INDORAMA VENTURES OXIDES ANKLESHWAR PRIVATE LIMITED ,MUMBAI V. DCIT, CIRCLE 14(1)(1), MUMBAI

ITA 4023/MUM/2024

AI Insights

The case involves Indorama Ventures Oxides Ankleshwar Private Limited, which appealed against the final assessment order passed by the Income-tax Department concerning the assessment year 2020-21. The primary issues revolved around transfer pricing adjustments related to the sale of embedded call options and the purchase of a business from Huntsman International (India) Private Limited. The Tribunal examined whether the CCDs issued were akin to equity instruments and whether the associated transfer pricing adjustments were justified. The Tribunal concluded that the CCDs were debt instruments, and the adjustments made by the Assessing Officer were not in accordance with the law.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 24076 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 22-10-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 12-08-2024
• Other Referred Cases: Vodafone India Services (P.) Ltd v UOI, Sahara India Real Estate Corpn. Ltd v SEBI, Zaheer Mauritius v DIT, ACIT v CAE Flight Training (India) Pvt. Ltd, CIT vs. EKL Appliances Ltd, Indorama Synthetics (India) Ltd v ACIT, Besix Kier Dabhol, SA v. DDIT, Ashima Syntex Ltd. v. ACIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY CHANDRA
• Assessee Lawyers: SANJAY SANGHVI AW UJJWAL; NEITHER
• Keywords: Set aside; Opportunity of being heard; Transfer pricing; International transaction; Depreciation; Fair market value; Period of limitation; Valuation report; Time period of passing order; Date of conversion
• Section: 143(3); 195; 56; 153; 37; 144C

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI. ANIKESH BANERJEE, JUDICIAL MEMBER I.T.A 4023/Mum/2024 (Assessment Year:2020-21) Indorama Ventures Oxides Ankleshwar Private Limited 6th Floor, B-Wing Marwah Centre, Krishanlal Marwah Marg, Saki Vihar, Andheri (East), Mumbai-400 072 PAN : AAFCI3533E vs Assessment Unit, Income-tax Department / DCIT, Circle 14(1)(1) New Marine Lines, Churchgate, Mumbai-400 020 APPELLANT RESPONDENT Assessee by : Shri Sanjay Sanghvi a/w Mr. Ujjwal Gangwal & Anurag Bukkpatnam Respondent by : Shri Ajay Chandra, CIT DR Date of hearing : 22/10/2024 Date of pronouncement : 29/10/2024 O R D E R PER ANIKESH BANERJEE, J.M: This appeal of the assessee is directed against the final assessment order of the Learned Assessment Unit, Income-tax Department (henceforth the Ld.AO) passed under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2020-21, date 2 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd of order 28/06/2024. The said order was originated by the recommendation of theLearned Dispute Resolution Panel-1, Mumbai (in short, ‘Ld.DRP’) passed under section 144C (5) of the Act, date of order30.05.2024. 2. The assessee has taken the following grounds: - “1. Re: General Grounds 11. On the facts and in the circumstances of the case and in law, assessment order dated 28 June 2014 Final Assessment Order\" passed by the learned assessment unit, Income tax department (\"Ld. AD\") in pursuance to the directions of the learned Dispute Resolution Panel-1, Mumbai (Ld. DRP\") under section 143(3) read with section 144C(13) read with section 1448 of the Income-tax Act, 1961 (\"IT Act\") is contrary to the facts and the law and, therefore, not tenable. 2 Validity of Final Assessment Order passed by the Ld. AO 2.1. On the facts and in the circumstances of the case and in law, the Ld. AD erred in passing the Final Assessment Order under section 143(3) u/s 14413) section 1448 of the IT Act, which is without jurisdiction and bad in law as the same is passed beyond the time limit prescribed under section 153 of the IT Act Re: Transfer pricing adjustment of INR 3888,00,000/- on account of sale of embedded call option 3.1. On the facts and in the circumstances of the case and in law, the Ld.AO under the directions of the Ld DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV. 3.2. On the facts and in the circumstances of the cave and in law the Ld. AO under the directions of the Ld. DRP erred in holding that the Appellant entered into transaction relating to alleged sale of call option with Indorama Netherlands BV which were embedded in the CCD subscription agreement dated 30 December 2019 and the same construed as an international transaction 3.3. On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of the Ld. DRP erred in holding that fair market value of a 3 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd share does not include within itself 'premium' and that \"premium\" is different and distinct and over and above its fair market value. 4. Re: Transfer pricing adjustment of INR 16,78,40.626/-on account of purchase of business from Huntsman International (India) Private Limited (\"HIPL”) 4.1. On the facts and in the circumstances of the case and in law, the learned transfer pricing officer (\"Ld. TPO\")/Ld. AD under the directions of the Ld. DRP erred in making upward adjustment of INR 16.78,40,626/- to the purchase price of the surfactants business of HIIPL purchased by the Appellant. 