ITAT Delhi Deletes Notional Interest Addition as No Real Income Had Accrued

ACME Cleantech Solutions Private Limoted Vs JCIT (ITAT Delhi)

LIBOR Rate Applicable to Foreign Currency Loans Because Repayment Was in US Dollars; Section 14A Disallowance To Be Recomputed Based Only on Investments Yielding Exempt Income; ITAT Upholds TNMM Because AE and Non-AE Segments Were Not Properly Comparable; Transfer Pricing Adjustment on Receivables Deleted Because Working Capital Impact Was Already Factored.

The ITAT Delhi decided cross appeals filed by the assessee and the Revenue for AY 2012-13 arising from assessment proceedings under Section 143(3) of the Income Tax Act. The assessee company had declared income of Rs.1.95 crore. During scrutiny, the Assessing Officer made additions relating to disallowance under Section 14A read with Rule 8D, notional interest on advances, and transfer pricing adjustments concerning loans to associated enterprises (AEs), sales to AEs, and interest on receivables.

The AO disallowed Rs.53.33 lakh under Section 14A after observing that the assessee had substantial investments generating exempt income. The assessee contended that no expenditure had been incurred for earning dividend income and that the AO had not recorded satisfaction under Section 14A(2) before invoking Rule 8D. Referring to earlier decisions in the assessee’s own case and judicial precedents including ACB India Ltd. and Vireet Investment Pvt. Ltd., the Tribunal directed the AO to recompute the disallowance by considering only investments that yielded exempt income. The grounds raised by both the assessee and Revenue on this issue were partly allowed for statistical purposes.

The AO had also made a notional addition of Rs.37.88 lakh towards alleged interest income on advances given to related parties. The assessee argued that the advances represented reimbursement-type business advances and there was no intention to lend money or earn interest. The Tribunal observed that notional income cannot be taxed without actual accrual or receipt and found that the advances were made in the ordinary course of business. Accordingly, the addition was deleted.

Regarding transfer pricing adjustment on loans advanced to subsidiaries, the AO/TPO had benchmarked interest using SBI Prime Lending Rate, resulting in an addition of Rs.11.02 crore. The assessee argued that the loans were repayable in US Dollars and therefore LIBOR-based benchmarking should apply. The Tribunal examined the loan agreements and modified agreements and found that repayment was stipulated in US Dollar equivalent currency. Relying on the Delhi High Court judgment in Cotton Naturals (I) Pvt. Ltd., the Tribunal directed the AO to benchmark interest using LIBOR plus 5.5%, as applicable at the relevant time.

On transfer pricing adjustment relating to sales made to AEs, the assessee challenged the application of the Transactional Net Margin Method (TNMM) and supported the Cost Plus Method (CPM) based on internal comparable segmental data. However, the CIT(A) held that AE and non-AE segments were insufficiently comparable for CPM purposes and upheld TNMM as the most appropriate method. The Tribunal found the reasoning of the CIT(A) to be just and reasonable and rejected the assessee’s challenge.

The Revenue challenged exclusion of comparables such as Avantel Ltd., Goldstone Infratech Ltd., and Azure Power India Pvt. Ltd. from the transfer pricing analysis. The Tribunal upheld the CIT(A)’s decision after noting functional and economic dissimilarities between those entities and the assessee’s telecom infrastructure business.

The Revenue also contested deletion of transfer pricing adjustment on interest relating to outstanding receivables from AEs. The Tribunal referred to earlier decisions in the assessee’s own case and observed that the assessee had already factored the impact of receivables into working capital adjustments and profit margins. Since margins from AE transactions were higher than margins from non-AE transactions, no separate adjustment was required. The deletion of the adjustment was therefore upheld.

On the issue of computation of book profit under Section 115JB, the Revenue argued that disallowance under Section 14A should be added back while computing MAT liability. The Tribunal upheld the CIT(A)’s view that no specific provision in Explanation 1 to Section 115JB permitted such an adjustment. Consequently, the Revenue’s appeal was dismissed, while the assessee’s appeal was partly allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The cross appeals filed by the assessee and Revenue are against the order dated 22.03.2018 of the Ld. Commissioner of Income Tax (Appeals)-44, New Delhi (hereinafter referred to as “Ld. CIT(A)”), u/s 250(6) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), arising out of order dated 27.04.2016 of the Ld. Assessing Officer/JCIT(OSD), Circle 1(2), New Delhi (hereinafter referred to as “Ld. AO”), u/s 143(3) of the Act for Assessment Year 2012-13.

