2019 (6) TMI 1536 - AT - Income Tax

TP adjustment - arm s-length price of the interest paid by the assessee - argument of the ld AR that interest on FCCD issued in only industry similar to the assessee must be taken for benchmarking - HELD THAT - We set aside the whole issue back to the file of the learned transfer pricing officer with a direction to re-determine the arm s-length price of interest payment on fully compulsorily convertible debentures issued by the assessee with a comparable product such as credit rating size timing etc. - assessee is also directed to advance all the arguments which it would like to place before him along with any additional evidences. TPO will also examine the whole issue with respect to whether fully compulsorily convertible debentures are comparable with simple debentures or are required to be benchmarked differently. According to us FCCD (Fully compulsorily convertible debenture ) is not a traditional debt but a complex financial instrument wherein the final repayment is through the issuance of common equity to investors ( which has a high value than the amount of loan also and vice versa) based on fixed conversion rate (or in a band). It is a mix of debt and equity features. There is a dominance of the equity feature in FCCDs with some entirely classifying it as an equity instrument. However true characterization and quantification of Debt/Equity feature in FCCDs would depend on the deeper analysis of its substance over form. Therefore comparing the interest payment on FCCD with bond interest rates is fallacious. AR relied upon the safe of the rules issued by the Ministry of Finance central board of direct taxes by notification number 07/06/2017 that applies only to the transaction of loan. In the present case it is the mixed transaction of loan as well as of equity and therefore the safe harbour rule does not apply as they do not deal with such instrument. Assessee as well as the ld TPO should look in to this aspect. Ground number 1 4 allowed for statistical purposes. Notional interest income - Accrual of interest income - Addition to the total income of the assessee on account of inter corporate loan given by the appellant to its related party - HELD THAT - In the present case it is evident that assessee has written off the principal itself subsequently. Resolution is also produced to the effect that assessee has not recorded interest income. Generally Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability the income is not hypothetical and it has really accrued to the assessee. Accrual of income is based on the facts of the case. Therefore merely relying on judicial precedents it cannot be held that whether a particular income has accrued to the assessee or not. Even otherwise in the present case it cannot be said there is no liability on the other party to pay the interest because it is for the loan accepted by that party and bound by the agreement to pay the interest. Naturally Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the Income is not hypothetical and it has really accrued to the assessee. We set aside the whole issue back to the file of the learned assessing officer with a direction to the assessee to show before the learned assessing officer that how the interest has not accrued to the assessee for assessment year 2014 15 and also to show the various correspondence between the lender and the borrower to substantiate the case that interest income was waived before it accrued to the assessee. - Ground 5 allowed for statistical purposes. Credit of minimum alternate tax under section 115JAA - HELD THAT - AO is directed to examine the claim of the assessee and if it is found in accordance with the law to grant credit of MAT of the above sum after proper verification. Accordingly ground number 6 of the appeal is allowed.

Issues Involved:
1. Validity of the directions issued by the Dispute Resolution Panel (DRP).
2. Transfer pricing adjustment on interest payment on Fully and Compulsorily Convertible Debentures (FCCDs).
3. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
4. Addition of notional interest income on inter-corporate loan.
5. Credit of Minimum Alternate Tax (MAT) under Section 115JAA.
6. Charging of interest under Section 234B.
7. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Validity of the Directions Issued by the DRP:
The assessee contended that the DRP erred in issuing directions for further enquiry by the Assessing Officer (AO) and Transfer Pricing Officer (TPO), rendering the final assessment order void ab initio. The assessee also argued that the principles of natural justice were violated as necessary data was not provided before the final assessment order was issued.

2. Transfer Pricing Adjustment on Interest Payment on FCCDs:
The TPO examined the international transaction of the assessee, which involved interest payment on FCCDs issued to an associated enterprise. The TPO used the Comparable Uncontrolled Price (CUP) method and found that the arm's-length price of the interest rate should be 9.65%, whereas the assessee had paid 15%. Consequently, an adjustment of INR 3,46,82,874 was made. The assessee argued that the TPO ignored critical filters and comparable data, and that the interest rate should be benchmarked considering the spread and safe harbour rules. The Tribunal set aside the issue to the TPO to re-determine the arm's-length price, considering the nature of FCCDs as complex financial instruments with both debt and equity features.

3. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed interest of INR 1,92,60,000, reasoning that the assessee had borrowed funds at 15% interest and given interest-free loans to its associate company, which was not for business purposes. The DRP upheld this disallowance but directed the AO to verify the rate of interest charged in the previous year and apply the same rate for disallowance. The Tribunal directed the AO to re-examine the issue, considering the commercial expediency and business purpose of the loan.

4. Addition of Notional Interest Income on Inter-Corporate Loan:
The AO added notional interest income of INR 3,84,13,000 on the loan given to Red Fort Akbar Properties Pvt Ltd, arguing that the interest had accrued but was not accounted for. The assessee contended that the interest was waived due to the borrower's liquidity issues and that tax should be imposed only on real income. The Tribunal set aside the issue to the AO to verify whether the interest was waived before it accrued and to examine the financial condition of the borrower.

5. Credit of Minimum Alternate Tax (MAT) under Section 115JAA:
The AO was directed to examine the assessee's claim for MAT credit of INR 26,76,031 and grant it if found in accordance with the law.

6. Charging of Interest under Section 234B:
This issue was deemed consequential and was dismissed.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
This issue was considered premature and was dismissed.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for re-examination and verification of several issues by the AO and TPO. The stay application became infructuous and was dismissed.

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