4.2. On the facts and in the circumstances of the case and in law, the Ld.. TPO/Ld. AD under the directions of the Ld. DRP erred in holding that purchase of surfactants business of HPL by the Appellant was a 'deemed international transaction under section 928(2) of the IT Act 4.3. On the facts and in the circumstances of the case and in law, the Ld. TPO/Ld. AO under the directions of the Ld. DRP erred in holding that purchase of surfactants business was taxable under section 56(2)(x) of the IT Act. 44 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. DRP erred in not following the mandatory and binding procedure set out in instruction No. 3 of 2016 dated 10 March 2016 issued by the Central Board of Direct Taxes, Ministry of Finance, Government of India and accordingly aforesaid adjustment was in direct contravention of the same and is liable to be deleted. 5. Re: Transfer pricing adjustment of INR 1.91.34.247/- towards interest on Compulsorily Convertible Debentures (\"CCDs\") paid to Indorama Netherlands B.V. 5.1. On the facts and in the circumstances of the case and in law, the Ld. TPO/Ld. AD under the directions of the Ld. DRP erred in making ad hoc adjustment of INR 1,91,34,247/- on account of interest on CCDs paid by the Appellant to Indorama Netherlands B.V. by treating the arm's length price (\"ALP\") of the transaction at Nil.” 3. The assessee is a private limited company primarily involved in manufacturing of surfactants. The assesseefiled its Income Tax Return (“ITR”) for AY 2020-21 declaring total loss at INR 6,78,11,415/-.During impugned assessment 4 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd year the assesseeacquired surfactants business (i.e.,business undertaking) of Huntsman International (India) Private Limited (“HIIPL”), an unrelated party under ‘slump sale’ in terms of Business Transfer Agreement dated 03/10/2020, copy of the agreement is enclosed pages 212-266 of the factual paper book. Acquisition of this business undertaking was part of a global business acquisition agreement signed between Indorama Ventures Holdings LP and Huntsman International LLC.The acquisition consideration for HIIPL’s surfactants business was determined based on the ratio of HIIPL’s EBITDA (i.e., Earnings before Interest, Depreciation and amortisation) to the total EBITDA of the business acquired globally.The acquisition price for the business undertaking was Rs. 1,74,01,59,374/- (approx. Rs. 174 crores).To finance such acquisition, assessee issued compulsorily convertible debentures (in short “CCDs”) to Indorama Netherlands B.V. (in short “INBV”)i.e., associated enterprise of the assesseeand the balance amount was financed by way of short-term loan from bank. The key terms of the CCDs were as under: 1. Principal Amount: INR 80,00,00,000/- 2. Date of subscription: 02/01/2020 3. Face value of CCDs: INR 1,000 4. Issue value of CCDs: Issued at par. 5. Conversion rate: Each CCD would be converted into 50 equity shares of INR 10 at a premium of INR 10 each. 6. Conversion terms: CCD may be converted into equity shares at anytime at the option of both the CCD holders and the assessee. In case no option would be exercised by any of them, then CCDs shall be 5 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd compulsorily converted on expiry of one year from issuance. 7. Interest rate: 9.7%. 8. The above CCDs were issued under the automatic route of Reserve Bank of India (“RBI”), and Form FCGPR filed by the assessee pursuant to allotment of CCDs to AE, INBV was also approved by the RBI. During the assessment the revenue the Ld.AO under the directions of the Ld. DRP has made adjustment of Rs. 38,88,00,000/-on account of alleged option premium arising on alleged sale of embedded call option to Indorama Netherlands BV. The assessee stated that the assessee did not enter intosale of any ‘call option’ to it’s AE, INBV so the question of receiving any ‘option premium’ does not arise. Related the purchase of ‘business undertaking’ was treated as purchase of property and by pursuing section 56(2)(x) of the Act the difference of purchase value amount to Rs. 174,01,59,374/- and the valuation under DCF method amount to Rs. 190,80,00,000/-which works out to Rs. 16,78,40,626/- was added back with the total income of the assessee. In third issue the assessee claimed expenses U/ 36(1)(iii) related to interest paid on CCD till its conversion. The ld. TPO has treated ALP of interest payment as nil as treating the same as nature of equity on which no interest to be paid. The addition on account of interest payment to INBV was made amount to Rs. 1,91,34,247/-. After recommendation of the ld. TPO the assessee filed objection before the ld. DRP. The final assessment order passed after getting recommendation from DRP. The aggrieved assessee filed the appeal before us by challenging the assessment order. 6 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd 4. In ground no 1 raised by the assessee is general in nature and does not need adjudication, hence dismissed. 