2. The brief facts of the case are that the assessee filed return of income on 30.11.2012 declaring total income of Rs. 1,95,60,970/-. The case was selected for scrutiny under CASS. The notice u/s 143(2) of the Act dated 08.08.2013 was issued. The assessee revised the return of income on 10.09.2013 declaring the same returned income. Due to change of Ld. AO, notice u/s 143(2) alongwith a questionnaire u/s 142(1) of the Act dated 22.02.2016 were issued to the assessee. Shri Shishir Tekriwal, CA/AR for company furnished details called for.

2.1 From perusal of note -13 to the balance sheet, it is noticed that the assessee company had made investment in shares. The investment of Rs. 116,31,00,000/- was made as on 31.03.2012 whereas the investment as on 31.03.2011 was for Rs. 86,77,00,000/-. These investments are made in exempted assets. Vide letter dated 22.02.2016, the assessee company was required to file working of disallowance u/s 14A read with Rule 8D of the Income-tax Rules. The assessee vide letter dated 07.03.2016 stated that it had earned dividend income on which there was no separate expenses incurred by the company as the amount invested is out of surplus money earned by the company. It is further submitted that disallowance u/s 14A has already been made in the computation.

2.2 From perusal of details filed for loan and advances given, it was noticed that the assessee had given advances of Rs. 317,77,00,000/- to its related parties. Vide letter dated 22.02.2016, the assessee was requested to explain whether any interest on loan and advances was charged. The assessee vide reply dated 11.03.2016 filed list of parties to whom loan and advances were given and interest charges. Since, the assessee failed to charge interest on 4.73 crore, the interest was charged @ 8% by the assessee from ACME Power Machines which comes to Rs. 37,88,000/-.

2.3 As per Form 3CEB filed along with return, it was found that the assessee had international transactions with associated enterprises/ concerns. The case was transferred to Transfer Pricing Officer (TPO-1, Delhi) vide letter dated 11.11.2014. The additional CIT/ Transfer Pricing officer-1 passed order u/s 92CA(3) dated 27.01.2016 wherein TPO has done an upward adjustment while determining the arm’s length price of the International Transactions.

2.4. On completion of proceedings, ld. AO vide order dated 27.04.2016 made additions of Rs. 53,33,917/- on account of disallowance u/s 14A r.w.r 8D, Rs. 37,88,000/- as interest income and Rs. 15,78,31,334/- on account of Arm’s Length price.

3. Against order dated 27.04.2016, the assessee filed appeal before the Ld. CIT(A) which was partly allowed vide order dated 22.03.2018.

4. Being aggrieved, the appellant/assessee and the Revenue preferred above captioned appeals.

4.1 Appellant-assessee have raised following grounds:-

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs.53,33,917/- fully made by Ld. AO u/s 14A r.w. Rule 8D and further erred in sustaining the same to the extent of Rs.12,62,166/- and that too without any satisfaction and without considering the our submissions.

2. That in any case and in any view of the matter, action of Ld. CIT(A) in sustaining the action of Ld. AO in making disallowance of Rs.12,62,166/-u/s 14A r.w. Rule 8D, is bad in law and against the facts and circumstances of the case and not sustainable on various legal and factual grounds.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making notional addition of Rs.37,88,000/- on account of alleged interest received on advances given.

4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in sustaining the action of Ld. AO/TPO in making addition of Rs. 11,02,24,932/- on account of interest on loans advanced to subsidiaries by directing to AO/TPO to apply Libor rate plus 300 bps to determine the arm’s length price of loan given to associate enterprises and that too without appreciating the methods adopted by the assessee and in violation of principles of natural justice.

5. That in any case and in any view of the matter, action of Ld. CIT(A) in not deleting the addition of Rs. 11,02,24,932/- on account of interest on loans advanced to subsidiaries is bad in law and against the facts and circumstances of the case.

