Mumbai Tribunal rules on availability of tax holiday benefit on the amount of voluntary TP adjustment

 
This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Mumbai Tribunal) in the case of Agilisys IT Services India Pvt. Ltd. (Taxpayer) wherein the issue under consideration was availability of tax holiday under the provisions of the Indian Tax Laws (ITL) for an export oriented unit (EOU). The Taxpayer made a suo moto transfer pricing (TP) adjustment only in its corporate tax return, without realizing the corresponding proceeds in foreign exchange, and claimed the tax holiday benefit on this enhanced amount. The Mumbai Tribunal held that the tax holiday benefit cannot be allowed in respect of such TP adjustment because the legislative intent of the tax holiday was to incentivize the EOU only when money was brought into India in convertible foreign exchange.
 
This decision of the Mumbai Tribunal highlights the importance of conforming with the legislative intent as well so as to avail the benefit of an incentive provision which, in this case, was the tax holiday benefit to a 100% EOU. 
 
The Mumbai Tribunal held that merely making a TP adjustment on a suo moto basis in the tax return is not sufficient to avoid the disqualification for eligibility of the tax holiday benefit under the ITL. The corresponding sale proceeds should actually be realized in convertible foreign exchange and brought into India to avail the tax holiday benefit under the ITL.