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Case Law Details

Case Name : Tech Mahindra Limited Vs DCIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 3643/Mum/2012
Date of Judgement/Order : 25/10/2023
Related Assessment Year : 2007-08

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:-

  • Interest on loan 1,35,44,787/-
  • Upfront payment of discount 524,93,78,079/-
  • Interest on upfront payment of discount

treated as free advance Rs. 26,40,50,908/-

4. The Assessing Officer, while passing the final assessment order, deleted the addition made towards upfront payment of discount for the reason that the assessee has, by itself, disallowed the upfront discount payment and, therefore, no further adjustment is required in this regard. The Assessing Officer, however, incorporated the TP adjustment towards differential interest on loan and the secondary adjustment made towards interest on the upfront payment of discount treating it as free advance to AE. 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.

5. Aggrieved, the assessee filed further appeal before the CIT(A). With regard to the TP adjustment the CIT(A) granted relief to the assessee by deleting the secondary adjustment made towards interest on upfront discount re-characterised as advances and also gave partial relief to the assessee with respect to interest on loan to AE. On the corporate tax front the CIT(A) gave relief to the assessee towards the adjustment made to the export turnover. Both the assessee and the revenue are in appeal against the order of the CIT(A) before the Tribunal. We will first consider revenue’s appeal

ITA No.3531/Mum/2012 (Revenue’s Appeal)

6. Ground No.1 of the revenue pertains to adjustment made to the export turnover towards expenditure in foreign currency and telecommunication expenses. The Assessing Officer noticed that the assessee being engaged in the business of export of computer software, has incurred an expenditure of Rs.2,86,68,68,261 in foreign currency towards technical services and also communication expenses of Rs.11,10,04,486/- in foreign currency. The Assessing Officer called on the assessee to justify the claim of exemption of Rs.6,58,69,93,208/- under section 10A wherein the turnover includes the expenses incurred in foreign currency towards technical services and telecommunication expenses. The assessee submitted that the consideration received from the customers for export of computer software does not include recoveries on account of technical services and telecommunication charges and, therefore, the same cannot be excluded from the export turnover. The assessee further made a without prejudice submitted that the amount if excluded from the export turnover should also be excluded from the total turnover. The Assessing Officer did not accept the submissions of the assessee and reduced the said amounts from the export turnover while re-computing the exemption under section 10A. The assessing officer also rejected the without prejudice claim of the assessee towards making the adjustment to the total turnover also.

7. The CIT(A) held that for the purpose of computing export turnover under section 10A, no adjustment of expenditure in foreign currency is needed from export turnover and total turnover by relying on the decision in assessee’s own case for A.Ys 2002-03 & 2003-04 (ITA No.3657/Mum/2007 & ITA No.3099/Mum/2008) as well as the decision of the Special Bench in the case of Saksoft Ltd in ITA No.691 & 1953/Mad/2007. Aggrieved revenue is in appeal before us.

8. The Ld.DR relied on the order of the Assessing Officer and submitted that as per definition of export turnover does not include expenses incurred in foreign currency and also telecommunication charges in foreign currency.

9. The Ld.AR submitted that in assessee’s case no adjustment is required to be made from both export turnover and total turnover as the said expenses were not recovered from the customers by the assessee and does not form part of the turnover of the assessee in the first place. The AR drew our attention to the decision of the co-ordinate bench in assessee’s own case for A.Y. 2005-06 in ITA No.2041/Mum/2010 dated 28th June, 2023 where, the above contention of the assessee has been accepted by the Hon’ble Tribunal . The Ld.AR placed reliance on several other judicial pronouncements in this regard.

