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2020 (12) TMI 747 - AT - Income TaxRecharacterization of the transaction of debt into equity - Treatment of Optionally and Compulsory Convertible Debentures issued by the assessee-company as Equity Share Capital - reversal by the ld. CIT(A) of the view of the AO/TPO in treating the transactions of issue of OCDs and CCDs into Equity capital - HELD THAT - There is no difference in the form and substance of the transaction. The amount was raised through debentures, reflected in the same way in its accounts and then such debentures also got redeemed by the assessee company. The position would have been different, if the assessee had taken the amount as equity but reflected it only as a debenture and also eventually converted into equity after some time. All the cases relied by the Department fall in such category where the amounts were, in fact, taken as equity but not declared as such and the intention behind the apparent transaction got unearthed due to surrounding circumstances. On the other hand, we are confronted with a situation in which the assessee was in need of funding for its ongoing projects. It took loan through debentures, which were eventually redeemed. So the instant case falls in the general provision of accepting the transaction as such and not in the exception requiring recharacterization of the transaction of debt into equity. De hors the provisions of section 94B and the GAAR in the period anterior to their applicability, the obiter in the case of EKL Appliances 1979 (10) TMI 22 - MADRAS HIGH COURT also supports the view canvassed by the ld. CIT(A) in not approving the recharacterization of the transaction of debt into equity. Thus, the first issue raised by the Revenue in its appeal is determined against it. Arm s length rate for determining the ALP of the International/Specified Domestic transactions of payment of interest - HELD THAT - On examination of the assessee s Balance sheet for the year under consideration, it emerges that the amount payable to IDBI bank stands at Nil. This shows that the interest rate paid by the assessee to IDBI Bank that was considered as an internal comparable under the CUP method for the earlier year, is no more relevant for the year under consideration. The exercise of ALP determination has to be undertaken each year separately by considering the facts and circumstances that are relevant and germane to the issue for that particular year. Given the fact that the basis for the determination of arm s length rate of interest for the preceding year 2011-12 does not survive and the ld. AR could not point out the rate of interest at which the assessee made borrowings from bank in the year under consideration, we are satisfied that it would be appropriate if the impugned order on this score is set-aside and the matter is restored to the file of AO. We order accordingly and direct the AO/TPO to find out the rate at which interest was paid by the assessee to its bank in the year under consideration and then apply the same as arm s length rate for determining the ALP of the International/Specified Domestic transactions of payment of interest. Disallowance u/s.40(a)(ii) - Education cess and secondary and higher education cess - HELD THAT - Answering the question posed before it in affirmative, their Lordships held that on the facts found by the authorities below, if a question of law arises (though not raised before the authorities) which has bearing on the tax liability of the assessee, the Tribunal has jurisdiction to examine the same. Having gone through the subject matter of the additional ground taken by the assessee, it is discernible that the additional ground raises a pure question of law. We, therefore, admit the additional ground and espouse it for disposal on merits. We find that the issue raised through the additional ground is no more res integra in view of the judgment of Hon ble jurisdictional High Court in Sesa Goa Lt. Vs. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT and CHAMBAL FERTILISERS AND CHEMICALS LTD., PR. COMMISSIONER OF INCOME TAX, KOTA 2018 (10) TMI 589 - RAJASTHAN HIGH COURT in which it has been held that Education Cess is not disallowable expenditure u/s.40(a)(ii). Also see - As correctness of the amount has not been disputed by the ld. DR, we direct to allow deduction for such an amount.
Issues Involved:
1. Recharacterization of debentures as equity share capital. 2. Benchmarking of the interest rate on debentures. 3. Deduction of education cess and secondary and higher education cess. Issue-wise Detailed Analysis: 1. Recharacterization of Debentures as Equity Share Capital: The primary issue raised by the Revenue was the CIT(A)'s reversal of the AO/TPO's decision to treat Optionally and Compulsory Convertible Debentures (OCDs/CCDs) issued by the assessee-company as equity share capital. The assessee, engaged in real estate development, issued debentures to its joint venture partners for funding ongoing projects. The TPO argued that these debentures were in the nature of equity and thus recharacterized the transactions, determining a Nil ALP for the interest payments, resulting in a transfer pricing adjustment of ?6,32,68,595/-. The CIT(A) disagreed, relying on various judgments, and determined the ALP of the transactions at 13.75% instead of Nil, restricting the adjustment to 1.25% of the transaction value. The Tribunal upheld the CIT(A)'s decision, noting that the debentures were eventually redeemed and not converted into equity, and that the TPO could not recharacterize the transactions in the absence of specific provisions under the Act at the relevant time. The Tribunal emphasized that borrowing and raising equity share capital are recognized modes of funding, and the TPO's reliance on thin capitalization and GAAR rules was misplaced as these provisions were not applicable during the assessment year 2013-14. 2. Benchmarking of the Interest Rate on Debentures: The second issue involved the determination of the ALP for the interest rate on the debentures. The assessee paid interest at 15% on the debentures, which the TPO/AO determined as Nil. The CIT(A) benchmarked the interest rate at 13.75% based on the interest paid by the assessee to its banker. The Tribunal agreed with the CIT(A) in principle but noted that the interest rate paid to the bank during the relevant year was not available. Consequently, the Tribunal set aside the CIT(A)'s order on this point and remanded the matter to the AO/TPO to determine the arm's length rate of interest based on the rate paid by the assessee to its bank during the year under consideration. 3. Deduction of Education Cess and Secondary and Higher Education Cess: The assessee raised an additional ground seeking the deduction of education cess and secondary and higher education cess amounting to ?18,97,751/-. The Tribunal admitted this additional ground, citing the Supreme Court's decision in National Thermal Power Company Ltd. Vs. CIT, which allows raising new grounds before the Tribunal if they have a bearing on the tax liability. The Tribunal referred to the jurisdictional High Court's judgment in Sesa Goa Ltd. Vs. JCIT, which held that education cess is not disallowable under section 40(a)(ii) of the Act. Therefore, the Tribunal directed the deduction of the education cess. Conclusion: The Tribunal upheld the CIT(A)'s decision on the recharacterization of debentures and remanded the matter of benchmarking the interest rate to the AO/TPO for fresh determination. Additionally, the Tribunal allowed the deduction of education cess, aligning with the jurisdictional High Court's ruling. The appeals of both the assessee and the Revenue were partly allowed for statistical purposes.
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