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2016 (9) TMI 106 - ITAT DELHI

2016 (9) TMI 106 - ITAT DELHI - TMI - Disallowance of part of the interest paid by the assessee - addition on the ground that the interest paid on Compulsory Convertible Debenture did not satisfy the armís length principle and application of LIBOR rate considering the rupee denominated Compulsory Convertible Debenture as External Commercial Borrowings instead of rupee denominated Compulsory Convertible Debentures - Held that:- The assessee had furnished the additional evidences for the first tim .....

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- In the present case, the assessee carried out analysis on BSE database which provides the details of the comparable instruments and submitted the same as additional/supplementary analysis vide letter dated 27.04.2016 which indicated that the average coupon rate of comparable instruments issued in Real Estate Industry was 14.50% as compared to the average coupon rate of 12.39% of all the instruments issued during the year, which is evident from Annexure 1 attached with the letter dated 27.04. .....

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aforesaid documents furnished by the assessee first time before the Tribunal are relevant to resolve the present controversy and the assessee had reasonable cause not to furnish the same before the authorities below because those were not available at the time of framing the assessment or the proceedings before the DRP/TPO. Therefore, the additional evidences furnished by the assessee are admitted. However, these documents are to be considered by the authorities below. Thus we deem it appropria .....

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after referred to as the Act). 2. Following grounds have been raised in this appeal: 1. The assessment order U/s 143(3) r.w.s. 144C passed by the Assessing Officer ('AO') and disallowance made by the AO is illegal, bad in law, on the basis of wrong facts and without jurisdiction. 2. The additions/ disallowances made are illegal, unjust, and highly excessive. The total income of the Appellant has been wrongly and illegally computed by the Assessing Officer at ₹ 7,68,52,550/- as agai .....

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ion of the arm's length price ('ALP'), as required under section 92CA(1) of the Income Tax Act, 1961 ('Act'). 4. The AO/ DRP/ TPO have erred on facts and in law in disallowing the part of interest paid by the appellant on the ground that the interest @ 12% paid by him on Compulsory Convertible Debenture during the year do not satisfy the arm's length principle envisaged under the Act and is excessive. 5. That the AO/ DRP/ TPO has erred, in law and in facts, by not accepti .....

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nomic reasons of such transaction. 7. The AO/DRP/TPO has erred on facts and in law in applying L1BOR rate considering the rupee denominated Compulsorily Convertible Debentures (CCDs) as External Commercial Borrowings (ECBs) instead of rupee denominated CCDs. The DRP failed to appreciate that borrowings were made in the Indian currency and therefore interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has been taken. 8. Without prejudi .....

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ed to be reduced from WIP. 10. The Assessing Officer has erred in not providing proper and adequate opportunity of hearing to the Appellant to place the evidence/details on record to substantiate its claim during the assessment proceedings. 11 .The additions made and the observations made are unjust, unlawful and based on mere surmises and conjunctures. The additions made cannot be justified by any material on record and also excessive. 12. The explanation given in the evidence produced, materia .....

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ire any adjudication on our part. 4. The grievance of the assessee in this appeal vide Ground Nos. 4 to 9 relates to the disallowance of part of the interest paid by the assessee, on the ground that the interest paid on Compulsory Convertible Debenture did not satisfy the arm s length principle and application of LIBOR rate considering the rupee denominated Compulsory Convertible Debenture as External Commercial Borrowings instead of rupee denominated Compulsory Convertible Debentures. The asses .....

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of the commercial complexes comprising of retail and commercial office complex. The assessee e-filed return of income on 30.11.2011, declaring Nil Income. During the course of assessment proceedings, the AO noticed that the assessee had undertaken the following international transactions: Name of AE Nature of Transaction Value(Rs.) Method Brahma Opportunities D. Ltd. Allotment of Share 9999850 CUP Brahma Opportunities D. Ltd. Receipt of Share Capital Money subsequently allotted as Equity Share .....

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had issued INR denominated compulsory convertible debenture (CCDs) amounting to ₹ 2,19,76,50,630/- to its AEs - i) JM Asian Cyprus B. Ltd. and ii) Neptune Cyprus A Ltd. The CCDs bear an annual coupon rate of 12% and the assessee had paid interest of ₹ 11,65,65,047/- to its AEs on the CCDs. The international transaction of payment of CCDs was benchmarked in the TP documentation maintained by the assessee applying the CUP method, the interest paid to the AEs along with other operating .....

