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.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Present appeal filed by assessee arises out of the final assessment order framed u/s 143(3) r.w.s. 144C(13) of the Act by the ACIT, Rg. – 2(3), Mumbai, dated 31/03/2008, for A.Y. 2008- 09, on the following grounds of appeal:-

“Adjustment / Addition to Total Income

1 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) erred in proposing and the Hon’ble Dispute Resolution Panel (‘DRP’) further erred in confirming the proposed addition of Rs 1,88,34,95,573 to the Appellant’s total income.

2 Incorrect computation of arm’s length price of Exclusivity Payment and incorrect characterization of the same as a loan and imputing interest thereon

2.1 On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the TPO of treating the transaction of Exclusivity Payment of Rs 440,12,32,827 as sham and make believe by selectively relying on the information and documents submitted by the appellant and by conveniently turning a blind eye towards the justification aptly put forward and demonstrated by the appellant vis-à- vis the necessity, rationale and commercial expediency vis-à-vis the aforesaid transaction of Exclusivity Payment.

2.2 On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the TPO of incorrectly re- characterizing the captioned sum as a loan thereby leading to erroneous addition of notional interest of Rs 72,34,903 on the same.

3 Incorrect computation of arm’s length price of payment of Transition Fees and incorrect characterization of the same as a loan and imputing interest thereon

3.1 On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the TPO of treating the transaction of payment of Transition Fees of Rs 23,25,00,000 as sham and make believe without appreciating necessity, rationale and commercial expediency of the captioned payment.

3.2 On the facts and in the circumstances of the case and in law, the learned TPO and AO erred in proposing and the DRP further erred in upholding the action of the TPO of incorrectly re-characterizing the captioned sum as a loan thereby leading to erroneous addition of notional interest of Rs 11,01,349 on the same.

4 Incorrect application of Notional Interest on payment of Upfront Discount as was incorrectly re-characterized as loan by the jurisdictional AO / TPO in AY 2007-08

4.1 On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO erred in proposing and the Hon’ble DRP further erred in mechanically following the approach adopted by the  jurisdictional AO / TPO in AY 2007-08, of incorrectly re-characterizing the transaction / payment upfront discount as Loan, thereby leading to erroneous addition of notional interest of Rs 69,81,70,200 on the same.

5 Interest on Loan advanced to AE

On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO erred in proposing and the Hon’ble DRP further erred in confirming the proposed addition of Rs 13,960,796/- being the difference between the interest charged by the appellant on the loan advance to AE @ 4% being the LIBOR interest rate (Rs 64,71,484) and the alleged arm’s length interest computed by the TPO @ 13.3% (Rs 2,04,32,280).

6 Disallowance of depreciation on the Intangible Asset (i.e. upfront payment of discount)

6.1 On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in holding that the payment of upfront discount to British Telecom PLC under the agreement dated 18 December 2006 does not result in to any business or commercial right and consequently, disallowing the Appellant’s claim of depreciation under section 32 of the Income-tax Act, 1961 (‘the Act’) in respect of the same.

6.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in rejecting the alternate plea of the Appellant that the payment of upfront discount to British Telecom PLC under the agreement dated 18 December 2006 should be allowed as an expense over five years under section 37 of the Act.

7 Addition of Rs. 85,14,40,158 – rejection of change in the accounting policy

7.1 On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in adding back Rs. 85,14,40,158 towards mark to market profit on cash flow hedges which had neither accrued / arisen nor credited to profit and loss account.

7.2 Without prejudice to the above, the Appellant prays that, if the profits on cash flow hedges are regarded as taxable, consequential deduction under section 10A of the Act should be allowed

7.3 Without prejudice to the above, the Appellant prays that, if the profits on cash flow hedges are taxed, than the taxable income of the subsequent years, in which the actual income is offered to tax should be appropriately adjusted

8 Disallowance under section 14A of the Act

8.1 On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in disallowing expenditure of Rs. 3,90,13,318 under section 14A of the Act read with Rule 8D of the Income- tax Rules, 1962, as expense incurred in relation to earning exempt income.

8.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in not accepting the alternate contention of the Appellant, that the disallowance under section 14A of the Act should be restricted to direct expenses of Rs. 8,03,900.

9 Reducing expenditure incurred on telecommunication charges and expenditure incurred in foreign exchange outside India from the export turnover while computing deduction under section 10A of the Act

9.1 On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO of reduction of expenditure incurred on telecommunication charges of Rs.7,23,74,813 and expenditure incurred in foreign exchange outside India of Rs. 3,17,54,66,143 from the export turnover while computing deduction under section 10A of the Act.

9.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon’ble DRP further erred in upholding the action of the learned AO in not accepting the alternate contention of the Appellant that if the telecommunication charges and expenses incurred in foreign exchange outside India for providing technical services are reduced from export turnover, then the same should also be reduced from the total turnover.

10. Lower Tax deducted at Source (TDS) Credit

10.1 The learned Assessing Officer erred in allowing a lower Tax deducted at source (TDS) credit of Rs. 2,35,00,735.

11. Interest charged under Section 234D and under Section 220(2) 11.1 The learned Assessing Officer erred in directing levy of interest under section 234D of Rs 68,42,220 and under section 220 (2) of Rs. 1,84,92,711.

The Appellant craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing the appeal.”

2. Brief facts of the case are as under:-

The assessee is a joint venture between M/s. Mahindra & Mahindra Limited and British Telecommunications Plc. (‘BT’). BT is one of the joint venture partners and also the major customer of the assessee. The assessee is engaged in the business of development of computer software and rendering allied information technology services and is one of the leading IT service providers in India.

2.1. The assessee filed its return of income for A.Y. 2008-09 on 30/09/2008. As there were international transactions between the assessee and its Associated Enterprises (‘AEs’), the matter was referred to the Transfer Pricing Officer (‘TPO’) for determination of the arm’s length price.

2.2. Upon receipt of the reference, the Ld.TPO called for economic details of the international transaction. The representatives of the assessee appeared before the Ld.TPO and filed requisite details as called for from time to time. After considering the submissions of the assessee the Ld.TPO passed order under section 92CA(3) proposing following transfer pricing adjustments aggregating to Rs.5,35,42,00,075/-.

Sure. The table converts to clean text as follows:

Particulars	Amount in Rs.
Interest on Loan	1,39,60,796
Exclusivity Payment with interest/interest on loan given in AY 07-08	510,66,37,930
Transition Fee	23,36,01,349
TOTAL ADJUSTMENT	535,42,00,075

2.2.1. On receipt of the order passes under section 92CA(3), the Ld.AO passes the draft assessment order on 30/12/2011 by further proposing additions as under:

I	Income from Business and Profession
	Business income (as per Return)		7,64,00,36,654
Add	Disallowance/additions as discussed above:-
	Transfer Pricing Adjustment— Para 4	5,35,42,00,075
	Disallowance depreciation claimed on upfront payment of Discount – Para 5	1,31,23,45,020
	Changes in Accounting policy – Profit on cash flow hedges – Para 6	85,14,40,158
	Disallowance under section 14A –Para 9	3,90,13,318	7,55,69,98,571
			15,19,70,35,225
Less	Deduction under section 10A – Para 7		8,68,11,17,341
	Revised Business Income		6,51,59,17,884
II	Capital Gains
	Short term Capital Gains		6,29,314
	Gross Total Income		6,51,65,47,198
Less	Deduction w/ s. 80G as claimed		2,83,30,000
	Total Income		6,48,82,17,198
	Rounded off to		6,48,82,17,200

2.3. On receipt of the Draft Assessment order, the assessee preferred objections before the DRP.

2.4. The DRP, in its Direction dated 07/09/2012 directed the Ld.AO to verify and delete the adjustment relating to exclusivity payment to the extent already disallowed by the assessee in its computation of income, sustained the adjustment towards interest on the exclusivity payment by treating the same as an interest-free advance to the AE. Besides the transfer pricing adjustments, the  disallowance proposed by the Ld.AO under section 14A of the Act amounting to Rs.3,90,13,318/- and recomputing deduction u/s.10A thereby reducing technical service expenses incurred in foreign currency and telecommunication charges from the export turnover was upheld.

2.4.1. On receipt of the DRP directions, the Ld.AO passed the final assessment order making additions in the hands of the assessee.

Aggrieved by the final assessment order dated 23/10/2012 passed pursuant to the directions of the DRP, the assessee is in appeal before this Tribunal.

3. Ld.Sr.Counsel submitted that Ground No.1 raised by the assessee is general in nature and do not require adjudication.

4. Ground No.2.1. to 2.2. raised by the assessee is on the addition made in the hands of the assessee towards interest charged on the exclusivity payment against project Andes.