10. We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee’s own case for A.Y. 2005-06 in ITA No.2041/Mum/2010 dated 28th June, 2023 has considered a similar issue and held that –

“13. Heard both the sides and perused the material on record. The assessee has submitted before the lower authority and before the ITAT, during the course of appellate proceedings that it has not recovered any foreign currency expenses from the customers and it was not made part of the turnover. In this regard we have perused the decision of Jurisdictional High Court of Bombay in the case of assessee/Tech Mahindra Ltd. as referred (Supra) wherein held that expenses incurred in foreign currency on telecommunication charges and providing technical services outside India should be excluded from total turnover for the purpose of computation of deduction u/s 10A of the Act. We have also perused the decision of Hon’ble high Court of Karnataka in the case of Tech Mahindra Ltd. in ITA No. 205­206/2011 wherein also on the similar proposition it has been held that the impugned expenditure has to be excluded from the total turnover. During the course of assessment proceedings, assessee has also placed on record written submission that it has not separately recovered any freight telecommunication charges or insurance attributable to the delivery of the article or computer software outside of India or expenses, if any incurred in foreign exchange in providing the technical services outside India from its customer. The assessee has also furnished the annexure 1 along with written submission showing working of deduction u/s 10A of without including the above referred expenses. After considering the above facts and submissions of the assessee that it has never recovered foreign currency expenses from the customers and it was not part of its total turnover, therefore, following the decision of Hon’ble Jurisdictional High Court as referred supra, we allow the appeal of the assessee 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, since this expenditure were not included in the export turnover of the assessee. In the result the appeal of the assessee is allowed and the appeal of the revenue is dismissed. “

11. The facts for the year under consideration being identical, in our view the issue is covered by the above decision of the coordinate bench. We therefore see no reason to interfere with the decision of the CIT(A). This ground of the revenue is dismissed.

12. Ground No.2 to 6 are with regard to the interest on the loan to AE. The assesssee has extended loan of USD 5 million to its AE during August, 2005. The assessee charged interest at the prevailing LIBOR of 4%. The assessee was asked to justify that the interest charged is at arm’s length. The assessee submitted that the rate of interest on the loan was determined having regard to the interest rate prevalent in the market at the time of granting the loan and that since this LIBOR was in the range of 4% and, therefore, the said rate is adopted as ALP. However, the TPO did not accept the submissions of the assessee. The TPO held that the assessee had borrowed loan @9% and proceeded to make a TP adjustment by adding 1% towards managerial cost, etc. to arrive at a TP adjustment of rs.1,35,44,787/-.

13. Before the CIT(A) the assessee submitted that since the loan transaction is in foreign currency the LIBOR rate only should be applied for charging interest. With regard to not adding any basis points to the LIBOR rate the assessee submitted that since the loan was extended to its own subsidiary, the assessee did not foresee any risk associated with the funding and hence only prevalent LIBOR was considered for charging interest.

14. The CIT(A) upheld that LIBOR is the appropriate rate to be considered for interest on loan to foreign AR in view of various judicial pronouncements of the Tribunal where it has been held that if the loan is given in foreign currency, the applicable rate of interest would be LIBOR basis and not in rate basis applicable to repo loan rates in India. However the CIT(A) did not accept the contention f the assessee that no basis points should be added to the LIBOR rate since the loan is risk free. The CIT(A) relied on the RBI Master Circular No.07/2006-07 dated 1st July, 2006 on ECB and directed the Assessing Officer to re-compute the interest adjustments @LIBOR (+) 350 bps.

15. The ld DR fairly conceded that LIBOR rate should be applied since the transaction of loan to AE is in foreign currency. However the ld DR argued that the loan extended by assessee to the AE is in the nature of ECB and therefore the CIT(A) has correctly added 350 basis points to the LIBOR rate.

16. The Ld.AR submitted that the loan was extended to AE for meenting temporary liquidity situations and since the loan is to own subsidiary there is no element of risk as far as the recovery of the loan is concerned. The ld AR further submitted that the loan to AE cannot be compared with loan from third parties in which the lender has to factor risk while applying the interest rate. The ld AR also submitted that the assessee made a without prejudice submission before the TPO to consider LIBOR (+) 80bps where the differential interest worked out to Rs.18,06,043/- and prayed that the same may be considered for the purpose of ALP.

