Foreign Currency Loans Benchmark via LIBOR, Dissimilar

Foreign Currency Loans Benchmark via LIBOR, Dissimilar Comparables Excluded, and Receivables Notional Interest Deleted

Issue

Whether, for Assessment Year 2013-14:

Benchmarking of interest on foreign currency loans to AEs should be based on LIBOR plus spread rather than SBI PLR.
Under TNMM, companies with distinct functional profiles, different sectors, or disparate product lines (including EPC service providers and government-owned capacitor manufacturers) can be included as comparables.
Notional interest adjustment on delayed AE receivables is warranted when the assessee uniformly charges no interest from both AEs and non-AEs while factoring credit terms into pricing.
Disallowance under Section 14A read with Rule 8D is permissible in the absence of any exempt income earned during the year.

Facts

Foreign Currency Loans: Assessee advanced foreign currency loans to its Associated Enterprises (AEs) charging interest between 6.5% and 9.5%. The Transfer Pricing Officer (TPO) applied SBI PLR (12.6%) to make a transfer pricing adjustment.
Engineering Services Comparable: Assessee provided high-quality engineering services to the telecom sector. The TPO selected a comparable engaged in Engineering, Procurement, and Construction (EPC) services for heavy industrial sectors like steel, fertilizers, and metals.
Product Line Comparables: Assessee was compared against a company manufacturing Aluminium Electrolytic Capacitors (a government company) operating in a completely different product domain.
Trade Receivables: Assessee had outstanding trade receivables from AEs. It followed a uniform policy of not charging interest on delayed payments from either AEs or non-AEs, asserting that credit terms were built into product pricing. The TPO imputed notional interest on delayed AE receivables.
Exempt Income Disallowance: The Assessing Officer made a disallowance under Section 14A read with Rule 8D despite the assessee earning zero exempt dividend income from its investments during the relevant financial year.

Decision

LIBOR-based Benchmarking Upheld: Foreign currency loans to AEs must be benchmarked using LIBOR + 300 bps instead of domestic SBI PLR. [Paras 9 & 10]
Functional & Sectoral Uncomparability: Companies executing EPC projects across heavy industries cannot be compared with a telecom-focused engineering service provider under TNMM. [Para 14.1]
Product Comparability Requirement: Broad functional tolerance under TNMM is insufficient if product lines fundamentally differ. The capacitor manufacturer was rightly excluded based on product mismatch, not merely its government-owned status. [Paras 20 & 21]
Deletion of Receivables Adjustment: No transfer pricing adjustment for notional interest on AE receivables is justified when non-charging of interest is uniform across AEs and non-AEs, and pricing incorporates agreed credit periods. [Paras 24 & 25]
No Section 14A Disallowance Without Exempt Income: Disallowance under Section 14A read with Rule 8D cannot exceed or exist without actual receipt of exempt income during the assessment year. [Para 28]

Key Takeaways

Currency-Matching Principle: Interest benchmarking must align with the currency of the loan transaction (LIBOR for international foreign currency loans; domestic prime lending rates like SBI PLR are inapplicable).
Product & Functional Granularity: While TNMM permits broad functional comparison, stark differences in industry sector, service type (e.g., pure engineering vs. full EPC construction), or physical product lines invalidate selection.
Uniform Credit Policy Protections: Imputation of notional interest on AE trade receivables is unviable if the assessee demonstrates a consistent, non-interest-bearing credit arrangement with third parties that is priced into contractual margins.
No Exempt Income, No Disallowance: The legal mandate under Section 14A remains contingent on the actual existence of tax-exempt earnings in the relevant year.

IN THE ITAT DELHI BENCH ‘I’

ACIT

Acme Cleantech Solutions (P.) Ltd

SATBEER SINGH GODARA, Judicial Member
and Manish Agarwal, Accountant Member

IT Appeal Nos. 5193 and 5194 (DEL) of 2019
[Assessment years 2013-14]

AUGUST 19, 2026

Dharm Veer Singh, CIT(DR) for the Appellant. Somil Agarwal, Dr. Rakesh Gupta and Deepesh Garg, Advs. for the Respondent.

ORDER

Manish Agarwal, Accountant Member.- The captioned cross-appeal is filed by assessee and the Revenue against the order dated 27.03.2019 passed by Ld. Commissioner of Income Tax (A)-44, New Delhi [“Ld. CIT(A)”] in Appeal No. 47/2018-19/CIT(A)-44 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 22.02.2017 passed u/s 143(3) r.w.s. 144C(3) of the Act pertaining to Assessment Year 2013-14.

