Introduction: The Expansion of Transfer Pricing

Transfer pricing (TP), once a specialised technical field, has become one of the most acrimonious areas of dispute between revenue authorities and taxpayers during the past 20 years. As a result of globalisation, Indian businesses are doing more and more cross-border business with their affiliated enterprises (AEs). To make sure they adhere to the arm's length concept, TP rules can examine any such transaction, including loans, guarantees, late payments, and intangible transfers.

The August 2025 ruling in Synthite Industries (P.) Ltd. vs. Deputy Commissioner of Income-tax by the Kerala High Court revives two contentious transfer pricing issues:

• What standards ought to be applied to corporate guarantees?

• Should transfer pricing regulations always impose notional interest on postponed trade receivables?

Both issues are important because they affect multinational corporations' daily business choices, not simply those involving complex tax arrangements. Let's analyse what the Court said and its significance.

First Concern: A Misunderstood Transaction Regarding Corporate Guarantees

The History

On behalf of its overseas business, Synthite Industries, like many multinational corporations, gave Axis Bank a corporate guarantee. The subsidiary's loan was then supported by a guarantee from Axis Bank.

This arrangement was contrasted with bank guarantees provided by commercial banks by the Transfer Pricing Officer (TPO). A TP adjustment of about ₹3.48 crores was obtained by the TPO by calculating the arm's length fee by averaging the guarantee commission rates from five banks (2.56%).

The Tribunal kept the same strategy while lowering the rate marginally to 2.45%. The Kerala High Court heard a challenge to this from Synthite.

Conclusions of the Court

According to the High Court, bank guarantees and company guarantees are not interchangeable.

Here's why:

• Risk type: Bank guarantees are commercial contracts that can be enforced upon demand and are entirely supported by the bank's balance sheet. Corporate guarantees, which are frequently reputational in nature rather than commercial, are motivated by shareholders.

• Justification for pricing: Because banks invest more money and take on greater default risks, they demand more commissions. On the other hand, a business guarantee is perceived as less risky and more of a comfort letter.

• Regulatory benchmarks: The Safe Harbour Rules of 2017 in India stipulate that corporate assurances must have a 1% charge. The Court recommended using this standard to make the decision, even if a corporation hasn't chosen Safe Harbour.

In Everest Kento Cylinders Ltd. (2015), the Bombay High Court dismissed the connection between corporate and bank guarantees, and the Court noted that decision.

Finding: The Tribunal's reliance on bank rates was deemed unwarranted, and the matter was remanded for further analysis.

Why This Is Important

This ruling is a major victory for corporations. There may be a significant TP exposure if corporate guarantees are benchmarked at 2–3% (based on bank rates). A 1% benchmark, on the other hand, is in line with business reality (per Safe Harbour).

Implication for practice:

• Multinational corporations are able to make a strong case for reduced guarantee commission rates.

• Tax officials will have to reevaluate changes made purely on the basis of bank assurances.

• Even though it is optional, Safe Harbour now has persuasive legal weight.

Problem 2: Deferred Receivables: When Credit Terms Turn into Background Financing

The AE also assessed Synthite for a TP adjustment on interest for postponed trade receivables. There was no basis for TP adjustment, the company contended, because it did not impose interest on late payments from non-AEs either.

Conclusions of the Court

The Court maintained the modification, citing the revised meaning of "international transaction" under Section 92B (which was added by the Finance Act 2012 and went into force retroactively in 2002).

Under the definition, "capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities, or any type of advance, payment or receivable…" is specifically covered.

Deferred receivables from AEs are seen as financing transactions, to put it simply. Money that is still owed from an AE falls under transfer pricing, even if interest is not paid to third parties.

Result: The Tribunal's confirmation of the TP adjustment on delayed receivables was confirmed by the Court without any basis to interfere.

Why This Is Important

Businesses have two challenges as a result of this:

• Receivables are a type of financing if credit terms are excessively long, which brings India into compliance with OECD guidelines.

• It causes a headache for compliance, however. Notional interest adjustments may be triggered by regular AE payment delays, regardless of industry standards.

Implication for practice:

• Businesses must constantly record their credit rules for both AEs and third parties.

• Businesses should justify extended lending, such as industry standards or competitive considerations, when interest is not assessed.

• If not, anticipate changes for notional interest.

The Wider Transfer Pricing Environment

The Synthite ruling results in two transactions being treated differently:

• Corporate guarantees: Courts are resisting the revenue's combative approach by prioritising business realities above fictitious comparisons.

• Courts are supporting revenue and confirming that the statute purposefully includes deferred receivables in the TP net.

This dichotomy illustrates a more general idea in Indian transfer pricing:

• Courts offer relief in cases when taxpayer arguments are consistent with economic substance (e.g., corporation guarantees vary from bank guarantees).

• When a transaction is expressly covered by the law (such as deferred receivables), courts defer to the statute and leave no opportunity for debate.

Conclusion: Important Lessons for Companies

Two obvious takeaways for Indian multinational corporations managing transfer pricing are provided by the Synthite Industries ruling:

• Corporate guarantees ought to be independently benchmarked, preferably at Safe Harbour margins (1%), rather than bank rates. This delivers more certainty when establishing group financing and protects against overstated TP adjustments.

• Businesses must handle deferred receivables as though they were financing transactions, charging interest or having solid business arguments available. Deferred receivables are firmly in the TP net.

The judiciary is willing to protect taxpayers from arbitrary comparisons, but it also wants firms to adhere to the broader legislative scope of overseas transactions.

The message for treasury teams, tax heads, and CFOs is unmistakable:

• Review the policies for intragroup finance.

• Align credit and guarantee procedures with industry standards and Safe Harbour.

• Provide documentation to support business justifications in front of tax authorities.

Cross-border financial arrangements will come under more scrutiny for Indian multinational corporations as globalisation intensifies. Important guidelines for striking a balance between compliance and commercial independence are provided by rulings such as Synthite.