4.1. Brief facts leading to this issue are as under:-

The Ld.Sr.Counsel submitted that, in February 2018, BT floated an invitation to tender for its global systems and processes rationalisation programme, namely, “Project Andes”. He submitted that Project Andes constituted a large, multi-year business transformation programme involving process transformation, reduction in the total cost of ownership through vendor rationalisation, systems rationalisation, improvement in speed to market and reduction in the number of vendors. According to him, the total estimated contract value on offer for the relevant year was GBP 350 million, and all major IT service providers, including TCS, Infosys and Accenture, were competing for the project.

4.2. The Ld.Sr.Counsel further submitted that, with a view to being shortlisted and negotiating with BT on an exclusive basis during a defined negotiation window, the assessee entered into an agreement with BT in March 2018, titled the “Exclusivity Agreement”. Reliance was placed on pages 182 to 186 of the Factual Paper Book, where the said agreement has been placed on record.

4.3. Referring to Clause 1.1 of the Exclusivity Agreement, the Ld.Sr.Counsel submitted that, against payment of GBP 55 million, equivalent to Rs.440.12 crores, the assessee acquired the following rights and benefits:

(i) empanelment of the assessee as a potential supplier for Project Andes;

(ii) BT’s time and effort in working with the assessee in the UK during the vendor-selection process for Project Andes;

(iii) negotiation and coaching in the UK in respect of Project Andes; and

(iv) an undertaking by BT not to negotiate with any other potential vendor in respect of Project Andes for a period of 90 days from the date of the agreement.

4.4. The Ld.Sr.Counsel further submitted that, under Clause 1.4 of the aforesaid agreement, it was expressly provided that the exclusivity payment was an unconditional, irrevocable and non- refundable payment to be made by the assessee to BT and that the assessee had no right of set-off in respect thereof.

4.5. The Ld.Sr.Counsel submitted that, in its books of account, the assessee had accounted for the aforesaid exclusivity payment as an extraordinary expenditure in the Profit and Loss Account. However, while computing its taxable income, the assessee had suo motu added back the entire amount and had not claimed any deduction in respect thereof. He, therefore, emphasised that the payment was tax-neutral from the perspective of the Revenue, as no deduction had been claimed by the assessee in respect of the same.

4.6. The Ld.Sr.Counsel further emphasised that, pursuant to the aforesaid payment, the assessee secured the Project Andes project and the consequential contract with BT. He submitted that, over a period of five years, the assessee generated aggregate revenue of Rs.2,988.87 crores from BT pursuant to the said contract, the year-wise details of which were furnished as under:

Financial Year	GBP	INR
2009-10	8,64,09,688	6,09,70,81,961
2010-11	8,20,13,400	6,21,96,16,071
2011-12	8,15,12,945	6,09,11,19,990
2012-13	7,32,72,908	6,20,25,95,654
2013-14	5,75,66,026	5,27,83,20,991
Total as printed	38,07,74,966	29,88,87,34,668

4.7. The Ld.TPO, while examining the aforesaid exclusivity payment, held that the payment was unusual and did not constitute a genuine business transaction. Accordingly, the Ld.TPO determined the ALP of the exclusivity payment of Rs.440.12 crores at Nil. Consequentially, the Ld.TPO re- characterised the very same payment as an interest-free advance/loan given by the assessee to BT and imputed notional interest thereon, resulting in an adjustment of Rs.72.34 lakhs.

4.8. Before the DRP, taking note of the undisputed fact that the assessee had itself not claimed the exclusivity payment as a deduction while computing its taxable income, the Ld.AO was directed to verify the said position and delete the principal adjustment of Rs.440.12 crores. However, the consequential adjustment on account of imputation of interest amounting to Rs.72.34 lakhs was sustained.

4.9. The Ld.Sr.Counsel submitted that, pursuant to the directions of the DRP, the Ld. AO verified the aforesaid position and did not make the principal adjustment of Rs.440.12 crores in the final assessment order. However, the consequential adjustment of Rs.72.34 lakhs on account of notional interest was retained.

4.10. The Ld.Sr.Counsel submitted that the exclusivity payment represented a genuine commercial transaction entered into for identifiable and cogent business purposes. He submitted that the payment was neither unusual in the sense of being devoid of commercial rationale nor did it involve any diversion of resources or reserves. According to him, the transaction was also not a sham.

4.11. Drawing our attention to Clause 1.1 of the Exclusivity Agreement, the Ld.Sr.Counsel submitted that, against the payment, the assessee acquired specific commercial rights for a period of 90 days, including BT’s undertaking not to negotiate with any other potential vendor during the said period. The assessee was also entitled to participate in the empanelment process and to benefit from BT’s time and efforts during the vendor-selection process, including negotiation and coaching in the UK.

4.12. He submitted that the payment was made against defined commercial rights and was expressly made non-refundable, even in the event that the assessee ultimately failed to establish itself as fit for the contract. According to him, the payment secured an exclusive negotiation window with BT in a highly competitive market. He further submitted that Project Andes was one of BT’s significant transformation programmes and was being pursued by major IT service providers, including TCS, Infosys and Accenture.

4.13. The Ld.Sr.Counsel submitted that the agreement was structured in such a manner that, during the 90-day exclusivity period, competing vendors could not intervene in the negotiations, destabilise the proposed arrangement, quote lower prices, offer deeper discounts or otherwise create impediments to the negotiations. He submitted that, even if such an arrangement were regarded as a non-conventional mode of commercial negotiation, the same could not, merely for that reason, be characterised as irrational, unusual or non-genuine.

4.14. The Ld.Sr.Counsel also referred to a newspaper publication bearing the heading, “Tech Mahindra-UK deal may be one of a kind”. He submitted that, after securing the project and assuming the associated commercial risks, the assessee, subsequent to expiry of the 90-day exclusivity period, earned substantial profits from BT over a period of five years. According to him, the generation of such revenue was an undisputed fact and the corresponding revenue had been duly offered to tax in India. The transaction, therefore, could not be regarded as a sham or as involving any diversion of reserves.

4.15. The Ld.Sr.Counsel further submitted that, in any event, no revenue was earned pursuant to the arrangement during the year under consideration, as the assessee had added back the entire exclusivity payment while computing its taxable income and had not claimed any deduction in respect thereof. Therefore, according to him, there was no basis to allege any diversion of profits through the said transaction, and the allegations in this regard were without factual foundation.

4.16. In support of the aforesaid submissions, particularly the proposition that a commercially structured transaction could not be disregarded as a sham merely because its terms were unconventional, the Ld.Sr.Counsel placed reliance upon the following judicial precedents:-

• CIT vs. A. Raman & Co. [1968] 67 ITR 11 (SC)
• EKL Appliances Ltd. [2012] 24 taxmann.com 199 [Del. HC]
• Aegis Ltd. [102 taxmann.com 495] (Bombay HC)
• Lever India Exports Ltd. [246 Taxman 133] (Bom. HC)
• L’oreal India (P.) Ltd. [116 taxmann.com 149] (Mumbai ITAT)

4.17. The Ld. Sr. Counsel submitted that, with regard to the re- characterisation of the exclusivity payment as an interest-free loan/advance and the consequential imputation of notional interest thereon, reliance was placed on the decision of the coordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2007-08 in ITA Nos.3643/Mum/2012 and 3531/Mum/2012, vide order dated 25/10/2023.

4.18. It was submitted that, in A.Y. 2007-08, the Tribunal had considered a similar payment, being an upfront discount of Rs.524.93 crores paid by the assessee to BT for securing a large, multi-year IT service contract. The Ld. Sr. Counsel submitted that, in similar circumstances, an identical adjustment had been made by the TPO and that the Tribunal had examined the consequential adjustment arising from the re-characterisation of the payment as an interest-free advance and the consequent imputation of notional interest. The relevant observations of the Tribunal are reproduced hereunder:-

“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 1abarbor 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—

(i) 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 section as they stood immediately before their amendment by 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-characterising 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.”

4.19. The Ld.Sr.Counsel submitted that, unless the primary adjustment survives, no secondary adjustment can be made for the year under consideration, as the provisions governing secondary adjustments were not applicable in the facts of the present case. He further submitted that, in any event and without prejudice to the aforesaid contention, the primary adjustment of Rs.440.12 crores had itself been deleted by the Ld.AO after due verification pursuant to the directions of the DRP. Therefore, even independently of the applicability of the provisions relating to secondary adjustment, there could be no consequential adjustment on account of notional interest when the underlying primary adjustment did not survive.

4.20. On the contrary, the Ld.DR submitted by way of written submission as under:-

“1. Ground No.2

1.1 As per Form No.36 filed by the assessee, Ground No.2 is as under- “2. Incorrect computation of arm’s length price of Exclusivity Payment and incorrect characterization of the same as a loan and imputing interest thereon.”

Therefore, this ground assails the re-characterization of the exclusivity payment by the TPO. Such a re-characterization has not been adjudicated by the ITAT in the earlier years, on any issue. Therefore, this re- characterization of the transaction requires fresh adjudication by the Hon’ble Bench.

