9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2019 (8) TMI 554 - AT - Income TaxTP adjustment - allowability of interest on CCDs for a period before conversion - whether Compulsorily Convertible Debentures (CCDs) are debt or equity - whether interest on CCDs is an allowable expenditure and if allowable then the amount allowable is as per LIBOR or PLR? - HELD THAT - Objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. The TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Whether such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? - In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest expenditure on convertible debentures for the pre-conversion period. Hence we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in ASHIMA SYNTEX LIMITED. VERSUS ACIT. 2006 (3) TMI 188 - ITAT AHMEDABAD-B . Any definition of any term is to be considered keeping in mind the context in which such definition was given. This definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. If you ask a question as to whether dividend can be paid on such convertible debentures in a period before the date of conversion or whether such holders of convertible debentures can be granted voting rights at par with voting rights of share holders during pre-conversion period, the answer will be a big NO. On the same analogy, in our considered opinion, the answer of this question is also a big NO as to whether interest paid on convertible debentures for pre-conversion period can be said to be interest on equity and interest on debentures allowable u/s. 36(1)(iii). ALP of such interest on CCDs - We find that in the order of TPO and AO for the initial year i.e. A. Y. 2009 10, there is no discussion or decision on ALP aspect. Learned CIT (A) in that year has held in a very cryptic manner that 15% interest claimed by the assessee is not at arm s length because as per SBI Corporate Office Website, it is 12.25% on 01.01.2009 and 13.00% as on 10.11.2008. He directed the AO/TPO to rework the ALP at 12.62% which appears to be average of these two lower and upper rates of SBI PLR as noted. In later years, DRP has adopted ALP of interest at LIBOR plus but in those years also, TPO has not decided the ALP aspect. This is also a claim of the assessee that ALP of interest should be decided in A. Y. 2009 10 only being the initial year in which CCDs were issued. There is no decision of any of the lower authorities in any year. Considering all these facts, we feel it proper to restore the ALP aspect to AO/TPO in all of these years for a decision as per law after providing adequate opportunity of being heard to the assessee. We do not make any comment on this issue.
Issues Involved:
1. Whether Compulsorily Convertible Debentures (CCDs) are debt or equity. 2. Whether interest on CCDs is an allowable expenditure. 3. Determination of the appropriate interest rate for CCDs (LIBOR vs. PLR). 4. Applicability of Thin Capitalisation Principle. 5. Validity of Transfer Pricing Officer's (TPO) rejection of comparability analysis. Issue-wise Detailed Analysis: 1. Whether CCDs are Debt or Equity: The primary issue was whether CCDs should be classified as debt or equity. The TPO argued that CCDs are equity based on the Reserve Bank of India (RBI) policy which treats fully and mandatorily convertible instruments as equity under the Foreign Direct Investment (FDI) policy. The TPO further contended that the financial position of the assessee was such that no third party would invest in the debts of the company, indicating thin capitalization. However, the tribunal held that for the purpose of Section 36(1)(iii) of the Income Tax Act, CCDs should be considered as debt until their conversion into equity. The tribunal noted that the RBI's classification for FDI policy does not alter the nature of CCDs for tax purposes before conversion. Therefore, CCDs were treated as debt, and interest on them was considered allowable. 2. Whether Interest on CCDs is an Allowable Expenditure: The tribunal held that interest on CCDs is an allowable expenditure under Section 36(1)(iii) of the Income Tax Act. The TPO's argument that interest on CCDs should not be allowed as CCDs are equity was rejected. The tribunal emphasized that until conversion, CCDs retain their character as debt, and therefore, interest paid on them is deductible. 3. Determination of the Appropriate Interest Rate for CCDs (LIBOR vs. PLR): The CIT(A) and DRP had different views on the appropriate interest rate. The CIT(A) suggested using the Prime Lending Rate (PLR) of Indian Public Sector Banks, averaging it to 12.62%. The DRP, however, recommended using the London Interbank Offered Rate (LIBOR) plus an additional 1% for risk adjustment. The tribunal did not make a final decision on this matter and remanded the issue back to the AO/TPO for a fresh determination of the arm's length price (ALP) of interest on CCDs, considering whether it should be benchmarked in the year of issue or annually, and whether to use LIBOR or PLR. 4. Applicability of Thin Capitalisation Principle: The TPO applied the Thin Capitalisation Principle, arguing that the company's debt-equity ratio was excessively high, indicating that the funds should be treated as equity. However, the tribunal referred to the Mumbai ITAT's decision in the case of Besix Kier Dabhol, SA vs. DDIT, which held that in the absence of specific thin capitalization rules in India, recharacterizing debt as equity is not permissible. The tribunal upheld this view, stating that the TPO's reliance on foreign thin capitalization rules was not applicable in the Indian context. 5. Validity of TPO's Rejection of Comparability Analysis: The TPO rejected the comparability analysis undertaken by the assessee, arguing that the comparables were for different periods and involved non-convertible debentures. The tribunal found that while the TPO was correct in rejecting the comparables, the TPO failed to undertake the exercise of determining the ALP of the interest on CCDs using the CUP method or any other prescribed method. The tribunal directed the AO/TPO to re-examine the ALP of interest on CCDs afresh, considering all relevant factors. Conclusion: The tribunal concluded that CCDs should be treated as debt until conversion, and interest on them is allowable as an expenditure. The tribunal remanded the issue of determining the ALP of interest on CCDs back to the AO/TPO for fresh consideration. The tribunal also held that the Thin Capitalisation Principle could not be applied in the absence of specific rules in India and dismissed the TPO's recharacterization of CCDs as equity. The tribunal directed the AO/TPO to rework the ALP of interest on CCDs, considering whether to use LIBOR or PLR and whether to benchmark it annually or in the year of issue.
|
