GST on Free of cost Corporate Guarantee (CG)– TP implications

Recently, DGGI has issued demand notices to various local corporate houses and MNCs in connection with CG given on behalf of their subsidiaries. Parent companies give guarantees to banks for their subsidiaries, free of charge.  Issue raised – under GST, supply of services between related parties for furtherance of business is subject to tax even if made without any consideration.

In this context, taxpayer must be aware of possible Transfer pricing consequences of these events before taking a position under GST.

Below TP implications may arise in specific scenarios:

A.     Decides to pay GST

1. Scenario 1 (No CG fee charged by Indian HQ to Domestic & foreign AEs) – The value determined for GST purposes for CG granted to Domestic AEs could be adopted by the Transfer Pricing Officer (TPO) as the ALP in cases of CG granted by the same Indian HQ to foreign subsidiaries
2. Scenario 2 (CG fee charged by Indian HQ to foreign subsidiaries but not to Domestic AEs) – The value of CG paid by foreign entity or ALP determined by the TPO for such fee may be used by GST authorities as value of CG granted to Domestic AE. One may need to account for  differences in credit rating of Domestic AEs and also country adjustment undertaken, if any before adopting the same fee.
3. Scenario 3 ( CG is granted by Foreign HQ to Indian subsidiaries) – For GST Purpose, under the reverse charge mechanism, domestic subsidiary decide to compute a notional value for GST payment. Where there is no consideration for the service, there may be no TP implications as the TPO would not proceed to determine the ALP for CG fee since this would result in reduction of taxable income for the Indian entity. However one may need to also evaluate if there would be any issue on WHT which would be raised

B.     Decides it is not subject to GST

In TP litigation, appellate forums have not accepted taxpayer claims that CG is not a service and that receipt of CG fees is not required, unless proved that it is a shareholder activity with robust evidence.

Quantification- Since there was no consideration for the CG granted, a notional value needs to be determined for GST. It is important that an ad-hoc number is not adopted and a robust benchmarking analysis is followed for arriving at the CG fees.

The value of guarantee determined for GST purposes could be the market value/ALP, which may be derived using TP BM principles. Multiple approaches could be adopted to arrive at the ALP of CG fees. (link to our previous post in comments).

In the past, similar demand notices had also been sent in connection with usage of Corporate brand names ,logos, without consideration.  The above TP principles would equally apply and a brand BM Analysis can support the same.