6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO/TPO in making addition of Rs.2,68,68,000/- on account of sales made to AEs and directed to AO/TPO to apply TNMM Method and that too without appreciating the methods adopted by the assessee and in violation of principles of natural justice.

7. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO/TPO in making addition of Rs.2,68,68,000/- on account of sales made to AEs is bad in law and against the facts and circumstances of the case.

8. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

4.2 Revenue has raised following grounds of appeal:

“1. The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TΡΟ) to exclude M/s Avantel Ltd., M/s Goldstone Infratech Ltd. and M/s Azure Power India Pvt Ltd. from the final list of comparables on account of TP adjustment in arm’s longth price as the Ld.CIT(A) has failed to appreciate the fact that the TPO has rightly considered comparables which fall within the broad domain of telecom power equipment as that of the assessee company by using Transactional Net Margin Method (MM) as the most appropriate method.

2. The Ld.CIT(A) has erred in law and on facts in directing the TPO to delete the adjustment towards interest on receivables as the Ld.CIT(A) has failed to appreciate the fact that any type of deferred payment or receivable or any other debts arising during the course of business have been expressly recognized as international transactions and any delay in realization of such debt would automatically attract TP adjustment on account of interest income short charged or uncharged.

3. The Ld.CIT(A) has erred in law and on facts in restricting the addition to Rs.12,62,166/- as against Rs.53,33,917/- made by the AO on account of disallowance u/s 14A r.w.r. 8D of Income-tax Rules.

4. The Ld.CIT(A) has erred in law in holding that disallowance of expenses u/s 14A cannot be imported into while computing the book profit u/s 115JB of the Income-tax Act, 1961 ignoring the provisions contained in Explanation 1(f) to the section 115JB which provides that amount of expenditure relatable to dividend income has to be increased for the purpose of book profit.

5. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

5. Ld. Authorized Representative for appellant/assessee submitted that Ground of appeal Nos. 1 and 2 of appeal by the assessee relate to the action of Ld. CIT(A) in not deleting the disallowance of Rs. 53,33,917/- fully made by ld. AO u/s 14A r.w.r. 8D of the Rule and further erred in sustaining the same to the extent of Rs. 12,62,166/- without any satisfaction. Ld. AO failed to record satisfaction as mandated u/s 14A(2) of the Act before invoking the Rule 8D of the Rule. No evidence was cited by the AO to establish any actual expenditure related to dividend income page no. 216 to 219 of paper book. Reliance was placed on:

i. Maxopp Investment Ltd. vs. CIT, ITA No. 687/2009 (Del HC)

ii. JK Investors (Bombay) Ltd., ITA No. 7851/Mum/2011

(iii)Godrej & Boyce, Eicher Ltd., Taikisha Engineering, Hero Cycles etc.

6. Ld. Departmental Representative by referring to ground of appeal No. 3 filed by the Revenue submitted that Ld. CIT(A) erred in restricting addition to Rs. 12,62,166/- as against Rs. 53,33,917/- on account of disallowance u/s 14A r.w.r. 8D of the Rule by the Ld. AO.

7. From the examination of the record in light of aforesaid rival contention, it is crystal clear that the ld. AO made addition of Rs. 53,33,917/-u/s 14A r.w.r. 8D of the Rules. Ld. CIT(A) restricted addition to Rs. 12,62,166/- as against Rs. 53,33,917/-. The appellant/assessee had submitted that no expenditure was incurred to earn dividend income of Rs. 12,62,000/-refer page 216 of paper book. Ld. AO failed to record satisfaction as mandated u/s 14A(2) of the Act before invoking Rule 8D of the Rules. In assessee’s own case in ITA No. 3641/Del/2017 title as M/s. Acme Cleantech Solutions Ltd. vs. DCIT for Assessment Year 2011-12 and ITA No. 4478/Del/2016, M/s. Acme Cleantech Solutions Ltd. vs. ACIT for Assessment Year 2010-11 in order dated 20.11.2025 in para no. 21 to 24 observed as under:

“21. Ground of appeal Nos. 6 & 7 raised by the assessee wherein the assessee has challenged the addition of INR 62,91,336/- made u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962.

22. Heard the contentions of both parties and perused the material available on record. The AO has made the addition of INR 62,91,336/- u/s 14A of the Act after reducing the amount to 41,35,664/- suo-motto disallowed by the assessee. The AO has computed the amount of disallowance in terms of computation provided in Rule 8D of the Rules. The main argument of the assessee is that investment which had not yielded exempt income should be excluded from the monthly average value of investments considered for computing the disallowance in terms of Rule 8D(2)(ii) of the Rules.

23. We find that as per Rule 8D(2)(ii), the average value of investment which has yielded exempt income needs to be considered and therefore, the action of the AO in considering the average value of gross value of investment is not correct. This view is supported by the judgement of Hon’ble Delhi High Court in the case of ACB India Ltd. reported in [2015] 374 ITR 108 (Delhi) and by the judgement of hon’ble Special Bench of the Delhi Tribunal in the case of ACIT, Circle-17(1), New Delhi vs Vireet Investment (P.) Ltd. reported in [2017] 82 com 415 (Delhi-Trib.) (SB).

24. In view of the above facts and discussions and by respectfully following the judgement of Hon’ble Delhi High Court in the case of ACB India (supra) and of the Special Bench of Delhi Tribunal in the case of Vireet Investments (supra), we direct the AO to re-compute the amount of disallowance by considering the value of only those investment which has yielded exempt income. Accordingly, Ground of appeal Nos. 6 & 7 raised by the assessee are partly allowed for statistical purposes.”

8. In view of the above material facts, by respectfully following the judicial precedents, it is considered expedient to set aside the orders of Ld. Departmental Authorities and direct the ld. AO to re-compute the amount of allowance by considering only the value of investments which have yielded exempt income. Accordingly, Ground Nos. 1 and 2 raised by the assessee and Ground No. 3 of Revenue are partly allowed for statistical purposes.

9. Authorized Representative for appellant/assessee submitted that Ground No. 3 of the Assessee is regarding action of ld. CIT(A) in confirming notional addition of Rs. 37,88,000/- on account of alleged interest received on advances given. The advances were not loans but reimbursement-type of advances i.e. SBLC renewals, salaries & other expenses page No. 91 of paper book. Notional income is not taxable without actual accrual/receipt. Reliance was placed on Highways Construction Co., B & A Plantations.

10. Ld. Departmental Representative relied upon the order of Ld. CIT(A).

11. From the record, it is evident that Ld. AO made an addition of Rs. 37,88,000/- on account of alleged interest on advances given. As per ratio of judgment in Highways Construction Company B and A Plantations, it is well settled that notional income is not taxable without actual accrual/receipts. The advances in the present case were incurred in ordinary course of business and were recoverable from the entities, which is evident that they were mentioned as “Loans and Advances” in the balance sheet. There was no intention to lend or earn interest, as is evident from page No. 91 of paper book. Therefore, Ld. AO erred in making the notional addition of Rs. 37,88,000/- and the same is set aside. Accordingly, Ground No. 3 of the assessee is allowed.

12. Authorized Representative for appellant/assessee regarding Ground No. 4 and 5 of Assessee’s appeal submitted that Ld. CIT(A) in sustaining the action of Ld. AO/TPO in making addition of Rs. 11,02,24,932/- on account of interest on loans advanced to subsidiaries by directing AO/TPO to apply Libor rate plus 300 bps to determine the arm’s length price of loan given to associate enterprises.

13. Ld. Departmental Representative submitted that the addition of Rs. 11,02,24,932/- on account of interest on loan advanced to subsidiaries was made to the subsidiaries required bench-marking based on LIBOR + 3% instead of SBIPLR.

14. From perusal of record in light of aforesaid rival contention, it is apparent on record that Ld. AO made addition of Rs. 11,02,24,932/- on account of ITA No. 3874 & 3963/Del/2018 ACME CLEANTECH SOLUTIONS Ltd.

interest on loans advance to the subsidiaries. Ld. CIT(A) directed benchmarking based on LIBOR+ 3% instead of SBIPLR.

14.1 A coordinate Bench in ITA No. 3641/Del/2017, A.Y. 2011-12 in assessee’s own case in order dated 20.11.2025 in para 6 to 10 extracted as under:

“6. Ground of appeal Nos.1 to 3 raised by the assessee are with respect to the additions of INR 11,62,89,103/- towards the loan advanced to its AEs wherein AO/TPO has applied domestic lending rate of SBI PLR for charging the interest on these loans by observing that the same were repayable in Indian Rupee.