5. In ground no 2 the assessee contends that final assessment order is passed beyond the limitation period prescribed under section 153 of the Act, which is not pressed before us, hence dismissed. 6. In ground no3 the assessee agitates that the Ld. DRP erred in making adjustment of INR 38,88,00,000/-on account of alleged optionpremium arising on alleged sale of embedded call option to Indorama Netherlands BV. The Ld.AR of the assessee submitted that CCDs cannot be equated with call option.The assessee did not enter into sale of any ‘call option’ to its AE, INBV and thus the question of receiving any ‘option premium’ does not arise. The CCDs were issued in accordance with the terms of the CCD subscription agreement dated 30/12/2019 and the same was not a contract for sale of any ‘call option’, the CCD subscription agreement dated 30/12/2019 is enclosed at pages 177-183 of the factual paperbook. A ‘call option’ contract gives the holder the right, but not the obligation, to buy an underlying security at a specific price within a specified time. This is in contrast with the terms of the CCD issued wherein the CCDs may be converted into equity shares at any time at the option of both the CCD holder and the assessee. Further, in case no option is exercised by any of them, the CCDs shall be compulsorily convertedon expiry of one year of its issuance. In the instant case, option to convert the CCDs before one year period was available to both the CCD holder and the assessee and not just to the CCD holder and as a fact, the instant conversion was made at the instance of the assessee. Accordingly, question of receiving any option premium does not arise at all. Further, the Ld.AR submitted that the holder of a call option pays a fee, known as ‘premium’. Such 7 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd premium is maximum that the holder can lose on a call option. This is in contrast with the CCD wherein no such premium is paid by the holder to the assessee. The entire CCD value was paid by the holder i.e. INBV at the time of issuance of CCDs amount to Rs. 1,000/- per CCD. Under CCD agreement, interest was charged by the holder until conversion, which is not the case with a call option. 7. It was further submitted that fair market value (“FMV”) is inclusive of ‘premium’ on shares: The “Ld. DRP” has erroneously added premium of INR 10 over and above the FMV of INR 19.72 per share, as determined in terms of valuation report dated 26/12/2019, annexed in pages 189 to 206 of the factual paperbook. Without appreciating the fact that the FMV of a share already includes its premium amount. This value includes the face value and premium of each share. Accordingly, 50 equity shares of value to Rs. 19.72 each which comes to Rs 986/- were exchanged in lieu of CCDs of Rs. 1,000/-. Thus, no premium income was earned or received by the assesseeon account of issuance or conversion of the CCDs. 8. The Ld.AR also argued that there is no ‘income’ element in the deal asissuance of CCDs was a capital account transaction not giving rise to any ‘income’. It is a settled position that transfer pricing provisions are not charging provisions and in the absence of ‘income’ chargeable to tax under any charging provisions of the Act, transfer pricing provisions cannot be invoked. Respectfully the reliance is placed on the decision of Hon’ble Jurisdictional High Court in the case of Vodafone India Services (P.) Ltd v UOI [(2014) 368 ITR 1. For abovementioned reasons, it cannot be said that the Assessee has transacted in 8 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd any options contract. Consequently, in the absence of any income (notional or otherwise) in the nature of options premium, transfer pricing adjustment cannot be made. He further submitted that the RBI took on record issuance of CCDs worth Rs. 80 crores by the assessee; CCDs were issued to foreign AE under automatic approval route of RBI. 9. With regard to ground no. 4 pertaining to transfer pricing adjustment of Rs. 16,78,40,626/- on account of purchase of business from HIIPL. The Ld. AR argued onnon-applicability of section 56(2)(x) of the Act on purchase / receipt of ‘business undertaking’.He submitted that therevenue has made this adjustment primarily on the ground that the business was purchased amount to Rs.1,74,01,59,374/- whereas its fair value computed under the DCF method (treated as ALP) was amount to Rs.1,90,80,00,000/-and thus difference amount to Rs. 16,78,40,626/- was taxable under section 56(2)(x) of the Act. In this connection he submitted that section 56(2)(x) can apply only to receipt of ‘property’ as defined in that section. The definition of ‘property’ under section 56 does not include ‘business undertaking’. As the assessee has acquired a ‘business undertaking’ for running business for a lump-sum consideration, provisions of Section 56(2)(x) are inapplicable and accordingly the entire adjustment ought to be deleted on this count itself. The Ld.AR further submitted that section 92(1) does not create an independent charge to tax ‘income’ which is otherwise not chargeable under the Act. And that, if income is not chargeable to tax under normal