TaxTMI 
TaxTMI 
2026 (7) TMI 1966
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....er 2024, passed by the Assistant Commissioner of Income Tax, Circle 4(1)(1), Mumbai ('the learned Assessing Officer" or "the Ld. AO") of the under Section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 ('the Act') in respect of AY 2021-22, is arbitrary, contrary to law, and liable to be quashed. 2. On the facts and in the circumstances of the case and in law, the final assessment order dated 23 October 2024 passed by the Ld. AO under section 143(3) r.w.s. 144C (13) r.w.s. 144B of the Act having passed beyond the limitation period provided under section 153 of the Act, and is thus illegal, being barred by limitation, void-ab-inito, bad in law and therefore is liable to be quashed. 3. On the facts and in the circumstances of the case and in law, the draft assessment order dated 23 December 2023, and the final assessment order dated 23 October 2024 are passed without valid jurisdiction and thus illegal, void ab initio, bad in law and therefore liable to be quashed. 4. On the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') erred in upholding the a....
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....ng the total income. 9. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234C of the Act while computing the total income. 10. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO / Ld. DRP have erred in proposing to initiate penalty proceedings under Section 270 of the Act." 3. Brief facts of the case are that the assessee issued 380,000 CCDs to its Associated Enterprise (AE), "Afton UK" at INR 1000/- per CCD i.e. INR denominated CCDs carrying 9 % coupon rate. Out of the 380,000 CCDs, 190,000 CCDs were converted into equity shares during the FY 2018-19. During FY 2020-21 assessee has paid/accrued interest on 190,000 CCDs at 9% amounting to Rs. 17,100,000/- to Afton UK, AE. To evaluate the arm's length nature of the coupon rate of 9%, the Comparable Uncontrolled Price ('CUP') method has been considered as most appropriate method and accordingly the search of external comparable transaction has been conduce in the year of issue. Under external CUP was considered to benchmark the arm's length interest rate on CCDs issued by assessee to its AE. External data base sources, av....
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....f payment of interest on CCDs which is INR denominated with foreign currency LIBOR rates or ECBs rate on foreign currency loans is not justified. 5. In this relation, the Ld. AR respectfully relied on the order of Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. reported in [2015] 55 taxmann.com 523 (Delhi) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- "39. 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. We have no hesitation in holding that the interest rate should be the 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 ....
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....there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money." 6. The Ld. AR contended that the issue is squarely covered by the order of the special bench of ITAT, Hyderabad in case of Hyderabad Infra Tech Private ....
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....rrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, ie. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt. B1. II 725 (1994), re. 1 AStG). 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 i....
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.... CIT v. Tech Mahindra Ltd. (supra) to reach the conclusion that ALP in the case of loans advanced to AEs would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the Revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). 23. In view of this matter and considering the facts of the present cases, and also by considering ratios of various High Courts, we are of the considered view, that once the CCDs issued by the appellant are denominated in Indian currency, the interest payment on the said CCDs is to be benchmarked with reference to the rate of interest applicable to th....
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.... to debt instruments until such conversion. This classification of CCDs as loans until conversion is consistent with their hybrid nature. 2.5.2 Furthermore, in determining the arm's length price (ALP) of interest on such CCDs, the Ld. TPO has applied the LIBOR benchmark, which is commonly used in international loan transactions. This is in accordance with commercial principles governing international transactions, where the loan component of the CCDs requires benchmarking against internationally recognized standards. The asessee has not provided any compelling argument or evidence to refute this Characterization. In view of the above discussion, the objection raised by the Assessee is not accepted. 2.5.3 Further, with regard to the contention that the CCDs are denominated in INR and should be benchmarked using INR based lending rates, it is pertinent /important to mention here that on account of the nature of CCD, the taxpayer would not have to repay the principal amount to its AE even on maturity and hence the currency in which loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. Hence, the contentions of the As....