TaxTMI 
TaxTMI 
2023 (6) TMI 29
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....oring that the fully compulsory convertible debentures were denominated in INR and interest for the same is appropriately benchmarked to SBI Prime lending rate. 3. The ld.CIT(A) has erred in sustaining the action of TPO / Assessing Officer by overlooking the same issue decided in respect of the same instruments in favour of the appellant. 4. The ld.CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in application of 11(7) of the India - Cyprus DTAA. 5. The ld.CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in the application of second proviso to section 92(4). 2.1 Thereafter, assessee has raised the additional grounds which read as under: "1. Without prejudice to the other grounds submitted in the original submission, we would like to rely on the provisions of Article 3 of the Double taxation avoidance agreement between India and Cyprus in respect of the interest paid / payable to the associated enterprise." 2. Without prejudice to the other grounds, the Assessing Officer erred in recharacterizing bonafide interest payment transaction, by splitting a transaction of single nature interest ....
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....rency specific interest rate benchmark of SBI PLR. However, the Assessing Officer had adopted LIBOR plus 200 basis points as more appropriate to determine the arm's length price, rejecting the SBI PLR plus 300 basis points adopted by the appellant. Finally, the Assessing Officer had taxed the excess interest of Rs. 13,98,41,656/ - at 40% and ALP of Rs. 2,73,89,512/ -is taxed at DTAA rate of 10% and passed assessment order under sec.143(3) r.w.s 144C of the Act. 4. Feeling aggrieved with the final assessment order, assessee carried the matter before ld.CIT(A), who granted partial relief to the assessee. 5. Feeling aggrieved with the order of ld.CIT(A), both the assessee and Revenue are now in appeal before us. 6. Admission of Additional grounds : We have heard the rival submissions and perused the material on record. Suffice to say, Hon'ble Apex Court's landmark decision in National Thermal Power Co. Ltd., Vs., CIT [229 ITR 383] (SC); as considered in Tribunal's Special Bench's decision All Cargo Global Logistics Ltd., Vs. DCIT (2012) [137 ITD 217](SB) (Mumbai), holds that the Tribunal can very well entertain a new ground going to root of the matter so as to....
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....are allotted on Conversion Date :- 120 (one hundred twenty) months from the date of allotment. Interest Rate :- (Benchmark + Spread) % per annum, where Benchmark means prime lending rate (PLR) of State Bank of India prevailing on the date of the meeting of the Board of Directors of the company at which the FCD is issued; and Spread means 3% per annum. Interest Payment Frequency :- Annually on 31st March of Each Year Conversion on Conversion Date :- Each Debenture would be compulsorily fully convertible into Equity Shares at a price per Equity Share that is mutually agreed upon by the company and the FCD Holder on the Conversion Date, subject to the company meeting with the minimum capitalization criteria prescribed under the applicable Law. Conversion Option before Conversion Date :- At any time during or before the conversion date, each FCD may at the option and sole discretion of its holder be convertible into Equity Share at a price per Equity share that is mutually agreed upon by the Company and the FCD Holder on the Conversion Date, subject to the Company meeting with the minimum capitalization criteria pres....
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.... of interest as an allowable expenditure. In the documents, the terms of debenture were mentioned as under :- "Terms of Debenture are 1. Debentures would be compulsorily converted into equity shares at the end of 120 months from the date of allotment, but may be converted at any time before the conversion date at the option and sole discretion of its holder." 25. In the present case, the TPO had benchmarked the transaction after treating the FCCDs as debt. This finding of TPO was based on Terms of issuance of FCCD and balance-sheets/ financials of the assessee as well as of it's A.E, where both had mentioned FCCD as debt. We agree with the finding of lower authority that FCCD is a debt, as holder had a right to recover the debt and had a right to receive the interest on the debt from the payee. Further assessee during the hearing had also agreed that the FCCD are debt instrument till its conversion. Further assessee had capiatlised the interest, being prior period expenses, however it was admitted that the interest was allowable expenditure as per section 36 r/w 2(28A) of the Income Tax Act 1961. In view thereof, we find no fault in the finding returned b....