17. We heard the parties and perused the materials on record. 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. This ground of the revenue is dismissed.

18. Ground No.7 & 8 relates to the relief given by the CIT(A) by deleting the secondary adjustment made towards interest on the upfront payment of discount treating the same as advance to AE. During the year under consideration, the assessee has entered into a contract for providing software and IT services to British Telecom Plc for a total contract value of about USD 1 billion. The contract is to be executed over a five year period beginning from financial year 2008-09. In order to secure the contract, the assessee has made an upfront discount payment of Rs.524,93,80,079/-.

As far as this international transaction is concerned, the assessee has benchmarked the transaction following TNMM. It is relevant to note here that the assessee has not debited the P&L Account towards the upfront discount payment and not claimed any deduction towards the same. The TPO, after going through the details of the contract was of the view that the payment of upfront discount by the assessee to British Telecom was not a normal commercial transaction between two independent unrelated parties in controlled conditions and that it is not the criteria of arm’s length pricing. He further observed that by making such payment, the assessee’s revenue and billing have been impaired and eroded to the extent of such discount paid and accordingly made an adjustment of Rs.524.94 crores to the total income of the assessee towards the upfront payment of discount. The TPO further proceeded to treat the upfront payment of discount as interest free advances given by the assessee to its AE and, therefore, in accordance with the acceptable commercial practices, held that there needs to be a levy of interest. The TPO accordingly charged an interest @18% p.a. for the number of days of advance and made an adjustment of Rs.26,40,50,908/-.

20. The Assessing Officer while passing the assessment order held that the adjustment made towards upfront payment of discount amounting to Rs.524.94 crores is not warranted for the reason that the assessee by itself has disallowed the said payment. The Assessing Officer, however, retained the adjustment made towards interest on the upfront discount payment treating the same as interest free advance.

21. The assessee submitted before the CIT(A) that the Assessing Officer did not make any reference with regard to the re-characterised transaction to the TPO and hence, the TPO exceeded his jurisdiction by making the impugned adjustment. The assessee further submitted that the Assessing Officer by accepting the re-characterisation of the payment as loan, accepted the imputing of interest thereon without there being any provision of secondary adjustment in the provisions of transfer pricing statute. The CIT(A), after considering the various submissions of the assessee rejected the contention that there cannot be any TP adjustment since the impugned transaction was not referred to the TPO by the Assessing Officer. With regard to the contention of the assessee that there cannot be any secondary adjustment with regard to the upfront payment of discount by charging interest treating the same as interest free advances, the CIT(A) held that –

“viii. In respect of the appellant’s contention, raised in the Ground no. 7 it is mentioned that once the ALP of the international transaction relating to upfront discount payment of Rs. 524.93 crores was determined by the TPO to be Nil.- and an adjustment of the sum of Rs.-524.93 crores, has been made then from the transfer pricing perspective, the transaction has assumed a status of nullity. It is further the fact of the case that the appellant has not charged the sum of Rs. 524.95 crores to its P & L account and has treated the sum to be below the line item. Further the appellant has not raised any ground of appeal against the ALP at NIL determined by the TPO of this international transaction. Accordingly there cannot be any further adjustment (secondary adjustment) in respect of same international transaction. In such view of the facts, the action of the TPO cannot be upheld, Accordingly the secondary adjustment so made is directed to be deleted and the Ground no. 7 so raised is therefore allowed.

ix. As the adjustment made by the AO/TPO by imputing interest @ 18% p.a. on she sum of Rs. 524.93 crores amounting to Rs. 26.40 crores has been directed to he deleted, the appellant’s contention on without prejudice basis regarding considering L1BOR. based rate to bench mark the treatment given to the international transaction by the TPO, becomes redundant/in-consequential. Accordingly the same are not being dealt.”

22. Aggrieved, the revenue is in appeal before the Tribunal. The Ld.DR, submitted that the amount paid by the assessee as upfront discount is in the nature of loan and therefore, the TPO has correctly charged interest on the same. Accordingly the ld DR supported the order of the assessing officer.

23. The Ld.AR submitted that it is a standard practice across the industry to pay upfront discount in order to obtain the contract. The ld AR made a detailed written submission along with supporting documents in this regard and the same is taken on record. The Ld.AR further submitted that the assessee has not claimed the upfront payment as deduction and, therefore, re-characterisation of the upfront payment as interest free advance does not arise. The Ld.AR relied on the decision of the Hon’ble Bombay High Court in the case of PCIT vs Aegis Ltd (ITA No1248 of 2016 dated 28.01.2019) wherein it is held that the re-characterisation of the transaction of subscription of shares to advancing of unsecured loans by the TPO is not correct and that the TPO cannot question the commercial expediency of the assessee entering into such transaction. The Ld.AR in this regard further relied on the decision of the co-ordinate bench in the case of Tops Group Electronic Systems Ltd vs ITO [(2016) 67 com 310 (Mum Trib)]. The Ld.AR drew our attention to the provisions of section 92CE where the proviso (ii) to subsection (1) clearly states that the provisions of section 92CE(1) will not apply if the primary adjustment is made in respect of any assessment year commencing on or before 01.04.2016. Therefore it was argued that the year under consideration i.e.2007-08 is before the said date and therefore there cannot be any secondary adjustment towards the primary adjustment of payment of upfront discount.

24. We heard the parties and perused the materials on record. The assessee in the given case has made a payment of RS.524.94 crores towards “upfront discount” in order to obtain the contract of USD 1 billion from British Telecom Plc which entity at that point in time was the venture partner of the assessee. The TPO held that the transaction of upfront payment of discount is not at arm’s length and made an adjustment of the entire amount of Rs.524.94 crores. The TPO also made an adjustment towards interest at the rate of 18% on the said amount re-characterizing the upfront discount payment as an interest free loan to AE. The assessing officer while passing the assessment order deleted the adjustment made towards the payment of upfront discount but retained the interest adjustment. The CIT(A) deleted the interest adjustment for the reason that since the ALP of the primary adjustment of upfront discount is determined at NIL which is not contended by the assessee, there cannot be a secondary adjustment in respect of the same international transaction. The ld AR presented three fold argument with regard to the issue to state that giving upfront discount is the normal industrial practice, that the TPO cannot re-characterise the upfront discount transaction as interest free advance to AE and that since the transaction pertains to period prior to 01.04.2016, there cannot be a secondary adjustment as per the proviso (iii) to section 92CE(1). For the purpose of adjudication, we will consider the arguments presented with regard whether secondary adjustment will apply if the primary adjustment is made prior to 01.04.2016.

25. Before proceeding further we will look at the relevant provisions of section 92CE which reads as under –

“Secondary adjustment in certain cases.

92CE. (1) Where a primary adjustment to transfer price,

(2) has been made suo motu by the assessee in his return of income;

(ii) made by the Assessing Officer has been accepted by the assessee;

(iii) is determined by an advance pricing agreement entered into by the assessee under section 92CC, on or after the 1st day of April, 2017;

(iv) is made as per the safe 16arbor rules framed under section 92CB; or

(v) is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or section 90A  for avoidance of double taxation, the assessee shall make a secondary adjustment:

Provided that nothing contained in this section shall apply, if,

(2) the amount of primary adjustment made in any previous year does not exceed one crore rupees; or

(ii) the primary adjustment is made in respect of an assessment year  commencing on or before the 1st day of April, 2016:

Provided further that no refund of taxes paid, if any, by virtue of provisions of this sub-section as they stood immediately before their amendment by the Finance (No. 2) Act, 2019 shall be claimed and allowed.

