TaxTMI 
TaxTMI 
2026 (10) TMI 335
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.... 2. Final Assessment Order is time barred That the learned AO has erred on the facts and circumstances of the case and in law, in issuing the final assessment order dated 1 October 2025, beyond the time-limit as prescribed under section 153 of the Act. The final assessment order is, thus, time-barred and liable to be quashed. 3. Notice under section 143(2) of the Act is invalid On the facts and circumstances of the case, the learned AO has erred in issuing notice under section 143(2) of the Act dated 02 June 2023 in violation of CBDT Instruction F.No.225/157/2017/ITA-II dated 23.06.2017. Therefore, the said notice is invalid, and consequently the entire assessment is bad in law and liable to be quashed. 4. Transfer Pricing Adjustment - Interest on Compulsorily Convertible Debenture of INR 3,60,00,000 4.1 That the Learned AO / TPO / Dispute Resolution Panel ('DRP') erred in law and on facts, in making arbitrary, adhoc and inconsistent upward adjustment of INR 3,60,00,000 to the total income of the Appellant in relation to the international transactions of payment of interest on Compulsory Convertible Debentures ('CCDs') by re-characterizing the CCDs as ....
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....d in re-characterizing the outstanding receivables balances of AE as loan granted by the Appellant to the AE. 5.3 That the Learned AO / TPO / DRP erred in not considering that the Appellant has already benchmarked outstanding receivables by undertaking working capital adjustment wherein the margins earned by the Appellant is significantly higher as compared to the margins earned by comparable companies. Hence it can be said that the higher margins earned by Appellant indicates that the implied cost of funding if any, has been factored in selling price. 5.4 That the Learned AO / TPO / DRP erred in law and on facts that the Appellant had no intention to provide the outstanding receivables as a loan or advance to the AE for such miniscule period of time. 5.5 That the Learned AO / TPO / DRP has erred in arbitrarily adopting 6 months LIBOR plus 300 basis points for imputing interest on the outstanding receivables of the Appellant. 5.6 That the Learned AO / TPO / DRP erred in ignoring the fact that neither Hilti AG charges to Appellant nor the Appellant charges to Hilti AG in case of delay of the amount receivable / payable. 5.7 That the Learn....
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....d 27/01/2025 proposing aggregate adjustment of Rs. 3,60,14,766/-, consisting of adjustment of Rs. 3,60,00,000/- in respect of interest paid on CCDs and Rs. 14,766/- towards notional interest on outstanding receivables. On receipt of the order passed under section 92CA(3), the Ld.AO incorporated the proposed adjustment in the draft assessment order dated 12/02/2025 and proposed total income at Rs. 28,78,91,296/-. On receipt of the draft assessment order, the assessee filed objections before the Ld. DRP. The DRP, vide its directions dated 10/09/2025, upheld the TP adjustments. In respect of interest paid on CCDs, the DRP directed that the sum could alternatively be disallowed under the normal provisions of sections 36(1)(iii) and 37(1) of the Act. On receipt of the DRP direction, the Ld.AO passed the final assessment order dated 01/10/2025 determining total income at Rs. 28,78,91,296/-. Aggrieved by the final assessment order, the assessee is in appeal before this Tribunal. Ground No.4 Interest on Compulsorily Convertible Debentures Brief facts leading to the issue are that, during financial year relevant to assessment year under consideration, the assessee issue....
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....ubmitted that, there was no change either in the underlying CCD Agreement or in the material facts warranting a departure during the year under consideration. The Ld.AR also referred to the corresponding reporting of the transaction in the hands of Hilti AG and submitted that the interest received by Hilti AG had been offered to tax in India and appropriate TDS was deducted by the assessee. The Ld.AR placed reliance upon, inter alia, Secure Meters Ltd., Reliance Natural Resources Ltd., HDFC Bank Ltd., Havells India Ltd. and the decision of the Coordinate Bench in Indorama Ventures Oxides Ankleshwar Private Limited v. DCIT, ITA No.4023/Mum/2024. It was submitted that, the terms governing the CCDs issued by the assessee were substantially similar to those examined by the Coordinate Bench in Indorama Ventures Oxides Ankleshwar Private Limited (supra), wherein the instrument was recognised as debt until its conversion. Reliance was also placed upon LMN India Ltd. [2008] 175 Taxman 139 (AAR) and Zaheer Mauritius v. DIT [2014] 47 taxmann.com 247 (Delhi) for the proposition that the fact that the debt is discharged by conversion into equity rather than repayment in cash does not alter ....