1.2 The assessee has made exclusivity payment of Rs.440 crores to its AE (British Telecom) during the year which has been debited to the P&L account as ‘Extraordinary expenditure’. This extraordinary expenditure has been added back by the assessee to the total income in the computation of income. This exclusivity payment has not been capitalized in the books of account of the assessee. Therefore, the ostensible reason for not claiming this expenditure as a deduction in the return of income could either be that the same has not been incurred for the purposes of business or it’s ALP is Zero. This being the case, this transaction between the assessee and its AE (exclusivity payment) cannot be left hanging in the air and needs to be correctly characterized. This transaction reduces the reserves and surplus available to the assessee and therefore has a bearing on the income and assets of the assessee. Therefore, this transaction of exclusivity expenditure is an international transaction within the meaning of section 92B and needs to be characterized properly since the treatment given by the assessee in its books of accounts of a business expenditure has been re-characterized by the assessee itself – as not an allowable expenditure. In such a situation, the TPO had no option but to correctly characterize this transaction and determine its ALP under the Transfer Pricing provisions of the Act. The TPO has characterized this transaction as an interest free advance given by the assessee to its AE (BT) and has determined the ALP of the interest income.

1.3 During the course of rejoinder, the Ld. AR submitted details of revenue received from Project Andes for which the assessee to have made exclusivity payment of Rs.440 crores. The detail submitted by the assessee is reproduced below-

F.Y. GBP INR 2009-10 8,64,09,688 6,09,70,81,961 2010-11 8,20,13,400 6,21,96,16,071 2011-12 8,15,12,945 6,09,11,19,990 2012-13 7,32,72,908 6,20,25,95,654 2013-14 5,75,66,026 5,27,83,20,991 Total 28,07,74,966 29,88,87,34,668

The percentage of exclusivity payment to gross (actual) revenue received from this project works out to 14.72%. As against this, the operating profit margin of the assessee is around 15% of its revenue. This shows that the entire operating profit margin from this project has been given upfront by the assessee to the AE in the form of exclusivity payment which the assessee would not have done in uncontrolled conditions. If we take the Net Present Value (NPV) of the receipts spread over the next 5 years, then exclusivity payment made upfront will exceed the Operating Profit Margin of the assessee.

1.4 During the course of rejoinder, the Ld. AR submitted copy of a press report which showed that this payment of Rs.440 crores along with payment of upfront discount of Rs.524 crore, in the preceding year has been termed as an ‘unusual structure’. That this transaction was an unusual occurrence and an extra ordinary expenditure (as shown in the books of accounts) is affirmed by the fact that the assessee has paid upfront its entire operating profit margin to its AE. That this transaction is unusual and extra-ordinary is further confirmed by the fact that it is a transaction with its AE and not an unrelated person. Moreover, this exclusivity payment is non-refundable, irrecoverable and does not guarantee that the contract will be awarded to the assessee or that the contract will last for its entire tenure, without premature termination. In such a situation the TPO had no alternative but to come to the conclusion that the assessee has shifted its reserves to the AE. Since the assessee is being deprived of funds and income thereon, on this payment made to its AE, the TPO has rightly re-characterized this unusual and extra- ordinary transaction as a loan. This is in accordance with Para 18 of the decision of the Delhi High Court in the case of EKL Appliances Ltd. (2012) 24 taxmann.com 199 (Del), wherein it has been held that a transaction can be recharacterized-

(i) where the economic substance of a transaction differs from its form and,

(ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 1.5 It is therefore, prayed that this ground may kindly be dismissed.

2. Ground No.4

2.1 As per Form No.36 filed by the assessee, Ground No.4 is as under-

“4. Incorrect application of Notional Interest on payment of Upfront Discount as was incorrectly re-characterized as loan by the jurisdictional AO/TPO in AY.2007-08”.

Therefore, this ground assails the re-characterization of the upfront discount, by the TPO. The re-characterization of this transaction has not been adjudicated by the ITAT in AY.2007-08. Furthermore, the order of the ITAT for AY 2007-08 on this issue is based on an incorrect appreciation of facts as can be seen from para 26 of the said order which states that-

“TPO has made secondary adjustment towards the same international transaction by recharacterizing the payment of upfront discount as an interest from the advance and charting interest on the same”.

In this case, the TPO has not made a secondary adjustment but has only recharacterized the payment of upfront discount as an interest free advance. In fact, there is no mention of secondary adjustment in the entire order of the TPO.

The decision of ITAT is based solely on the incorrect premise that the interest adjustment is a secondary adjustment. Whereas, such an interest adjustment by the TPO has been made by recharacterizing the upfront discount (and not by way of secondary adjustment). In fact, the decision of the ITAT, Mumbai has not given any finding on the issue of recharacterization of transaction by the TPO.

Therefore, the assessee’s ground relating to re-characterization of upfront discount requires fresh adjudication by the Hon’ble Bench.

2.2 The assessee has made upfront discount of Rs.524 crores to its AE (British Telecom) during F.Y.2006-07 (AY.2007-08). The TPO has stated in para 6 of the order u/s.92CA(3) dated 27/10/2010 for AY.2007-08 that it has been submitted by the assessee made payment of upfront discount of 60 million GBP against a contract of 500 million GBP (spread over a period of 5 years). This works out to 12% of total contract value. As against this, the operating profit margin of the assessee is around 15% of its revenue. This shows that the entire operating profit margin from this project has been given upfront by the assessee to the AE in the form of upfront discount which the assessee would not have done in uncontrolled conditions. If we take the Net Present Value (NPV) of the receipts spread over the next 5 years, then the discount payment made upfront will equal or exceed the Operating Profit Margin of the assessee.

2.3 During the course of rejoinder, the Ld. AR submitted copy of a press report which showed that this payment of Rs.440 crores along with payment of upfront discount of Rs.524 crore, in the preceding year has been termed as an ‘unusual structure’. That this transaction was an unusual occurrence is affirmed by the fact that the assessee has paid upfront almost its entire operating profit margin to its AE. That this transaction is unusual and extra-ordinary is further confirmed by the fact that it is a transaction with its AE and not an unrelated person. Moreover, this upfront discount is non-refundable and irrecoverable. In such a situation the TPO had no alternative but to come to the conclusion that the assessee has shifted its reserves to the AE. Since the assessee is being deprived of funds and income thereon, on this payment made to its AE, the TPO has rightly re-characterized this unusual and extra-ordinary transaction as a loan. This is in accordance with Para 18 of the decision of the Delhi High Court in the case of EKL Appliances Ltd. (2012) 24 taxmann.com 199 (Del), wherein it has been held that a transaction can be recharacterized-

(i) where the economic substance of a transaction differs from its form and,

(ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.

2.4 It is therefore, prayed that this ground may kindly be dismissed.”

4.21. In rejoinder to the submissions of the Ld. DR, the Ld. Sr. Counsel contended that the Revenue’s challenge to the order for A.Y. 2007-08 proceeded on an incorrect premise that the Ld. TPO had merely re-characterised the upfront discount as a loan/advance without making any secondary adjustment. He submitted that, in substance, the imputation of interest constituted a secondary/consequential adjustment, particularly when the ALP of the underlying international transaction, i.e. the upfront discount, had already been determined at Nil.

4.22. The Ld. Sr. Counsel further contended that the decision for A.Y. 2007-08 was not founded merely on the nomenclature of the adjustment as a “secondary adjustment”. According to him, the Ld. CIT(A), and thereafter the Tribunal, had independently held that once the primary adjustment in respect of the upfront discount did not survive, no further adjustment could be made in respect of the same transaction. He submitted that the bar contained in the proviso to section 92CE(1) constituted an additional and independent ground supporting deletion of the interest adjustment.

4.23. On the issue of re-characterisation, the Ld. Sr. Counsel submitted that the Revenue’s reliance on EKL Appliances Ltd. was misplaced. He submitted that the said decision, while recognising that re-characterisation may be permissible in limited circumstances, also cautioned that, ordinarily, the actual transaction cannot be disregarded or substituted with another transaction. According to him, the transaction in the present case did not fall within any such exceptional circumstances. The upfront discount represented a commercial discount/sign-on payment made to secure a large, multi-year IT services contract and could not be regarded as a disguised loan or advance.

4.24. The Ld.Sr.Counsel also disputed the Revenue’s allegation that the payment represented a shifting of reserves to the AE. He submitted that the payment was made pursuant to an express commercial requirement of BT for securing the contract and had resulted in substantial taxable revenue for the assessee. Therefore, the payment could not be equated with diversion or shifting of reserves.

4.25. It was further submitted that the Revenue’s description of the transaction as “unusual” was contrary to the contemporaneous material on record, including the RFP, evidence regarding industry practice, the comparable commercial arrangement with an unrelated party and the fact that other major IT service providers also offered similar upfront benefits. The Ld.Sr.Counsel submitted that, even assuming the transaction to be unconventional or unusual, such circumstance by itself could not establish commercial irrationality or, much less, render the transaction a sham. Reliance was placed on the principles stated in Aegis Ltd. and Voltas Ltd. that a transaction must be shown to be bogus or sham before its re-characterisation could be justified.