7. Before us, Ld.AR for the assessee submits that the assessee has advanced loans to its AEs which are being repayable in US$ hence the LIBOR rate is applicable. The assessee filed the agreements of all the loans given to its AEs from time to time according to which all of them were given in US$ and during the year, no fresh loan was given and all are the opening balances. Ld.AR for the assessee further submits that terms of loans were subsequently revised and also filed the modified agreements wherein in terms of terms and conditions of the modified agreements also, all the loans are receivable in US$ equivalent currency and therefore, he submits that LIBOR rate should be applied as has been applied by the assessee. For this Reliance is placed on the judgement of Hon’ble Jurisdictional High Court in the case of CIT-I vs Cotton Naturals (I) (P.) Ltd. reported in [2015] 55 com 523 (Delhi) and further in the case of Hon’ble Rajasthan High Court in the case of CIT vs Vaibhav Gems Ltd. reported in [2017] 88 taxmann.com 12 (Raj.). Ld. AR prayed accordingly.

8. On the other hand, Ld. CIT DR for the Revenue vehemently supported the orders of the lower authorities and submits that Ld. CIT(A) dealt with this issue in detail wherein Ld. CIT(A) has discussed all the terms of the agreements as well as of the modified agreements therefore, he was of the view that repayments were done in Indian Rupees therefore, the AO/TPO has rightly applied the SBI PLI rate. Ld. CIT DR alternatively prayed that the matter may be remanded back to the file to the AO for making necessary verification of the claim of the assessee that as per the modified agreements, all the loans are receivable in US$ at the time of maturity.

9. Heard the contentions of both parties and perused the material available on record. In the instant case, the main allegation of the Revenue is that the assessee as per the modified agreement has agreed that all these loans are receivable in Indian Rupees. In this regard, Ld. AR for the assessee drew our attention to the Paper Book wherein the original agreements of all the loans are placed and as per terms of each agreement, it was provided that same were repayable in US $. Further all the modified agreements entered with the AEs are also placed in the paper book which are available at page 371 to 388. For verification purposes, we took one modified loan agreement with its AE at Mauritius which is at page 372 of the Paper Book wherein as per clause (1) specifically provides that the repayment of the loan shall be made in US $ equivalent currency as on the date of the repayment and as on the time specified. Likewise in respect of the other loans given to AEs at Mauritius as well as at Cyprus, as per modified agreements placed at page 374 to 388 of the Paper Book, iIt is clearly provided that that the repayment should be made in US $. Therefore, observations of Ld. CIT(A) with regard to the repayment of loans is in Indian Rupees is incorrect. The Hon’ble Delhi High Court in the case of CIT-I vs Cotton Naturals (I) (P.) Ltd. (supra) held that the interest rate should be market determine interest rate applicable to the currency concern in which loan has to be repaid.

10. In view of the above facts and by respectfully following the judgement of hon’ble jurisdictional high court in the case of Cotton Natural (supra), we direct the AO to charge the interest on the loan at LIBOR rate as all the loans are to be repaid in US $ and the same is to be further increased by the factor of 5.5% as applicable at the relevant point of time. Accordingly, Ground of appeal Nos. 1 to 3 raised by the assessee are allowed as directed above.”

15. In view of above facts by respectfully following the judicial precedents, Ld. AO is directed to charge interest on loan at LIBOR rate as all the loans are to be repaid in US Dollar and the same is further increased by the factor of 5.5% as applicable at the relevant point of time. Accordingly, Ground of appeal Nos. 4 and 5 are allowed in above terms.

16. Ld. Authorized Representative for appellant/assessee regarding ground No. 6 and 7 submitted that Ld. CIT(A) erred in confirming addition of Rs. 2,68,68,000/- on account of sale made to AE and directed AO/TPO to apply TNMM method. Ld. CIT(A) upheld TNMM method as the most appropriate method. Ld. CIT(A) found AE and non-AE segments in sufficient comparable for Cost-Plus Method i.e. CPM.

