TATA CONSULTANCY SERVICES LTD,MUMBAI vs. ADDL CIT LARGE TAX PAYER UNIT, MUMBAI

& 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 47 - guarantees commissions by following the order of CIT(A) for AY 2009-10. The financial guarantee commissions were reduced to 0.77% per annum and performance guarantee commissions to 1.14%

per annum. We have seen that on similar grounds related to the issue of various corporate guarantees the Tribunal in AY 2009-10 passed the following order;

& 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 48 - 50. On the basis of aforesaid factual discussion and considering the decision of Tribunal in appeal for AY 2009-10 on identical grounds of appeal, wherein all the contentions has been considered by the Tribunal, while affirming the order of ld CIT(A). No variation in facts nor any contrary law is brought to our notice, hence, we uphold the order of ld CIT(A) on this ground of appeal

. In the result the grounds of appeal raised by the assessee are dismissed and the ground of appeal raised by assessee is partly allowed.

51. Ground No. 17 in revenue’s appeal and ground No. 6 in assessee’s appeal relates to TP adjustment on account of interest free loans to AEs. The ld DR for the revenue submits that during the TP proceedings, the TPO noted that the assessee provided loan to its AEs without charging any interest. On show cause, the assessee contended that these are quasi capital. The TPO after considering the submissions of the assessee suggested adjustment on account of these loans by charging interest @11% per annum and suggested adjustment of Rs. 41.04 Crore. The ld CIT(A) granted partial relief to the assessee by reducing the rate of interest to LIBOR plus 300 bps by following the order for AY 2009-10. The Tribunal in AY 2009-10 restored the issue to the file of AO for de novo adjudication & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 49 - as per the ratio in case of DLF Hotels Holdings Ltd (ITA No.

6336/Delhi/2012 dated 30.06.206). The ld. DR for the revenue submits that following the order of Tribunal these issues may be restored to the file of AO with similar direction.

“37. We have considered rival submissions and perused the material on record. We have also carefully gone through the case law cited before us. Notably, right from the stage of transfer pricing proceeding itself the assessee has taken a stand that loans and advances to the AEs are in the nature of quasi equity, hence, cannot be treated as loan simpliciter. It is relevant to observe, the transfer pricing adjustment made on account of interest is in respect of loans advanced to four overseas AEs. From the details available on record, it is noticed that major portion of loans advanced to TCS Ibero America, is for acquisition of downstream subsidiary and about 20% of the advance was for working capital. Money advanced to TCS FNS Pty. Ltd., Australia, was purely for acquisition of downstream subsidiary. Similarly, advance to TCS Asia Pacific Pty. Ltd., is for acquisition of downstream subsidiary. Only the advance made to TCS Morocco is for working capital requirement. It is further noted, major part of advances made to TCS Ibero America, TCS FNS Pty. Ltd. and TCS Morocco have been converted to equity subsequently. It is also a fact on record that before learned Commissioner (Appeals), the assessee has filed a detailed written submission on 27th March 2014, elaborately discussing the nature of advance made to the AEs and the purpose for which such advances were made. It was submitted by the & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 51 - assessee that the advances made to the AEs were as a part of business strategy and not simply to help the AEs with capital infusion. The assessee has advanced detailed argument stating that advances made to the AEs is a shareholder activity and not advancement of loan. In this context, the assessee has referred to OECD Transfer Pricing Guidelines as well as UK and Australian Regulations. It is evident from the impugned order of the learned Commissioner (Appeals), though, he sketchily referred to some of the submissions made by the assessee, however, he has not at all dealt with them in an effective manner. The learned Commissioner (Appeals), though, has observed that the loans advanced were not merely for downstream acquisition but for a variety of purpose including working capital requirement and other business uses, however, he has not elaborated as to for what other purpose loans were advanced. Without properly dealing with the factual aspect of the issue, learned Commissioner (Appeals) has jumped to the legal aspect and has held that the amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder’s activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 52 - 92B r/w Explanation–1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. The Assessing Officer must examine all relevant facts to find out the exact nature of the advances made to the AEs. He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. (supra) and any other case laws which may be cited before him. The assessee must be afforded reasonable opportunity of being heard. Ground is allowed for statistical purposes. “ 54. Considering the order of the Tribunal in AY 2009-10, the ground No. 6 in revenues appeal is restored to the file of AO with similar direction. No doubt the AO before passing the order afresh shall grant opportunity of hearing to the assessee.

raised by the revenue is dismissed.

