NATEMS SOLAR POWER PRIVATE LIMITED ,HYDERABAD V. INCOME TAX OFFICER, WARD 16(1), HYDERABAD

ITA 140/HYD/2024

AI Insights

The case involves Natems Solar Power Private Limited, which appealed against the order of the AO concerning the assessment year 2020-21. The primary contention was regarding the transfer pricing adjustments made on the interest payments on CCDs and supplier's credit, which the AO benchmarked using LIBOR rates. The assessee argued that these transactions should be benchmarked using SBI-PLR rates as they were INR denominated and involved Indian entities. The Tribunal's decision was influenced by precedents and principles that interest rates for INR denominated loans should be based on domestic benchmarks rather than international ones like LIBOR.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315859 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Assessment Year: 2020-2021
• Other Referred Cases: Hyderabad Infratech (P) Ltd. Vs. Deputy Commissioner of Income Tax, CIT Vs. Naturals India Pvt. Ltd., PCIT Vs. India Debt Management (P.) Ltd., CIT Vs. Tata Autocomp Systems Ltd., Cotton Naturals (I) (P) Ltd. Vs. CIT, Maanaveeya Development & Finance (P.) Ltd. Vs. ACIT, Watermarke Residency Ltd. Vs. DCIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revised return; Transfer pricing; International transaction; Fair market value; Search and seizure; Wholly owned subsidiary; Residential status; Related party transaction
• Section: 143(3); 234B; 115JB

Judgement Text

" आयकर अपीलीय न्यायाधिकरण में, हैदराबाद ‘बी’ बेंच, हैदराबाद IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘B’ Bench, Hyderabad श्री मंजूनाथ जी., माननीय लेखा सदस्य एवं श्री रवीश सूद, माननीय न्याययक सदस्य SHRI MANJUNATHA G., HON’BLE ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, HON’BLE JUDICIAL MEMBER आयकर अपील सं./I.T.A.No.140/Hyd/2024 (निर्धारण वर्ा/ Assessment Year:2020-21) Natems Solar Power Private Limited Hyderabad PAN : AAECN6826G Vs. Income Tax Officer Ward-16(1) Hyderabad (अपीलार्थी/ Appellant) (प्रत्यर्थी/ Respondent) करदाता का प्रतततितित्व/ Assessee Represented by : Shri Harsh Shah and Yash Ranglani, AR राजस्व का प्रतततितित्व/ Department Represented by : Ms. M. Narmada, CIT-DR सुिवाई समाप्त होिे की ततति/ Date of Conclusion of Hearing : 12.03.2025 घोर्णध की तधरीख/Date of Pronouncement : 14.05.2025 2 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 O R D E R प्रनत रवीश सूद, जे.एम./PER RAVISH SOOD, J.M. The present appeal filed by the assessee company is directed against the order passed by the Assessing Officer (“the AO”) u/s 143(3) r.w.s. 144C(13) read with section 144B of the Income-tax Act, 1961 (“the Act”) dated 20.12.2023. The assessee has assailed the impugned order on the following grounds of appeal before us: 1. On the facts and circumstances of the case and in law, the assessment proceedings in the case of the Appellant’s case for AY 2020-21 are barred by limitation and accordingly, the final assessment order dated 20December 2023 ought to be quashed in-limine. Payment of Interest on CCDs 2. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble Dispute Resolution Panel (DRP’), erred in rejecting the Appellant’s benchmarking analysis which demonstrated that payment of Interest on CCDs was at arm’s length and further erred in conducting a fresh benchmarking exercise. 3. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon'ble DRP erred in determining the arm’s length price (‘ALP’) of interest on CCDs by using CUP Method without analyzing or identifying any uncontrolled transaction of similar nature which is mandatory for application of the CUP method. 3 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 4. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP, erred in benchmarking ‘Payment of interest on CCDs’ by applying LIBOR rates applicable to USD, without appreciating the fact that CCDs issued are INR denominated and the interest thereon is also computed in terms of INR. 5. Without prejudice, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP, erred in adding the amount of transfer pricing adjustment to the total income of the Appellant without appreciating the fact that Assessee has not claimed a deduction of the interest paid on CCDs and accordingly transfer pricing provisions are not applicable to the said transaction. Payment of interest towards purchase on supplier credit 6. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP, erred in disregarding the Appellant’s benchmarking analysis, the documentation maintained thereunder and determining the arm’s length price of the transaction of interest towards purchase on supplier credit. 7. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP erred in determining the ALP of interest towards purchase on supplier credit by using CUP Method without analyzing or identifying any uncontrolled transaction of similar nature which is mandatory for application of the CUP method. 8. Without prejudice, the Ld. AO and the Ld. TPO, under the directions of the Hon'ble DRP, erred in computing the amount of transfer Pricing adjustments. 9. Without prejudice, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP, erred in adding the amount of transfer pricing adjustment to the total income of the Appellant 4 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 without appreciating the fact that Assessee has not claimed a deduction of the interest towards purchase on supplier credit and accordingly transfer Pricing provisions are not applicable to the said transaction. Setoff of losses 10. On the facts and circumstances of the case and in law, the Ld. AO erred in in computing the assessed income by not-granting set off of losses brought forward. Computation of book profits 11. On the facts and circumstances of the case and in law, the Ld. AO erred in computing the amount of book profits and the consequent taxes as per Section 115JB of the Act. The AO ought to have appreciated that ‘book profits’ cannot be enhanced by the quantum of additions under Chapter X. Interest under section 234A, 234B and 234C of the Act 12. On the facts and circumstances of the case and in law, the Ld. AO erred in computing the interest under Section 234A, Section 234B and Section 234C of the Act while calculating the Appellant’s payable demand. Initiation of penalty under Section 270A 13. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 270A of the Act. The above grounds are independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal, so as to enable the Hon’ble Income-tax Appellate Tribunal to decide this appeal according to law. 5 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 2. Succinctly stated, the assessee company, which is engaged in the business of generation, accumulation, distribution and supply of solar energy, had e-filed its return of income for the A.Y.2020-21 on 29.01.2021, declaring an income of Rs.2,05, 4,00/-. Thereafter, the assessee company filed a revised return of income on 17.03.2021 declaring the same income as was originally returned. Subsequently, the case of the assessee company was selected for scrutiny assessment u/s 143(2) of the Act. 3. During the course of assessment proceedings, the AO taking cognizance of the fact that the assessee company had during the subject year carried out international transactions, made a reference to the Transfer Pricing Officer (“the TPO”) u/s 92CA(3) of the Act. 4. The TPO during the course of proceedings before him, observed that the assessee company as per its TP Study Report in “Form 3CEB”/TP documents had carried out international transactions during the subject year, as under: , 6 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 Name of the Transaction MAM Amount (Rs.) Issue of Equity Shares Any Other Method 9,09,91,200 Issue of Compulsory Convertible Debentures (CCDs) Any Other Method 6,00,00,000 Interest on CCDs Any Other Method 29,18,333 Receipt of Supplier’s credit Any Other Method 20,79,57,552 Interest on supplier’s credit Any Other Method 44,56,273 Purchase of PV Solar Modules CUP 19,60,12,184 Reimbursement of Expenses Any Other Method 7,50,937 5. After necessary deliberations, the TPO, inter-alia, proposed certain adjustments to the Arms Length Price (“ALP”) of the international transactions of the assessee company, as under: Nature of transaction Amount reported in 3ECB Arms Length Price (Rs.) MAM Adjustment (Rs.) Interest on CCDs 29,18,333 13,76,767 CUP 15,41,567 Reimbursement of expenses 7,50,937 Nil Other Method 7,50,937 Interest on Supplier’s Credit 44,56,273 42,03,819 CUP 2,52,454 Total 25,44,958 7 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 6. Accordingly, the TPO directed the AO to enhance the total income of the assessee company by Rs.25,44,958/- u/s 92CA of the Act. 7. The AO, on receipt of the order passed by the TPO u/s 92CA(3) of the Act, dated 30.12.2022, called upon the assessee company to explain that as to why a transfer pricing adjustment of Rs.25.44 lacs (supra) may not be made to its returned income. As the assessee company failed to respond to the “Show cause notice” (“SCN”) issued by the AO, therefore, the latter inferred that it had no objection to the proposed addition. Accordingly, the A.O. vide his draft assessment order u/s 144C(1) of the Act, dated 15/02/2023 proposed to assess the income of the assessee company after making the aforesaid additions. 8. Aggrieved, the assessee objected to the draft assessment order passed by the AO u/s 144C(1) dated 15.02.2023 before the Dispute Resolution Panel-1, Bangalore (“DRP”). The DRP though vacated the proposed adjustment of the “reimbursement of expenses” of Rs. 7,50,937/- but upheld the remaining two proposed adjustments u/s 92CA(3) of the Act, viz. (i). adjustment by the TPO of the ALP of the international transaction of interest 8 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 paid/payable to AE on Supplier credit based on LIBOR Plus 200 Basis points: Rs. 2,52,454/-; and (ii). adjustment by the TPO of the ALP of the international transaction of interest paid to AE on Compulsory Convertible Debentures (CCDs) on LIBOR Plus 200 Basis points: Rs. 15,41,567/-. 9. Thereafter, the AO vide his final order of assessment u/s 143(3) rws 144C(13) rws 144B of the Act, dated 20/12/2013 after making the aforesaid two-fold additions determined the income of the assessee company at Rs. 17,94,021/-. 10. The assessee company being aggrieved with the order passed by the AO u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act, dated 20/12/2013, has carried the matter in appeal before us. 11. We have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 12. As the controversy involved in the appeal before us hinges around two material aspects, viz. (i) benchmarking by the AO/TPO 9 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 of the ALP of interest paid by the assessee company on the Compulsorily Convertible Debentures (“CCDs”) issued to its AE i.e., Vibrant Energy Holdings Pte Ltd., Singapore (“VEHPL”) by adopting LIBOR plus 200 basis points as CUP - as against benchmarking of the same by the assessee company adopting SBI- PLR, RBI Master Directions and Safe Harbour Rules; and (ii) benchmarking by the AO/TPO of the ALP of the interest on supplier’s credit paid/payable by the assessee company to its AE using CUP method as against “Other method” adopted by the assessee company as Most Appropriate Method (“MAM”); therefore, we will confine our adjudication to the said two issues, as under : (A). Interest on Compulsorily Convertible Debentures 12.1 On a perusal of the record, it transpires that the assessee company had issued 1200000 CCD’s to its AE, i.e. VEHPL at a value of INR 50 per CCD to raise an aggregate consideration of Rs.6,00,00,000/-. The tenure of the CCDs was 10 years from the date of issue and on maturity each CCD was to be converted into equity share. The assessee company during the subject year had paid to its AE, i.e VHPL interest on CCD’s at the 10 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 coupon rate of 8.5% amounting to Rs.29,18,333/-. The assessee company had adopted “other method” as “Most Appropriate Method” (MAM) for benchmarking the aforesaid transaction of payment of interest on CCD’s. It had based on a search on the NSDL website, wherein, the arms length range of comparable companies was between 10% (35th percentile) and 11.10 (65th percentile) and the median being 10.75%, claimed that the subject payment of interest on CCDs was as per the arms length standard and in accordance with the Indian transfer pricing regulations. Apart from that, the assessee company had also benchmarked its aforesaid transaction based on the SBI-PLR, RBI Master directions and Safe Harbour Rules. 12.2 The TPO did not find favour with the benchmarking that was carried out by the assessee company regarding the payment of interest on CCD’s at 8.5% and proposed to benchmark its ALP by adopting LIBOR+200 basis points as CUP. The TPO was of the view that as per the RBI guidelines and other judicial pronouncements, the CCDs were hybrid instruments which were in nature of a loan till their conversion into equity. Accordingly, he was of the view that for all international loans, LIBOR is usually 11 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 considered as a benchmark. Also, the TPO was of the view that as on account of the nature of CCDs, the assessee company remained under no obligation to repay the amount to its AE even on maturity, therefore, the currency in which the loan was taken and to be repaid would not be relevant for purpose of determining the interest rate. 12.3 Apropos, the benchmarking analysis undertaken by the assessee company using RBI Master Circular, the TPO was of the view that the same was also not appropriate, for the reason, that the RBI Circular was on a different criteria and for different purposes. Elaborating on his view, it was observed by him that the RBI directions/policies were in respect of Foreign Direct Investment policy and fund infusion from foreign sources into the Indian economy and were aimed at controlling the fund inflow from abroad in the form of debt. 12.4 Apropos the option to exercise Safe Harbour Rules by the assessee company, the TPO observed that the same was not applicable to each and every assessee, but only in some classes of assessees subject to fulfilment of certain criteria. Accordingly, the AO based on his aforesaid observations rejected the 12 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 benchmarking of the interest paid on CCDs by the assessee company and substituted the same by LIBOR+200 basis points. 