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2017 (1) TMI 893 - ITAT HYDERABAD

2017 (1) TMI 893 - ITAT HYDERABAD - TMI - Treatment to issuance of CCDs as a loan - TPA - considering LIBOR as benchmark rate - Held that:- There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature - .....

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- Thus we agree with the assessee’s contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case. - Adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, but also from the data from NSDL website in which average coupon rate ranged from 0.50% to 16.50% with an arithmetic mean of 12.50%. Thes .....

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NT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri Raghunathan, S. AR For The Revenue : Shri P. Chandra Sekhar, DR ORDER PER D. MANMOHAN, Vice-President: This is an appeal against the order of the Assessing Officer u/s. 143(3) r.w.s. 144C of the Income Tax Act [Act] consequent to the directions of the Dispute Resolution Panel [DRP]-I, Bengaluru. The issue in this appeal is with reference to Transfer Pricing adjustments made by the Assessing Officer [AO]/Transfer Pricing Office .....

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per the State Bank of India (SBI), which was at 12.26%. Since the rate of interest paid by it is lesser than SBI PLR, Assessee has maintained that its rate of interest paid is consistent with arm s length standard from the Indian TP Regulations perspective. The Ld.TPO however, did not agree with assessee s contentions. He has considered the CCDs as loan and benchmarked the interest rate at LIBOR plus 200 basis points, thereby determining Arm s Length Price [ALP] at ₹ 1,29,10,335/- and mad .....

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justment made. On the objection that the assessment order passed U/s. 143(3) r.w.s. 92CA(3) dt. 19-03-2015 was invalid, the DRP however, considered that it is a mistake committed by the AO in issuing a notice U/s. 156 but since the order on the face of it clearly stated as draft assessment order, the DRP rejected the objections. It confirmed the TP adjustments made by the TPO rejecting the assessee s detailed contentions. Hence the present appeal. Assessee has raised the following grounds: 1 The .....

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o be set aside. Without prejudice to ground no. 1 and 2, the Appellant raises the following grounds of appeal: 3 On facts and in the circumstances of the case and in contrary to law, the Learned transfer Pricing Officer ('TPO')/Ld. AO has erred 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 and the Hon'ble DRP has further erred in upholding the action .....

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DRP further erred in upholding the action of Ld.TPO/Ld.AO in considering LIBOR plus 200 basis points i.e. 2.91 %, s an arm's length interest on CCD on ad hoc basis which is complete violation of transfer pricing provisions and against the principles of law. 6 The Ld.TPO/Ld.AO erred on facts and in law in disregarding the independent alternative analysis carried out by the Appellant based on the data available from public database i.e., NSDL website; and subsequently DRP further erred in not .....

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ore the subsequent proceedings are bad in law. When it was pointed out that assessee withdrew the appeal before the CIT(A) and accepted the objections before the DRP, Ld. Counsel fairly admitted that assessee withdrew the appeal. However, Counsel relied upon the following case law in support of the stand that the AO was not justified in treating the draft assessment order as a final order and such a course of action is not a curable irregularity; therefore, the draft assessment order should be t .....

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assessee by catena of decisions and if a decision is taken in favour of the assessee, he may not be interested in pressing Ground Nos. 1 & 2. We therefore proceed to take up Ground Nos. 3 to 6. Ground Nos. 3 to 6: 6. It was the submission of the Ld. Counsel that assessee has issued the CCDs to the AE which were wrongly categorised as loan by the TPO. Referring to the Ministry of Commerce and Industry, Govt. of India, FDI Policy Circular of 2014, it was submitted that CCDs are not loans and .....

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reme Court. It was further submitted that TPO has gone beyond the scope to re-characterise the CCD as loan ignoring the principles laid down by the Hon'ble Delhi High Court in the case of Cotton Naturals India Pvt. Ltd., [276 CTR 445] and also the principles laid down by the Hon'ble High Court of Delhi in the case of EKL Appliances Ltd., [345 ITR 241]. It was also submitted that TPO has no power to re-characterise the transaction as laid down by the Co-ordinate Bench at Ahmadabad in the .....

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(374 ITR 516) (Bombay) to submit that rate of interest should be determined based on the country where the amount/loan is received/consumed. Ld. Counsel placed on record the comparison of facts between assessee s case and the above referred CIT Vs. Tata Autocomp Systems Ltd., ITA No. 1320 of 2012 (374 ITR 516) (Bombay). Referring to the decision of the Co-ordinate Bench, Mumbai in the case of India Debt Management Pvt. Ltd., in IT(TP)A No. 7518/Mum/2014 dt. 10-03-2016 [69 taxmann.com 125], it w .....

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down by the Co-ordinate Benches and the Hon'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Invest .....

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issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated: i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014; ii. CIT Vs. Cotton Naturals (I) Ltd., ITA No. 233/2014 (Del.HC); iii. M/s. Brahma Center Develop .....

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