4.26. With regard to the Revenue’s NPV/operating-profit-margin analysis, the Ld.Sr.Counsel submitted that the upfront discount of Rs.524.93 crores could not appropriately be compared with the operating profit margin or the overall value of the BT contract for the purpose of re-characterising the payment as an interest-free loan. According to him, such a comparison, at the highest, may raise a question regarding the quantum or commercial reasonableness of the upfront discount, but could not, by itself, justify imputation of interest after the primary adjustment had ceased to survive.

4.27. The Ld.Sr.Counsel further contended that such NPV comparison did not constitute any of the prescribed methods under section 92C(1) read with Rule 10B. Therefore, according to him, the same could not be adopted as an ad hoc benchmarking mechanism. The subjective perception of the Ld.TPO as to what the amount of upfront discount ought to have been could not substitute a method prescribed under the transfer-pricing provisions.

4.28. It was also submitted that the transaction did not possess the essential characteristics of a loan or advance. There was no principal outstanding in favour of the assessee, no stipulated maturity period, no repayment schedule and no lender-borrower relationship between the parties. The upfront discount was, according to the Ld.Sr.Counsel, a commercial payment forming part of the contractual arrangement with BT and was effectively reflected in the commercial terms of the contract over its contractual period. Consequently, according to him, treating the payment as a notional loan and imputing interest thereon was contrary to the economic substance of the transaction.

4.29. Lastly, the Ld.Sr.Counsel relied upon the uncontrolled transaction involving Vodafone Hutchison Australia (“VHA”), submitting that the same constituted the most direct comparable available on record and demonstrated that an upfront/sign-on payment could form part of an arm’s-length commercial arrangement for securing a large contract. According to him, the existence of such an uncontrolled comparable materially contradicted the Revenue’s re-characterisation of the payment as a loan or advance. He further submitted that accepting the Revenue’s approach would lead to the anomalous consequence of treating substantial upfront customer-acquisition payments or sign-on fees as interest-free loans merely because the amount bears some relationship to the expected future margins from the contract, which, according to him, was not permissible in law.

We have perused the submissions advanced by both sides in light of the records placed before us.

5. We have considered the rival submissions and perused the material available on record. The payment under the Exclusivity Agreement was made by the assessee to BT in connection with securing a large transformation contract, which was expected to augment the assessee’s business. While the manner adopted by the assessee for securing the contract may be regarded as unconventional, such circumstance, by itself, cannot lead to the conclusion that the transaction was devoid of commercial rationale. The material on record shows that the payment of Rs.440.12 crores was made pursuant to the Exclusivity Agreement for securing an exclusive negotiation window with BT for a period of 90 days, during which the assessee was required to participate in the vendor-selection process and demonstrate its capability for obtaining the contract.

5.1. It is also an admitted position that the amount paid by the assessee to BT was unconditional, irrevocable and non-refundable and did not carry any right of set-off. Consequently, if the assessee had ultimately failed to secure the contract, the payment would nevertheless have remained non-refundable. Further, the press material placed before us by the Ld.Sr.Counsel indicates that arrangements involving upfront payments or similar commercial benefits in connection with securing large, long-term contracts were not unknown in the IT industry. These circumstances lend support to the assessee’s contention that the payment was made pursuant to a commercial arrangement and cannot, merely on account of its unconventional nature, be regarded as lacking commercial substance.

5.2. In the absence of any material brought on record by the Revenue to establish that the transaction was sham, fictitious or otherwise lacking in commercial substance, we find no justification to disregard the commercial character of the payment merely because the manner adopted by the assessee was unconventional. It is also undisputed that, after securing the contract, the assessee earned substantial revenue from BT in the subsequent years, which was duly offered to tax in India. The subsequent generation of substantial revenue pursuant to the contract constitutes a relevant circumstance supporting the commercial rationale for the payment.

5.3. As regards the consequential adjustment on account of notional interest on the exclusivity payment, we find merit in the contention of the Ld.Sr.Counsel. The primary adjustment of Rs.440.12 crores in respect of the exclusivity payment was not ultimately made in the final assessment, pursuant to the directions of the Ld. DRP and after verification by the Ld.AO. Consequently, there was no surviving primary adjustment to which a consequential adjustment on account of notional interest could attach. Further, the assessment year under consideration is prior to 01/04/2016 and, therefore, the provisions of section 92CE relating to secondary adjustment were not applicable to the transaction under consideration.

5.4. In view of the foregoing, the consequential adjustment of Rs.72.34 lakhs made by imputing notional interest by re- characterising the exclusivity payment as an interest-free loan/advance given by the assessee to BT cannot be sustained in law. We, therefore, find no merit in the adjustment made by the Revenue and direct the Ld.AO to delete the same. Accordingly, the ground raised by the assessee on this issue is allowed.

Accordingly, Ground Nos.2.1 and 2.2 raised by the assessee are allowed.

6. Ground No. 3.1. raised by the assessee is in respect of the computation of ALP of transition fee of Rs.23.36 Crores to be Nil.

6.1. The brief facts relating to the issue are that the assessee paid a transition fee to BT to enable it to smoothly transition the existing work from third-party vendors and provide seamless services to the AE without any impediments.

6.2. The Ld. Counsel submitted that, as per the agreement dated 19/03/2008, the assessee paid the said sum during the financial year relevant to the assessment year under consideration towards the efforts undertaken by BT for transition of its obligations to the assessee under the new project. It was submitted that the said charges included the costs incurred towards activities required for successfully executing the transition plan and transferring the ongoing responsibilities from the existing vendors, as described in the tender documents relating to the transition.

6.3. It was submitted that the payment made to BT was, therefore, in the nature of reimbursement of costs incurred by BT towards the contracts which were transitioned, with no element of profit embedded therein. The Ld.Sr.Counsel submitted that all relevant evidence pertaining to the transition fee paid to BT, including the agreement with BT, evidence of costs incurred in the relevant activities, and copies of agreements entered into with BT’s vendors from whom the work was transitioned, had been furnished before the authorities below.

6.4. It was further submitted that the payment also included costs incurred by BT towards training imparted by it to the assessee’s employees. The Ld.Sr.Counsel also submitted that certain projects were already being carried out by major IT service providers such as TCS and Wipro, which were subsequently transitioned to the assessee. BT had, therefore, incurred costs in facilitating such transition when it selected the assessee to render the said services.

6.5. The Ld.Sr.Counsel emphasised that, in substance, the transition charges represented payments in respect of services rendered on software platforms by Wipro/TCS, which were subsequently transitioned to the assessee after BT selected the assessee to render the same services. Upon transition of such work to the assessee, the assessee was required to reimburse the costs incurred by BT towards payments made to Wipro/TCS. The Ld. Senior Counsel, therefore, emphasised that the ALP of the transition fee could not be determined at Nil.

6.6. He also placed reliance on the Work Package Agreement dated 19/03/2008, placed in the Paper Book, as well as the agreement entered into with Infosys, under which payment was made for transition of services from Infosys to Tech Mahindra. The said agreement was placed at page 93 of the Paper Book.

6.7. The Ld.Sr.Counsel submitted that, while determining the ALP of the transaction at Nil, the Ld.TPO proceeded on the premise that the assessee ought not to have made such payment since an independent third party would not have made a similar payment. He further submitted that, while determining the ALP at Nil, the Ld.TPO had not applied any of the prescribed methods under Rule 10B of the Income-tax Rules, 1962, and had thus determined the ALP at Nil on an ad hoc basis by holding the transaction to be sham and make-believe.

6.7. He further submitted that the Ld.TPO had proceeded on the premise that there was no evidence to establish that such transition services had actually been provided by BT. The Ld.Sr.Counsel submitted that it is a well-settled principle that the Ld.TPO has no jurisdiction to question the commercial wisdom of the assessee and that his jurisdiction is confined to determining the ALP of the international transactions in accordance with the provisions of Chapter X of the Act and the prescribed methodology. In support of the aforesaid submissions, he placed reliance upon the following decisions:

> EKL Appliances Ltd. [2012] 24 taxmann.com 199 [Del. HC]

> Lever India Exports Ltd. [246 Taxman 133] (Bom. HC)

> L’oreal India (P.) Ltd. [116 taxmann.com 149] (Mumbai ITAT)

6.8. The Ld.Sr.Counsel further submitted that the assessee had entered into a Work Package Agreement and an Access and Confidentiality Agreement with Infosys, both of which had been furnished before the lower authorities. He, therefore, submitted that the conclusion that there was no evidence of actual transition services having been rendered by BT was contrary to the material available on record.