12.5 Thereafter, the AO based on the aforesaid directions of the TPO had vide his draft assessment order u/s 144C(1) of the Act, dated 15/02/2023 proposed the TP adjustment of interest paid on CCDs of Rs. 15,41,567/- (supra). The DRP vide its directions u/s 144C(5), dated 10/11/2023 approved the TP adjustment of interest paid on CCDs of Rs. 15,41,567/- (supra). Thereafter, the A.O vide his final assessment order passed u/s 143(3) r.w.s.144C(13) r.w.s 144B, dated 20.12.2023 giving effect to the directions of the DRP, inter alia, made an addition of Rs. 15,41,567/-(supra). 12.6 We have heard the learned authorized representatives of both parties, qua the aforesaid issue, i.e. benchmarking by the AO/TPO of the ALP of the interest paid by the assessee company on the Compulsorily Convertible Debentures (“CCDs”) issued to its AE i.e., Vibrant Energy Holdings Pte Ltd., Singapore (“VEHPL”) by adopting LIBOR+200 basis points as CUP - as against benchmarking of the same by the assessee company adopting SBI- PLR, RBI Master Directions and Safe Harbour Rule. 13 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 12.7 Controversy involved qua the aforesaid issue lies in a narrow compass, i.e., whether the ALP of the interest paid by the assessee company on the INR denominated CCDs issued to its AE i.e., Vibrant Energy Holdings Pte Ltd., Singapore (“VEHPL”) is rightly benchmarked by the assessee company by applying SBI- PLR; or by the AO/TPO by adopting LIBOR as CUP? We find that the subject issue is covered by the order of the “Special Bench” of the ITAT, Hyderabad in the case of Hyderabad Infratech (P) Ltd. Vs. Deputy Commissioner of Income Tax [2025] 171 taxmann.com 385 (Hyderabad-Trib). The Tribunal based on its exhaustive deliberations on the aforesaid issue, had concluded, that the interest payable on FCCD/NCDs/other debentures which are denominated in Indian currency is to be benchmarked by applying PLR as against LIBOR. For the sake of clarity, the observations of the Tribunal are culled out as under: “16. We have heard both the parties and perused relevant material available on record in light of the question which arises for consideration before this Special Bench on the issue of benchmarking interest paid / payable on FCCDs/NCDs/other debentures, which are denominated in Indian currency. We have also carefully considered various case laws referred to by both the sides in support of their arguments. The question, which arises for consideration before the 14 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 Special Bench is whether as regards TP adjustment made in respect of interest paid / payable on FCCDs/NCDs/other debentures, which are denominated in Indian currency, the benchmarking is to be made by applying PLR as against LIBOR?. In order to answer the question, it is necessary for us to refer to relevant facts of the case. The facts borne out from the record indicates that the appellant in the present cases is a wholly owned subsidiary of foreign holding company and engaged in the business of development, operation and maintenance of information technology parks in special economic zones and incidental and associated activities. During the previous year, relevant to the assessment year 2015-16, one of the international transactions that took place between the appellant and its AE was payment of interest on FCCDs. The appellant company issued FCCDs in the financial year 2011-12. The appellant has benchmarked the transaction of interest paid on FCCDs by applying the CUP method and selected comparable companies which are in similar line of business and paid interest on FCCDs. The TPO determined the TP adjustment by holding the transaction to be a loan transaction and benchmarked interest paid / payable on FCCDs by applying LIBOR plus 200 basis points. 17. In this factual background, it is necessary for us to understand the nature of transaction to answer the question referred to for the Special Bench. Admittedly, the appellant has issued FCCDs. Debenture has been defined u/s 2(30) of the Companies Act, 2013, which includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. The debenture is a type of debt instrument issued by companies to raise capital. Debentures are not ordinarily secured by physical assets or collateral securities. Debentures promise to pay interest and principal to the debenture holders. They are a way of 15 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 companies to raise capital without issuance of shares and diluting their equity. Debenture is a common method for companies to raise long term financing. There are two types of debentures, one is convertible debentures and another is non convertible debentures. Under convertible debentures, there are two categories, one is optionally convertible debentures and the other category is fully and compulsorily convertible debentures. Fully and compulsorily convertible debentures are hybrid instruments and are a type of debenture, in which the whole value of the debenture must be converted into equity at specified time. Till such conversion takes place, the instrument is a debt instrument. Only upon conversion of FCCDs into equity, the authorised capital of the company would be increased and the debenture holders will receive shares in lieu of debenture certificates. The conversion ratio of FCCDs is decided by issuer of such FCCDs, either at the time of issue or at the time the actual conversion takes place and upon conversion, the investors become the shareholders of the company. Until the conversion of such FCCDs, the instrument becomes debt instrument and in the nature of a loan or borrowing for the company which issues debentures. Therefore, from the definition of debentures, as per section 2(30) of the Companies Act, 2013 and the nature of instrument, there is no dispute of whatsoever with regard to fact that, the nature of the transaction is a loan / borrowing or a liability. Even in the present cases, the appellant companies have treated the debentures as a long term borrowing and classified under the head liabilities in their financial statements. In fact, the TPO/Assessing Officer has also considered debentures as a loan and benchmarked the interest as a long term borrowing. Therefore, the first and preliminary argument advanced by the Sr. Standing Counsel for the Revenue in light of Clause 2.1.5 of the FDI Policy and Rule 2(k) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 that debentures are equity instruments and it is not a loan cannot be accepted. 