Notional Interest Cannot Be Taxed Without Actual Accrual; ITAT Directs LIBOR-Based Benchmarking for Foreign Currency Loans to AEs

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) while dealing with multiple transfer pricing and corporate tax issues including disallowance under Section 14A, taxation of notional interest on advances, arm's length pricing for loans granted to associated enterprises (AEs), outstanding receivables and comparable selection under transfer pricing provisions. The bench of Vimal Kumar (Judicial Member) and S. Rifaur Rahman (Accountant Member) has observed that the amounts in question were advanced during the ordinary course of business and there was no intention to lend money or earn interest. Merely because such advances were reflected under “Loans and Advances” in the balance sheet would not justify taxation of hypothetical income. Accordingly, the addition of ₹37.88 lakh was deleted. The dispute pertained to Assessment Year 2012–13 and arose from additions made by the Assessing Officer amounting to disallowance under Section 14A, alleged interest income on advances and transfer pricing adjustments. The Tribunal considered cross appeals filed by both the assessee and the Revenue against the order of the Commissioner of Income Tax (Appeals). During assessment proceedings, the department noted that the company had made substantial investments in shares and had also extended advances to related parties. The Assessing Officer made additions of ₹53.33 lakh under Section 14A read with Rule 8D, ₹37.88 lakh towards alleged interest income on advances and a transfer pricing adjustment of ₹15.78 crore. One of the key issues before the Tribunal concerned the addition of ₹37.88 lakh towards alleged interest income on advances given by the assessee. The department treated certain advances as interest-bearing in nature and computed interest on a notional basis. The assessee argued that these advances were not loans but represented reimbursements and business-related advances such as expenses and bank guarantee related transactions. The Tribunal accepted the assessee's contention and held that notional income cannot be subjected to taxation in the absence of actual accrual or receipt. The Tribunal also examined transfer pricing adjustments relating to loans advanced to subsidiaries. The department had adopted SBI Prime Lending Rate (PLR) for benchmarking such transactions. The assessee argued that since the loans were repayable in US Dollars, the benchmark should be based on LIBOR rather than domestic interest rates. Relying upon its earlier order in the assessee's own case and judicial precedents including CIT v. Cotton Naturals (I) Pvt. Ltd., the Tribunal held that the applicable interest rate must correspond to the currency in which repayment is to be made. Since the agreements demonstrated repayment in US dollars, the Tribunal directed the Assessing Officer to apply LIBOR along with an additional factor of 5.5%, rather than domestic lending rates. Another significant issue related to transfer pricing adjustments for delayed receivables from associated enterprises. The department argued that receivables constituted a separate international transaction requiring benchmarking. However, the Tribunal observed that the assessee had already factored the impact of receivables in its working capital adjustments and had demonstrated significantly higher margins from AE transactions compared to non-AE transactions. Following the Delhi High Court ruling in Kusum Healthcare Pvt. Ltd., the Tribunal held that no separate adjustment was warranted merely because receivables remained outstanding. Consequently, deletion of transfer pricing adjustments on this issue was upheld. The Tribunal further addressed Section 14A disallowance and directed recomputation by considering only those investments that had actually yielded exempt income. The bench followed earlier judicial precedents and the assessee's own prior rulings for this purpose. The ITAT partly allowed the assessee's appeal and dismissed the Revenue's appeal, granting substantial relief to the taxpayer on major transfer pricing and notional income issues. Case Details Case Title: M/S. Acme Cleantech Solutions (P) Ltd. Versus JCIT Citation: JURISHOUR-1361-CES-2026(DEL) Case No.: ITA No. 3874/Del/2018 Date: 22.05.2026 Counsel For Appellant: Somil Aggarwal, Advocate Counsel For Respondent: Rajesh Kumar, CIT(DR) Click Here To Read Order Read More: AO Can’t Disallow Intra-Group Service Expenses U/s 37 Once Transaction Is Covered Under APA: ITAT

Notional Interest Cannot Be Taxed Without Actual Accrual; ITAT Directs LIBOR-Based Benchmarking for Foreign Currency Loans to AEs

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