Transfer pricing adjustments on bank guarantees and loan support

Transfer pricing adjustments on bank guarantees and loan support services are legally unsustainable without proper FAR analysis.

Issue

Whether transfer pricing adjustments made on counter/back-to-back guarantees (without establishing FAR comparability or data confrontation) and the arbitrary attribution of 50 percent net interest/fee income for loan support services (without a prescribed method or comparables) are sustainable?

Facts

Assessee Profile: The assessee is an Indian branch of a Netherlands-based bank, operating during Assessment Year 2022-23.
Counter Guarantee Transaction: The assessee acted as an intermediary in counter/back-to-back guarantee transactions. The Transfer Pricing Officer (TPO) determined the Arm’s Length Price (ALP) using third-party bank guarantee rates obtained under section 133(6) of the Income-tax Act, 1961, and made a TP adjustment.
Loan Support Services: The assessee rendered loan support services to its overseas Associated Enterprise (AE). The overseas AE provided the actual funds and carried out substantive lending functions.
Income Attribution: The TPO arbitrarily attributed 50 percent of the net interest and fee income to the assessee for these loan support services, resulting in a TP adjustment.
Assessee’s Stance: The assessee had already voluntarily attributed 25 percent of the net interest and fee income to itself.

Decision

On Counter Guarantees: The TP adjustment is not sustainable and deleted. The TPO erred by applying third-party rates under section 133(6) without demonstrating Functional, Asset, and Risk (FAR) comparability or properly confronting the underlying data to the assessee.
On Loan Support Services: The 50 percent interest attribution adjustment is unjustified and deleted. In the absence of a comparable uncontrolled transaction, a prescribed transfer pricing method, or evidence negating the overseas AE’s funding and risk-taking role, the attribution was arbitrary.
Arm’s Length Standard: Since the assessee had already attributed 25 percent of net interest/fee income, and the Revenue failed to establish that this attribution was not at arm’s length, the impugned adjustment could not stand.

Key Takeaways

Mandatory FAR Analysis: Transfer pricing adjustments on intermediary bank guarantees cannot rely on section 133(6) third-party data without establishing clear FAR comparability and giving the assessee an opportunity to rebut.
No Arbitrary Allocations: Arbitrary profit or income splits (such as a flat 50 percent attribution) without applying a recognized transfer pricing method or identifying comparables are legally untenable.
Burden of Proof: When an assessee adopts a reasonable attribution methodology reflecting its functional profile, the burden lies squarely on the Revenue to prove through proper benchmarking that it fails the arm’s length standard.

IN THE ITAT MUMBAI BENCH ‘K’

Cooperatieve Rabobank U.A.

Assistant Commissioner of Income-tax, International Tax Circle 2(1)(1)^*

ANIKESH BANERJEE, Judicial Member
and Ms. Ratna Dasgupta, Accountant Member

IT APPEAL NO. 8084 (Mum) OF 2025
[Assessment year 2022-23]

SEPTEMBER 30, 2026

Nitesh Joshi, Adv. for the Appellant. Ashish Kumar, CIT, Sr. D.R for the Respondent.

ORDER

Anikesh Banerjee, Judicial Member.- The present appeal has been filed by the assessee against the final assessment order dated 25/09/2025 passed by the Ld. Assistant Commissioner of Income-tax, International Tax Circle 2(1)(1), Mumbai (for brevity, the “Ld. AO”), u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (“the Act”), pursuant to directions dated 21/08/2025 issued by the Hon’ble Dispute Resolution Panel-1, Mumbai (for brevity, the “Ld. DRP”), for A.Y. 2022-23.

2. The assessee has raised the following grounds of appeal:

“General

1. Whether on the facts and circumstances of the case and in law, the learned Additional Commissioner of Income-tax, Transfer Pricing – 1(3), Mumbai (‘TPO’) and the learned AO, under the directions of the Hon’ble DRP, erred in assessing the Appellant’s income as Rs. 111,36,40,430 as against the returned income of Rs. 68,40,98,230.

Guarantee commission earned on back-to-back guarantees (64,55,610)

2. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 64,55,610 in respect of services rendered in connection with guarantees given by overseas branches where the Appellant only acted as an intermediary, without appreciating the functions performed, assets employed, and risks assumed (‘FAR’) and the benchmarking study of the Appellant?

3. Whether on the facts and circumstance of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in using third-party bank guarantee rates obtained under section 133(6) of the Act as comparable instances without appreciating that (i) this information was not available in the public domain and was not available with the Appellant during the relevant financial year, (ii) that this information was not concerning any actual transactions and (iii) there is a difference in the nature of the two guarantees?