16 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 Although the Hon’ble Supreme Court in the case of IFCI Ltd. Vs. Sutanu Sinha & Ors (supra) held them to be equity, while giving effect to contractual classification of such instruments as equity, but fact remains that the question before us is not the nature of debentures, whether it is capital or liability, but it is only on the benchmarking of interest paid / payable on the FCCDs and therefore, the arguments of the counsel for the revenue becomes purely academic. Since the TPO himself has accepted the transaction to be a loan and also benchmarked the interest payable on FCCDs by applying LIBOR plus 200 basis points, in our considered view, the argument advanced by the Ld. Standing Counsel in light of certain regulatory frameworks and the decision of the Hon'ble Supreme Court in the case of IFCI Ltd. Vs. Sutanu Sinha & Ors (supra) that debentures is an equity and interest paid on such FCCDs is not allowable expenditure, cannot be accepted and rejected. Further, the scope and powers of the Tribunal in deciding the question is limited to the extent of question referred to by the parties for the consideration of the Bench, but not beyond. Since the question before the Bench is on the issue of benchmarking of interest paid on FCCDs, in our considered view, the arguments of the Ld. Counsel on the nature of instrument is irrelevant and therefore, is rejected. 18. Having said so, let us come back to the real question before the Special Bench. Admittedly, the appellant companies have issued FCCDs to foreign holding companies in Indian Currency and also denominated debentures in the books of accounts in Indian rupees. The terms and conditions for issuing FCCDs has been regulated in the agreement between the parties and as per the said agreement, the appellant company has received amount towards debentures issue in Indian rupees. The parties have also agreed for interest, which varies from period to period. The appellant companies in the present cases 17 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 have paid interest ranging from 9.5% to 13.5% and benchmarked interest by applying SBI PLR, because the debentures issued by the appellant companies to its foreign subscribers is in the nature of loans extended in Indian currency. Since debentures are issued is INR and denominated as such in books of account, in our considered view, while deciding the rate of interest, among the many factors which would influence coupon / interest rates, such as credit rating of the borrower, tenor of the loan, currency would be one of the most important factors, which influence the rate of interest. The currency and the risk associated with it are directly linked to the rate of interest applicable on such loan / debt. Further, when the loan is borrowed in Indian currency, there would be no risk of foreign exchange fluctuation on the borrower, but the lender is exposed to the risk of under realization of principal, against which the lender must hedge with appropriate forward cover, which would be an additional cost. At the same time, when the loan is denominated foreign currency, the lender does not bear any foreign exchange risk, whereas the borrower does for this and in the situation, the borrower has to hedge and may have to enter into appropriate forward contracts which would cost additionally. The economic condition between these two situations i.e. issuance of INR denominated loan and foreign currency denominated loan is radically different and cannot be compensated on the same basis of LIBOR plus. This is a fundamental percept of transfer pricing, one has to delineate the differences in transactions undertaken and apply the benchmarking based on the functions, risks and assets. If this difference is effaced, as has been done in the rulings against the taxpayer, it would be fundamentally erroneous application of TP principles. Another key influencer of the rate of interest on a cross-border loan is the economic output, market maturity and the country credit risk of the borrower’s country vis-à-vis the lender’s country. From the above, it is undisputedly clear that the currency of the 18 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 borrowing is a critical factor influencing the interest of a loan / debt instrument and that an appropriate benchmark in respect of a loan issued in the currency of the borrower’s country would be the rates prevailing in the said country, i.e. of the borrower and this principle has been supported by the decision of Hon'ble Delhi High court in the case of CIT Vs. Naturals India Pvt. Ltd. (supra), where, the Hon'ble High Court has dealt with the similar issue of benchmarking of interest received by an assessee, being a resident of India on loan extended to its foreign subsidiaries. The Hon'ble High Court in para 39 of their order clearly held that the “question, whether the interest rate prevailing in India should be applied, for the lender was an Indian company / assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning.”. The Court further observed that “interest rate should be market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrowers or the lender would vary and are dependent upon the fiscal policy of the Central Bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans / deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. The Hon'ble Delhi High Court discussed this issue at length in light of the theory of Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 and after considering the relevant U.N. Transfer Pricing Manual, clearly held that in order to determine the rate of interest, the currency in which the loan is to be repaid normally 19 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 determines the rate of return on the money lend i.e. the rate of interest. A similar view has been taken by the Hon'ble High Court of Bombay in the case of PCIT Vs. India Debt Management (P.) Ltd., wherein, it has been clearly held that once the tested transaction is an INR denominated debt, interest rate must necessarily be based on the economic and market factors affecting Indian currency and data available for debt issuance in India rather than foreign currency rate or external data. This principle has been reiterated in the case of CIT Vs. Tata Autocomp Systems Ltd.[2015] 56 taxmann.com 206 (Bombay). From the ratios laid down by the Hon'ble High Court of Delhi and Hon'ble High Court of Bombay, it is undisputedly clear that while deciding the rate of interest for the purpose of benchmarking interest payment, it is the currency concerned in which the loan is borrowed and to be repaid is alone relevant, but not the basis of interest payable on the currency or legal tender of the place or country of resident of either party. Since the appellant in the present case has issued FCCDs to its foreign subsidiaries and denominated in Indian rupees, in our considered view, while benchmarking the rate of interest paid / payable on FCCDs, it is only the PLR rate is appropriate, but not the LIBOR plus spread as considered by the TPO. 19. Having said so, let us come back to the Regulatory framework in India for foreign investments in CCDs. Any cross border financing into India is subject to foreign exchange regulations provided under Exchange Control Regulations under which every form of investment is classified as equity or debt. Such classification under FEMA is made based on several factors by the RBI. The foreign investments through equity investments are governed by the Foreign Direct Investment regulations, while the foreign debt financing / loans are governed by the External Commercial Borrowings regulations which lay down a framework for raising funds through loans / debt 