Tata International Ltd. Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that there is a fundamental gap between guarantee and Letter of Comfort. Guarantee is a legally enforceable; however, Letter of Comfort is not. Thus, issuing Letter of Comfort to the Bankers of AE, the assessee did not incurred any cost and hence it does not constitute international transaction under section 92B of the Act
Facts- Appellant alleges the transfer pricing adjustment made with respect to the Letter of Comfort issued by the Appellant. As per TPO, the transaction of providing Letter of Comfort would fall within the ambit of the term ‘international transaction’ u/s. 92B of the Act. The Letter of Comfort given by the Appellant is held to be guarantee. On the basis of information received from various banks, the TPO held that the fees receivable by the Appellant from its AEs for providing the Letter of Comfort ought to be 3% of the total funding facility covered by the Letters of Comfort.
Further, the appellant contested the transfer pricing adjustments in respect of interest of Rs. 20, 70,633/- on delayed realisation of sales proceeds from its AEs. Appellant charged interest @ 6% on the realisation of sale proceeds from its AEs for the entire credit period extended to the AEs of 150/180 days. TPO held that interest chargeable by the Appellant on the outstanding balances should be at par with the Prime Lending Rate (‘PLR’) in India which according to him was 12.25% prevalent in the month of March 2008.
Conclusion- Held that by issuing Letter of Comfort to the Bankers of AE, the assessee did not incurred any cost. The issuance of Letter of Comfort by assessee have no bearing on the profit, income or loss as the assessee did not incur any cost or expenditure for issuing such Letter of Comfort and it does not constitute international transaction under section 92B of the Act. There is a fundamental gap between guarantee and Letter of Comfort. Guarantee is a legally enforceable; however, Letter of Comfort is not.
Hon’ble Delhi High Court in the case of CIT-I vs. Cotton Naturals (I) (P) Ltd. has held that even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by assessee is directed against the order of Dispute Resolution Panel – II, Mumbai dated 25.09.2011 u/s. 144C (5) of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2008-09.
1. The learned Assessing Officer and/or the learned Dispute Resolution Panel [“AO-DRP”] erred in disallowing expenditure aggregating 3, 74, 855 by way of payments made to clubs.
2. This ground raised by the assessee is covered by the decision of Coordinate Bench of ITAT Mumbai in assessee’s own case for AY 2005-06 in ITA 4376/Mum/2010. The operative portion of the order of Coordinate Bench of ITAT is as under:-
“13. Ground no.2 relates to disallowance out of payment made to club. The ld. AR of the assessee submits that this ground of appeal is also covered by Hon’ble Bombay High Court and decision of various benches of Tribunal in Otis Elevator (195 ITR 682). The ld. AR of the assessee submits that the assessee claimed total expenses of Rs. 3,52,200/- out of which, the Assessing Officer allowed Rs. 52,000/- paid to Devas Office and rest of the amount of Rs. 2,99,500/- for subscription fees, annual contribution and membership of various club and other expenses paid on club were disallowed. The ld. CIT (A) granted part relief restricting the disallowance to Rs. 2,65,000/-. The ld. AR of the assessee submits that the issue is stand covered by the decision of jurisdictional High Court in Otis Elevator (supra).
14. On the other hand, the ld. DR for the revenue supported the order of lower authorities.
15. We have considered the submission of both the parties and perused the record and find that the Hon’ble Bombay High Court in Otis Elevator (supra) held that the payment made to clubs are revenue in nature and are allowable as such. We have further noted that in assessee’s own case for Assessment Year 1996-97, 1997-98 & 1998-99, the co-ordinate bench of Tribunal in ITA No. 4976, 4977 & 4978/Mum/2005 vide order dated 26.03.2009 allowed similar claim in favour of assessee. Therefore, considering the decision of Tribunal in assessee’s own case for Assessment Year 1996-97, 1997-98 & 1998-99 and decision of jurisdictional High Court, this ground of appeal is allowed in favour of assessee.”
