TaxTMI 
TaxTMI 
2024 (10) TMI 1625
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....the facts and in the circumstances of the case and in law, assessment order dated 28 June 2014 Final Assessment Order" passed by the learned assessment unit, Income tax department ("Ld. AD") in pursuance to the directions of the learned Dispute Resolution Panel-1, Mumbai (Ld. DRP") under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 ("IT Act") is contrary to the facts and the law and, therefore, not tenable. 2 Validity of Final Assessment Order passed by the Ld. AO 2.1. On the facts and in the circumstances of the case and in law, the Ld. AD erred in passing the Final Assessment Order under section 143(3) u/s 144(3) section 144B of the IT Act, which is without jurisdiction and bad in law as the same is passed beyond the time limit prescribed under section 153 of the IT Act Re: Transfer pricing adjustment of INR 3888,00,000/- on account of sale of embedded call option 3.1. On the facts and in the circumstances of the case and in law, the Ld.AO under the directions of the Ld DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call....
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....rections of the Ld. DRP erred in making ad hoc adjustment of INR 1,91,34,247/- on account of interest on CCDs paid by the Appellant to Indorama Netherlands B.V. by treating the arm's length price ("ALP") of the transaction at Nil." 3. The assessee is a private limited company primarily involved in manufacturing of surfactants. The assessee filed its Income Tax Return ("ITR") for AY 2020-21 declaring total loss at INR 6,78,11,415/-.During impugned assessment year the assessee acquired surfactants business (i.e., business undertaking) of Huntsman International (India) Private Limited ("HIIPL"), an unrelated party under 'slump sale' in terms of Business Transfer Agreement dated 03/10/2020, copy of the agreement is enclosed pages 212-266 of the factual paper book. Acquisition of this business undertaking was part of a global business acquisition agreement signed between Indorama Ventures Holdings LP and Huntsman International LLC. The acquisition consideration for HIIPL's surfactants business was determined based on the ratio of HIIPL's EBITDA (i.e., Earnings before Interest, Depreciation and amortisation) to the total EBITDA of the business acquired globally. The acquisition pr....
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....ter getting recommendation from DRP. The aggrieved assessee filed the appeal before us by challenging the assessment order. 4. In ground no 1 raised by the assessee is general in nature and does not need adjudication, hence dismissed. 5. In ground no 2 the assessee contends that final assessment order is passed beyond the limitation period prescribed under section 153 of the Act, which is not pressed before us, hence dismissed. 6. In ground no3 the assessee agitates that the Ld. DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV. The Ld.AR of the assessee submitted that CCDs cannot be equated with call option. The assessee did not enter into sale of any 'call option' to its AE, INBV and thus the question of receiving any 'option premium' does not arise. The CCDs were issued in accordance with the terms of the CCD subscription agreement dated 30/12/2019 and the same was not a contract for sale of any 'call option', the CCD subscription agreement dated 30/12/2019 is enclosed at pages 177-183 of the factual paperbook. A 'call option' contract gives the holder the r....
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....in the case of Vodafone India Services (P.) Ltd v UOI [(2014) 368 ITR 1. For above mentioned reasons, it cannot be said that the Assessee has transacted in any options contract. Consequently, in the absence of any income (notional or otherwise) in the nature of options premium, transfer pricing adjustment cannot be made. He further submitted that the RBI took on record issuance of CCDs worth Rs. 80 crores by the assessee; CCDs were issued to foreign AE under automatic approval route of RBI. 9. With regard to ground no. 4 pertaining to transfer pricing adjustment of Rs. 16,78,40,626/- on account of purchase of business from HIIPL. The Ld. AR argued on non-applicability of section 56(2)(x) of the Act on purchase / receipt of 'business under taking'. He submitted that the revenue has made this adjustment primarily on the ground that the business was purchased amount to Rs. 1,74,01,59,374/- whereas its fair value computed under the DCF method (treated as ALP) was amount to Rs. 1,90,80,00,000/-and thus difference amount to Rs. 16,78,40,626/- was taxable under section 56(2)(x) of the Act. In this connection he submitted that section 56(2)(x) can apply only to receipt of 'property' as ....
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....e judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CIT (Appeals)" 10. The Ld.AR further submitted that there is contravention of Instruction No. 3/2016 dated 10/03/2016: The assessee declared the international transaction with HIIPL in Form 3CEB with qualifying remark that the transaction was not a 'deemed international transaction', and that it was reported out of abundant caution. In such circumstances, Instruction 3/2016 required the Ld. AO to record satisfaction and provide opportunity of being heard before making a TP reference. This jurisdictional requirement has not been complied with, and therefore the transfer pricing adjustment is bad on this count as well. Respectfully the ld. AR relied on the decision of Hon'ble Delhi High Court in the case of Indorama Synthetics (India) Ltd v ACIT [2016] 71 taxmann.com 349 (Delhi). 11. The Ld.AR further argued that the acquisition of Huntsman group's global business was between two unrelated parties, and the EBITDA method for valuation of businesses has arrived at betwee....