20 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 instruments from non-resident parties. In the above background, FEMA regulations classify CCDs as equity for the limited purpose of regulating foreign investments, given the hybrid nature of CCDs. Unlike a traditional loan/debenture, CCDs must be mandatorily converted into equity based on the terms of the agreement. Hence, said regulations also provide for the manner and timing of determination of the conversion ratio of CCDs, i.e. the same shall be determined upfront based on the fair market value at the time of issuance of such CCDs. Therefore, liability on CCDs is extinguished by allotment of equity shares which is obviously a rupee based settlement. In other words, there is no obligation on the part of the Indian company to bear any forex fluctuations and it is left to the lender or investor to hedge the forex risks. From the regulatory treatment of CCDs issued by an Indian company to a non-resident, as equity instruments under the FDI regulations, the same can be determined only in the domestic currency, i.e. INR. It is not the case of the appellant that any loan issued to non-resident investors by an Indian Company shall be denominated in INR and shall therefore be benchmarked against the interest rates in domestic markets. Therefore, once FEMA Regulations permit foreign investments in various types of debt instruments, which may be denominated in Indian Rupees or in Foreign Currency and these instruments are governed by the ECB regulations and therefore, in our considered view when the regulatory framework is allowed to issue debentures in Indian denominated currency, the obvious nature of such instrument becomes a loan or debt extended in Indian currency and rate applicable for benchmarking such interest is PLR based rates, but not LIBOR plus spread as considered by the TPO. Further, from the above discussion, it is undisputedly clear that the currency of a loan has a significant impact on the corresponding interest, and therefore, interest on loans denominated in different currencies cannot be benchmarked against the same rate of 21 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 interest which is considered for foreign currency loans/debt. In other words, the benchmark interest rate is different for loans with different currency denominations. The above position is well recognized even under the TP provisions of the Act and the related Rules. In this regard, the appellant refers to section 92CB of the Act and Rule 10TD, providing for Safe Harbour Rules. Safe Harbour Rules provide for certain circumstances, where the transfer price declared by an eligible assessee in respect of the specified international transactions, shall be accepted to be at arm’s length by the tax authorities. The said rules recognizes above position that loans denominated in different currencies cannot be benchmarked against the same interest rate and provide separate criteria / benchmark rates for loans denominated in INR as against those denominated in a foreign currency. On this point it is relevant to refer Sub Rule (2A), which deals with loans denominated in INR for which SBI lending rate plus spread is prescribed based on applicable credit rating, whereas Point 5 in the same table deals with loans denominated in foreign currency, where the spread is based on reference rate such as SOFR/EURIBOR/SONIA etc. Although Safe Harbour Rules are applicable for outbound loans from A.Y.2021-22 and not directly relevant for the issue on hand, it is a statutory recognition of the economic difference between INR denominated and foreign currency denominated loans and therefore, a clue from the Safe Harbour Rules can be taken to strengthen the arguments of the appellant that different category of loans has to be benchmarked at different rate of interest, keeping in view, the economic parameters, currency in which such loan is accepted and repaid etc. We, further noted that CBDT has issued a Notification No.58/2013 dated 29.07.2013 u/s 194-LD in the context of tax deduction at source on interest payments, also envisages capping of interest at Base Rate of State Bank of India in the case of rupee denominated bonds. From the above, it is undisputedly 22 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 clear that where the transaction is undertaken in Indian currency, then the rate of interest has to be benchmarked, by considering the rate of interest prevailing in the country of the currency, and if we go by said analogy, in our considered view, there is an error in the reasons given by the TPO/DRP for applying LIBOR plus spread for the purpose of benchmarking rate of interest paid / payable on FCCDs. 20. Coming back to contrary decisions in Maanaveeya Development & Finance (P.) Ltd. Vs. ACIT and Watermarke Residency Ltd. Vs. DCIT (supra). Maanaveeya was a case where the Tribunal upheld the application of LIBOR as the benchmark rate on the basis that the Form 3ECB mentioned that the FDI had been received in Euros and INR value is recorded in the books of account. It is quite possible that investments may hit the bank account of the issuer in foreign currency as the same is inbound into India from outside India and, then, converted to INR. Therefore, the currency in which the monies are received is irrelevant and what is required to be seen is the currency in which the debenture is denominated or debt is consumed. Similarly, in Watermarke, the Tribunal predominantly dealt with the characterization of FCCDs as to whether FCCDs were in the nature of equity or debt. The Tribunal held that until conversion to equity, CCDs are debt instruments. In our considered view, there is inherent inconsistency in the order of the Tribunal in this regard. In fact, the assessee’s before the Special Bench do not contest that CCDs are indeed in the nature of equity and in fact, the revenue in the course of their arguments have sought to argue on the contrary. Having said so, on the issue of benchmark rate, the Tribunal erroneously holds that there would be no occasion for the assessee’s to repay the loan to its AE (on account of the nature of FCCD). Therefore, the currency in which the loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. This finding is erroneous, 23 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 because, the Tribunal upheld the adoption of LIBOR plus 200 basis points without any discussion. Further it upholds the application of LIBOR rate as being in consonance with the RBI guidelines, but there are no such guidelines issued by the RBI capping interest payments on FCCDs to LIBOR rates. In fact, the RBI Master direction itself recognizes the supremacy and relevance of the currency of the loan in the determination of the interest rates. Therefore, in our considered view, the decision rendered by the Tribunal on the basis of reasoning is contrary to the facts on record and therefore, does not address the issue in right perspective. 