MOVATE TECHNOLOGIES PRIVATE LIMITED,CHENNAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI

PDF · subscribers
ITTPA 53/CHNY/2026Status: DisposedITAT Chennai02 September 2026AY 2022-2310 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal decided both issues in favor of the assessee. Regarding the downward adjustment on interest on CCDs, the Tribunal noted that a coordinate bench in the assessee's own case for AY 2020-21 had held that CCDs, until converted, are in the nature of debt. The Tribunal also referred to the decision in Stahl India Pvt. Ltd. where it was held that CCDs constitute debt and interest payable is deductible until conversion into equity. The Tribunal further observed that the department had not preferred an appeal against the earlier decision and that similar views were taken in other cases. Consequently, the Tribunal remitted the issue back to the AO/TPO with a similar direction, allowing Ground No.2 for statistical purposes. For the upward adjustment on interest on receivables, the Tribunal relied on the Bombay High Court's decision in Indo American Jewellery Ltd. and the Tribunal's own decision in Elgi Rubber Co. Ltd., which held that delayed realization of receivables is a commercial consideration and that consistency in not charging interest on delayed receivables from both AEs and non-AEs supports the assessee's position. The Tribunal also cited several other coordinate bench decisions supporting this view. Therefore, the Tribunal directed the AO/TPO to delete the adjustment made towards interest on receivables, allowing the ground raised by the assessee. The appeal of the assessee was allowed.

What were the facts?

The assessee, Movate Technologies Private Limited, is in appeal against the final assessment order passed by the National Faceless Assessment Unit for Assessment Year 2022-23. The assessee provides web-based support services, software development, testing, and consulting to both group companies (as a captive service provider) and third-party customers. The case was selected for scrutiny, and the Transfer Pricing Officer (TPO) proposed two adjustments: a downward adjustment of Rs. 7,40,67,000/- for excess interest paid on Compulsorily Convertible Debentures (CCDs) and an upward adjustment of Rs. 85,68,038/- for interest on outstanding receivables. The Dispute Resolution Panel (DRP) upheld these adjustments. The assessee's appeal to the Income Tax Appellate Tribunal (ITAT) challenges these adjustments.

What were the issues?

The Income Tax Appellate Tribunal (ITAT) had to decide the following issues: 1. Whether the downward adjustment of Rs. 7,40,67,000/- on interest paid on Compulsorily Convertible Debentures (CCDs) is justified, considering the assessee's classification of CCDs as partly debt and partly equity in its financial statements. - Assessee's contention: CCDs are direct, unconditional obligations and should be treated as debt instruments until converted into equity. The presentation in financial statements mandated by Ind AS should not alter the character of the CCD for income tax purposes. Reliance was placed on a coordinate bench's decision for AY 2020-21 where interest on unconverted CCDs was allowed, and the TPO subsequently deleted the adjustment in the order giving effect. - Revenue's contention: Relied on the orders of the lower authorities (TPO and DRP). 2. Whether the upward adjustment of Rs. 85,68,038/- towards interest on outstanding receivables is justified, given that the assessee does not charge interest on similar receivables from third-party customers. - Assessee's contention: Imputing interest only on Associated Enterprise (AE) receivables when similar receivables from third-party customers do not attract interest is incorrect. The principle of commercial uniformity should be applied. - Revenue's contention: Not recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

For Respondent: Mr. K.Jayaganesh, CIT

आदेश / O R D E R

PER PADMAVATHY.S, A.M: This appeal by the assessee is against the final order of the assessment passed by National Faceless Assessment Unit (in short "AO") passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 16.01.2026 for Assessment Year (AY) 2022-23. The assessee raised the following grounds of appeal:

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 2 -:

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 3 -:

2.

The assessee is a company engaged in the business of providing web- based support services using internet technology with call centre solutions, software development and testing services and consulting and engineering services in and outside India for carrier services/telecom industries. The assessee provides such services to Movate Group companies and third-party customers. For AE segment, the assessee functions as a captive service provider and hence does not bear any risk and is remunerated at cost plus mark-up for both IT & ITES. For the non-AE segment, the assessee renders the same services to third-party customers, functions as an entrepreneurial entity. The assessee filed a return of income for AY 2022-23 on 30.11.2022 declaring total income of Rs.41,68,64,717/-. 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 compute the Arm's Length Price (ALP) of

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 4 -:

the international transactions. The TPO proposed the following two adjustments: i. Downward adjustment of excess interest paid by the assessee on Compulsorily covertable debentures (CCD) – Rs.7,40,67,000/-;

ii. Upward adjustment towards interest on outstanding receivables – Rs. 85,68,038/-.

3.

The AO passed the draft assessment order incorporating the TP adjustments. Aggrieved the assessee filed its objections before the Disputes Resolution Panel (in short “DRP”) who upheld the TP adjustments. The assessee is in appeal before the Tribunal against the final order of the A.O passed pursuant to the directions of the DRP.

4.

Ground No.1 is general and Ground No.4 is consequential. Hence these grounds do not warrant a separate adjudication.