provisions of the Act, provisions of Chapter X cannot be invoked. Chapter X of the Act pre-supposes existence of ‘income’ and lays down machinery provisions to compute ALP for such income. In this regard he placed reliance on 9 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd the judgement of the Hon’ble jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. v UOI [2014] 368 ITR 1 (Bom), wherein it has been held as under: - “24. A plain reading of Section 92(1) of the Act very clearly brings out that income arising from an International Transaction is a condition precedent for application of Chapter X of the Act… 38…If it is income which is chargeable to tax, under the normal provision of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act….” The Ld.AR submitted that Pertinently, CBDT vide its Instruction No. 2/2015 dated 29/01/2015 has accepted the aforesaid decision of the Hon’ble Bombay High Court in the case of Vodafone India Services Private Limited (supra). The relevant extracts of said CBDT instructions are reproduced below: “In reference to the above cited subject, I am directed to draw yourattention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for A.Y. 2009-10 (WP No.871/2014), wherein the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment.” 2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment 10 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CIT (Appeals)” 10. The Ld.AR further submitted that there is contravention of Instruction No. 3/2016 dated 10/03/2016: The assessee declared the international transaction with HIIPL in Form 3CEB with qualifying remark that the transaction was not a ‘deemed international transaction’, and that it was reported out of abundant caution. In such circumstances,Instruction 3/2016 required the Ld. AO to record satisfaction and provide opportunity of being heard before making a TP reference. This jurisdictional requirement has not been complied with, and therefore the transfer pricing adjustment is bad on this count as well.Respectfully the ld. AR relied on the decision of Hon’ble Delhi High Court in the case of Indorama Synthetics (India) Ltd v ACIT [2016] 71 taxmann.com 349 (Delhi). 11. The Ld.AR further argued that the acquisition of Huntsman group’s global business was between two unrelated parties, and the EBITDA method for valuation of businesses has arrived at between such parties. In the absence of cogent reasons, the EBITDA method cannot be rejected. The ld. AR mentioned that in any merger and acquisition deal with a third party, EBITDA is the primary driver for the determination of purchase price. 12. With regard to ground no.5 pertaining to adjustment on account of interest of Rs.1,91,34,1247/- on CCDs paid to INBV. The Ld.AR submitted thatCCDs are debt instruments until conversion.The CCDs are fundamentally distinct from equity shares, as: (i) there is an obligation to pay interest until conversion date. (ii) they do not carry voting rights. 11 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd (iii) they do not carry any dividend rights. (iv) they do not provide a share in the profits. Thus, until the date of its conversion, they continue to remain ‘debenture’ in nature of ‘debt’ and cannot be treated as ‘equity’. Reliance in this regard is placed on following judicial precedents which have held the same: (a) Hon’ble Supreme Court in the case of SaharaIndia Real Estate Corpn. Ltd v SEBI [2012] 25 taxmann.com 18 (SC) wherein it is clearly held that optionally fully convertible debentures (“OFCDs”) will continue to remain debentures till they are converted. For ease of reference, relevant extracts of the ruling are reproduced below: “112. OFCDs issued have the characteristics of shares and debentures and fall within the definition of Section2(h) of SCR Act, which continue to remain debentures till they are converted. In other words, OFCDs issuedby Saharas are debentures in present and become shares in future. Even if OFCDs are hybrid securities, asdefined in Section 2(19A) of the Companies Act, they shall remain within the purview of the definition of\"securities\" in Section 2(h) of SCR Act.” (b) Hon’ble Delhi High Court in the case of Zaheer Mauritius v DIT [2014] 270 CTR 244 (Delhi) wherein the Hon’ble High Court held as under: “13.There is no dispute as to the nature of Compulsorily Convertible Debentures. A debenture indisputably creates and recognizes the existence of a debt and till it is discharged, either by payment or by conversion, the debenture would essentially represent a debt. A Compulsorily Convertible Debenture is a debt which is compulsorily liable to be discharged by conversion into equity. Any 12 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd amount payable by the issuer of debentures to its holder would usually be interest in the hands of the holder…” (c) Hon’ble Income Tax Appellate Tribunal Bangalore, A-Bench in the case of ACIT v CAE Flight Training (India) Pvt. Ltd [2023] 150 taxmann.com 276 (Bangalore); relevant paragraphs 23 to 24 are reproduced as below: - ”23. As per above paras of this tribunal order, Statute book of the other country, no disallowance can be made in India by applying dis Principle. To this extent, we uphold the finding of CIT(A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin Capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009-10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated thar fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36(1)(iii). This finding of TPO is not by Invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. O the same logic, in our considered opinion, t (iii) of Income-tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be till the date of conversion. for allowability of interest u/s 36 (1) allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly This issue is decided. 