(2) to (3)****

(emphasis supplied)

26. Section 92CE was introduced by the Finance Act 2017, w.e.f.01.04.2018 In order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices, so as to provide that the assessee shall be required to carry out secondary adjustment. The proviso to section 92CE (1) states that such secondary adjustment shall not be carried out if, the amount of primary adjustment made in the case of an assessee in any previous year does not exceed one crore rupees or the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016. In assessee’s case the primary adjustment determining the ALP of impugned transaction of payment of upfront fee at NIL pertains to AY 2007-08 which is prior to 01.04.2016. The TPO has made the secondary adjustment towards the same international transaction by re-charactarising the payment of upfront discount as an interest free advance and charging interest on the same. It is an undisputed fact that the interest adjustment made is a secondary adjustment since the CIT(A) has deleted the adjustment by holding the interest adjustment to be a secondary adjustment. Therefore there is merit in the contention that the secondary adjustment is unlawful and contrary to the provisions of Chapter X, since the primary adjustment is made in respect of assessment year commencing on or before 01.04.2016. In view of this discussion we uphold the decision of CIT(A) to delete the interest adjustment made at 18% treating the upfront payment of discount as interest free advance to AE. This ground of the revenue is dismissed. Since we have upheld the decision of the CIT(A) on the ground that no secondary adjustment could be made if the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016, the arguments presented with respect to re-characterisation of the transaction and that the payment of upfront discount is done for commercial expedience in which the TPO cannot comment etc., have become academic not warranting any adjudication.

ITA No.3643/Mum/2012 (Assessee’s Appeal)

27. Ground No.1 is general in nature not warranting any adjudication. The assessee raised two sets of additional grounds dated 15.09.2020 and 28.01.2020. The Ld.AR with regard to the admission of additional ground submitted that the issue contended is purely legal and does not involved verification of any new facts. The Ld.DR, on the other hand, vehemently objected to the admission of additional ground.

28. We heard the parties with regard to the admission of additional ground. The additional ground raised is pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds for adjudication.

29. Ground Nos.2 is with respect to application of LIBOR rate + 350 basis points by the CIT(A). We have while adjudicating the revenue appeal Ground Nos.2 to 6 have held that LIBOR rates should be applied with respect to interest on the loan to foreign AE and that in assessee’s case interest at the rate of LIBOR + 80 basis points to be applied. Accordingly this ground of the assessee is partly allowed.

30. Ground No.3 pertains to the TP adjustment done towards the payment of upfront discount to AE. In view of our decision while considering ground no.7 & 8 of revenue appeal this ground has become infructuous and dismissed accordingly.

29. During the course of hearing, the Ld.AR submitted that the additional ground raised vide letter dated 15/09/2020 stating that the assessment is barred by limitation, is not pressed.

30. Through additional ground vide letter dated 28/01/2020, the assessee raised an issue with regard to education cess paid to be allowed as deduction under section 37(1) of the Act. In view of the decision of the co-ordinate bench in the case of Tech Mahindra Business Services Ltd (ITA No.24/07/2023) where the co­ordinate bench has rejected the claim of the deduction holding that the amendment by Finance Act, 2022 is retrospective this issue is decided against the assessee and accordingly, the ground is dismissed.

31. Through additional ground No.2, vide letter dated 28/01/2020, the assessee is contending that the Dividend Distribution Tax (DDT) to be restricted to the rate provided in the respective DTAA provisions. This issue is covered by the decision of the Hon’ble Special Bench of the Tribunal in the case of Total Oil India Pvt Ltd in ITA No.6997/Mum/2019 dated 20th April, 2023 wherein the issue is decided against the assessee. Accordingly, the ground is dismissed.

32. In result the revenue’s appeal is dismissed and assessee’s appeal is partly allowed.

Order pronounced in the open court on 25/10/2023

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