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"19. So far as these grievances of the parties are concerned, the relevant material facts are as follows. During the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee company has extended a corporate guarantee in respect of loan of Rs 101.48 crores taken by its subsidiary Suzlon Energy BV Netherland. This loan was said to have been taken for the purpose of construction of a guest house in Europe for the use by, amongst others, the employees of assessee company. The assessee company had also extended cross guarantees, with other AEs, for loans obtained by AE Rotor Holding BV- Netherlands, SE Drive Technik GmbH- Germany, Suzlon Wind Energy GmbH- Germany and Suzlon Energy Ltd Mauritius. These loans were said to have been obtained for acquisition of a German company by the name of RE Power Systems AG. The first transaction was for the loan of Rs 4,660.89 crores, for acquisition of RE Power Systems AG, and the second transaction was for acquisition, by SE Drive Tecknik GmbH, of balance stake in RE Power Systems AG. The assessee had not charged any fees for issuance of these corporate guarantees. The stand of the assessee was that these guarantees were given in the stewardship capacity and hence need not be benchmarked. It was also submitted that these are cross guarantees by the group entities in a manner that each of the entity stood a guarantee for each other in circulating as well as reciprocating manner. The assessee further clarified that standing as a guarantor for the subsidiary does not result in any provision for services which can be treated as an international transaction. It was based on these, and several other, arguments that the assessee contended that the transaction of giving corporate guarantees cannot be treated as an international transaction. Without prejudice to this stand, it was further submitted that ICICI Bank has given a guarantee to the group in consideration of guarantee ITA No.2074 & 2179/Ahd/2013 Assessment year: 2009-10 commission @ 0.75% which can be treated as a CUP. None of these submissions, however, impressed the Assessing Officer. He rejected these submissions and, while doing so, gave the following reasoning:

In order to appreciate the benchmarking aspect of the transaction of providing guarantee to AEs, the observations made by the transfer pricing officer in paras 6 to 6.12 of the order are relevant wherein he adopted 2% as guarantee fees so as to make an addition of Rs.2,02,96,000/. While dealing with the said addition, the TPO has made academic observations regarding the guarantor, borrower, credit rating, inference to Canada and US court decisions, and the reason as to why Group Company providing a guarantee should charge a guarantee fees. Vide paras 6.13 and 6.14 of the order, the TPO has observed that In the absence of internal CUP, external CUP should be applied and the guarantee fees should be charged taking into consideration the facts that under the similar circumstances what amount of guarantee fees would have been charged by an independent party. Thereafter, the TPO has adopted guarantee fees @ 2% to make an addition of Rs,2,02,96,000/-. However, I could not find any comparable instance / external CUP being taken into consideration by the TPO to benchmark the guarantee fees @ 2%. Though he himself has stated that in the absence of internal CUP, external CUP is to be applied, he has not brought on record even a single comparable instance so as to benchmark the guarantee fees @ 2%, which is not fully justified.

The justification of the Appellant for not charging guarantee fees has force and action of TPO in adopting guarantee fees @ 2% without taking into consideration any comparable instances is not fully justified. However, while dealing with the submission and observation with regard to second upward adjustments on account of guarantee fees, I find that the ICICI Bank Ltd. has charged guarantee fees @ 0.75% for providing a guarantee to one of the AEs i.e SE Drive Technik GmbH. Though appellant stated that no guarantee fees was required to be charged, I am of the opinion that this instance can certainty be taken as an external CUP as this represents the rate of guarantee fees charged by the bank to one of the AEs while providing guarantee. Hence, I modify the addition by adopting 0.75% as guarantee fees as against the 2.00% charged by the TPO, and accordingly, the addition to the extent of Rs.76,11,000/- (i.e 0.75% of 101.48 Crores) is sustained and the balance amount of Rs.1,26,85,000/- is hereby directed to be deleted.

40. At this stage, it would appropriate to analyze the business model of bank guarantees, with which corporate guarantees are sometimes compared, in the context of benchmarking the arm's length price of corporate guarantees. A bank guarantee is a surety that that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and ITA No.2074 & 2179/Ahd/2013 Assessment year: 2009-10 the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred per cent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlying assets. When these guarantees are invoked, there is no occasion for the guarantor to seek recourse to any assets of the guaranteed entity for recovering payment of defaulted guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees.