The Bombay High Court on Friday dismissed the plea of the Aditya Birla Group flagship Hindalco Industries which had challenged the income-tax (I-T) department's contention that tax should be levied on corporate guaranatees issued by the company. A division bench comprising justices DY Chandrachud and AA Sayed, while dismissing the petition filed by Hindalco, said there is no breach of any natural justice and the petitioner can exercise alternate remedies to go for an appeal, including the dispute resolution panel.

The Hindalco plea challenged a draft transfer pricing order of the income-tax department, saying that Hindalco needs to pay approximately Rs 1,100 crore. According to the tax department, eight hearings were given by the transfer pricing officer to Hindalco before concluding on the levy.

The draft order represents a potential tax liability and the I-T department has time till December 31 for issuing a final order against the company. Hindalco has filed the petition on December 15, seeking immediate relief and quashing of the tax department order. The aluminum and copper giant was served with the draft transfer pricing order for 2008-09. The case relates to corporate guarantees issued by Hindalco to an SPV formed for the acquisition of the Canadian giant Novelis for $6 billion in 2007.

The acquisition, which was considered one of India's largest outbound transactions, catapulted Mumbai-based Hindalco as one of the largest aluminium player in the world. Transfer price is the amount used in accounting for transfer of goods or services from one place to another or from one company to another which belongs to the same parent company. In the case of acquisition, a company floats an overseas special purpose vehicle which raises money for completing the acquisition.

Since the SPV does not have any asset or revenue stream, it relies on a guarantee by the parent. ET had earlier reported that the government is likely to impose tax on companies giving guarantees for overseas acquisitions in its efforts to boost tax collections. Typically, a charge or fee is payable if a company gives a guarantee to unrelated parties. However, when such guarantees are given to an associated enterprise or a related party for the purpose of an acquisition, the parties involved make adjustments.

As a result of this adjustment, charges payable on such guarantees "become invisible," according to people familiar with the process, leading to a loss of revenue for the government. The I-T department has brought such under the transfer pricing net of the Income-Tax Act. The I-T department had raised Rs 20,000 crore last year from transfer pricing and is aiming to generate at least 50% more in the current fiscal. It has also brought in expenditure on brand building under the transfer pricing net. (Economic Times)