Case Law Details
Axis Bank Limited Vs ACIT (ITAT Ahmedabad)
The case of Axis Bank Limited Vs. ACIT (Income Tax Appellate Tribunal, Ahmedabad) revolves around the determination of the arm’s length price (ALP) of interest on a loan provided by the assessee to its associate entity. Specifically, it concerns a Tier-II Loan amounting to 25 million USD provided by the assessee to Axis Bank, UK. The dispute arises from the interest charged by the assessee compared to the interest determined by the Transfer Pricing Officer (TPO) to be the ALP.
The assessee charged interest based on 3 months USD LIBOR plus 425 basis points (bps), along with an upfront fee of 2.5% of the loan amount. However, the TPO determined the ALP of interest based on the interest charged by Bank of India (BOI) for a similar loan to Axis Bank, UK. The TPO’s determination included an adjustment for a letter of comfort (LOC) required by BOI from the assessee, resulting in a higher ALP.
The main contention of the assessee is that the adjustment made on account of the LOC was erroneous, as it equated the LOC with a bank guarantee. The assessee argued that LOC should not warrant any adjustment to interest rates, citing relevant decisions of the ITAT and Rule 10A of the Income Tax Rules, 1962, which excludes LOC from corporate guarantee.
To adjudicate this, it’s essential to distinguish between bank guarantees and LOCs. A bank guarantee ensures debt repayment if the borrower defaults, whereas an LOC provides assurance of the borrower’s creditworthiness without entailing financial risk for the provider. While they serve different purposes, LOCs facilitate loan approvals by assuring the lender of the borrower’s financial reliability.
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