6.9. The Ld.Sr.Counsel further submitted that paragraph 7.3 of the order passed by the Ld.TPO itself records the details called for and the submissions furnished by the assessee vide letter dated 21/07/2011. According to him, the material referred to in the said paragraph demonstrated that the assessee had furnished contemporaneous evidence before the lower authorities to substantiate the payment made towards transition services. He, therefore, submitted that the Ld.TPO’s conclusion that the assessee failed to establish the rendering of services was not borne out from the record.

6.10. The Ld. DR, on the other hand, relied upon the observations and findings recorded by the Ld.TPO and the DRP and supported the disallowance made by the lower authorities.

We have perused the submissions advanced by both sides in light of the record placed before us.

7. We have considered the rival submissions and perused the material available on record. The Ld. TPO, while rejecting the submissions of the assessee, observed that there was no necessity for the assessee to make the impugned payment for maintaining a system which was already in existence and operational. The Ld. TPO also proceeded on the premise that an independent third party would not have made such an upfront payment in anticipation of future work.

7.1. In our considered view, the aforesaid premise, by itself, cannot constitute a valid basis for disregarding a transaction supported by contemporaneous documentary evidence. The material placed on record indicates that the assessee derived commercial benefit from the transition to it of agreements with BT relating to IT services which had earlier been rendered by other IT service providers. The existence of such transition arrangements and the commercial benefit accruing therefrom cannot be disregarded merely on the basis of a hypothetical assessment of what an independent third party might have done in similar circumstances.

7.2. It is further noted that the payment made by the assessee to BT was on a cost-to-cost basis and did not contain any profit element. The assessee had reimbursed the costs incurred by BT in transitioning to the assessee the contracts which BT had with other IT service providers. In these circumstances, we find no material to conclude that the payment resulted in any shifting of profits or that the amount paid towards transition of the contracts was otherwise unreasonable.

7.3. We further note that the Ld.TPO determined the ALP of the transaction at Nil without applying any of the prescribed methods under Rule 10B of the Income-tax Rules, 1962. Such determination, in our considered view, cannot be sustained merely on the basis of the Ld.TPO’s perception as to the necessity or commercial expediency of the payment, without benchmarking the transaction in accordance with the statutory framework. The requirement of determining the ALP by applying one of the methods prescribed under section 92C read with Rule 10B has also been recognised in various decisions of the Hon’ble High Courts and the coordinate Benches of the Tribunal, including the decisions relied upon by the assessee, as under:-

> Johnson & Johnson Ltd. [297 CTR 480 (Bombay HC)]

> Johnson & Johnson Limited [1291/ 2014 dated 3 April 2017 (Bombay HC)]

> Lever India Exports Ltd. [246 Taxman 133 (Bombay HC)]

> CA Computer Associates India (P.) Ltd. [209 Taxman 382 (Bombay HC)]

> L’Oreal India (P.) Ltd. [141 taxmann.com 168 (Mumbai ITAT)]

> Hamon Cooling Systems (P.) Ltd. [145 taxmann.com 476 (Mumbai ITAT)]

> UPS Express (P.) Ltd. [142 taxmann.com 172 (Mumbai ITAT)]

> PPG Coatings India (P.) Ltd. [139 taxmann.com 165 (Mumbai ITAT)]

7.3. Based on the ratios laid down in these decisions, we hold that the addition made in the hands of assessee against the transition fees paid by assessee deserves to be deleted. Accordingly, Ground No.3.1. raised by assessee stands allowed.

8. Ground No.3.2. raised by assessee is against secondary adjustment made by Ld.TPO in respect of the transition fee by treating the same to be loan to AE and computing notional interest. We have already considered the impact of secondary adjustment in the foregoing paragraphs hereinabove. The same principle is applied mutatis mutandis to this issue under consideration after considering identical arguments raised by the Ld.Sr. Counsel as well as the Ld.DR.

Accordingly, Ground No.3.2. raised by assessee stands allowed.

9. Ground No.4 raised by the assessee is against secondary adjustment of upfront discount of Rs.524 Crores that was made in A.Y. 2007-08 which is treated as loan to AE and notional interest was added in the hands of the assessee during the year under consideration.

9.1. The brief facts relating to the issue are that, during AY 2007- 08, pursuant to an RFP floated by BT to various major players in the IT industry, including Accenture and Infosys, the assessee bid for and secured the software and IT services contract with BT having an approximate value of USD 1 billion, to be executed over a period of five years commencing from FY 2008-09.

9.1.1. As one of the commercial terms of the RFP, BT required an “upfront benefit”/“unconditional upfront payment” from the successful vendor. Accordingly, the assessee made an upfront discount payment of Rs. 524.93 crores to BT during AY 2007-08. The said payment was neither debited to the Profit & Loss Account nor claimed as a deduction while computing the taxable income and was, therefore, tax neutral from the assessee’s standpoint.

9.2. During the transfer pricing proceedings for AY 2007-08, the Ld.TPO determined the ALP of the upfront discount at Nil and re- characterised the same as an interest-free advance/loan given by the assessee to BT, resulting in a consequential adjustment on account of notional interest. Although the principal adjustment was subsequently deleted, the consequential adjustment on account of interest was sustained by the Ld.CIT(A). On further appeal, the Coordinate Bench of the Tribunal, vide order dated 25/10/2023 in ITA No.3531/Mum/2012, deleted the consequential adjustment.

9.3. During the year under consideration, i.e. AY 2008-09, the Ld.TPO did not make any fresh determination of the ALP of the underlying upfront discount. Instead, following his order for assessment year 2007-08, the Ld.TPO re-characterised the same upfront discount of Rs.524.93 crores as a continuing interest-free advance/loan given by the assessee to BT and computed notional interest thereon at 16.3% p.a., resulting in a consequential adjustment of Rs.69.82 crores.

9.4. The DRP sustained the said consequential adjustment, and the final assessment order accordingly retained the adjustment of Rs.69.82 crores.

9.5. The Ld.Sr.Counsel submitted that this Tribunal in assessee’s own case for AY 2007-08 (supra) dealt with identical issue by observing as under:-

“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-charactenzing the upfront discount payment as an interest free loan to AE. The assessing officer while passing the assessment order deleted the adjustment made deleted the interest adjustment for the reason that since the ALP of the primary adjustment towards the payment of upfront discount but retained the interest adjustment. The CIT(A) 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 Id 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

(i) 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.

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-charactersation 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.”

9.6. Based on the undisputed facts, the Ld.Sr.Counsel submitted that A.Y. 2008-09 stood on the same footing as assessment year 2007-08. He submitted that the payment in question was the very same upfront discount of Rs.524.93 crores paid by the assessee to BT in assessment year 2007-08 and that the assessee had never claimed the said payment as an expenditure or deduction either in the assessment year 2007-08 or in A.Y. 2008-09. He, therefore, submitted that the re-characterisation of the said payment as an interest-free advance/loan originated entirely from the order passed by the Ld.TPO for A.Y. 2007-08. Consequently, the adjustment of Rs.69.82 crores towards interest in A.Y. 2008-09 was merely a continuation of the same imputation of interest which had already been deleted by the coordinate Bench of this Tribunal in assessment year 2007-08. He further submitted that, as in assessment year 2007-08, the year under consideration was prior to 01/04/2016 and, therefore, proviso (ii) to section 92CE(1) barred any secondary or consequential adjustment in respect of the said payment.

9.7. Without prejudice to the aforesaid submission that the issue was squarely covered by the decision of the coordinate Bench, the Ld.Sr.Counsel submitted that the consequential adjustment was, in any event, legally unsustainable, as there was no primary adjustment in respect of the upfront discount of Rs.524.93 crores for the year under consideration(2008-09) to which the consequential adjustment could attach. According to him, the attempt of the Ld. CIT(DR) to revisit the issue and seek a review of the earlier decision of the Tribunal was, therefore, wholly unwarranted.

9.8. The Ld. Sr. Counsel further submitted that, in A.Y. 2007-08, the main adjustment in respect of the upfront discount of Rs.524.93 crores had itself been deleted by the Ld.AO. The Ld.CIT(A), according to him, correctly held that such deletion rendered the relevant international transaction non-existent for transfer-pricing purposes and, consequently, the re- characterisation of the payment as a loan and the consequential imputation of interest could not survive. He further submitted that the Revenue’s appeal against the said decision had been dismissed by the coordinate Bench of this Tribunal.

9.9. The Ld. Sr. Counsel submitted that the position in for the year under consideration was a fortiori. He submitted that there was no primary adjustment at all in respect of the upfront discount of Rs.524.93 crores in the year under consideration. According to him, neither the Ld.TPO nor the Ld.AO could have made any primary adjustment in respect of the said upfront discount for the year under consideration. The Ld.TPO had merely carried forward the re-characterisation made in A.Y. 2007-08 and imputed interest for the year under consideration, without there being any surviving primary adjustment to which such consequential adjustment could validly attach.

