TECH MAHINDRA LTD ( FORMERLY KNOWN AS MAHINDRA BRITISH TELECOM LTD), MUMBAI V. DCIT CIR 2(3), MUMBAI

ITA 1035/MUM/2010

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6208 (ITAT-MUMBAI)
• Duration Of Justice: 12 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Assessment Year: 2005-2006
• Appeal Filed On: 08-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 80G; 92CA

Judgement Text

ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 1 of 8 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “K” BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER (Conducted through Virtual Court) ITA Nos.1034 & 1035/MUM/2010 Assessment Years: 2004-05 & 2005-06 Tech Mahindra Limited vs. Dy. Commissioner of Income Tax (Formerly Known as Mahindra Mumbai Circle 2(3). British Telecom Limited), Gateway Building, Apollo Bunder, Mumbai – 400 020. [PAN – AAACM 3484 F] ITA No.2041/MUM/2010 Assessment Year: 2005-06 Dy. Commissioner of Income Tax-2(3), vs. Tech Mahindra Limited Mumbai. (Formerly Known as Mahindra British Telecom Limited), Gateway Building, Apollo Bunder, Mumbai – 400 020. [PAN – AAACM 3484 F] (Appellants) (Respondents) Assessee by : Shri Jehangir D. Mistri, Sr. Advocate/ Harsh M. Kapadia Revenue by : Dr. Yogesh Kamat, CIT D.R. Date of hearing : 18.01.2022 Date of pronouncement : 23.03.2022 O R D E R PER SUCHITRA KAMBLE, JUDICIAL MEMBER : 1. These three appeals, consisting of one appeal filed by the assessee for the Assessment Year 2004-05 & one set of cross appeals filed by the assessee and Revenue for the assessment year 2005-06, pertain to the same assessee, involve some common issues and were heard together. As a matter of convenience, ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 2 of 8 therefore, all these three appeals are being disposed of by way of this consolidated order. 2. We will first take up the appeal filed by the assessee for the assessment year 2004-05 i.e. ITA No.1034/MUM/2010 3. The assessee has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in confirming addition of Rs.37,50,475/- towards interest at a rate of 2% [as against Rs.1,87,52,378/- made by the Assessing Officer pursuant to the order of the Transfer Pricing Officer passed u/s. 92CA(3)] to the total income of the Appellant. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) having accepted the submissions of the Appellant for not charging interest while extending credit to its USA-Associated Enterprise for payment of sale consideration by the AE, ought to have desisted from partially confirming the adjustment to total income, made by the AO-TPO and ought to have deleted the said addition in its entirety. In any event the rate of interest adopted by the learned CIT(A) while partially confirming the addition as aforesaid is excessive and contrary to facts. The addition of Rs.37,50,475/- confirmed by the learned CIT(A) be deleted.” 4. The assessee is engaged in the business of development of computer software and other related services. A reference under Section 92CA in case of the assessee was received from DCIT. The Assessing Officer made the reference for determining of Arm’s Length Price with reference to all transactions reported in Form No.3CEB filed by the assessee. The return of income was filed by the assessee on 30.10.2004 declaring total income of Rs.4,39,59,203/- after claim of deduction under Section 80HHE of Rs.94,016/-, under Section 80G of Rs.23,18,590/- and exemption under Section 10A of Rs.105,50,58,391/-. The Transfer Pricing Officer vide order dated 18.12.2006 made adjustment of Rs.1,87,52,378/- on account of the assessee’s International transactions with associated enterprises. The assessee submitted their clarification and requested for not accepting the value of International transactions as determined by the Transfer Pricing Officer during the assessment proceedings. The submissions made by the assessee was not accepted by the Assessing Officer and ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 3 of 8 thus made addition of Rs.1,87,52,378/-. The Assessing Officer also made addition of Rs.22,33,489/- in respect of advance/debt written off. The Assessing Officer further made addition on Short Term Capital Loss amounting to Rs.6,82,889/-. The Assessing Officer further made revised exemption under Section 10A amounting to Rs.105,71,97,847/-. The Assessing Officer also revised the 10A exemption and worked out at Rs.66,57,24,276/-. The Assessing Officer granted relief of DTA agreement between India and UK to the assessee as per Auditor’s Certificate. 5. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 6. The ld. A.R. submitted that the assessee has furnished the details for justifying its stand of not charging interest on extended credit to its AE. The ld. A.R. submitted that the AE was not performing well and had incurred losses in the year under consideration. The funding option available with the AE i.e. borrowing from Financial Institutions and obtaining trade credit from the assessee. In the first instance, since the AE was incurring losses, it would have been very difficult for it to raise funds and that too at competitive rates. This would naturally affect the growth of the entity and it would further bleed. The ld. A.R. alternatively submitted that the option available was, for the assessee to support the AE by extending credit period by a few days. The profits that are now coming to the assessee would not have been arisen if MBTI had not been supported in the years when it was incurring losses. The assessee did not charge any interest to MBTI as the extending of credit was to enable MBTI to tide over the temporary liquidity situation. The result of this has been detailed by the assessee which was quoted in paragraph no.3.1 of the CIT(A)’s order. The ld. A.R. further submitted that the TPO was not justified in charging interest at 10% to AE as the rate of interest charged by the assessee to its German AE on a Euro denominated loan, as the nature of funding is not the same. The ld. A.R. pointed out the difference between the trade credit (extended credit period) and loan as follows: (i) Tenor – Trade credit is for meeting short term funding needs whereas a loan is for meeting longer term needs. ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 4 of 8 (ii) Purpose – trade credit is normally required to meet the working capital needs of the business. A loan is normally required to meet capital expenditures. (iii) Funding – Trade credit is normally funded internally through associate companies whereas a loan is funded through banking channels. (iv) Security – In the case of a loan, generally, a security or as asset has to be maintained as a collateral. This may not be the case for trade credit. (v) Geography – Thais is also a determinant when funding has to be evaluated. (vi) Timing of funds and state of economy – These factors also play a key role in determining the nature of funding. 7. The ld. A.R. further submitted that in case of TML, the geographies, the timing, the nature and purpose of funds are different and hence charging of interest to AE on extended credit periods is not justifiable. 8. The ld. D.R. submitted that the CIT(A) has rightly observed that the loan invariably and compulsorily will carry an interest amount while there is no compulsion in charging trade credit. The assessee, as per its own convenience pointed out the difference between trade credit and interest loan and so the very basis of adopting 10% interest rate by comparing it with Euro denominated loan extended to its AE in Germany is questionable. Thus, the ld. D.R. relied upon the order of the TPO and the order of CIT(A). 9. We have heard both the parties and perused all the relevant materials available on record. The assessee has taken a business decision to extend credit period to its AE to tide over the temporary liquidity situation but charging interest to the AE will not suffice the purpose. The average debtor days for the year under consideration is 124 days and the debtor days for unrelated third party transactions is 150 days. The assessee granted extended credit periods to non-AEs without charging any interest on ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 5 of 8 delayed payments. There has been no adjustment on account of interest for extended credit period in the transfer pricing for A.Y. 2002-03 and A.Y. 2003-04. The CIT(A) relied upon the decision of the Bangalore Tribunal in the case of Artect Software which states that at the initial stage of reference no such consideration will apply but this finding seems to be vague. Coming to the merits of the addition, the TPO has equated normal trade credit with the loan. The loan invariably and compulsorily will carry interest amount while there was no compulsion in charging trade credit. As per the submissions of the assessee and the observation of the CIT(A), since the AE was having net loss, there was no business consideration to shift profit as there cannot be any tax liability on account of such loss. Before the CIT(A) the assessee demonstrated that it has extended credit profit to non-AE without charging any interest for delayed payment proving that it has been even handed and consistent in this area. There was no adjustment on this issue in the TPO’s order for A.Y. 2002-03 & 2003-04 implying thereby that transaction was held to be at ALT. There is no change whatsoever in the nature of transactions or time thereof. The ld. CIT(A) has rightly pointed out that Transfer Pricing regime normally judges the transfer pricing of the tax payer based on the results rather than on the intent to shift income from one side to another. In the normal ALP an element of implied interest would always have been there so as to compensate for the opportunity cost and notional financial cost associated with account receivable/ adjustments so called for. Thus, USD LIBOR rate at that point of time was 1.22% with markup of 80 basis point would be appropriate for determining ALP interest for trade credit which was be charged to the AE. Thus, the CIT(A) granted the partial relief thereby making adjustment at the rate of Rs.37,50,475/-. But this observation appears to be vague as no period was quantified or verified by the Assessing Officer as well as by the CIT(A) while giving this partial relief. This needs to be verified. Therefore, we are remanding back this issue to the file of the Assessing Officer/Transfer Pricing Officer to verify the period as well as the interest rate which is available at that particular point of time in the open market and as per the practice on. Thus, ground no.1 & 2 of the assessee’s appeal is partly allowed for statistical purpose. 10. In the result, ITA No.1034/MUM/2010 is partly allowed for statistical purposes. ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 6 of 8 11. We now take up the appeal filed by the assessee for the assessment year 2005-06 i.e. ITA No.1035/MUM/2010. 12. The assessee has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming addition of Rs.89,04,156/- towards interest at a rate of 4.20% [as against Rs.1,35,68,237/- made by the Assessing Officer pursuant to the order of the Transfer Pricing Officer passed u/s. 92CA(3)] to the total income of the Appellant. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) having accepted the submissions of the Appellant for not charging interest while extending credit to its USA-Associated Enterprise for payment of sale consideration by the AE, ought to have desisted from partially confirming the adjustment to total income, made by the AO-TPO and ought to have deleted the said addition in its entirety. In any event the rate of interest adopted by the learned CIT(A) while partially confirming the addition as aforesaid is excessive and contrary to facts. The addition of Rs.89,04,156/- confirmed by the learned CIT(A) be deleted. 3. On the facts and in the circumstances of the case and in law for the purposes of computing deduction u/s 10A the learned CIT(A) ought to have directed the Assessing Officer not to do any adjustment to Export Turnover and to Total Turnover in respect of expenditure incurred in foreign currency on telecommunications and on rendering technical services outside India, as the adjustment is required to be done only if such expenditure is, in the first place, included in the Export Turnover and Total Turnover. The learned AO be directed to re-compute deduction u/s. 10A accordingly.” 13. As regards this appeal filed by the assessee, ground nos.1 & 2 are identical to the Assessment Year 2004-05 and similar finding were given by the CIT(A). Therefore, we are remanding back this issue to the file of the Assessing Officer/ Transfer Pricing Officer for proper adjudication as per the directions given hereinabove in A.Y. 2004-05. Thus, ground no.1 & 2 are partly allowed for statistical purposes. 14. In the result, ITA No.1035/Mum/2010 is partly allowed for statistical purposes. ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 7 of 8 15. We now take up take up the cross appeal filed by the Revenue for the assessment year 2005-06 i.e. ITA No.2041/MUM/2010. 16. The Revenue in its appeal has raised the following grounds : “1. The order of the CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the adjustment to arm’s length price should be only to the extent of Rs.89,04,156/- as against Rs.1,35,68,237/- made by the Assessing Officer in conformity with Section 92CA(3)/92CA(4) of the I.T. Act, 1961. 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that consideration relating to expenditure incurred in foreign currency on telecommunication charges and provision of technical service outside India, amounting to Rs.3,63,59,691/- and Rs.3,03,52,68,901/- respectively, should not be excluded from export turnover for the purpose of computing deduction u/s.10A, disregarding the provisions of Explanation 2(iv) to Sec.10A of I.T. Act, 1961. 4. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the Assessing officer be restored.” 17. As regards this appeal filed by the Revenue, there is only one issue pertaining to the claim of deduction under Section 10A of the Act which is also contested by the assessee in its appeal as ground no.3. 18. For the purpose of computing export turnover under Section 10A of the Act, the Assessing Officer reduced the consideration in respect of export by expenditure incurred in foreign currency on telecommunications charges amounting to Rs.3,03,52,68,901/-. The Assessing Officer has observed that by not defining the terms “total turnover” in Section 10A, the statute had intended to include such expenditure in total turnover only. According to him, in Section 80HHC, 80HHD & 80HHE the definition of total turnover given while the same is absent in Section 10A and, therefore, the Assessing Officer was of the view that the expenditure on foreign exchange is liable to be included in the total turnover and excluded in the export turnover. The assessee pointed out that the assessee claimed the said amount in the return of income by adjusting both export turnover and total turnover. The assessee ITA Nos.1034, 1035 & 2041/MUM/2010 A.Ys. 2004-05 & 2005-06 Page 8 of 8 relied upon the decision of the Special Bench in the case of ITO vs. Sak Soft Ltd. (ITA Nos.691 & 1953/MDS/2007 – A.Y. 2002-03 & 2003-04 dated 06.03.2009). The ld. A.R. relied upon the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 being ITA No.3657/Mum/2007 dated 29.08.2008. The Hon’ble Bombay High Court has also granted relief in A.Y. 2004-05. Thus, in the light of the decision of the Hon’ble Bombay High Court in assessee’s own case for A.Y. 2004-05, we follow the same as the factual aspects are identical in this A.Y. i.e. 2005-06 and, therefore, the ground raised in Revenue’s appeal is dismissed. 19. In the result, Revenue’s appeal for A.Y. 2005-06 is dismissed. 20. In the combined result, both the appeals filed by the assessee are partly allowed for statistical purposes and the appeal filed by the Revenue is dismissed. Order pronounced in the open Court on this 23 rd day of March, 2022. Sd/- Sd/- (PRAMOD KUMAR) (SUCHITRA KAMBLE) Vice President Judicial Member Mumbai, the 23 rd day of March, 2022 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Mumbai Benches, Mumbai