Unconventional Business Payment Cannot Be Branded a Sham: Mumbai ITAT

Tech Mahindra Ltd Vs DCIT (ITAT Mumbai)

Unconventional Business Payment Cannot Be Branded a Sham: Mumbai ITAT Deletes Major TP Adjustments in Tech Mahindra’s Case

The Mumbai ITAT partly allowed Tech Mahindra Ltd.’s appeal for AY 2008-09, holding that a transaction cannot be disregarded merely because the commercial arrangement adopted by the assessee appears unconventional.

Tech Mahindra had paid ₹440.12 crore to British Telecommunications Plc. as an exclusivity payment to obtain an exclusive negotiation window for securing a substantial, multi-year IT contract. The payment was unconditional, irrevocable and non-refundable. The Tribunal observed that the Revenue had produced no material to establish that the transaction was sham or lacked commercial substance. The fact that Tech Mahindra subsequently earned revenue of approximately ₹2,988.87 crore from the contract further demonstrated its commercial rationale. Consequently, the ₹72.34 lakh notional-interest adjustment, made by treating the payment as an interest-free loan, was deleted. The Tribunal also noted that Section 92CE concerning secondary adjustments was inapplicable to AY 2008-09.

The Tribunal similarly deleted the adjustment relating to the ₹23.25 crore transition fee paid to BT. The payment represented reimbursement, on a cost-to-cost basis, of expenses incurred by BT in transitioning contracts previously handled by other IT service providers. The TPO could not determine its arm’s length price at nil merely by questioning its necessity or commercial expediency without applying any prescribed method under Section 92C read with Rule 10B. The related notional-interest adjustment was also deleted.

Further, the Tribunal deleted the ₹69.82 crore notional-interest adjustment on the upfront discount of ₹524.93 crore paid in an earlier year. Since the primary adjustment concerning that payment had already been deleted and Section 92CE was not applicable, no consequential or secondary adjustment could survive.

Regarding the foreign-currency loan advanced to the associated enterprise, the Tribunal held that the interest must be benchmarked with reference to the currency in which the loan was denominated. Following its decision for the preceding year, it directed the TPO to adopt LIBOR plus 80 basis points, instead of the domestic borrowing rate of 13.3%.

The Section 14A disallowance was remitted to the AO for fresh computation by considering only those investments that had actually yielded exempt income and by verifying whether the investments were made from the assessee’s own funds.

For computing deduction under Section 10A, the Tribunal held that telecommunication charges and foreign-currency expenses that were neither billed to customers nor included in export turnover could not subsequently be reduced from export turnover.

The Tribunal also directed the AO to grant the assessee’s TDS credit of ₹5.83 crore, subject to verification of the TDS certificates. It clarified that the claim could not be rejected for non-reflection in Form 26AS because Form 26AS was not in existence for the relevant year. The claim for deduction of education cess under Section 37(1) was rejected in view of the retrospective amendment made by the Finance Act, 2022. The grounds concerning depreciation on upfront discount and mark-to-market profit on cash-flow hedges were dismissed as not pressed.