2. Before us, both the parties have admitted that the facts involved in both captioned cross-appeals are common, therefore, they are taken together and decided by a common order.

3. Brief facts of the case are that the assessee e-filed its return of income on 30.11.2013, declaring total income of INR 23,85,28,970/-. The case was selected for scrutiny and since the assessee has carried out international transaction with its Associated Enterprises (“AEs”), therefore, a reference was made to the TPO for determination of Arm’s Length Price (“ALP”) of the international transactions. The Transfer Pricing Officer (“TPO”) in terms of order dated 18.102.2016 has made following adjustments:-

Sl.No.	Nature of international transaction	ALP determined by assessee (Rs.)
1.	Loan	47,52,39, 333/-
2.	Manufacturing segment	11,02,91,500/-
3.	Receivables	2,02,11,-68/-
	Total	60,57,12,301/-

4. Thereafter, the AO passed the assessment order u/s 143(3) r.w.s. 144C(3) of the Act wherein total adjustment made by TPO at INR 60,57,12,301/- to the ALP has been made. Besides this, AO has further made an addition u/s 14A of INR 3,14,18,961/-. Accordingly, total income of the assessee company was assessed at INR 87,56,60,232/-.

5. Against the said order, the assessee preferred an appeal before Ld. CIT(A) who in terms of its order dated 27.03.2019, has partly allowed the appeal of the assessee.

6. Aggrieved by the order of Ld.CIT(A), both the Revenue and the assessee are in appeal before the Tribunal by taking following Grounds of appeal:-

ITA No.5194/Del/2019 [Assessment Year 2013-14]

[Assessee’s apepal]

1. “That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in sustaining the addition/adjustment of Rs.14,81,75,218/- even though no interest was chargeable on the loan given to associate enterprises and has further erred in directing AO/TPO to apply Libor plus 300 bps to determine the arm’s length price.

2. That in any case and in any view of the matter, action of Ld. CIT(A) in directing the AO/TPO to apply Libor plus 300 bps to determine the arm’s length price of loan given to associate enterprises, is bad in law and against the facts and circumstances of the case.

3. 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.”

ITA No.5193/Del/2019 [Assessment Year 2013-14]

[Revenue’s apepal]

1. “Whether the Ld. CIT(A) was justified in excluding Techno Electric & Engineering Company Limited as a comparable and laying down strict standard of comparability and attempting to, identify exact replica of the taxpayer for comparability analysis whereas Indian Law and International Jurisprudence recognized that they cannot be exact comparable in the given situation without any differences and without appreciating that such stringency will defeat the purpose of flexibility provided in comparability analysis for determining of Arm’s Length Price?

2. Whether the Ld. CIT(A) was justified in excluding Keltron Component Complex Limited as a comparable only on the ground of being a government company without analysis how this fact has impacted profitability?

3. Whether in the facts and circumstances of the case the Ld. CIT(A) erred in giving direction to the TPO for giving relief to the assessee in interest on receivables without considering the fact and explanation to section 92B.

4. Whether in the facts and circumstances of the case the Ld. CIT(A) was correct in law to reject interest on receivables merely on the ground of not charging interest from its AEs as well as non-AEs.

5. Whether in the facts and circumstances of the case, Ld CIT(A) was correct in law by deleting the addition made under section 14A r.w.r 8D of the Income Tax Act, 1961.”

7. First we take appeal of the assessee in ITA No.5194/Del/2019 for Assessment Year 2013-14.

ITA No.5194/Del/2019 [Assessment Year 2013-14]

[Assessee’s apepal]

8. In this appeal, assessee has challenged the action of AO in confirming the addition of INR 1,44,58,500/- out of 47,52,09,333/- made by AO/TPO on account of interest on borrowings where the AO/TPO has applied SBI PLR @ 12.6% to benchmark the interest as against interest charged at 6.5% to 9.5%. Ld.CIT(A) has confirmed the benchmarking based on LIBOR+ 300 instead of SBI PLR. Before us, Ld.AR submits that since the loans were in foreign currency therefore, benchmarking should be done in LIBOR Plus markup based on prevailing rate and further placed reliance on the Jurisdictional High Court in the case of CIT v. Cotton Naturals (I) (P.) Ltd. (Delhi).

