2023 (6) TMI 1349 - AT - Income Tax

TP adjustment - granting extended credit periods to the associated enterprises of the assessee without charging any interest on delayed payments - TPO has made adjustment to the amount on account of arms length price in respect of credit period extended by the assessee to its associates Enterprises in USA - TPO had taken the stand that for extending credit period to its associated enterprises the assessee was required to charge the interest and has taken the LIBOR rate of 3.40% and the amount loaded on it was plus 300 points (6.40%) - CIT(A) has partly allowed the grounds of appeal of the assessee, holding that USD LABOR rate at that point of time being 3.40% with a mark up of 80 basis point would be adequate for determining ALP interest for trade credit which can reasonable to charged to the Associates Enterprises - HELD THAT - Considering the undisputed fact that assessee has also extended credit period to its non-associated enterprises without charging any interest on delayed payment, therefore, after following the decision of Hon ble Jurisdictional High court as referred in M/s Indo American Jewellery Ltd. 2013 (1) TMI 804 - BOMBAY HIGH COURT and Mr Livingstone Ltd. 2016 (11) TMI 1647 - BOMBAY HIGH COURT this ground of appeal of the assessee is allowed that in such circumstances the AO/TPO is not required to make the adjustment on notional basis. Claim of deduction u/s 10A - assessee submitted that for the purpose of computing the export turnover u/s 10A and AO has incorrectly reduced the expenditure incurred in foreign currency on telecommunication charges and expenses incurred in foreign currency in providing technical services outside of India - HELD THAT - As perused the decision of Jurisdictional High Court of Bombay in the case of assessee/Tech Mahindra Ltd. 2014 (8) TMI 71 - BOMBAY HIGH COURT 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. 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 that it has never recovered foreign currency expenses from the customers and it was not part of its total turnover, therefore, we allow the appeal of the assessee that e xpenditure 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 10A, since this expenditure were not included in the export turnover of the assessee . Decided in favour of assessee.

Summary

Issues:
The judgment involves issues related to transfer pricing adjustment for charging interest on extended credit period to associated enterprises and the claim of deduction under section 10A of the Income Tax Act.

Transfer Pricing Adjustment Issue:
The Appellate Tribunal ITAT Mumbai addressed appeals by the assessee and the revenue arising from the order of CIT(A)-15, Mumbai. The assessee filed a miscellaneous application on the transfer pricing adjustment issue, citing relevant legal precedents. The ITAT recalled the earlier order to adjudicate the issues raised by the assessee. The revenue challenged the CIT(A)'s decision on the adjustment to arm's length price and exclusion of certain expenditures from export turnover for computing deduction under section 10A.

Transfer Pricing Adjustment Decision:
The Transfer Pricing Officer (TPO) had made adjustments regarding extended credit periods to associated enterprises without charging interest. The ITAT considered the uniformity in the assessee's practice of not charging interest to non-associated enterprises and ruled in favor of the assessee. Citing legal precedents, the ITAT concluded that no adjustment should be made on a notional basis for extended credit periods to associated enterprises.

Deduction under Section 10A Issue:
The assessee contested the assessing officer's reduction of foreign currency expenditures from export turnover for computing deduction under section 10A. The ITAT examined the submissions and legal references provided by the assessee, emphasizing that the foreign currency expenses were not recovered from customers and thus should not be part of turnover calculations. Relying on relevant court decisions, the ITAT allowed the appeal of the assessee and dismissed the revenue's appeal on this issue.

Conclusion:
The ITAT Mumbai, in the judgment dated 20.06.2023, addressed the transfer pricing adjustment issue and the deduction under section 10A raised by the assessee and the revenue. The decision favored the assessee on both issues, emphasizing the non-recovery of foreign currency expenses and the uniformity in not charging interest to associated and non-associated enterprises. The judgment provides clarity on transfer pricing practices and deduction calculations under the Income Tax Act.