2024 (10) TMI 1625 - AT - Income Tax

TP adjustment - alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV - assessee submitted that CCDs cannot be equated with call option - HELD THAT - We find that the assessee issued CCDs to the AE through the CCD subscription agreement dated 30/12/2019. The CCDs Cannot be equated with call options. The assessee did not enter into the sale of any call option to its AE. Thus, the question of receiving any option premium does not arise. CCDs were issued in accordance with the terms of CCDs subscription agreement dated 30/12/2019 and the same was not a contract for sale for any call option . The revenue was not able to show any income element in the deal as issuance of CCDs which is a capital account transaction and not giving rise to any income. As settled proposition that transfer pricing provisions are not charging provisions and in absence of income chargeable to tax under any charging provisions of the Act, transfer pricing provision cannot be invoked. We respectfully relied on the order of Vodafone India Services Pvt Ltd 2014 (10) TMI 278 - BOMBAY HIGH COURT held that in the absence of any income in nature of notional or otherwise in the nature of options premium, transfer pricing adjustment cannot be made. Even income arising from international transaction between AE must satisfy the test of income under the Act and must find its home in chapter X on charging provision. DR was unable to show any revenue generating from these transactions. The calculation of ALP amounted to Rs. 33,88,000/- by the direction of the DRP on account of alleged option premium is unjustified and liable to be deleted. TP Adjustment on account of purchase of business from HIIPL - AR argued on non-applicability of section 56(2)(x) of the Act on purchase / receipt of business under taking - The section 56(2)(x) can apply only to transaction of property as defined in that section, but the property is never included with business undertaking . the acquisition of Huntsman group s global business was between two unrelated parties, so section 56(2)(x) is not applicable related to slump sale and accordingly is directed to be deleted. Adjustment on account of interest on CCDs paid to INBV - AR submitted that CCDs are debt instruments until conversion - CCDs are utilized for the purpose of business for payment of purchase consideration for acquisition of business undertaking from HIIPL as an ongoing concern on a slump sale basis and entire transaction is guided by the CCDs subscription agreement. Further, it is placed that the RBI took on record related to issue AE under automatic approval route of RBI. The assessee Suo-motu disallowed an amount out of total interest paid in accordance with thin capitalization rule u/s 94B of the Act during filing the return of income. We find that there is no wrong in the submission of the Ld.AR. We respectfully follow the order of CAE Flight Training India Pvt Ltd 2023 (6) TMI 24 - ITAT BANGALORE wherein the coordinate bench of ITAT has explicitly rejected reliance on that RBI policy / FEMA guidelines adopted by the revenue for recharacterizing CCDs as equity for tax purposes. DR has not rebutted the submission of the AR by submitting any contrary judgment. Addition was made on account of the company following adjustments are duly set aside and liable to be quashed. In our considered view, the grounds of the assessee are succeeded.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Validity of the Final Assessment Order passed by the Learned Assessment Unit (Ld. AO) under the Income-tax Act, 1961.
• Transfer pricing adjustment regarding the alleged sale of an embedded call option and its characterization as an international transaction.
• Transfer pricing adjustment related to the purchase of a business from Huntsman International (India) Private Limited (HIIPL) and its classification as a deemed international transaction.
• Adjustment concerning interest on Compulsorily Convertible Debentures (CCDs) paid to Indorama Netherlands B.V. and its treatment under the arm's length principle.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the Final Assessment Order

• Relevant Legal Framework and Precedents: The issue revolves around the jurisdiction and timing of the assessment order under sections 143(3), 144C(13), and 144B of the Income-tax Act, 1961.
• Court's Interpretation and Reasoning: The court dismissed the ground as it was not pressed by the assessee.
• Conclusion: The challenge to the validity of the assessment order was dismissed.

Issue 2: Transfer Pricing Adjustment on Embedded Call Option

• Relevant Legal Framework and Precedents: The adjustment was made under the transfer pricing provisions, focusing on the characterization of CCDs as a call option.
• Court's Interpretation and Reasoning: The court determined that CCDs cannot be equated with call options. The issuance of CCDs was a capital account transaction not giving rise to income, and thus, transfer pricing provisions were not applicable.
• Key Evidence and Findings: The CCDs were issued under a subscription agreement, and no call option was sold to the associated enterprise.
• Application of Law to Facts: The court found no income element in the transaction, thus negating the transfer pricing adjustment.
• Conclusion: The adjustment of INR 38,88,00,000/- was unjustified and deleted.

Issue 3: Transfer Pricing Adjustment on Business Purchase from HIIPL

• Relevant Legal Framework and Precedents: The adjustment was based on the application of section 56(2)(x) of the Act, concerning the purchase price of a business undertaking.
• Court's Interpretation and Reasoning: The court held that section 56(2)(x) applies only to 'property' and does not include 'business undertaking.' The acquisition was between unrelated parties, making the section inapplicable.
• Key Evidence and Findings: The business was purchased based on EBITDA valuation, a common method in mergers and acquisitions.
• Conclusion: The adjustment of INR 16,78,40,626/- was deleted.

Issue 4: Adjustment on Interest on CCDs

• Relevant Legal Framework and Precedents: The issue involved the characterization of CCDs as debt or equity and the applicability of section 36(1)(iii) for interest deduction.
• Court's Interpretation and Reasoning: The court held that CCDs remain debt instruments until conversion and interest paid is deductible under section 36(1)(iii).
• Key Evidence and Findings: The court relied on precedents affirming that CCDs are debt until converted and the interest was paid for business purposes.
• Conclusion: The adjustment of INR 1,91,34,247/- was quashed.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: Transfer pricing provisions cannot be applied in the absence of income chargeable under the Act. CCDs are debt instruments until conversion, and interest is deductible under section 36(1)(iii).
• Final Determinations on Each Issue: The court allowed the appeal, deleting all adjustments made by the revenue authorities.
• Verbatim Quotes of Crucial Legal Reasoning: "The CCDs Cannot be equated with call options... transfer pricing provisions are not charging provisions and in absence of 'income' chargeable to tax under any charging provisions of the Act, transfer pricing provision cannot be invoked."