9911796707
TMI Blog2022 (9) TMI 1661X X X X Extracts X X X X X X X X Extracts X X X X ..... bentures of the assessee at by proposing a downward adjustment to the tune of Rs. 12,63,75,549/- to the international transactions, being expenditure incurred by the assessee in the nature of Interest on Fully Compulsory Convertible Debentures paid/payable by the assessee company to its associated enterprise. 3. The Learned CIT (A) has erred in sustaining the action of Ld. TPO/Assessing officer in going beyond the scope to re-characterize the Compulsory Convertible Debentures ('CCD') as loan for benchmarking the international transaction of interest payments on CCD. 4. The Learned CIT (A) has erred in sustaining the action of Ld. TPO/Assessing officer in proposing to benchmark the interest rate on Fully Compulsory Convertible Debentures at LIBOR+200 basis points ignoring that the Fully Compulsory Convertible debentures were denominated in INR and interest for the same is appropriately benchmarked to SBI Prime lending Rate." 4. Brief facts of the case : The assessee has mentioned the following international transactions as per 3CEB / TP document : A.E. Nature of transaction Amount (Rs.) Fairfield Developments Ltd, Cyprus Interest @ 15.75% on 8811 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the creditworthiness of the taxpayer is much better. However, considering the duration of the loan and the nature of the transaction being CCDs, LIBOR plus 200 points is appropriate. 7.4. For the reasons mentioned above, the TPO adopts LIBOR plus 200 basis points. The average 1 year LIBOR during the year is 0.483%. Thus, the total interest payable works out to 2.483% as arm's length interest. The excess amount paid being the adjustment u/s 92CA calculated as under : Description date from Amount Days % of interest Interest paid Arm's length interest Arm's length interest Excess paid Opening balance 01.04 2012 881.100,000 365 15.75% 138.773,250 2.48% 21.877.713 116.895.537 Issued during the year 26.04 2012 14,400,000 340 17.75% 2,380,932 2.48% 333.062 2.047,889 -do- 16.05 2012 1,300,000 320 17.75% 202,301 2.48% 28,299 174.002 -do- 25.05 2012 39,200,000 311 17.75% 5.928.597 2.48% 829.336 5.099 262 -do 09.07 2012 1,800.000 266 17.75% 232.841 2.48% 32,572 200.270 -do 24.08 2012 7,700,000 220 17.75% 823.795 2.48% 115.238 708 556 -do 08.11 2012 1,800.000 144 17.75% 126,049 2.48% 17 633 108.417 -do 19.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. DCIT in ITA No. 1495/Hyd/2010 dt. 09.09.2011. 3. Aurobindo Pharma Ltd. Vs. ACIT in ITA No. 1096/Hyd/2011 dt. 31.01.2014. 4. Dr. Reddy's Laboratories Ltd. Vs. ACIT in ITA No. 1739/Hyd/2017 dt. 13.06.2018. 5. Dr. Reddy's Laboratories Ltd. Vs. ACIT in ITA No. 2229/Hyd/2011 & 85/Hyd/2013 dt. 02.01.2017." 8. ITA No. 1590/Hyd/2019 for A.Y. 2014-15 Aggrieved with the order of ld.CIT(A), the assessee is now in appeal before the Tribunal by raising the following grounds : 1. The Order of CIT (A) is erroneous and contrary to the facts of the case and law on point. 2. The Learned CIT (A) has erred in sustaining the action of Ld. TPO/Assessing officer in proposing to compute the interest payable on Fully Compulsory Convertible Debentures of the assessee by proposing a downward adjustment to the tune of Rs 13,98,41,656/- to the international transactions, being expenditure incurred by the assessee in the nature of Interest on Fully Compulsory Convertible Debentures paid/payable by the assessee company to its associated enterprise. 3. The Learned CIT (A) has erred in sustaining the action of Ld. TPO/Assessing Officer in going beyond the scop to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee was within the ALP and no addition was required to be made in the hands of the assessee. The learned TPO had examined the T.P. Study of the assessee company, however, after examining the T.P.Study Report, had rejected the same at Page 7 in Para 11 wherein the TPO mentioned it as under : "11. Rejection of TP study of assessee company : However TP study conducted by assessee company is rejected for following reasons. Independent study conducted by TPO using step wise procedure given by assessee to arrive at comparable companies from database www.bseindia.com showed that only following 23 companies out of 78 companies selected by assessee are available in concerned link of bse India which are as follows : S. No. Company 1 Ansal Phalak Infrastructure Pvt Ltd 2 ARUN EXCELLO HOMES PRIVATE LIMITED 3 Ashiana Landcraft Real Private Limited 4 Ashoka Buildcon Limited 5 Bellona Estate Developers Limited 6 Ca den Developers Private Limited 7 Centu Real Estate Holding Pvt Ltd 8 Chalama Infraaproperties Private Limited 9 Emaar MGF Land Limited 10 GOODTIME REAL ESTATE DEVELOPMENT PRIVATE LIMITED 11 HAAMID REAL ESTATES PRIVATE LIMITED 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FCCDs has come in the form of Foreign Currency from Fairfield Development, the company was asked to show cause why this transaction can't benchmarked using LIBOR plus 200 basis points by issuing show cause notice dated 04-102017." 