Assessee is Matrix Clothing Pvt. Ltd.
The Assessee is engaged in the business of design, manufacturing and export of a wide range of garments for men, women and children, catering to several international fashion brands.
The Transfer Pricing Officer (TPO) made adjustments by imputing guarantee commission on Standby Letter of Credit (SBLC) issued on behalf of the Associated Enterprise (AE) and by enhancing the interest rate on loans advanced, alleging that the transactions were not at arm’s length.
Assessee’s Contentions | Revenue’s Contentions | Judgement |
|---|---|---|
The assessee submitted that SBLC charges incurred on behalf of the AE were fully recovered on a cost-to-cost basis without any mark-up. | Revenue argued that issuance of SBLC amounted to a corporate guarantee and warranted charging of guarantee commission at arm’s length. | ITAT held that the TPO proceeded on an incorrect assumption that the assessee had not recovered SBLC charges, whereas evidence clearly showed cost-to-cost reimbursement by the AE. |
The assessee contented that issuance of SBLC could not be equated with bank or corporate guarantees issued by commercial banks, rendering bank guarantee–based benchmarking is inappropriate and justified benchmarking of SBLC transactions using the “Other Method,” determining the ALP at Nil. | The TPO alleged that the assessee had not charged any consideration for SBLC services and applied external CUP using bank guarantee commission rates. | The Tribunal held that SBLC or corporate guarantees issued by group entities cannot be benchmarked against bank guarantee commission rates charged by commercial banks. Relying on the Bombay High Court’s ruling in Glenmark Pharmaceuticals Ltd., ITAT accepted benchmarking under the ‘Other Method’ and deleted the TP adjustment on SBLC commission. |
With respect to loans advanced to the AE, the assessee submitted that interest was charged at 3.55%, based on LIBOR plus appropriate spread, which was comparable to prevailing rates offered by the Jordan Central Bank. The assessee contended that CUP method adopted using local market rates was appropriate and reflected arm’s length conditions. | Revenue further contended that the interest rate charged on loans to the AE was inadequate and adopted a higher rate based on LIBOR with an enhanced spread. Accordingly, Transfer Pricing adjustments were proposed on both SBLC commission and interest on loan. | With respect to interest on loan, ITAT held that the interest rate charged by the assessee was in line with prevailing market rates. Accordingly, ITAT deleted the Transfer Pricing adjustments on both counts and ruled in favour of the assessee. |
The Delhi ITAT deleted TP adjustments, holding that SBLC charges shouldn't be benchmarked against bank rates and interest rates aligned with market benchmarks are at arm's length.
