Transfer pricing on CCDs and receivables: debt character preserved until conversion, with notional interest recomputed after a 90-day credit period.

Compulsorily convertible debentures were held not to be re-characterised as equity for transfer pricing merely because they are compulsorily convertible; the instrument remained debt until conversion, and the nil arm's length interest approach was rejected. Notional interest on delayed trade receivables from associated enterprises had to be examined on facts, including the assessee's credit pattern and a reasonable credit period; a 90-day credit period was accepted for recomputation. The CCD adjustment was deleted in principle, while the receivables adjustment was remitted for fresh computation on that basis.

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Issues: (i) Whether compulsorily convertible debentures could be re-characterised as equity for transfer pricing purposes so as to treat the arm's length interest as nil. (ii) Whether notional interest on delayed trade receivables from associated enterprises could be computed, and if so, whether a 90-day credit period should be allowed.

Issue (i): Whether compulsorily convertible debentures could be re-characterised as equity for transfer pricing purposes so as to treat the arm's length interest as nil.

Analysis: The CCDs remained shown as borrowings in the assessee's financials and interest had in fact been paid on them. The re-characterisation adopted by the transfer pricing authorities was found to be unsupported, with the instrument continuing to be debt until conversion. The reliance on FDI policy to treat the CCDs as equity was held to be inapposite for transfer pricing valuation.

Conclusion: The re-characterisation of the CCDs as equity was rejected and the nil arm's length interest determination was set aside.

Issue (ii): Whether notional interest on delayed trade receivables from associated enterprises could be computed, and if so, whether a 90-day credit period should be allowed.

Analysis: The receivables adjustment required fresh examination on the facts, including the assessee's credit pattern and the appropriate credit period. The Tribunal accepted the assessee's alternate plea for a 90-day credit period and directed recomputation of the adjustment accordingly.

Conclusion: The upward adjustment on receivables was restored for recomputation after allowing a 90-day credit period.

Final Conclusion: The appeal succeeded in part: the CCD adjustment was deleted in principle, while the receivables adjustment was sent back for fresh computation, resulting in a remand for statistical purposes.

Ratio Decidendi: A CCD cannot be re-characterised as equity for transfer pricing merely because it is compulsorily convertible, and notional interest on receivables must be determined on a fact-specific basis with a reasonable credit period.

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