2022 (9) TMI 1661 - AT - Income Tax

TP Adjustment - interest payable on fully convertible debentures of the assessee - benchmarking the interest rate in international transactions - assessee has benchmarked the interest on the debentures at a coupon rate of 17.75% based on prime lending rate of the SBI prevailing on the board meeting date at which the fully convertible debentures were issued at 3% per annum. HELD THAT - As benchmarking of interest to be paid or payable of FCCDs before its conversion to equity. As mentioned elsewhere in the order there would be no occasion for the assessee to repay the loan to it s A.E (on account of the nature of FCCD) therefore the currency in which loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. As we have already mentioned that as per the assessee FCCDs are debt in nature till its conversion into equity. Therefore there is no recharacterization of the transaction by the TPO / Assessing Officer. Further the TPO/Assessing Officer cannot act as a silent spectator and accept the nature of transaction as claimed by the assessee though there were contradiction on the characterisation by assessee with that of terms and conditions of issuance of the instrument. The economic substance of the document is different than what had been claimed by the assessee. As per the assessee the FCCDs are debt till it is converted into equity. Hence there is no recharacterization by the AO/TPO. Assuming the case of the assessee that FCCDs are equity then we must look into the substance over the form of the instrument which can be ascertained by looking into its terms and conditions of allotment. As discussed hereinabove the terms and conditions clearly show that the FCCDs are debt till its conversion. Yet another reason to above conclusion is that there is no recharacterization of the instrument by the Assessing Officer as there is no concept of paying the interest on the equity by the company to its holder under the Companies Act or under Income Tax Act or under the Accounting standards. The reliance of the assessee on the RBI policy for the non- convertible debenture is not relevant. In view of the above we do not find any substance in the argument of the assessee that the Assessing Officer has recharacterized the nature of transaction. See Maanaveeya Development Finance P. Ltd. 2021 (12) TMI 1440 - ITAT HYDERABAD Accordingly we hold that FCCDs are debt therefore the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points which is in consonance with the RBI guidelines issued for the purposes of FDI. Decided against assessee.

2025 (4) TMI 83 - AT

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the Fully Compulsory Convertible Debentures (FCCDs) issued by the assessee should be treated as equity or debt for the purpose of benchmarking the interest rate in international transactions.
Whether the interest rate on FCCDs should be benchmarked using the LIBOR plus 200 basis points or the State Bank of India (SBI) Prime Lending Rate plus 300 basis points.
Whether the Transfer Pricing Officer (TPO) and Assessing Officer (AO) were correct in recharacterizing the FCCDs as loans for the purpose of transfer pricing adjustments.
Whether the assessee's argument that the interest should be benchmarked based on the currency in which the loan is denominated (INR) rather than using LIBOR is valid.
Whether the principle of res judicata applies given previous decisions on similar transactions for the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature of FCCDs as Debt or Equity

Relevant Legal Framework and Precedents: The court considered the RBI guidelines, which categorize CCDs as loans until conversion into equity. The Tribunal also referenced several judicial precedents, including decisions from the ITAT and High Courts, which have treated similar instruments as debt.
Court's Interpretation and Reasoning: The Tribunal held that FCCDs are in the nature of debt until they are converted into equity. This interpretation was based on the terms of issuance, financial statements, and the nature of the instrument as acknowledged by both the assessee and its associated enterprise.
Key Evidence and Findings: The financial statements of both the assessee and its associated enterprise categorized the FCCDs as loans. The terms of issuance indicated that FCCDs would be converted into equity after a specified period, reinforcing their initial characterization as debt.
Application of Law to Facts: The Tribunal applied the legal framework to conclude that the FCCDs should be treated as debt instruments, which justified the benchmarking of interest using LIBOR plus 200 basis points.
Treatment of Competing Arguments: The assessee's argument that FCCDs should be treated as equity due to their eventual conversion was rejected. The Tribunal emphasized that interest on equity is not an allowable expenditure under the Income Tax Act.
Conclusions: The Tribunal concluded that FCCDs are debt instruments until conversion and should be treated as such for benchmarking purposes.

Issue 2: Benchmarking Interest Rate

Relevant Legal Framework and Precedents: The Tribunal relied on precedents where LIBOR was accepted as an appropriate benchmark for international transactions involving loans.
Court's Interpretation and Reasoning: The Tribunal found that the use of LIBOR plus 200 basis points was appropriate given the international nature of the transaction and the characterization of FCCDs as debt.
Key Evidence and Findings: The TPO's analysis showed that using LIBOR plus 200 basis points was consistent with international practices and previous judicial decisions.
Application of Law to Facts: The Tribunal applied the LIBOR benchmark, rejecting the assessee's argument to use the SBI Prime Lending Rate, as the transaction was international in nature.
Treatment of Competing Arguments: The Tribunal rejected the assessee's argument that the interest rate should be based on the INR denomination of the FCCDs, citing that the international nature of the transaction warranted the use of LIBOR.
Conclusions: The Tribunal upheld the use of LIBOR plus 200 basis points for benchmarking the interest rate on FCCDs.

Issue 3: Recharacterization of FCCDs

Relevant Legal Framework and Precedents: The Tribunal considered the guidelines discouraging recharacterization of legitimate business transactions unless the economic substance differs from the form.
Court's Interpretation and Reasoning: The Tribunal found no recharacterization by the TPO, as the FCCDs were consistently treated as debt by both the assessee and its associated enterprise.
Key Evidence and Findings: Financial statements and terms of issuance supported the characterization of FCCDs as debt.
Application of Law to Facts: The Tribunal applied the guidelines to conclude that there was no recharacterization, as the economic substance matched the form.
Treatment of Competing Arguments: The Tribunal rejected the assessee's claim of recharacterization, finding it unsupported by the facts and legal framework.
Conclusions: The Tribunal concluded that there was no recharacterization of FCCDs by the TPO.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The uncontroverted finding recorded by the TPO was that as per the RBI Guidelines the CCDs are in the nature of loans."
Core Principles Established: FCCDs are to be treated as debt instruments until conversion into equity, and LIBOR plus 200 basis points is an appropriate benchmark for international transactions involving such instruments.
Final Determinations on Each Issue: The Tribunal upheld the characterization of FCCDs as debt, the use of LIBOR plus 200 basis points for benchmarking interest, and found no recharacterization by the TPO.

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