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....nbsp; 6,60,00,000 13,00,000 2013-14 2,69,00,000 16,72,31,168 7,23,44,203 9,48,86,965 4,65,43,559 2014-15 3,74,48,500 1,57,37,358 2,17,11,142 25,75,000 27. The ld.AR for the assessee has drawn our attention to the judgment of the Hon'ble Bombay High Court in the case of PCIT Vs. India Debt Management reported in (2019) 106 Taxmann.com (Bom) 55, whereby the hon'ble Bombay High Court had decided the issue in para 3 and 6 as under : "3. Having heard learned Counsel for the parties and having perused the materials on record, we are broadly in agreement with the view of tribunal. The significant features of the assessee's case were that the assessee was mainly engaged in identifying the companies in financial distress whose products were otherwise viable and taking over or financing of such companies. The business of the assessee was thus froth with inherent risks. Its credit rating therefore was relatively low of 'BBB-'. The assessee was raising funds for such investments through issuance of debentures to its AEs.....
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....A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where ....
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....is imperative while applying other methods from comparison for transfer pricing and not while applying CUP method. Our non-consideration of the revenue's Appeal in the present case, should not be seen as putting our seal on such observations of the tribunal. In other words, we keep such question open to be examined in an appropriate case. In the present case, independent of such observations of the tribunal, we find that the conclusions arrive at, are based on evidence on record which conclusions call for no interference." 28. In our view, the decision of Hon'ble Bombay High Court as well as Delhi High Court are not applicable to the facts of the present case as both the Hon'ble Courts had not examined the issue of whether the FCCDs were in the nature of debt or equity and hence, there was no occasion to bench mark the interest payable on FCCD. In the present case, the issue involved is benchmarking of interest to be paid or payable of FCCDs before its conversion to equity. As mentioned elsewhere in the order, there would be no occasion for the assessee to repay the loan to it's A.E (on account of the nature of FCCD), therefore, the currency in which loan was taken or ....
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....osite stand stating that the debt being shown as capital under FEMA or under some other Regulations, therefore it is not a debt. As to civil rights are concerned, as long as such rights are not prohibited under any law, a rule or definition given in some provision of some other civil law, cannot change the rights agreed between the parties. Here in this case, this Corporate Debtor all through mentioned and shown this claim as a debt in the books of it. In view of the same, today this Corporate Debtor by relying upon some FEMA Regulations cannot say that it is not a debt, it is an equity invested by the applicant. As to this aspect, the applicant counsel has stated that the submission of the debtor counsel saying that this money is shown as equity in the Form filed before RBI is factually incorrect, because debt and equity are separately shown in the said Form. As to the judgment refereed by the Resolution Professional counsel, to our understanding, this ratio has been decided with regard to the Guideline IV (i) r/w IV (ii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guideline No. 8 and 11 of the Employees Stock Option Guide....
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....tion, this is shown as debt. It is true that in the agreement, that after 15 years, these debentures would become equity, but until such time the Corporate Debtor shall pay fixed returns to this applicant. The RP merely by showing this, the RP Counsel cannot come with an argument to say that this is to be treated as equity for redemption of debentures has not been envisaged in the agreement. At the time of winding up or admission of a case under IBC, if the debentures are not matured and not convertible for the period for redemption is not complete, they shall be treated as debentures and the consequence is, it will remain as debt. Same is the case here, debentures are not matured for conversion, interest shall be paid through coupons periodically. That has also not complied with. In view thereof, this application is hereby allowed directing the Resolution Professional to admit the claim as Financial Debt as envisaged under Section 5(8) (c) of the Insolvency and Bankruptcy Code, 2016. Accordingly, this application is allowed. 32. Further, we may fruitfully rely upon the decision of the Tribunal in the case of ACIT Vs. CAE Fright Training (India) Pvt. Ltd.....
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....form of fund infusion from abroad. The Government Policy only defined non-admissibility and non-validity of Optionally or Partially Convertible Debentures and other Hybrid Instruments as means of fund infusion vis a vis admissibility and validity of Compulsory Convertible Debentures as an instrument and means of fund infusion from abroad. This was the need and requirement in a Regulatory environment and for Regulatory purposes. Nowhere did the Government Policy redefined or re- characterized the nature of a Compulsory Convertible Debenture as equity. 7.5. As far as need and requirement under the Income Tax Act is concerned it is enough to understand that the Government nowhere said in the given situation that a Compulsory Convertible Debenture is equity even at the time of its inception and during its continuity as a debenture prior to its compulsory and actual conversion in to equity at the appointed date. That being the case, purposes of Income Tax Act just requires to determine the nature of receipt and expense and decide the taxability of the resultant income. Thus, in the case of a Compulsory Convertible Debenture the nature of its value is that of a debt and once it ....