17. Ld. Departmental Representative submitted that application of TNMM method using the external comparable due to product/segment mismatch is reasonable.

18. From examination of the record in the light of aforesaid rival contention, it is crystal clear that the Ld. CIT(A) confirmed the addition made of Rs. 2,68,68,000/- on account of sale made to AE’s and directed to AO to apply TNMM method. The assessee had submitted Cost-Plus Method i.e. CPM with internal comparable segmental data for AE vs. Non-AE sales page No. 125 -155 of paper book. The assessee cited OECD Guidelines, consistent historical acceptance and internal segment wise ERP data placed at Page No. 128-129 of Paper Book. It was submitted that TNMM is less reliable. However, ld. CIT(A) upheld application of TNMM method as most appropriate method and found AE and Non-AE segments insufficiently comparable for Cost Plus Method (CPM). The action of ld. CIT(A) being just, fair, reasonable is upheld. Therefore the Ground of appeal No. 6 and 7 of the assessee are rejected.

19. In the result, the appeal filed by the Assessee is partly allowed.

20. Regarding appeal of Revenue, Ld. Departmental Representative submitted that Ld. CIT(A) erred in directing TPO to exclude M/s. Avantel Ltd., and M/s. Goldstone Infratech Ltd. and M/s. Azure Power India Pvt. Ltd. from final list of comparable on account of TP adjustment in arm’s length. Ld. CIT(A) after examining functional and economic comparability, directed their exclusion which was challenged.

21. Ld. Authorized Representative for respondent/assessee submitted that Ld. CIT(A) directed exclusion comparables for following reasons:

M/s. Avantel Ltd.

• Nature of Business:
  • Specializes in customized product development in the field of defence communication and satellite-based telecom.
  • Engaged in significant R&D activities, innovation-driven operations, and caters to a niche defense sector.
• Appellant’s Activity:
  • Manufacture and sale of standard telecom infrastructure equipment to group entities – no customized R&D products, no defense projects.
• Why Not Comparable:
  • Functionally different due to high-end R&D, product differentiation, and target sector.
  • R&D leads to higher pricing and superior profit margins, rendering it a high-risk, high-reward company.
• Legal Support:
  • Functional dissimilarity and high R&D intensity are recognized grounds for exclusion by courts, e.g.:
    •  Agility Logistics Pvt. Ltd. v. DCIT (ITAT Delhi)
    • DCIT v. LG Soft India Pvt. Ltd. (ITAT Bangalore)

2. M/s Goldstone Infratech Ltd.

• Nature of Business:
  • Primarily involved in manufacturing and retrofitting electric buses, LED lighting and assembly of smart power systems.
  • Engaged in government contracts, infrastructure deployment and public sector turnkey projects.
• Why Not Comparable:
  • Operates in infrastructure and public transportation sector -a different product and service domain.
  • Involvement in capital-intensive, project-based revenues unlike regular product sales of the appellant.
  • Engages in custom-built contracts, which carry different risk/reward profiles.
• Legal Precedents:
  • Turnkey infra companies have been excluded for being asset-intensive and contract-specific, e.g.:
    • Birlasoft India Ltd. v. DCIT (ITAT Delhi)
    • Nokia Siemens Networks India Pvt. Ltd. v. ACIT

3. M/s Azure Power India Pvt. Ltd.

• Nature of Business:
  • Independent Power Producer (IPP) in solar energy generation.
  • Revenue generated from long-term power purchase agreements with dissimilar risk profiles and pricing mechanisms.
• Why Not Comparable:
  • Business model is based on regulated tariffs, capital investment, and long­term contracts.
  • Entirely different industry renewable energy vs. telecom manufacturing.
  • Operates in asset-heavy utility space with minimal operational similarity.
    • Legal Basis for Exclusion:
• Companies in the energy sector are generally excluded due to:
  • Different regulatory framework
  • Capital intensity
  • Revenue recognition models
• Refer: ACIT. ITC Infotech India Ltd., ITAT Bangalore.

