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TMI Blog2023 (6) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... nominated in INR and interest for the same is appropriately benchmarked to SBI Prime lending rate. 3. The ld.CIT(A) has erred in sustaining the action of TPO / Assessing Officer by overlooking the same issue decided in respect of the same instruments in favour of the appellant. 4. The ld.CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in application of 11(7) of the India - Cyprus DTAA. 5. The ld.CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in the application of second proviso to section 92(4). 2.1 Thereafter, assessee has raised the additional grounds which read as under: "1. Without prejudice to the other grounds submitted in the original submission, we would like to rely on the provisions of Article 3 of the Double taxation avoidance agreement between India and Cyprus in respect of the interest paid / payable to the associated enterprise." 2. Without prejudice to the other grounds, the Assessing Officer erred in recharacterizing bonafide interest payment transaction, by splitting a transaction of single nature interest payment into two tranches i.e. interest and other income other than interest income, on surmise bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more appropriate to determine the arm's length price, rejecting the SBI PLR plus 300 basis points adopted by the appellant. Finally, the Assessing Officer had taxed the excess interest of Rs. 13,98,41,656/ - at 40% and ALP of Rs. 2,73,89,512/ -is taxed at DTAA rate of 10% and passed assessment order under sec.143(3) r.w.s 144C of the Act. 4. Feeling aggrieved with the final assessment order, assessee carried the matter before ld.CIT(A), who granted partial relief to the assessee. 5. Feeling aggrieved with the order of ld.CIT(A), both the assessee and Revenue are now in appeal before us. 6. Admission of Additional grounds : We have heard the rival submissions and perused the material on record. Suffice to say, Hon'ble Apex Court's landmark decision in National Thermal Power Co. Ltd., Vs., CIT [229 ITR 383] (SC); as considered in Tribunal's Special Bench's decision All Cargo Global Logistics Ltd., Vs. DCIT (2012) [137 ITD 217](SB) (Mumbai), holds that the Tribunal can very well entertain a new ground going to root of the matter so as to determine correct tax liability of a taxpayer provided all the relevant facts are already on record. Respectfully, following the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of State Bank of India prevailing on the date of the meeting of the Board of Directors of the company at which the FCD is issued; and Spread means 3% per annum. Interest Payment Frequency :- Annually on 31st March of Each Year Conversion on Conversion Date :- Each Debenture would be compulsorily fully convertible into Equity Shares at a price per Equity Share that is mutually agreed upon by the company and the FCD Holder on the Conversion Date, subject to the company meeting with the minimum capitalization criteria prescribed under the applicable Law. Conversion Option before Conversion Date :- At any time during or before the conversion date, each FCD may at the option and sole discretion of its holder be convertible into Equity Share at a price per Equity share that is mutually agreed upon by the Company and the FCD Holder on the Conversion Date, subject to the Company meeting with the minimum capitalization criteria prescribed under the applicable law. Security :- The Debentures are unsecured. Ranking :- Upon conversion of FCDs into equity shares, the same shall rank pari passu with the existing equity shares of the company." 21. The notable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sole discretion of its holder." 25. In the present case, the TPO had benchmarked the transaction after treating the FCCDs as debt. This finding of TPO was based on Terms of issuance of FCCD and balance-sheets/ financials of the assessee as well as of it's A.E, where both had mentioned FCCD as debt. We agree with the finding of lower authority that FCCD is a debt, as holder had a right to recover the debt and had a right to receive the interest on the debt from the payee. Further assessee during the hearing had also agreed that the FCCD are debt instrument till its conversion. Further assessee had capiatlised the interest, being prior period expenses, however it was admitted that the interest was allowable expenditure as per section 36 r/w 2(28A) of the Income Tax Act 1961. In view thereof, we find no fault in the finding returned by the TPO/ld.CIT(A). 26. Assessee before the ld.CIT(A) had stated in reply dated 15/6/2017 that FCCD are in the nature of equity instruments and are denominated in INR and interest is payable in INR. Thus the assessee had changed its stand before ld.CIT(A), which is contrary to terms of issuance of FCCD, its financials and TP study, which is not per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court had decided the issue in para 3 and 6 as under : "3. Having heard learned Counsel for the parties and having perused the materials on record, we are broadly in agreement with the view of tribunal. The significant features of the assessee's case were that the assessee was mainly engaged in identifying the companies in financial distress whose products were otherwise viable and taking over or financing of such companies. The business of the assessee was thus froth with inherent risks. Its credit rating therefore was relatively low of 'BBB-'. The assessee was raising funds for such investments through issuance of debentures to its AEs. The tribunal even on comparison found that the average rate of interest of 11.30% paid by the assessee to its AEs was not excessive and was in any case lower than in the comparable instances. The tribunal rejected the transfer pricing adjustment comparing the rate of return for the assessee's US based AE. This later conclusion of the Tribunal is supported by following decisions. 