The facts
Cyient Limited is an Indian technology and engineering services company listed in Hyderabad. For assessment year 2020–21, Cyient had provided corporate guarantees on behalf of various associated enterprises (AEs) — including subsidiaries in the USA, Germany, Europe, the Czech Republic, Singapore and Australia — and charged guarantee commission at 0.53 per cent on those guarantees.
The 0.53 per cent rate was consistent with the rate applied in Cyient’s own earlier assessment years, upheld by the ITAT Hyderabad bench in prior decisions, and widely applied across the Hyderabad bench’s jurisprudence on corporate guarantee fees.
The Transfer Pricing Officer (TPO) rejected the 0.53 per cent rate for AY 2020–21. Rather than conducting a fresh benchmarking analysis using comparable corporate guarantee transactions, the TPO issued notices under Section 133(6) to six Indian banks and used the bank guarantee rates obtained as the arm’s length price under the CUP method. The median of those bank rates was 1.90 per cent. Applying 1.90 per cent to the full year on the total guarantee exposure of INR 567 crore, the TPO proposed an addition of INR 8.13 crore.
A second issue arose from a letter of comfort issued by Cyient to Cyient GmbH (a German AE) in connection with a loan from Cyient GmbH to Cyient Europe Limited (a UK AE). The letter committed Cyient to procure that Cyient Europe would receive adequate funding to meet its repayment obligations to Cyient GmbH at all times. The TPO characterised this letter as equivalent to a corporate guarantee and applied the same 1.90 per cent rate, proposing an addition of INR 1.12 crore.
The Dispute Resolution Panel (DRP) confirmed both additions, acknowledging the inconsistency in judicial approaches to corporate guarantee rates but accepting the 1.90 per cent rate in the absence of a credit rating or other risk quantification from Cyient.
The litigation
Issue 1 — Corporate guarantee fee rate and period
The ITAT allowed this ground. On the rate, the Tribunal followed its consistent Hyderabad bench precedent, most recently affirmed in Hetero Labs Limited v ACIT (ITA 312 & 313/HYD/2023, 21 May 2024) and Aurobindo Pharma Limited v ACIT (ITA 485/HYD/2022, 27 April 2023), that corporate guarantee fees are not equivalent to bank guarantee fees. Bank guarantees are commercial products issued to third parties with no control over the applicant’s behaviour, carrying the full default risk at arm’s length. Corporate guarantees are provided within a group context where the guarantor has visibility and often influence over the subsidiary’s financial position. The appropriate rate, consistently applied across Hyderabad bench cases, is 0.53 per cent.
The TPO’s reliance on bank rates gathered under Section 133(6) was rejected. The ITAT also noted the internal inconsistency in the TPO’s own analysis: the arm’s length rate for external commercial borrowing (ECB) had been determined at 1.67 per cent, yet the TPO was applying a guarantee fee rate of 1.90 per cent — higher than the underlying borrowing cost — which made no economic sense given that a guarantee fee should reflect the benefit conferred on the borrower from improved credit access, not exceed the borrowing cost itself.
On the period, the ITAT made an important independent ruling: guarantee fees must be computed on the actual period for which each guarantee was outstanding, not on a full-year basis. Cyient had provided 19 corporate guarantees with terms ranging from 91 to 365 days. The TPO had applied the fee for a full year on all of them. The Tribunal directed the TPO to recompute charges based on actual days. This period-based direction is significant as a standalone principle applicable to all guarantee fee calculations.
Issue 2 — Letter of comfort
The ITAT held that the letter of comfort issued by Cyient constituted an international transaction equivalent to a corporate guarantee, and directed the TPO to price it at 0.53 per cent.
The characterisation turned on the specific language of the letter. Cyient had argued that a letter of comfort is merely an expression of intent without creating a binding financial obligation, relying on Karnataka High Court authority (United Breweries Holdings Ltd.) and various ITAT decisions holding that letters of comfort are not international transactions. The ITAT acknowledged this body of authority but distinguished the present letter on its terms: it committed Cyient to procure that the borrower AE would receive adequate financial funding until full repayment of the loan, such that the borrower would be able to fulfil its repayment and interest obligations at any point in time. The lender could also accelerate the loan on demand, creating a potential immediate repayment obligation that would fall on Cyient if the borrower could not meet it.
