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TMI Blog2024 (10) TMI 1625X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Dispute Resolution Panel-1, Mumbai (Ld. DRP ) under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 ( IT Act ) is contrary to the facts and the law and, therefore, not tenable. 2 Validity of Final Assessment Order passed by the Ld. AO 2.1. On the facts and in the circumstances of the case and in law, the Ld. AD erred in passing the Final Assessment Order under section 143(3) u/s 144(3) section 144B of the IT Act, which is without jurisdiction and bad in law as the same is passed beyond the time limit prescribed under section 153 of the IT Act Re: Transfer pricing adjustment of INR 3888,00,000/- on account of sale of embedded call option 3.1. On the facts and in the circumstances of the case and in law, the Ld.AO under the directions of the Ld DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV. 3.2. On the facts and in the circumstances of the cave and in law the Ld. AO under the directions of the Ld. DRP erred in holding that the Appellant entered into transaction relating to alleged sale of call option with Indorama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led its Income Tax Return ( ITR ) for AY 2020-21 declaring total loss at INR 6,78,11,415/-.During impugned assessment year the assessee acquired surfactants business (i.e., business undertaking) of Huntsman International (India) Private Limited ( HIIPL ), an unrelated party under slump sale in terms of Business Transfer Agreement dated 03/10/2020, copy of the agreement is enclosed pages 212-266 of the factual paper book. Acquisition of this business undertaking was part of a global business acquisition agreement signed between Indorama Ventures Holdings LP and Huntsman International LLC. The acquisition consideration for HIIPL s surfactants business was determined based on the ratio of HIIPL s EBITDA (i.e., Earnings before Interest, Depreciation and amortisation) to the total EBITDA of the business acquired globally. The acquisition price for the business undertaking was Rs. 1,74,01,59,374/- (approx. Rs. 174 crores).To finance such acquisition, assessee issued compulsorily convertible debentures (in short CCDs ) to Indorama Netherlands B.V. (in short INBV ) i.e., associated enterprise of the assessee and the balance amount was financed by way of short-term loan from bank. The key t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ground no3 the assessee agitates that the Ld. DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV. The Ld.AR of the assessee submitted that CCDs cannot be equated with call option. The assessee did not enter into sale of any call option to its AE, INBV and thus the question of receiving any option premium does not arise. The CCDs were issued in accordance with the terms of the CCD subscription agreement dated 30/12/2019 and the same was not a contract for sale of any call option , the CCD subscription agreement dated 30/12/2019 is enclosed at pages 177-183 of the factual paperbook. A call option contract gives the holder the right, but not the obligation, to buy an underlying security at a specific price within a specified time. This is in contrast with the terms of the CCD issued wherein the CCDs may be converted into equity shares at any time at the option of both the CCD holder and the assessee. Further, in case no option is exercised by any of them, the CCDs shall be compulsorily converted on expiry of one year of its issuance. In the instant case, option to convert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atic approval route of RBI. 9. With regard to ground no. 4 pertaining to transfer pricing adjustment of Rs. 16,78,40,626/- on account of purchase of business from HIIPL. The Ld. AR argued on non-applicability of section 56(2)(x) of the Act on purchase / receipt of business under taking . He submitted that the revenue has made this adjustment primarily on the ground that the business was purchased amount to Rs. 1,74,01,59,374/- whereas its fair value computed under the DCF method (treated as ALP) was amount to Rs. 1,90,80,00,000/-and thus difference amount to Rs. 16,78,40,626/- was taxable under section 56(2)(x) of the Act. In this connection he submitted that section 56(2)(x) can apply only to receipt of property as defined in that section. The definition of property under section 56 does not include business undertaking . As the assessee has acquired a business undertaking for running business for a lump-sum consideration, provisions of Section 56(2)(x) are inapplicable and accordingly the entire adjustment ought to be deleted on this count itself. The Ld.AR further submitted that section 92(1) does not create an independent charge to tax income which is otherwise not chargeable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant caution. In such circumstances, Instruction 3/2016 required the Ld. AO to record satisfaction and provide opportunity of being heard before making a TP reference. This jurisdictional requirement has not been complied with, and therefore the transfer pricing adjustment is bad on this count as well. Respectfully the ld. AR relied on the decision of Hon ble Delhi High Court in the case of Indorama Synthetics (India) Ltd v ACIT [2016] 71 taxmann.com 349 (Delhi). 