Ahmedabad ITAT Explains Difference Between Letter Of Credit From Corporate Guarantee

With respect to LOC being equated to bank guarantees, the Bench comprising Annapurna Gupta (Accountant Member) and T.R Senthil (Judicial Member) explains that bank guarantee is a kind of guarantee from a lending organization to cover a debtor's liabilities if they fail to meet them, thus, serving as a promise to pay off a borrower's debt in case of default.

As per the brief facts of the case, the assessee provided loan to its AE and benchmarked using other methods considering State Bank of India (SBI) and Bank of India (BOI) quotes, and thus, charged interest at three months' USD LIBOR plus 425 bps. The TPO observed that BOI required suitable 'Letter of Comfort' (LOC) by assessee, and viewed that the same tantamounted to corporate guarantee given to BOI. Accordingly, TPO determined ALP at 6 months' USD LIBOR plus 625 bps. However, the DRP restricted the adjustment made for LOC to 0.5%.

The Bench stated that LOC ensures that obligations are fulfilled and helps business establish trust and credibility with involved parties; Highlights that there is no scope for equating them as there is risk involved in the former and no financial risk on the provider of LOC.

The Bench concurred with assessee that TPO/DRP erred in treating LOC as bank guarantees, and explained that LOC's facilitate procuring the loans and one must consider LOC's wording to determine the extent of liability undertaken by the provider.

The Bench noted that, in the present case, BOI sought LOC but the format in which it is asked is not available, thus, nothing can be said about the impact of the same on the interest to be charged on the loan transaction.

Accordingly, the ITAT deleted the adjustment made to the interest rate by the AO/DRP treating the LOC as bank guarantee, however, accepts assessee's alternative argument of treating interest rates prescribed under the head 'Safe Harbour Rules” i.e. Rule 10TD(2A)(5) i.e., 6 months' LIBOR plus 400 bps.

The ITAT however disagreed with assessee's contention that since upfront fees of 1.25% were charged on loans, no adjustment on LOC was warranted; Views that BOI also charged the same upfront fee, thus, LOC necessitated a separate adjustment.

Counsel for Taxpayer: Senior Advocate Tushar Hemani and Parimalsinh B. Parmar

Counsel for Revenue: Dr. Darsi Suman Ratnam

Case Title: Axis Bank Limited verses ACIT

Case Number: ITA No 365/Ahd/2022

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