“Corporate Guarantee” and “Letter of Comfort” in GST

 

Recently, the Hon’ble ITAT Mumbai ruled* that the issuance of a “Letter of Comfort” (LOC) by a holding company to its subsidiaries qualifies as an international transaction and is subject to the Transfer Pricing regulations.

Here are some key observations:

— Contingent Liability Disclosure: The assessee declared the letters of comfort/support issued to banks on behalf of subsidiaries as contingent liabilities in the Notes to Financial Statements.

Notably, the holding company treated both Corporate Guarantees (CG) issued for subsidiaries and the LOC equally as contingent liabilities.

— Impact on Assets: The LOC issued by the holding company, related to credit facilities extended to subsidiaries, affects the holding company’s assets. This constitutes an international transaction.

— Holding Company’s Financial Obligations: No material evidence to the contrary to controvert the disclosure made by the assessee in its financial statement that the holding company isn’t obligated to bear loan repayment costs if subsidiaries defaults.

— Credit Facility Documentation: The credit facility documents from banks to subsidiaries explicitly link the extension to the security/support provided by the holding company’s LOC.

While the specifics may vary case by case, assessing taxability involves examining comprehensive documentation i.e. not only the LOC language but also what are the terms under which the LOC has actually been put to use.

These should further align with the accounting treatment and contractual understanding extended by the different parties involved in the transaction..