9.2 Thereafter, the TPO had issued a show cause notice with a view to benchmark the international transactions and sought to benchmark by charging LIBOR plus 200 base points by issuing show cause notice. The assessee had raised the following objections : "12. Objections raised by assessee company : In response assessee company filed reply on 11.10.2017 in which following arguments are put forward. 1. Compulsorily Convertible Debentures (CCDs) can't be categorized as loans. Reliance placed on Sahara India Real estate Corpn. Ltd, CIT v. EKL Appliances Ltd., Sun Pharmaceuticals Ind. Ltd. v. Asst. CIT, ADAMA India (P.) Ltd. v. Deputy Commissioner of Income-Tax, circle-1(1), Hyderabad. 2. FCCDs are issued in Indian currency, denominated in Indian currency. They are convertible into equity and interest is payable in Indian rupees. Interest should not be computed on the basis of interest payable on the currency or legal tender of the place. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. In the order it was mentioned as under : "18. Therefore clarification regarding nature of CCDs is for the purpose of FDI policy only and in order to keep a track on FDI flows into the country. Further as mentioned above Hon'ble Apex court itself clarified in Sahara India Real estate case that CCDs are debt instruments till date of conversion. 19. Further it is also noticed from Financials of 'Fair Fields Developments Limited' for Financial years 2009-10 & 2010-11 that company itself categorized amounts advanced to Water mark residency as loans. Relevant extract of financial is reproduced as under. 12. Non current receivables The Company The Company 2010 2009 US$ US$ Loans to subsidiaries 36,614,770 32,572,277 36,614,770 32,572,277 Loans receivable for the company from subsidiaries represent amounts due from Watermarke Residency Private Ltd ($ 26,175,617) and Watermarke Villas Private Ltd ($ 10,439,153). The loan due from WRPL carries interest of 15.75% (9% until 31 March 2010). The loan from WVPL carries interest of 3% (9% until 31 March 2010). Both loans have no set repayment date and are denominated in Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.75%. It can be seen that whatever amount remitted towards interest is also being remitted in the form of foreign currency. In page 19 of Study report filed by assessee while discussing about foreign exchange fluctuation risk of assessee company it is mentioned as under : 24. "Currency risk is the risk of any adverse fluctuation in exchange rates, which would eventually have an impact on the profitability. Watermarke pays interest in Indian currency for interest on FCCD. Accordingly, it bears no foreign exchange risks. Similarly FDL receives in foreign currency for debentures. Accordingly, it bears normal foreign exchange risks. 10. Feeling aggrieved by the order of Assessing Officer, assessee carried the matter before ld.CIT(A). The ld.CIT(A) had confirmed the order passed by the holding as under : "5. Decision : In this case, it was seen that the appellant's international transactions during the previous year exceeded Rs. 15 crores and accordingly the case was referred to Transfer Pricing Officer for determination of Arm's Length Price. The TPO vide order dated 31.10.2017 determined the ALP at Rs. 2,73,89,512/- whereas the total interest paid as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as appropriate rate for bench marking purposes: 1. Aurionpro Solutions Ltd. vs Addl.CIT in ITA No. 7872 (Mum) of 2011, dated 1242013. 2. Foursofi Limtied vs DCITin ITA No. 1495/Hyd/2010, dated 9-9-2011. 3. Aurobindo Pharma Ltd., vs Addl. CIT ITA No. 1096/Hyd/2011, dated 31-1-2014. 4. Dr.Reddy's Laboratories Ltd. vs ACITin ITA No. 1739/Hyd/2017, dated 13-6-2018. 5. Dr.Reddy's Laboratories Ltd. vs Addl.crr in ITA No. 2229/Hyd/2011 & 85/Hyd/2013, dated 2-12017. 1.2.1 Respectfully following the ratio of the decisions cited supra, the contentions raised by the AR of the appellant are rejected. Therefore, I confirm the addition made by the Assessing Officer. 1.3 The other grounds of appeal were not pressed by the AR of the appellant during the course of appellate proceedings, hence, the same are not adjudicated. 5. In the result, the appeal is treated as DISMISSED." 11. Feeling aggrieved with the order of ld.CIT(A), assessee is now in appeal before us for A.Y. 2013-14, 2014-15 and 2015-16. 