Section 10A deduction allowable on interest income & foreign exchange gain

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:-

6. Applying the arithmetic mean of the selected comparables, the TPO determined the ALP of the transactions with the AE at R.102,42,52,000/- and proposed an adjustment of Rs.95,59,64,000/-. Based on the adjustment proposed by the TPO, the assessing officer framed the draft assessment order. Against the draft assessment order, assessee raised objections before learned DRP. However, learned DRP more or less concurred with the decision of the TPO.

7. Learned senior counsel for the assessee submitted, both, eClerx Services Ltd and Acropetal Technologies Ltd are not comparable to the assessee for varied reasons. He submitted, being convinced with the aforesaid factual position, the Tribunal in assessee’s own case in Assessment Year 2008-09, vide ITA No.7520/Mum/2012 dated 23-01-2019 has held that Acropetal Technologies Ltd and eClerx Services Ltd are not comparable to the assessee. Clarifying further, he submitted, while doing so, the Tribunal also took note of the fact that the nature of business carried on by the assessee is ITES. In this context, he drew our attention to the relevant observations of the Tribunal in corrigendum order dated 30-04-2019 placed in the paper book. Thus, he submitted, facts being identical, the earlier decision of the Tribunal would squarely apply to the present appeal.

8. The learned departmental representative strongly relying upon the observations of the TPO and learned DRP submitted, the TPO has provided valid reasons for selecting these two comparables. He submitted, in the impugned assessment year, the TPO had taken a fresh look at the functions carried out by the assessee and found that the assessee comes in the category of KPO service provider. Therefore, the decision of the Tribunal in Assessment Year 2008-09 having not considered these facts discussed by the TPO, would be inapplicable.

9. We have considered rival submissions and perused materials on record. The facts emanating from record clearly indicate that the assessee in December,2007 had taken over the ITES business of Vodafone India Services Pvt Ltd as a going concern. It is a fact on record that the assessee continued to carry on the business of provision of ITES earlier carried on by Vodafone India Services Pvt Ltd and provided such services to the AE. The aforesaid finding of fact has been very clearly recorded by the Tribunal while deciding assessee’s appeal in Assessment Year 2008-09 in the order referred to earlier. On a perusal of the aforesaid order of the Tribunal, we find that while considering the issue of comparability of Acropetal Technologies Ltd and eClerx Services Ltd in case of Vodafone India Services Ltd, learned DRP had directed to excluded these two comparables along with some other comparables. The exclusion of these two comparables was also upheld by the Tribunal while deciding the appeal in ITA No.7514/Mum/2013 dated 10-12-2014. Taking note of the aforesaid factual position, the Tribunal, while deciding assessee’s appeal in Assessment Year 2008-09 has observed as under:-

“7. We find that the very same seventeen comparables were also considered in the hands of the Vodafone India Services Pvt. Ltd by learned TPO and learned DRP in their case had directed to exclude following seven comparables:-

1. Acropetal Technologies (Seg.)

2. Coral Hubs Ltd (Formerly Vishal Information Technologies Ltd)

3. Genesys International Corporation Ltd

4. Crossdomain Solutions Ltd

5. Datamatics Financil Services Ltd (Seg.)

6. Eclerx Services Ltd

7. Mold-Tek Technologies Ltd

Aggrieved by this order, we find that the assessee preferred n appeal before this Tribunal and the Tribunal further directed to exclude following two comparables vide its order in ITA No.7514/Mum/2013 dated 10.12.2014:

1. Mold-Tex Technologies Ltd

2. Cosmic Global Ltd

8. Now, we are left with remaining eight comparables. Learned AR placed a chart before us stating that margin of these eight comparables would as under:-

10. Now, pertinent question that remains to be answered is as to whether orders passed by learned DRP and by this Tribunal in the case of Vodafone India Services Pvt Ltd. could be used in the hands of the assessee herein.

11. We find that the very same business carried out by the assessee up to 4.12. 2007 was carried out by Vodafone India Services Pvt Ltd. for the remaining part of the financial year. We also find that the very same seventeen comparable companies (supra) were selected by learned TPO while framing transfer pricing assessment in the hands of Vodafone India Services Pvt Ltd for A.Y. 2008-09. Hence, we hold that there is no harm in following learned DRP’s order and order of this Tribunal for the assessee herein.”

10. Some inadvertent factual mistakes in the aforesaid order of the Tribunal regarding the taking over of the business of Vodafone India services Ltd. has subsequently been rectified by the Tribunal in a corrigendum. Therefore, considering the fact that there is no change in the nature of business being earlier carried on by Vodafone India Services Pvt Ltd and the present assessee and keeping in view the aforesaid observations of the Tribunal in assessee’s own case, we are of the view that both Acropetal Technologies Ltd and eClerx Services Ltd cannot be treated as comparables to the assessee. Accordingly, we direct the assessing officer to exclude them from the list of comparables and determine the ALP. As discussed earlier in the order, in course of hearing, learned senior counsel for the assessee has specifically submitted before us that with the exclusion of Acropetal Technologies Ltd and eClerx Services Ltd, the arithmetic mean of the rest of the comparables will work out to 13.91% as against the margin shown by the assessee of 14.9%, requiring no further adjustment. Thus, in view of the aforesaid submissions of learned senior counsel, the other grounds raised by the assessee relating to transfer pricing adjustment being grounds 2 to 6 and grounds 8 to 11 having become infrctuous, are dismissed. Whereas, ground 7 is allowed to the extent indicated above.

