TaxTMI 
TaxTMI 
2026 (10) TMI 604
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....essment record states that one of the matters identified for examination concerned interest expenditure and the applicability of section 94B of the Act. 3. During the relevant previous year, the assessee reported an international transaction involving interest of Rs. 3,40,27,280/- on compulsorily convertible debentures ("CCDs") issued to its associated enterprise (AE), ILP Core Ventures III Pte. Ltd. The matter was referred to the Transfer Pricing Officer ("TPO"). In the order dated 27.01.2025 passed under section 92CA(3), the TPO treated the CCDs as instruments in the nature of equity, determined the arm's length price of the interest payment at nil and proposed an adjustment of Rs. 3,40,27,280/-. The Assessing Officer incorporated that adjustment in the draft assessment order dated 28.02.2025 and proposed to assess the total income at Rs. 3,40,27,280/-. 4. The assessee filed objections before the DRP. It disputed, among other matters, the characterisation of the CCDs as equity, the determination of the arm's length price at nil, the rejection of its benchmarking analysis and the treatment of interest already disallowed by it under section 94B of the Act. The DRP, by its dir....
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....ce of CCDs, while in reality, the terms of issue as per CCD subscription agreement clearly provides that conversion will be at Fair Market Value determined by an independent valuer at the time of conversion and the same was not decided in advance . 2.3. Ignoring the fact that CCDs are not appreciating in nature until conversion The Hon'ble DRP/ Ld. AO / Ld. TPO erred in ignoring the fact that the CCDs are non-appreciating in nature i.e., AE, being the CCD holder, will only get such number of equity shares based on the Fair Market Value of the Company on the conversion date and therefore, not entitled to any appreciation in equity value until conversion. 2.4. Mere absence of redemption does not justify re-characterisation of CCDs as equity The Ld. AO / Ld. TPO / Ld. DRP have erred in law in holding that absence of redemption or traditional cash repayment renders CCDs as equity from the date of issuance, ignoring that conversion into equity itself results in extinguishment of the debt obligation and hence akin to repayment/redemption. Ground No. 3 - Failure to record satisfaction under section 92C(3) of the Act and incorrect rejection of b....
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....e-tax The Ld. DRP erred in treating the CCDs as being in the nature of equity by relying on the definition/explanation under FEMA and judicial precedents by Hon'ble Supreme Court rendered under other statutes (Insolvency and Bankruptcy Code, 2016, Capital Issues (Control) Act, 1947/Capital Issues (Exemption) Order, 1969, Companies Act, 1956, Securities and Exchange Board of India Act, 1992, Electricity Supply Act, 1948), while ignoring the fundamental principle, as consistently upheld by judicial precedents, that interpretations from other statutes cannot be imported for Income-tax purposes unless expressly provided under the Income-tax law. Ground No. 9 - Incorrect alternate disallowance of interest under Section 36/Section 37 of the Act On facts and circumstances of the case, Ld. DRP erred in making an alternative disallowance of interest on CCDs under Section 36(1)(iii)/Section 37(1) of the Act. Ground No. 10 - Levy of interest and fee without any specification of underlying sections of the Act in the computation sheet On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest without specif....
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....n conversion would depend on the fair market value determined at that time, subject to the contractual floor stated above. The associated enterprise, according to the learned AR, had no voting or dividend rights as a shareholder before conversion and did not participate in any appreciation in the assessee's equity during that period. He contended that a mandatory future conversion did not, by itself, make the CCDs equity at the time of issue. He further submitted that the TPO could determine the arm's length price of the reported interest transaction but could not replace that transaction with an assumed equity investment and, on that basis, determine its interest price at nil. 11. In support of the asserted distinction between a debenture and a share before conversion, the learned AR relied on the following decisions: i. CIT v. Secure Meters Ltd., 321 ITR 611 (Raj.): ii. CIT v. ITC Hotels Ltd., 334 ITR 109 (Karn.) iii. Ebixcash World Money Ltd. v. DCIT [2026] 187 taxmann.com 346 (Mumbai Tribunal) iv. Summit Developments Pvt. Ltd. v. DCIT [IT(TP)A No. 794/Bang/2022] v. CAE Flight Training (India) v. DCIT [IT(TP)A No. 2060/Bang/2016] ....
