2025 (4) TMI 1041 - AT - Income Tax

Issuance of a Standby Letter of Credit (SBLC) by the assessee in favor of its Associated Enterprise (AE) constitutes an international transaction or not? - HELD THAT - We find that the issue has been extensively examined by the Bench on which both of us were in quorum and the Bench has considered the ratio in the case of CIT v. Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT and has concluded that there is no difference between bank guarantee and SBLCs as compared to corporate guarantees. Further we have also concluded that issuance of SBLC in the international transaction can be put to ALP tests. As for completeness the observations and finding of the Bench in the case of Anand NVH Products Pvt. Ltd. 2025 (1) TMI 1003 - ITAT DELHI Thus we are inclined to hold that the AO/TPO shall consider rate of 0.5% as against 1.3% to ALP for international transaction and accordingly determine the adjustment required to be made. Ground no.2 and its sub-grounds are accordingly decided in favour of the assessee. Deduction u/s 80G - assessee made a donation to FCS Foundation a trust registered u/s 80G - AO has made the disallowance of cheque of Rs. 55 lakh on an allegation that the receipt issued by the said foundation is not of period ending 31.03.2016 as there was a cutting in the date - HELD THAT - The assessee has produced the affidavit of the director as additional evidence before the DRP. However the assessee could not produce any evidence from the recipient as to how this fund was received and acknowledged in the financials of the recipient. At the same time the AO has also not made any effort to enquire into the alleged fact of the receipt being dated 31.03.2016 thus we consider it appropriate to restore the issue to the file of the AO to give liberty for enquiry afresh with regard to the correctness of the claim of the assessee with respect to the disputed receipt number 400 to the extent of the date on which it was received by the trust namely FCS Foundation and the year in which it was accounted for. AO will allow the deduction u/s 80G if it was satisfactorily demonstrated by the assessee before the AO that the trust namely FCS Foundation has accounted the receipt paid by cheque. Accordingly the ground allowed with the above observations.

Summary

The core legal questions considered in this appeal pertain primarily to two issues: (1) Whether the issuance of a Stand by Letter of Credit (SBLC) by the assessee in favor of its associated enterprise (AE) constitutes an international transaction under section 92B of the Income Tax Act, 1961, thereby attracting transfer pricing adjustments; and if so, what is the appropriate arm's length price (ALP) for such a transaction; and (2) Whether the assessee is entitled to claim deduction under section 80G of the Act for a donation of Rs. 55 lakhs made to a registered trust, given the dispute regarding the date of receipt and acknowledgment of the donation by the trust.

Regarding the first issue, the Tribunal examined whether the guarantee issued by the assessee to facilitate the SBLC for its wholly owned subsidiary, Lava International (HK) Limited, constitutes an international transaction under the transfer pricing provisions. The Transfer Pricing Officer (TPO) had made an adjustment by imputing a notional commission at the rate of 1.3%, based on the commission charged by State Bank of India on bank guarantees, amounting to Rs. 8,27,766. The Dispute Resolution Panel (DRP) upheld this adjustment, which was challenged by the assessee.

The legal framework relevant to this issue includes section 92B of the Income Tax Act defining international transactions, and section 92CA(3) empowering the TPO to determine ALP. The assessee contended that the guarantee was issued as a shareholder activity to protect its business interest and did not involve any cost or profit element, thus not constituting an international transaction. Reliance was placed on the Supreme Court decision in Morgan Stanley and Co. Inc., and various High Court and Tribunal precedents, including Jindal Pipes Ltd., Vaibhav Gems Limited, Hindalco Industries Limited, and The Bombay Dyeing & Mfg. Co. Ltd., which distinguish between corporate guarantees issued as shareholder activities and bank guarantees issued by commercial banks.

The Tribunal referred extensively to its earlier decisions and those of coordinate benches, particularly the decision in Anand NVH Products Pvt. Ltd., which clarified that for transfer pricing purposes, SBLCs and bank guarantees are similar in purpose but differ in commercial implications and risk exposure. The Tribunal emphasized that if the guarantee increases the risk profile or leverage of the guarantor company, it constitutes an international transaction subject to ALP determination. However, the commission charged by commercial banks on bank guarantees cannot be automatically applied as a benchmark for corporate guarantees or SBLCs, as the commercial considerations differ significantly.