3. As the issue involved is identical in facts and law to those in A.Ys. 1996-97, 1997-98, 1998-99 and 2005-06 and issue decided in favour of assessee by the Coordinate Benches. We respectfully follow the ratio laid down by the Coordinate Benches and decision for earlier years will apply mutatis mutandis to this year also. In view of this ground no. 1 raised by the assessee is allowed.
2.1. The learned AO-DRP erred in disallowing a sum of Rs. 1,65,35,000/- out of the aggregate Interest of Rs. 11,44,02,081/- paid by the Appellant in respect of capital borrowed by the Appellant for the purposes of its business and hence claimed by the Appellant as deductible under Section 36(1)(iii).
2.2. Without prejudice to the generality of the foregoing ground, the Appellant submits that the learned AO-DRP, not having controverted the evidence on record to the effect that the Appellant’s entire Borrowings had been utilised for the purposes of the Appellant’s export business and that no part of such Borrowings had been utilised for making any of its investments, erred in disallowing the said sum of 1,65,35,000 out of the aggregate Interest expenditure of approx Rs. 11,44,02,081/- .
2.3. without prejudice to the foregoing grounds, the Appellant submits that the learned AO-DRP erred in not allowing the Appellant’s claim that, having regard to –
(1) The fact that the Investments were made from a mixed fund comprising both the Appellant’s Own Funds as well as its borrowed funds and
(ii) The fact that the Appellant’s Own Funds (Rs. 294.23 Crores) were far in excess of the Appellant’s total Investments in shares (₹ 133.67 Crores), the AO-DRP ought to have held –
(a) That such Investments had been made from the Appellant’s Own Funds and not from any part of the Appellant’s borrowed funds,
(b) that, therefore, the borrowed funds had been utilised, not for the purpose of making investment in shares, but for the other purposes of the Appellant’s business and
(c) That, accordingly, the Interest of Rs. 1,65, 35,000/- was allowable under Section 36(1) (iii) of the Act.
The Appellant submits that the learned AO-DRP erred in this respect in not following the binding order of this Hon’ble Tribunal in the Appellant’s own case for the Assessment Years 2000-01 to 2002-03, viz., the Order dated 8th June, 2012 of the Hon’ble Mumbai Bench ‘E’, in I.T.A. Nos. 3957, 3958 & 3959 / M um / 2006
2.4. without prejudice to the foregoing grounds, the Appellant submits that, in making their determinations in respect of the disallowance under Section 14-A, the learned AO-DRP erred in the following respects:
(1) The learned AO-DRP erred in holding that the amount disallowed under Section 14-A was not allowable under Section 36(1) (iii) of the Act
(2) The learned AO-DRP erred in holding that a part of the Appellant’s borrowed funds had been used for the purpose of making investments in shares, particularly in view of the fact that the Appellant’s Own Funds (Rs. 294.23 Crores) were far in excess of the Appellant’s Total Investments ( Rs. 133.67 Crores).
(3) The learned AO-DRP erred in holding that a part of the Appellant’s borrowed funds had been used for the purpose of making Investments in shares, for the reason also that the learned AO-DRP has not brought on record any material establishing any nexus between any part of the Appellant’s borrowed funds and the funds utilized by the Appellant to make such investments.
(4) The learned AO-DRP erred in rejecting the Appellant’s alternative claim to the effect that the amount disallowed under Section 14-A was allowable under Section 37(1).
(5) The learned AO-DRP erred in rejecting the Appellant’s alternative claim to the effect that the amount disallowed under Section 14-A was allowable under Section 57(iii).
(6) The learned AO-DRP erred in holding that a part of the aggregate Interest of 11,44,02,081 paid by the Appellant in respect of capital borrowed by the Appellant for the purposes of its business was disallowable under Section 14-A.
(7) The learned Commissioner (Appeals) erred in rejecting the Appellant’s alternative claim to the effect that, if at all any amount was disallowable under Section 14-A, an amount of 6,74,768, representing the interest apportionable to the exempt income in the same proportion that the gross exempt income by way of dividends received bore to the total gross revenue of the Appellant, ought to have been adopted, having regard to the fact that such manner of apportionment had received the seal of approval of the Supreme Court in Consolidated Coffee Ltd v State of Karnataka (2001) 9 SCC 720.
