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Facts
The assessee, engaged in real estate development, issued Compulsorily Convertible Debentures (CCDs) to its associated enterprise. The Assessing Officer/Transfer Pricing Officer (TPO) made adjustments to the arm's length interest on these CCDs, using LIBOR as a benchmark. The assessee contested these adjustments, arguing for the use of the State Bank of India Prime Lending Rate (SBI PLR) as per a Special Bench ruling.
Held
The Tribunal held that for CCDs denominated in Indian currency, the interest rate should be benchmarked against domestic rates like PLR, not international rates like LIBOR. Consequently, the TPO/AO were directed to re-benchmark the interest on CCDs using PLR. Grounds related to carry forward of losses and unabsorbed depreciation were restored to the AO for examination.
Key Issues
Whether interest on Compulsory Convertible Debentures (CCDs) denominated in Indian currency should be benchmarked using domestic PLR or international LIBOR. Whether carry forward of business losses and unabsorbed depreciation for AY 2015-16 is allowable.
Sections Cited
92C(2), 270A
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Income Tax Appellate Tribunal, DELHI BENCH “H” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI M BALAGANESH
आदेश /O R D E R PER C.N. PRASAD, J.M.
These appeals are filed by the Assessee against different final assessment orders of the Assessing Officer in the pursuance of the directions issued by the DRP for the assessment years 2017-18 & 2018-19.
For the AY 2017-18 the assessee raised the following grounds:
“1. That on the facts and circumstances of the case and in law, the final pursuance of the directions issued by the Hon'ble Dispute Resolution Panel assessment order passed by the Learned Assessing Officer (Ld. AO) in (DRP) is vitiated as the Hon'ble DRP erred in confirming the arbitrary transfer pricing adjustment made by the Id. AO/Ld. Transfer Pricing Officer (TPO) to the international transaction pertaining to payment of interest on Compulsory Convertible Debentures ('CCDs') by the Appellant to its Associated Enterprise ('AE).
2. That on the facts and circumstances of the case and in law, the Hon'ble DRP the Appellant to the extent of INR 5.27.79.211/- and in doing so, has grossly has erred in confirming the adjustment made by the TPO to the income of Assessee Company in the TP Study without providing any cogent reasons search process, the benchmarking analysis and the approach adopted by the for the same.
3. That on the facts and circumstances of the case and in law, the Ld. TPO interest rate paid on CCDs issued in Financial Years (FYs') 2014-15 and while conducting the fresh benchmarking analysis with respect to the 2015-16, has applied incorrect filters to arrive at a fresh set of comparables. 2 3.1 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in not considering the credit rating filter. 3.2 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in not considering the tenor filter. 3.3 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in not considering the industry filter. 3.4 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in not considering the terms of the CCDs' issuance by the Assessee Company.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in denying the carry forward of business loss amounting to INR 8,99,87,136 and unabsorbed depreciation of INR 28,26,29,170 pertaining to AΥ 2015-16. 4.1 That on the facts and circumstances of the case and in law, the Ld. AO has failed to appreciate that the Assessee had claimed the said business loss and unabsorbed depreciation in its return of income for AY 2015-16 and the same have not been utilized during AY 2016-17 and AY 2017-18. 4.2 That on the facts and circumstances of the case and in law, the Ld. AO has failed to appreciate that the adjustments made in the assessment orders 4.2 That on the facts and circumstances of the case and in law, the Ld. AO passed in AY 2015-16 and AY 2016-17 have been challenged by the Assessee before the Hon'ble Tribunal. Therefore, pending set-off of the aforesaid amounts, the Assessee should be allowed to carry forward and set-off the said amounts.
5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty under section 270A of the Act for under-reporting of income.”
The assessee also raised the following additional grounds of appeal:
"6. That on the facts and in the circumstances of the case and in law, the Ld. AO/TPO ought to be directed that the determination of arm's length interest paid /payable on CCDs denominated in Indian currency should be made by applying the SBI Prime Lending Rate (SBI PLR) as held by the Hon'ble Special Bench of ITAT Hyderabad in the case of Hyderabad Infratech Private Limited v. DCIT.”
The Ld. Counsel for the assessee submitted that the additional ground raised by the assessee is a legal ground and is based on the decision of the Special Bench of ITAT Hyderabad in the case of Hyderabad Infra Tech Pvt. Limited vs. DCIT (171 taxmann.com 385)
(Hyd. Spl. Bench) (2021) on the subject of whether the determination of arm’s length interest paid/payable on CCDs denominated in Indian currency should be made by applying the SBI Prime Lending Rate (SBI PLR).
Ld. Counsel submitted that the TPO applied interest on CCDs at LIBOR while determining the arm’s length interest. Ld. Counsel for the assessee placing reliance on the decision of the Spl. Bench ruling in the case of Hyderabad Infratech Pvt. Ltd. vs. DCIT in ITA (TP) No. 1856/Hyd./2019 dated 29.01.2025 submitted that the Hon’ble Spl.
Bench held that once the CCDs issued by the assessee are denominated in Indian currency the interest payment on the said CCDs is to be bench marked with reference to the rate of interest applicable to the loans extended in Indian currency. Ld. Counsel further submitted that the Hon’ble Spl. Bench held that LIBOR being the interest rate prevalent in the International Market is applicable to foreign currency loans and the same cannot be applied to bench mark interest on the loans extended in Indian currency.