9.10. The Ld.Sr.Counsel, without prejudice to the aforesaid submissions, further submitted that the transaction was genuine and, therefore, could not be re-characterised. He submitted that the upfront discount paid by the assessee to BT was a genuine commercial payment made in the ordinary course of its business. In support, he submitted that the RFP floated by BT to multiple large IT service providers, including Accenture and Infosys, expressly contemplated an “upfront benefit” as part of the commercial terms of the proposed contract. The RFPs issued to the assessee and Accenture, placed on record, were relied upon to demonstrate that the requirement of an upfront benefit was part of the commercial terms contemplated by BT and was not a term introduced subsequently or solely in the arrangement between the assessee and BT.

The Ld.Sr.Counsel further submitted that payment of upfront discounts or “sign-on fees” for securing large, multi-year contracts was a recognised industry practice among large IT service providers, including TCS, Infosys, Wipro and HCL. In support thereof, reliance was placed on contemporaneous press reports published in the Economic Times dated 15/12/2008 and 30/07/2014, Livemint dated 15/10/2012 and India Infoline dated 26/04/2016.

He further relied upon an uncontrolled transaction involving Vodafone Hutchison Australia under a contract dated 07/05/2010. It was submitted that, in that case also, the customer had floated a tender containing a provision for payment of an upfront fee of AUD 50 million as a sign-on fee for securing the contract. According to the Ld. Sr. Counsel, the existence of a similar commercial term in an uncontrolled transaction constituted corroborative evidence that the upfront discount paid to BT was a genuine commercial arrangement and was consistent with arm’s length dealings.

The Ld. Sr. Counsel further submitted that the upfront discount enabled the assessee to secure a five-year contract with BT, pursuant to which the assessee earned revenues of GBP 380.77 million, equivalent to approximately Rs. 2,988.87 crores. It was submitted that the said revenues were recognised by the assessee in the subsequent years and duly offered to tax.

The Ld. Sr. Counsel finally submitted that the evidence and documents relied upon in support of the aforesaid submissions had already been compiled by the assessee in A.Y. 2007-08 and furnished before the authorities vide letter dated 13/10/2023. He submitted that a copy of the said compilation was also handed over to the Hon’ble Bench on 01/07/2026 during the hearing of the present appeal for A.Y. 2008-09.

9.11. In support of his contentions, the Ld.Sr.Counsel relied on the following decisions:-

> PCIT v. Aegis Ltd. (Bombay High Court, ITA No. 1248 of 2016, order dated 28.01.2019) – [102 taxmann.com 495]

> Besix Kier Dabhol, SA v. DDIT [(2010) 134 TTJ 513] (Mumbai ITAT)

Vodafone India Services Pvt. Ltd. v. UOI [(2014) 369 ITR 511] (Bombay HC)

> Topsgrup Electronic Systems Ltd. v. ITO [(2016) 67 taxmann.com 310] (Mumbai ITAT),

> Oracle Financial Services Software Ltd. [183 taxmann.com 712] (Mumbai ITAT).

> Voltas Limited [(2020) 183 ITD 857] (Mumbai Tribunal)

10. The Ld.DR, on the contrary, referred to the written submissions furnished and reproduced hereinabove.

We have perused the submissions advanced by both sides in light of the records placed before us.

11. We have considered the rival submissions and perused the material available on record. The upfront discount of Rs.524.93 crores was paid by the assessee to BT in connection with securing a large, multi-year transformation contract, which was expected to generate substantial business for the assessee. While the manner in which the assessee sought to secure the contract may be regarded as unconventional, the same, by itself, cannot be regarded as lacking commercial rationale. The material on record shows that the payment was made pursuant to the commercial terms contemplated in the RFP floated by BT, under which the assessee was required to provide an upfront benefit as part of the arrangement for securing the contract.

11.1. It is an admitted position that the upfront discount of Rs.524.93 crores was paid by the assessee to BT as part of the commercial arrangement for securing the aforesaid contract and that the assessee did not claim the said payment as an expenditure or deduction while computing its taxable income. The contemporaneous material placed on record further indicates that upfront payments/discounts were not unknown in the IT industry, particularly in the context of large, long-term and multi-year contracts. The existence of similar commercial terms in uncontrolled transactions also lends support to the assessee’s contention regarding the commercial nature of the payment.

11.2. In the absence of any material brought on record by the Revenue to demonstrate that the transaction was not genuine or that the payment was a mere device lacking commercial substance, we find no justification to disregard the commercial character of the upfront discount merely on the ground that the manner adopted by the assessee was unconventional. It is also undisputed that, pursuant to securing the contract, the assessee earned substantial revenues from BT in the subsequent years, aggregating to GBP 380.77 million, approximately equivalent to Rs.2,988.87 crores, which were duly offered to tax in India. The subsequent generation of substantial revenue from the contract constitutes a relevant circumstance corroborating the commercial rationale for the payment.

11.3. We now turn to the consequential adjustment on account of notional interest on the aforesaid upfront discount. The upfront discount of Rs.524.93 crores was paid in A.Y. 2007-08, and the primary adjustment made in respect thereof in that year had already been deleted. In the year under consideration, there was no independent primary adjustment in respect of the said payment to which a consequential adjustment could validly attach. Further, A.Y. 2008-09 is an assessment year commencing prior to 01/04/2016. Consequently, in view of proviso (ii) to section 92CE(1) of the Act, the provisions relating to secondary adjustment were not applicable to the transaction under consideration.

11.4. In view of the above discussion, the adjustment of Rs.69.82 crores made towards notional interest by re-characterising the upfront discount of Rs.524.93 crores as an interest-free loan/advance given by the assessee to BT cannot be sustained.

Accordingly, Ground No. 4 stands allowed.

12. Ground No. 5 relates to the addition on account of interest on loan advanced to the Associated Enterprise (AE), wherein the assessee has challenged the addition of Rs.13,960,796/-, being the difference between the interest charged by the assessee to its AE at 4% based on LIBOR and the arm’s length interest rate of 13.3% determined by the TPO and confirmed by the DRP.

12.1. The brief facts apropos this issue are that the assessee advanced a loan of US$ 5 million out of its internal accruals to its AE, namely, Tech Mahindra Americas Inc., USA, in August, 2005. The loan was advanced to support the AE during a temporary liquidity requirement and was denominated in US Dollars. Accordingly, for benchmarking the transaction, the assessee adopted the six-month LIBOR rate of 4%, prevailing at the time of advancing the loan.

12.2. The Ld. TPO, however, rejected LIBOR as the appropriate benchmark. The Ld. TPO observed that the assessee had converted Indian Rupee funds into US Dollars before advancing the loan to its AE. He, therefore, considered the assessee’s average domestic borrowing cost of 10.3% and, after adding a markup of 3% towards country-specific risk, entity risk, currency risk and managerial/administrative costs, determined the arm’s length interest rate at 13.3%. Accordingly, the Ld.TPO computed the interest chargeable at Rs.2,04,32,280/- as against the interest of Rs.64,71,484/- actually charged by the assessee, resulting in an adjustment of Rs.1,39,60,796/-. The Ld.DRP upheld the adjustment.

12.3. The Ld. Sr.Counsel submitted that the issue was recurring in nature and stood covered by the decisions of the Tribunal in the assessee’s own case for earlier assessment years. He submitted that the very same loan of US$ 5 million, advanced in August, 2005, continued in the subsequent years and that the Ld.TPO followed the same approach as adopted in the earlier years.

12.4. The Ld.Sr.Counsel submitted that, for A.Y. 2004-05, in ITA No.1176/Mum/2010, vide order dated 30/06/2011, the coordinate Bench of this Tribunal accepted LIBOR as the appropriate benchmark rate for determining the arm’s length interest in respect of a foreign currency loan advanced to the AE. He further submitted that, for A.Y. 2006-07, the Tribunal had again accepted LIBOR as the appropriate benchmark. He submitted that for A.Y. 2007-08, the Tribunal had held that LIBOR plus 80 basis points constituted an appropriate benchmark rate.

12.5. The Ld.Sr.Counsel relied on various judicial precedents to contend that interest on a loan advanced to an AE in foreign currency ought to be benchmarked with reference to the rate applicable to the currency in which the loan was denominated and in the jurisdiction where the funds were consumed, rather than by reference to the domestic borrowing cost or PLR prevailing in India. He accordingly submitted that LIBOR be accepted as the appropriate benchmark rate and, without prejudice, LIBOR plus 80 basis points be adopted, consistently with the decision of the Tribunal in the assessee’s own case for A.Y. 2007-08.

12.6. The Ld. DR, on the other hand, supported the orders of the lower authorities. He submitted that the benchmarking ought to take into consideration the domestic borrowing cost of the assessee, particularly since the assessee had converted funds from Indian Rupees into US Dollars before advancing the loan to its AE. According to the Ld.DR, the domestic rate of borrowing was, therefore, relevant for determining the arm’s length interest rate.

