Assessee Being A Debt Free Company, No Need To Impute Notional Interest On Outstanding Receivables: Delhi High Court

The Delhi High Court has held that the assessee was a debt-free company and there was no need to impute notional interest on outstanding receivables.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that there has to be a proper inquiry by the Transfer Pricing Officer by analyzing the statistics over a period of time to discern a pattern that would indicate that vis-à-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way.

The case of the respondent or assessee was selected for scrutiny. The notice under Section 143(2) was issued to it on August 8, 2013, which was followed by a notice under Section 142(1) with a detailed questionnaire in response to which the assessee attended the proceedings whenever called upon to do so.

The assessee was called upon to show cause as to why a disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Rules was not made pertaining to the dividend income of Rs. 30,15,872 pertaining to which expenses were not declared during the relevant financial year. The assessee answered that it did not incur any direct or indirect expenditure in making the concerned investment.

Reference under Section 92CA of the Income Tax Act was made to the Transfer Pricing Officer (TPO) for the determination of arms-length price qua international transactions undertaken by the assessee. In the course of proceedings, the TPO issued a show cause notice to the assessee, calling upon it to explain why an upward adjustment be not made to the value of an international transaction resulting in a corresponding enhancement in the income of the assessee, and the TPO selected, in the list of comparables, two entities, namely Accentia Technologies Ltd. and TCS E-Serve Ltd. The TPO added a sum of Rs. 13,20,31,648 to the total income of the assessee on account of the Arm's Length Price (ALP) adjustment pertaining to IT-enabled services.

After issuance of show cause notice to the assessee qua upward adjustment, the Assessing Officer (AO) passed the Draft Assessment Order, making an addition to the total income of the assessee, which amount was included towards disallowance under Section 14A of the Income Tax Act.

The objections filed by the assessee before the Dispute Resolution Panel (DRP) were disposed of. The DRP upheld the selection of Accentia Technologies Ltd. and TCS E-Serve Ltd. as comparables and also held that deferred receivables from AE being an international transaction, the assessee had failed to establish that adjustment towards overdue receivables was not justified. The DRP upheld the view of the Assessing Officer and upheld the disallowance of expenses under Section 14A.

The assessee filed an appeal before the Tribunal, which was allowed, holding that, being a debt-free company, an adjustment on account of interest on receivables was not sustainable in the eyes of the law.

The department contended that the Tribunal fell in error by blindly following the decision of its coordinate bench in the assessee's case by holding that the assessee was a debt-free company and there was no need to impute notional interest on outstanding receivables.

The court held that the assessee being a debt-free company, it would not be justifiable to presume that the borrowed funds have been utilized to pass on the facilities to its AEs, and the revenue also had not brought on record that the assessee had been found paying interest to its creditors or suppliers on delayed payments.

Counsel For Appellant: Prashant Meharchandani

Counsel For Respondent: Vishal Kalra

Case Title: PCIT Versus M/S Inductis India Pvt. Ltd.

Citation: 2023 LiveLaw (Del) 1222

Case No.: ITA 175/2019

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