Summit Developers Private Limited, Bangalore V. The Deputy Commissioner Of Income Tax, Circle-6(1)(1), Bangalore

ITTPA 794/BANG/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8764 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 1 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 09-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 08-11-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 07-09-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SRIRAM SHESHADRI
• Keywords: Depreciation; Transfer pricing; International transaction; Date of conversion
• Section: 143(3); 92; 92F; 36 (1) (iii); 144C; 143(2); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM IT(TP)A No.794/Bang/2022 : Asst.Year 2018-2019 M/s.Summit Developments Private Limited No.150, Embassy Point, Infantry Road, Bangalore – 560 001. PAN : AAPCS4469K. v. The Deputy Commissioner of Income-tax, Circle 6(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.Sriram Sheshadri, Advocate Respondent by : Sri.K.Sankar Ganesh, JCIT –DR Date of Hearing : 09.11.2022 Date of Pronouncement : 10.11.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 14.07.2022 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2018-2019. 2. The assessee had raised three grounds, however, during the course of hearing, the assessee had only raised submissions with reference to ground 3 and its sub-grounds. Ground 3 and its sub-grounds read as follows:- 3.TRANSFER PRICING ADJUSTMENT WITH RESPECT TO INTEREST PAID ON COMPULSORILY CONVERTIBLE DEBENTURES ("CCD") 3.1 On the facts and in the circumstances of the case and in law, the lower authorities erred in making a transfer pricing adjustment of INR 13,89,60,371/- in respect of the interest IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 2 expenditure incurred by the Appellant, on the CCD's issued by it to its non-resident AE. 3.2 The lower authorities erred in concluding the ALP of the said interest as NIL, without undertaking any benchmarking and comparability analysis, using external comparable transactions. 3.3 The lower authorities exceeded his jurisdiction in recharacterizing and concluding that the CCDs issued by the Appellant are in the nature of equity investments. 3-4 The lower authorities erred in disregarding the Appellant's TP documentation and in not considering / arbitrarily rejecting the benchmarking analysis undertaken by it using external comparable uncontrolled transactions, to demonstrate that the said interest expenditure is at arms' length. 3.5 On the facts and circumstances of the case and in law, the lower authorities erred in not appreciating the Appellant's argument that the CCDs should be benchmarked only in the year of issue and that the terms and conditions prevalent at the time of issue continues to hold good until the conversion of CCDs. 3.6 The lower authorities erred in law and in facts in holding that the investor in the other jurisdiction may treat the investment in CCDs as equity and claim the interest receipt as exempt under their domestic laws, as such finding is without any basis.” 3. The brief facts of the case are as follows: The assessee is a private limited company primarily engaged in the business of real estate development. It is a subsidiary of Embassy Property Developments Private Limited. For the assessment year 2018-2019, the return of income was filed on 30.11.2918 declaring loss of Rs.44,07,32,927. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 22.09.2019. During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 3 for determination of Arm’s Length Price (ALP) of the international transaction undertaken by the assessee with its AE. The TPO passed an order u/s 92CA(3) of the I.T.Act (order dated 31.07.2021) proposing transfer pricing adjustment of Rs.13,89,60,371 towards interest paid by the assessee on Compulsory Convertible Debentures (CCDs). Pursuant to the TPO’s order, draft assessment order was passed on 23.09.2021 u/s 143(3) r.w.s. 144C of the I.T.Act incorporating the above mentioned TP adjustment proposed by the TPO. The A.O. also proposed corporate tax disallowance of loss on valuation of CCDs. 4. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) on 21.10.2021. The DRP vide its directions dated 08.06.2022 upheld the adjustment proposed by the TPO and confirmed the corporate tax disallowance. Pursuant to the DRP’s directions, the impugned final assessment order was passed on 14.07.2022. 5. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The learned AR submitted that the lower authorities has exceeded the jurisdiction in re-charactering and concluding that CCDs issued by the assessee are in the nature of equity investments. It was further submitted by the learned AR that the assessee’s TP documentation has been arbitrarily rejected. The learned AR submitted that subsequent to the introduction of new section 94B of the I.T.Act relating to Thin IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 4 Capitalisation Rules, the interest paid on the CCDs needs to be disallowed under the normal provisions of the Act. The learned AR relied on the following judicial pronouncements, in support of the above contention that CCD’s cannot be re- characterized as equities:- (i) CAE Flight Training India Pvt. Ltd. 2019 (8) TMi 554 (ITAT-Bangalore) (ii) Embassy One Developers Pvt. Ltd. 2020 (12)TMI 110 (ITAT-Bangalore) (iii) IMS Health Analytics Services Pvt. Ltd. 2020 (6) TMI 505 (ITAT-Bangalore) (iv) TE Connectivity Services India Private Limited IT(TP)A No.191/Bang/2020 (order dated 16.09.2022) (v) Amanora Future Towers Pvt. Ltd. ITA No.772/Pun/2018 (order dated 18.12.2020) (vi) Enzen Global Solutions Pvt. Ltd. 144 taxmann.com 6. The learned Departmental Representative supported the orders of the TPO and the DRP. 7. We have heard rival submissions and perused the material on record. The assessee issued 27,79,20,741 nos. CCDs of face value INR 10/- each to M/s. Pollhater Investments Limited ("PIL") pursuant to the Securities Subscription and Shareholders Agreement dated 17.08.2011. The terms of the CCDs are as under:-  PIL shall pay an amount of INR 277,92,07.410 (i.e. INR 277.92 Crores) as the investor subscription amount in respect of CCDs issued to PIL.  CCDs shall be unsecured and shall carry an interest rate of 5% per annum and interest shall be payable as on 31st March of each year IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 5  Interest on CCDs shall be accrued and payable annually.  