Ld. Counsel for the assessee submits that the rate of interest and the SBI PLR rate as prevailing on the date of issuance of the CCDs is captured as under for the ready reference.
Date of Issuance Rate of Interest SBI PLR Rate 15/01/2015 15.00% 14.75% 18/03/2015 15.00% 14.75% 20/03/2015 15.00% 14.75% 18/05/2015 15.00% 14.60%
Ld. Counsel submitted that where the aforesaid ruling is accepted, then after providing the benefit of second proviso to Section 92C(2) of the Act, no addition is warranted and the addition made by the Ld. TPO should be deleted.
On the other hand, the Ld. DR placed reliance on the orders of the authorities below.
Heard rival submissions, perused the orders of the authorities below. In the present appeal, a Transfer Pricing (TP) adjust of INR 5,27,79,211 was made in respect of the interest paid by the Appellant on compulsorily convertible debentures. During the AY 2015-16, the Appellant had issued 8,580 CCDs each having different face value for each issuance of debentures. These CCDs carried a coupon rate of 15% per annum. The critical terms and characteristics of the issuance summarized in the table below:
Table 1: Terms of CCD issued in AY 2015-16 During AY 2016-17, the Appellant issued 540 CCDs having face value of INR 110,918 per CCD. These CCDs carried an interest rate of 15%
per annum. The critical terms and characteristics of the issuance are summarized in the table below:
Table 2: Terms of CCD issued in AY 2016-17 The Appellant undertook a detailed and scientific benchmarking analysis taking into consideration the terms and conditions of the transaction. The Appellant adopted a scientific methodology for finding the comparable companies in which certain adjustments (such as tenure adjustment and adjustment for conversion factor) were made so as to make them a more suitable comparable. The adjustments were done since reliable comparable data on CCD issuances was not available, hence non-convertible debenture and non-convertible bond issuances were used as a probable proxy for benchmarking of underlying CCD issuances. The Ld. TPO though accepted the use of non-convertible debentures and non-convertible bonds as comparable, however, the adjustment made by the Appellant to the interest rates were rejected. Accordingly, the Ld. TPO determined the arm's length price of both the tranches as under:
10.2 in view of the above discussion, the arm's length price of the international transaction related to interest paid on CCDs issued during the FY 2014-15 is computed as below:
Particulars Amount (INR) Value of Compulsory Convertible 94,90,44,300 Debentures Interest Paid by Assessee 15,05,66,272 Arm’s Length Interest Rate 10,24,96,784 (@ 10.8%) Proposed adjustment u/s 92CA 4,80,69,488 13.2 In view of the above discussion, the arm's length price of the international transaction related to interest paid on CCDs issued during the FY 2015-16 is computed as below:
Particulars Amount (INR) Value of Compulsory Convertible 5,98,95,735 Debentures Interest Paid by Assessee 95,02,483 Arm’s Length Interest Rate 53,90,616 (@ 9%) Proposed adjustment u/s 92CA 47,09,723
We observed that the Special Bench in the case of Hyderabad Infratech Private Limited v. DCIT (ITA-TP No.1856/Hyd/2019) dated 29.01.2025 decided the following question:
“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 PLRs as against LIBOR?”
The Hon'ble Special Bench has examined all the facts and finally reached the following conclusion:
"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 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 currency loons 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."
Respectfully following the Spl. Bench decision in the case of Hyderabad Infratech Pvt. Ltd. vs. DCIT, we hold that since the assessee issued CCDs in Indian currency the interest payment on the said CCDs is to be bench marked with reference to the rate of interest applicable to the loans extended in the currency concerned.
The said interest has to be bench marked against the interest rates prevailing in the domestic market and similar debt instructions, applying domestic Prime Lending Rates (PLR) as against LIBOR. Thus, we direct the TPO/AO to Bench mark the interest on CCDs applying the ratio of the decision of the Special Bench and decide the issue accordingly after providing adequate opportunity to the assessee.
Additional ground raised by the assessee is allowed.
Coming to the regular grounds of appeal filed by the assessee, we noticed that ground nos. 1 to 3 are academic as we have allowed the additional ground filed by the assessee directing the TPO/AO to apply interest rate on CCDs by applying PLR as against LIBOR.
Ground No.4 of grounds of appeal is with regard to denying carry forward of business loss and unabsorbed depreciation pertaining to AY 2015-16. This ground is restored to the file of the AO who shall examine the contention of the assessee and decide in accordance with law after providing adequate opportunity to the assessee.
15. The assessee has raised similar additional ground for the AY 2018-19. The decision rendered by us for the AY 2017-18 in respect of the additional ground applies mutatis mutandis to the appeal for the AY 2018-19 and we order accordingly.
Coming to the regular grounds of appeal for the AY 2018-19, Ld. Counsel for the assessee submitted that ground no.1 of grounds of appeal is not pressed and accordingly the same is dismissed as not pressed.
17. Coming to ground nos. 2 to 8, we observe that these grounds became academic in the light of the additional ground allowed by us and therefore these grounds need not be adjudicated.
Ground no. 9 of grounds of appeal is in respect of not granting credit for taxes deducted at source while passing the final assessment order. This ground is restored to the file of the AO to examine the contention of the assessee and to decide in accordance with law.
Ground nos. 10 & 11 of grounds of appeal are in respect of initiation of penalty proceedings and these grounds are premature and the same are not adjudicated.
In the result, both the appeals of the assessee are partly allowed as indicated above.
Order pronounced in the open court on 08.08.2025