AFTON CHEMICAL INDIA PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), MUMBAI, MUMBAI

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: K BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER ITA 6642/MUM/2024 िनधा�रण वष�/Assessment Year:2021-22) AFTON CHEMICAL INDIA PRIVATE ASSISTANT COMMISSIONER LIMITED OF INCOME TAX, CIRCLE A-Wing , Unit 701/702, Lotus 4(1)(1), MUMBAI Corporate Park, Western Express Room No 640, 6th Floor, Highway, Graham Firth Steel Aayakar Bhavan, Maharishi Vs. Compound, Goregoan East, S.O, Karve Road, Mumbai, Mumbai-400063, Maharashtra Maharashta, 400020 Mumbai-400020, Maharashtra अपीलाथ� Appellant ��थ� Respondent Permanent Account Number of Assessee: AADCP3112G

अपीलाथ� �ारा/Appellant represented by: Shri Dhanesh Bafna ��थ� �ारा/Respondent represented by: Shri Ajay Kr. Sr. A.R. सुनवाई की तारीख/Date of conclusion of hearing: 29-Jun-2026 घोषणा की तारीख/Date of pronouncement: 30-Jun-2026 आदेश / ORDER Per: Anikesh Banerjee (JM): The instant appeal of the assessee filed against the order of the Ld. Assistant Commissioner of Income Tax, Circle 4(1)(1), Mumbai [for brevity the “Ld. AO”], order passed under section 143 r.w.s. 144C(13) of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Year 2021-22, date of order 23.10.2024. the impugned order originated from the recommendation of the

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED Ld. Dispute Resolution Panel-1, Bengaluru (for brevity ‘Ld. DRP’) by order dated 12.09.2024 under section 144C(5) of the Act.

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 5. On the facts and in the circumstances of the case and in law, the Ld. DRP /Ld. AO / Ld. TPO erred in re-characterizing CCDs as external commercial borrowings ('ECB') and in applying GBP London Inter-bank offered rate (‘LIBOR') to INR-denominated CCDs instead of State Bank of India Prime Lending rate ('SBI PLR'). 6. On the facts and in the circumstances of the case and in law, the Ld. AO/ TPO has erred in: a. Conducting a fresh benchmarking analysis by applying LIBOR plus 200 BPS i.e. 2.977%, as an arm's length interest on CCD on ad hoc basis which is complete violation of transfer pricing provisions and against the principles of law. b. Not appreciating that the CCDs were issued in Indian Rupees ('INR') and also consumed in India and the interest on CCDs should be benchmarked using State Bank of India ('SBI') Prime Lending Rate ('PLR') instead of LIBOR rate. c. Not appreciating that the CCDs availed by the Appellant are INR denominated and not foreign currency denominated loans. Accordingly, the obligation of the Appellant is to pay the interest in Indian rupees and not in foreign currency. 7. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A of the Act. 8. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234B of the Act while computing the total income. 9. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234C of the Act while computing the total income. 10. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO / Ld. DRP have erred in proposing to initiate penalty proceedings under Section 270 of the Act.”

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED coupon rate of 9%, the Comparable Uncontrolled Price (‘CUP’) method has been considered as most appropriate method and accordingly the search of external comparable transaction has been conduce in the year of issue. Under external CUP was considered to benchmark the arm’s length interest rate on CCDs issued by assessee to its AE. External data base sources, available in the public domain, provided information on the prevailing interest rates that would be comparable to the CCDs issued to AE. Accordingly, external CUP was selected for determining the arm’s length nature of the coupon rate applicable to CCDs. Accordingly the show cause notice was issued by the Ld. TPO and proposed to restrict the interest payment at 12 months LIBOR plus 200 basis points in lying with stand taken in A.Y. 2017-18. The assessee is not in agreement with the said proposal of interest rate and submitted that the benchmarking analysis conduct in the TP documentation, the assessee submits that as it has issued INR denominated CCDs to its AE, State Bank of India (‘SBI’) Prime Lending Rate (‘PLR’) should be considered as arm’s length interest rate for payment of interest on CCD. The assessee submitted that interest rate at which the assessee has accrued interest on CCDs i.e. 9% which shall be lesser than SBI PLR. Hence the rate of interest adopted by the assessee meets the arm’s length requirement under Indian Transfer Pricing Regulation. But finally the contention of the assessee was rejected and the Ld. AO made the addition amount of Rs. 1,14,43,700/- under section 92CA(4) of the Act. The aggrieved assessee filed an appeal before the Bench, by challenging the order of the Ld. AO.

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED related to the PLR rate on the Interest on CCDs for INR denomination. The Ld. AR contended that the assessee respectfully disagrees with the conclusions of the Ld. TPO to benchmark INR denominated CCD using LIBOR plus 200 basis points as arm's length interest rate, without performing any benchmarking analysis. The assessee submits that LIBOR rates can be used as a measure to benchmark interest rate for the international transactions involving loans but not for CCDs which are in the nature of quasi-capital. The ld. AR contended that the LIBOR is used to benchmark foreign currency loans i.e. loans borrowed and repaid in foreign currency. In this regard, the assessee had issued CCDs in INR and the assessee paid interest on the same in INR at the rate of 9.00%. Since, the transaction under review is made in INR, benchmarking the transaction of payment of interest on CCDs which is INR denominated with foreign currency LIBOR rates or ECBs rate on foreign currency loans is not justified.

"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 5

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 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. 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 lenders State or that in the borrowers is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. Il 725 (1994), re 1 § ASIG). 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 Alt. 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."

