TaxTMI 
TaxTMI 
2026 (8) TMI 1243
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....nd in law, the learned AO erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act which is the outer time limit for passing the final assessment order and hence, the final assessment order dated 13 January 2026 which is passed after 31 March 2025 (being the time limit as per the provisions of Section 153 of the Act) is time barred and liable to be quashed. i. Adjustment to the Arm's Length Price (ALP) On the facts and circumstances of the case and in law, the learned AO/Transfer Pricing Officer ("TPO") has erred in making an upward transfer pricing adjustment of INR 7,78,12,548 in respect of the international transaction of payment of interest on compulsory convertible debentures ("CCDs"), on the following grounds: 2.1. The learned AO/TPO and the Hon'ble DRP erred in re characterizing the nature of CCDs as an equity instrument without appreciating the actual terms of CCDs and the fact that CCDs are debt instruments until conversion into equity. 2.2. The learned AO/TPO and the Hon'ble DRP erred in rejecting the economic analysis of the Appellant undertaken in accordance with the pro....
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....claring a total income of Rs. 13,94,78,590/-. The return was selected for scrutiny through the Computer Assisted Scrutiny Selection (CASS) mechanism, and statutory notices issued under the Act were duly complied with. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had entered into international transactions with its Associated Enterprises ("AEs"). Consequently, after obtaining the requisite approval from the competent authority, the matter was referred to the learned Transfer Pricing Officer ("TPO") under section 92CA of the Act for determination of the arm's length price of the international transactions. 2.2 The learned TPO, vide order dated 22nd January 2025, proposed an adjustment of Rs. 7,78,12,548/- in respect of the international transaction relating to payment of interest on Compulsorily Convertible Debentures (CCDs). Taking into consideration the aforesaid transfer pricing adjustment, together with the proposed disallowance of Rs. 21,65,961/- towards bad debts written off, the Assessing Officer passed a draft assessment order dated 19th March 2025 under section 144C(1) of the Act proposing variations to the returned inco....
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....hich was reported in Form No. 3CEB as under: Sr. No. Description of transactions Amount in INR Method Adopted by Assessee 1 Interest paid on Compulsory Convertible Debentures ('CCDs') issued 7,78,12,548/- Comparable Uncontrolled Price ('CUP') method 2 Buy back of compulsory convertible debentures 40,00,00,000/- Other method 4.2 The assessee did not furnish a fresh Transfer Pricing Study Report ("TPSR") for the year under consideration on the ground that the impugned transaction had already been benchmarked in the TPSR prepared for Assessment Year 2020-21 and there was no material change either in the terms of the instrument or in the underlying contractual arrangement. The assessee submitted that during the Financial Year 2019-20, it had issued 4,64,38,560 Compulsorily Convertible Debentures of Rs. 10 each to its Associated Enterprise, M/s Geosansar Mauritius Limited ("Geosansar"). The CCDs were compulsorily convertible into equity after ten years from the date of issuance at the agreed conversion price. For benchmarking the payment of interest on the CCDs, the assessee adopted the Comparable Uncontrolled Price (CUP) Methodas t....
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....o a right akin to equity shareholder thus having attribute of a equity transaction and thus such right flowing from the CCD arrangement, when read with the dominant shareholding of the Associated Enterprise, conferred attributes substantially akin to those of an equity shareholder. (vi) Predominant Equity Features: The absence of security, contractual nature of interest, and the provision for conversion of the CCDs into equity led the TPO to conclude that the instruments possessed predominant equity characteristics rather than those of a conventional debt instrument. 4.4 On the basis of the above analysis, the TPO concluded that the CCD holder enjoyed rights substantially similar to those of an equity shareholder and that the substance of the transaction prevailed over its legal form. Accordingly, he held that the CCDs were, in essence, equity instruments. Relevant observation of the TPO is reproduced as under: " 4. From the above analysis, it can be observed that there are clauses which grant the CCDs holders rights similar to equity shareholders. Vide this Agreement, and by virtue of ultimate shareholding the CCDs holder i.e., AE can control the composition o....
