1. What is a Confirmed LC?

Under UCP 600 Article 8, a confirmed LC is:

An irrevocable LC where a second bank (usually in exporter's country) adds its own independent undertaking to pay the beneficiary on complying presentation, regardless of whether the issuing bank pays.

Why confirmation? Eliminates issuing bank risk and country risk for exporter.

Commission structure:

• Issuing Commission: Charged by issuing bank to importer/applicant - 0.5% to 2% per quarter
• Advising Commission: Small flat fee by advising bank
• Confirmation Commission: Charged by confirming bank for bearing credit risk. This is the main disputed item. Usually 1% - 2.5% p.a. of LC value, payable at request and cost of applicant as per LC terms.
• Negotiation/Usance Commission

Court in Fortis Bank SA/NV v Stemcor & IOB held that if LC field says "may add confirmation" and "confirmed at request and cost of ", that amounts to authorization to be a Confirming Bank under UCP 600. The confirming bank is then liable as primary obligor.[applicant]

2. Accounting Treatment

A. In Books of Bank - The Wholesaler:

As per bank accounting:
Total Commission = Commission per quarter x No. of quarters
E.g. 100 Million x 0.5% = 0.5 Million per quarter. If 9 months = 3 quarters = 1.5 Million total.

Entry:

Code

Dr. Customer Account / NostroCr. Commission Income - LC (P&L)Cr. GST Payable @18%

Commission is recognized on accrual over LC validity period, not upfront if LC is >1 quarter.

B. In Books of Importer / Applicant - India:

Rule: LC issuance does not create liability. No entry when bank issues LC. Only fees and devolvement create entry.

1. On opening / confirmation commission debited by bank:

Code

Dr. LC Commission / Bank Charges (P&L) - or Dr. Cost of Asset if directly attributableDr. GST Input @18%Cr. Bank Account

1. If LC commission is for import of machinery (Capital Goods):
   Under Ind AS 23 - Borrowing Cost and Ind AS 109, confirmation commission is ancillary cost considered as transaction cost. If it is directly attributable to acquisition of qualifying asset and LC is up to delivery, you can capitalize:

Code

Dr. Machinery Cost (CWIP)Cr. Bank

Otherwise, expense to P&L over LC period on straight-line.

If LC is 90 days opened on 1.3.2010 and year ends 31.3.2010, bifurcate expense: 30 days to current year, 60 days prepaid.

1. When documents received and payment made:

Code

Dr. Purchases / MachineryCr. Bank / LC Payable (if devolved as loan)

1. On devolvement - LC becomes funded facility:

Code

Dr. LC Liability to BankCr. Bank CC Account

C. In Books of Exporter / Beneficiary:

Exporter does NOT bear confirmation commission unless LC says "confirmation charges for beneficiary's account". Normally importer bears. If exporter bears as per contract:

Code

Dr. Export Expenses - LC Confirmation CommissionDr. GST if charged by Indian confirming bankCr. Bank / Cr. Receivable from Importer (if recoverable)

If LC is at foreign bank, no GST.

3. Taxation and GST - India

GST: CBIC FAQ: 18% GST applicable on LC opening charges, confirmation charges charged by bank. If confirming bank is outside India, under RCM, importer pays GST under Reverse Charge as import of financial service.

Income Tax: LC commission is allowable business expense u/s 37(1). Not disallowable for TDS default under 40(a)(ia) if it is bank charge without principal-agent relationship - treated similar to credit card commission.

4. Detailed Case Laws on LC Commission

Case 1: Addl. CIT v. Ram Bahadur Thakur & Co. - Patna High Court (1975)
Assessee opened LC with Bank of Tokyo, Japan for import of paper for Govt of India on cost basis. Bank charged interest + LC commission totalling Rs. X as assessee could not repay in time. Revenue disallowed. Tribunal and High Court held commission + interest was incidental to business, wholly and exclusively for purpose of business, allowable u/s 37. This is leading case that LC commission is not capital but revenue expense unless for capital asset.

Case 2: M/s Jet Airways (India) Ltd v DCIT - ITAT Mumbai - Transfer Pricing on Standby LC Commission
TPO made adjustment of Rs. 19,67,62,500/- for Standby Letter of Credit Commission charged to AE. Issue: Whether SBLC commission to AE at arm's length. Tribunal examined whether intra-group guarantee/ SBLC is an international transaction and benchmarking using CUP. This case is cited for how to benchmark LC commission between related parties - need to compare bank guarantee rate vs parent guarantee.

Case 3: Fortis Bank v Stemcor - English Commercial Court on UCP 600 - Confirming Bank Status
Court held "may add" instruction in Confirmation Instructions field + phrase "confirmed at request and cost of " = valid authorization to act as Confirming Bank under UCP 600. Therefore Fortis entitled to confirmation commission and liable as confirmer. Important for accounting: confirming bank must book contingent liability as off-balance sheet and recognize commission income, not just advising fee.[Stemcor]

Case 4: JPC? / Indian Hotels - Credit Card Commission vs 194H - Principle Applied to LC Commission
ACIT v Indian Hotels Co. Ltd - ITAT held commission retained by bank for credit card is not under 194H as no principal-agent. Same logic applied by banks for LC commission - no TDS u/s 194H on LC commission paid to bank, as banking service.

5. Confirmed LC Commission - Who Finally Bears?

Audit Tip:
Check: LC application + Bank debit advice + FEMA Form A1 + UCP 600 compliance certificate. Ensure commission not capitalized if revenue import. For confirmed LC, get confirming bank's confirmation message (MT799/MT760) to prove service actually rendered - else GST credit may be denied.