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....n Sachs (India) Finance (P.) Ltd. [2025] 177 taxmann.com 797 (Mum.-Trib.), wherein applicability of IFCI Ltd. in the context of characterisation of CCDs under the Income-tax Act was considered and distinguished on account of the different contractual matrix. The Ld.AR thus reiterated his reliance on the decision of Zaheer Mauritius v. DIT (supra), wherein it was observed that a compulsorily convertible debenture essentially remains debt until discharged by conversion into equity. We have perused the submissions advanced by both sides in light of the record placed before us. The limited controversy before us is whether the Ld.TPO was justified in disregarding the CCDs as debt instruments, treating the investment as equity from inception and consequently determining the ALP of the interest paid thereon at Nil. It is undisputed that the assessee issued the subject CCDs in FY 2015-16 for a tenure of ten years and that, during the subsistence of the instrument, interest was contractually stipulated at 12% per annum. The CCD holders did not acquire voting rights or entitlement to dividend prior to conversion. The instrument admittedly remained outstanding as CCD during the year ....
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....d. (supra), wherein the aforesaid decision of Hon'ble Supreme Court was considered in the context of characterisation of CCDs and was held to arise in a materially different contractual matrix. The decision in IFCI Ltd. arose in the context of rights of parties under the Insolvency and Bankruptcy Code and upon examination of the particular agreement involved therein. In the present case, the subject instrument has continued to be recognised under the contractual arrangement as a CCD carrying a stipulated interest rate until conversion. We therefore do not find the said decision sufficient to justify substitution of the actual transaction entered into between the parties by an equity transaction for purposes of determining the ALP. We also find significance in the fact that the Ld.TPO determined the ALP at Nil not on the basis of any comparable uncontrolled transaction demonstrating that no interest was payable, but on the premise that an independent party would not have entered into such financing arrangement. The transaction actually undertaken by the assessee was issuance of CCDs. Once such transaction is recognised as a debt instrument during the pre-conversion period, its ar....
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....mitted that neither Hilti AG charges interest from the assessee nor does the assessee charge interest from Hilti AG on delayed settlements. The assessee also demonstrated that receivables from unrelated third-party customers remained outstanding for substantially longer periods, including delays running into several hundred days, without any interest being charged. Accordingly, it was submitted that the assessee followed the same commercial policy for AEs and non-AEs. The Ld.AR submitted that the impact of receivables had already been factored while benchmarking the principal international transaction by way of working capital adjustment. It was submitted that the entity-level NCP margin earned by the assessee was substantially higher than the working-capital-adjusted margins of the comparable companies and, therefore, the funding effect, if any, stood subsumed in the price of the principal transaction. Reliance was placed upon the decision of the Hon'ble Delhi High Court in PCIT v. Kusum Health Care Pvt. Ltd., ITA No.765/2016, and the decisions of the Tribunal in Amwin Automotive Pvt. Ltd. and Strides Pharma Science Ltd. The Ld.DR on the contrary, relied upon the findings of....
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....assessee stands allowed. 6. Ground No. 11 - Alternate disallowance u/s. 36(1)(iii) and 37(1) Ground No.11 challenges the alternate direction of the Ld. DRP to sustain the payment of interest on CCDs as a disallowance under sections 36(1)(iii) and 37(1) of the Act even in the event of the transfer pricing adjustment not surviving. The Ld. DRP observed that the CCDs represented investment/equity rather than "capital borrowed" and therefore interest thereon could not qualify for deduction u/s. 36(1)(iii). It was further held that the assessee had failed to establish the business nexus for purposes of section 37(1). The Ld.AR submitted that, the alternate disallowance proceeds on the same fundamental premise on which the transfer pricing adjustment was made, namely that the CCDs constituted equity rather than debt. It was submitted that the audited financial statements themselves disclose the CCDs under "Long-term Borrowings". The assessee further submitted that interest was actually incurred on the CCDs issued for purposes of its business, TDS u/s. 195 had been duly deducted, and the corresponding interest income had been offered to tax by Hilti AG. Reliance was placed upon v....