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 6. The Ld. AR contended that the issue is squarely covered by the order of the special bench of ITAT, Hyderabad in case of Hyderabad Infra Tech Private Limited v. DCIT, ITA-TP No. 1856/HYD/2019 date of pronouncement 29.01.2025. The observations of the Hon’ble Special Bench are contended in the following paragraphs:-

“22. The assessee 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:

"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.

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 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-paid normally determines the rate of return on the money lent, ie. 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

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 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 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.

"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).

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 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 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 (i) Yes, in favour of the in respect of interest paid/payable on assessee. FCCDs/NCDs/other debentures, which are (ii) Interest paid/payable on denominated in Indian currency the FCCDs/ NCDs/other benchmarking is to be made by applying debentures, which are PLR as against LIBOR?” denominated in Indian currency to be bench marked by applying PLR rates.

2.5.1 Having considered the submissions, the Panel notes the Assessee's objection that the TPO has erred in re-characterizing the Compulsorily Convertible Debentures

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED (CCDs) as ECB/loan for the purpose of benchmarking the international transaction of payment of interest on CCDs. The Assessee contends that this re-characterization is unjustified. However, the Panel is of the opinion that it is well-established by both Reserve Bank of India (RBI) guidelines and judicial authorities that CCDs, until their conversion into equity, possess the characteristics of a loan. The nature of CCDs allows the Assessee to defer repayment and conversion to equity at a future date, which implies that they function similarly to debt instruments until such conversion. This classification of CCDs as loans until conversion is consistent with their hybrid nature. 2.5.2 Furthermore, in determining the arm's length price (ALP) of interest on such CCDs, the Ld. TPO has applied the LIBOR benchmark, which is commonly used in international loan transactions. This is in accordance with commercial principles governing international transactions, where the loan component of the CCDs requires benchmarking against internationally recognized standards. The asessee has not provided any compelling argument or evidence to refute this Characterization. In view of the above discussion, the objection raised by the Assessee is not accepted. 2.5.3 Further, with regard to the contention that the CCDs are denominated in INR and should be benchmarked using INR based lending rates, it is pertinent /important to mention here that on account of the nature of CCD, the taxpayer would not have to repay the principal amount to its AE even on maturity and hence the currency in which loan was taken or to be paid would not be relevant for the purpose of determining the interest rate. Hence, the contentions of the Assessee are here by rejected. 2.5.4 In this scenario, the TPO is required to see as to what is the interest that these investments fetch in the international money markets or in the third-party scenario. It would have definitely earned less interest in tune with the accepted LIBOR Rate with adequate spread. 2.5.5 In the case of M/s Watermark Residency, the Jurisdictional ITAT, Hyderabad has held that the currency in which FCCD were issued or interest to be paid is not relevant for the purpose of determining the interest rate. The decisions of Bombay High Court in the case of India Debt Management and the Hon'ble Delhi High Court in the case of Cottons Naturals were discussed and distinguished in this order. Hence, we uphold the TPO's action of benchmarking the payment of interest using 12-month LIBOR Plus 200bps. Grounds rejected.

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED 8. We have heard the rival submissions and perused the material available on record. The undisputed facts reveal that the assessee had issued CCDs denominated in Indian Rupees to its AE and paid interest thereon at the rate of 9%. The Ld. TPO, however, benchmarked the transaction by applying 12-month LIBOR plus 200 basis points by treating the CCDs akin to foreign currency borrowings, which approach has been upheld by the Ld. DRP. In our considered view, the issue is no longer res integra. The Delhi High Court in the case of Cotton Naturals (I) Pvt. Ltd.(supra) has categorically held that the arm's length rate of interest must be determined with reference to the currency in which the borrowing is denominated and repayable. Thus, where the borrowing is denominated in INR, the benchmarking has to be undertaken by adopting the domestic lending rates applicable to INR-denominated instruments and not LIBOR, which is relevant only for foreign currency loans. Further, the issue stands authoritatively settled by the Special Bench of the ITAT, Hyderabad in Hyderabad Infra Tech Pvt Ltd. (supra), wherein, after considering the judgments of the Hon'ble Delhi High Court in Cotton Naturals (I) Pvt. Ltd. (supra) as well as the Hon'ble Bombay High Court in India Debt Management (P.) Ltd.(supra) and Tata Autocomp Systems Ltd. (supra), it was unequivocally held that interest paid on CCDs/FCCDs/NCDs denominated in INR is required to be benchmarked by applying the domestic PLR and not LIBOR. The Special Bench further held that merely because the debentures are issued to a foreign Associated Enterprise, the same cannot be equated with foreign currency borrowings for transfer pricing purposes. Respectfully following the binding ratio laid down by the Hon'ble Delhi High Court and the decision of the Special Bench, we hold that the action of the Ld. TPO/DRP in benchmarking the interest on INR-denominated CCDs by applying LIBOR plus 200 basis points is unsustainable in law. The benchmarking is required to be undertaken with reference to the domestic PLR applicable to comparable INR-denominated debt

ITA 6642/MUM/2024 AFTON CHEMICAL INDIA PRIVATE LIMITED instruments. Accordingly, the transfer pricing adjustment of Rs.1,14,43,700/- is directed to be deleted. Consequently, Ground No. 4 and 5 and their connected sub-grounds raised by the assessee are allowed. The remaining grounds being consequential or general in nature do not call for separate adjudication.

Order pronounced in the open court on 30th June 2026 Sd/- Sd/- (OM PRAKASH KANT) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, िदनांक/Dated: 30/06/2026 ANKIT, PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. TRUE COPY

ASSISTANT REGISTRAR / SR. PRIVATE SECRETARY I.T.A.T., MUMBAI