21. At this stage, it is necessary to refer to the case laws relied upon by the assessees. The ld. Counsel for the assessee relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) (P) Ltd. (2015) 55 taxmann.con 523(Delhi). The Hon’ble High Court, in the context of outbound loans by an Indian parent to foreign AE, held as under: “39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest 24 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:— \"The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk 25 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money.\" 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable 26 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 41. Counsel for the Revenue had made reference to Chapter 10 of the U.N. Transfer Pricing Manual, relevant portion of which reads:— \"10.4.10. Financial Transactions 10.4.10.1. Intercompany loans and guarantees are becoming common international transactions between related parties due to the management of cross-border funding within group entities of an MNE group. Transfer pricing of inter-company loans and guarantees are increasingly being considered some of the most complex transfer pricing issues in India. The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing inter-company loans which revolves around: ♦ Examination of the loan agreement; ♦ A comparison of terms and conditions of loan agreements; ♦ The determination of credit ratings of lender and borrower; ♦ The identification of comparable third party loan agreements: and ♦ Suitable adjustments to enhance comparability. 10.4.10.2. The Indian transfer pricing administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities (AE) in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate). The main issue before the transfer pricing administration is benchmarking of these loan 27 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 transactions to arrive at the ALP of the rates of interest applicable on these loans. The Indian transfer pricing administration has determined that since the loans are advanced from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE, the Prime Lending Rate (PLR) of the Indian banks should be applied as the external CUP and not the LIBOR or EURIBOR rate. 10.4.10.3. A further issue in financial transactions is credit guarantee fees. With the increase in outbound investments, the Indian transfer pricing administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agrees to pay the entire amount due on a loan instrument on default by the borrower. The guarantee helps an associated entity of the Indian parent to secure a loan from the bank. The Indian transfer pricing administration generally determines the ALP of such guarantee under the Comparable Uncontrolled Price Method. In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm's length price of such guarantees. 10.4.10.4. However, the Indian transfer pricing administration is facing a challenge due to nonavailability of specialized databases and of comparable transfer prices for cases of complex intercompany loans as well as mergers and acquisitions that involve complex inter-company loan 28 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 instruments as well as an implicit element of guarantee from the parent company in securing debt.\" 42. The first paragraph quoted above, rightly stipulates that inter-company loans would require examination of the loan agreement, comparison of the terms and conditions of loan agreements, the determination of credit rating of the lender and the borrower, identification of comparable third party loan agreements and suitable adjustments should be made. In addition to the aforesaid factors, the comparability analysis should also take into account the business relationship and the functions performed by the subsidiary AE for the parent company. In the present case, we are not concerned with paragraph 10.4.10.3 of the United Nations Transfer Pricing Manual. However, we are unable to agree with the position set out and asserted in paragraph 10.4.10.2 of the Manual. The reasoning given therein is contrary to the accepted international tax jurisprudence and the rules adopted and applied. There is no justification or a cogent reason for applying PLR for outbound loan transactions where the Indian parent has advanced loan to an AE abroad. Chapter 10 of the United Nations Practical Manual on Transfer Pricing relates to country practices. The said Chapter sets out an individual country's view point and its experiences for the information of the readers. The said Chapter does not reflect the view of the Manual. Paragraph 10.1 of the United Nations Practical Manual on Transfer Pricing for Developing Countries reads:— \"10.1. Preamble by the Subcommittee on Transfer Pricing: Practical Aspects 10.1.1. In the first nine chapters of this Manual, the Subcommittee has sought to provide practical guidance on the application of transfer pricing rules based on Article 9(1) of the UN Model Tax Convention and the arm's length principle embodied in that Article. With regard to chapters one through nine, the Subcommittee 29 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 has discussed and debated the merits of the guidance that is provided and, while there may be some disagreement on certain points, for the most part the Subcommittee is in agreement that the guidance in those chapters reflects the application of the arm's length principle as embodied in the UN Model Tax Convention. 10.1.2. The Subcommittee recognizes that individual countries, particularly developing and emerging economies, struggle at times with the details of applying these treaty-based principles in a wide variety of practical situations. It therefore seemed appropriate to allow representatives of individual countries an opportunity to set out their individual country viewpoints and experiences for the information of readers. Those individual country views are contained in this chapter. It should be emphasized that it does not reflect a consistent or consensus view of the Subcommittee.\" 43. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel, have suggested that economic purpose and substance of the debt- claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply.” 22. The assessees relied upon the decision of Hon’ble Bombay High Court in the case of PCIT vs. India Debt Management (P) Ltd. (2019) 106 Taxmann.com 55 (Bombay). The Hon’ble High Court, while upholding tribunal finding held as under: 30 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 “3. Having heard learned Counsel for the parties and having perused the materials on record, we are broadly in agreement with the view of tribunal. The significant features of the assessee's case were that the assessee was mainly engaged in identifying the companies in financial distress whose products were otherwise viable and taking over or financing of such companies. The business of the assessee was thus froth with inherent risks. Its credit rating therefore was relatively low of 'BBB-'. The assessee was raising funds for such investments through issuance of debentures to its AEs. The tribunal even on comparison found that the average rate of interest of 11.30% paid by the assessee to its AEs was not excessive and was in any case lower than in the comparable instances. The tribunal rejected the transfer pricing adjustment comparing the rate of return for the assessee's US based AE. This later conclusion of the Tribunal is supported by following decisions. 