11. The Ld.AR further argued that the acquisition of Huntsman group s global business was between two unrelated parties, and the EBITDA method for valuation of businesses has arrived at between such parties. In the absence of cogent reasons, the EBITDA method cannot be rejected. The ld. AR mentioned that in any merger and acquisition deal with a third party, EBITDA is the primary driver for the determination of purchase price. 12. With regard to ground no. 5 pertaining to adjustment on account of interest of Rs. 1,91,34,1247/- on CCDs paid to INBV. The Ld.AR submitted that CCDs are debt instruments until conversion. The CCDs are fundamentally distinct from equity shares, as: (i) there is an obligation to pay interest until ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009-10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated thar fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36(1)(iii). This finding of TPO is not by Invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses incurred on issue of such debentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted only on expiry of 15 months from the date of allotment of debenture and under these facts, it was held by Special Bench of the Tribunal in that case that the expenses incurred on issue of such debentures has to be considered as expenses incurred for issue of shares because it was found that first part of the debentures was to be converted into shares on the date of allotment itself and the second part was to be converted after expiry of 15 months from the date of allotment of debenture and therefore it was held that expenses incurred were actually incurred for issue of shares and not issue of debentures. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ds under FEMA / foreign direct investment ( FDI ) regulations as equity instruments. The Ld. DRP failed to appreciate the fact that these rules were introduced in an entirely different context of Indian foreign exchange regulations, and that treatment under FEMA does not change the essential nature of the CCDs as a debt instrument for the purpose of IT Act. The Ld. DRP also relied on Circular No. 74 dated 8 June 2007 issued by the RBI wherein RBI stated that instruments which are fully and mandatorily convertible into equity would be treated as part of equity under foreign direct investment policy. The Ld. TPO/ Ld. DRP placed reliance on such circular and held that CCDs would be in the nature of equity for Indian transfer pricing purposes. They failed to appreciate the context of the circular, which was to prevent Indian companies from raising debt by means of issuing optionally convertible debentures without complying with the conditions specified under the applicable External Commercial Borrowings ( ECB ) regulations. Such a policy decision is from the perspective of conserving Indian foreign exchange by regulating borrowing from foreign sources, their permissible use in India, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further applicable taxes were withheld while making interest payments and INBV also filed its return of income in India for AY 2020-21 where by it reported this interest income and the taxes withheld under section 195 of the Act and no refund of the same was claimed by it in the return of income. Thus, Ld. DRP s observations at page 79 of its order that there was base erosion by way of exempt payments is, incorrect / faulty. 22. The Ld.AR further submitted that the assessee obtained a secured term loan from HSBC bank in April 2020 wherein the interest is charged at 9.05%. As availing unsecured loans from third parties entails higher interest rates, the interest rate of 9.7% paid by the assessee on its CCDs should be considered to be at arm s length. 23. The Ld.AR summed up his arguments by submitting that RBI took on record issuance of CCDs worth INR 80 crores by the assessee; CCDs were issued to foreign AE under automatic approval route of RBI, copy is annexed in page 305 of the factual paper book. 24. The ld. DR vehemently argued and fully relied on the order of revenue authorities. 25. We heard the rival submission and considered the documents available in the record. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the Ld.TPO has changed the characteristics of the CCDs to an equity share. So, the re-characterization and transaction is beyond the jurisdiction of the Ld.TPO. Respectfully followed the order of the Hon ble Delhi High Court in EKL Appliances Ltd(supra). The Ld. DRP got the concept of thin capital and relied on the circular No. 74 dated 08/06/2007 issued by the RBI wherein the RBI stated that the instructions which are fully and mandatorily convertible into equity would be treated as part of equity under foreign direct investment policy. The circular is duly applied on that CCDs and treated as equity for Indian transfer pricing process. But the revenue has failed to appreciate the context of the circular which was to prevent the Indian companies for raising debt by means of issuing optional convertible debentures without complying with the conditions specified under the applicable External Commercial Borrowing regulations. So, the said circular is not applicable for the assessee. In factual relation, the interest under section 36(1)(iii) related to CCDs which are a debt instrument until its conversion and the interest paid on CCDs should be considered as interest on borrowing fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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