12. The ld.AR for the assessee has submitted that the interest paid by the assessee on FCCDs were to be benchmarked on the basis of SBI base rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Our attention was also drawn by ld.DR to Paras 28 to 31 of that TPO order which is to the following effect : "28. Further M/S Fair Field Developments Limited has invested its funds (foreign currency) in India which otherwise would have fetched it interest basing on LIBOR rate in foreign market It is also seen that Fair field Developments Limited in case of FCCDs issued by another Indian Subsidiary company M/s Watermarke Villas Pvt Ltd which is also in real estate business is in receipt of only 3% of interest which is more or less LIBOR plus 200 basis points against average Interest rate of 16.17% paid by assessee company. 29. Assessee company stated that in case of M/S Fair field Development for assessment year 2011-12, Assessing officer benchmarked the interest payment made by the company at a lower interest rate. On appeal by assessee, Commissioner (Appeals) deleted the adjustment made by the assessing officer, up held ALP arrived by the assessee. Hence it is the argument of assessee that this issue has already reached finality. Principles res judicata apply. But as argued by assessee company, issue has not reached finality. Department has preferred appeal against order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receding paragraphs Libor + 200 basis points is considered more appropriate CUP. Hence, this difference is ignored. In view of detailed discussion made, Libor plus 200 basis points is considered more appropriate CUP to determine ALP in case of Interest paid on FCCDs to Fair field Developments Limited." 16. Lastly, ld.DR submitted that the assessee is shifting the profits from India to Cyprus which is a low tax jurisdiction by benchmarking the interest payable to it's A.E. at Cyprus by applying the SBI PLR rate Plus 300 points. 17. Ld.DR had also filled the written submissions in support of stand of revenue. In written submissions it was mentioned as under:- "2. The following submissions are made wrt twin grounds of appeal of assessee i.e Recharactarisation of CCDs as Loan transaction and non applicability of LIBOR + 200 basis points applied by TPO/AO to compute ALP of Interest paid on CCDs. 3. It is the contention of assessee that it is in correct on part of TPO' to recharacterize FCCDs as loan for benchmarking international transaction of Interest payment on CCDs. In this connection it to submit that assessee company itself categorized CCDs as 'long term borrowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urvives. Thus Hon'ble Authority concludes that CCDs are basically debt instruments till the date of conversion. 5. Coming to Objections of assessee wrt LIBOR+ 200 basis points applied by TPO to compute ALP, It is the argument of assessee that interest paid to its cyprus based parent on FCCDs is to be benchmarked taking SBI PLR since FCCDs are rupee denominated, interest is also to be paid in Indian currency. For this assessee heavily relied on Hon'ble Delhi High court Ruling in case of CIT Vs Cotton Naturals (I) Pvt Ltd ITA 233/2014 dated 27-03-2015 where Hon'ble court has held that interest rate is not to be determined basing on resident country of lender or Borrower but the currency in which loan is to be repaid because interest rate is market driven. Normally currency in which loan is to be repaid determines rate of return on money borrowed/lent ALP is to be determined basing on currency in which loan and interest is to be repaid/paid. All other case laws relied on by assessee have been rendered basing on Ruling of Deli HC in Cotton naturals . 6. It is humbly submitted that cotton naturals ruling can't be applied in a straitjacketed manner to the facts of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or interest but claimed interest on accrual basis and debentures amount was converted into shares. Thus there is no payment in any currency, let alone in INR so as to claim higher rate of interest on the basis of domestic PLR. Since the amount was invested by the holding company being a non resident company it is required to see had the non resident company invested the same in international money market how much interest it would have received. Obviously at a much lower rate than the rate of interest claimed than SBI PLR and actually would have received interest in tune with internationally approved LIBOR plus basis points. Similarly had the assessee company borrowed the same from international market, it would have paid LIBOR rate only. Even in Indian Market it would have borrowed at a much lesser rate than 15 -17.5% claimed by the assessee. 7. Thus the purpose of this investment is profit shifting (by way of higher interest rates consequent reduction of taxable income in assessee hands( thin capitalisation i.e investing in the form of debt rather than equity)) to lower tax jurisdiction i.e cyprus. In the present case share capital of assessee company for the year is Rs 50,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5% made by the assessee." 