Compulsorily convertible debentures, despite their hybrid...

Compulsorily convertible debentures, despite their hybrid features, retain their character as debt until conversion into shares. Transfer-pricing authorities cannot treat such instruments as equity solely from their features and fix the arm's length price of related interest at nil. Debt-to-equity recharacterisation is contemplated under Chapter X-A only after an impermissible avoidance arrangement is declared through the prescribed procedure. As no such procedure was invoked, the recharacterisation and resulting transfer-pricing adjustment were deleted, and the appeal was allowed.