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length interest rate arrived at an Arm s Length Price of ₹ 3,36,09,589. Consequently, the TPO made an adjustment u/s 92CA of the Act of ₹ 8,29,55,458/-. The assessee raised the objection before the ld. DRP who upheld the approach of the TPO in treating the CCDs as External Commercial Borrowings and directed the AO/TPO to make an adjustment, considering 6 months LIBOR + 300 bps i.e. 3.96% as the ALP. Accordingly, the adjustment was restricted to ₹ 7,80,98,582/-. On the direction .....

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interest to AEs was shown an international transaction as the assessee had lent interestITA free loan to its AEs. He drew our attention towards page no. 10 of the PTO s order wherein it has been noted as under: Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. Thus as can be seen from above, while borrowing money by X (in India) from Y (outside India), the interest rates are .....

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are without security). Thus the benchmarking rate for lending would be different from that of borrowing. 8. The ld. Counsel for the assessee submitted that the TPO himself stated in his order that prevailing market conditions, volatility, period, forward premium, period of loan, USD/INR forward premium/discount, availability of foreign currency, cost of rupee resource, credit rating etc. were important factors which needed appropriate adjustments while determining the ALP and that the basic pri .....

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the TPO were factually incorrect by treating them as ECB. It was further submitted that to benchmark inbound loans, the basic principle to be followed was that the currency in which the loan had originated must be considered. Therefore, the assessee selected CUP as the most appropriate method for the purpose of benchmarking. However, the ld. DRP completely ignored the fact i.e. CCDs were denominated in Indian currency and merely upheld the approach of the TPO. It was submitted that the TPO wrong .....

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ted Policy effective from 01.04.2010 issued by the Department of Industrial Policy and promotion (DIPP), RBI guidelines and FEMA regulations, the issuance of the CCD is part of FDI being quasi-equity (hybrid) in nature and considering it as ECB would be completely against the regulations laid by DIPP, RBI and FEMA. It was emphasized that the issue of CCDs was denominated in INR and not foreign currency. Therefore, the TPO erred in considering LIBOR as a benchmark rate, which is in complete contr .....

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Vs Tata Autocomp Systems Ltd., ITA No. 1320/2012 (Mum. HC) Bharti Airtel Ltd., ITA No. 5816/Del/2012 (ITATDel) M/s Aithent Technologies Pvt. Ltd. Vs ITO, ITA No. 3647/Del/2007 (ITAT Del) 9. It was contended that the adjustment had been proposed in violations of the law and thus, ought to be deleted. It was contended that the assessee has also carried out analysis on BSE database, which provides the details of comparable instruments. The assessee requested to admit the same as an additional/supp .....

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ng as of the assessee and the average lending was computed at 13.66%, which again support and substantiate the arm s length nature of the international transaction of payment of interest on CCD entered into by the assessee from an Indian Transfer Pricing perspective. A reference was made to page no. 4 of the letter dated 27.04.2016 moved by the assessee for admission of the additional evidences. It was accordingly contended that the payment of interest on CCD @ 12% entered into by the assessee m .....

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d and such price must be adjusted to account for differences in the international transactions and comparable uncontrolled transaction. It was stated that even if the LIBOR rates were to be used for the purpose of benchmarking INR denominated CCDs, adjustment should have been made by keeping in view the following factors for computing the return from an instrument: a) nature of security b) foreign exchange risk hedging c) withholding tax d) floating rate to fixed rate e) tenor of the security f) .....

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ssee had not claimed any deduction of the interest paid on issuance of the CCDs in its return of income. A reference was made to page nos. 682 to 684 of the assessee s paper book, which is the copy of return of income. 12. In his rival submissions the ld. CIT DR reiterated the observations made by the TPO and the DRP in their respective orders and further submitted that the international transactions were not at arm s length, therefore, the AO rightly made the adjustment which was recommended by .....

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P. The new evidence now furnished by the assessee, go to the root of the matter and are very much relevant to resolve the present controversy i.e. as to whether the borrowing was the External Commercial Borrowings or not, it is also not clear as to whether the assessee claimed the deduction of the interest paid on issuance of Compulsorily Convertible Debenture in its return of income. In the present case, the assessee carried out analysis on BSE database which provides the details of the compara .....

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