Tribunal directs re-evaluation of Arm's Length Price for interest on CCDs, confirms CCDs as debt.

The Tribunal partly allowed the appeal, directing the AO/TPO to re-evaluate the Arm's Length Price (ALP) of interest on Compulsory Convertible Debentures (CCDs) while confirming CCDs as debt for interest allowability. The issues of set-off of losses and consequential interest under sections 234B and 234D were not addressed due to lack of arguments and their dependence on the main issues. The decision was rendered on 02nd August 2022.

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Issues Involved:
1. Re-characterization of Compulsory Convertible Debentures (CCDs) as equity.
2. Determination of Arm's Length Price (ALP) for interest on CCDs.
3. Set-off of brought forward business losses and unabsorbed depreciation.
4. Levy of consequential interest under section 234B and 234D of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Re-characterization of CCDs as Equity:
The primary issue raised by the assessee was the treatment of CCDs as equity by the Assessing Officer (AO) and Transfer Pricing Officer (TPO), resulting in the computation of the ALP of interest as Nil. The assessee argued that CCDs should be considered as debt until converted into equity, citing judicial precedents and the Tribunal's earlier decisions in the assessee's own case for previous assessment years (AYs 2009-10 to 2013-14). The Tribunal upheld the assessee's position, referencing the Mumbai ITAT's decision in Besix Kier Dabhol, SA vs DDIT, which stated that in the absence of specific thin capitalization rules in India, recharacterization of debt as equity is not permissible. The Tribunal concluded that the RBI's classification of CCDs as equity for FDI policy purposes does not extend to other contexts, such as the allowability of interest under section 36(1)(iii) of the Income-tax Act.

2. Determination of ALP for Interest on CCDs:
The Tribunal noted that the AO and TPO had not adequately addressed the ALP aspect of the interest on CCDs. The CIT(A) had previously suggested an average rate based on SBI PLR, while the DRP had adopted LIBOR plus rates in subsequent years. The Tribunal remanded the matter to the AO/TPO for a proper determination of the ALP of the interest on CCDs, emphasizing the need for a thorough analysis in accordance with transfer pricing provisions.

3. Set-off of Brought Forward Business Losses and Unabsorbed Depreciation:
The assessee contended that the AO did not grant credit for brought forward business losses and unabsorbed depreciation for the year under consideration. However, no arguments were presented by the assessee's representative on this ground during the hearing, and thus, the Tribunal did not adjudicate this issue.

4. Levy of Consequential Interest under Section 234B and 234D:
The assessee challenged the levy of interest under sections 234B and 234D, which was consequential to the primary grounds of appeal. Given that these grounds were dependent on the resolution of the main issues, the Tribunal did not provide a separate adjudication for this ground.

Conclusion:
The Tribunal partly allowed the appeal, primarily directing the AO/TPO to re-evaluate the ALP of the interest on CCDs while upholding the treatment of CCDs as debt for the purpose of interest allowability under section 36(1)(iii). The issues regarding set-off of losses and consequential interest were not adjudicated due to lack of arguments and their dependent nature, respectively. The order was pronounced in the open court on 02nd August 2022.

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