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Facts
The assessee, M/s Lava International Limited, faced a transfer pricing adjustment for AY 2016-17 concerning a Stand-by Letter of Credit (SBLC) facility extended to its Hong Kong subsidiary (AE), where the TPO imputed a notional commission of 1.3%. Additionally, the assessee claimed a Section 80G deduction for a Rs. 55 lakh donation to FCS Foundation, which the AO disallowed citing overwriting on the receipt date and the cheque being debited after the financial year end.
Held
The Tribunal held that a 1% rate should be considered as the Arm's Length Price (ALP) for the SBLC transaction, based on the assessee's own bank charges. For the donation, the issue was remanded to the Assessing Officer for fresh inquiry, with a directive to allow the Section 80G deduction if the assessee can satisfactorily demonstrate that FCS Foundation accounted for the Rs. 55 lakh receipt in the financial year 2015-16 relevant to AY 2016-17.
Key Issues
1. Whether a transfer pricing adjustment for a Stand-by Letter of Credit (SBLC) issued to an Associated Enterprise is warranted, and what constitutes the Arm's Length Price (ALP). 2. Whether a deduction under Section 80G for a donation should be allowed when the donation receipt's date is disputed and the cheque was cleared in the subsequent financial year.
Sections Cited
143(3), 144C(13), 143(3A), 143(3B), 92CA(3), 92B, 80G, Rule 115
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Income Tax Appellate Tribunal, DELHI BENCH, ‘I’: NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI BRAJESH KUMAR SINGH
Date of Hearing 09.04.2025 Date of Pronouncement 17.04.2025 ORDER PER BRAJESH KUMAR SINGH, AM,
This appeal filed by the assessee is directed against the order u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A and 143(3B) of the Income Tax Act, 1961 (hereinafter referred to ‘the Act’) dated 24.03.2021 of National e- assessment Centre, Delhi, relating to Assessment Year 2016-17 arising out of learned Dispute Resolution Pannel (in short ‘DRP’) order dated 28.12.2020.
Brief facts of the case:- The assessee was incorporated in 2009 and is engaged in the business of trading and manufacturing of mobile phones, smart phones, tablets, storage devices and other wireless telecommunication devices under the brand name ‘LAVA’ and ‘XOLO’.
M/s Lava International (HK) Limited is a wholly owned subsidiary of the assessee said to be engaged in procuring raw materials/finished products for the assessee and selling finished products manufactured by the assessee in the neighbouring countries. During the year, the assessee facilitated the Stand by Letter of Credit (in short ‘SBLC’) facility of Rs.33,16,64,500/- to Lava HK by issuing guarantee to its bank, i.e. Bank of Baroda which extended the said guarantee to HDFC Bank the lender of Lava HK. This transaction was examined by the Ld. Transfer Pricing Officer (in short ‘the TPO’) who proposed to make an adjustment in respect of guarantee issued by the assessee by imputing notional commission equivalent to the commission charged by State Bank of the India on bank guarantee issued to its customers. Accordingly, the TPO applied the rate of commission of 1.3% being commission charged by SBI on bank guarantee issued for an amount in excess of Rs.10 Crores and made an adjustment of Rs.8,27,766/- by considering the period for which credit limit was availed by Lava HK under SBLC. The same was sustained by the ld. DRP for which the assessee is in appeal before us by raising following grounds no.2 with its sub-ground no.2.1.
“2. That the assessing officer erred on facts and in law in making transfer pricing addition of Rs. 8,27,766 in relation to guarantee issued to the lenders of its Associated Enterprises (AE'). on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('TPO") and Dispute Resolution Panel (*DRP'). 2.1 That the DRP/ TPO erred on facts and in law in not appreciating that the appellant has not incurred any cost in facilitating the issuance of Stand-by Letter of Credit ('SBLC*) on behalf of the associated enterprise, and since the transaction of facilitating the issuance of SBLC has no bearing on the cost or profits of the appellant, it cannot be considered as an international transaction in term of section 92B of the Act.”
The ld. AR has submitted that this guarantee was issued pursuant to obligation on the assessee being the promoter of this beneficiary company i.e. Lava HK. It was further submitted that the activities of Lava HK have benefited the assessee and the corporate guarantee was issued out of commercial prudence to protect the business interest of shareholder activities. Thus, it was submitted that being a shareholder activity, it does not amount to service to Associated Enterprises (in short ‘AE’) and therefore has no bearing on the income of the assessee so as to determine its Arms Length Price (in short ‘ALP’). Reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Morgan Stanley and Co. Inc. (292 ITR 416)(SC) and the decision of the Co-ordinate Bench of Delhi Tribunal in the case of Jindal Pipes Ltd. in ITA No.1886/Del/2012. The decision of Hon’ble Rajasthan High Court in the case of CIT vs Vaibhav Gems Limited in and the decision of Hon’ble Bombay High Court in the case of Hindalco Industries Limited vs ACIT 359 ITR 46(Bom) were also relied. Reliance was also placed on the decision of Mumbai Bench of the Tribunal in the case of The Bombay Dyeing & Mfg. Co. Ltd. Vs DCIT in 2017, order dated 27.10.2017.