2.5. Without prejudice to the foregoing grounds, the Appellant submits that the learned AO-DRP erred in applying Rule 8-D to the Appellant’s case, without having been dissatisfied with the correctness of the claim of the Appellant in respect of its expenditure by way of Interest in relation to income which did not form part of the total income under the Income-tax Act, 1961.
2.6. Without prejudice to the foregoing grounds, the Appellant submits that, assuming (whilst denying) that the provisions of Rule 8-D were properly applied to its case, the learned AO-DRP erred in the following respects in such application, viz.:
(1) The learned AO-DRP erred in rejecting the Appellant’s alternative claim to the effect that the learned AO-DRP ought to have excluded the average cost of such of the Appellant’s investments as were made on or before 31 March, 1999 (“Old Investments”).
(2) The learned AO-DRP erred in rejecting the Appellant’s further alternative claim to the effect that the learned AO-DRP ought to have excluded the average cost of such of the Appellant’s investments as had not yielded any dividends during the year under consideration (“Non Dividend Yielding Investments”).
(3) The findings of the learned DRP [in paragraph 19 (at page 6) and paragraph 20 (at page 7) of its Directions] to the effect that there is expenditure incurred in respect of the Appellant’s investments by way of costs involving decision-making, direct supervision and funding, are based on conjectures and surmises and are unsupported by any evidence on record and, consequently, are perverse.
4. During the year under reference, the appellant has earned exempt income of Rs. 4, 52, 05,031/-. The appellant has not incurred any expenditure for earning the exempt income. The appellant’s Owned Funds aggregated to Rs. 31,048.70 Lakhs which comprise of Share Capital amounting to Rs. 2,153.80 Lakhs and Reserves and Surplus amounting to Rs. 29,048.70 Lakhs. The Annual Accounts of the appellants are placed at Page 12 of the Paper Book (Corporate Grounds).
5. The value of total investments as on 31 March 2008 is Rs. 23,726.67 Lakhs. Attention is invited to page 56 of the Paper Book (Corporate Grounds), giving analysis of Investment of the appellant as at 31 March 2008 and 31 March 2007, specifically giving the details of actual cost of investments and such investments on which no exempt income is earned during the year under reference. It is submitted that only the actual cost (excluding revaluation thereof) of such investments which have yielded exempt income should be taken into account. The appellant’s funds are mixed funds. During the year under reference the company has incurred interest expenditure of Rs. 1144.02 Lakhs. The appellant submits that all the borrowed funds were utilized wholly for the purpose of its business and no part of such borrowings were utilized for acquisition of any shares yielding domestic dividends and consequently, no interest should be disallowed. Details of interest expenditure are mentioned at page 57 of the Paper Book (Corporate Ground).
6. It is submitted by the appellant that, for the purpose of section 14A, cost of only those investments have to be considered which have yielded exempt income during the year. (Working at Page 56 of Paper Book Corporate Grounds). The amount of investments on which exempt income is earned is as under:
Opening cost of investments (01/04/2007) – Rs. 2, 153.80 Lakhs Closing cost of investment (31/03/2008) -Rs. 2,551.26 Lakhs Average cost of investments – Rs. 2,352.53 Lakhs
7. The appellant’s own funds aggregating to Rs. 31,048.70 Lakh are far in excess of amount of its cost of Investments which have yielded exempt income i.e Rs. 2352.53 Lakh (Average). Even otherwise, the total investments as at 31 Mach 2008 held by the appellant stand at Rs. 23,726.67 Lakhs, whereas own funds of the appellant as at 31.03.2008 stand at Rs. 31,048.70 Lakhs. Hence, it is submitted no disallowance should be made in respect of interest expenditure. The appellant places reliance on the following judicial pronouncements, wherein it has been held that where the Appellant’s own funds are in excess of investments then it should be presumed that the investments are made from the Own Funds and not from Borrowings, consequently disallowance u/s. 14A of the Act in respect of interest expenditure ought to be deleted.
