Tech Mahindra Limited Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that expenditure incurred on foreign currency on telecommunication charges and provision of technical services outside of India should not be excluded from export turnover for the purpose of computing u/s 10A of the Income Tax Act.
Facts- The assessee is a joint venture between M/s Mahindra & Mahindra Limited and British Telecom Plc, which is a venture partner and also the major customer of the assessee. The assessee is engaged in the business of development of computer software and other related services. The case of the assessee was selected for scrutiny. Since the assessee had international transaction with its Associated Enterprise (AE), a reference was made to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction. The TPO made a transfer pricing adjustment of Rs.552,69,73,774/-
Besides TP adjustment, the Assessing Officer made a disallowance of Rs.6,50,290/- under section 14A of the Act and also made an adjustment in the 10A deduction claimed by the assessee by reducing from the export turnover (i) Technical services expenses incurred in foreign currency, (ii) telecommunication charges and (iii) Unrealised export proceeds.
CIT(A) granted partial relief. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- Co-ordinate bench in assessee’s own case has held that expenditure incurred on foreign currency on telecommunication charges and provision of technical services outside of India should not be excluded from export turnover for the purpose of computing u/s 10A.
It is the settled position that in the loan borrowed in foreign currency, the appropriate LIBOR rate should be applied for the purpose of ALP. The CIT(A) has relied on the RBI circular in which the rates for ECB having provided at LIBOR (+) 200 bps for maturity period upto 5 years and the LIBOR (+) 350 bps for more than 5 years. However we see merit in the submission of the ld AR that the risk element in assessee’s case is less compared to loans to third parties (in the case of ECB) since here the loan is given to its own subsidiary. Therefore taking to consideration the facts of the present case and the alternate plea of the ld AR, we hold that the interest at the rate of LIBOR plus 80 basis points would be appropriate in assessee’s case.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These cross appeals by the revenue and the assessee are against the order of the Commissioner of Income-tax (Appeals)-15, Mumbai [in short, ‘the CIT(A)’] dated 09.03.2012 for assessment year 2007-08.
2. The grounds raised by the assessee and the revenue are as below:-
Assessee’s appeal (ITA No.3643/Mum/2012)
“Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals) -15, Mumbai the Appellant submits the following grounds of appeal.
1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the Hon’ble Commissioner of Income Tax (Appeals) (CIT(A)) erred in imputing interest rate over and above the LIBOR, as applied by the Appellant for the loan advanced by the Appellant to its subsidiary, inspite of the fact that the TPO could not prove that the conditions mentioned in clauses (a) to (d) of section 92C(3) of the Act were satisfied for warranting an adjustment to the income of the Appellant.
2. (a) On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in partially confirming the proposed addition by learned TPO of Rs.1,35,44,787 without appreciating the commercial and business reasons for providing loan to the subsidiary of the Appellant.
(b) On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in adopting a rate of 6 month LIBOR plus 350 basis to the loan granted without providing cogent reason for applying additional rate of 350 basis over and above the LIBOR.
(c) On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in applying the interest rate applicable to External Commercial Borrowing (ECB) as prescribed by the RBI and consequently erred in applying the interest rate applicable to the transaction of borrowing by an Indian company to the international transaction of lending of money by the Appellant, an Indian company.
(d) On the facts and in the circumstances of the case and in law, the learned TPO and the Hon’ble CIT(A) erred in disregarding the US Federal Fund Rate prevalent at the time of extending the inter-company loan by the Appellant and the rate applied by Appellant being within the aforesaid range which ought to have been considered taking into account the geographical region of international transaction.”
Assuming without admitting, on the facts and in the circumstances of the case and in law, the learned TPO and the Hon’ble CIT(A) erred in disregarding the rate of interest that an independent party would have charged for providing the loan despite the fact that the said rate was brought to the notice of the learned TPO and Hon’ble CIT(A).
