Tribunal upholds 13% interest rate on unsecured NCDs as arm's length after TPO used incorrect secured debenture comparables

The ITAT Visakhapatnam held that the assessee's 13% interest rate on unsecured NCDs was at arm's length. The TPO incorrectly selected comparables with secured debentures and companies outside the solar power sector. The tribunal found that when proper filters for unsecured instruments and relevant sector companies were applied, the 65th percentile rate was 14.25%, exceeding the assessee's rate. Following precedents from ITAT Surat and Bangalore, the tribunal concluded the interest rate was appropriate given the higher risk of unsecured debt, allowing the assessee's grounds.

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Issues Involved:
1. Benchmarking of the interest rate on Non-Convertible Debentures (NCDs)
2. Mistake in computing total income and tax thereon
3. Computation of interest under sections 234B and 234D
4. Initiation of penalty under section 270A

Summary:

Benchmarking of the Interest Rate on NCDs:
The primary issue revolves around the appropriate benchmarking of the interest rate on NCDs issued by the assessee. The assessee argued that the NCDs were unsecured, justifying a higher interest rate of 13%. The Transfer Pricing Officer (TPO) initially accepted the Comparable Uncontrolled Price (CUP) method but disputed the comparables selected by the assessee, ultimately determining an Arm's Length Price (ALP) interest rate of 8.95%. The assessee challenged this, arguing that the TPO failed to apply filters distinguishing between secured and unsecured debt instruments and did not consider industry-specific factors. The Tribunal agreed with the assessee, noting that higher risk associated with unsecured loans justifies a higher interest rate. Citing precedents, the Tribunal concluded that the interest rate charged by the assessee was at arm's length, allowing grounds 1 and 2 of the appeal.

Mistake in Computing Total Income and Tax Thereon:
The assessee contended that the Assessing Officer (AO) erred in computing the total taxable income and tax. This issue was deemed consequential and did not require separate adjudication as it depended on the resolution of the primary issue regarding the interest rate on NCDs.

Computation of Interest Under Sections 234B and 234D:
The assessee argued that the AO incorrectly computed interest under sections 234B and 234D. This issue was also considered consequential and did not require separate adjudication.

Initiation of Penalty Under Section 270A:
The assessee challenged the AO's initiation of penalty proceedings under section 270A. Like the previous issues, this was deemed consequential and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the interest rate on NCDs was at arm's length. The other issues raised were deemed consequential and did not require separate adjudication. The appeal was pronounced in open court on 22nd December, 2023.

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