TaxTMI 
TaxTMI 
2025 (8) TMI 1503
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....2025 (AY 2012-13) 3. Brief facts are as follows: The assessee is a private limited company engaged in the manufacture and assembly of gear box for wind turbine generators. The assessee also imports gear box from overseas and supplies to the end customers acting as intermediary between entrepreneur and customers. For the assessment year 2012-13, original return of income was filed on 29.11.2012 and subsequently, revised return was filed on 31.10.2013 declaring loss of Rs. 22,25,56,267/-. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued on 04.09.2013. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the arm's length price of the International transactions undertaken by the assessee with its AEs. The TPO passed an order u/s. 92CA(3) of the Act on 22.01.2016 proposing TP adjustment of Rs. 6,07,18,138/-. The TPO in the manufacturing section had taken sale of scrap (others) as non-operating in nature. With regard to interest payment on Fully Compulsory Convertible Debentures ("FCCD"), the TPO rejected the TP analysis of the assessee company wherein assessee had adopted Comparable U....
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.... of the CIT(A) reads as follows:- "7.10.3 In respect of CCDs in Indian Rupee, the adoption of SBI PLR has been upheld in a plethora of decisions such as Praxair India (P.) Ltd. [2023] 147 taxmann.com 205 (Bangalore - Trib.) and Hyderabad Infratech (P.) Ltd. [2018] 95 taxmann.com 405 (Hyderabad - Trib.), provided the FCCDs were issued in INR. The TPO/AO is directed to verify the terms of the FCCDs as to whether the transactions were denominated in INR and thereafter adopt the average SBI PLR for FY 2011-12 as the ALP of the transaction involving interest payments on FCCDs. Accordingly, Ground No.8 & 9 are partly allowed." 7. Aggrieved by the order of the CIT(A), the Revenue has filed the present appeal before the Tribunal. The grounds raised by the Revenue read as follows:- 1. The order of Ld. CIT(A) is against the facts and circumstances of the case. 2. Whether on the facts and circumstances of the case the Ld. CIT(A) was correct in disregarding the PLI computed by the TPO and directing him to adopt the average SBI Prime Lending Rate (PLR) for FY 2011-12 as the Arm's Length Price (ALP) of the transaction involving interest payments on FCCDs? ....
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....onsidering the revenue from sale of scrap to be non-operating in nature. The sole reason for treating sale of scrap as non-operating was that assessee had classified the receipts as 'other income'. 11. The CIT(A) after considering submissions of the assessee directed the TPO to consider the income from scrap sales as 'operating income' while computing the margin from the manufacturing segment. The Pune Bench of the Tribunal in the case of Cummins India Limited reported in 101 taxmann.com 325 and Behr India Ltd. reported in 81 taxmann.com 46 held that that scrap sales are to be considered as part of the operating income for computing the margin earned by the Company. Relying on the decision of the Pune Bench of the Tribunal, the CIT(A) has concluded that the scrap sales are to be treated as operating income. 12. The Revenue before us has challenged the above order of the CIT(A) on the basis that TPO had already included the 'scrap sales' associated with the operations as 'operating income' while computing the assessee's margin and had excluded only that scrap sale which is not connected to the operations. It is pertinent to note that the assessee company has classified scrap s....
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.... above position that loans denominated in different currencies cannot be benchmarked against the same interest rate and provide separate criteria/benchmark rates for loans denominated in INR as against those denominated in a foreign currency. 16. The FCCDs, denominated in Indian Rupees and being in the nature of a loan/debt instrument until conversion, are akin to a loan taken from a domestic lender in India. Further, the interest on the said FCCDs is not subject to the foreign-currency fluctuation and is determined and paid based on the face-value of the said FCCDs in Indian Rupees. The FCCDs are compulsorily convertible into equity shares at the end of the defined term and are not repayable to the lender. Hence, such conversion is akin to repayment in the case of traditional loan. At the time of conversion, the same amount received in INR towards the said FCCDs, i.e., 100 Crores, is converted into equity shares. In other words, foreign exchange has no role / influence on the conversion amount. Therefore, the said FCCDs are therefore akin to a domestic term-loan and are required to be benchmarked with reference to domestic PLR, i.e., interest rates in the domestic market. For t....