9. Heard the contentions of both the parties at length and perused the material on record. It is observed that identical issue was decided in the case of assessee in preceding AYs where under similar facts, the Co-ordinate Bench in Acme Cleantech Solutions Ltd. v. Dy. CIT (Delhi – Trib.)/ITA No. 3641/Del/2017 for AY 2011-12 has held that “LIBOR rate as the basis and further increased by the factor of 5.5% as applicable at the relevant point of time”. The observations made therein for AY 2011-12 has been followed by Coordinate Bench in assessee’s own case in Acme Cleantech Solutions (P.) Ltd. v. JCIT [IT Appeal Nos. 3874 & 3963 (Del) of 2018, dated 22-5-2026] for AY 2012-13 wherein vide para 14.1 to 15, it was held as under:-

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 v. Cotton Naturals (I) (P.) Ltd. reported in [2015] 55 5axmann.com 523 (Delhi) and further in the case of Hon’ble Rajasthan High Court in the case of CIT v. Vaibhav Gems Ltd. reported in (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, it 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 v. 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.”

10. Before us, both the parties have fairly admitted that the facts are identical therefore, by respectfully following the orders of coordinate bench in assessee’s own case, we find no error in the order of ld. CIT(A) who has directed to benchmark the transactions by taking LIBOR +300 as against SBI PLR. Thus, we are not inclined to interference in the order of ld. CIT(A) which is hereby upheld.

11. In the result, appeal of the assessee is dismissed.

12. Now we take appeal of the Revenue in ITA No.5193/Del/2019 for Assessment Year 2013-14.

ITA No.5193/Del/2019 [Assessment Year 2013-14]

[Revenue’s Appeal]

13. Ground of appeal No.1 raised by the Revenue is with respect to the exclusion of the comparable Techno Electric & Engineering Company from the list of valid comparable for determining the ALP of international transactions of sales made to its AE’s.

14. Before us, ld. CIT DR submits that the assessee has taken CPM method as Most Appropriate Method (“MAM”) for determination of ALP. The TPO has changed the selected TNMM as MAM and further included various other comparable companies for which the assessee has challenged the action before ld. CIT(A) who in terms of its order while deciding the Ground of appeal No.4 though, had confirmed TNMM as MAM however, excluded one company namely Techno Engineering Company Ltd. From the final set of valid comparable. As per ld. CIT DR while excluding this company, the ld. CIT(A) observed that the said comparable is involved in providing engineering procurement and construction services to various sectors like steel, fertilizers, metals etc. whereas the assessee is engaged in manufacturing and provision of services in the telecom sector which is totaling the different segment.

14.1. Ld. CIT DR submits that the TPO observed that this company has passed all the filters applied and functionally comparable as both are providing high quality engineering and engineering services to core and infrastructure sectors. Though under TNMM, only broader similarity is to be seen however, as observed above, both the assessee and M/s Techno Electric & Engg. Co. Ltd are working in totally different sectors and therefore in our considered view, ld. CIT(A) has rightly excluded this company from the final set of comparables after examining the functions carried out by it. Further before us, the Revenue has failed to controvert these findings given by ld. CIT(A), accordingly, we uphold the order of ld. CIT(A) of excluding this company from the final set of comparables.

15. The second company for which the Revenue has challenged its exclusion is M/s Keltron Component Complex Ltd. Before us, ld. CIT DR submits that ld. CIT(A) excluded the it being a Government company and therefore, cannot be a valid comparable. He submits that TPO has applied TNMM where broad comparable is to be seen and once it is accepted by both the parties that the this company is functionally similar, it cannot be excluded for the solitary reason that it is a Government company. He therefore, requested for the inclusion of the same in final set of comparables.

16. On the other hand, ld.AR submit that this company is a Government company and has better playing field as compared to the other company and therefore, has rightly been excluded from the final set of comparable and he prayed accordingly.

17. Heard the contentions of both the parties at length and perused the material on record. It is observed that TPO has included the said company has final set of comparable by observing as under:-

“M/s Keltron component complex ltd. is acceptable as comparable owing to the following reasons:-

•

Passes all the filters applied by the undersigned.

