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2020 (12) TMI 110 - AT - Income TaxTP adjustment - Recharacterising the compulsorily convertible debentures (`CCDs') as equity shares - Disallowance of capitalisation of interest expenditure on CCDs - Whether TPO has erred in law by recharacterising the CCDs into equity shares since a Transfer Pricing Officer ('TPO') does not have powers under the Act to recharacterise any international transaction? - HELD THAT:- As decided in M/S. CAE FLIGHT TRAINING (INDIA) PVT. LTD. (VICE-VERSA) [2019 (8) TMI 554 - ITAT BANGALORE] as per the tribunal order of Mumbai Bench rendered in the case of Besix Kier Dabhol, SA [2010 (11) TMI 589 - ITAT, MUMBAI] in which the issue was decided in favour of the assessee on this basis that in the absence of specific Thin capitalization Rules in India, recharacterization of Debt Capital as equity Capital and disregarding of interest is not in order. Interest payment in the present case did not constitute an intraorganization transaction at all. Even if these interest payments were to be treated as intra-organization transactions by treating the same as payments made to the GE, and not to the joint venture partners, these payments cannot be viewed as notional payments because in such a situation the GE will have corresponding liability to pay the same to the joint venture partners. We have also noted that the interest paid by the assessee may have been contrary to the spirit, if not letter of the RBI guidelines, but then this fact, by itself and particularly in view of Explanation to s. 37 being confined to the amounts admissible as deduction u/s. 37, does not render the interest paid by the assessee as not deductible, and it is not even necessary to examine the scope of Explanation to s. 37. Tax considerations may have played a role in assessee’s planning the capital structure, but an element of planning in structuring capital does not transform a tax-deductible expense of interest into an expense that is non-tax deductible. In view of these discussions, it is clear that the impugned disallowance is indeed contrary to the scheme of the law as it exists; the grievance of the taxpayer deserves to be upheld. In our considered opinion, till the date of conversion, for allowability of interest u/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. -Being so, taking a consistent view, we remit the issues in dispute to the file of AO/TPO on similar directions.
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