4. Division Bench of Delhi High Court in case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401, had held and observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetical' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay High Court as well as Delhi High Court are not applicable to the facts of the present case as both the Hon'ble Courts had not examined the issue of whether the FCCDs were in the nature of debt or equity and hence, there was no occasion to bench mark the interest payable on FCCD. In the present case, the issue involved is benchmarking of interest to be paid or payable of FCCDs before its conversion to equity. As mentioned elsewhere in the order, there would be no occasion for the assessee to repay the loan to it's A.E (on account of the nature of FCCD), therefore, the currency in which loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. Therefore also, the decision in the case of Cotton Natural (supra) is not applicable to the present set of unique facts. 29. The next judgment relied upon by the assessee was ADAMA India (P) Ltd. Vs. DCIT reported in (2017) 78 taxmann.com 75 is not applicable to the facts of the present case. As the coordinate bench had decided the issue based on the above two noted decisions of Hon'ble High Courts without discussing and deciding the nature of CCD. In our view, this decision is also distinguisha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. As to this aspect, the applicant counsel has stated that the submission of the debtor counsel saying that this money is shown as equity in the Form filed before RBI is factually incorrect, because debt and equity are separately shown in the said Form. As to the judgment refereed by the Resolution Professional counsel, to our understanding, this ratio has been decided with regard to the Guideline IV (i) r/w IV (ii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guideline No. 8 and 11 of the Employees Stock Option Guidelines. These Guidelines being in relation to Employees Stock Option Guidelines and Issue of Cumulative Convertible Preference Shares, this ratio cannot be extended to say that debentures also fall under this category. Therefore, we believe that the ratio decided in Narendra Kumar Maheshwari (supra) is not applicable to the present facts of the case. Moreover, since Insolvency and Bankruptcy Code, 2016 has overriding effect over other enactments, the debentures being treated as debt under IBC, this value of debentures shall be treated as debt, not as equity. In any event, since it is not the case of this Corporate Debtor that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, debentures are not matured for conversion, interest shall be paid through coupons periodically. That has also not complied with. In view thereof, this application is hereby allowed directing the Resolution Professional to admit the claim as Financial Debt as envisaged under Section 5(8) (c) of the Insolvency and Bankruptcy Code, 2016. Accordingly, this application is allowed. 32. Further, we may fruitfully rely upon the decision of the Tribunal in the case of ACIT Vs. CAE Fright Training (India) Pvt. Ltd. IT(TP)A 63/Bang/2015, had held CCD as debt, whereby it was held as under : "7.1. Core theme and arguments of the Transfer Pricing Officer is nonexistent Thin Capitalization concept in Indian context. Towards this objective the Transfer Pricing Officer has re- characterized the Compulsory Convertible Debentures (debt) in to equity as has been seen in discussion above. For this the Transfer Pricing Officer also makes reference to the Foreign Direct Investment (FDI) Policy and the Reserve Bank of India (RBI) Policy in respect of fund infusion from foreign sources in to Indian economy. Misplaced understanding of the Government Policy and its purpose has only created a smokesc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that a Compulsory Convertible Debenture is equity even at the time of its inception and during its continuity as a debenture prior to its compulsory and actual conversion in to equity at the appointed date. That being the case, purposes of Income Tax Act just requires to determine the nature of receipt and expense and decide the taxability of the resultant income. Thus, in the case of a Compulsory Convertible Debenture the nature of its value is that of a debt and once it is converted into equity at the appointed date, its value is that of an equity. The resultant expense therefore correspondingly will be that of an interest and a dividend, in that sequence. Reading anything more in to the Government's Policy through RBI and FDI Policies is not only misleading but also purposive. 