Tech Mahindra Business Services Ltd Vs DCIT (ITAT Mumbai)
Undisputedly, the assessee has earned the interest income from the deposit made towards bank guarantee and temporary parking of surplus funds. It is evident, the assessee has no other activity of earning income except export of ITES through its 10A unit. Thus, it can be safely concluded that the deposits on which the assessee had earned interest income were on account of its business activity. There cannot be any doubt that deposits made towards bank guarantee is purely in connection with its business activity. As far as the interest on fixed deposit is concerned, it is an accepted factual position that the surplus fund available with the assessee and not immediately required for business was temporarily invested in fixed deposit. Thus, this activity of parking surplus funds in the fixed deposit has to be construed to be in the course of its regular business activity. Our aforesaid view is fully supported by the Full Bench decision of the Hon’ble Karnataka High Court in the case of CIT vs Hewlett Packard Global Soft. Ltd (supra), wherein, it is held that all profits and gains including incidental income of an export oriented unit even in the nature of interest on bank deposits or soft loans would be entitled for deduction under section 10A or 10B. In case of Cybertech Systems & Software vs. DCIT (supra), though the Hon’ble jurisdictional High Court was dealing with a case relating to imposition of penalty under section 271(1)(c) of the Act due to disallowance of deduction claimed under section 10B of the Act; however, the Hon’ble Court, following the decision of the Hon’ble Karnataka High Court in case of CIT vs Hewlett Packard Global Soft Ltd (supra) has given a categorical finding that benefit of deduction under section 10B of the Act would be available on the interest income. Keeping in view the ratio laid down in the aforesaid decisions, we hold that the assessee is eligible to claim deduction under section 10A of the Act in respect of the interest income.
As regards deduction claimed in respect of foreign exchange gain, it is noticed that both the assessing officer and learned DRP have disallowed assessee’s claim relying upon the decision of the Hon’ble jurisdictional High Court in the case of CIT vs Shah Originals (supra). However, on a careful reading of the said judgement, it is noticed that the decision of the Hon’ble jurisdictional High Court was rendered in the context of deduction claimed under section 80HHC of the Act. Whereas, in the present case, assessee has claimed deduction under section 10A of the Act. On going through the relevant statutory provisions, we find a marked difference in the language used in both the provisions. While, as per section 80HHC(1), the deduction is available on profits derived by the assessee from the export of goods or merchandise, in case of section 10A the deduction is available on profits and gains derived by an undertaking from the export of articles, things, etc. Taking note of the difference in the language used in both the provisions, the Hon’ble Karnataka High Court in CIT vs Motorola India Electronics (P) Ltd (supra) has held that unlike section 80HHC of the Act, which expressly excluded certain types of income such as foreign exchange gain in EEFC account, etc; however, no such express provision is there in sections 10A / 10B of the Act. The Hon’ble Court has held, what is exempted is not merely the profits and gains of the export of articles, but also the income from the business of the undertaking. Proceeding further, the Hon’ble Court has observed that since the export proceeds kept in the EEFC account are the income of the business undertaking; hence, the claim of deduction would be allowable. In our considered opinion, the aforesaid decision of the Hon’ble Karnataka High Court clinches the issue in favour of the assesseee. Hence, we direct the assessing officer to allow assessee’s claim of deduction on the foreign exchange gain.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal by the assessee assailing the assessment order dated 29-01-2016 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 for the assessment year 2011-12, in pursuance to the directions of learned Dispute Resolution Panel (DRP), Mumbai.
2. Ground 1 is general in nature; hence, does not require specific adjudication.
3. In grounds 2 to 11 assessee has raised various issues relating to addition made on account of transfer pricing adjustment. However, at the very outset, Shri J.D. Mistri, learned Senior Counsel appearing for the assessee submitted, in case assessee’s pleading in relation to ground 7 is accepted, all other grounds relating to transfer pricing issue would become infructuous. Narrowing down the issue further, he submitted, in case, two of the comparables selected by the Transfer Pricing Officer (TPO) are excluded, assessee’s margin would be within the tolerance band of rest of the comparables selected by TPO. Keeping in view the aforesaid submission of learned senior counsel appearing for the assessee, we proceed to deal with the issue raised in ground no. 7.
4. Briefly the facts are, the assessee is a resident company. As stated, the assessee provides information technology enabled services (ITES) to its overseas associated enterprises (AE). The services rendered by the assessee are mainly in relation to handling service related queries, billing related queries, mobile number portability related queries, hand-set related queries, network related queries and handset plan related queries. It is relevant to observe, earlier these services were rendered to the AE by Vodafone India Services Pvt Ltd upto 04-12-2017. Thereafter, the entire ITES segment of Vodafone India Services Ltd was transferred to the present assessee as a going concern and assessee continued to provide such services to the AE. Be that as it may, during the year under consideration, the assessee had provided ITES to the AE and earned revenue from such services. For benchmarking the international transactions entered with the AE, the assessee adopted transactional net margin method (TNMM) as the most appropriate method with operating profit / total cost (OP / TC) as the profit level indicator (PLI). Choosing itself as the outside party, the assessee conducted a function, asset, risk (FAR) analysis and undertaking a search in the database identified certain companies as comparable with arithmetic mean of 11.27% as against the PLI of the assessee shown at 14.9%. Thus, the transactions with AE were claimed to be at arm’s length.
5. The Transfer Pricing Officer (TPO), however, pointed out various deficiencies in the transfer pricing study report and more particularly, with regard to the filters adopted by the assessee for selecting comparables. Though, the TPO accepted TNMM as the most appropriate method; however, he treated the assessee as a knowledge process outsourcing (KPO) service provider. After rejecting all, except, one of the comparables selected by the assessee, the TPO selected fresh set of six comparables with arithmetic mean of 27.50 as below:-