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....were a loan. According to him, the TPO examined the features of the instrument, rejected that benchmarking and determined that an unrelated party would not have paid interest for a funding facility on those terms. 16. The learned DR disputed the assessee's contention that the TPO had impermissibly recharacterised the CCDs. Referring to sections 92(1) and 92(2) of the Act, he submitted that income and expenditure arising from an international transaction must be computed having regard to the arm's length price. His case was that the TPO had left the legal form of the CCDs undisturbed and had determined the arm's length price of the funding facility by applying the "Other Method" under rule 10AB. The inquiry, as framed by the learned DR, was whether unrelated parties would have agreed to pay interest for a facility bearing the features of these CCDs. He characterised the determination of nil interest as a pricing conclusion, rather than a substitution of another transaction. 17. In that connection, the learned DR referred to CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del.) He submitted that the decision recognises exceptions to the ordinary approach of examining an internat....
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.... concerning the purpose of incurring an expenditure or entering into a transaction, but did not prevent a TPO from pricing an international transaction by reference to what independent parties would have agreed. In support of that submission, he relied on the TPO's and DRP's conclusion that "no third party would have invested in the convertible debentures issued by the assessee except by way of participation in equity". 21. As regards the conversion terms, the learned DR submitted that fixing the number of shares by reference to fair market value on the conversion date did not alter the mandatory nature of conversion. In his submission, that mechanism determined how many shares would be issued, whereas the obligation to issue shares was certain. He therefore disputed the assessee's contention that the absence of a conversion ratio fixed at issuance was decisive of the debt or equity character of the CCDs. He further argued that the fair market value mechanism indicated an intention that the subscriber participate in the company's appreciation or depreciation through conversion, instead of receiving repayment of a fixed principal amount. 22. Lastly, the learned DR adopted the ....
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....r a TPO could treat them as equity instead of determining the arm's length price of the transaction reported by the assessee. As to Secure Meters and Religare Finvest, he acknowledged that they arose in the context of deductibility, but maintained that they remained relevant to the character of a debenture before its conversion. 26. Responding to the Revenue's reliance on IFCI Ltd. v. Sutanu Sinha, the learned AR maintained the distinction drawn in the earlier submission. He submitted that IFCI Ltd. arose under the Insolvency and Bankruptcy Code, 2016, and did not determine the treatment of the interest payment under the Income-tax Act. He also contended that the Revenue's approach was inconsistent: it sought to distinguish authorities cited by the assessee because they arose in the context of deductions, while relying upon IFCI Ltd., which arose under another enactment. He reiterated the assessee's submission that an interpretation under another statute could not, without the requisite basis, be adopted for determining the present adjustment. 27. The learned AR continued to rely on S.A. Builders [2007] 288 ITR 1 (SC) and Cotton Naturals [2015] 55 taxmann.com 523 (Del.) in an....
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....ssued 2,43,052 CCDs of Rs. 1,000/- each to its Singapore AE. The instrument carries a stated coupon of 14%, subject to the terms concerning the initial moratorium. Conversion is compulsory on the expiry of twenty years, with provision for earlier conversion. The conversion price is linked to fair market value at conversion, subject to the stipulated floor. These provisions, rather than the word "debenture" or its classification under another regulatory regime alone, identify the rights for which the parties contracted. 32. Two features must be kept in view together. The holder cannot require ordinary repayment of the principal in cash at maturity: the instrument must convert into shares. Yet the material identified by the Revenue does not show that shares had been allotted during the relevant year, that the holder could then vote as a shareholder or receive a dividend, or that the contractual provision for pre-conversion interest had ceased to operate. The issue before us is the ALP of that present payment obligation. A conclusion about the treatment of the principal on eventual conversion does not, without further analysis, answer that issue. 33. The conversion clause also b....
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.... It does not supply a rule that every contractual payment of interest before conversion is to be valued at nil under Chapter X. 37. In IFCI Ltd. v. Sutanu Sinha, [2023] 156 taxmann.com 681 (SC), the question was whether the CCD subscriber was a financial creditor of the company undergoing insolvency, ICTL. The Court examined the financing documents together. The concession agreement expressly included compulsorily convertible instruments in the equity component of project financing. Under the debenture subscription agreement, the 11% coupon and the buyback arrangement were obligations of the sponsor company, IVRCL, rather than ICTL. The Court's conclusion thus depended both on the agreed place of the CCDs in the project's capital structure and on whose obligation the subscriber sought to enforce. In paragraph 20 the Court stated: "the obligations are of the sponsor company." It declined to create a debt against ICTL by adding an obligation that the commercial documents did not place upon it. 38. Paragraphs 21 to 24 of IFCI explain the basis of that conclusion. Commercial instruments drafted by the parties were to be read according to their terms; the Court would not supplemen....