56. Last issue in assessee’s appeal left for adjudication relates to legal issues with regard to reference to TPO without proper application of mind, no intention of shifting of profit etc that is ground No.

4. Considering the facts that all transfer pricing grounds of appeal are basically decided in favour of the assessee, thus, in our view the discussions on this (these) ground of appeal have become academic.

57. In the result, appeal of the assessee as well as revenue both are partly allowed.

(Appeals for AY 2008-09 being by assessee ITA No. 3746/M/2017 by Revenue) 58. At the outset of hearing the ld. AR for the assessee submits that all the grounds of appeal raised by the assessee as well as by revenue are identical to the grounds of appeal raised by them in AY 2010-11. The ld. AR for the assessee filed his short written synopsis; however, the ld. DR adopted the similar submissions as submitted in AY 2010-11. Ground No. 1&2 in & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 54 - assessee’s appeal relates to the disallowance of State tax and Interest paid in overseas countries. We have noted that part of this ground of appeal so far as it relates to the disallowance of State Taxes is concerned, is identical to the Ground No.1 in appeal for AY 2010-11, which we have allowed in preceding paras of this order by following the order for AY 2009-10. Thus, following the principles of consistency this part of ground of appeal is allowed with similar directions.

59. So far as disallowance of Interest paid in overseas countries is concerned, the ld. AR for the assessee submitted that the payments made on account of interest in delay in payments of Federal or State taxes overseas which is compensatory in nature should be allowed as business expenditure under section 37(1). Considering the submissions of the ld AR for the assessee, we are of the view that the general principle of allowability that the expenditure cannot be overlooked and that the accepted principle is that only those expenditure can be allowed which are attributable to the business activity as well as laid out wholly and exclusively for the purposes of the business.

Thus, we direct the AO to allow the interest on delayed payment of State tax or Federal Taxes being compensatory in nature. In the result these grounds of appeal are allowed. & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 55 -

60. Ground No. 3 in assessee’s appeal relates to disallowance under section 40(a)(i) on account of expenditure on imported software. We have noted that this ground of appeal is identical to the ground No. 1 of appeal raised by revenue in AY 2010-11, which we have dismissed by following the order of Tribunal for AY 2009-10, therefore, following the principles of consistency this ground of appeal is allowed with similar directions. In the result this ground of appeal is allowed.

61. Additional grounds of appeal raised by the assessee vide application dated 10.01.2020, with regard to deduction of education cess, is also identical with the additional ground of appeal raised by assessee in appeal for AY 2010-11, which we have admitted and restored to the file of AO, therefore, following the principles of consistency this ground of appeal is also admitted and restored to the file of AO with similar directions. In the result this ground of appeal is allowed for statistical purpose.

is dismissed.

63. Next ground of appeal that is ground No. 2 in revenue’s appeal relates to deduction under section10A in respect of units on which deduction under section 80HHC was allowed in past. The ld. DR for the revenue supported the order of the AO.

64. On the other hand the ld AR for the assessee submits that nothing in section 10A prohibits assessee from claiming deduction in respect of profits of an undertaking, where deduction under section 80 HHE has been claimed in past. The claim for deduction is claimed in respect of residual years remaining in the block 10 years and there is no attempt to extent the period of 10 years of tax holidays by exercising option to claim deduction under section 10 instead of continuing under section 80HHE. The claim of assessee was duly supported by Audit Certificate and date of commencement of manufacture / production has been taken as the initial date and not the date of commencement of claim under section 10A. the ld AR fof the assessee further submits that CBDT vide Circular No. 1/2005 dated 06.01.2005, clarifies that undertaking set up in Domestic Tariff area and deriving profit from export of computer software and which is subsequently converted in to export oriented unit (EOU) shall be eligible for a deduction under section10B & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 57 - for the remaining period of 10 consecutive years beginning with the assessment year relevant year relevant to the previous year in which undertaking begins to manufacture or produce computer software as a DTA unit. In other alternative submissions it was submitted that in case the assessee is eligible to claim deduction under two alternative sections, the assessee would be allowed deduction under such as section which is more beneficial to the assessee. Finally, the ld AR for the assessee submits that similar deduction under section 10A was allowed to the assessee by Bombay High Court in AY 2005-06 in of 2016 and by Tribunal in AY 2009-10.

