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TMI Blog2022 (11) TMI 1323X X X X Extracts X X X X X X X X Extracts X X X X ..... see had only raised submissions with reference to ground 3 and its sub-grounds. Ground 3 and its sub-grounds read as follows:- 3.TRANSFER PRICING ADJUSTMENT WITH RESPECT TO INTEREST PAID ON COMPULSORILY CONVERTIBLE DEBENTURES ("CCD") 3.1 On the facts and in the circumstances of the case and in law, the lower authorities erred in making a transfer pricing adjustment of INR 13,89,60,371/- in respect of the interest expenditure incurred by the Appellant, on the CCD's issued by it to its non-resident AE. 3.2 The lower authorities erred in concluding the ALP of the said interest as NIL, without undertaking any benchmarking and comparability analysis, using external comparable transactions. 3.3 The lower authorities exceeded his juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was referred to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) of the international transaction undertaken by the assessee with its AE. The TPO passed an order u/s 92CA(3) of the I.T.Act (order dated 31.07.2021) proposing transfer pricing adjustment of Rs.13,89,60,371 towards interest paid by the assessee on Compulsory Convertible Debentures (CCDs). Pursuant to the TPO's order, draft assessment order was passed on 23.09.2021 u/s 143(3) r.w.s. 144C of the I.T.Act incorporating the above mentioned TP adjustment proposed by the TPO. The A.O. also proposed corporate tax disallowance of loss on valuation of CCDs. 4. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. 144 taxmann.com 6. The learned Departmental Representative supported the orders of the TPO and the DRP. 7. We have heard rival submissions and perused the material on record. The assessee issued 27,79,20,741 nos. CCDs of face value INR 10/- each to M/s. Pollhater Investments Limited ("PIL") pursuant to the Securities Subscription and Shareholders Agreement dated 17.08.2011. The terms of the CCDs are as under:- * PIL shall pay an amount of INR 277,92,07.410 (i.e. INR 277.92 Crores) as the investor subscription amount in respect of CCDs issued to PIL. * CCDs shall be unsecured and shall carry an interest rate of 5% per annum and interest shall be payable as on 31st March of each year * Interest on CCDs shall be accrued and paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CapitaLine Plus, ACE TP and NSDL databases. Pursuant to the search process adopted by the assessee, 14 companies containing 22 CCD transactions were identified as comparable to the assessee's transaction. Since the rate of interest paid by the assessee to PIL is less than the median of the rates of the interest paid in the above comparable transactions identified i.e. 11%, the transaction with respect to payment of interest on CCD, assessee treated payment of interest at ALP in its TP study. The TPO in the TP order recharacterized the CCDs as Equity and held that once character of funds received from AE is determined as equity, no interest is payable and accordingly no interest is allowable. The DRP held that Reserve Bank of India ("R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest ii/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided." 7.4 The Tribunal in the case of CAE Flight Training (supra) also rejected the reliance placed by the lower authorities on the decision of the Ahmedabad Tribunal (Special Bench) in the case of Ashima Syntex Limited reported in 100 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the I.T.Act is applicable with effect from 01.04.2018, and hence is applicable for the impugned assessment year, namely, A.Y. 2018-2019. Section 94B of the I.T.Act is different from transfer pricing provisions contained in sections 92 to 92F of the I.T.Act. The transfer pricing provisions deal with the determining the arm's length rate of interest payable on a debt-claim from an AE. In contrast, section 94B of the I.T.Act places a blanket threshold on the deductibility of interest paid, based on the profitability of the Assessee and not based on the debt-claim itself. The assessee did not comply with the provisions of section 94B of the I.T.Act to suo moto disallow the interest on CCD while computing the taxable income in the income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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