(i) South Indian Bank Ltd vs. Commissioner of Income Tax 438 ITR 1 (SC) (09- 09-2021) (Para 27 Page 51) (Page 45 to 51)
(ii) CIT vs. Reliance Utilities & Power Ltd [2009] 313 ITR 340 (Bom) (Page 52 to 55)
(iii) HDFC Bank Ltd vs. DCIT 383 ITR 529 (Bom. HC) (Page 56 to 68)
8. Alternatively and without prejudice to the above, it is submitted that interest expense of Rs. 1144.02 Lakhs includes interest aggregating to Rs. 1041.99 Lakhs which is in relation to (EPC) Export Packing Credit and Pre Shipment Credit in Foreign Currency incurred for the purpose of export/ import business of the appellant. The appellant is prohibited, under Reserve Bank of India’s Regulations, from using any part of such credit for any purpose other than the appellant’s export business. Hence, such interest has to be excluded while computing the amount of disallowance. The details of interest expenditure are submitted at Page 57 of Paper Book (Corporate Grounds).
9. The appellant submits that the disallowance under Rule 8D(2)(iii) may be restricted to 0.5% of only those investments which have yielded income i.e 0.5% of Rs. 2352.53 Lakhs which will come to Rs.11.76 Lakhs. The appellant places reliance on decision of Special Bench in case of ACIT Vs. Vireet Investment Pvt. Ltd. (SB) (2017) 165 ITD 27 (Para 11.16 of the Order). (Page 69 to 99)
10. Considering the above facts, which are not under challenge, judicial pronouncements discussed and relied up-on (supra), it can be safely concluded relying on the decision of Hon’ble jurisdictional High Court in the case of Reliance Utilities & Power Ltd. and HDFC Bank Ltd wherein it has been held that where the Appellant’s own funds are in excess of investments then it should be presumed that the investments are made from the Own Funds and not from Borrowings, consequently disallowance u/s. 14A of the Act cannot be made. Relying on Reliance Utilities & Power Ltd. and HDFC Bank Ltd., there is no need to discuss alternative arguments raised by the assessee. As far as disallowance of 0.5% on average investment amounting to Rs. 11.76 lakhs is concerned, it is found there is no specific finding or working has been done by the AO and Ld. DRP, hence same need not be sustained here also. In view of the above, ground no. 2 raised by the assessee is allowed and AO is directed to delete the same.
3.1. The learned AO-DRP erred in making an addition of Rs. 9,29,30,250/- to the Total Income returned by the Appellant, as and by way of a Transfer Pricing Adjustment in respect of the non-recovery by the Appellant from its concerned Associated Enterprises (“AEs” or “AE”), of fees or commission allegedly payable by such AEs to the Appellant for the issue of Letters of Comfort by the Appellant to the Bankers of such AES.
3.2. Without prejudice to the foregoing ground, and assuming whilst denying that any Transfer Pricing Adjustment was required to be made to the Total Income returned by the Appellant in respect of the Appellant’s non-recovery of any fees or commission from its concerned AEs, the Appellant submits that the “commission” determined by the learned AO-DRP as recoverable by the Appellant from its concerned AEs ought to have been computed,
(1) not with reference to the value of the relevant LOC, but with reference to the sanctioned credit limit actually utilised by the concerned AE and, (iii) in any event, at least with reference to the sanctioned credit limit.
3.3. The Appellant submits, without prejudice to the foregoing ground, and assuming whilst denying that any Transfer Pricing Adjustment was required to be made to the Total Income returned by the Appellant in respect of the Appellant’s non-recovery of any fees or commission from its concerned AEs, that bank guarantee commission is not the appropriate benchmarking tool for determining the arm’s length price of the “Income” accruing to the Appellant from the issue of each of the LOCs aforesaid.