The Tribunal applied the OECD Chapter X distinction (para 10.162–10.163): an ‘explicit guarantee’ creates a legal commitment and is priced; ‘anything less than a legally binding commitment’ (such as a letter of comfort that provides only reassurance) does not. The language in Cyient’s letter crossed the threshold into an explicit commitment. Once characterised as a guarantee, the same 0.53 per cent rate applied.
ajiho commentary
The actual-period direction — a discrete and important principle
The most operationally significant element of this decision is the ITAT’s ruling on computation period. The TPO’s approach of applying a full-year guarantee fee to guarantees that were outstanding for only part of the year is a recurring error in Indian TP assessments. A guarantee fee is compensation for risk borne during the period the guarantee is in force. Applying it for a longer period than the guarantee was outstanding overstates the arm’s length consideration just as surely as applying the wrong rate does.
Groups that provide multiple short-term or variable-term guarantees across assessment years should document the actual outstanding period for each guarantee contemporaneously. The Tribunal’s direction here — to restrict the fee to actual days — is consistent with economic logic and should be applied as a matter of standard practice, not only when challenged.
The letter of comfort distinction — language is everything
The ITAT’s analysis of the letter of comfort is a useful illustration of how the same instrument type can fall on different sides of the guarantee/non-guarantee line depending solely on its drafting. Letters of comfort that merely express a parent’s intention to support a subsidiary’s solvency, or commit to not disposing of shares during the loan period, have consistently been held not to constitute guarantees in Indian jurisprudence. Letters that commit the parent to ensure the subsidiary has funding to repay — particularly where the loan can be accelerated by the lender — create a real financial obligation and are priced accordingly.
The distinction maps directly onto the OECD Chapter X framework. Groups should review the specific language of any letters of comfort, letters of support, or keep-well agreements issued in favour of AEs. Where the language creates a genuine obligation to fund or ensure repayment, the instrument should be benchmarked as a guarantee. The rate (0.53 per cent per Hyderabad bench) is modest; the risk of an unanticipated adjustment on the full notional value is not.
The rate debate in India — where things stand
The DRP itself acknowledged in this case that Indian tribunals have applied inconsistent rates for corporate guarantee fees, ranging from 0.3 per cent to 1 per cent across different benches and assessment years. The Hyderabad bench has consistently applied 0.53 per cent since at least 2011 (Mylan Laboratories), and the ITAT here reaffirms that position. The key principle underlying the Hyderabad approach is that bank guarantee rates are not appropriate comparables for corporate guarantees: they measure different risks, involve different parties, and serve different purposes. This principle is now well-established in the Hyderabad bench and consistent with the OECD’s recognition that the yield approach (benefit to the borrower from improved credit terms) is generally more appropriate than a cost-plus bank rate approach.
What this means for your business
For groups with Indian entities providing guarantees to overseas AEs, guarantee fee documentation should specify: (a) the precise period for which each guarantee is outstanding; (b) the rate applied and its basis; and (c) a clear distinction between guarantees (creating a legal obligation) and letters of support or comfort (expressing intent only). Where letters of support have been issued with language that goes beyond mere intent — particularly where they commit to ensuring funding for repayment or are referenced as security in the underlying loan agreement — these should be reviewed and benchmarked as guarantees.
The 0.53 per cent Hyderabad bench rate provides a defensible arm’s length benchmark for corporate guarantees in India, but it should be supported by a contemporaneous analysis of the benefit to the AE from improved credit access and the risk profile of the guarantee — not simply cited by reference to prior years without fresh benchmarking.
Case reference
Cyient Limited v DCIT, Circle 1(1), Hyderabad · Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench · ITA No. 913/HYD/2024 · Assessment Year 2020–21 · 6 January 2025
Judgment in English. Access via the ITAT / Indian Tax Tribunal database.