18. Per contra, the ld.AR has rebutted all the allegations and submitted that there was no issue of shifting of profits as argued by the ld.DR and further submitted that it is not appropriate on the part of the TPO or on the part of ld.DR to recharacterize the instrument of FCCD. The ld.AR relied upon the decision of Hon'ble Supreme Court in the case of S.A.Builders reported in 288 ITR 1 and E.K.L Appliances reported in 345 ITR 241 (Delhi) [TS-206-HC-2012(DEL)-TP] to buttress his argument. It was the contention of the assessee that the AO / TPO cannot sit in the arm-chair of the assessee and change the nature of the transaction. It was submitted that the FCCD was a hybrid instrument and was considered to be an equity document by virtue of RBI Circular and therefore, the characteristic of this instrument cannot be considered either as a debt or a loan by the Revenue. Further, the ld.AR had submitted that the decision on which the lower authorities have relied upon are not applicable to the facts of the case in all the transactions. There were outward remittance of amount in all these cases whereas in the present case, there was inwards receipt of amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y meeting with the minimum capitalization criteria prescribed under the applicable Law. Conversion Option before Conversion Date :- At any time during or before the conversion date, each FCD may at the option and sole discretion of its holder be convertible into Equity Share at a price per Equity share that is mutually agreed upon by the Company and the FCD Holder on the Conversion Date, subject to the Company meeting with the minimum capitalization criteria prescribed under the applicable law. Security :- The Debentures are unsecured. Ranking :- Upon conversion of FCDs into equity shares, the same shall rank pari passu with the existing equity shares of the company." 21. The notable points are that 1) The debentures were issued for a period of 120 months (10 years), 2) The interest rate payable was PLR of SBI Plus 300 basic points. 3) Debentures would be compulsorily converted into equity at a price that is mutually agreed. 4) The A.E. of the assessee has an option to convert FCCD into equity at a price mutually agreed before the stipulated conversion date. 5) The debentures are unsecured. 6) The debentures after upon conversion of FCCD into equity, would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g had also agreed that the FCCD are debt instrument till its conversion. Further assessee had capiatlised the interest, being prior period expenses, however it was admitted that the interest was allowable expenditure as per section 36 r/w 2(28A) of the Income Tax Act 1961. In view thereof, we find no fault in the finding returned by the TPO/ld.CIT(A). 26. Assessee before the ld.CIT(A) had stated in reply dated 15/6/2017 that FCCD are in the nature of equity instruments and are denominated in INR and interest is payable in INR. Thus the assessee had changed its stand before ld.CIT(A), which is contrary to terms of issuance of FCCD, its financials and TP study, which is not permissible. Assessee had not given any reason for claiming the FCCD as equity. In our view the assessee cannot change the nomenclature of instrument from debt to equity for the purposes of bench marking the interest paid by its to AE, which would result into shifting of profit of assessee to its AE, in low tax jurisdiction. No prudent person like assessee having strong fundamentals and financials would pay such interest to its AE at the rate of 17-to 18% on debt instrument. As per Chart filled by assessee, no in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment comparing the rate of return for the assessee's US based AE. This later conclusion of the Tribunal is supported by following decisions. 4. Division Bench of Delhi High Court in case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401, had held and observed as under; "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetical' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money." " 5. Similarly this Court in case of CIT v. Tata Autocomp Systems Ltd. [2015] 374 ITR 516/230 Taxman 649/56 taxmann.com 206, had observed as under; "7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) to reach the conclusion that ALP in the case of loans adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT reported in (2017) 78 taxmann.com 75 is not applicable to the facts of the present case. As the coordinate bench had decided the issue based on the above two noted decisions of Hon'ble High Courts without discussing and deciding the nature of CCD. In our view, this decision is also distinguishable on account of the fact that the Bench has not examined the real nature of the CCD and therefore, this decision is not applicable to the facts of the case. 30. Similarly, the decision of Delhi Tribunal in the case of Assotech Moonshine Urban Developments (P.) Ltd Vs. DCIT reported in (202) 121 taxmann.com 220 is also not applicable to the present case as the Bench has not examined the nature of the instrument issued by the assessee to it's A.E. The decision of Bangalore Bench of the Tribunal in the case of Praxair India (P) Ltd. Vs. ACIT reported in (20220 138 taxmann.com 67 is also not applicable as the Tribunal without examining the nature of CCDs has benchmarked it applying the decision of the Cotton Naturals. 