3.4. without, prejudice to the foregoing grounds, and assuming whilst denying
(1) that any Transfer Pricing Adjustment was required to be made to the Total Income returned by the Appellant in respect of the Appellant’s non-recovery of any fees or commission from its concerned AEs and
(i) that the rates of bank guarantee commission charged to the Appellant by its Bankers are relevant for making any such Adjustment, the Appellant submits that, having regard to the fact that the rates of such bank guarantee commission ranged from 0.30% per annum to 2.0% per annum [Paragraph 57, at Page 19 of the learned DRP’s Directions), it is the lowest of those rates, i.e., 0.30% per annum, which ought to have been applied in making any such Adjustment.
3.5. Without, prejudice to the foregoing grounds, and assuming whilst denying that any Transfer Pricing Adjustment was required to be made to the Total Income returned by the Appellant in respect of the Appellant’s non-recovery of any fees or commission from its concerned AEs, the Appellant submits that,
(i) if the dividend paid to the Appellant by the concerned AE was equal to or in excess of the value of any benefit(s) allegedly enjoyed by such AE consequent to the issue by the Appellant to the Bankers of such AE of any LOCs, no such Transfer Pricing Adjustment ought to be made and,
(ii) If the dividend paid to the Appellant by the concerned AE was less than the value of any such alleged benefit(s), then it is only the excess of such alleged benefit(s) over such dividend which ought to be determined as the Transfer Pricing Adjustment.
11. This ground relates to the transfer pricing adjustment made with respect to the Letter of Comfort issued by the Appellant. As per TPO, the transaction of providing Letter of Comfort would fall within the ambit of the term ‘international transaction’ u/s. 92B of the Act. The Letter of Comfort given by the Appellant is held to be guarantee. On the basis of information received from various banks, the TPO held that the fees receivable by the Appellant from its AEs for providing the Letter of Comfort ought to be 3% of the total funding facility covered by the Letters of Comfort.
12. As per Ld. DRP Letter of Comfort is similar to a letter of guarantee and it is an international transaction. The rate at which fees ought to be received by the Appellant from its AEs for providing the Letter of Comfort was reduced from 3% to 1.50%. As per assessee the Letter of Comfort given by the Appellant in the earlier years has continued during the year under consideration. No fresh Letter of Comfort has been issued for the current year. A summary of them including copies thereof are at Page 32 to 49 of Paper Book Volume -2.
13. This issue is covered in favour of the Appellant by the decision of the Hon’ble ITAT in its own case for the A.Y. 2005-06 (bearing ITA No. 4376/Mum/2010 dated 29 January 2020). A copy of the said decision was submitted before the Bench during the course of hearing on 24 January 2024 (refer para Nos. 19 to 24 on page nos. 31 to 36 of the order) and is enclosed herewith at page 21 to 38 for ease of reference. The relevant extracts of the said decision are reproduced hereunder:
“The Id. CIT()A) after considering the submission of assessee concluded that by issuing Letter of Comfort to the Bankers of AE, the assessee did not incurred any cost. The issuance of Letter of Comfort by assessee have no bearing on the profit, income or loss as the assessee did not incur any cost or expenditure for issuing such Letter of Comfort and it does not constitute international transaction under section 92B of the Act. The Id. CIT (A) concluded that there is a fundamental gap between guarantee and Letter of Comfort. Guarantee is a legally enforceable; however, Letter of Comfort is not. We have noted that Hon’ble Karnataka High Court in United Braveries (Holding) Ltd. vs. Karnataka State Industrial Investment and Development Corporation (supra) held that Letter of Comfort merely indicates the appellant’s assurance that respondent would comply with the term of financial transaction without guaranteeing performance in the event of default. The coordinate bench of Tribunal in India Hotels Co. Ltd. (supra) on similar ground of appeal by following the decision of Hon’ble Karnataka High Court held that Letter of Comfort does not constitute international transaction. So far as contention of Id. DR for the revenue that after amendment in Explanation to section 92B is concerned, we have noted that coordinate bench in SIRO Clinpharm P. Ltd. (supra) held that amendment in Explanation to section 92B by Finance Act, effective from 01.04.2012 is to be treated as effective at the best from A.Y. 2013-14. Thus, in view of the aforesaid discussion, we do not find any illegality or infirmity in the order passed by Id. CIT (A). In the result, Ground No. 6 to 9 (additional ground) of assessee’s appeals are allowed and consequently the grounds of appeal raised by revenue are dismissed.”
