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Income Tax Appellate Tribunal, DELHI BENCH, ‘H’: NEW DELHI
Before: SHRI PRAKASH CHAND YADAV & SHRI BRAJESH KUMAR SINGH
ORDER PER PRAKASH CHAND YADAV, JM
The present appeal of the assessee is arising from the order of the Ld. Assessing Officer dated 30.07.2024 having DIN No.
ITBA/COM/F/17/2024-25/1067157841(1) relates to Assessment Year 2020-21.
Brief facts of the case as coming out of the orders of the authorities below are that the assessee is a company and engaged in rendering consultancy services on management of various aspects of business such as general, investment, financial, marketing, etc. The company provides back office processing and software development, maintenance and support service to its Associated Enterprises (in short ‘AE’). It has filed its return of income on 19.01.2021. Thereafter, the case of the assessee was selected for scrutiny. Since, international transactions are involved in this case, the Assessing Officer referred the matter to the learned Transfer Pricing Officer (in short ‘TPO’) for computation of Arm’s Length Price (in short ‘ALP’) of the international transaction entered into with its AE. The learned TPO vide its order dated 21.07.2023 conducted TP study and made adjustment of Rs.2,72,20,413/-. Accordingly, the Assessing Officer made this addition to the income of the assessee. In addition to the TP adjustment, the Assessing Officer has also invoked the provisions of section 14A r.w. rule 8D and made a disallowance of Rs.77,64,077/-.
Aggrieved with the draft order of the Assessing Officer, the assessee filed its objections to the learned Dispute Resolution Panel (in short ‘DRP') and assailed the order of the Assessing Officer on both as well as domestic issue and transfer pricing issue. The ld. DRP could not find any force in the arguments of the assessee and confirmed the order of the Assessing Officer/TPO. The Assessing Officer passed the fresh assessment order, which is impugned before us.
Aggrieved with the final assessment order, the assessee is in appeal before us by raising the following grounds of appeal.
“Appeal under section 253(I)(d) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"'), against the order dated 30 July 2024 passed by Ld. Assistant/ Deputy Commissioner of Income Tax - Circle 1(1), Delhi ("Ld. AO") under 143(3) read with Section 144C(13) of the Income-tax Act and rectification order u/s 154/143(3) read with section 144C(13) of the Act dated 31 July 2024. GROUNDS OF OBJECTION The following grounds are independent of and without any prejudice to one another: A. GENERAL GROUND: That on the facts and circumstances of the case and in law, the Ld. AO has erred in enhancing the total income of the Appellant under section 143(3) read with section 144C(13) of the Act, for the assessment year ("A Y") 2020-21 to Rs. 1,249,727,847 as against the returned income of Rs. 1,076,114,310 under the normal provisions of Act. B. CORPRATE TAX GROUNDS Addition on account of disallowance made under section 14A read with Rule 8D.
2. That the facts and circumstances of the case and in law, the Ld. AO erred in disallowing Rs.7,764,077 under Section 14A of the Act read with Rule 8D over and above suo-moto disallowance of Rs 1,146,077 made by the Appellant in the return of income filed for the captioned assessment year, without recording any finding that any specific and identifiable expenditure has been incurred by the Appellant for earning exempt income. The disallowance made is without any basis and merely on surmises and conjectures and hence not sustainable in law.
3. On the facts and circumstances of case and in law, the Ld. AO also failed to appreciate that the Appellant suo-moto disallowed expenditure of Rs. 1,146,077 in relation to investment in units of Mutual funds.
4. On the facts and circumstances of the case and in law, the Hon'ble DRP/Ld.AO failed to appreciate that the investments in mutual funds were made out of own funds/ idle funds and there were no borrowed funds/outstanding loans during the captioned assessment year. Addition on account of income considered as per intimation order issued under section 143(1) of the Act. 5 That the facts and circumstances of case and in law, the Ld. AO/CPC erred in considering income as determined in the intimation order under section 143(1) of the Act of Rs 1,238,603,590 vis-à-vis returned income of Rs 1,076,114,310. 6 That on the facts and circumstances of the case and in law, the Ld. AO/CPC has failed to appreciate that the additions/disallowances made in the intimation are beyond the scope of section 143(1) of the Act C. TRANSFER PRICING GROUNDS 7 That on the facts and circumstances of the case and in law, Ld. AO/ Ld. TPO erred in proposing an adjustment of Rs. 3,360,180, to the income of the Appellant on account of alleged difference in the arm's length price of interest on outstanding receivables. In doing so, the Ld. AO/ Ld. TPO erred on the following: 13.1 That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in considering the continuing debit balance of receivables of the Appellant as a separate 'international transaction. 13.2 That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in not appreciating that once a working capital adjustment is performed on the margins of comparable companies, separate determination of arm's length price of outstanding receivables is not required. 13.3 That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in ignoring the fact that the Appellant is a debt-free company and it cannot be alleged that interest bearing funds were used to pass on benefit in the form of extended credit period to the AE. 13.4 That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in not appreciating that no interest was paid by the Appellant on account of delay in payment to AEs and therefore, no such notional interest is warranted for outstanding receivables by the Appellant from its AEs. 13.5 That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in arbitrarily applying 6 months LIBOR + 400 basis points for the purpose of computing notional interest on outstanding receivables. D. OTHER GROUNDS On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270 A of the Act.
Ground no.1 is general in nature and hence does not require any specific adjudication.
In ground no.2, 3 and 4, the assessee has disputed the disallowance u/s 14 r.w.r.8D.
In ground no.7, the assessee has disputed the addition of Rs.33,66,180/- (remains in dispute after the directions of the Dispute Resolution Panel)
The ld. Counsel appearing on behalf of the assessee, contended that the assessee has suo-moto made a disallowance of Rs.11,46,077/- vis-a-vis earning of exempt dividend income of Rs.4.98 Crores. The ld. Counsel for the assessee pointed out that the ld. Assessing Officer failed to demonstrate as to why this suo-moto disallowance is incorrect. The ld. Counsel for the assessee further argued that it is settled position of law that for making a disallowance by invoking provisions of section 14A, the Assessing Officer has to record the satisfaction with respect the correctness of the accounts of the assessee. The ld. Counsel for the assessee relied upon the judgments of Hon’ble Delhi High Court in the case of H.T. Media Ltd. vs PCIT [2017] 85 taxmann.com 113 (Del. HC) and Joint Investments (P.) Ltd. vs CIT [2015] 59 taxmann.com 295 (Del. HC). It is further submitted by the ld. Counsel for the assessee that the assessee has not utilized any borrowed funds for the purpose of making investments in the mutual fund and therefore no further disallowance is required to be made in the present case.
The ld. DR appearing on behalf of the Revenue vehemently argued that there is no Performa for recording satisfaction u/s 14A and he drawn the attention of the Bench towards the order of the ld. Dispute Resolution Panel, wherein, the DRP has quoted the satisfaction of the Assessing Officer and argued that the Assessing Officer is correct in making the disallowance of Rs.77,64,077/-. It is pertinent to note here that when the Bench put a query with the ld. DR that as to why an amount of Rs.30,20,006/- has been mentioned by the Assessing Officer in the alleged satisfaction, the ld. DR stated that it may be a typographical error.
10. With respect to the addition of Rs.33,60,180/- i.e. interest on delayed receivables, the ld. Counsel for the assessee argued that the TPO and ld. DRP has not allowed the working capital adjustments and if the working capital adjustment is provided to the assessee then the interest on delayed receivables is no more required. The ld. Counsel for the assessee relied upon the judgment of Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (ITA No.765/2016) (Delhi High Court) dated 25.04.2017 and contended that working capital adjustments subsumes the impact of outstanding balance and hence the notional interest on outstanding receivable will be subsumed with the notional interest on outstanding payables and therefore no further adjustment is called for in this matter.
The Ld. DR relied upon the orders of the authorities below.
We have heard the rival submission and perused the material available on record. With respect to the issue of section 14A, we observe that in this case, Ld DR has failed to refute the argument of the assessee that no borrowed funds have been utilized by the assessee for making investment in mutual fund. It is also an admitted position of the fact that the assessee has made suo-moto disallowance an amount of Rs.11,46,007/-. The ld. Assessing Officer while recording satisfaction, failed to point out any defect with respect of the disallowance made by the assessee, further the Assessing Officer has failed to point out as to why the accounts of the assessee are not correct. We also observe that the Assessing Officer has wrongly recorded the amount of Rs.30,20,006/- at the time of recording of satisfaction. It is settled position of law that recording of satisfaction is sine qua non before invoking the provisions of section 14A as held by the Hon’ble Delhi High Court in the case of H.T. Media Ltd. vs PCIT (supra) and Joint Investments (P.) Ltd. vs CIT (supra). In the case of H.T. Media Ltd., the Hon’ble High Court in para-35 has categorically held that “the Assessing Officer had to first record, on examining the accounts, that he was not satisfied with the correctness of the assessee’s claim of Rs.3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14A(2) of the Act and read with Rule 8D(2) of the Rules”.
Hon’ble High Court further held that these type of observations made by the Assessing Officer are not done in the present case and hence the satisfaction recorded by the Assessing Officer is of no use. In the present case also, the Assessing Officer has failed to point out the incorrectness of the account of the assessee. Further, the assessee has not diverted any borrowed fund vis-a-vis investments in mutual fund, there is another aspect of the matter that is the assessee has invested in mutual funds, on which STT as applicable has also been deducted by the payee. Considering all these aspects, we are of the firm opinion that the Assessing Officer has wrongly invoked the provisions of section 14A. Hence, we delete the addition made by the Assessing Officer on this ground.
With respect to the issue of interest on delayed receivables is concerned, Hon’ble Delhi High Court in Kusum Health Care (Supra) has held that working capital adjustment subsumes the interest on delayed receivables and if the net result is Nil then no adjustment qua interest on delayed receivables can be made. With these observations, we restore this issue to the file of the ld. TPO, first to examine the facts of the present case with the facts of M/s Kusum Health Care and then to provide working capital adjustment to the assessee and thereafter, if anything left with respect to the interest on outstanding receivables the TPO will make the adjustment accordingly. Before parting we further observe that so far as the reliance of Ld DRP on the order of Mckisney in ITA number 461 and 526 of 2017 order dated 9.08.2018, is concerned, that order has been subsequently recalled by the Hon'ble Jurisdictional High Court in review petition number 360 of 2018 dated 19.04.2019. Similarly the Ld DRP has relied on the order of Cordinate Bench in the case of Bechal India Ltd Vs ACIT reported in 85 Taxman.com 121(Del)(2017) relevant for AY 2011-12, which order has been distinguished by the Cordinate Bench in the case of Bechtel itself rendered for AY 2013- 14, reported in 125 Taxman.com67 (2021) wherein the coordinate Bench has distinguished the order of AY 2011-12 in Para- 11.1 to 11.8. The order of Bechtel for AY 2013-14 has been challenged before the Hon’ble Delhi High Court, and the High Court has affirmed the view of the ITAT. Therefore, reliance of the DRP on the order of Bechtel for AY 2011-12 is of no relevance.
In ground no.5 and 6, the assessee has disputed certain errors committed by CPC while processing the return of income. With respect to this, we direct the Assessing Officer to verify the issue and decide afresh in accordance law.
Similarly, there is an addition of Rs.16,01,89,573/-u/s 43B of the Act. In respect of this issue also, we direct the Assessing Officer to decide the issue in accordance with law.
Similarly, the assessee has disputed the disallowance of bonus to the tune of Rs.10,69,52,819/- and disputed the amount of Rs.16,61,161/- paid towards penalty towards as per SEZ Act and lastly the assessee has disputed the Short credit of TDS amounting to Rs.7,80,127/-. All these issues will go to the Assessing Officer and the Assessing Officer will decide in accordance with law.
Ground no.2 to 4 and 7 are allowed and ground no.5 to 6 are restored to the file Jurisdictional Assessing Officer (in short ‘JAO’) for deciding the issue in accordance with law.
In the result, the appeal of the assessee is allowed as indicated above.
Order pronounced in the open court on 20th June, 2025.