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....e interest in the hands of the holder..." (c) Hon'ble Income Tax Appellate Tribunal Bangalore, A-Bench in the case of ACIT v CAE Flight Training (India) Pvt. Ltd [2023] 150 taxmann.com 276 (Bangalore); relevant paragraphs 23 to 24 are reproduced as below: - "23. As per above paras of this tribunal order, Statute book of the other country, no disallowance can be made in India by applying dis Principle. To this extent, we uphold the finding of CIT(A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin Capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009-10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated thar fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowab....
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....bentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted on the date of share on the expiry of 15 months from the date of allotment of the debenture. Part-B debenture was to carry an interest at the rate of Rs. 14 per annum till the date of conversion payable half yearly on 30th June and 31st December each year and on conversion. The issue in dispute in that case was regarding the allowability of expenses incurred on issue of such debentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted only on expiry of 15 months from the date of allotment of debenture and under these facts, it was held by Special Bench of the Tribunal in that case that the expenses incurred ....
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...., inter-alia, convert all CCDs into equity shares by 31/03/2020 as a condition precedent to providing a term loan and working capital loan. 15. The Ld.AR submitted that it is a settled position that the Ld. TPO cannot step into the shoes of the assessee to determine whether it should have made the commercial choice of issuing CCDs to raise capital for business. Respectfully reliance in this regard is placed on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd vs. CIT(A) [2007] 288 ITR 1. 16. The Ld.AR submitted that the FEMA / RBI guidelines are not relevant in this case The Ld. DRP erroneously placed reliance on the characterization of CCDs under FEMA / foreign direct investment ("FDI") regulations as 'equity instruments.' The Ld. DRP failed to appreciate the fact that these rules were introduced in an entirely different context of Indian foreign exchange regulations, and that treatment under FEMA does not change the essential nature of the CCDs as a 'debt instrument' for the purpose of IT Act. The Ld. DRP also relied on Circular No. 74 dated 8 June 2007 issued by the RBI wherein RBI stated that instruments which are fully and mandatorily convertible int....
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....arables having an arm's length range of 8.00% to 12.00% per annum. Since, the assessee's interest payment of 9.7% was within this range, it was treated at arm's length. The Ld. TPO / DRP disregarded the independent benchmarking analysis undertaken by the assessee by neither giving any cogent reasons nor independently conducting any search in accordance with the transfer pricing regulations under the Act. 21. I was also submitted that the assessee suo-motu disallowed an amount of INR 1,55,02,844/- out of the total interest paid of INR 1,91,34,247/- in accordance with thin capitalization rules under section 94B of the IT Act while filing its return of income for the year under consideration. Further applicable taxes were withheld while making interest payments and INBV also filed its return of income in India for AY 2020-21 where by it reported this interest income and the taxes withheld under section 195 of the Act and no refund of the same was claimed by it in the return of income. Thus, Ld. DRP's observations at page 79 of its order that there was base erosion by way of exempt payments is, incorrect / faulty. 22. The Ld.AR further submitted that the assessee obtained a s....
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....computed under the DCF method, treated as ALP was amount to Rs. 1,90,80,00,000/-and thus difference amount to Rs. 16,78,40,626/- by invoking provisions of section 56(2)(x) of the Act. The section 56(2)(x) can apply only to transaction of 'property' as defined in that section, but the 'property' is never included with 'business undertaking'. the acquisition of Huntsman group's global business was between two unrelated parties, so section 56(2)(x) is not applicable related to "slump sale" and accordingly amount to Rs. 16,78,40,626/- is directed to be deleted. We considered the addition made under section 36(1)(iii) of the Act. The assessee submitted that the interest was paid to AE for CCDs till conversion to the equity share. But the Ld.TPO has changed the characteristics of the CCDs to an equity share. So, the re-characterization and transaction is beyond the jurisdiction of the Ld.TPO. Respectfully followed the order of the Hon'ble Delhi High Court in EKL Appliances Ltd(supra). The Ld. DRP got the concept of thin capital and relied on the circular No. 74 dated 08/06/2007 issued by the RBI wherein the RBI stated that the instructions which are fully and mandatorily convertible i....