, the form/structure of these guarantees are contextual/need based. The same may also arise across different countries/tax jurisdictions. Applying a flat/nominal rate universally on these as per Indian market rates, though being one form of a benchmarking, might be incorrect as they ignore the differential counterparty risk dimension between a third party and an assessee vis-a-vis to that of an assessee with his associated enterprises (AEs).
The right principle
Accordingly, country-specific pricing should be the right principle taking into cognisance country risk, positioning of the assessee, their bargaining power, volume of the transaction besides a number of other internal/external factors as well.
Country specific credit rating/market pricing has been accepted in cross border financing amongst AEs to a large extent that even dues from AEs arising in the normal course of the business have been read as a means of financing with notional dis-allowances or add-backs to expenses/incomes being telescoped (at market rates as the case may be) under TP provisions.
ECGC gives cross border premium rates based on individual country risk profile/exposure. Something similar could be used here with the CBDT and GST collaborating and issuing a country-wise pricing/rates, at least to key countries where Indian corporates have a sizeable presence of AEs. These might be pegged to market rates or be made floating to the changing circumstances to accommodate market dynamics.
The purpose of both laws, GST and TP, are certainly different. GST is an indirect tax with the charge on the implicit pricing of the guarantee (in this case) while TP is a direct tax to check and plug cross border tax arbitrage. Eventually both rely on market pricing to fix the consideration or the ALP which if streamlined or circularised, will obviate superfluous litigations besides bringing greater transparency and certainty on tax costs/implications.
Such simple measures will lead to greater ease of doing business on this otherwise controversial topic.
The writer is a chartered accountant