Fees for Loan Support Services (Rs. 22,57,20,161)

4. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 22,57,20,161 in respect of the Loan Support Services transaction without appreciating the FAR and the benchmarking study of the Appellant?

5. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have failed to appreciate the Appellant’s FAR and have instead attributed certain functions, assets and risks to it which are factually incorrect and also impermissible in the legal framework as applicable to this case and undertaking a contribution analysis based on their perception of how the Appellant ought to have conducted its affairs?

6. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in rejecting supplementary benchmarking analysis undertaken by the Appellant?

Payment for Regional Support Services (Rs. 6,97,68,191)

7. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in making an adjustment of Rs. 6,97,68,191 in respect of Payment for Regional Support Services without appreciating the FAR and the benchmarking study of the Appellant?

8. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in not appreciating the (i) voluminous documentary evidence, (ii) details of cost incurred by the AEs, (iii) details of allocation keys used by AEs and (iv) certificate of independent consultant, etc. filed by the Appellant and proceeding on surmises and conjectures?

9. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in not considering the benefits derived by the Appellant and disregarding the commercial expediency of the Appellant?

10. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in rejecting the Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) for the determination of the Arm’s Length Price (‘ALP’)?

11. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in going beyond their jurisdiction in determining ALP on an ad-hoc basis without applying any of the prescribed methods as per section 92C(1) of the Act. They have erred in justifying the ad-hoc approach of determining the ALP by terming it as use of Comparable Uncontrolled Price (‘CUP’) Method?

12. Whether on the facts and circumstances of the case and in law, the learned AO and the learned TPO, under the directions of the Hon’ble DRP, have erred in undertaking an alternative disallowance by holding that the Appellant has failed to fulfil the ingredients of section 37 of the Act?

Disallowance of Mark to Market Loss on Investments (Rs. 12,75,98,241)

13. Whether on the facts and circumstances of the case an in law, the learned AO under the directions of the Hon’ble DRP has erred in disallowing Mark to Market Loss of Rs. 12,75,98,241 on Investments Held for Trading (‘HFT’) and Investments Available for Sale (‘AFS’)?

Initiation of penalty under section 270A

14. Whether on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 270A of the Act.

Short grant of credit of Tax Deducted at Source (‘TDS’) (Rs. 70,000)

15. Whether on the facts and circumstances of the case and in law, the learned AO has erred in not granting credit of TDS of Rs. 70,000?

Error in Computation Sheet (Rs. 1,64,08,650)

16. Whether on the facts and circumstances of the case and in law, the learned AO in the computation sheet enclosed with the final assessment order dated 25 September 2025 has erred in arbitrarily adding Rs. 1,64,08,650 to the net tax liability of the Appellant?

Order barred by limitation

17. Whether on the facts and circumstances of the case and in law, the final assessment order dated 25 September 2025 passed under section 143(3) read with section 144C(13) of the Act for AY 2022-23 is void and bad in law as it has been passed beyond the time limit prescribed under section 153 of the Act?”

3. Brief facts are that the assessee is a branch of Cooperatieve Rabobank U.A., Netherlands, engaged in banking operations in India. The assessee filed its return of income on 30/11/2022 declaring total income at Rs. 68,40,98,230/-. The case was selected for scrutiny under CASS and notices u/s. 142(1) of the Act were issued from time to time. In response, the assessee filed details, explanations and documentary evidence. During the assessment proceedings, the Ld. AO made a reference to the Ld. TPO after obtaining the approval of the competent authority. The Ld. TPO passed an order u/s. 92CA(3) dated 28/01/2025 proposing transfer pricing adjustments in respect of counter guarantee, ECB net interest share and regional support services/head office expenses. Thereafter, the Ld. AO passed the draft assessment order dated 20/03/2025.

3.1. From the final assessment order, it is observed that the following transfer pricing adjustments were proposed by the Ld. TPO:

Sr. No.	International transaction	Adjustment
1	Counter guarantee	Rs. 64,55,610/-
2	ECB net interest share	Rs. 22,57,20,161/-
3	Regional support services and head office expenses	Rs. 16,56,04,696/-
	Total	Rs. 39,77,80,467/-

4. The assessee had suomotu disallowed an amount of Rs. 9,58,36,505/-out of the regional support services/head office expenses. Accordingly, while giving effect to the transfer pricing order, the Ld. AO made a net adjustment of Rs. 6,97,68,191/- under this head. The aggregate transfer pricing adjustment incorporated in the final assessment order was thus Rs. 30,19,43,962/-.The Ld. AO also disallowed Rs. 12,75,98,241/- being provision for depreciation/mark-to-market loss on investments. Consequently, the total income was assessed at Rs. 111,36,40,430/-.