The Ld. DR submitted that the assessee must have incurred some expenditure in providing SBLC benefit and therefore, the TPO was justified to consider the banking commission for the purpose of making the adjustment. The ld. AR, however, has stated that no commission was paid or incurred to the bank.
We have considered the rival submissions and the materials placed on record. 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 of decision of Mumbai Bench of the Tribunal in the case of CIT v.
Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 (Bom.) 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. in order dated 02.12.2024 is reproduced below:-
“11. We have given thoughtful consideration to the matter on record. Taking ground Nos.5 to 7, we are of the view that 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.
12. We are also of the considered view that for determination of ALP of the this sort of international transaction there is no justification and commercial prudence to compare the bank guarantees with corporate guarantees or SBLC as guarantors accepting the liability to compensate in respect of principal borrower have different commercial and business reasons, to enter into these transactions. While granting bank guarantees is one of the main functions of the commercial banks and the corporate guarantee or SBLC given to an AE is more or less an attempt to ensure freeing up working capital of AE and potentially securing better contract terms for the AE.
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.
Further, we find that in M/s Technocraft Industries (I) Ltd. v. DCIT, the Mumbai Tribunal has held that as the said Appellant had issued an SBLC to its AE and had been charged a rate of 0.9% by an Indian bank for such SBLC which can be considered as an internal CUP. Hence, 0.9% paid to the bank should be considered as the arm’s length rate of commission. Then in M/s GMR Infrastructure Ltd. v. DCIT– the Bangalore Tribunal has held that the considerations involved in a corporate guarantee are distinct from that of a bank guarantee and hence, the adjustment proposed by the TPO based on commercial bank rates cannot be upheld. The Tribunal while upholding the same relied on the Delhi High Court ruling of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi).
In the case of CIT vs. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 (Bombay), the Hon’ble High Court has dealt with this issue with the following relevant observations in para 10 of the order:- “10. …….. Furthermore, having considered the fact that a sum of Rs.4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily
encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. 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 ita1165.13 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. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed. There will be no order as to costs.” 15.1 In the said case, the assessee had charged guarantee commission @ 0.5% from the AE. However, the TPO, taking into consideration the fact that banks and companies are charging at least 3% for providing guarantee at benchmarked arm’s length price for the guarantee given by the assessee for the benefit of AE at 3% of the amount of guarantee and this was sustained by the CIT(A), but, was deleted by the Tribunal. In that case, the assessee had not benchmarked the guarantee commission. Accordingly, the assessee had taken the ALP of the said transaction at ‘nil’ as it had contended that no cost was incurred in providing bank guarantee for its AE and the Tribunal had not agreed to the contention of the assessee that there could not be any cost or charge of the guarantee if by providing corporate guarantee to a subsidiary because there is by way of element of benefit or cost while providing such kind of guarantee to AE. Therefore, the fact that the assessee in that case had itself charged 0.5% guarantee commission from its AE the same was considered at arm’s length. 15.2 Even in the case relied by ld. DR, ultimately the assessee was given benefit of decision in Everest Kento Cylinders’s case (supra) in para 8 as follows:- “8. Rebutting the argument of the ld. DR, the ld. AR alternatively argued that determination of the corporate guarantee at 1.3% is on a higher side and relied on the judgment of Hob'ble High Court of Bombay in the case of CIT Vs. Everest Kento Cylinders Ltd . 58 Taxmann
254 and also on the judgment of Hon'ble High Court of Bombay in the case of CIT Vs Thomas Cook (India) Ltd. in of 2017 order dated 26.08.2019. Keeping in view, the judgments of the Hon'ble Bombay High Court and in the absence of any other judgment contrarily brought to our notice, we hereby direct that the adjustment in respect of corporate guarantee provided to AEs be determined at date of 0.5% instead of 1.3% determined by the revenue.”
Here in case before us, we find that the assessee’s bank has charged 0.50% per annum for the period after 17.06.2018 till 17.06.2022 and before that assessee was charged @ 1% for the period 17.06.2016 to 17.06.2018. Thus, in the financial year 2016-17 assessee had paid 1% as the cost of extending the SBLC to AE, for which assessed should have been compensated by the AE. Therefore, we are inclined hold that Ld. AO/TPO shall consider rate of 1%, to be ALP for this international transaction and accordingly we allow the grounds No.5-7. Further as per the provisions of Rule 115 of the Income-tax Rules, 1962, the TPO will apply the correct conversion rate for which assessee may also be given opportunity of hearing.”
