Banking groups frequently engage in treasury and corporate guarantee arrangements with related parties. These transactions are subject to transfer pricing rules under the Direct Tax Code (DTC) 2025. The safe harbour rules provide specific guidance on corporate guarantees, requiring a minimum 1% commission. This guide analyses the transfer pricing implications for banking group treasury and corporate guarantee arrangements.
The Transfer Pricing Framework
Section 161 — The Arm's Length Principle
Section 161(1) requires that "Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price". Section 161(2) extends this to "Any allowance for any expense or interest".
Section 162 — Associated Enterprise
The banking group entities become associated enterprises (AEs) under Section 162 when:
- One holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other
- One participates in the management or control or capital of the other
- One has the power to appoint more than half of the board of directors
Section 163 — International Transaction
Transactions between the banking group entities constitute international transactions under Section 163 if they are in different jurisdictions.
Corporate Guarantee Arrangements
Safe Harbour for Corporate Guarantees
Rule 88 specifies that provision of corporate guarantees is an eligible international transaction for safe harbour.
Safe Harbour Commission Rate
Rule 89(2) provides that the commission or fee declared in relation to the eligible international transaction entered into during the tax year is at the rate not less than 1% per annum on the amount guaranteed.
Eligibility Conditions
Rule 86(d) defines "corporate guarantee" as explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long-term borrowing, but does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature.
Threshold
The safe harbour applies:
- Where the amount guaranteed does not exceed ₹100 crore; or
- Where the amount guaranteed exceeds ₹100 crore, and the credit rating of the associated enterprise is of adequate to highest safety
Treasury Arrangements
Intra-Group Loans
Rule 88 specifies that advancing of intra-group loans is an eligible international transaction for safe harbour.
Interest Rate — INR Loans
The interest rate must be not less than the one-year marginal cost of funds lending rate (MCLR) of State Bank of India as on 1st April of the relevant tax year plus:
- 175 basis points: Credit rating AAA to A
- 325 basis points: Credit rating BBB-, BBB or BBB+
- 475 basis points: Credit rating BB to B
- 625 basis points: Credit rating C to D
- 425 basis points: Credit rating not available and amount ≤ ₹100 crore
Interest Rate — Foreign Currency Loans
The interest rate must be not less than the reference rate of the relevant foreign currency plus specified basis points.
Reference Rates
- US Dollar: 6-month Term SOFR + 45 basis points
- Euro: 6-month EURIBOR
- UK Pound Sterling: 6-month Term SONIA + 30 basis points
- Japanese Yen: 6-month TORF + 10 basis points
- Australian Dollar: 6-month BBSW
- Singapore Dollar: 6-month SORA + 45 basis points
Documentation Requirements
Section 171 — Maintenance of Information and Documents
Rule 84(1) prescribes the information and documents to be maintained:
- Description of the ownership structure
- Profile of the multinational group
- Description of the business and industry
- Nature and terms of the international transaction
- Functional analysis
- Method selection and application
Section 172 — Report from an Accountant
Every person who has entered into an international transaction or specified domestic transaction shall obtain a report from an accountant and furnish it on or before the specified date.
Practical Compliance
1. Identify Treasury Transactions
- Identify all intra-group loans
- Identify all corporate guarantees
- Identify all other treasury transactions
2. Determine Arm's Length Price
- For corporate guarantees: Apply the 1% commission rate
- For intra-group loans: Apply the MCLR + basis points formula
- Document the benchmarking analysis
3. Maintain Documentation
- Maintain contemporaneous documentation
- Ensure documentation is complete and accurate
- Retain documentation for nine years
4. File Report
- Obtain a report from an accountant
- File the report on or before the specified date
5. Monitor Compliance
- Regularly monitor compliance with transfer pricing rules
- Update documentation as necessary
Consequences of Non-Compliance
Transfer Pricing Adjustment
If the transfer price is determined not to be at arm's length:
- The income may be adjusted
- Interest and penalty may be levied
Penalties
- Section 442: Penalty of 2% of the value of each international transaction
- Section 457: Penalty of 2% for failure to furnish information
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on transfer pricing for banking group treasury and corporate guarantee arrangements. Our direct tax experts help banking groups understand their obligations, prepare documentation, and navigate the regulatory framework. We assist in TP study preparation, report filing, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on transfer pricing or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex transfer pricing framework for banking group treasury and corporate guarantee arrangements requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- TP Assessment: Evaluation of transfer pricing obligations
- Documentation: Assistance with TP study and documentation
- Safe Harbour: Guidance on safe harbour eligibility
- Representation: Representation before Transfer Pricing Officers
Contact us for expert legal guidance on your banking transfer pricing matters.