•

Functionally comparable to the assessee company as evident below:-

Keltron Component Complex Limited is a Government of Kerala undertaking promoted by Kerala State Electronics Development Corporation Ltd (KELTRON). The Company is located in the district of Kannur in Kerala. It commenced commercial production of Aluminium Electrolytic Capacitors in August 1978 in technical collaboration with M/s N.V Sprague Electromag, Belgium a subsidiary of the world famous Sprague Electric Company of USA. Keltron Component Complex Limited markets its products under the brand name “KELTRON” of its parent Company. It has a state of the art manufacturing facility with sophisticated automatic machines from Japan and Europe. It has the capability to produce all types of Aluminium Electrolytic Capacitors which conform to national and international standards. The manufacturing technology is constantly upgraded by R&D Centre of the Company which has the recognition of the Department of Scientific & Industrial Research, Ministry of Science & Technology, Govt. of India. The Company’s Quality system has been conferred with the ISO 9001 accreditation by M/s KPMG.

In view of the above discussion Keltron component complex ltd. shall be retained as a comparable.”

18. Claim of the assessee was that it is a Government company and thus, is not comparable at all. So first we have to see whether a company can be excluded merely it is a govt. company. Any govt. company enjoys benefits of exclusiveness, price preferences and since have cheap funding/grants are having distorts operating profit margins. As compared to this, the private companies purely worked on strict environment having competition and high cost funding therefore, they are having same field to operate that a govt. company enjoys, thus broadly the govt. company always be in the better position as compared to a private company.

19. Now coming to the issue whether under TNMM, only broader comparability is to seen. This method requires broad based comparability of the functionality of the comparables. So, in the case the company is functionally similar, it would not matter as to what kind of customer it serves as the broad range of services remain the same. The Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. v. CIT 377 ITR 533 (Delhi) held that while selecting the comparables transactions or entities, the basis should be one of similarity with the control transactions/entities and mere broad similarity is not sufficient. Following the aforesaid judgements of Hon’ble Delhi High Court, the Hon’ble Court in the case of Avenue Asia Advisors (P.) Ltd. v. Dy. CIT [2017] 398 ITR 120 (Delhi)/ITA No.350/2016 dated 18.09.2017 has further analyzed the said judgement and laid down certain principles. The relevant observations of the Hon’ble Court as contained in para 19 & 20 of the judgment are as under:-

Analysis of the decision in Rampgreen Solutions

19. “The first and the foremost issue that arises in this case is with respect to the applicability of tests laid down in Rampgreen Solutions (supra), which has rendered on 10th August, 2015. This decision has clearly laid down the various principles on the basis of which determination of comparables needs to be undertaken while fixing the ALP and the margin that needs to be assigned. This Court had specifically rejected the proposition that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables. This proposition having been rejected, the Court in Rampgreen Solutions (supra) held as under:

“43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm ‘s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis.

44. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. ”

20. A perusal of the above decision reveals that the following steps ought to be undertaken in identification of comparable transactions/entities.

The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.

Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity.

Rule 10B (2) of the Income Tax Rules, 1962 ought to be borne in mind while choosing the factors of comparability in respect of uncontrolled transactions.

Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted.

Wide deviation in the Profit Level Indicator (‘PLI’) would require further investigation/analysis.

For comparison of transactions, factors such as the nature of capital, resources used, the risks assumed, etc. ought to be considered.

Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient. “

20. In view of the above, it is now settled by the Hon’ble Jurisdictional High Court that though under TNMM method, there is sufficient tolerance, mere broad functionality is by itself insufficient. Thus, unless the product comparability is to be established, such comparable cannot be taken as a valid comparable. Coming to the facts of the present case, as is observed that M/s Keltron Component Complex Ltd. manufactures Aluminium Electrolytic Capacitors, which is completely different from the products manufactured by the assessee. The product mix is not comparable with the assessee company.

21. Therefore, it is not the case where solely on the grounds that the company is Government company, it is to be excluded but it is not even pass the product comparability test. Though we are holding so on different reasoning but the result remained the same that M/s Keltron Component Complex Ltd. cannot be included in the final set of comparables. We order accordingly. The grounds of appeal Nos. 1 & 2 of the revenue are thus dismissed.

22. Ground of appeal Nos. 3 & 4 raised by the Revenue are with respect to the direction of ld. CIT(A) that if the assessee has not charged interest from its AE’s as well as from non AE’s, no interest is to be taken in account. Ld.CIT DR vehemently supported the order of AO and submits that on delayed realization of receivables beyond the agreed credit policy, interest should have been charged and accordingly, he supported the order of the AO/TPO.