33. During the course of argument, the ld.AR had submitted that the TPO cannot recharacterize the nature of FCCD as equity to loan. In this regard, we have already mentioned that as per the assessee, FCCDs are debt in nature till its conversion into equity. Therefore, there is no recharacterization of the transaction by the TPO / Assessing Officer. Further, the TPO/Assessing Officer cannot act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Accounting standards. The reliance of the assessee on the RBI policy for the non- convertible debenture is not relevant. In view of the above, we do not find any substance in the argument of the assessee that the Assessing Officer has recharacterized the nature of transaction. 35. Accordingly, we hold that FCCDs are debt, therefore, the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points, which is in consonance with the RBI guidelines issued for the purposes of FDI. 36. We may also draw support from the decision of co-ordinate Bench of the Tribunal in the case of Maanaveeya Development & Finance P. Ltd. in ITA Nos.134/Hyd/2017 and others dt.14.12.2021 wherein at Para 6 it was held as under: "6. Learned counsel has quoted a catena of case law regarding adoption of interest rate going by currency involved in the international transactions. We note that the same are not relevant to this instant issue since we have already held that the currency involved herein is not "Euro" only. The alleged "safe harbor" rules (supra) also do not pertain to these four assessment years. We thus affirm the TPO's identical action in all these four ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %. In the original return of income, the appellant declared income of \Rs.16,72,31,170/- and arrived at tax payable of Rs.7,23,44,204/-, being the amount of TDS made by WRPL. However, the appellant revised the return by claiming benefit of special rate of tax @ 10% relying on Article 11(2) of the India-Cyprus Double Tax Avoidance Agreement (DTAA) and offering nil income with a claim for refund of Rs.5,47,74,900/-. 8.1 The case was referred to the Transfer Pricing Officer (TPO) and the total TP adjustment made on international transactions was of Rs.13,98,41,656/-. The AO has correctly taxed the excess interest income of Rs.13,98,41,656/- @ 40% relying on Article 11(7) of the India-Cyprus DTAA. The view taken in other assessment years is not relevant as the principle of res judicata is not applicable to income tax proceedings. 8.2 As pointed out by the AO, as per Article 11(7) of the DTAA, if the interest paid is not at ALP, then the benefit of special rate of tax will not be available to the excess interest paid and the same will be taxed at normal rates prescribed under the Act. Section 92(1) is clear that any income arising from an international transaction shall be computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In light of the above, we do not find any error in the order passed by the lower authorities. During the course of argument, the ld. AR had vaguely argued that excess amount of the interest paid / received by the assessee shall be chargeable under the head "Income from business" and thereafter, it may be taxed under the other provisions of DTAA. In our view, the Assessing Officer / ld.CIT(A) cannot be changed the characteristics of "head of income" when the assessee itself has admitted that the amount received by it was in the nature of interest only and hence, it would be improper either on the part of the Assessing Officer or the assessee to change or recharacterize the amount received by it as 'business income' within the meaning of DTAA. Once the assessee itself admits that the amounts received by it on the FCCDs were in the nature of "Interest income", then the same cannot be converted into "income from business" and therefore, the submissions of the ld. AR are without any basis and hence, the same are rejected. Accordingly, the appeal of the assessee is dismissed. 13. In the result, the appeal of assessee in ITA No.347/Hyd/2019 is dismissed. 14. Now we will deal with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax which can be charged from the assessee shall not exceed 10% of the gross total amount of the interest. Our view is also supported by the decision of co-ordinate Bench of the Tribunal in the case of R.A.K. Ceramics, UAE Vs. DCIT reported in (2019) 104 taxmann.com 380 (Hyd.Trib), wherein this Tribunal decided the issue in favour of the assessee by holding as under : "9. The view so taken by the coordinate bench, with which we are in complete agreement, has also been adopted in a large number of cases and including in the context of the India UAE Double Taxation Avoidance Agreement. These cases include Capgemini SA v. Dy. CIT (International Taxation) [2016] 72 taxmann.com 58/160 ITD 13 (Mum. - Trib.), Dy. DIT v. J.P. Morgan Securities Asia (P.) Ltd. [2014] 42 taxmann.com 33/[2015] 152 ITD 553 (Mum. - Trib.), Dy. DIT v. BOC Group Ltd. [2015] 64 taxmann.com 386/[2016] 156 ITD 402 (Kol. - Trib.), Everest Industries Ltd. v. Jt. CIT [2018] 90 taxmann.com 330 (Mum. - Trib.), Soregam SA v. Dy. DIT (Int. Taxation) [2019] 101 taxmann.com 94 (Delhi - Trib.) and Sunil v. Motiani v. ITO (International Taxation) [2013] 33 taxmann.com 252/59 SOT 37 (Mum. - Trib.). We may add that no contr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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