Tribunal directs fresh ALP benchmarking for NCD interest, emphasizes internal comparables, security & currency adjustments.

The Tribunal allowed the appeals filed by the assessee for statistical purposes, directing the AO/TPO to undertake a fresh benchmarking of the Arm's Length Price (ALP) of interest on Non-Convertible Debentures (NCDs), emphasizing the preference for internal comparables. The Tribunal highlighted the need for adjustments based on security differences and currency considerations, remanding the matter for further verification and appropriate adjustments.

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Issues Involved:
1. Legality of the assessment order.
2. Transfer pricing adjustment on account of excess interest paid on Non-Convertible Debentures (NCDs).

Detailed Analysis:

1. Legality of the Assessment Order:
The assessee argued that the assessment order passed by the AO/TPO is "bad in law and void ab-initio." This contention was raised as a preliminary issue, challenging the validity of the assessment order itself. However, the judgment does not provide a detailed discussion or ruling on this specific issue, suggesting that the primary focus was on the transfer pricing adjustments.

2. Transfer Pricing Adjustment on Account of Excess Interest Paid on NCDs:
The core issue in both assessment years 2017-2018 and 2018-2019 was the proposed adjustment of INR 10,85,05,943 and INR 10,25,04,498, respectively, on account of alleged excess interest paid by the assessee on NCDs to its Associated Enterprise (AE), Hydreq Pte. Ltd.

2.1. Transfer Pricing Officer's (TPO) Analysis:
- The TPO rejected the assessee's benchmarking analysis, which used internal Comparable Uncontrolled Price (CUP) method.
- The TPO chose 24 comparables for assessment year 2017-2018 and 31 comparables for assessment year 2018-2019 from the Bloomberg database.
- The TPO determined the Arm's Length Price (ALP) at 10% for both assessment years, leading to the proposed adjustments.

2.2. Dispute Resolution Panel (DRP) Findings:
- The DRP upheld the TPO's adjustments, rejecting the assessee's methodology based on inappropriate filters.
- The DRP emphasized that the TPO was justified in conducting a fresh benchmarking analysis using the CUP method and applying appropriate filters.
- The DRP dismissed the assessee's argument that the rule of consistency should apply, as the DRP had accepted the internal CUP for assessment year 2015-2016.

2.3. Assessee's Arguments:
- The assessee argued that the internal CUP should be preferred over the external CUP, citing several judicial pronouncements to support this position.
- The assessee highlighted that the DRP for assessment year 2015-2016 had accepted the internal CUP, and there was no change in facts warranting a different approach.
- The assessee contended that the comparables chosen by the TPO included government companies with AAA ratings and companies issuing convertible debentures, which are not comparable to the assessee's NCDs.
- The assessee also pointed out that the TPO's comparables dealt in different financial instruments, making them unsuitable for comparison.

2.4. Tribunal's Observations and Ruling:
- The Tribunal emphasized that when internal comparables are available, they should be preferred for ALP computation.
- The Tribunal referenced the case of Tecnimont ICB Pvt Ltd v ACIT, which supports the use of internal comparables due to their higher degree of comparability.
- The Tribunal noted that the assessee had taken secured loans from unrelated third parties at an interest rate of 13.75%, which could serve as internal comparables after necessary adjustments for security differences.
- The Tribunal remanded the matter back to the TPO to verify if the currency of the internal comparables and NCDs issued to the associated enterprise is the same. If so, the internal comparables should be adopted for ALP computation after making adjustments for differences in security.
- If the currencies are different, the TPO should analyze whether any adjustment can be made for such differences as mandated by Rule 10B(3). If internal comparables fail, external comparables with similar credit ratings should be used, and only NCDs should be considered for comparison, not convertible debentures.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for statistical purposes, directing the AO/TPO to undertake a fresh benchmarking of the ALP of interest on NCDs, keeping in view the directions provided. The matter was remanded back for a detailed verification and appropriate adjustments.

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