The assessee claimed deduction in respect of two units, (i) Chennai Sholinganallur STP and (ii) Delhi Noida I STP. The assessee claimed that its claim is duly supported by Audit Certificate and date of commencement of manufacture / production has been taken as the initial date and not the date of commencement of claim under section 10. the assessee relied on the CBDT vide Circular No. 1/2005 dated 06.01.2005, which clarifies that undertaking set up in Domestic Tariff area and deriving profit from export of computer & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 58 - software and which is subsequently converted in to export oriented unit (EOU) shall be eligible for a deduction under section10B for the remaining period of 10 consecutive years beginning with the assessment year relevant year relevant to the previous year in which undertaking begins to manufacture or produce computer software as a DTA unit. The AO during the assessment disallowed the deduction under section 10 A by taking view that commencement of unit (eligible for benefit of setion10A) is not available to the assessee. the AO also held that by opting out of 80HHE and claiming deduction under section 10A, the assessee is trying to claim which in not available to the unit in the light of phasing out of section 80HHE form AY 2001-02. The ld CIT(A) allowed relief to the assessee by noting that claim was to the assessee by CIT(A)in AY 2005-06, which has been upheld by Tribunal in ITA No. 6820/Mum/2010. We have noted that in appeal for AY 2009-10 the Tribunal allowed the similar deduction under section 10A by passing the following order;

“ 53. We have considered rival submissions and perused the material on record. As noted, identical issue arising in assessee’s own case for the assessment year 2005–06 came up for consideration before the Tribunal in ITA no.6820/Mum./2010 dated 4th November 2015. While deciding the issue, the Tribunal held that since both, section 80HHE and section 10A of & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 59 - the Act entitle the assessee for benefit, the assessee would legitimately be entitled to the benefit of that provision of law which enables a larger benefit being earned by him. It is also noticed that the aforesaid decision of the Tribunal has been upheld by the Hon'ble Jurisdictional High Court while deciding Revenue’s appeal in vide judgment dated 18th March 2019. The observation of the Hon’ble Jurisdictional High Court on the issue is as under:–

"6] Section 80HHE of the Act pertains to deduction in respect of profits from export of computer software etc. Sub-section (5) of section 80 HHE provides that where deduction under said section is claimed and allowed in respect of the profits of the business referred in sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of the Act for the same or any other assessment year. What subsection (5) of section 80 HHE thus prohibits is the claim of deduction allowed under section 80HHE under any other provision, be it in the same assessment year or in other assessment year. In the present case, it is not even the ground of the revenue that the deduction under section 10A of the Act claimed by the assessee in the present year is in relation to profit for which the assessee was granted deduction under section 80HHE. Sub-section 5 of section 80 HHE of the Act, therefore, in the present case would have no applicability. We are fortified in our view by a division bench judge ent of Delhi High Court in the case of Commissioner Income Tax Vs. Damco Solutions Pvt. Ltd., reported in 200 Taxman page 26 in which it was observed as under:-

"2. This stand of the Assessing Officer was repelled by the CIT (A) holding that the purpose of subsection (5) of section 80HHE was to avoid double benefit and that would not mean that if the assessee for a particular assessment year wanted relief only under section 10A of the Act that would be denied to the assessee. The & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 60 - only embargo was not to give relief under both the provisions."

7] Coming to the revenue’s second objection to the assessee’s claim of deduction under section 10A of the Act, we may recall, that the assessee had admittedly started manufacturing computer software for export prior to 1st April 2001, when section 10A was substituted by the Finance Act of 2000. It was under this amendment that the profit and gains derived by an undertaking from export of computer software came to be covered for deduction under section bA. The revenue contends that this benefit would not be available to an industry which was already existing and engaged in such activity. However, the interpretation of the revenue would render the first proviso to subsection (1) of section 10A wholly redundant. This proviso reads as under:- "10A(1)Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this subsection only for the unexpired period of the aforesaid ten consecutive assessment years. As per this proviso, therefore, while computing total income of the undertaking for any assessment year, the profit and gain which had not been included prior to the introduction of Finance Act, 2000, such an undertaking would be entitled to deduction as per sub-section (1) only for the unexpired period of 10 consecutive assessment years. In plain terms, therefore, this proviso would apply to an industry which was already in existence, engaged in manufacturing and export of computer software when the said amendment was made in section 10A. However, such an industry would be eligible to claim that deduction in relation to profit and gain arising out of such activity only for remainder of the period of 10 assessment & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 61 - years, which could be claimed for consequent assessment years alone. 9] If the revenue's interpretation of sub-section (1) of section 10 were to be accepted, then, this proviso would be rendered redundant. "10] Coming to the revenue's contention in relation to the computation of benefit of section 10A of the Act, this issue is squarely covered by the judgment of Supreme Court in the case of Commissioner of Income Tax Vs. HCL Technologies, reported in 404 ITR 719, in which the Court held that the total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80 HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover.