23. On the other hand, Ld.AR submits that no interest was charged on the delayed payment from AE’s and non-AE’s and further the assessee has already factored the margins in the price charged from its AE’s therefore, by placing reliance on the judgement of Hon’ble jurisdictional High Court in the case of Pr. CIT v. Kusum Health Care (P.) Ltd. [2017] 398 ITR 66 (Delhi), requested that ld. CIT(A) has rightly deleted the addition made towards interest on receivables and requested for the confirmation of the said order.

24. Heard the contentions of both the parties at length and perused the material on record. It is observed that identical issue was come for consideration before the Co-ordinate Bench in assessee’s own case for AY 2011-12 in Acme Cleantech Solutions Ltd. (supra), where the Co-ordinate Bench by following the decision of Hon’ble High Court in the case of Kusum Healthcare Pvt. Ltd. (supra) has deleted the addition so made towards ALP adjustment of interest on delayed payment of receivables from AE’s. Following the said order, in AY 2012-13 in Acme Cleantech Solutions (P.) Ltd. (supra) in the assessee’s own case vide order dated 22.05.2026, the addition made on this count was also deleted.

25. Since the facts are identical and Revenue has failed to controvert the findings of the ld. CIT(A) who has deleted the addition by following the order of Tribunal in preceding assessment years. Thus, by respectfully following the same observation as made in Acme Cleantech Solutions Ltd. (supra), we find no error in the order of ld. CIT(A) in holding that when there was no interest charged from the AEs and further prices has been factored therefore, no adjustment is required to be made on delayed payment of outstanding receivables from AE’s. Accordingly, Grounds of appeal Nos. 3 & 4 of the Revenue are dismissed.

26. Ground of appeal No.5 raised by the Revenue is with respect to the deletion of addition made u/s 14A of the Act.

27. Heard the contentions of both the parties at length and perused the material on record. At the outset, it is observed that ld. CIT(A) has deleted the addition by following the order of Hon’ble jurisdictional High Court in the case of Cheminvest Ltd. v. CIT-IV [2015] 378 ITR 33 (Delhi)/[2015] 94 CCH 0081 [Del. HC] wherein it is held that “if no exempt income is earned during the year, no disallowance could be made under 14A r.w. Rule 8D of the Income Tax Rules, 1962”. The observations of ld. CIT(A) as contained in para 5.19 to 5.20 are reproduced as under:-

5.19. “The issue under consideration is covered by the order of the Hon’ble Delhi High Court in the case of Cheminvest Ltd v. CIT in ITA No 749/2014 dated 02.09.2015 where it was held that no addition could be made by the AO when exempt income was not earned during the year. The Hon’ble court held as follows:-

“15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 144 of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Lid. v. CIT (2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue The first was the decision in Commissioner of Income Tax, Faridabad v. M’s. Lakhani Marketing Incl (decision dated 2 nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited (2010) 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-1 v. Corrtech Energy (P) Ltd. (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question “corresponding expenditure could not be worked out for disallowance.”

16. In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under:

“15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”

17. On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.

18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income. In light of the clear exposition of the law in Holcim India (P) Ltd. (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.

20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57 (iii) of the Act could be allowed as a deduction against dividend income assessable under the head “income from other sources”. Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression “incurred for making or earning such income”, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: “What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”

21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is for the purpose of making or earning such income”. Section 144 of the Act on the other hand contains the expression in relation to income which does not form part of the total income.” The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 144 of the Act.

22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (supra)was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14 A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.

23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 144 will not apply if no exempt income is received or receivable during the relevant previous year.”

5.20. In accordance with the principle of consistency & the doctrine of judicial discipline and respectfully following the order of the Hon’ble Delhi High Court in the case of Cheminvest Ltd v/s CIT (supra), the AO is directed to delete the disallowance made by him u/s 14Aof the Act.”

28. Admittedly, no exempt income in the shape of dividend was received in the year under appeal on the investments made by the assessee and therefore, by respectfully following the order of Hon’ble Jurisdictional High Court in the case of Chem Investment Ltd. (supra), we hold that the ld. CIT(A) has rightly deleted the addition which order is hereby, upheld. Accordingly, Ground of appeal No.5 raised by the Revenue is dismissed.

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

30. In the final result, both appeals i.e. appeal of the assessee in ITA No. 5194/Del/2019 and appeal of the Revenue in ITA No.5193/Del/2019 for Assessment Year 2013-14, both are dismissed.