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....stitute of Chartered Accountants of India (ICAI). According to the TPO, an instrument evidencing a residual interest in the assets of an entity after deducting all liabilities assumes the character of an equity instrument, and the CCDs issued by the assessee satisfied that description by reason of their compulsory conversion into equity. Accordingly, the Ld. TPO interpreted that all instruments including convertible preference shares and convertible debentures meet the definition of the equity as per Ind AS-32 in its entirety and when they do not have any component of the liability, should be considered as having the nature of the equity for the purpose of Ind AS Schedule III, such instruments shall be of termed as instruments entirely equity in nature. In view of the above interpretation, the Ld. TPO was of the view that the CCD are more of equity in nature as those instruments are compulsorily converted into equity shares of the company, which evidences the residual interest assets of the company. 4.8 The TPO further observed that the conversion feature embodied in the CCDs created an obligation to issue equity shares in accordance with the predetermined conversion formula and....
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....sidered the peculiar clauses of its Debenture Agreement nor considered the credit ratings of the comparable, while undertaking the benchmarking analysis 4.10 The TPO observed that the assessee had benchmarked the transaction merely by comparing coupon rates of other CCD issuances available in the NSDL database without assigning any value to the embedded option available to the Associated Enterprise to convert the instrument into equity. According to him, such an option conferred valuable commercial rights and could not be assumed to have a nil value. He further observed that recognised valuation methodologies, including the 'Black-Scholes', 'Binomial Option Pricing', and 'Monte Carlo Simulation models', were available for valuing such embedded options; however, the assessee had neither undertaken such valuation nor furnished any working to demonstrate that the value of the conversion option was insignificant. The TPO, therefore, held that the benchmarking exercise undertaken by the assessee did not satisfy the requirements of section 92C read with Rule 10B and rejected the transfer pricing analysis under section 92C(3) of the Act, observing as under: "The assessee has b....
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....ices charged in the international transaction of charging interest on CCDs have not been determined by the assessee in accordance with sub-sections (1) and (2) of Section 92C of the Income Tax Act, 1961." 4.11 Thereafter, the ld. TPO proceeded to determine the arm's length price by adopting the "Other Method" as the Most Appropriate Method, placing reliance upon the decision of the Chennai Bench of the Tribunal in Ascendas (India) Pvt. Ltd. v. DCIT [(2013) 33 taxmann.com 295]. Proceeding on the premise that the CCDs were, in substance, equity instruments, the TPO treated the arm's length price of the interest attributable to the equity component as Nil and consequently proposed an adjustment of Rs. 7,78,12,548, being the entire amount of interest paid by the assessee on the CCDs during the relevant previous year. 4.12 The learned DRP, after considering the objections of the assessee, affirmed the approach adopted by the Transfer Pricing Officer and rejected all the objections raised in relation to the transfer pricing adjustment. The principal findings recorded by the DRP may be summarised thus. 4.13 The DRP held that the Compulsorily Convertible Debentures ("CCDs"....
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....rities and Exchange Board of India[(2013) 1 SCC 1 : (2012) 25 taxmann.com 18 (SC)], IFCI Ltd. v. Sutanu Sinha &Ors. [(2023) 156 taxmann.com 681 (SC)], and Ferro Alloys Corporation Ltd. v. A.P. State Electricity Board[(1993) 4 SCC 136 : AIR 1993 SC 2005], to hold that Compulsorily Convertible Debentures ("CCDs") are hybrid instruments possessing predominant attributes of equity and do not partake the character of conventional borrowings. The Panel also referred to the provisions of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, Indian Accounting Standard (Ind AS) 32, the OECD Transfer Pricing Guidelines, and the judgment of the Hon'ble Delhi High Court in CIT v. EKL Appliances Ltd.[(2012) 345 ITR 241 (Delhi) : (2012) 24 taxmann.com 199 (Delhi)], to conclude that the economic substance of the transaction justified treating the CCDs as equity for transfer pricing purposes. 4.18 The learned DRP further held that, quite apart from sustaining the transfer pricing adjustment, the payment described as interest on the CCDs was not allowable under the normal provisions of the Act. According to th....
