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2019 (6) TMI 1536 - AT - Income TaxTP adjustment - arm’s-length price of the interest paid by the assessee - argument of the ld AR that interest on FCCD issued in only industry similar to the assessee must be taken for benchmarking - HELD THAT:- We set aside the whole issue back to the file of the learned transfer pricing officer with a direction to re-determine the arm’s-length price of interest payment on fully compulsorily convertible debentures issued by the assessee with a comparable product such as credit rating, size, timing etc. - assessee is also directed to advance all the arguments, which it would like, to place before him along with any additional evidences. TPO will also examine the whole issue with respect to whether fully compulsorily convertible debentures are comparable with simple debentures or are required to be benchmarked differently. According to us FCCD (Fully compulsorily convertible debenture ) is not a traditional debt, but a complex financial instrument wherein the final repayment is through the issuance of common equity to investors ( which has a high value than the amount of loan also and vice versa) , based on fixed conversion rate, (or in a band). It is a mix of debt and equity features. There is a dominance of the equity feature in FCCDs with some entirely classifying it as an equity instrument. However, true characterization and quantification of Debt/Equity feature in FCCDs would depend on the deeper analysis of its substance over form. Therefore comparing the interest payment on FCCD with bond interest rates is fallacious. AR relied upon the safe of the rules issued by the Ministry of Finance central board of direct taxes by notification number 07/06/2017 that applies only to the transaction of loan. In the present case, it is the mixed transaction of loan as well as of equity and therefore the safe harbour rule does not apply, as they do not deal with such instrument. Assessee as well as the ld TPO should look in to this aspect. Ground number 1 – 4 allowed for statistical purposes. Notional interest income - Accrual of interest income - Addition to the total income of the assessee on account of inter corporate loan given by the appellant to its related party - HELD THAT:- In the present case it is evident that assessee has written off the principal itself subsequently. Resolution is also produced to the effect that assessee has not recorded interest income. Generally , Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability, the income is not hypothetical and it has really accrued to the assessee. Accrual of income is based on the facts of the case. Therefore, merely relying on judicial precedents it cannot be held that whether a particular income has accrued to the assessee or not. Even otherwise in the present case it cannot be said there is no liability on the other party to pay the interest because, it is for the loan accepted by that party and bound by the agreement to pay the interest. Naturally Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the Income is not hypothetical and it has really accrued to the assessee. We set aside the whole issue back to the file of the learned assessing officer with a direction to the assessee to show before the learned assessing officer that how the interest has not accrued to the assessee for assessment year 2014 – 15 and also to show the various correspondence between the lender and the borrower to substantiate the case that interest income was waived before it accrued to the assessee. - Ground 5 allowed for statistical purposes. Credit of minimum alternate tax under section 115JAA - HELD THAT:- AO is directed to examine the claim of the assessee and if it is found in accordance with the law to grant credit of MAT of the above sum after proper verification. Accordingly, ground number 6 of the appeal is allowed.
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