Legal Principle: Functional Comparability over Superficial Similarity

• • As per Rule 10B(2) and 10B(3) of the Income Tax Rules:
  • The comparability analysis must consider functions performed, assets employed, and risks assumed (FAR analysis).
  • Even if the company is in a broad “technology” domain, different business models, R&D functions, and asset structures justify exclusion.
  • Judicial Precedents:
  • Sony India (P) Ltd. v. DCIT (ITAT Delhi): Functional dissimilarity alone is enough to reject a comparable.
  •  ACIT MSS India (P) Ltd. [(2009) 32 SOT 132 (Pune)]: TNMM comparables must be closely aligned on risk and function.

Conclusion:

The direction of CIT(A) to exclude Avantel Ltd., Goldstone Infratech Ltd., and Azure Power India Pvt. Ltd. is:

• • In line with established transfer pricing jurisprudence.
  • Based on sound functional and sectoral differentiation.
  • Supported by Rule 10B(2), which mandates a detailed FAR analysis.
  • Further supported by a body of ITAT and High Court rulings, especially from jurisdictional benches.

Hence, the department’s appeal on this issue is without merit and should be dismissed. The CIT(A)’s decision is not only correct but essential for ensuring reliable arm’s length benchmarking.”

22. From perusal of record, it is crystal clear that Ld. CIT(A) after examining functional and economic comparability directed exclusion of M/s. M/s. Avantel Ltd., and M/s. Goldstone Infratech Ltd. and M/s. Azure Power India Pvt. Ltd. from final list of comparable on account of TP adjustment in arm’s length. In absence of any material to support the grounds of appeal, the view of Ld. CIT(A) being just, fair and reasonable is upheld. Ground of appeal No. 1 of the Revenue is rejected.

23. Ground of appeal No. 2 of Revenue relates to action of Ld. CIT(A) in directing Ld. TPO to delete the adjustment towards interest on receivables. Ld. Departmental Representative made following submission:

“An amendment has been brought in the section 92B of the IT Act by Finance Act 2012 with retrospective effect from 01.04.2002. Vide this amendment, an explanation (i)(c) to section 928 has been inserted, which gives meaning to the expression “International transaction”. For ready reference, sub clause (c) of clause (i) of this explanation is reproduced as under :-

(c)capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; securities

The Hon’ble ITAT in the case of Ameriprise India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-1 (1), New Delhi [2015] 62 taxmann.com 237 (Delhi Trib.) has clarified the meaning of the above noted amendment and held that interest on outstanding receivables is a separate international transaction.

Further, the Hon’ble Delhi Tribunal in the case of [Bechtel India (P.) Ltd.v/s. Assistant Commissioner of Income-tax, Circle-4(2), New Delhi” [2017] 85 taxmann.com 121 (Delhi Trib.) after considering the decisions in the cases of Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 (Delhi-Trib)and Mckinsey Knowledge Centre (P.) Ltd. v. Dy. CIT (2017) 77 taxmann.com 164 (Delhi-Trib has again held that interest on delayed realization of receivables is a separate international transaction and, therefore, requires separate benchmarking; and it is nothing to do with operations of assessee company involving debt free funds.

Also, most importantly, in the case of the assessee, the outstanding receivables beyond the agreed period has been considered as separate International transaction by the Hon’ble ITAT in the assessee’s own case for AY 2010-11and 2011-12..

Further, the similar position has been upheld by several Courts and Tribunals and this issue is no longer res integra. Thus, once it is held as separate international transaction, then it has to be benchmarked separately as per the TP Provisions.”

24. Ld. Authorized Representative for respondent/assessee submitted that the issue of adjustment towards interest on receivables is covered by the decision of ITAT in assessee’s own case in ITA No. 3641/Del/2017, A.Y. 2011-12.

25. From examination of record in light of aforesaid rival contention, it is crystal clear that Ld. CIT(A) directed to TPO to delete the addition towards interest on receivables.

26. In assessee’s own case in ITA No. ITA No. 3641/Del/2017 (supra) in para No. 11 to 20 is extracted as under:

“11. Ground of appeal Nos. 4 & 5 raised by the assessee are with respect to the addition of INR 33,33,195/- made towards the transfer pricing adjustment on account of interest on outstanding receivables with AEs.

12. Before us, ld.AR of the assessee argued that the assessee has not charged any interest on outstanding balances of receivables from both AEs and non-AEs. The learned counsel further pointed out that interest cost has also been suitably factored in sale price as profit margin of the assessee is much higher than operating margin of the comparable companies.