It is prayed that the LIBOR rate applied by the Appellant on the loan advanced to the Appellant’s US subsidiary be accepted as arm’s length price and the total addition arrived after application of LIBOR plus 350 basis rate, as determined by Hon’ble CIT(A), be deleted in its entirety.
3. On the facts and in the circumstances of the case and in law, the Learned TPO and Learned AO erred in treating the transaction of payment of upfront discount as not being a normal commercial transaction between two independent / unrelated parties, and accordingly held the arm’s length value of the transaction as ‘Nil’ without appreciating the inherent arm’s length nature of the captioned transaction.
The appellant had not pressed the ground vis-a-vis the justification of arm’s length nature of the transaction at the CIT(A) proceedings since the adjustment proposed by the Learned TPO was correctly negated by the Learned AO and hence did not have any financial impact on the appellant. In this regard, the appellant prays that, given the inherent arm’s length nature of the aforesaid transaction, the learned TPO be directed to rectify the observations made with regard to non-commercial nature of the transaction and be directed to consider the transaction satisfying the arm’s length standard.”
Revenue’s Appeal (ITA No.3531/Mum/2012)
On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in allowing relief to the extent impugned in the grounds enumerated below:
1. On the facts of the case and in law, the Ld. CIT(A) erred in holding that consideration relating to expenditure incurred in foreign currency on telecommunication charges and providing technical service outside India, amounting to Rs. 11,10,04,486/- and Rs.2,86,68,68,261/ – respectively, should not be excluded from export turnover for the purpose of computing deduction u/s 10A, disregarding the provisions of Explanation 2(iv) to Sec.10A of the I.T. Act. 1961.
2. On the facts and circumstances of the case and in law. the Ld. CIT(A) erred in equating a lending transaction (outbound loan) of the taxpayer with a borrowing transaction (inbound loan), which is fundamental for comparability analysis for the purpose arriving at arm s length price.
3. On the facts and circumstances of the case and in law. the Ld. CIT(A) erred in comparing a lending transaction of the taxpayer, which is a lending transaction by an Indian entity with foreign AE with External Commercial Borrowing (ECB) transaction, which is a borrowing transaction by an Indian entity from outside India in foreign currency.
4. On the facts and circumstances of the case and in law. the Ld. CTT(A) erred in comparing interest on a lending transaction of the taxpayer with the interest on external commercial borrowing transactions(s) as enunciated by the RBI’s Circular.
5. On the facts and circumstances of the case and in law. the Ld. CIT(A) erred in benchmarking interest on unsecured lending with interest on ECBs rather than with the interest rate prevalent for unsecured debtor or equivalent.
6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not accepting the benchmarking interest rate on unsecured loan with borrowing rate of the taxpayer at 9% p.a. plus profit for the taxpayer for the risk of l% p.a. i.e. at the rate of 10% p.a.. which is closer to the interest chargeable on unsecured loan at arm’s length condition than interest chargeable on external commercial borrowing.
7. On the facts and circumstances of the case and in law. the Ld. CIT(A) holding that once the transaction assured the status of nullity, then there cannot be any further adjustment i.e. treating the transactions as loan transaction.
8. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that interest (& 18% cannot be charged on the transactions of upfront discount which has been treated as ‘Loan transaction”
9. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the AO restored.”
3. The assessee is a joint venture between M/s Mahindra & Mahindra Limited and British Telecom Plc. British Telecommunications, which is a venture partner and also the major customer of the assessee. The assessee is engaged in the business of development of computer software and other related services. The assessee filed the return of income for A.Y. 2007-08 on 29/10/2007 declaring a total income of Rs.23,05,46,624/-. The case was selected for scrutiny and the notices were duly served on the assessee. Since the assessee had international transaction with its Associated Enterprise (AE), a reference was made to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction. The TPO made a transfer pricing adjustment of Rs.552,69,73,774/-, the break up of which is as given below:-
