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2017 (1) TMI 893 - AT - Income TaxTreatment to issuance of CCDs as a loan - TPA - considering LIBOR as benchmark rate - Held that - There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. Thus 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. 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 re-examination, when assessee has justified the issuance of CCDs at 12%. In view of that 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. - Decided in favour of assessee
Issues:
Transfer Pricing adjustments on Compulsorily Convertible Debentures (CCDs) issued in Indian currency. Detailed Analysis: Issue 1: Transfer Pricing Adjustments The Assessing Officer (AO) and Transfer Pricing Officer (TPO) made Transfer Pricing adjustments on the CCDs issued in Indian currency. The AO considered the CCDs as a loan and benchmarked the interest rate at LIBOR plus 200 basis points, resulting in a significant adjustment. The Assessee argued that the interest paid was consistent with arm’s length standard based on the State Bank of India's Prime Lending Rate (PLR). However, the TPO disagreed with the Assessee's contentions, leading to a substantial adjustment. Issue 2: Appeal and Objections The Assessee appealed the AO's order before the CIT(A) and raised objections before the Dispute Resolution Panel (DRP). Despite the DRP accepting the objections, it upheld the Transfer Pricing adjustments made by the TPO. The Assessee contended that the assessment order was invalid due to a mistake in issuing a notice under section 156. The DRP rejected this argument, stating that the order was a draft assessment order. The Assessee raised multiple grounds challenging the TP adjustments and the validity of the assessment order. Issue 3: Categorization of CCDs The Assessee argued that the CCDs issued were wrongly categorized as a loan by the TPO. Referring to legal precedents and FDI policies, the Assessee contended that CCDs should be considered as ‘capital instruments’ or ‘hybrid instruments’ and not as loans. The TPO's re-characterization of CCDs as loans was deemed incorrect, and the bench agreed with the Assessee's position based on relevant judicial precedents and regulatory guidelines. Issue 4: Benchmarking and Interest Rate The bench analyzed the benchmarking of interest rates on CCDs and concluded that the TPO erred in considering LIBOR as the benchmark rate. Given that the CCDs were issued in Indian Rupees, the bench held that the benchmark rate should align with Indian currency standards. The bench supported the Assessee's argument that the interest rate should be based on the currency in which the loan originated, citing relevant legal decisions and industry practices. Issue 5: Decision and Outcome After considering all arguments and legal precedents, the bench ruled in favor of the Assessee. It held that the CCDs should not be treated as loans and that the benchmarking should align with Indian currency standards. The bench deleted the TP adjustments made by the TPO, as the interest rates on the CCDs were deemed to be within an acceptable range. The bench partially allowed the Assessee's appeal and rejected the initiation of penalty proceedings under section 271(1)(c). This detailed analysis highlights the key legal issues, arguments presented, and the final decision rendered by the bench regarding the Transfer Pricing adjustments on CCDs issued in Indian currency.
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