13. Further, Ld.AR drew our attention to the table of margin computed of sales including sales goods to AEs and non-AEs Paper available at paper book page 90 submitted before the TPO vide letter dated 30.12.2014 according to which the margin on sales to non-AEs was 23.65% as against margin of 47.21% from the sale of goods to its AEs. Ld.AR also placed reliance on the judgement of Hon’ble Delhi High Court in the case of Pr.CIT vs Kusum Healthcare (P.) Ltd. [2018] 99 taxmann.com 431 (Delhi) wherein Hon’ble Delhi High Corut has held that when assessee has factored the impact of receivable on working capital, no further adjustment is required on the outstanding receivables.

14. On the other hand, Ld. CIT. DR supported the orders of the lower authorities and requested for the confirmation of the same.

15. We have heard the rival submissions and perused the material. By way of Finance Act, 2012 an Explanation to Section 92B has been inserted to the Income Tax Act with retrospective effect from 01.04.2002, which clarifies the expression ‘international transaction’ as follows :

Explanation.—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

a. the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;

b. the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;

c. capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business.”

16. The above explanation clarified and justified the adjustment made by the TPO towards interest on receivables, which is well within the definition of international transaction. Therefore, interest on outstanding receivables to AE is an international transaction.

17. In this case, it is seen that assessee has been able to demonstrate that after undertaking the economic adjustments of working capital, the operating profit margin charged by the assessee on its AE’s was higher than the margin on the goods sold to NonAE’s. From the perusal of the table available at paper book page 90 as filed before the TPO vide letter dated 30.12.2014, it is seen that margin on sales to non-AEs was 23.65% as against margin of 47.21% from the sale of goods to its AEs thus no further adjustment is required.

18. The Hon’ble Delhi High Court in the case of Pr.CIT vs Kusum Healthcare (P.) Ltd. (supra), held as under:

i. “The inclusion in the Explanation to Section 92B of the Act of the expression “receivables” does not mean that de hors the context every item of “receivables” appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction, and

ii. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction.”

19. This view is further confirmed by the Hon’ble Delhi High Court in the case of Avenue Asia Advisors Pvt. Ltd. vs. DCIT reported in 398 ITR 120 (Delhi).

20. In view of the above discussion and by respectfully following the aforesaid orders of hon’ble jurisdictional high court in the case of Kusum Healthcare (supra) and others we direct the AO to delete the addition made on account of transfer price adjustments towards interest on outstanding receivable. The grounds of appeal No. 4 & 5 of the assessee are allowed.”

27. In view of above facts and the judicial precedents, the addition made by Ld. AO on account of transfer pricing adjustment towards interest on outstanding receivables being unsustainable has been rightly deleted by ld. CIT(A). Therefore, Ground of appeal No. 2 of Revenue is rejected.

28. Regarding Ground of appeal No. 4, ld. Departmental Representative submitted that the action of ld. CIT(A) in holding disallowance of expenses u/s 14A of the Act cannot be emerged while computing book profit u/s 115JB of the Act. Ld. AO had added the amount disallowed u/s 14A of the Act i.e. Rs. 53.33 lakh to the assessee’s book profit u/s 115JB of the Act for the purpose of compute alternate tax.

29. Ld. Authorized Representative for respondent/assessee submitted that Ld. CIT(A) held that the addition is not permissible.

30. From the examination of the record in light of aforesaid rival contention, it is crystal clear that Ld. CIT(A) held the disallowance of expenses u/s 14A of the Act cannot be emerged while computing book profit u/s 115JB of the Act. Ld. AO had included disallowed amount in computation of book profits. Ld. CIT(A) rightly deleted the addition, as there is no specific provision in Explanation 1 to Section 115JB of the Act allowing for 14A-type adjustment. The decision of ld. CIT(A) is legal and justified. Accordingly, Ground of appeal No. 4 of the Revenue is rejected.

31. In the result, the appeal of Revenue is dismissed.

32. In the final result, the appeal of Assessee is partly allowed and the appeal of Revenue is dismissed.

Order pronounced in the open court on 22.05.2026.