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....ed as equity merely because they are compulsorily convertible at a future date and that the Transfer Pricing Officer has no jurisdiction to disregard the legal character of the instrument and determine the arm's length price of interest at Nil. For ready reference finding in the case of EBIXCASH World Money Ltd (supra) is reproduced as under: "8. We have considered the rival submissions of both the parties sand have gone through the orders of lowers authorities carefully. We have also deliberated on various case laws relied by Id AR of the assessee. We find that there is no dispute that during the relevant financial year under consideration, the assessee issued CCDs of Rs. 849.49 Crore to Ebix Asia Holding Inc, Mauritius at an interest @ 9% per annum. The assessee paid total interest of Rs. 76.45 Crore. To substantiate ALP of such interest payment the assessee furnished its TPSR in Form-3ECB. We find that TPO disregarded the benchmarking of the transaction and other objections of assessee for making reference for ALP by holding that that CCDs are equity-like and therefore, interest could not be allowed. It was also held that the substance of transaction is different fr....
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....ell as the earlier decisions of the coordinate Benches, the Tribunal held that CCDs continue to retain the character of debt till the stage of conversion and that the Transfer Pricing Officer cannot disregard the legal form of the transaction merely on the basis of its perceived economic substance so as to determine the arm's length price of interest at Nil.Likewise, in Indorama Ventures Oxides Ankleshwar Pvt. Ltd. (supra), the coordinate Bench, after considering the reliance placed by the Revenue upon the FEMA Regulations, RBI Circulars, Indian Accounting Standards (Ind AS), and the concept of thin capitalisation, categorically held that such regulatory provisions, enacted for purposes distinct from income-tax legislation, cannot be imported for re-characterising a valid borrowing transaction for transfer pricing purposes. The Tribunal further held that till the date of conversion, CCDs continue to represent debt instruments and the interest paid thereon is required to be examined in accordance with the provisions of the Act. The relevant finding of Tribunal(supra) is reproduced as under;- "We considered the addition made under section 36(1)(iii) of the Act. The asses....
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....r tax purposes. The Ld. DR has not rebutted the submission of the Id. AR by submitting any contrary judgment. The addition was made on account of the company following adjustments are duly set aside and liable to be quashed. In our considered view, the grounds of the assessee are succeeded. 26. In the result, the appeal of the assessee bearing ITA No. 4023/Mum/2023 is allowed. 5.3 We find that the controversy involved in the present appeal is materially identical to that considered by the coordinate Benches in the aforesaid decisions. The reasons assigned by the learned TPO as well as the learned DRP, namely, the compulsory conversion feature of the CCDs, absence of repayment obligation, reliance upon FEMA (Non-Debt Instruments) Rules, 2019, Ind AS-32, OECD Guidelines and the concept of "substance over form", have all been specifically considered and rejected by the coordinate Benches. Significantly, no decision of the Hon'ble jurisdictional High Court or of the Hon'ble Supreme Court taking a contrary view has been brought to our notice by the Revenue. Judicial discipline demands that, in the absence of any distinguishing feature or contrary binding precedent, w....
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....the parties and cannot substitute or re-characterise it merely because another commercial structure appears more appropriate. The recognised exceptions permitting re-characterisation are narrow and must be applied with circumspection. 5.7 In the present case, the Revenue has not demonstrated that the impugned transaction falls within any of the recognised exceptions warranting disregard of its legal character. On the contrary, the coordinate Benches in Indorama Ventures Oxides Ankleshwar Pvt. Ltd. (ITA Nos. 4023 & 4024/Mum/2024) and EBIXCASH World Money Ltd. v. DCIT[(2025) 187 taxmann.com 346 (Mum. - Trib.)], after considering the aforesaid Supreme Court decisions, the FEMA Regulations, RBI Circulars, OECD Guidelines and Ind AS-32, have consistently held that the character of CCDs as debt instruments till conversion cannot be disregarded for determining the arm's length price under Chapter X. Respectfully following the said decisions, we are unable to concur with the reasoning adopted by the learned TPO and affirmed by the learned DRP. 5.8 Respectfully following the decisions of the coordinate Benches in Indorama Ventures Oxides Ankleshwar Pvt. Ltd. (supra) and EBIXCASH W....
