BEROE CONSULTING INDIA PRIVATE LIMITED,KANCHIPURAM vs. INCOME TAX OFFICER, CORPORATE WARD 1(3) CHENNAI, CHENNAI
What did the Tribunal hold?
The Tribunal held that CCDs should be treated as debt instruments until conversion and that the AO erred in re-characterizing them as equity. Regarding trade receivables, the Tribunal allowed a 90-day credit period for computing interest, directing the AO to recompute the adjustment.
What were the facts?
The assessee, a subsidiary of Beroe INC, USA, appealed against the order of the Assessing Officer (AO) concerning transfer pricing adjustments. The primary issues involved the characterization of Compulsorily Convertible Debentures (CCDs) and the charging of interest on trade receivables from Associated Enterprises (AEs).
What were the issues?
Whether Compulsorily Convertible Debentures should be treated as debt or equity for transfer pricing purposes, and whether interest should be charged on trade receivables from AEs.
Which sections of the Income-tax Act were involved?
Section 143(3),Section 144B(8),Section 260A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S
आदेश / O R D E R
PER PADMAVATHY.S, A.M: This appeal by the assessee is against the order of the Income Tax Officer, Corporate Ward-1(3), Chennai passed u/s. 143(3) r.w.s 144B(8) r.w.s 260A of the Income Tax Act, 1961 (in short "the Act") dated 22.12.2025 for Assessment Year (AY) 2022-23. The assessee raised the following grounds of appeal: “1. For that the order of the Learned Assessing Officer ("Learned AO") passed u/s. 143(3) r,w.s.1448(8) r.w.s.260A of the lncome Tax Act, 1961 ("the Act") pursuant to the directions of the Dispute Resolution Panel ("DRP") is erroneous and bad in law as it is passed on: a. inaccurate appreciation of facts;
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b. references / conclusions are contrary to the documentation / materials on record; c. non-consideration of the documentation / materials on record and d. in any case passed in violation of natural justice.
General ground on Transfer Pricing issues: For that the Hon'ble DRP, the Learned Transfer Pricing Officer ('TPO') and the Learned AO (hereinafter collectively called as "the Revenue") grossly erred in making a total adjustment of Rs. 87,26,743l- to the Taxable lncome on account of Arm's Length Price determination of its lnternational Transactions with Associated Enterprises ("AEs").
Transfer Pricing issue - Downward adjustment of Rs.72.60.510/- in respect of interest paid on fully and 9ompulsorilv Convertible Debentures: 3.1 For that the Revenue erred in disallowing Rs. 72,60,510/- on account of a downward adjustment in respect of interest paid on Fully and Compulsorily Convertible Debentu res ("FCCD"). (Tax effect - Rs.18,27, 470/- 3.2 For that the Revenue has grossly erred, both in law and on facts, in re-characterizing the FCCDs as equity instruments instead of debt, disregarding the contractual terms, accounting treatment, commercial substance, consistent conduct of the parties, and well-settled legal principles governing the characterization of FCCDs prior to conversion.
Transfer Pricing issue - Upward adjustment of Rs.14.66.233/- on account of interest on trade receivables from AEs:
4.1. For that the Revenue erred in adding Rs.14,66,233/- on account of an upward adjustment in respect of interest on trade receivables from AEs (Tax effect - Rs.3,69,050/-).
4.2. For that the Revenue ought to have appreciated the fact that the TNMM provides most reliable measure to evidence Arm's Length Price and no separate benchmarking for trade receivables was required, as the TNMM inherently accounts for notional costs included therein.
4.3. For that the Revenue erred in law and on facts in treating 'trade receivables' as a standalone international transaction, ignoring that such receivables are merely a consequence of the primary international transaction. Since they are directly linked to the provision of services, they should have been examined together with the main transaction and not separately for transfer pricing purposes.
4.4 For that the Revenue failed to appreciate the undisputed fact that the Appellant does not charge any interest on delayed collection of receivables from non-AE customers as well, and therefore, in the
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absence of any differential treatment between Associated Enterprises and non-Associated Enterprises, notransfer pricing adjustment could have been made on the ground of notional interest on receivables. 4.5. For that Revenue arbitrarily adopted a uniform credit period of 30 days for computing the alleged delay in realization of trade receivables, without examining the facts and circumstances of the case, rendering the adjustment factually erroneous and legally unsustainable. 4.6 Without prejudice to the above, for that the Revenue erred in applying 350bps, without providing proper reasoning / furnishing the basis on which addition of 350bps to the LIBOR rate was appropriate in making the aforesaid addition.”
The assessee is a private limited company and is wholly owned subsidiary of Beroe INC, USA. The assessee is engaged in the business of provision of support services for procurement intelligence. The assessee filed a return of income for AY 2022-23 on 30.12.2022 declaring a total income of Rs.12,87,62,814/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to complete the Arm's Length Price (ALP) of the international transactions. The TPO proposed a downward TP adjustment in respect of interest on Compulsory Convertible Debentures (CCD) to the tune of Rs.72,60,510/-. The TPO also proposed an upward TP adjustment towards interest on trade receivables to the tune of Rs.14,66,233/-. The A.O passed a draft assessment order on 27.02.2025 and the assessee has filed objections before the Disputes Resolution Panel (DRP) on 25.03.2025 which was received by the DRP on 28.03.2025. The AO passed the assessment order on 31.03.2025 before the objections could be disposed off by the DRP. Therefore, the assessee filed a writ petition before the Hon'ble Madras High Court and the Hon'ble High Court vide order dated 27.10.2025 set aside the final assessment order passed
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on 31.03.2025 and directed the AO to reframe the assessment order on receipt of directions to be issued by the DRP. Subsequently, the directions of the DRP were passed on 28.11.2025, wherein the DRP confirmed the adjustments made by the TPO. The A.O passed the impugned order after considering the directions of the DRP against which the assessee is in appeal before the Tribunal.
Downward adjustment in respect of interest on CCD: 3. During the financial year 2017-18, the assessee issued fully and compulsorily convertible debenture bonds to Alyssum Investment Ltd. amounting to Rs. 6,50,00,000/- carrying interest @ 11.17% per annum. As per agreement dated 26.04.2020, the CCD holders can opt to convert into equity shares and if the option is not exercised the CCD will be automatically converted into CCD shares on 27.04.2023. During the relevant previous year 1,21,580 debentures were transferred to M/s. Beroeinc being the holding company of the assessee on 14.02.2022. During the year under consideration the assessee company paid interest @ 11.17% amounting to Rs.72,60,510/- and benchmarked the same under other method. The assessee treated the interest to be at Arm's Length since the arithmetic mean of interest paid on CCD by the comparables was worked out at 11.85%. The TPO held that the CCD are equity in nature and not debt instruments and therefore, no interest can be charged on the same. Accordingly, the TPO proposed a downward adjustment towards the interest amounting to Rs.72,60,510/-. The DRP on further appeal upheld the adjustment by holding that: “2.7 A close examination of these terms confirms that the subscriber holds only the right to receive 147 number of equity shares at the time of conversion, with no entitlement to any monetary repayment. While the number of equity shares to be issued upon conversion is predetermined under the agreement, the economic value that the investor ultimately realises from such shares will depend entirely on the Company's
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financial position and market conditions prevailing on the date of conversion, a characteristic typically associated with equity instruments. Further, Clause 1 (c ) of Schedule XVII -terms and conditions of the CCD of SSHA dated 28.12.2017 and Clause 1(c ) of Schedule IX- terms and conditions of the CCD of SSHA dated 7.4.2020 & Clauce 1(c ) of Schedule IX of the amended SSHA dated 26.4.2020
c). In addition to the CCD interest, each CCD would be entitled to participate pari passu in any cash or non-cash dividends paid to the holders of equity shares in the company on a pro rata, as if converted basis. For the purpose of this clause ,the CCD shall be deemed to be converted to Equity Shares as per Clause 2.3 and Clause 2.4 below;”
2.8 From the above, it is clear that each CCD will also be eligible to receive dividends whether in cash or in kind just like equity shareholders. The dividend will be calculated on a pro-rata basis as if the CCDs were already converted into equity shares. For this purpose, the CCDs will be treated as equity shares though they have been converted under the terms specified in Clauses 2.3 and 2.4 of the agreement.”
2.9 to 2.14 ******
2.15 In view of the above overwhelming reasons, empowered by the decision of Hon’ble Delhi High Court cited supra and the relevant OECD guidelines in this regard and as per the intent of section 92F(ii), the said CCD investment is recharacterized as equity instrument and interest on the same is to be treated as nil. The Panel is of the view that for the purpose of Section 92C of the Act, the Most Appropriate Method in this case will be ‘CUP’, which the assessee has also followed. But herein the Panel is of the view that in uncontrolled transactions, no independent entity would pay interest for an instrument which will eventually be an equity and hence interest payment will be ‘nil’ for comparable uncontrolled transactions. This is opposed to the assessee’s benchmarking exercise wherein it has taken supposedly comparable debt instruments characterizing the instrument as ‘debt’ in nature.
2.16 Applying this principle, the Panel finds that an independent enterprise acting under arm’s length conditions would not agree to borrow funds under an arrangement where it pays annual interest and, in addition, allots a fixed number of equity shares at the end of the term that may have appreciated significantly. Such a structure confers an excessive economic advantage on the lender and imposes an unduly onerous burden on the borrower. The arrangement is commercially irrational from the perspective of an independent borrower and therefore cannot represent an arm’s length transaction. This economic reality
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reinforces the conclusion that the CCDs are equity instruments and not debt. 2.17 A Compulsory Convertible Debenture (CCD) is regarded as an equity-linked instrument where the terms of issue mandate conversion into a fixed number of equity shares, without granting the issuer any discretion or obligation to redeem the instrument in cash. In the present case, the CCDs carry a compulsory conversion feature on a specified date, and the number of equity shares to be issued upon conversion is predetermined under the agreement. As a result, there is no contractual repayment obligation on the Company, and the eventual economic value realised by the investor depends solely on the Company’s financial and market conditions prevailing at the time of conversion which is a characteristic inherent to equity instruments. Therefore, for all practical and economic purposes, the CCDs function as equity from inception, with only the periodic interest component attracting liability classification. 2.18 In light of the explicit contractual terms, the authoritative tests laid down by the Hon’ble Supreme Court, and the mandatory provisions of Ind AS 32 the Panel concludes that the CCDs issued by the assessee are equity in substance from inception. Once the instrument is characterised as equity, there can be no question of interest being payable between independent parties in comparable circumstances. Applying the CUP method—the very method chosen by the assessee—the arm’s length rate of interest is therefore nil. The assessee’s objection to the TPO’s recharacterisation is accordingly rejected.”
The Ld. Authorized Representative (AR) of the assessee submitted that the TPO is not correct in re-characterising at that instrument as equity without considering the contractual obligations of the assessee. The Ld. AR further submitted that the assessee in the financial statements has classified the CCDs as long term borrowings and has actually paid interest @ 11.17% which facts have not been considered by the TPO. The Ld. AR also argued that until conversion the CCD remains to be and interest bearing debt and the CCD holders do not have any voting rights nor they are entitled for participation in profits. The Ld. AR in this regard placed reliance on the decision of the Coordinate Bench of the Tribunal in the case of Strides Pharma Science Ltd.
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vs. DCIT [2022] 141 taxmann.com 430 (Mum-Trib.) and CAE Flight Training (India) Pvt. Ltd. v. DCIT [2023] 150 taxmann.com 276 (Bang.- Trib.).
The Ld. Departmental Representative (DR), on the other hand, submitted that as per the terms of the CCD agreement the assessee does not have the obligation to repay the loan and that the CCD holders are entitled for dividends. Accordingly, the Ld. DR submitted that the lower authorities have rightly treated the CCD as equity.
We have heard the parties, and perused the material available on record. The assessee has issued CCDs to its AEs and has paid interest at the rate of 11.17%. The TPO re-characterised the transaction as equity for the reason that the obligation to repay determines the nature of the borrowing and since there is no obligation to repay in CCD, the same cannot be treated as debt. The TPO further held that under FDI Policy of RBI the CCD are considered as equity allowed under Automatic Route and accordingly determined the ALP of the interest paid as Nil. The contention of the assessee is that the TPO cannot re-characterise the international transaction and that CCD until converted cannot be considered as equity. With regard to the contention that as per RBI policy the CCDs are considered as equity, the following observation of the coordinate bench of the Bangalore Tribunal in the case of M/s. CAE Flight Training (India) Pvt. Ltd. (ITA Nos. 2006/Bang/2017, IT(TP)A No.63 & 84/Bang/2015, 599, 2060 & 2178/Bang/2016 & CO No.83/Bang/2017 and 09/Bang/2019.) is relevant –
Apart from relying on this decision of Special Bench of the Tribunal, the ld.DR of revenue in written submissions as reproduced above has mainly
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reiterated the same arguments which are adopted by the TPO in its order i.e. regarding RBI Master Circular on Foreign Investment in India dated 02.07.2007 and 01.07.2008. We would like to observe that such circular in the context of FDI policy of RBI is in a different context i.e. regarding future repayment obligations in convertible foreign currency and to have control over such future re-payment obligations, the RBI is exercising strict and control so that such future repayment obligations does not go beyond a point and since in the case of fully convertible debentures, there is no future re-payment obligation, the same was considered as equity for the purpose of FDI policy. In our considered opinion, any definition of any term is to be considered keeping in mind the context in which such definition was given. This 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. In our considered opinion, 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 preconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion.*******
The ratio laid down is that FDI policy cannot be the basis for treating the CCD as equity and therefore the reliance placed by the revenue on the decisions of the Hon'ble Supreme Court is distinguishable. We further notice that the coordinate bench of Delhi Tribunal in the case of Alfanar Energy Private Limited vs DCIT [ITA No.4439/Del/2024 dated 15.10.2025] has considered a similar issue and held that - 14. In the light of the above discussion, we are of the considered view that the re-characterization of CCDs issued by the appellant before us, as equity was not justified and legal. The CCDs as long as they are not converted, continue to be a debt side item in the financials. The mere fact that the CCDs are compulsorily convertible at the end of a particular period like in the present case 15 years, then too, the nature of CCDs continues to be debt instrument. Thus, to the extent of re-charaterisation of CCDs of equity being not permissible, the assessee needs to be benefitted.
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From the perusal of the above judicial precedence it is clear that the CCD until conversion need to be considered as a debt instrument and that the TPO is not correct in re-characterising the same as equity. We notice that the DRP while upholding the adjustment has considered certain clauses in the CCD agreement to hold that the CCD holders are entitled to dividends also and hence the CCD is to be considered as equity. During the course of hearing the ld AR in this regard submitted that the said clause in essence is inserted to make the CCD more attractive to mobilise funds and that the assessee till date has not paid any amount as dividend to the CCD holders. We from the financials of the assessee notice that the CCDs are classified under borrowings and that the assessee has actually paid the impugned interest to the CCD holders. Considering the overall facts and circumstances of the case and the judicial precedence we hold that the TPO is not correct in re- characterising ṭhe CCD as equity to arrive at the ALP as Nil.
Having held so we notice that the TPO has not made any exercise of determining the ALP and has not examined the benchmarking analysis carried out by the assessee with regard to interest on CCD. Therefore we consider it an appropriate to restore the issue of determination of ALP of the imugned transaction of interest on CCD back to the AO with a direction to make reference to TPO as appropriate to examine ALP determination afresh in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
Upward adjustment towards interest on delayed receivables: 10. On perusal of the financial statements, the TPO noticed that the assessee is having trade receivables to the tune of Rs. 36.21 Crores against the
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AE and that the assessee has not charged any interest towards the delayed payment. The A.O made an adjustment towards interest at LIBOR + 350 BPS (0.197% + 3.5%) to arrive at an adjustment of Rs.14,66,243/-. The TPO considered a 30 day credit period while computing the interest.
We have heard the parties, and perused the material available on record. The Ld. AR submitted that the assessee is having transactions with AEs as well as Non AEs and that the assessee does not charged any interest from the third parties. The Ld. AR relied on the various judicial pronouncements in this regard. Without prejudice the Ld. AR submitted that a credit period of 90 days may be allowed for the purpose of calculating interests on the receivables. From the perusal of the breakup of outstanding receivable we notice that the assessee is having balances outstanding with aging of more than 365 days. The judicial precedence have considered imputing interest on receivable taking into account (i) whether the service provider is a debt-free company, (ii) What is the credit period offered to third parties in comparison with that of the AEs and (iii) Whether the impact of excess credit period on working capital was factored in the pricing.etc. In the present case we notice that the assessee is not a debt free company. Further nothing has been brought on record to show that the impact of excess credit period is factored in the sale price. Considering the facts unique to assessee's case we deem it fit to allow the alternate plea of 90 days credit period while computing the interest on receivables. Accordingly we direct the TPO to recompute the upward adjustment towards interest on receivables after allowing 90 days credit period. Having held so, we make it clear that our decision on the impugned issue is specific to the year under consideration and
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cannot be considered as precedence for any other AYs in assessee's case or in any other case. It is ordered accordingly.
In result the appeal of the assessee is allowed for statistical purposes. 12. Order pronounced on 07th day of May, 2026 at Chennai.
Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य चे�नई/Chennai, �दनांक/Dated: 07th May, 2026. EDN, Sr. P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF EJTADA Digitally signed by EJTADA DURGA DURGA NARESH Date: 2026.05.13 NARESH 10:50:46 +05'30'
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