31. For our above said finding of FCCD is debt in nature, we draw support from the decision of NCLT in the case of SGM Webtech Pvt. Ltd Vs. Boulevard Projects Pvt. Ltd MANU/N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case. Moreover, since Insolvency and Bankruptcy Code, 2016 has overriding effect over other enactments, the debentures being treated as debt under IBC, this value of debentures shall be treated as debt, not as equity. In any event, since it is not the case of this Corporate Debtor that it is not a debt as per its books, the debtor counsel cannot come out with a new argument saying that these debentures shall be treated as equity. Another argument advanced by the Resolution Professional counsel is that the nature of investment being compulsorily convertible debentures, the applicant cannot claim the value of the investment except to the extent of interest. As to this point, if a company is a running company and regularly paying interest, it is understandable that this RP Counsel can come with this argument to say that it is not repayable to the claimant because over a period of time these debentures would be converted into equity. This situation wil arise when this debt is converted into equity as on the date of admission. But as on the date of admission, when the debentures are not matured for conversion and the debtor already defaulted paying interest, where is the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer also makes reference to the Foreign Direct Investment (FDI) Policy and the Reserve Bank of India (RBI) Policy in respect of fund infusion from foreign sources in to Indian economy. Misplaced understanding of the Government Policy and its purpose has only created a smokescreen of confusion hiding the truth and reality of the matter. (Kindly refer, Para- 3.1. to 3.6. on Page- 10 to 12 of the Transfer Pricing Order for AY: 2009-10). 7.2. Even though statutorily the Transfer Pricing Officer was not entitled to delve in to anything else other than determination of arm's length price of the given transactions, it should have been understood that the needs requirements and purpose under the Income Tax Act and those of the FDI and RBI Policies do not stand opposite to each other or contradict each other. However, they just need to be understood in their respective contexts. 7.3. The purposes of the FDI and RBI Policies are aimed at controlling fund inflow from abroad in the form of debt. They have no problem if the infusions of funds are in the form of equity. In order to ensure this, these policies just declared that Optionally or Partially Convertibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of FCCD as equity to loan. In this regard, 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. This is in tune with the decision of the Hon'ble Delhi High Court in the case of EKL Appliances (supra) wherein it was noted as under:- "17. The significance of the aforesaid guidelines lies in the fact that they recognize that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions. We note that the same are not relevant to this instant issue since we have already held that the currency involved herein is not "Euro" only. The alleged "safe harbor" rules (supra) also do not pertain to these four assessment years. We thus affirm the TPO's identical action in all these four assessment years adopting "LIBOR + 200" interest rate coming to 2.9% as against that claimed @ 11% at assessee's behest. These four taxpayer appeals in ITA Nos. 134 & 565/Hyd/2017 for A.Ys 201112 and 1507 and 1682/Hyd/2018 for the A.Ys 2013-14 and 2014-15; respectively, are dismissed. The Revenue's former two cross appeals in ITA Nos. 149/Hyd/2017 and 1506/Hyd/2018 for A.Ys 2011-12 and 2013-14 raising in the instant sole ground are accepted." 37. In view of our above discussion, we do not find any merits in the arguments of the learned counsel for the assessee. Accordingly, order of ld.CIT(A) is upheld and the grounds raised by the assessee are dismissed. 38. In the result, the appeals of the assessee vide ITA Nos. 740/Hyd/2019 and 1590/Hyd/2019 are dismissed. 39. As the facts of other appeal bearing no. 1591/Hyd/2019 is similar to the facts of ITA 740/Hyd/2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