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....d judicial precedents relied upon by it, and thereafter determine the arm's length price by passing a speaking order in accordance with law. Accordingly, Ground No. 2 is allowed for statistical purposes. Ground No. 3 - Disallowance of Bad Debts Written Off 6. Ground No. 3 challenges the disallowance of Rs. 21,65,961/- representing bad debts written off under section 36(1)(vii) of the Income-tax Act, 1961. 6.1 During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited a sum of Rs. 21,65,961/- in the Profit and Loss Account towards bad debts written off. The explanation furnished by the assessee was that the amounts represented old outstanding receivables which, despite repeated follow-up, had become commercially irrecoverable and were accordingly written off pursuant to the decision of the management. The Assessing Officer, however, was not satisfied with the explanation. According to him, since the concerned parties continued to remain regular customers of the assessee and business transactions with them had continued during the relevant previous year, the debts could not be regarded as bad or irrecoverable. He, therefore, ....
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....ty. the ordinary course of business exigencies that rendered the amounts genuinely bad. The absence of communications, reminders, legal notices, settlement attempts, or any recovery effort contradicts the Assessee's claim. A unilateral entry without supporting facts does not satisfy clause 36(1) (vii). The reasoning adopted by the Supreme Court squarely applies: where the Assessee fails to demonstrate that the write-off meets the statutory conditions or occurred in the course of regular business, the claim must be rejected. The Panel also notes that CBDT Circular 12/2016 clarifies the legislative intention to reduce litigation, but it does not remove the requirement of bona fide write-off. The Assessee must demonstrate that the write-off is not arbitrary or colourable. In the present case, the absence of recovery efforts, the absence of debtor communications, continuing business relationships, and the lack of any evidence of disputes or settlement failures indicate that the write-off lacks commercial basis. The Panel therefore agrees with the AO that the amounts cannot be regarded as bad debts under clause 36(1)(vii), even after the amendment, as the foundatio....
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....rable and that it is sufficient if the bad debt is written off as irrecoverable in the books of account of the assessee. The aforesaid legal position has also been accepted by the Central Board of Direct Taxes in Circular No.12/2016 dated 30 May 2016, wherein the Board has specifically directed that the legislative intent behind the amendment was to eliminate litigation on the issue of irrecoverability and that deduction under section 36(1)(vii) shall be allowed where the debt is written off in the books of account and the conditions of section 36(2) are fulfilled. 6.6 In the present case, the Revenue has not disputed that the amounts in question represented trade receivables arising in the ordinary course of the assessee's business. It is equally undisputed that the impugned amounts have been debited to the Profit and Loss Account and the corresponding debtor accounts have been credited, thereby effecting an actual write-off in the books of account. 6.7 The learned counsel has invited our attention to page 452 of the paper book containing the ledger account evidencing the write-off of the outstanding amount. For ready reference said ledger account is reproduced as under:....
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....siness and have been actually written off in the books of account. 6.12 In view of the foregoing discussion, we hold that the assessee has duly complied with the statutory requirements prescribed under section 36(1)(vii) read with section 36(2) of the Act. The disallowance sustained by the Assessing Officer and affirmed by the learned DRP is, therefore, unsustainable in law. We accordingly direct the Assessing Officer to delete the addition of Rs. 21,65,961/.Accordingly, Ground No. 3 is allowed. 7. Ground No. 4, relating to initiation of penalty proceedings under section 270A of the Act, is merely consequential. Since the issue pertains only to initiation of penalty proceedings, the same is premature for adjudication at this stage and is, accordingly, dismissed as infructuous. 8. Since the assessee has substantially succeeded on the issues arising in the present appeal, we do not consider it necessary to adjudicate Ground No. 1, challenging the validity of the assessment on the ground of limitation. The said ground is left open, with no opinion expressed thereon. 9. In the result, the appeal of the assessee is allowed partly for statistical purposes. Order pronounced....