4. Division Bench of Delhi High Court in case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401, had held and observed as under; \"39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be re- 31 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- \"The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt. B1. II 725 (1994), re. 1 AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetical' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such 32 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money.\" \" 5. Similarly this Court in case of CIT v. Tata Autocomp Systems Ltd. [2015] 374 ITR 516/230 Taxman 649/56 taxmann.com 206, had observed as under; \"7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) to reach the conclusion that ALP in the case of loans advanced to AEs would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the Revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra)\" 23. In view of this matter and considering the facts of the present cases, and also by considering ratios of various High Courts, we are of the considered view, that once the CCDs issued by the appellant are denominated in Indian currency, the interest payment on the said CCDs is to be benchmarked with reference 33 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 to the rate of interest applicable to the loans extended in currency concerned. Since the CCDs issued by the appellant are in the nature of rupee denominated loan, in our considered view, FCCD/CCD cannot be construed on par with the foreign currency loan for the purpose of benchmarking. Further, LIBOR plus 200 basis points being the interest rate prevalent in the international market and applicable to foreign curreny loans cannot be applied to benchmark interest on the appellants CCDs. Further, the said interest has to be benchmarked against the interest rates prevailing in the domestic market and similar debt instrument, such as the domestic prime lending rate (PLR). Therefore, we are of the considered view that as regards TP adjustment made in respect of interest paid / payable on CCD/NCD/other debentures, which are denominated in Indian currency, the benchmark is to be by applying PLR against LIBOR. Accordingly, we answer the question referred to for the Special Bench as under: Whether as regards TP adjustment made in respect of interest paid / payable on FCCDs / NCDs / other debentures, which are denominated in Indian currency the benchmarking is to be made by applying PLR as against LIBOR?” (i) Yes, in favour of the assessees. (ii) Interest paid / payable on FCCDs / NCDs / other debentures, which are denominated in Indian currency to be bench marked by applying PLR rates. 13. We thus, in the backdrop of the aforesaid observations of the Tribunal, are of a firm conviction that no infirmity emerges from 34 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 the benchmarking by the assessee company of the ALP of the transaction of interest paid on the CCDs to its AE by adopting SBI- PLR. Resultantly, the impugned TP adjustment of the ALP of the interest paid by the assessee company on CCDs to its AE of Rs. 15,41,567/- (supra) so made by the AO is vacated. The Grounds of appeal Nos. 2 to 5 are allowed in terms of our aforesaid observations. (B) Interest paid/payable on Suppliers Credit : 14. On a perusal of the record it transpires that the assessee company in its TP study report had reported an international transaction of interest paid/payable on supplier’s credit to its AE, viz. M/s VEHPL amounting to Rs.44,56,273/-. The assessee company had during the subject year purchased PV Solar Modules from M/s VEHPL. As per the terms of payment, the module price and interest accrued thereon were to be paid in 10 equal installments at the end of each quarter, starting from the quarter ending 31.03.2020 over the period of the next three years from the date of shipment of the product. The interest on the installment was to be calculated at six months aggregate LIBOR + 225 basis points as on 1st January and 1st July of each year. The 35 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 TPO observed that the assessee company had benchmarked the subject transaction under “other method”. It was further observed by him that the assessee company had conducted a search in Prowess database and arrived at Arms’s Length Range of LIBOR + 215 basis points to 384 Basis Points and held that the rate of interest paid to its AE was at arm’s length. The assessee company had also benchmarked the aforesaid transaction by applying SBI- PLR markup, RBI Master Circular and Safe Harbour Rules and held the transaction as being at ALP. 14.1 The TPO however, did not accept the benchmarking analysis carried out by the assessee company for multi-facet reasons, which for the sake of clarity are culled out as under: “(a) It is seen from Transfer Pricing Study Report that while benchmarking the transaction under RBI Master Directions / Safe Harbor Rules etc., the interest rate as per agreement is shown as 4.071% (1.821% LIBOR * 2.25%). However, in the working of interest paid / payable vide annexure-5 to the submissions dated 25.11.2022, the rate of interest is taken at 4.46% & 4.16%. (b) The search conducted in Prowess could not give accurate results as the companies having External Commercial Borrowings were selected but the issue in question is Suppliers Credit which cannot be equated with ECB. (c) Further, the taxapayer has not applied ‘related party transaction’ filter while conducting search which is very crucial and essence for determination of arm's length price. This is for the reason that while conducting transfer pricing 36 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 analysis, the related party transaction undertaken by the assessee is to be compared with the uncontrolled transactions undertaken by the comparable and thus to arrive at a conclusion as to whether the transaction is benchmarked at arm's length or not. But if the comparable selected itself has undertaken significant controlled transaction / no date with regard to related party transactions undertaken by it, then the comparable company, having entered into international transactions beyond a particular percentage with the related parties, it is quite possible that its overall profit may have been distorted due to such transactions irrespective of the fact whether that comparable company is functionally similar or not. Thus related party transactions entered into by comparable company tenders it as incomparable. That is why, this filter is applied to make certain that a company sought to be considered as comparable should have its profit uninfluenced by the impact of the related party transactions. When the search / comparability analysis is carried out without application of this filter, then is same cannot be stated in accordance with Rule 40B(2) of the Income Tax Rules. (d) Moreover, as seen from the final set of comparables that in most of the comparable companies current year data i.e data pertaining to F Y 2019-20 is shown as not available and in the absence of current year data, it cannot be stated in accordance with Rule 10B(2) of the Income Tax