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...." 34. Even as per the assessee, the FCCDs are debt till it is converted into equity. Hence, there is no recharacterization by the Assessing Officer/TPO. Assuming the case of the assessee that FCCDs are equity then we must look into the substance over the form of the instrument, which can be ascertained by looking into its terms and conditions of allotment. As discussed hereinabove, the terms and conditions clearly show that the FCCDs are debt till its conversion. Yet another reason to above conclusion is that there is no recharacterization of the instrument by the Assessing Officer as there is no concept of paying the interest on the equity by the company to its holder under the Companies Act or under Income Tax Act or under the Accounting standards. The reliance of the assessee on the RBI policy for the non- convertible debenture is not relevant. In view of the above, we do not find any substance in the argument of the assessee that the Assessing Officer has recharacterized the nature of transaction. 35. Accordingly, we hold that FCCDs are debt, therefore, the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points, which ....
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....the ld.CIT(A) is not in accordance with the law and therefore, the benefit of section 11(7) of India Cyprus DTAA is required to be given to the assessee and rate of interest is required to be restricted. 8.2. In this regard, the ld.CIT(A) had dismissed the ground of the assessee by observing as under : "8. The material available on record has been perused and I am in agreement with the stand taken by the AO. The appellant is an investment company having two subsidiaries in India i.e., M/s. Watermarke Residency Pvt. Ltd. (WRPL) and M/s. Watermarke Villas Pvt. Ltd. (WVPL). The appellant received a sum of Rs.16,72,31,170/- from WRPL towards interest income on investments in the form of fully completely convertible debentures (FCCDs). Tax was deducted at source by WRPL @ 42.024%. In the original return of income, the appellant declared income of \Rs.16,72,31,170/- and arrived at tax payable of Rs.7,23,44,204/-, being the amount of TDS made by WRPL. However, the appellant revised the return by claiming benefit of special rate of tax @ 10% relying on Article 11(2) of the India-Cyprus Double Tax Avoidance Agreement (DTAA) and offering nil income with a claim for refund of Rs.5....
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....he Act. 11. We have heard the rival submissions and perused the material on record. Admittedly, the interest as computed by the Assessing Officer pursuant to the application of applying LIBOR + 200 points was confirmed by the Tribunal in the case of Watermarke Residency Limited. Now the issue is that whether only 10% of the gross amount of the interest is required to be taxed in the hands of the assessee and the remaining interest amount cannot be taxed as per clause 7 of Article 11 of the DTAA or not ? In our view, the conjoint reading of Clauses 2 and 7 of Article 11 of DTAA made it abundantly clear that interest paid over and above the interest mentioned in clause 7 of Article 11 of DTAA, shall be chargeable at Income Tax rate as applicable in Contracting State namely, India, as mentioned in Article 11(7) of DTAA. 12. In light of the above, we do not find any error in the order passed by the lower authorities. During the course of argument, the ld. AR had vaguely argued that excess amount of the interest paid / received by the assessee shall be chargeable under the head "Income from business" and thereafter, it may be taxed under the other provisions of DTAA. In our view, ....
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....t arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10% of the gross amount of the interest." 15.3. From the perusal of definition of 'tax' provided under Article 3 of DTAA, and clause (2) of Article 11, it is abundantly clear that tax shall not exceed 10% of the gross amount of the interest. Assuming for the purpose of arriving at applicable rate of tax, if we consider that the education cess is a part of tax which has now been clarified by the recent amendment made to the Finance Act, 2022, then also the tax was required to be restricted to the cap of 10% mentioned in 11(2) of DTAA. In that eventuality also, the applicable rate of tax cannot exceed the rate of tax mentioned in Article 3(k) r.w. Article 11(2) of the DTAA. Hence, the rate of tax which can be charged from the assessee shall not exceed 10% of the gross total amount of the interest. Our view is also supported by the decision of co-ordinate Bench of the Tribunal in the case of R.A.K. Ceramics, UAE Vs. DCIT reported in (2019) 104 taxmann.com 380 (Hyd.Trib), wherein this Tribunal decided the iss....