Friday, August 12, 2016

Letter of comfort given to AE is outside the ambit of international transaction

The issue for consideration of the Tribunal was as under:

Whether Letter of Comfort issued by the assessee-company to its Associate Enterprise (‘AE’) could be deemed as international transaction under transfer pricing provisions?

The Tribunal held as under:

1) Letter of Comfort was nothing but a guarantee given by the assessee-company to its AE so as to enable the AE to avail of loan facility. By giving such loan, the assessee exposed itself to the risk of repaying the loan availed by the AE.

2) However, in Redington (India) Ltd. v. Asstt. CIT [2016] 69 351 (Chennai), the Tribunal held that such a guarantee or Letter of Comfort did not involve any cost to the assessee, therefore, it was outside the ambit of international transaction.

3) Thus, following such verdict of Redington (supra) it could be concluded that Letter of Comfort given to AE could not be deemed as international transaction and there would not be any need to make any adjustment in respect of Letter of Comfort. Accordingly, the orders of the lower authorities were to be set aside. - TVS Logistics Services Ltd. v. DY. CIT [2016] 72 89 (Chennai - Trib.)

Income from distribution of “Ten Sports” channel to cable operators couldn’t be held as ‘royalty’


a) The assessee was engaged in business of telecasting “Ten Sports”. Its revenue arose from advertisement and distribution of sports channel in India. A distribution agreement was entered into by the assessee with ‘Taj India’ for distribution of pay channel to various cable operators and ultimately to consumers in India.

b) The AO made following observations:

The income from distribution of sports channel by assessee is taxable as royalty.

Transponder fee paid to US based company for rendering services in connection with telecasting of “Ten Sports” was taxable as royalty.

c) The CIT(A) reversed the order of AO. The aggrieved-revenue filed the instant appeal. The Tribunal held as under: