2023 (12) TMI 140 - HC - Income Tax

Disallowance u/s 14A - connection between the subject expenditure and the exempt income - HELD THAT - Assessing Officer proceeded on a mere assumption that interest bearing funds could also have been utilized for making the investment in question, because the respondent/assessee had failed to establish that source of investments was its own funds. In view of the stand taken by assessee that the investments were made in the mutual funds in ICICI Liquidity Plan wherein the dividend was automatically reinvested with weekly frequency without any efforts for earning dividend income and that it did not have any borrowings, the Tribunal examined the balance sheets of the respondent/assessee from which it came to a definite conclusion that there were no borrowed funds in the books of the respondent/assessee pertaining to the relevant year, therefore there was no question of using borrowed funds for investments in mutual funds and consequently the impugned disallowance under Section 14A of the Act was unwarranted. Adjustments on account of delay in realization of receivables - Tribunal accepted the claim of the respondent/assessee that it being a debt free company, no adjustment on account of notional interest on receivables was warranted in view of an earlier decision of a coordinate bench of the Tribunal - HELD THAT - This issue stands clearly covered by the decision of a coordinate bench of this court in the case of PCIT vs Boeing India (P) Ltd 2022 (10) TMI 498 - DELHI HIGH COURT in which after traversing through various judicial precedents, the court held that the assessee company being a debt free company the question of receiving any interest on receivables did not arise so the adjustment made by the Assessing Officer on account of interest on outstanding receivables was liable to be deleted. TP Adjustment - comparable selection - rejection of Accentia Technologies Ltd and TCS E-Serve Ltd - HELD THAT - The issue stands covered by earlier decisions of this court in the cases PCIT vs Inductis India (P) Ltd 2019 (2) TMI 1745 - DELHI HIGH COURT AND B.C. MANAGEMENT SERVICES PVT. LTD. 2017 (12) TMI 255 - DELHI HIGH COURT wherein Accentia Technologies Ltd., was excluded on the basis that the company was functionally dissimilar and that the segmental data for the assessment year with regard to the comparable segment was not available. The second comparable directed to be excluded i.e. TCS E-Serve Ltd., was on the ground that the concern provided high end online software solutions unlike the assessee, which provided internet based medical health related services. The real services, therefore, were entirely dissimilar. No substantial questions of law arises for present purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Classification of receivables from AE as international transactions.
3. Exclusion of certain companies from the list of comparables.

Summary:

Disallowance under Section 14A of the Income Tax Act, 1961:
The court addressed whether earning/receipt of income exempt from tax is a necessary pre-requisite before making disallowance under Section 14A(1) of the Income Tax Act, 1961. The Tribunal had found that the respondent/assessee was a debt-free company, and thus, no interest-bearing borrowed funds were used for making investments in exempt securities. The court upheld this finding, noting that the Assessing Officer had proceeded on mere assumptions without concrete evidence. The court referenced the case of PCIT vs Security Printing and Mining Corporation of India Ltd, which mandates the Assessing Officer to scan and scrutinize the accounts of the assessee to ascertain the causal connection between the subject expenditure and the exempt income. Consequently, the court ruled that the questions proposed by the appellant/revenue do not constitute substantial questions of law.

Classification of Receivables from AE as International Transactions:
The court examined whether receivables beyond the due date of payment as agreed under the contract with the AE constitute an international transaction under sub-clause (c) of clause (i) of Explanation below Section 92B of the Act, requiring determination of Arm's Length Price. The Tribunal had accepted the claim that the respondent/assessee, being a debt-free company, did not warrant an adjustment on account of notional interest on receivables. The court referenced the case of PCIT vs Boeing India (P) Ltd, which held that a debt-free company does not need to impute notional interest on outstanding receivables. The court concluded that the questions proposed by the appellant/revenue on this issue do not constitute substantial questions of law.

Exclusion of Certain Companies from the List of Comparables:
The court addressed whether the Tribunal erred in excluding TCS E-Serve Ltd. and Accentia Technologies Ltd. from the list of comparables. The Tribunal had found that the segmental data for Accentia Technologies Ltd. was not available and TCS E-Serve Ltd. had been excluded earlier due to high turnover, large scale operations, high brand value, and the nature of services. The court referenced earlier decisions, including PCIT vs Inductis India (P) Ltd, which supported the exclusion of these companies based on functional dissimilarity. The court ruled that the questions proposed by the appellant/revenue on this issue do not constitute substantial questions of law.

Conclusion:
The appeal fails to raise any substantial question of law and is therefore dismissed.