24. After examining the applicability of the Tribunal order rendered in the case of Besix Kier Dabhol, SA v. DDIT (supra), we now examine the applicability of the decision of Special Bench of the Tribunal rendered in the case of Ashima Syntex Ltd. v. ACIT as reported in 100 IID 247 (Ahd) (SB) on which reliance has been placed by Id. DR of revenue in the written submissions filed by him as reproduced above. From the facts noted by the Tribunal in this case, it is seen that in that case the assessee issued convertible debentures for subscription 13 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd at the rate of Rs. 75 per debenture and these were in two parts Part-A of Rs. 35 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 25 per share on the date of allotment of the debenture and Part-B of Rs. 40 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 30 per share on the expiry of 15 months from the date of allotment of the debenture. Part-B debenture was to carry an interest at the rate of Rs. 14 per annum till the date of conversion payable half yearly on 30th June and 31st December each year and on conversion. The issue in dispute in that case was regarding the allowability of expenses incurred on issue of such debentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted on the date of share on the expiry of 15 months from the date of allotment of the debenture. Part-B debenture was to carry an interest at the rate of Rs. 14 per annum till the date of conversion payable half yearly on 30th June and 31st December each year and on conversion. The issue in dispute in that case was regarding the allowability of expenses incurred on issue of such debentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted only on expiry of 15 months from the date of allotment of debenture and under these facts, it was held by Special Bench of the Tribunal in that case that the expenses incurred on issue of such debentures has to be considered as expenses incurred for issue of shares because it was found that first part of the debentures was to be converted into shares on the date of allotment itself and the second part was to be converted after expiry of 15 months from the date of allotment of debenture and therefore it was held that expenses incurred were actually incurred for issue of shares and not issue of debentures. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest expenditure on convertible debentures for the pre-conversion period. Hence, we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in that case.” 14 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd 13. Further, the Ld.AR submitted that the TPO does not have power to characterise a transaction as the jurisdiction of the transfer pricing officer is to determine the ALP of international transaction in accordance with the methods prescribed under the Act and accordingly, the powers accorded under the law cannot be exceeded by the Ld. TPO by re-characterizing the transaction. Respectfully reliance in this regard is placed on the following judicial precedents which affirm the limited scope of transfer pricing proceedings and that re- characterizing a transaction is beyond the scope of the Ld. TPO. For this proposition, he respectfully relied on the following judgements of the Hon’ble Delhi High Court decision in the case of CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi). 14. The Ld.AR further submitted that the assessee required additional funds for business operations and given that it already had high debt in nature of CCDs, it was facing difficulty in obtaining term loan and working capital loan from banks. Accordingly, the assesseeentered into an arrangement with HSBC Bank for obtaining additional debt. Given the assessee’s high debt-to-equity ratio, the amended loan arrangement with HSBC required the assesseeto, inter-alia, convert all CCDs into equity shares by 31/03/2020 as a condition precedent to providing a term loan and working capital loan. 15. The Ld.AR submitted that it is a settled position that the Ld. TPO cannot step into the shoes of the assessee to determine whether it should have made the commercial choice of issuing CCDs to raise capital for business.Respectfully 15 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd vs. CIT(A) [2007] 288 ITR 1. 