At any time after the expiry of five years from the date of allotment of CCDs, PIL shall be entitled to convert the CCDs into equity shares such that the number of equity shares issued and allotted to PIL shall represent 18.59% of the share capital of the assessee, 7.1 The above-mentioned agreement was amended vide "First Amendment to Securities Subscription and Shareholders Agreement" dated 09.12.2016, in order to extend the period for the conversion of the CCDs from five years to six years. Subsequently, it was amended again vide "Second Amendment to Securities Subscription and Shareholders Agreement" dated 30.12.2017, in order to extend the period of conversion of the CCDs from six years to a fixed date i.e. 31.07.2018. PIL is incorporated under the laws of Cyprus and is engaged in the business of investment in the construction development and allied sectors in India. On applying the provisions of section 92A(2)(c) of the I.T.Act, PIL shall be deemed to be an Associated Enterprise ("AE") of the assessee , as loan advanced by PIL (subscription to CCDs) constitutes not less than 51 percent of the book value of the total assets of the assessee. For the year under consideration, the average interest rate is 5% and the assessee incurred interest expenditure of INR 13,89,60,371 (i.e. 13.90 Crores) on the said CCDs issued. 7.2 The assessee benchmarked the international transaction with respect to payment of interest on CCD using external CUP method by using the CapitaLine Plus, ACE TP and NSDL databases. Pursuant to the search process adopted by the IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 6 assessee, 14 companies containing 22 CCD transactions were identified as comparable to the assessee's transaction. Since the rate of interest paid by the assessee to PIL is less than the median of the rates of the interest paid in the above comparable transactions identified i.e. 11%, the transaction with respect to payment of interest on CCD, assessee treated payment of interest at ALP in its TP study. The TPO in the TP order recharacterized the CCDs as Equity and held that once character of funds received from AE is determined as equity, no interest is payable and accordingly no interest is allowable. The DRP held that Reserve Bank of India ("RBI") has treated CCDs as equity and since conversion is compulsory, it shall be treated as equity rather than debt. The DRP therefore upheld the adjustment proposed by the TPO. 7.3 It is well settled by judicial proposition that CCDs constitute debt and interest payable thereon is a deductible expenditure till the time the same are converted into equity. The definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency and since CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 7 conversion. Hence the disallowance of Interest expenditure on CCD cannot be sustained on the basis that CCDs are in the nature of equity. In this context, we place reliance on the order of the Bangalore Bench of the Tribunal in the case of CAE Flight Training (India) Pvt. Ltd 2019 (8) TMI 554. The relevant finding of the Tribunal reads as follows:- "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 its 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. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest ii/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided." 7.4 The Tribunal in the case of CAE Flight Training (supra) also rejected the reliance placed by the lower authorities on the decision of the Ahmedabad Tribunal (Special Bench) in the case of Ashima Syntex Limited reported in 100 ITD 247, holding that issue in dispute in Ashima Syntex (supra) 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 and therefore the decision of Special Bench of the Tribunal in Ashima Syntex does not support the contention of the Revenue. We also place reliance on the following judicial pronouncements, which have upheld the same view: IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 8 (i) Besix Kier Dabhol SA 26 taxmann.com 169 (Bom.) (ii) Embassy One Developers Pvt. Ltd. 65 taxmann.com 238, ITAT Bangalore. (iii) IMS Health Analytics Services Pvt.Ltd. TS-811-HC- 2012 (Bangalore Tribunal) (iv) TE Connectivity Services India Pvt. Ltd. in IT(PT)A No.191/Bang/2022 (v) Amanora Future Twoers Pvt. Ltd. 144 taxmann.co. 7.5 In light of the aforesaid judicial pronouncements, we delete the TP adjustment with respect to interest on CCD, contending CCD is equity. 7.6 However, the Finance Act, 2017 introduced a new section 94B of the I.T.Act relating to thin capitalisation rules, to limit payment of interest by Indian companies to non- resident AE, upto to a certain limit. The requirements limit an Indian company's payment of interest exceeding INR 1 Crore to its non-resident AEs to: (a) 30% of its earnings before interest, taxes, depreciation, and amortization ("EBITDA"); or (b) Interest paid or payable to its associated enterprise whichever is lesser. 7.7 The new section 94B of the I.T.Act is applicable with effect from 01.04.2018, and hence is applicable for the impugned assessment year, namely, A.Y. 2018-2019. Section 94B of the I.T.Act is different from transfer pricing provisions contained in sections 92 to 92F of the I.T.Act. The transfer pricing provisions deal with the determining the arm's length rate of interest payable on a debt-claim from an AE. In IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 9 contrast, section 94B of the I.T.Act places a blanket threshold on the deductibility of interest paid, based on the profitability of the Assessee and not based on the debt-claim itself. The assessee did not comply with the provisions of section 94B of the I.T.Act to suo moto disallow the interest on CCD while computing the taxable income in the income tax return filed for the impugned AY (probably due to oversight). The assessee failed to appreciate that the same definition of AE as per sub section (1) and sub section (2) of section 94A is referred in section 94B of the I.T.Act and hence interest on CCD paid to PIL, who being a deemed AE as per the provisions of section 94A(2)(C) of the I.T.ACt, also comes under the purview of section 94B of the I.T.Act. In the light of the aforesaid reasoning and the judicial pronouncements, cited supra, the impugned TP adjustment with respect to payment of interest on CCD is deleted. However, the disallowance is liable to be made under section 94B of the I.T.Act. It is ordered accordingly. 8. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on this 10 th day of November, 2022. Sd/- (Laxmi Prasad Sahu) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 10 th November, 2022. Devadas G* IT(TPA No.794/Bang/2022 M/s.Summit Developments Private Limited. 10 Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP-2, Bangalore. 4. The DCIT TP-2(2)(1), Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore