TaxTMI 
TaxTMI 
2023 (10) TMI 1614
X X X X Extracts X X X X
X X X X Extracts X X X X
....)) erred in imputing interest rate over and above the LIBOR, as applied by the Appellant for the loan advanced by the Appellant to its subsidiary, inspite of the fact that the TPO could not prove that the conditions mentioned in clauses (a) to (d) of section 92C(3) of the Act were satisfied for warranting an adjustment to the income of the Appellant. 2. (a) On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in partially confirming the proposed addition by learned TPO of Rs.1,35,44,787 without appreciating the commercial and business reasons for providing loan to the subsidiary of the Appellant. (b) On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in adopting a rate of 6 month LIBOR plus 350 basis to the loan granted without providing cogent reason for applying additional rate of 350 basis over and above the LIBOR. (c) On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in applying the interest rate applicable to External Commercial Borrowing (ECB) as prescribed by the RBI and consequently erred in applying the interest rate applicable t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e learned CIT(A) has erred in allowing relief to the extent impugned in the grounds enumerated below: 1. On the facts of the case and in law, the Ld. CIT(A) erred in holding that consideration relating to expenditure incurred in foreign currency on telecommunication charges and providing technical service outside India, amounting to Rs. 11,10,04,486/- and Rs.2,86,68,68,261/- respectively, should not be excluded from export turnover for the purpose of computing deduction u/s 10A, disregarding the provisions of Explanation 2(iv) to Sec.10A of the I.T. Act. 1961. 2. On the facts and circumstances of the case and in law. the Ld. CIT(A) erred in equating a lending transaction (outbound loan) of the taxpayer with a borrowing transaction (inbound loan), which is fundamental for comparability analysis for the purpose arriving at arm s length price. 3. On the facts and circumstances of the case and in law. the Ld. CIT(A) erred in comparing a lending transaction of the taxpayer, which is a lending transaction by an Indian entity with foreign AE with External Commercial Borrowing (ECB) transaction, which is a borrowing transaction by an Indian entity from outside In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is as given below :- Interest on loan Rs. 1,35,44,787/- Upfront payment of discount Rs.524,93,78,079/- Interest on upfront payment of discount treated as free advance Rs. 26,40,50,908/- 4. The Assessing Officer, while passing the final assessment order, deleted the addition made towards upfront payment of discount for the reason that the assessee has, by itself, disallowed the upfront discount payment and, therefore, no further adjustment is required in this regard. The Assessing Officer, however, incorporated the TP adjustment towards differential interest on loan and the secondary adjustment made towards interest on the upfront payment of discount treating it as free advance to AE. Besides TP adjustment, the Assessing Officer made a disallowance of Rs.6,50,290/- under section 14A of the Act and also made an adjustment in the 10A deduction claimed by the assessee by reducing from the export turnover (i) Technical services expenses incurred in foreign currency, (ii) telecommunication charges and (iii) Unrealised export proceeds. 5. Aggrieved, the assessee filed further appeal before the CIT(A). With regard to the TP adjustment the CIT(A) granted relief to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 8. The Ld.DR relied on the order of the Assessing Officer and submitted that as per definition of export turnover does not include expenses incurred in foreign currency and also telecommunication charges in foreign currency. 9. The Ld.AR submitted that in assessee's case no adjustment is required to be made from both export turnover and total turnover as the said expenses were not recovered from the customers by the assessee and does not form part of the turnover of the assessee in the first place. The AR drew our attention to the decision of the co-ordinate bench in assessee's own case for A. Y. 2005-06 in ITA No.2041/Mum/2010 dated 28th June, 2023 where, the above contention of the assessee has been accepted by the Hon'ble Tribunal . The Ld.AR placed reliance on several other judicial pronouncements in this regard. 10. We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee's own case for A.Y. 2005-06 in ITA No. 2041/Mum/2010 dated 28th June, 2023 has considered a similar issue and held that - "13. Heard both the sides and perused the material on record. The assessee has submitted before the lo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest on the loan to AE. The assessee has extended loan of USD 5 million to its AE during August, 2005. The assessee charged interest at the prevailing LIBOR of 4%. The assessee was asked to justify that the interest charged is at arm's length. The assessee submitted that the rate of interest on the loan was determined having regard to the interest rate prevalent in the market at the time of granting the loan and that since this LIBOR was in the range of 4% and, therefore, the said rate is adopted as ALP. However, the TPO did not accept the submissions of the assessee. The TPO held that the assessee had borrowed loan @9% and proceeded to make a TP adjustment by adding 1% towards managerial cost, etc. to arrive at a TP adjustment of rs. 1,35,44,787/-. 13. Before the CIT(A) the assessee submitted that since the loan transaction is in foreign currency the LIBOR rate only should be applied for charging interest. With regard to not adding any basis points to the LIBOR rate the assessee submitted that since the loan was extended to its own subsidiary, the assessee did not foresee any risk associated with the funding and hence only prevalent LIBOR was considered for charging inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis points would be appropriate in assessee's case. This ground of the revenue is dismissed. 18. Ground No.7 & 8 relates to the relief given by the CIT(A) by deleting the secondary adjustment made towards interest on the upfront payment of discount treating the same as advance to AE. During the year under consideration, the assessee has entered into a contract for providing software and IT services to British Telecom Plc for a total contract value of about USD 1 billion. The contract is to be executed over a five year period beginning from financial year 2008-09. In order to secure the contract, the assessee has made an upfront discount payment of Rs. 524,93,80,079/-. 19. As far as this international transaction is concerned, the assessee has benchmarked the transaction following TNMM. It is relevant to note here that the assessee has not debited the P&L Account towards the upfront discount payment and not claimed any deduction towards the same. The TPO, after going through the details of the contract was of the view that the payment of upfront discount by the assessee to British Telecom was not a normal commercial transaction between two independent unrelated parties in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....93 crores, has been made then from the transfer pricing perspective, the transaction has assumed a status of nullity. It is further the fact of the case that the appellant has not charged the sum of Rs. 524.95 crores to its P & L account and has treated the sum to be below the line item. Further the appellant has not raised any ground of appeal against the ALP at NIL determined by the TPO of this international transaction. Accordingly there cannot be any further adjustment (secondary adjustment) in respect of same international transaction. In such view of the facts, the action of the TPO cannot be upheld, Accordingly the secondary adjustment so made is directed to be deleted and the Ground no. 7 so raised is therefore allowed. ix. As the adjustment made by the AO/TPO by imputing interest @ 18% p.a. on she sum of Rs. 524.93 crores amounting to Rs. 26.40 crores has been directed to he deleted, the appellant's contention on without prejudice basis regarding considering L1BOR. based rate to bench mark the treatment given to the international transaction by the TPO, becomes redundant/in- consequential. Accordingly the same are not being dealt." 22. Aggrieved, the revenu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 cas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....leted the adjustment by holding the interest adjustment to be a secondary adjustment. Therefore there is merit in the contention that the secondary adjustment is unlawful and contrary to the provisions of Chapter X, since the primary adjustment is made in respect of assessment year commencing on or before 01.04.2016. In view of this discussion we uphold the decision of CIT(A) to delete the interest adjustment made at 18% treating the upfront payment of discount as interest free advance to AE. This ground of the revenue is dismissed. Since we have upheld the decision of the CIT(A) on the ground that no secondary adjustment could be made if the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016, the arguments presented with respect to re-characterisation of the transaction and that the payment of upfront discount is done for commercial expedience in which the TPO cannot comment etc., have become academic not warranting any adjudication. ITA No.3643/Mum/2012 (Assessee's Appeal) 27. Ground No.1 is general in nature not warranting any adjudication. The assessee raised two sets of additional grounds dated 15.09.2020 and 28.01.202....