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2023 (4) TMI 557 - AT - Income TaxTP Adjustment - ALP of interest on NDC’s [Non-convertible debentures] - Comparable selection - HELD THAT:- When internal comparables are available, it would be more appropriate to analyse the comparability first with the internal comparables. First internal comparables should be evaluated for ALP computation. If for any reasons, internal comparables fail the comparability test, then the external comparables can be adopted for ALP computation. ALP of interest on loan will depend on various factors like the nature and purpose of the loan, currency in which the loan is provided and in which interest is to be paid, security or guarantees offered by the borrower, the amount & duration of the loan and credit rating of the borrower. In the instant case, the assessee has also taken secured loans from unrelated third parties being PFC, REC and PNB at the rate of interest of 13.75%. The assessee has contended that these third party loans can be taken as internal comparables and they were also accepted by the DRP as comparables for A Y 2015-16. The learned DR contended that the internal comparables cannot be accepted due to difference in geographical region. It is contended that the associated enterprises are outside India and the third party lenders are in India. It is not clear if the NCD issued to associated enterprise is denominated in Indian rupees and whether the interest on these NCD's is paid in Indian rupees. If the loan taken from associated enterprise is denominated in Indian rupees and the loan taken from third parties is also denominated in Indian rupees and the interest on such loans is also paid in Indian rupees, the question of geographical difference does not arise. Therefore, taking internal comparables will also take care of credit rating of borrowers and nature and purpose of the loan. Thus, if both the loans are denominated in same currency, internal comparables can be adopted for computation of ALP. NCD issued to associated enterprise is unsecured and loans taken from third parties are secured loans, hence, adjustment for this difference should be made as directed by the DRP in AY 2015- 16. Therefore, we remand the matter back to the TPO to verify if the currency of the internal comparables and NCD issued to associated enterprise is same - internal comparable should be adopted for ALP computation after making adjustment for difference in security - borrowers in external comparables should have similar credit rating like that of the assessee - comparison should be made for interest on NCD and convertible debenture cannot be adopted for comparison. Appeals filed by the assessee are allowed for statistical purposes.
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