11. In ground 12, the assessee has challenged the disallowance of deduction claimed under section 10A of the Act in respect of interest income of Rs.1,44,03,437/- and foreign exchange gain of Rs.4,86,061. Of course, in ground 13, the assessee has made an alternative claim to the effect that in case it is held that foreign exchange gain is not eligible for deduction under section 10A of the Act, then, deduction under section 10A of the Act ought to be calculated after reducing the foreign exchange loss.

12. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that assessee has included interest earned on bank guarantee and fixed deposit amounting to Rs.1,44,03,437/- in the profits of business and has claimed deduction under section 10A of the Act thereon. Being of the view that interest income being assessable under the head ‘Income from other sources’; hence, cannot be treated as business income and further, observing that it has no connection with the business income, the assessing officer disallowed the deduction claimed under section 10A of the Act on the interest income. Further, he noticed that assessee has included an amount of Rs. 4,86,061/- towards foreign exchange gain for the purpose of computing deduction under section 10A of the Act. Being of the view that gain derived from fluctuation in the rate of foreign exchange deposit in EEFC account arises after completion of the export activity and does not have any direct nexus with the export transaction, disallowed assessee’s claim of deduction under section 10A of the Act. Though, the assessee contested the aforesaid decision of the assessing officer before learned DRP; however, assessee was unsuccessful.

13. The learned senior counsel appearing for the assessee submitted, the assessee has earned the interest income from the deposit made towards bank guarantee and temporarily parking of surplus funds in fixed deposit. He submitted, since the assessee has earned such interest income in course of business, it is eligible for deduction under section 10A of the Act. In this regard, he relied upon the following decisions:-

1. CIT vs Hewlett Packard Global Soft Ltd (2017) 403 ITR 453 (Karn –FB)

2. Cybertech Systems & Software vs. DCIT (2018) 91 taxmann.com 407(Bom)

14. As regards deduction claimed in respect of foreign exchange gain, the learned counsel submitted, since the assessee derives income only from its 10A unit which is engaged in export activity, it has outstanding overseas creditors as on the last day of the financial year. He submitted, the assessee operates an EEFC account with a bank in India wherein assessee is permitted to maintain balance and undertake transactions in foreign currency. He submitted, such account facilitate receipt of export proceeds and payments of import payable in foreign currency, without there being any need to convert the same into Indian currency. He submitted, as per accounting standard-11, it is mandatory for a company to re-instate its foreign currency mandatory items such as debtors, creditors, cash and bank balances, etc., to the rate of exchange prevailing as on 31^stMarch of each year. Following the aforesaid accounting guidelines, the assessee has revalued its year-end creditors’ balance which resulted in gain of Rs.4,86,061/-. Whereas, on reinstatement of debtors, EEFC bank account and on dollar sale, assessee incurred loss of Rs.9,80,67,531/-. He submitted, since the foreign exchange gain on revaluation of creditors’ balance is intrinsically connected to the export activity, it is eligible for deduction under section 10A of the Act. Further, he submitted, section 10A of the Act uses the words “profits of business” and not ‘profits of business and profession’. Since, the assessee has no other activity except its section 10A unit; the interest income earned has to be regarded as profits of business. Further, he submitted, in assessee’s own case for Assessment Year 2010-11, the DRP has directed the assessing officer to treat foreign exchange gain as “Income from business” for computing deduction under section 10A of the Act. As regards the decision of the Hon’ble jurisdictional High Court in case of CIT vs Shah Original (2010) 327 ITR 19 (Bom) relied upon by the TPO and learned DRP, learned senior counsel submitted, the said decision of the Hon’ble jurisdictional High Court was rendered in the context of deduction claimed under section 80HHC of the Act. Whereas, in assessee’s case the claim of deduction is under section 10A of the Act. He submitted, since the provisions of section 10A and 80HHC are not identical, the decision rendered in case of Shah Originals (supra) would not be applicable. In this context, he relied upon a decision of the Hon’ble Karnataka High Court in the case of CIT vs Motorola India Electronics (P) Ltd (2014) 46 taxmann.com 167. Without prejudice, he submitted, in case assessee’s claim of deduction under section 10A of the Act in respect of foreign exchange gain is not accepted, the assessing officer may be directed to compute deduction under section 10A of the Act without considering foreign exchange loss on account of EEFC revaluation and dollar sale.

15. The learned departmental representative strongly relied upon the observations of the assessing officer and learned DRP.

16. We have considered rival submissions in the light of the decisions relied upon and perused materials on record. 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.

17. 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. Ground 12 is allowed.

18. In view of our decision in ground 12, ground 13 has become infructuous; hence, dismissed.

19. Grounds 14, 15 & 16 being consequential in nature, do not require adjudication.

20. In addition to the aforesaid grounds, the assessee has raised an additional ground seeking deduction of education cess paid on income-tax.

21. Having considered rival submissions, we find that this issue is squarely covered by the decision of the hon’ble jurisdictional High Court in case of Sesa Goa Ltd vs JCIT (2020) 423 ITR 426(Bom). Respectfully following the aforesaid decision, we direct the assessing officer to allow deduction of education cess while computing the income under the head “Profits and gains of business or profession”. Additional ground is allowed.

22. In the result, assessee’s appeal is partly allowed.

Order pronounced on 30/06/2021.