In the light of the above observation, we are inclined to hold that the Ld. Assessing Officer/Ld. 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.
In regard ground no.3, the basic facts are that during the year under consideration, the assessee made a donation of Rs.1,10,00,000/- to FCS Foundation a trust registered u/s 80G of the Act entitling the assessee to deduction of Rs.55 lakhs being 50% of the said amount. Out of the total donation, a sum of Rs.90 lakhs was paid by means of two separate cheques issued to FSC foundation one of Rs.35 lakhs and other of Rs.55 lakhs. The 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. The relevant receipts and the part of the observations of the AO are reproduced as below:-
4.3 The above overwriting shows that day and month in the above receipt have been overwritten. The month seems to be originally '4' with overwritten figure as '03'. The day seems to be originally 12' with overwritten figure as '31'. Thus, the original date of 12/04/16 has been clearly overwritten as 31/03/16. The assessee was apprised of this fact and ask to explain as to why claim of deduction u/s 80G not be disallowed. The assessee was also asked to file copy of bank statement showing actual date when the aforesaid amounts were debited from its account. In this regard, the assessee stated as under vide its letter dt. 20/12/2019: ".......It is respectfully submitted that in receipt no. 400 cheque details are mentioned (i.e. 033619 dated 31/03/2016, HDFC Bank). The said cheque amounting to INR 55,00,000 issue by Assessee Company to FCS Foundation on 31/03/2019, which is evident from the Bank Reconciliation Statement is duly attached herewith as per Annesure-4A. This shows that cheque has been issue well within FY 2015-16, but it is being presented by FCS Foundation later on and therefore it was cleared/ debited on 15/04/2016. So there was no mismatch between the amount claimed and paid by the assessee." 4.4 I have considered the submission of the assessee. The fact that the date in the receipt no. 400 has been overwritten cannot be denied. The assessee has been issued two receipts, no.399 and 400, both purportedly, dt. 31/03/2016 by FCS foundation and both have same handwriting which shows that both receipts have been issued by the same person. Both receipts also bear the signatures of the same person. It is highly improbable, almost impossible, that a person, who has been regularly issuing receipts and writing dates on them and on other documents, would erroneously write the next month on any document written by them. This error becomes all the more improbable when it is seen that the said person has also issued another receipt (no.399) just before issuing this receipt. Another improbability in a genuine error would be writing both the day as well as month wrongly by a person working on the last day of the financial year on any document. These facts prove beyond doubt that it is not a case of a genuine error where a person wrongly wrote some other date on 31/03/2016 and later on corrected it by overwriting. It is a clear cut case of forgery where a receipt issued in the month of April, 2016 has been back-dated by dating it as 31/03/2016. 4.5 The above fact is further strengthened by the fact that the cheque was debited in the bank account of the assessee on 15/04/2016 which leaves no doubt that the donation was actually made after 31/03/2016. The fact that the impugned cheque was issued on 31/03/2016 does not prove that the same was delivered to the Done on the same date. 4.6 The facts mentioned above leave no doubt that 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. I am satisfied that the assessee concealed its income by making the false claim.”
The ld. DR has supported the findings of the Assessing Officer and submitted that apart from the unilateral evidence of the assessee in the form of an affidavit dated 11.11.2020 of the director before the Ld. Dispute Resolution Panel-II, New Delhi (placed at Pg No.314 to 315 of the paper book), the assessee has not brought anything on record to show that the recipient had acknowledged the receipt of donation for the period ending 31.03.2016. The ld. AR submitted that receipt for donation of Rs.35 lakhs and Rs.55 lakhs are consecutively numbered 399 and 400 and the Assessing Officer having accepted the receipt no.399 for the financial year 2015-16 should have also accepted the receipt no.400 for the same financial year i.e. FY 2015-16 relevant to AY 2016-17. The Ld. AR further submitted that cheques were simultaneously encashed and reconciliation statement of the bank was placed at page no.249 of the paper book.
We have considered the rival submissions and the materials placed on record. The assessee has produced the affidavit of the director Mr. Shailendra Nath 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 In these circumstances, 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. The Assessing Officer will allow the deduction of Rs.27,50,000/- u/s 80G of the Act if it was satisfactorily demonstrated by the assessee before the Assessing Officer that the trust namely FCS Foundation has accounted the receipt of Rs.55 lakhs paid by cheque no.033619 dated 31.03.2016 drawn on HDFC Bank vide receipt no.400 during the Financial year 2015-16 to relevant to AY 2016-17. Accordingly, the ground no.3 and its sub grounds of the appeal are allowed with the above observations.
Ground No.1 is general in nature.
The additional ground of appeal raised vide letter dated 08.12.2023 has not been pressed. Hence this ground is dismissed as not pressed.
In the result, the appeal of the assessee is partly allowed.