in revenue’s appeal i.e., ground No. 3 to 6 which relates to disallowance under section 40. (a) (i) on account on non deduction of TDS on expenditure on commission to non-resident. We have noted that this ground of appeal is identical to the ground No. 5 to 6 of revenue’s appeal for AY 2010-11, which we have dismissed on the basis of decision of & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 62 - Tribunal for AY 2009-10. Hence, following the principles of consistency these grounds of appeal are dismissed.

68. Next grounds of appeal in revenue’s appeal i.e. ground No. 7 to 9 relates to method of computation of deduction under section 10A. We have noted that this ground of appeal is identical to the ground No. 7, 8 & 9 of revenue’s appeal for AY 2010-11, which we have dismissed on the basis of decision of Tribunal for AY 2009-10. Hence, following the principles of consistency these grounds of appeal are dismissed.

69. Next grounds of appeal in revenue’s appeal i.e. ground No. 10 relates to disallowance of deduction under section 10A/ 10AA. The ld. DR for the revenue supported the order of AO.

70. On the other hand the ld. AR for the assessee submits that this ground of appeal is completely covered by the CBDT Circular No.1/2013 dated 17th January 2013 and the same has been accepted by the department in subsequent years.

Ground No. 12 to 15 in revenue’s appeal relates to provision of software consultancy services. The basic and primary issue in these grounds of appeal is if the GP/Sales is the appropriate PLI or not. We have noted similar grounds of appeal was raised by the revenue in appeal for AY 2010-11 vide ground No. 9 to 12, which we have dismissed in earlier part of this order, by following the order of Tribunal for AY 2009-10. Thus, following the & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 64 - principles of consistency these grounds of appeal are dismissed with similar observation. 73. Ground No. 17 & 18 in revenues appeal and ground No. 9.3 in assessee’s appeal relates to provision of various guarantees. We have seen that these grounds of appeal are identical as ground No.13 to 16 in revenues appeal and 7.3 in assessee’s appeal for AY 2010-11, which we have decided in earlier paras of this order. Thus, following the principles of consistency these grounds of appeal are by revenue is dismissed with similar observation and the ground in assessee’s appeal is partly allowed.

74. Ground No. 16 in revenue’s appeal relates to charging of guarantee fee on the entire amount. The ld. DR for the revenue supported the order of the AO/TPO.

75. On the other hand the ld. AR for the assessee for the performance guarantee submits that part of the activity was performed by the assessee itself while the remaining services were rendered by AE. If the performance guarantee is treated as chargeable services, the charges should be levied only on the component of services performed by the AE. With regard to lease guarantee, the ld. AR submits that part of the premises (40% during the year) was occupied by the assessee. Thus, if the lease guarantee is treated as chargeable & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 65 - services, the charges should be levied only for the balance 60% during the year under consideration.

is identical to the ground No. 7.3 of appeal by assessee in AY 2010- 11, wherein we have restricted the guarantee commission to 0.5% by following the order of Tribunal in AY 2009-10, therefore, following the principles of consistency this ground of appeal is partly allowed with similar directions.

80. Ground No. 8 in assessee’s appeal relates to provision of inter-company loans. We have noted that this ground of appeal is identical to the ground No. 6 of appeal by assessee in AY 2010-11, wherein we have restored the issue to the file of AO, therefore, following the principles of consistency this ground of appeal is partly allowed with similar directions. & 3746/Mum/2017, 794 & 1207/Mum/2018. Tata Consultancy Services Ltd., Mumbai (AY 2008-09 &2010-11) - 67 -

81. Now a last ground of appeal in assessee’s is ground No. 6, which relates to alleged procedural irregularity in making reference to TPO. Considering the fact that we have allowed all TP related grounds of appeal in favour of the assessee, hence, this ground and all remaining parts of various grounds of appeal by assessee have become infructuous.

82. In the result the appeal of the assessee in AY 2008-09 is partly allowed and the appeal of the revenue is dismissed. Order pronounced in open court on 18th August 2020.

Sd/- Sd/- ( PAWAN SINGH ) (RAJESH KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 18/08/2020 SK, PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / The CIT(A) 4. आयकर आयु�त(अपील) / Concerned CIT 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार ( Asst. Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Mumbai