#notional interest

ITAT Delhi rules that interest-free advances to wholly owned subsidiaries are justified under commercial expediency, rejecting Revenue's notional interest addition. The tribunal also deleted ad-hoc disallowances, emphasizing documentary evidence over presumptive additions, reinforcing tax treatment of intra-group transactions.

The ITAT Delhi has ruled that tax authorities cannot impute notional interest on loans extended by a company to its subsidiaries if those loans are financed entirely from the company’s own interest-free surplus funds. This clarifies that Section 36(1)(iii) applies only to interest on borrowed capital, not internal fund allocation - a critical relief for corporate groups with strong internal liquidity.

ITAT Ahmedabad rules that once working capital adjustment is granted under the Transactional Net Margin Method (TNMM), imputing additional notional interest on delayed receivables constitutes double adjustment and is legally unsustainable. The decision reinforces that receivables are integral to primary transactions and cannot be re-characterized as loan financing for tax purposes.

ITAT Bangalore ruled that delayed trade receivables from associated enterprises constitute an international transaction under Section 92B, warranting notional interest adjustment. However, it reduced the applicable rate from LIBOR+450 to LIBOR+200 basis points, setting a precedent for transfer pricing disputes involving deferred payments.

ITAT Delhi rules that notional interest recognized under IND AS cannot be taxed as income under Section 56 of the Income Tax Act. The tribunal also mandates acceptance of documentary evidence reconciling GST and P&L discrepancies if verified by the Assessing Officer, reinforcing the primacy of accounting standards over tax disputes.