List of Cases Discussed / Relied Upon

• CIT vs. A. Raman & Co.,[1968] 67 ITR 11 (SC) — cited on commercial structuring and the Revenue’s ability to disregard a transaction.
• EKL Appliances Ltd.,[2012] 24 taxmann.com 199 (Delhi HC) — relied upon on commercial expediency and limits on TPO re-characterisation.
• Aegis Ltd.,[102 taxmann.com 495] (Bombay HC) — relied upon in support of the assessee’s challenge to re-characterisation.
• Lever India Exports Ltd.,[246 Taxman 133] (Bombay HC) — relied upon on transfer-pricing benchmarking and commercial expediency.
• L’oreal India (P.) Ltd.,[116 taxmann.com 149] (Mumbai ITAT) — relied upon in relation to commercial expediency and transfer-pricing adjustment.
• Tech Mahindra Ltd., ITA Nos.3643/Mum/2012 and 3531/Mum/2012, order dated 25/10/2023— assessee’s own A.Y. 2007-08 decision on secondary adjustment and LIBOR benchmarking.
• Johnson & Johnson Ltd.,[297 CTR 480] (Bombay HC) — cited for the requirement to determine ALP under a prescribed method.
• Johnson & Johnson Limited, ITA No.1291/2014, dated 3 April 2017 (Bombay HC) — cited for the requirement to determine ALP under a prescribed method.
• CA Computer Associates India (P.) Ltd., [209 Taxman 382] (Bombay HC) — cited on prescribed-method benchmarking of ALP.
• L’Oreal India (P.) Ltd., [141 taxmann.com 168] (Mumbai ITAT) — cited on prescribed-method benchmarking of ALP.
• Hamon Cooling Systems (P.) Ltd., [145 taxmann.com 476] (Mumbai ITAT) — cited on prescribed-method benchmarking of ALP.
• UPS Express (P.) Ltd., [142 taxmann.com 172] (Mumbai ITAT) — cited on prescribed-method benchmarking of ALP.
• PPG Coatings India (P.) Ltd., [139 taxmann.com 165] (Mumbai ITAT) — cited on prescribed-method benchmarking of ALP.
• PCIT v. Aegis Ltd., ITA No.1248 of 2016, order dated 28.01.2019; [102 taxmann.com 495] (Bombay HC) — relied upon against re-characterising a commercial payment as a loan.
• Besix Kier Dabhol, SA v. DDIT, [(2010) 134 TTJ 513] (Mumbai ITAT) — relied upon in support of the assessee’s transfer-pricing contentions.
• Vodafone India Services Pvt. Ltd. v. UOI,[(2014) 369 ITR 511] (Bombay HC) — relied upon against transfer-pricing re-characterisation.
• Topsgrup Electronic Systems Ltd. v. ITO, [(2016) 67 taxmann.com 310] (Mumbai ITAT) — relied upon against treating the payment as an interest-bearing loan.
• Oracle Financial Services Software Ltd., [183 taxmann.com 712] (Mumbai ITAT) — relied upon in relation to transfer-pricing re-characterisation.
• Voltas Limited,[(2020) 183 ITD 857] (Mumbai Tribunal) — relied upon in relation to notional-interest transfer-pricing adjustment.
• Vireet Investment (P.) Ltd., [2017] 165 ITD 27 (Delhi ITAT Special Bench) — followed for considering only investments yielding exempt income under Rule 8D(2)(iii).
• Tech Mahindra (P.) Ltd., [2022] 142 taxmann.com 29 (Mumbai ITAT) — cited on computation of disallowance under section 14A.
• JSW Steel Ltd., [2023] 153 taxmann.com 17 (Mumbai ITAT)— cited on computation of disallowance under section 14A.
• Strides Pharma Science Ltd., [2022] 141 taxmann.com 430 (Mumbai ITAT) — cited on computation of disallowance under section 14A.
• Reliance Industries Ltd., [2023] 198 ITD 158 (Mumbai ITAT) — cited on computation of disallowance under section 14A.
• HDFC Bank Ltd.,[2014] 366 ITR 505 (Bombay HC) — followed for the presumption that investments are from own funds where sufficient interest-free funds exist.
• CIT v. HCL Technologies Ltd.,(2018) 404 ITR 719 (SC) — relied upon on corresponding treatment of export turnover and total turnover under section 10A.
• CIT v. Tech Mahindra Ltd.,ITA Nos.205-206/2011 (Karnataka High Court) — cited on section 10A treatment of foreign-currency and telecommunication expenditure.
• National Thermal Power Co. Ltd. v. CIT, [1998] 229 ITR 383 (SC) — followed for admission of a pure question of law arising from facts already on record.
• Jute Corporation of India Ltd. v. CIT, [1991] 187 ITR 688 (SC) — followed on appellate power to entertain additional legal grounds.
• Tech Mahindra Business Services Ltd., ITA No.24/Mum/2023, order dated 07/07/2023 — followed for rejection of education-cess deduction after the Finance Act, 2022 amendment. Please note we have not Found this case on ITAT Website.

FULL TEXT OF THE ORDER OF ITAT MUMBAI