16. The Ld.AR submitted that the FEMA / RBI guidelines are not relevant in this case The Ld. DRP erroneously placed reliance on the characterization of CCDs under FEMA / foreign direct investment (“FDI”) regulations as ‘equity instruments.’ The Ld. DRP failed to appreciate the fact that these rules were introduced in an entirely different context of Indian foreign exchange regulations, and that treatment under FEMA does not change the essential nature of the CCDs as a ‘debt instrument’ for the purpose of IT Act.The Ld. DRP also relied on Circular No. 74 dated 8 June 2007 issued by the RBI wherein RBI stated that instruments which are fully and mandatorily convertible into equity would be treated as part of ‘equity’ under foreign direct investment policy. The Ld. TPO/ Ld. DRP placed reliance on such circular and held that CCDs would be in the nature of ‘equity’ for Indian transfer pricing purposes. They failed to appreciate the context of the circular, which was to prevent Indian companies from raising debt by means of issuing optionally convertible debentures without complying with the conditions specified under the applicable ‘External Commercial Borrowings’ (“ECB”) regulations. Such a policy decision is from the perspective of conserving Indian foreign exchange by regulating borrowing from foreign sources, their permissible use in India, interest payment thereon, etc andwould have no bearing on the income tax implications regarding interest expenditure on CCDs. 17. Further, with regard to allowability of interest under section 36(1)(iii), the Ld.AR submitted that as CCDs are debt instruments until their conversion, interest paid on CCDs should be considered as ‘interest on borrowings’ for section 16 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd 36(1)(iii).It is not disputed that proceeds from issuance of CCDs were utilised for the purpose of business (which included payment of purchase consideration for acquisition of ‘business undertaking’ from HIIPL) as a going concern on a slump sale basis. This is also specifically mentioned in the CCD subscription agreement. Therefore, the proceeds derived from issuance of CCDs are in the nature of ‘capital borrowed for the purpose of business. Consequently, interest ought to be allowed under section 36(1)(iii) of the IT Act, as a legitimate business expense. 18. The Ld.AR also alternatively submitted that the CCDs were issued to raise funds for acquisition of the surfactants business of HIIPL. As this was for business purpose, and CCDs are debt instruments till date of conversion, interest paid on CCDs is also allowable as deduction under section 37 as well. 19. It was also submitted that the ALP of a transaction cannot be regarded as Nil: The Ld. TPO has treated ALP of interest payment as Nil on an arbitrarybasis primarily treating the same in the nature of equity on which no interest is to be paid. This action of the Ld. TPO / Ld. DRP is not permissible since CCDs remain debt until they are converted. 20. The Ld.AR contended thatduring the course of transfer pricing proceedings, the assessee submitted set of 8 comparables having an arm's length range of 8.00% to 12.00% per annum. Since, the assessee’s interest payment of 9.7% was within this range, it was treated at arm’s length. The Ld. TPO / DRP disregarded the independent benchmarking analysis undertaken by the assesseeby neither giving any cogent reasons nor independently conducting any search in accordance with the transfer pricing regulations under the Act. 17 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd 21. I was also submitted that the assessee suo-motu disallowed an amount of INR 1,55,02,844/- out of the total interest paid of INR 1,91,34,247/- in accordance with thin capitalization rules under section 94B of the IT Act while filing its return of income for the year under consideration. Further applicable taxes were withheld while making interest payments and INBV also filed its return of income in India for AY 2020-21whereby it reported this interest income and the taxes withheld under section 195 of the Act and no refund of the same was claimed by it in the return of income. Thus, Ld. DRP’s observations at page 79 of its order that there was base erosion by way of exempt payments is, incorrect / faulty. 22. The Ld.AR further submitted thatthe assesseeobtained a secured term loan from HSBC bank in April 2020 wherein the interest is charged at 9.05%. As availing unsecured loans from third parties entails higher interest rates, the interest rate of 9.7% paid by the assessee on its CCDs should be considered to be at arm’s length. 23. The Ld.AR summed up his arguments by submitting that RBI took on record issuance of CCDs worth INR 80 crores by the assessee; CCDs were issued to foreign AE under automatic approval route of RBI, copy is annexed in page 305 of the factual paperbook. 24. The ld. DR vehemently argued and fully relied on the order of revenue authorities. 