14. Similar view has been taken by the coordinate bench again in the Appellant’s own case for the A.Y. 2007- 08 vide Order dated 30 November 2023 (bearing ITA No. 6753/Mum/2012). A copy of the said decision was also handed over to the Bench during the course of hearing on 24 January 2024 (refer para Nos. 11 to 13 on page nos. 07 to 11 of the order) reproduced herein below as under:
“11. The brief facts are that the Assessing Officer has made addition of Rs.5,75,38,800/-on account of transfer pricing adjustment in respect of non-recovery by the assessee from its AE and the issue of letter of credit holding that assessee has not charged any commission from the AE. The ld. CIT (A) has deleted the said adjustment after observing and holding as under:-
9.4 I have considered the facts of the case and written submissions and oral arguments of the appellant advanced during the course of the appeal as against the observations/findings of the TPO/AO in their orders. The contention of the appellant are being discussed and decided as under:
i. The international transactions of the appellant were analyzed by the TPO during proceedings. The TPO examined in detail the international transactions of the appellant referred to by the AO and proposed no further adjustment to the value of arm’s length price of international transactions benchmarked by the appellant in its TP documentation. In respect of the LOCs issued by the appellant to its AEs, the TPO selected Comparable Uncontrolled Price method (“CUP”) as the most appropriate method for determining the arm’s length price of this transaction and in determining the price, the TPO mentioned that Indian bank charged a fee ranging from 0.25% to 15% of the value of guarantee given to its customers depending upon the risk involved.
The TPO proceeded to determine the arm’s length commission to be 50% of 1.5% at 0.75%. Based on this the TPO proposed an adjustment of Rs. 5, 75, 38,800/- be made to the total income of the appellant. The adjustment was computed on the value of the LOCs issued by the appellant to its AE’s as against the actual draw down of funds from the bank by the AE’s.
ii. The AO under Section 143(3) of the Act passed the assessment order in conformity with the addition proposed by the TPO incorporating the proposed addition of Rs. 5,75,38,800/- to the returned income of the appellant.
iii. The appellant has filed detailed submissions distinguishing a letter of comfort with intra-group credit guarantees together with other related issues.
iv) In view of the facts of the case and position of letter of comfort 1 am not inclined to treat letter of comfort (LOC) at par with intra-group credit guarantees or equivalent to guarantees as averred by the TPO. The reasons for this are summarized as under
a) the LOC is a unilateral letter issued by the appellant and does not constitute an agreement or contract It is not accepted by the Banker to whom it has been issued,
b) it is not enforceable by law as in an event where the AE were to default in respect of the loan given to it by its Banker, the Banker has no legal recourse to the appellant in respect of the LOC issued;
c) again if the appellant were to dispose of its shares in the AE(s) without first obtaining the consent of the Banker or having ensured that the AE’s liability to the bank is discharged in full no legal recourse is available to the banker against such dilution or disposal; and
d) as the very title of the LOC suggests, the LOC merely provides comfort to the Bank as to the AE’s ability / willingness to perform its obligations and neither creates nor is intended to create any kind of binding recourse which the Banker may have on the appellant.
v. Moreover, it is an incidental benefit arising merely from passive association with the group and are therefore not regarded as giving rise to arrangements subject to remuneration. Para 7.13 of OECD Guidelines, July 2011 deal with the issue which is reproduced hereunder:
“Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to guarantee by another group member, or where the enterprise benefited from the group’s reputation deriving from global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances.”
vi. Appellant vide its letter dated 23.08.2012 has submitted that it does not press ground No. 6C(ii) which is in respect of comparable data for benchmarking and accordingly the appellant would not like to press ground No. 6C(ii) of appeal However in view of the position above such letter filed by the appellant becomes in consequential
vii. In view of the facts of the case, discussion herein above and consistent with the decision taken by my predecessor for A.Y. 2005-06 and by me for A.Y 2006-07 in the appellant’s case, the adjustment of Rs. 5,75,38,800/- is therefore deleted.
viii Thus, this ground of appeal is allowed.
