2023 (6) TMI 24 - AT - Income Tax

TP adjustment - assessee has made a payment as interest on CCD @ 15% - Assessee has benchmarked the interest rate using LPC Loan Connector Blumberg Bond and Bombay Stock Exchange, the mean interest of which was arrived at 14.56% - TPO held the CCD to be not a debt but in the nature of equity capital. Accordingly the TPO arrived at the ALP as NIL using CUP as the most appropriate method which resulted in the TP adjustment of entire payment of interest made by the assessee - HELD THAT - Tribunal in earlier years i.e., AYs 2009-10 to 2013-14 2019 (8) TMI 554 - ITAT BANGALORE has held that until the date of conversion, the interest paid on CCD cannot be treated as interest on equity and that interest paid on debentures are allowable as expenditure u/s. 36(1)(iii). Determination of ALP, AR brought to our attention the order giving effect passed by the DCIT, TP 1(1)(2), Bangalore for AY 2010-11 dated 24.12.2020 pursuant to the directions of the Tribunal where the TPO has applied the SBI PLR for the purpose of determining the ALP of the interest rate. We remit the issue back to the TPO with a direction to apply appropriate SBI PLR rate to determine the ALP of the interest on CCD. Set off of brought forward business loss and unabsorbed depreciation - We in this regard issue direction to the AO to consider the brought forward losses and unabsorbed depreciation and allow the set off in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing Adjustment regarding payment of interest on Compulsorily Convertible Debentures (CCDs).
2. Set off of brought forward business loss and unabsorbed depreciation.
3. Levy of interest under Section 234B.

Summary:

1. Transfer Pricing Adjustment regarding payment of interest on CCDs (Ground 2):
The TPO proposed an adjustment of Rs.7,41,69,020 by recharacterizing the CCDs as equity and treating the Arm's Length Price (ALP) of the interest payment as NIL. The DRP upheld this adjustment. The Tribunal referred to its earlier decisions in the assessee's own case for AYs 2009-10 to 2013-14, stating that until the date of conversion, the interest paid on CCDs cannot be treated as interest on equity and is allowable as expenditure under Section 36(1)(iii). Regarding the determination of ALP, the Tribunal remitted the issue back to the TPO with directions to apply the appropriate SBI PLR rate to determine the ALP of the interest on CCDs, ensuring the assessee is given an opportunity of being heard.

2. Set off of brought forward business loss and unabsorbed depreciation (Ground 3):
The Tribunal directed the AO to consider the brought forward losses and unabsorbed depreciation and allow the set off in accordance with the law.

3. Levy of interest under Section 234B (Ground 4):
This ground was deemed consequential and did not warrant separate adjudication.

Conclusion:
The appeal of the assessee was allowed, with specific directions provided for the determination of ALP for interest on CCDs and the set off of brought forward business loss and unabsorbed depreciation. The judgment was pronounced on 17th March 2023.