TaxTMI 
TaxTMI 
2026 (6) TMI 1073
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....ord; c. non-consideration of the documentation / materials on record and d. in any case passed in violation of natural justice. 2. General ground on Transfer Pricing issues: For that the Hon'ble DRP, the Learned Transfer Pricing Officer ('TPO') and the Learned AO (hereinafter collectively called as "the Revenue") grossly erred in making a total adjustment of Rs. 87,26,743/- to the Taxable Income on account of Arm's Length Price determination of its International Transactions with Associated Enterprises ("AEs"). 3. Transfer Pricing issue - Downward adjustment of Rs. 72.60.510/- in respect of interest paid on fully and compulsorily Convertible Debentures: 3.1 For that the Revenue erred in disallowing Rs. 72,60,510/- on account of a downward adjustment in respect of interest paid on Fully and Compulsorily Convertible Debentures ("FCCD"). (Tax effect - Rs. 18,27, 470/- 3.2 For that the Revenue has grossly erred, both in law and on facts, in re-characterizing the FCCDs as equity instruments instead of debt, disregarding the contractual terms, accounting treatment, commercial substance, consistent conduct of the partie....
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....ed for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to complete the Arm's Length Price (ALP) of the international transactions. The TPO proposed a downward TP adjustment in respect of interest on Compulsory Convertible Debentures (CCD) to the tune of Rs. 72,60,510/-. The TPO also proposed an upward TP adjustment towards interest on trade receivables to the tune of Rs. 14,66,233/-. The A.O passed a draft assessment order on 27.02.2025 and the assessee has filed objections before the Disputes Resolution Panel (DRP) on 25.03.2025 which was received by the DRP on 28.03.2025. The AO passed the assessment order on 31.03.2025 before the objections could be disposed off by the DRP. Therefore, the assessee filed a writ petition before the Hon'ble Madras High Court and the Hon'ble High Court vide order dated 27.10.2025 set aside the final assessment order passed on 31.03.2025 and directed the AO to reframe the assessment order on receipt of directions to be issued by the DRP. Subsequently, the directions of the DRP were passed on 28.11.2025, wh....
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....e company on a pro rata, as if converted basis. For the purpose of this clause,the CCD shall be deemed to be converted to Equity Shares as per Clause 2.3 and Clause 2.4 below;" 2.8 From the above, it is clear that each CCD will also be eligible to receive dividends whether in cash or in kind just like equity shareholders. The dividend will be calculated on a pro-rata basis as if the CCDs were already converted into equity shares. For this purpose, the CCDs will be treated as equity shares though they have been converted under the terms specified in Clauses 2.3 and 2.4 of the agreement." 2.9 to 2.14 ****** 2.15 In view of the above overwhelming reasons, empowered by the decision of Hon'ble Delhi High Court cited supra and the relevant OECD guidelines in this regard and as per the intent of section 92F(ii), the said CCD investment is recharacterized as equity instrument and interest on the same is to be treated as nil. The Panel is of the view that for the purpose of Section 92C of the Act, the Most Appropriate Method in this case will be 'CUP', which the assessee has also followed. But herein the Panel is of the view that in uncontrolled transactions, no i....
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....method-the very method chosen by the assessee-the arm's length rate of interest is therefore nil. The assessee's objection to the TPO's recharacterisation is accordingly rejected." 4. The Ld. Authorized Representative (AR) of the assessee submitted that the TPO is not correct in re-characterising at that instrument as equity without considering the contractual obligations of the assessee. The Ld. AR further submitted that the assessee in the financial statements has classified the CCDs as long term borrowings and has actually paid interest @ 11.17% which facts have not been considered by the TPO. The Ld. AR also argued that until conversion the CCD remains to be and interest bearing debt and the CCD holders do not have any voting rights nor they are entitled for participation in profits. The Ld. AR in this regard placed reliance on the decision of the Coordinate Bench of the Tribunal in the case of Strides Pharma Science Ltd. vs. DCIT [2022] 141 taxmann.com 430 (Mum-Trib.) and CAE Flight Training (India) Pvt. Ltd. v. DCIT [2023] 150 taxmann.com 276 (Bang.Trib.). 5. The Ld. Departmental Representative (DR), on the other hand, submitted that as per the terms of the CCD agreemen....
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....e-payment obligations in convertible foreign currency. In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during preconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion.******* 7. The ratio laid down is that FDI policy cannot be the basis for treating the CCD as equity and therefore the reliance placed by the revenue on the decisions of the Hon'ble Supreme Court is distinguishable. We further notice that the coordinate bench of Delhi Tribunal in the case of Alfanar Energy Private Limited vs DCIT [ITA No.4439/Del/2024 dated 15.10.2025] has considered a similar issue and held that - 14. In the light of the above discussion, we are of the considered view that the re-characterization of CCDs issued by the appellant before us, as equity was not justified and legal. The CCDs as long as they are not converted, continue to be a debt side item in the financials. The mere fact that the CCDs are....