He accordingly supported the adoption of the PLR/domestic lending rate for benchmarking the transaction.

We have perused the submissions advanced by both sides in light of the record placed before us.

13. We note that the identical issue has been considered by the co-ordinate Bench of the Tribunal in the assessee’s own case for AY 2007-08, wherein, after considering the facts of the loan advanced in foreign currency to the AE, the Tribunal had held that LIBOR plus 80 basis points was an appropriate benchmark rate for determining the arm’s length interest on the said transaction. The relevant findings of the Tribunal reads as under:-

“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 Id 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.”

13.1. The Ld. Sr.Counsel placed on record that the very same loan transaction has continued from the earlier years and that the issue of benchmarking the interest with reference to LIBOR has been considered by the Tribunal in the assessee’s own case for AYs 2004- 05 and 2006-07. Therefore, in the absence of any distinguishing feature having been brought on record by the Revenue for the year under consideration, we find no reason to take a different view.

13.2. Respectfully following the above decision of the co-ordinate Bench of the Tribunal in the assessee’s own case for AY 2007-08, we direct that the interest rate of LIBOR plus 80 basis points be adopted as the appropriate benchmark rate for determining the arm’s length price of the loan transaction for the year under consideration. The Ld.AO/TPO is accordingly directed to recompute the arm’s length interest and the resultant adjustment, if any, in accordance with the above direction.

Accordingly, Ground No.5 raised by the assessee stands partly allowed.

14. The Ld.Sr.Counsel for the assessee submitted that the assessee did not wish to press Ground Nos. 6 & 7.

Accordingly, Ground Nos. 6 & 7 are dismissed as not pressed.

15. Ground No. 8 relates to disallowance u/s 14A r.w.r 8D.

The brief facts apropos this issue are that the assessee had not made any disallowance under section 14A of the Act while filing its return of income. During the course of assessment proceedings, the assessee submitted that an amount of Rs.8,03,900/-, comprising salary cost of identified employees engaged in investment-related activities and a portion of infrastructure cost, was attributable to earning exempt income. During the year, the assessee had earned dividend income of Rs.3.38 crores and long- term capital gains of Rs.2.15 crores.

15.1. The Ld.AO, however, without recording any objective satisfaction as to the correctness of the computation furnished by the assessee, proceeded to compute the disallowance under Rule 8D and determined the same at approximately Rs.3.90 crores. The Ld. DRP upheld the action of the Ld. AO by observing that the disallowance under section 14A was required to be computed in accordance with the mechanism prescribed under Rule 8D.

15.2. The Ld.Sr.Counsel submitted that, even assuming that the disallowance was required to be computed in accordance with Rule 8D, only those investments which had actually yielded exempt income during the relevant previous year could be considered for the purpose of computation. In support of the said proposition, reliance was placed, inter alia, on the decision of the Special Bench of the Tribunal in Vireet Investment (P.) Ltd., [2017] 165 ITD 27 (Delhi ITAT), as well as the decisions of the coordinate Benches in Tech Mahindra (P.) Ltd., [2022] 142 taxmann.com 29 (Mumbai ITAT), JSW Steel Ltd., [2023] 153 taxmann.com 17 (Mumbai ITAT), Strides Pharma Science Ltd., [2022] 141 taxmann.com 430 (Mumbai ITAT) and Reliance Industries Ltd., [2023] 198 ITD 158 (Mumbai ITAT).

15.3. The Ld.Sr.Counsel further submitted that the investments which had yielded exempt income during the year had been made out of the assessee’s own funds and not out of borrowed funds. Therefore, according to him, no disallowance towards interest expenditure was warranted under Rule 8D(2)(ii). Reliance in this regard was placed on the decision of the Hon’ble Bombay High Court in HDFC Bank Ltd., reported in [2014] 366 ITR 505 (Bom.).

15.4. The Ld.DR, on the other hand, supported the orders of the lower authorities. He submitted that the disallowance under section 14A was required to be computed in accordance with the mechanism prescribed under Rule 8D and contended that the Ld.AO correctly computed the disallowance having regard to the exempt income earned by the assessee.

We have perused the submissions advanced by both sides in light of the record placed before us.

16. We have considered the rival submissions and perused the material available on record. It is noted that the Ld. AO proceeded to invoke Rule 8D without recording any objective satisfaction, with reference to the accounts of the assessee, as to the correctness of the claim made by the assessee regarding the expenditure incurred in relation to exempt income. However, since the assessee itself had identified and admitted expenditure of Rs.8,03,900/- as attributable to investment-related activities, the issue before us is required to be considered in the context of the applicable legal principles governing determination of disallowance under section 14A read with Rule 8D.

16.1. We further note that the Special Bench of the Tribunal in Vireet Investment (P.) Ltd. (supra) held that, for the purposes of computation under Rule 8D(2)(iii), only those investments which have actually yielded exempt income during the relevant previous year are to be considered. Respectfully following the aforesaid decision, we hold that, if disallowance is otherwise required to be computed under Rule 8D(2)(iii), the average value of investments shall be determined by taking into consideration only those investments which have actually yielded exempt income during the year under consideration.

16.2. We also note that the assessee has contended that the investments which yielded exempt income during the year were made out of its own funds and not out of borrowed funds. The said contention finds support from the decision of the Hon’ble Bombay High Court in HDFC Bank Ltd. (supra), wherein it was held that where an assessee possesses sufficient interest-free own funds, a presumption arises that investments in tax-free securities have been made out of such own funds. Accordingly, where the investments yielding exempt income are demonstrated to have been made out of the assessee’s own funds, no disallowance of interest expenditure under Rule 8D(2)(ii) would be warranted.

16.3. In view of the above, we restore the issue to the file of the Ld.AO for recomputation of the disallowance under section 14A read with Rule 8D in accordance with law, after taking into consideration only those investments which have actually yielded exempt income during the year under consideration and, while computing the disallowance under Rule 8D(2)(ii), after verifying whether the corresponding investments were made out of the assessee’s own funds. Needless to state, the Ld. AO shall afford the assessee reasonable opportunity of being heard and shall pass an order in accordance with law.

Accordingly, Ground No. 8 raised by the assessee stands allowed for statistical purposes.

17. Ground No. 9 relates to the issue of exclusion of expenditure incurred in foreign currency and telecommunication charges from the export turnover for the purpose of computing deduction u/s

10A. Ground No. 9.1 relates to the grievance of the assessee that the Ld. AO/DRP erred in reducing the aforesaid expenditure from the export turnover, whereas Ground No. 9.2 is an alternate contention that, if such expenditure is reduced from the export turnover, a corresponding reduction ought to be made from the total turnover.

17.1. The brief facts apropos this issue are that the assessee, engaged in the business of providing software development and IT- enabled services to clients globally, claimed deduction under section 10A of the Act. While computing the deduction, the assessee did not reduce telecommunication charges of Rs.7.23 crores and expenditure incurred in foreign exchange outside India amounting to Rs.317 crores from either the export turnover or the total turnover. The assessee’s contention was that the aforesaid expenditure was neither recovered from nor billed to the customers and, therefore, did not form part of the export turnover.

17.2. Since the aforesaid expenditure had not been included in the export turnover in the first place, the assessee did not make any adjustment to the figure of export turnover while computing the deduction under section 10A. The Ld. AO, however, while framing the draft assessment order, reduced the aforesaid expenditure from the export turnover without making any corresponding adjustment to the total turnover. The Ld. DRP upheld the action of the Ld. AO, observing that the issue stood covered by its directions for A.Y. 2006-07.

17.2.1. The Ld.Sr.Counsel submitted that the expenditure incurred towards telecommunication charges and expenditure in foreign currency outside India was not included in the export consideration realised from the customers and was neither recovered from nor billed to them. Accordingly, such expenditure did not form part of the export turnover and no adjustment was warranted to the figure of export turnover or total turnover.

17.3. It was submitted that the identical issue stood squarely covered by the decision of the Tribunal in the assessee’s own case for A.Y. 2005-06, wherein the Tribunal accepted the assessee’s contention and held that expenditure incurred in foreign currency towards telecommunication charges and provision of technical services outside India, having not been included in the export turnover of the assessee, ought not to be excluded from the export turnover for the purpose of computing deduction under section 10A.

17.4. The Ld.Sr.Counsel further submitted that the aforesaid decision was followed by the Tribunal in the assessee’s own case for A.Y. 2006-07 vide order dated 18/10/2023 and for A.Y. 2007- 08 vide order dated 25/10/2023, wherein it was consistently held that no adjustment was required to be made to the export turnover on account of such expenditure.

17.5. Accordingly, the Ld.Sr.Counsel submitted that, following the decisions of the Tribunal in the assessee’s own case for the earlier years, the assessee was entitled to compute the deduction under section 10A without making any adjustment to the export turnover on account of the aforesaid expenditure.