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....ts. 17. In this factual background, it is necessary for us to understand the nature of transaction to answer the question referred to for the Special Bench. Admittedly, the appellant has issued FCCDs. Debenture has been defined u/s 2(30) of the Companies Act, 2013, which includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. The debenture is a type of debt instrument issued by companies to raise capital. Debentures are not ordinarily secured by physical assets or collateral securities. Debentures promise to pay interest and principal to the debenture holders. They are a way of companies to raise capital without issuance of shares and diluting their equity. Debenture is a common method for companies to raise long term financing. There are two types of debentures, one is convertible debentures and another is non convertible debentures. Under convertible debentures, there are two categories, one is optionally convertible debentures and the other category is fully and compulsorily convertible debentures. Fully and compulsorily convertible debentures are hybrid instruments and ar....
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....rt in the case of IFCI Ltd. v. Sutanu Sinha & Ors (supra) that debentures is an equity and interest paid on Such FCCDSs is not allowable expenditure, cannot be accepted and rejected. Further, the scope and powers of the Tribunal in deciding the question is limited to the extent of question referred to by the parties for the consideration of the Bench, but not beyond. Since the question before the Bench is on the issue of benchmarking of interest paid on FCCDs, in our considered view, the arguments of the Ld. Counsel on the nature of instrument is irrelevant and therefore. is rejected. 18. Having said so, let us come back to the real question before the Special Bench. Admittedly. the appellant companies have issued FCCDS to foreign holding companies in Indian Currency and also denominated debentures in the books of accounts in Indian rupees. The terms and conditions for issuing FCCDs has been regulated in the agreement between the parties and as per the said agreement, the appellant company has received amount towards debentures issue in Indian rupees. The parties have also agreed for interest, which varies from period to period. The appellant companies in the present cases....
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....e has been supported by the decision of Hon'ble Delhi High court in the case of CIT v. Naturals India Pvt. Lid. (supra), where, the Hon'ble High Court has dealt with the similar issue of benchmarking of interest received by an assessee, being a resident of India on loan extended to its foreign subsidiaries. The Hon'ble High Court in para 39 of their order clearly held that the "question, whether the interest rate prevailing in India should be applied, for the lender was an Indian company / assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning.". The Court further observed that "interest rate should be market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrowers or the lender woul....
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....or debt. Such classification under FEMA is made based on several factors by the RBI. The foreign investments through equity investments are governed by the Foreign Direct Investment regulations, while the foreign debt financing / loans are governed by the External Commercial Borrowings regulations which lay down a framework for raising funds through loans debt instruments from non-resident parties. In the above background, FEMA regulations classify CCDs as equity for the limited purpose of regulating foreign investments, given the hybrid nature of CCDs. Unlike a traditional loan / debenture, CCDs must be mandatorily converted into equity based on the terms of the agreement. Hence, said regulations also provide for the manner and timing of determination of the conversion ratio of CCDs, i.e. the same shall be determined upfront based on the fair market value at the time of issuance of such CCDs. Therefore, liability on CCDs is extinguished by allotment of equity shares which is obviously a rupee based settlement. In other words, there is no obligation on the part of the Indian company to bear any forex fluctuations and it is left to the lender or investor to hedge the forex risks. Fr....
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.... the spread is based on reference rate such as SOFR/EURIBOR/SONIA etc. Although Sate Harbour Rules are applicable for outbound loans from A.Y.202 1-22 and not directly relevant for the issue on hand. it is a statutory recognition of the economic difference between INR denominated and foreign currency denominated loans and therefore, a clue from the Safe Harbour Rules can be taken to strengthen the arguments of the appellant that different category of loans has to be benchmarked at different rate of interest. keeping in View; the economic parameters, currency in which such loan is accepted and repaid etc. We further noted that CBDT has issued a Notification No.58/2013 dated 29.07.2013 u/s 194-LD in the context of tax deduction at source on interest payments, also envisages capping o interest at Base Rate of State Bank of India in the case of denominated bonds. From the above, it is undisputedly clear that where the transaction is undertaken in Indian rupee currency, then the rate of interest has to be benchmarked, by considering the rate of interest prevailing in the country of the currency, and 1 if we go by said analogy, in our considered view, there is an error in the reasons giv....