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....006) 100 ITD 247 (Ahd) must likewise be tested against the expenditure actually in issue. That decision examined expenditure incurred in issuing convertible instruments, including an instrument partly converted on allotment. Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC) addressed expenditure incurred to raise share capital. The present adjustment concerns a recurring amount stated to be payable to the holder while conversion has not occurred. An answer to whether the cost of procuring capital is capital or revenue expenditure does not automatically answer whether a later coupon has an arm's length price. 42. The same distinction governs the decisions cited by the assessee on issue expenditure. In CIT v. Secure Meters Ltd., 321 ITR 611 (Raj), the Rajasthan High Court applied India Cements Ltd. v. CIT [1966] 60 ITR 52, to expenditure incurred in raising funds through convertible debentures. Its reasoning examined the character of expenditure when the funds were raised, and rejected the contention that prospective conversion necessarily made that expenditure a cost of raising share capital. CIT v. ITC Hotels Ltd. considered the same kind of issue expenditure. Those holdings....
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....makes a current coupon a dividend or extinguishes an agreed obligation. Their respective questions of deductibility and contractual character must nevertheless be distinguished from the separate task of pricing this assessee's transaction under Chapter X. 46. There are also decisions addressing transfer pricing itself. In Sthal India Pvt. Ltd. v. DCIT IT(TP)A No. 52/Chny/2024, the Co-ordinate Bench considered a nil-ALP determination on CCD interest. The assessee had presented 57 uncontrolled CCD issuances, yielding a range of 10% to 12.65%, within which its 11% coupon fell. The Bench noted that the TPO had discarded that analysis without cogent reasons and "did not conduct any search in accordance with TP regulations." Its conclusion was thus supported by both its examination of the legal premise and actual comparable evidence. The record before us must be judged on its own comparables; Sthal India is authority against replacing that examination with a bare nil figure. 47. In Ebixcash World Money Ltd. v. DCIT, the coordinate Bench considered a 9% coupon on CCDs and a substantial adjustment founded on the TPO's treatment of the instruments as equity. The decision addresses the....
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...., is commercially irrational and practically impedes determination of an appropriate transfer price. Thus neither the assessee's assertion that recharacterisation is invariably forbidden nor the Revenue's assertion that it may always substitute equity for a CCD states the full principle. The relevant contractual and economic facts must establish the basis for such a course. 51. Here, the TPO said that an independent investor would have subscribed only as an equity participant and consequently valued every rupee of the stipulated coupon at nil. Yet the order itself discusses creditworthiness, tenure, conversion and possible interest-rate comparisons. It does not explain why these features make determination of an appropriate price impracticable. It does not reconcile its assumed fifteen-year term or fixed share ratio with the clause reproduced by the assessee. Nor does it identify evidence establishing that the obligation to pay the coupon was a sham or that, notwithstanding the agreement, the issuer bore no such obligation. The exceptional basis discussed in EKL Appliances has therefore not been established on this record. 52. Calling this exercise the "Other Method" does not....
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....ALP or deductibility. The payer's expenditure and recipient's income have to be considered under the provisions applicable to each. Equally, the possibility of tax in the recipient's hands provides no missing uncontrolled price of nil. Ground 4 supplies no separate ground of relief. 56. For these reasons, the determination of the ALP of interest of Rs. 3,40,27,280/- at nil cannot be sustained. The defect is substantive: the current interest obligation was displaced by a conclusion about eventual equity ownership; material terms of conversion were inaccurately stated; and a nil price was not established through the asserted method. We direct deletion of that transfer pricing adjustment. We do not determine in these proceedings that a 14% coupon, or the asserted effective 10.50% rate, is a universally applicable arm's length rate for CCDs. Grounds 1 to 3 and 8 are allowed to the extent stated. 57. The DRP's alternative disallowance under sections 36(1)(iii) and 37(1) substantially rests on the same proposition that the CCDs already represented issued equity and that no interest could consequently be due. The decisions concerning pre-conversion obligations, considered above, do ....