2018 (1) TMI 1604 - AT - Income Tax

TP Adjustment - rate of interest on CCDs - whether it is to be calculated under PLR as claimed by the assessee or at LIBOR as computed by the TPO/DRP - HELD THAT - As decided in Adama India Pvt. Ltd 2017 (1) TMI 893 - ITAT HYDERABAD we agree with the assessee's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case. Coming to the issue of adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, but also from the data from NSDL website in which average coupon rate ranged from 0.50% to 16.50% with an arithmetic mean of 12.50%. These rates were already before the TPO. Therefore, we are of the opinion that there is no need to restore the matter to the file of the AO for reexamination, when assessee has justified the issuance of CCDs at 12%. We are of the opinion that the rate at which the CCDs were given are within the range, therefore, no further addition can be considered under the TP provisions. In view of that, the addition so made is deleted and grounds of the assessee.

Summary

Issues:
1. Transfer pricing adjustment on interest payments on Fully Compulsory Convertible Debentures (FCCDs).
2. Recharacterization of FCCDs as foreign loans for benchmarking international transactions.
3. Determination of arm's length price (ALP) for interest on FCCDs.
4. Application of PLR vs. LIBOR for benchmarking interest rates.
5. Levying of interest under sections 234B and 234D of the Income-tax Act.

Analysis:
1. The appeal concerned the transfer pricing adjustment on interest payments related to FCCDs. The assessee contested the assessment order under sections 143(3), 144C(5), and 144C(13) of the Income-tax Act, 1961. The primary grievance was the excessive transfer pricing addition of INR 14,66,09,696. The appellant argued against recharacterizing FCCDs as foreign loans for benchmarking interest payments, which was upheld by the Dispute Resolution Panel (DRP).
2. The issue of recharacterizing FCCDs as foreign loans was central to the dispute. The Tribunal referenced a similar case involving Adama India Pvt. Ltd, where it was established that CCDs are hybrid instruments categorized as equity, not loans. The Tribunal emphasized that FCCDs were issued in Indian Rupees and should not be treated as external commercial borrowings. The Tribunal also noted that LIBOR should not be used as a benchmark rate, supporting the assessee's argument.
3. The determination of the arm's length price for interest on FCCDs was a key aspect of the appeal. The Tribunal highlighted that the issuance of FCCDs in Indian Rupees and the justification of ALP based on SBI PLR and NSDL data supported the assessee's position. The Tribunal agreed that the CCDs should not be categorized as loans and that the interest rates were within an acceptable range, leading to the deletion of the addition under transfer pricing provisions.
4. The debate between using PLR or LIBOR for benchmarking interest rates was a significant contention. The Tribunal favored the assessee's argument, citing precedents and the specific nature of FCCDs issued in Indian Rupees. The Tribunal agreed that LIBOR plus 200 basis points was not an appropriate benchmark, supporting the use of SBI PLR and NSDL data for determining ALP.
5. Lastly, the issue of levying interest under sections 234B and 234D of the Income-tax Act was raised. The Tribunal did not delve deeply into this matter as the primary focus was on transfer pricing adjustments related to FCCDs. The appeal was allowed in favor of the assessee based on the precedents and arguments presented regarding the recharacterization of FCCDs and the determination of ALP for interest payments.