5. Aggrieved by the draft assessment order, the assessee filed objections before the Hon’ble DRP on 17/04/2025. The assessee filed paper book and documentary evidence in support of its objections. The Hon’ble DRP issued directions u/s. 144C(5) of the Act on 21/08/2025, substantially affirming the transfer pricing adjustments. In respect of regional support services, the Hon’ble DRP further directed the Ld. AO to make an alternate disallowance u/s. 37(1) of the Act on the basis that the assessee had failed to establish the receipt and rendition of services.

Pursuant to the directions of the Hon’ble DRP, the Ld. AO passed the impugned final assessment order dated 25/09/2025.

Aggrieved by the aforesaid order, the assessee is in appeal before us.

6. Grounds No. 2 and 3 – Counter guarantee

The Ld. AR submitted that the assessee did not issue the underlying guarantees and only performed intermediary/support functions in respect of guarantees issued by overseas branches. It was submitted that the Ld. TPO erroneously applied third-party bank guarantee rates obtained u/s. 133(6) of the Act, without establishing functional comparability. The Ld. AR submitted that the data did not pertain to comparable actual transactions and was not available in the public domain during the relevant year.

6.1. The Ld. DR, on the other hand, relied upon the orders of the revenue authorities.

7. We have heard the rival submissions and perused the material available on record. The Ld. TPO has applied third-party bank guarantee rates for determining the ALP of the impugned transaction. However, the assessee’s consistent submission is that it acted only as an intermediary and neither issued the guarantee nor assumed the risks ordinarily borne by a guarantor bank.

7.1. In our considered view, before applying a third-party bank guarantee rate, the Ld. TPO was required to demonstrate that the uncontrolled transactions were comparable having regard to the functions performed, assets employed and risks assumed by the assessee. No such exercise has been demonstrated from the orders of the revenue authorities. Further, the data obtained u/s. 133(6) of the Act cannot be used against the assessee without properly confronting the same and allowing an effective opportunity to rebut it.

8. In the absence of a reliable comparable uncontrolled transaction and a proper FAR analysis, the adjustment of Rs. 64,55,610/- cannot be sustained.

We therefore direct the Ld. AO to delete the same. Grounds No. 2 and 3 are allowed.

9. Grounds No. 4 to 6 – Loan support services/ECB net interest share

The Ld. AR submitted that the overseas AE provided the funds and carried out the substantive lending functions, including credit approval, pricing, disbursement and portfolio management. It was submitted that the overseas AE assumed the credit, liquidity and interest-rate risks. The assessee, on the other hand, performed loan origination and support functions in India.

9.1. The Ld. AR further submitted that the assessee had already attributed 25% of the net interest income and fee income to itself. It was submitted that the Ld. TPO erred in attributing 50% of the net interest income and fee income to the assessee without any reliable comparable or proper application of a prescribed transfer pricing method. Reliance was placed on Credit Lyonnais v. ADIT (International Taxation) [2014] 61 SOT 75 (Mumbai – Trib.) order dated 30/09/2013; DIT v. Calyon Bank [Income Tax Appeal No. 1781 of 2014, dated 23-3-2017] (Bombay High Court); Pr. CIT-8 v. RBS Financial Services (India) (P.) Ltd. [2020] 122 (Bombay)/Income Tax Appeal (IT) No. 1417 of 2017.

9.2. The Ld. DR relied upon the orders of the Ld. AO/TPO and the directions of the Hon’ble DRP.

10. We have heard the rival submissions and perused the material available on record. It is undisputed that the overseas AE provided the funds and carried out the substantive lending functions. The Ld. TPO has not brought on record any comparable uncontrolled transaction to justify equal allocation of the net interest income and fee income between the assessee and the overseas AE.

11. The authorities cited by the assessee in the written submissions support the proposition that where the overseas entity provides the funds and assumes the lending risks, interest income from lending activity cannot be attributed to the Indian entity merely because it performs borrower analysis, market analysis or origination-related functions. The remuneration of the Indian entity has to be determined with reference to the actual functions performed by it. The assessee has already attributed 25% of the net interest income and fee income to itself. The Revenue has not established, on the basis of a reliable comparable or a prescribed method that the said attribution is not at arm’s length. The assessee has also demonstrated that its transfer pricing analysis in respect of the subject transaction was not disturbed in the earlier years referred to in the written submissions.We, therefore, direct the Ld. AO to delete the adjustment of Rs. 22,57,20,161/-. Grounds No. 4 to 6 are allowed.

