ITAT Deletes Secondary Adjustment for Upfront Discount Payment by Tech Mahindra to Secure Software and IT Services Contract with Non-Resident Venture Partner [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, deleted the secondary adjustment made towards the upfront discount payment by Tech Mahindra to secure contracts for software and IT services provided to non-resident venture partners.

Tech Mahindra Limited, a joint venture between M/s Mahindra & Mahindra Limited and British Telecom Plc, entered into a contract to provide software and IT services to British Telecom Plc for a total contract value of about USD 1 billion during the year. To secure the contract, the assessee made an upfront discount payment of Rs. 524,93,80,079/-. The Transfer Pricing Officer (TPO) considered this upfront discount payment as an interest-free advance and imposed interest.

The Assessing Officer retained the adjustment made towards interest but disputed the adjustment for the upfront discount payment. The CIT(A) ruled against a secondary adjustment, stating that interest on the upfront discount, treated as an interest-free advance, was not justified.

The revenue filed a second appeal before the tribunal, arguing that the upfront discount payment is in the nature of a loan, and therefore, interest is justified. The counsel for the assessee argued that upfront discounts are standard industry practice and recharacterizing them as interest-free advances is unnecessary.

The Tribunal observed that the TPO made the secondary adjustment by recharacterizing the upfront discount payment as an interest-free advance and charging interest on it. The bench highlighted the proviso to section 92CE(1), stating that no secondary adjustment shall be carried out if the primary adjustment is made in respect of an assessment year commencing on or before April 1, 2016.

As the primary adjustment determining the Arm's Length Price (ALP) of the upfront discount payment pertained to AY 2007-08 (prior to April 1, 2016), the tribunal, consisting of Padmavathy S (Accountant Member) and Amit Shukla (Judicial Member), deleted the secondary adjustment made towards the upfront discount payment, dismissing the revenue's appeal.

To Read the full text of the Order CLICK HERE

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