12. We find that the Tribunal in A.Y.2005-06 has decided this issue in favour of the assessee after observing as under:-
Ground No.6 to 9 relates to Transfer Pricing Adjustment with respect to issuance of “Letter of Comfort”. This issue is interconnected with the grounds of appeal raised by revenue in its cross appeal. The Id. AR of the assessee submits that Id. CIT (A) deleted the adjustment against which the revenue has filed its cross appeal. The Id. AR of the assessee submits that the assessee issued Letter of Comfort to Bankers of Associated Enterprises (AE) of assessee. The assessee not reported this transaction (issuance of Letter of Comfort) in its Transfer Pricing Study Report (TPSR). The Assessing Officer made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP) of transaction reported by assessee with its AE in its report furnished under Form 3CEB. The TPO noted that the assessee has not reported about issuance of Letter of Comfort to the Banker of AE. The TPO issued show cause notice for determination of ALP with regard to issuance of Letter of Comfort. The assessee filed its reply vide reply dated 07.01.2008 & 18.01.2008. In reply to the show-cause, the assessee submitted that no adjustment is ought to be made as Letter of Comfort would not represent international transaction within the meaning of section 92B (1). It was further stated that merely an unequivocal statement of intention expressed by assessee not being bilateral, is not a transaction and letter is a private affair between the assessee and the lender/banker (non associate and is not a transaction between two associate). The contention of assessee was not accepted by TPO by taking view that transaction relating to provision for Letter of Comfort and payment of commission for the services by AE to the assessee would fall within the definition in term of international transaction 92B of the Act. The TPO made adjustment of Rs. 8.70 crore on account of issuance of Letter of Comfort. The Id. CIT (A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an international transaction. The Id. CIT (A) appreciated the difference between corporate guarantee and Letter of Comfort. The Ld. AR further submits that there is a basic difference between corporate guarantee and Letter of Comfort. In a Letter of Comfort, the party issues only a letter that a subsidiary or group company would comply term of financial transaction and have no obligation to indemnify, however, in case of corporate guarantee, the party issuing guarantee is under obligation to the lender. The Ld. AR further submits that in fact this ground of appeal is also covered by the decision of Tribunal in case of The India Hotel Company Ltd. vs. DCIT in ITA No. 9087/Mum/2010 dated 06.09.2019, wherein similar ground of appeal was considered and by following the decision of earlier years in that assessee and decision of Hon’ble Karnataka High Court in United Braveries Holding Ltd. Karnataka State Industrial Investment and Development Corporation Ltd. (M.F.A. No. 4234 of 2007 (SFC), wherein it was held that Letter of Comfort merely indicates the parties assurance that respondent would comply with the term of financial transaction without guaranteeing performance in the event of default.
13. since in the earlier year this precise issue has been decided in favour of the assessee, therefore, as precedence, following the aforesaid decision, we uphold the order of the ld. CIT (A) and consequently grounds raised by the Revenue are dismissed.
15. Since in the earlier assessment years namely 2005-06, 2006-07 and 2007-08 issue has been discussed and examined by the Coordinate Benches and revenue is not able to bring anything adverse on record to deviate from the earlier views, we respectfully follow the decisions of Coordinate Benches in earlier years and allow the ground taken by the assessee. In the result, AO is directed to delete the addition made on this count.
4.1. The learned AO-DRP erred in making an addition of Rs. 20, 79,633/- to the Total Income returned by the Appellant, as and by way of a Transfer Pricing Adjustment in respect of the rate of interest charged by the Appellant from some of its AEs for the extended period agreed to between the Appellant and such AEs for remittance by such AEs to the Appellant, of the sale proceeds of exports made by the Appellant to such AEs.
