(ITAT Delhi Judgement - SBLC for Associated Enterprise)
Case Study Overview
This case study analyses the ITAT Delhi Bench ruling in Matrix Clothing Pvt. Ltd. vs. ACIT, which examined the transfer pricing treatment of Standby Letter of Credit (SBLC) charges incurred on behalf of an Associated Enterprise (AE). The core issue was whether reimbursement of SBLC charges on a cost-to-cost basis could be recharacterised as a corporate guarantee and subjected to arm’s length pricing. The assessee incurred SBLC charges from a bank and fully recovered the same from its AE without any markup. The transaction was benchmarked using the “Other Method,” determining the Arm’s Length Price (ALP) at Nil on the basis that no service element or value addition was involved. However, the Transfer Pricing Officer treated the SBLC as a corporate guarantee and applied the CUP method using bank guarantee commission rates, resulting in an upward adjustment upheld by the DRP.
The ITAT held that the adjustment was based on incorrect facts, as the costs were fully reimbursed. It further ruled that bank guarantees issued by commercial banks are not comparable to SBLCs or guarantees provided within group entities. Consequently, the adjustment was deleted, reaffirming that pure cost reimbursement without economic benefit does not warrant an arm’s length markup.
Facts of the Case
- The assessee, Matrix Clothing Pvt. Ltd., is engaged in the business of manufacturing and exporting garments and also operates power generation units.
- During the relevant AY 2017-18 and AY 2020-21, the assessee incurred various expenses on behalf of its foreign Associated Enterprise, including SBLC charges paid to banks.
- These SBLC charges were fully reimbursed by the AE on a cost-to-cost basis, without any markup or profit element.
- The assessee benchmarked the transaction using the “Other Method” and determined the Arm’s Length Price (ALP) at Nil.
- The Transfer Pricing Officer (TPO) treated the SBLC as equivalent to a corporate guarantee transfer pricing transaction.
- Applying the CUP method, the TPO relied on bank guarantee commission rates and proposed a Transfer Pricing adjustment.
- The adjustment was confirmed by the DRP order income tax, leading to the appeal before the ITAT.
Key Issues Considered by ITAT Delhi
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Whether reimbursement of SBLC transfer pricing charges without markup constitutes an international transaction requiring an ALP adjustment.
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Whether SBLCs issued by a group entity can be equated with bank guarantees issued by commercial banks.
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Whether bank guarantee commission rates are valid comparables for determining Arm’s Length Price (ALP).
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Whether the TPO was justified in rejecting the assessee’s benchmarking under Section 92CA transfer pricing.
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Whether any secondary adjustment transfer pricing consequences arise in the absence of income.
Observations and Ruling of the Tribunal
Incorrect Assumption by the TPO
The ITAT observed that the TPO proceeded on an incorrect factual premise that the assessee had not recovered SBLC charges from its AE. On verification of records, it was evident that the entire SBLC cost was reimbursed on a cost-to-cost basis.
Since no income was earned, the very foundation of the Transfer Pricing adjustment was flawed.
SBLC Cannot Be Compared with Bank Guarantees
A key finding of the Tribunal was that SBLC arrangements between group entities are not comparable to bank guarantees issued by commercial banks. The Tribunal noted that:
- Banks assume substantial credit risk and regulatory obligations.
- Banks charge commission based on capital adequacy, risk exposure, and regulatory costs.
- A corporate entity issuing an SBLC for its AE does not operate under similar conditions.
Accordingly, adopting bank guarantee commission rates for SBLC transfer pricing or corporate guarantee transfer pricing was held to be legally unsustainable.
Acceptance of Nil ALP
The ITAT held that where SBLC charges are reimbursed on a cost-to-cost basis and no service element exists, the ALP can legitimately be Nil. The benchmarking method adopted by the assessee was accepted.
The Tribunal categorically rejected the mechanical application of CUP by the TPO.
Reliance on Settled Judicial Precedents
The Tribunal relied on binding precedents, including rulings affirmed by the Supreme Court, which establish that bank guarantee commission cannot be used as a benchmark for corporate guarantees.
This reinforced the principle that Transfer pricing litigation India must be decided based on economic substance rather than assumptions.
DRP Order Lacked Independent Analysis
The ITAT noted that the DRP order income tax merely upheld the TPO’s conclusions without independently examining the factual position or judicial precedents. As a result, the DRP order could not be sustained.
Final Verdict
- The Transfer Pricing adjustment relating to SBLC and corporate guarantee was deleted in full.
- The Arm’s Length Price (ALP) was accepted at Nil.
- Grounds relating to secondary adjustment transfer pricing were rendered infructuous.
- Relief was granted to the assessee for all relevant assessment years.
Practical Impact of the Ruling
This ITAT Delhi judgement provides strong support to taxpayers by confirming that:
- Cost reimbursements without markup do not result in taxable income.
- SBLC arrangements cannot be benchmarked using bank guarantee rates.
- Notional income cannot be imputed under International transaction transfer pricing rules.
- Arbitrary adjustments under Section 92CA transfer pricing are liable to be struck down.
Conclusion
In this landmark ITAT Delhi judgement dated 01 December 2025, the Income Tax Appellate Tribunal order in Matrix Clothing Pvt. Ltd. v. ACIT provided significant relief on corporate guarantee transfer pricing and SBLC transfer pricing for AY 2017–18 and AY 2020–21.
The Tribunal held that Standby Letter of Credit (SBLC) charges reimbursed on a cost-to-cost basis do not give rise to any taxable income, and therefore no Transfer Pricing adjustment can be made. It categorically ruled that SBLCs or corporate guarantees issued by group entities cannot be equated with bank guarantees issued by commercial banks for determining the Arm’s Length Price (ALP). The ITAT rejected the TPO’s use of bank guarantee commission rates under the CUP method and upheld the assessee’s benchmarking under the “Other Method”, accepting the ALP at Nil. The Tribunal also criticised the DRP order income tax for mechanically affirming the adjustment without independent analysis.
Importantly, the Tribunal relied upon settled judicial precedents upheld by the Hon’ble Supreme Court, which clearly establish that corporate guarantees cannot be benchmarked using bank guarantee rates. By following these binding precedents, the ITAT reaffirmed that transfer pricing provisions must be applied based on economic substance and real income, not assumptions.
In view of the above findings, the Tribunal deleted the entire Transfer Pricing adjustment made on account of SBLC and corporate guarantee for both assessment years. Consequently, issues relating to secondary adjustment transfer pricing were held to be infructuous, as no primary adjustment survived.
This ruling reinforces settled principles in Transfer pricing litigation India—that notional income cannot be imputed under Section 92CA transfer pricing, and International transaction transfer pricing adjustments must be based on real economic benefit. The judgement serves as a strong precedent for taxpayers facing unwarranted adjustments on SBLC and corporate guarantee transactions.