17.6. Without prejudice, the Ld.Sr.Counsel submitted that, even if any portion of the aforesaid expenditure was required to be excluded from the export turnover, a corresponding exclusion was necessarily required to be made from the total turnover. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court in CIT v. HCL Technologies Ltd., reported in (2018) 404 ITR

719. Reliance was also placed on the decisions of the Hon’ble Bombay High Court and the Hon’ble Karnataka High Court in CIT v. Tech Mahindra Ltd. The Ld.Sr.Counsel further submitted that this alternative contention had also been accepted by the Tribunal in the assessee’s own case for the earlier assessment years.

17.7. It was, accordingly, prayed that no adjustment be made to the export turnover and, consequently, Ground No.9.2 raised by the assessee may be treated as academic.

17.8. The Ld. DR, on the other hand, supported the orders of the lower authorities and submitted that the expenditure incurred in foreign currency and the telecommunication charges were liable to be excluded from the export turnover while computing the deduction under section 10A. The Ld. DR relied upon the reasoning adopted by the Ld.AO and the DRP in support of the adjustment. We have perused the submissions advanced by both sides in light of the record placed before us.

18. We have considered the rival submissions and perused the material available on record. We note that the issue raised in Ground No.9.1 is squarely covered by the decisions of the coordinate Benches of the Tribunal in the assessee’s own case for the earlier assessment years.

18.1. In the assessee’s own case for A.Y. 2005-06, the Tribunal considered an identical issue and held that expenditure incurred in foreign currency towards telecommunication charges and provision of technical services outside India, having not been included in the export turnover of the assessee, could not be excluded therefrom for the purpose of computing deduction under section 10A. The relevant findings of the Tribunal read as under:-

“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. 205-206/2011 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 104, 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. “

The said view was thereafter followed by the Tribunal in the assessee’s own case for A.Y. 2006-07 and A.Y. 2007-08.

18.2. We further note that the factual position in the year under consideration remains the same, inasmuch as the impugned expenditure was not included in the export turnover, the same having neither been recovered from nor billed to the customers. Therefore, respectfully following the aforesaid decisions of the coordinate Benches of the Tribunal in the assessee’s own case, we hold that no adjustment is warranted to the figure of export turnover on account of such expenditure while computing the deduction under section 10A of the Act.

18.3. Accordingly, the Ld.AO is directed to compute the deduction under section 10A without reducing the telecommunication charges and expenditure incurred in foreign currency from the export turnover.

18.4. In view of our decision on Ground No.9.1, the alternate contention raised by the assessee in Ground No.9.2, namely, that in the event such expenditure is excluded from the export turnover, a corresponding exclusion ought also to be made from the total turnover, does not survive for adjudication and is, accordingly, rendered academic.

Accordingly, Ground No. 9.1 is allowed and Ground No. 9.2 is dismissed as academic.

19. Ground No. 10 relates to short grant of TDS credit.

19. The brief facts apropos this issue are that the assessee claimed TDS credit of Rs.5,82,99,140/-, supported by the TDS certificates furnished on record. However, while completing the assessment, the Ld. AO granted TDS credit of only Rs.3,83,89,468/-, resulting in a short grant of credit of Rs.1,99,09,672/-. The assessee has placed on record the relevant TDS certificates evidencing the TDS

credit claimed. It was further submitted that Form 26AS was not in existence for the year under consideration.

19.1. The Ld. Sr. Counsel submitted that the assessee was entitled to TDS credit of Rs.5,82,99,140/- on the basis of the TDS certificates furnished on record. He submitted that the short credit of Rs.1,99,09,672/- had arisen merely on account of non-grant of the credit claimed by the assessee. It was further submitted that, since Form 26AS was not in existence for the year under consideration, the TDS certificates constituted the relevant evidence for determining the TDS credit available to the assessee. Accordingly, the Ld. AR prayed that the Ld. AO be directed to grant TDS credit of Rs.5,82,99,140/- after verification of the TDS certificates furnished by the assessee.

19.2. The Ld. DR relied upon the assessment order. However, the Ld. DR did not dispute the assessee’s entitlement to TDS credit to the extent duly evidenced by the TDS certificates furnished on record.

We have perused the submissions advanced by both sides in light of the record placed before us.

20. We have considered the rival submissions and perused the material available on record. We note that the assessee had claimed TDS credit of Rs.5,82,99,140/-, whereas the Ld.AO had granted credit of only Rs.3,83,89,468/-, resulting in a short grant of credit of Rs.1,99,09,672/-. The assessee has placed on record the relevant TDS certificates evidencing the TDS deducted on its behalf. Considering that Form 26AS was not in existence for the year under consideration, the assessee’s claim of TDS credit cannot be rejected merely on the ground that the corresponding credit is not reflected in Form 26AS.

20.1. Accordingly, we direct the Ld. AO to grant TDS credit of Rs.5,82,99,140/- to the assessee, after duly verifying the TDS certificates furnished on record and subject to verification that the corresponding tax has been deducted and deposited into the account of the Central Government. Needless to say, the assessee shall be afforded reasonable opportunity of being heard in the course of such verification.

Accordingly, Ground No. 10 raised by the assessee stands allowed for statistical purposes.

21. Ground No. 11 is consequential in nature.

ADDITIONAL GROUNDS

22. Before proceeding to adjudicate the additional grounds of appeal, we shall first deal with the applications filed by the assessee seeking admission of additional grounds. The assessee, vide application dated 28/01/2020, has raised two additional grounds, namely, (i) the claim of deduction u/s 37(1) in respect of education cess paid, and (ii) restriction of Dividend Distribution Tax (DDT) to the rate provided under the respective DAA provisions. Further, vide application dated 01/12/2023, the assessee has raised two additional grounds challenging the jurisdiction of the Additional Commissioner of Income-tax to act as the Ld. AO and as the Ld. TPO, respectively.

22.1. We have considered the applications filed by the assessee and the submissions advanced by the Ld.Sr. Counsel. The additional grounds raised by the assessee are purely legal in nature and arise from the facts already available on record. The adjudication of the said grounds does not require investigation into any fresh facts. The Hon’ble Supreme Court in National Thermal Power Co. Ltd. v. CIT reported in [1998] 229 ITR 383 (SC) has held that the Tribunal has jurisdiction to examine a question of law arising from the facts which are on record, even if the same was not raised before the lower authorities. Similar principle was laid down by the Hon’ble Supreme Court in Jute Corporation of India Ltd. v. CIT reported in [1991] 187 ITR 688 (SC).

22.2. In view of the above, and considering that the additional grounds raised by the assessee involve legal issues arising from the facts already available on record, we admit the additional grounds of appeal filed vide applications dated 28/01/2020 and 01/12/2023 for adjudication.

22.3. However, the Ld.Sr.Counsel submitted that the additional ground relating to DDT is not pressed, since no dividend was paid by the assessee during the year under consideration, and that the additional grounds challenging the jurisdiction of the Additional Commissioner of Income-tax to act as the Ld. AO and Ld. TPO are academic in nature. Accordingly, the said grounds are dealt with hereinafter in terms of the submissions of the Ld. AR.

23. Additional Ground No. 1 – Education Cess

Through additional ground vide application dated 28/01/2020, the assessee has raised an issue with regard to education cess paid being allowable as deduction u/s 37(1) of the Act. We find that the issue stands decided against the assessee in its own case for AY 2007-08. Further, the co-ordinate Bench in the case of Tech Mahindra Business Services Ltd. in ITA No. 24/Mum/2023, vide order dated 07/07/2023, has rejected the claim of deduction, holding that the amendment brought in by the Finance Act, 2022 is retrospective in operation.

Respectfully following the aforesaid decision, this issue is decided against the assessee and, accordingly, the additional ground is dismissed.

24. Additional Ground No. 2 – DDT

Through additional ground No.2, vide application dated 28/01/2020, the assessee has contended that the Dividend Distribution Tax (DDT) ought to be restricted to the rate provided in the respective DAA provisions. However, the Ld.Sr.Counsel submitted that the said ground is not pressed, since no dividend was paid by the assessee during the year under consideration.

Accordingly, the additional ground is dismissed as not pressed.

24. Additional Ground No. 1 vide application dated 01/12/2- 23:

Through additional ground No. 1, vide application dated 01/12/2023, the assessee has challenged the jurisdiction of the Additional Commissioner of Income-tax to act as the Ld. AO. The Ld. AR submitted that, in the facts of the present case, the issue has become academic in nature.

Accordingly, the additional ground is dismissed as academic.

25. Additional Ground No. 2 vide application dated 01/12/2023

Through additional ground No. 2, the assessee has challenged the jurisdiction of the Additional Commissioner of Income-tax to act as the Ld.TPO. The Ld.Sr.Counsel submitted that the issue has become academic in nature.

Accordingly, the additional ground is dismissed as academic.

In the result the appeal filed by the assessee stands partly allowed.

Order pronounced in the open court on 24/08/2026.