12. Grounds No. 7 to 12 – Regional support services and head office expenses

The Ld. AR submitted that the assessee had furnished voluminous evidence to establish receipt of services, business need, benefits derived, underlying cost base and allocation keys. It was submitted that the evidence included contemporaneous e-mail correspondence in respect of IT support, finance, human resource, audit, compliance, credit administration and market/corporate platform services. The Ld. AR submitted that the assessee had also furnished an Agreed Upon Procedures report to substantiate the underlying cost base. It was submitted that the assessee had already made a suomotu disallowance of Rs. 9,58,36,505/- and, therefore, the residual adjustment of Rs. 6,97,68,191/- was unwarranted. Reliance was placed only on the decisions cited in the written submissions, including CIT v. Merck Ltd. [2016] 73 (Mumbai – Trib.)/ITA No. 902/Mum/2016, dated 03/02/2020 (Mumbai–Trib.).

12.1. The Ld. AR further submitted that the Ld. TPO rejected TNMM and determined the ALP at Nil/ad hoc without applying any prescribed method. It was submitted that the alternate disallowance u/s. 37(1) of the Act, as directed by the Ld. DRP, was also not justified in the light of the documentary evidence furnished by the assessee.

12.2. The Ld. DR relied upon the findings of the Ld. TPO and the directions of the Ld. DRP.

13. We have heard the rival submissions and perused the material available on record. The assessee has placed on record extensive contemporaneous documentation demonstrating the receipt of regional support services. The material referred to in the written submissions includes evidence of IT, finance, HR, audit, compliance, credit core and corporate platform support.

13.1. We note that the Ld. TPO has rejected the assessee’s TNMM analysis and has effectively determined the ALP on an ad hoc basis. No comparable uncontrolled transaction has been identified and no prescribed method has been applied in the manner contemplated u/s. 92C of the Act. An ALP cannot be determined on an ad hoc basis without identifying a proper comparable or applying a prescribed method.

13.2. The alternate disallowance u/s. 37(1) of the Act is also not sustainable. The evidence placed on record demonstrates business nexus, receipt of services and benefits derived by the assessee. The assessee has further furnished supporting details of the cost base and allocation mechanism and has already made suomotu disallowance of Rs. 9,58,36,505/-.

13.3. In view of the above, we direct the Ld. AO to delete the adjustment of Rs. 6,97,68,191/- and the consequential alternate disallowance u/s. 37(1) of the Act. Grounds No. 7 to 12 are allowed.

14. Ground No. 13 – Mark-to-market loss on investments

14.1. The Ld. AR submitted that the assessee is a banking company regulated by the RBI and is required to value investments classified as AFS and HFT in accordance with the applicable RBI guidelines. It was submitted that the investments are held as stock-in-trade and are valued at cost or market value, whichever is lower. The diminution in value was recognised in the profit and loss account consistently and in accordance with the applicable prudential norms.

14.2. The Ld. DR relied upon the orders of the Ld. AO and the directions of the Ld. DRP.

14.3. We have heard the rival submissions and perused the material available on record. The loss claimed by the assessee is not a provision for an unascertained liability. It represents diminution in the value of investments held as stock-in-trade and valued in accordance with RBI guidelines. The decisions relied upon by the assessee in United Commercial Bank v. CIT 368 ITR 377 (Bombay), support the allowability of such loss where investments are consistently valued at cost or market value, whichever is lower, in accordance with the applicable banking guidelines. We therefore direct the Ld. AO to delete the disallowance of Rs. 12,75,98,241/-. Ground No. 13 is allowed.

15. Ground No. 14 – Initiation of penalty proceedings

Ground No. 14 challenging initiation of penalty proceedings u/s. 270A of the Act is premature. The same is dismissed.

16. Ground No. 15 – Short grant of TDS credit

The Ld. AR submitted that the Ld. AO had not granted TDS credit of Rs. 70,000/-. The Ld. DR submitted that the claim may be verified. We direct the Ld. AO to verify the claim from Form 26AS and other supporting material and grant due credit in accordance with law. Ground No. 15 is allowed for statistical purposes.

17. Ground No. 16 – Error in computation

The Ld. AR submitted that Rs. 1,64,08,650/- was wrongly added to the assessee’s net tax liability. The Ld. DR submitted that the issue may be verified by the Ld. AO. We direct the Ld. AO to verify the computation and rectify the same, if found incorrect, in accordance with law. Ground No. 16 is allowed for statistical purposes.

18. Ground No. 17 – Limitation

In view of our decision on the substantive grounds, this ground becomes academic and is left open.

19. In the result, the appeal filed by the assessee bearing ITA No. 8084/Mum/2025 is partly allowed for statistical purposes.