Rules. (e) Further, the benchmarking analysis conducted by the taxpayer using RBI Master Circular, is also not appropriate for the reason that RBI's circulars are on a different criteria and are for different purposes. The said RBI directions / policies are in respect of Foreign Direct Investment policy and also in respect of fund infusion from foreign sources in to Indian economy. The purposes of the FDI and RBI Policies are aimed at controlling fund inflow from abroad in the form of debt. Further, as can be seen from the Master Circular, the same is meant for Foreign Exchange Management Act (FEMA) and hence the same cannot be applied for determination of the Arm’s Length Price. Further, in the case of Perot Systems TSI (India) Ltd vs. DCIT reported in (2010- TIOL-ITAT -DEL) Hon'ble Delhi Bench held that the RBI's approval does not put the seal of 37 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 approval on the true character of the transaction from the perspective of T.P. regulations as the substance of the transaction has to be judged as to whether the transaction is at Arm's Length or not. (f) With regard to Safe Harbour rules also, it is stated that the option to exercise Safe Harbour Rules are not applicable to each and every assessee but only to some class of assessee’s on fulfilling certain criteria. Hence, these rules cannot be considered for arriving arm’s length price. Moreover, the taxpayer has not exercised any option of Safe Harbour application.” 14.2 Accordingly, the TPO rejected the benchmarking analysis of the assessee company and adopted LIBOR+200 basis points as the relevant CUP for determination of the ALP of the subject transaction i.e., payment of interest on supplier’s credit. The TPO while concluding as herein above has taken support from certain judicial pronouncements, wherein, the adoption of LIBOR+2% as ALP was approved. The TPO based on his aforesaid deliberations, had after working out 6 Months LIBOR for the subject year at 2.01% determined the ALP of the interest payment at 4.01% as against 4.16% and 4.46% paid by the assessee company. Resultantly, the TPO worked out the adjustment qua the interest paid by the assessee company on the suppliers credit of Rs.2,52,454/-. 38 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 14.3. Thereafter, the AO vide his order passed u/s 143(3) r.w.s. 144C(13) r.w.s 144B of the Act, dated 20.12.2023 made an addition of Rs.2,52,454/- to the returned income of the assessee. 15. We have heard the learned representatives of both parties on the aforesaid issue i.e. transfer pricing adjustment of Rs.2.52 lakhs (Approx.) on account of interest paid/payable on supplier’s credit has been carried out by the AO/TPO. 16. Apropos the alternative contention of the Ld.AR that as the assessee company which had not earned revenue from operations during the subject year had not claimed any deduction of interest paid/payable on the supplier’s credit, there was no justification for the AO to have made any addition qua TP adjustment as was suggested by the TPO, we find substance in the same. Section 92(1) of the Act, which contemplates the process of computing the income for international transactions having regard to ALP provides that any income arising from an international transaction shall be computed having regard to ALP. As per the “Explanation” to Section 92(1) of the Act, it is clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. 39 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 17. Considering the facts involved in the present case, we are of the view that as the assessee company which had not earned any revenue from the operations from the subject year, had not claimed deduction for any expenditure, therefore, the A.O. while computing the taxable income of the assessee company could not have made any addition based on the Transfer Pricing adjustment qua the interest paid/payable by the assessee company on the supplier’s credit to its AE. We thus, based on our aforesaid deliberations are unable to persuade ourselves to subscribe to the addition of Rs.2,52,454/- made by the AO vide his final order of assessment u/s 143(3) r.w.s. 144C(13) r.w.s 144B dated 20.12.2023 qua the interest on supplier’s credit, and thus, vacate the same. The Ground of appeal No.9 is allowed. 18. As we have vacated the addition made by the A.O. of the Transfer Pricing adjustment of the interest paid/payable on the supplier’s credit in terms of our aforesaid observation, therefore, we refrain from adverting to and adjudicating the contentions advanced by the Ld.AR regarding the merits on the aforesaid issue which, thus, are left open. Grounds of appeal No.6,7 and 8 are disposed of as per aforesaid observations. 40 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 19. The Ground of appeal No. 1 being general is dismissed as not pressed. 20. As we have vacated both the transfer pricing adjustments based on which the additions had been made by the AO, therefore, the contention of the Ld.AR that the AO had erred in recasting the book profits u/s 115JB of the Act by enhancing the same by the quantum of the transfer pricing adjustment having been rendered as merely academic in nature is thus not being adverted to and is left open. 21. The Ld. AR during the course of hearing of the appeal, had submitted, that the AO while framing the assessment had erred in computing the assessed income without granting the set-off of the losses brought forward. As the said contention of the Ld.AR would require verification, therefore, we deem it fit to restore the issue to the file of the AO with a direction to look into the said grievance of the assessee company in the backdrop of the extant law. The Ground of Appeal No.10 is allowed for statistical purposes in terms of our aforesaid observations. 41 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 22. The assessee company has assailed the levy of interest u/s 234A, 234B and 234C of the Act. As the same is consequential, therefore, the A.O. is directed to recompute the same while giving effect to our order. 23. Apropos the grievance of the assessee company that the AO had erred in initiating penalty proceedings u/s 270A of the Act, we are of the view that the said grievance is pre-mature and is accordingly disposed. 24. Resultantly, the appeal filed by the assessee company is allowed in terms of aforesaid observations. 14 मई, 2025 को खुली अदालत में सुनाया गया आदेश। Order pronounced in the Open Court on 14th May, 2025. Sd/- Sd/- (मंजूनाथ जी) (MANJUNATHA G.) लेखा सदस्य/ACCOUNTANT MEMBER Sd/- Sd/- (रवीश सूद) (RAVISH SOOD) न्यायिक सदस्य/JUDICIAL MEMBER Sd/- Hyderabad, dated 14.05.2025. #**L.Rama /SPS 42 Natems Solar Power Private Limited ITA No. 140/Hyd/2024 आदेशकी प्रनतनलनप अग्रेनर्त/ Copy of the order forwarded to:- 1. निर्धाररती/The Assessee : M/s Natems Solar Power Private Limited, 9th Floor, My Home Twitza, Plot No.30/A, TSIIC Hyderabad Knowledge City, Raidurg Hyderabad 2. रधजस्व/ The Revenue : Income Tax Officer, Ward-16(1), Aayakar Bhavan, Hyderabad 3. The Principal Commissioner of Income Tax, Hyderabad 4. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 5. गधर्ाफ़धईल / Guard file आदेशधिुसधर / BY ORDER Sr. Private Secretary ITAT, Hyderabad "