4.2. without prejudice to the foregoing ground, and assuming whilst denying that any Transfer Pricing Adjustment was required to be made to the Total Income returned by the Appellant in respect of the rate of interest charged by the Appellant from its said AEs, the Appellant submits that such rate –
(1) Ought to be charged from the perspective of the persons availing the credit (viz., the said AEs) and
(ii) Ought to be based on rates applicable to the currency in which the credit was extended [e.g. the London Inter-Bank Offered Rate (LIBOR) and not on the Indian Prime Lending Rate (Indian PLR)
16. Ground No. 4, Transfer Pricing adjustments in respect of interest of Rs. 20,
70,633/- on delayed realisation of sales proceeds from its AEs. This ground relates to the transfer pricing adjustment vis-à-vis imputing interest on delayed realisation of sale proceeds from its AEs. The Appellant charged interest at the rate of 6% on the realisation of sale proceeds from its AEs for the entire credit period extended to the AEs of 150/180 days. The TPO held that interest chargeable by the Appellant on the outstanding balances should be at par with the Prime Lending Rate (‘PLR’) in India which according to him was 12.25% prevalent in the month of March 2008. The Ld. DRP confirms the view of TPO on the ground that the transaction originates in India and therefore the TPO has correctly applied the PLR of SBI.
17. As per assessee, Interest rate should be computed based on the interest rate applicable to the currency in which loan has to be repaid. Reliance in this regard is placed on the decision of the Delhi High Court in the case of CIT v/s. Cotton Naturals India Pvt. Ltd. (2015) 231 Taxman 401 (Delhi), a copy whereof is enclosed herewith at Page 100 to 117. The PLR considered by the TPO primarily relates to lending in Indian currency and cannot be applied to amounts outstanding in foreign currency. The average LIBOR rate for the captioned year considered by the Appellant works out to 4.74% (refer page Nos. 18 to 31 of the Paperbook-volume 2 filed on 15 November 2023) and the rate of interest charged by the Appellant is 6%, which is higher than the said LIBOR rate.
18. The dispute here is applicability of interest rate on amounts due from AEs is to be calculated based on PLR rate declared by RBI (being Central Bank of India where assessee is based) or LIBOR rate (as AE is based outside India). It’s a legal issue and precisely the same issue has been dealt in by the Hon’ble Delhi High Court in the case of CIT-I vs. Cotton Naturals (I) (P) Ltd. [2015] 231 Taxmann 401 (Del.) and held as under:
“The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, must be answered by adopting and applying a commonsensical and pragmatic reasoning. The interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. [Para 39]
The methodology recommended by Klaus Vogel appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. [Para 40]
The Chapter 10 of UN Transfer Pricing rightly stipulates that inter-company loans would require examination of the loan agreement, comparison of the terms and conditions of loan agreements, the determination of credit rating of the lender and the borrower, identification of comparable third party loan agreements and suitable adjustments should be made. In addition to the aforesaid factors, the comparability analysis should also take into account the business relationship and the functions performed by the subsidiary AE for the parent company. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel have suggested that economic purpose and substance of the debt-claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. We do not deem it necessary to enter into this controversy and express our view as regards the same. [Para 43]”
19. As the identical situation was there and analysed by the Hon’ble High Court (supra) and there is no argument advanced by the revenue to counter the same, we respectfully follow the same and confirmed the treatment on this issue given by the assessee. In view of above, ground raised by the assessee is allowed and AO is directed to delete the addition made on this count.
5. the Learned AO-DRP in disallowing expenditure aggregating Rs. 1, 74,544/-, by way of payments made to the Tata Public School, Devas Madhya Pradesh.
20. This ground of appeal is not pressed by the AR of the assessee, hence the same is dismissed.
6. the learned AO-DRP erred in disallowing expenditure aggregating 17, 76,270/-, by way of Additional Sales Tax paid.
21. This ground relates to disallowance of expenditure incurred by way of “Additional Sales Tax” amounting to Rs. 17,76,270/-. During the assessment proceedings, the appellant was asked to produce the orders passed by the concerned revenue authorities in respect of following amounts debited as Additional Sales Tax-Leather Division.