25. We heard the rival submission and considered the documents available in the record. We find that the assessee issued CCDs to the AE through the CCD subscription agreement dated 30/12/2019. The CCDs Cannot be equated with call options. The assessee did not enter into the sale of any call option to its AE. 18 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd Thus, the question of receiving any ‘option premium’ does not arise. The CCDs were issued in accordance with the terms of CCDs subscription agreement dated 30/12/2019 and the same was not a contract for sale for any ‘call option’. The revenue was not able to show any income element in the deal as issuance of CCDs which is a capital account transaction and not giving rise to any income. It is settled proposition that transfer pricing provisions are not charging provisions and in absence of ‘income’ chargeable to tax under any charging provisions of the Act, transfer pricing provision cannot be invoked. We respectfully relied on the order of Vodafone India Services Pvt Ltd (supra) held that in the absence of any income in nature of notional or otherwise in the nature of options premium, transfer pricing adjustment cannot be made.Even income arising from international transaction between AE must satisfy the test of ‘income’ under the Act and must find its home in chapter X on charging provision. But Ld. DR was unable to show any revenue generating from these transactions. The calculation of ALP amounted to Rs.33,88,000/- by the direction of the Ld. DRP on account of alleged option premium is unjustified and liable to be deleted. Further, in case of invoking of provisions of section 56(2)(x) of the Act, we find that the assessee’s purchase of business from HIIPL the business was purchased amount to Rs.1,74,01,59,374/- whereas its fair value computed under the DCF method, treated as ALP was amount to Rs.1,90,80,00,000/-and thus difference amount to Rs. 16,78,40,626/- by invoking provisions of section 56(2)(x) of the Act. The section 56(2)(x) can apply only to transaction of ‘property’ as defined in that section, but the ‘property’ is never included with ‘business undertaking’. the acquisition of Huntsman group’s global business was between two unrelated 19 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd parties, so section 56(2)(x) is not applicable related to “slump sale” and accordingly amount to Rs.16,78,40,626/- is directed to be deleted. We considered the addition made under section 36(1)(iii) of the Act. The assessee submitted that the interest was paid to AE for CCDs till conversion to the equity share. But the Ld.TPO has changed the characteristics of the CCDs to an equity share. So, the re-characterization and transaction is beyond the jurisdiction of the Ld.TPO. Respectfully followed the order of the Hon’ble Delhi High Court in EKL Appliances Ltd(supra). The Ld. DRP got the concept of thin capital and relied on the circular No.74 dated 08/06/2007 issued by the RBI wherein the RBI stated that the instructions which are fully and mandatorily convertible into equity would be treated as part of equity under foreign direct investment policy. The circular is duly applied on that CCDs and treated as equity for Indian transfer pricing process. But the revenue has failed to appreciate the context of the circular which was to prevent the Indian companies for raising debt by means of issuing optional convertible debentures without complying with the conditions specified under the applicable ‘External Commercial Borrowing’ regulations. So, the said circular is not applicable for the assessee. In factual relation, the interest under section 36(1)(iii) related to CCDs which are a debt instrument until its conversion and the interest paid on CCDs should be considered as interest on borrowing for section 36(1)(iii) of the Act. Respectfully followed the order of Sahara India Real Estate Corpn. Ltd(supra). And finally, the CCDs are utilized for the purpose of business for payment of purchase consideration for acquisition of business undertaking from HIIPL as an ongoing concern on a slump sale basis and entire transaction is guided by the CCDs 20 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd subscription agreement. Further, it is placed that the RBI took on record related to issue AE under automatic approval route of RBI. The assessee Suo-motu disallowed an amount of Rs.1,55,02,844/- out of total interest paid of Rs.1,91,34,247/- in accordance with thin capitalization rule under section 94B of the Act during filing the return of income. We find that there is no wrong in the submission of the Ld.AR. We respectfully follow the order of the co-ordinate bench of ITAT, Bangalore in the case of CAE Flight Training India Pvt Ltd (supra), wherein the coordinate bench of ITAT has explicitly rejected reliance on that RBI policy / FEMA guidelines adopted by the revenue for recharacterizing CCDs as ‘equity’ for tax purposes. The Ld. DR has not rebutted the submission of the ld. 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. Order pronounced in the open court on 29th day of October 2024. Sd/- sd/- (B.R. BASKARAN) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 29/10/2024 Pavanan 21 ITA No.4023 /Mum/2024 Indorama Ventures Oxides Ankleshwar Pvt Ltd Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, Mumbai "