Further, the Tribunal cited the Mumbai Tribunal's ruling in Technocraft Industries (I) Ltd., which accepted internal comparables where the assessee had paid commission for SBLCs, and the Bangalore Tribunal's decision in GMR Infrastructure Ltd., which rejected TPO's adjustment based on commercial bank rates for corporate guarantees. The Bombay High Court's ruling in CIT vs. Everest Kento Cylinders Ltd. was pivotal, holding that corporate guarantees issued by holding companies for subsidiaries are distinct from bank guarantees and that commission rates charged by banks cannot be indiscriminately applied to corporate guarantees. The Court underscored that the commission charged by the assessee itself (0.5%) was a more appropriate ALP.

Applying these principles to the facts, the Tribunal found that the assessee had indeed incurred a cost for the SBLC, as evidenced by the bank charges of 1% per annum during the relevant period. Therefore, the ALP should reflect this actual cost rather than the higher 1.3% rate used by the TPO. The Tribunal directed the Assessing Officer and TPO to consider a rate of 0.5% or 1% as the ALP for the guarantee commission, allowing the assessee to be compensated accordingly. The Tribunal thus allowed the appeal on this ground, setting aside the higher adjustment made by the revenue authorities.

The second issue concerned the deduction claimed under section 80G for a donation of Rs. 1.10 crores, specifically Rs. 55 lakhs paid by cheque no. 033619. The Assessing Officer disallowed the deduction for Rs. 27.5 lakhs (50% of Rs. 55 lakhs) on the ground that the receipt issued by the donee trust, FCS Foundation, bore an overwritten date, indicating back-dating from 12/04/2016 to 31/03/2016. The AO observed that the cheque was debited from the assessee's bank account on 15/04/2016, after the end of the financial year, suggesting the donation was made in the next financial year, thus ineligible for deduction in AY 2016-17.

The assessee argued that the cheque was issued on 31/03/2016 and produced bank reconciliation statements and an affidavit from a director to support the claim that the donation was made within the relevant financial year. The assessee also contended that the consecutive numbering and similar handwriting on receipts no. 399 and 400 should indicate acceptance of both donations in the same year.

The Tribunal noted the AO's detailed observations on the improbability of a genuine error in overwriting both day and month on the receipt, concluding it was a case of forgery or back-dating. The Tribunal also noted the absence of any evidence from the donee trust acknowledging receipt of the donation in the relevant year and the lack of enquiry by the AO into this aspect. Given these circumstances, the Tribunal considered it appropriate to restore the issue to the AO for fresh enquiry. The AO was directed to verify the date of receipt and accounting of the donation by the trust and allow the deduction if the assessee satisfactorily demonstrates that the donation was accounted for in the relevant financial year.

The Tribunal thus allowed the ground subject to verification and enquiry, providing the assessee an opportunity to substantiate its claim. The Tribunal's approach balanced the AO's findings with the assessee's right to prove the genuineness and timing of the donation.

Other grounds raised by the assessee were either general or not pressed and were accordingly dismissed or not considered.

Significant holdings include the following:

"In common parlance, there is no difference between a Bank Guarantee and an SBLC in regards to their intended purpose however they may be governed by different rules and local laws with regard to their enforceability. However, for the purpose of issue before us, if the provision of benefit of any guarantee to AE has a bearing on the profits, income, losses or assets of the company and the overall risk exposure of the assessee company becomes higher by virtue of the amount of guarantee and the assessee company becomes more leveraged including by virtue of its debt equity ratio which would ultimately affect the cost of borrowings, then providing SBLC or corporate guarantee becomes an international transaction."

"Therefore, the commission charged by a commercial bank under bank guarantee cannot be a benchmarking parameter and a suitable comparable for determination of arm's length price of the alleged international transaction, if some other internal comparable is available where assessed has paid commission or other charges for securing a guarantee for itself."

"The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company."

"The cheque was provided to the done some time in April, 2016. However, as per the provisions of Sec.80G of the IT Act, an assessee is entitled for deduction under this section only for donations made during the relevant previous year. Since the donation for Rs. 55,00,000/- vide cheque no. 033619 was not made during the financial year 2015-16, the deduction claimed on this account, that is Rs. 27,50,000/-(50% of Rs. 55 Lacs) is ordered to be denied."

However, the Tribunal remanded the matter for fresh enquiry to verify the date of receipt and accounting by the trust before finalizing the deduction claim.

In conclusion, the Tribunal held that the issuance of SBLC by the assessee to its AE constitutes an international transaction subject to transfer pricing adjustment, but the ALP must be determined on actual cost incurred (0.5% or 1%) rather than the higher notional rate of 1.3%. On the donation issue, the Tribunal found prima facie evidence of back-dating but allowed the assessee an opportunity to prove the genuineness and timing of the donation, directing the AO to conduct further enquiry accordingly.