Transfer Pricing Issue: AO was not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares

Transfer Pricing Issue: AO was not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares

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Transfer Pricing Issue:

AO was not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares

Here is an interesting case before ITAT, Pune on transfer pricing wherein it is held that AO is not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares
Short overview of the case:
CITY CORPORATION LTD
ITA No. 276/Pun/2021
The assessee is engaged in the business activity of real estate projects.
During transfer pricing proceedings, the TPO while going through the assessee’s Form 3CEB and transfer pricing report observed that it had not done the benchmarking of the payment of interest on debentures/compulsory Convertible debentures (CCDs) properly.
The TPO observed that the assessee had issued CCDs to its AEs in India and abroad against which it had claimed an interest payment of Rs.3,92,81,275/-.
In respect of the same, the TPO held that the said transaction was, in fact, a shareholder activity and that the payment of interest was nothing but a self-inflicting loss.
Accordingly, a show cause notice was issued to the assessee in this regard.
The assessee’s reply was duly considered but rebutted by the TPO.
It was observed by the TPO that as per the assessee’s agreement under which the funds had been brought, the AE’s were referred to as investor and not as lender.
Further, as per the terms of the agreement, the funds were to be used for the specific projects only.
The assessee was also not allowed to raise any loan or debt for the project without the written consent of the lender.
The TPO then held that by this agreement, the lenders have been ensured that it did not have to pay the tax on the dividend which would be available for the distribution and would have been taxed in India.
Therefore, it was clear that the interest payments were made to the shareholder/ultimate shareholder only.
Accordingly, the TPO took the Arm’s Length Price of the payment of interest to AE at Rs. Nil and thus, made an unward adjustment of Rs.3,92,81,275/-.
On appeal, the issue before ITAT was whether TPO is justified in re-characterising transaction of issue of debentures/CCDs to AEs as that of shareholders activity?
ITAT opined it in negative.
It held as under:
  1. In assessee’s own case for the assessment year 2014-15 in ITA No.618/PUN/2020 & ITA No.44/PUN/2021 – 2021-TII-272-ITAT-PUNE-TP the Tribunal had referred to its own order for assessment year 2013-14 in ITA No.772/PUN/2018 and taken a decision upholding the findings of the Tribunal in assessee’s own case for the assessment year 2013-14, by observing that: “….it is seen that similar issue came up for consideration before the Tribunal in the assessee’s own case for the immediately preceding assessment year 2013-14. In fact, the TPO also referred to his own decision taken for the assessment year 2013-14 for determining NIL ALP.
  1. The Tribunal, vide its order dated 18-12-2020 in ITA No.772/PUN/2018, has countenanced the assessee’s stand by holding that the assessee rightly issued debentures and CCDs to its AEs and the AO was not justified in re-characterizing the transactions.
  1. As regards the ALP determination, the Tribunal restored the matter to the file of AO/TPO for a fresh determination.
  1. Since the facts and circumstances of the instant appeal are mutatis mutandis similar to those of the preceding year, respectfully following the precedent, we approve the view taken by the CIT(A) and hold that the AO was not justified in re-characterising the transaction of issue of debentures/CCDs as that of equity shares.
  1. As regards the ALP determination, we again follow the view taken by the Tribunal for the immediately preceding year and direct the AO/TPO to recompute the ALP of the transactions of payment of interest on debentures/CCDs….”
  1. Therefore, there is no reason to interfere with the findings of the CIT(Appeal) and accordingly, the same is upheld.

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