Downward adjustment of interest on CCD – Ground No.2 5. The assessee had issued 377,690 CCDs of INR 10,000 each, allotted on 23 March 2017 with a put option to transfer the CCD to the Company or any other person nominated by it at arm’s length any time on or after March 23, 2018, but prior to September 24, 2026. A part of the CCD was redeemed during the financial year 2018-19 and the balance amount of CCD was carried in the books of accounts. The TPO during the hearing noticed that the assessee has paid sum of Rs. 28,32,67,000/- as interest @ 10% per annum on the outstanding CCD balance and that the assessee has bench marked to at arm’s length considering the prime lending rate of State Bank of India which is in the range of 12.25% to 12.30%. The TPO held that in the audited financial statements, the assessee has classified the CCDs between debt and

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 5 -:

equity components and therefore the interest attributable to the equity portion cannot be claimed. Accordingly, the TPO made a downward adjustment of Rs. 7,40,67,000/-. The relevant observations of the TPO in this regard is extracted here under – “7.3………To conclude CCDs are Financial investments which consists of both equity and debt components. The CCDs are convertible into equity shares which is not a normal character of any debt. Now whether the argument that since CCDs are not converted into shares therefore, interest payment should be allowed on the entire amount is correct? In the considerable view of TPO, while interest is allowable only on the debt portion not on the equity portion reported by the assessee itself. Further, the TPO is of the view that an accounting standard cannot change the inherent nature of a transaction as reported by the assessee in his Audited Financial Statements. Further, since adjustment has been made in AY 2018-19 on the same issue with regard to CCDs and the assessee’s appeal is still pending, the interest payment on debt portion only is allowed to maintain consistency. Therefore, the interest is allowable on the debt portion only and the excessive interest charged by the assessee in assessee’s P&L account and paid to AE should be downwardly adjusted by Rs. 7,40,67,000/- Crs (28,32,67,000 – 20,92,00,000)”

6.

The DRP upheld the above findings of the TPO. The Ld. Authorized Representative (AR) of the assessee submitted that CCDs are direct, unconditional and unsecured obligation of the assessee which is ranking pari passu with any unsecured debt. The Ld. AR further submitted that the CCD until converted will have to be considered as debt instrument. The Ld. AR also argued that the presentation in the financial statements as mandated by Ind AS cannot change the character of the CCD for income tax purposes and therefore the TPO is not correct in making the downward adjustment. The Ld. AR drew our attention to the fact that a similar adjustment was made in assessee’s own case for AY 2020-21 [ITA No.2467/Chny/2024 dated 16.02.2026] where the Coordinate Bench has directed the TPO to allow the interest on CCD which has not been converted into equity. The Ld. AR

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 6 -:

further drew our attention to the order giving effect passed by the TPO where after verification the TPO has deleted the downward adjustment [page 449 of paper book].

7.

The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

8.

We have heard the parties and perused the material available on record. We notice that the coordinate bench in assessee’s own case has considered an identical issue for AY 2020-21 where it is held that:

“10.4 We have heard the rival contentions, perused the material on record and gone through the orders of the Authorities. At the outset, we feel it is imperative to determine whether the CCD are actually converted into equity or it is only a change in the disclosure in financials without actual redemption or conversion. Apparently, the mandate of Ind-AS 32 seems to reclassify compound financial instruments such as CCDs. Mere reclassification for the purpose of disclosure in Financials will not alter the true nature of the subsisting CCD. Further, the Chennai Tribunal in the case of Stahl India Pvt. Ltd. Vs DCIT [IT(TP)A No.52/CHNY/2024 dated 10.12.2024 has concluded that CCDs until conversion are in nature of debt: “7.5 We have heard rival submissions and perused the material on record. The TPO exceeded his jurisdiction in recharacterizing CCDs as equity, in line with thin capitalization, which cannot be applied in the present case. It has been a judicially well settled proposition that CCDs constitute debt and interest payable thereon is a deductible expenditure till the time the same are converted into equity. The Hon’ble Rajasthan High Court in the case of Secure Meters Ltd reported in 321 ITR 611 (Raj), held that the debentures when issued is a loan, and therefore, whether it is convertible, or non-convertible, does not militate against the nature of the debenture, being loan. 10.5 Further the Ld.AR also pointed out that the TPO and the DRP have held that since the adjustment was made in A.Y.2018-19 and it is pending in appeal, the adjustment is being made/sustained in the subject A.Y. as well. However, presently, the ld.CIT(A) has decided the appeal for A.Y.2018-19 and copy of the said order was placed on record. The ld.CIT(A) has held that as under:

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 7 -:

“5.4.4 On an analysis of the above, it is clear that reclassification was mandated by Ind AS and the appellant had accordingly treated CCDs as compound financial instruments in its accounts. The nature of presentation does not alter the characteristics of CCDs. Despite its treatment in the accounts, CCDs continued to be debt instruments until converted into equity. Further, it is seen that as per clause 3.5 of Investment Agreement for issue of compulsorily convertible debentures between Glow Networks Pvt Ltd and CSS Corp Technologies (MAURITIUS) Ltd, the Subscriber shall have a put option to transfer the CCDs to the Company (or any person nominated by it) at any time after the expiry of one year from the date of issue of the CCDs, at a price worked out as per any internationally accepted pricing methodology on an arm's length basis on the date of exercise of the optionality. Thus it is not necessary that the CCDs would eventually be converted to equity. It would therefore be premature to consider any portion of CCDs as equity without its actual redemption for the purpose of transfer pricing. Thus on careful consideration of the material on record, I hold that the transfer pricing adjustment made on account of interest disallowance on the equity component as per Ind As fair valuation, is without merit. As the CCDs were not redeemed into equity during the year, the appellant is entitled to claim the interest incurred on CCDs, subject to restriction of interest u/s 94B. Accordingly, the AO is directed to delete the addition of Rs.9,59,90,000/- on account of downward adjustment of interest charged by the appellant in the P & L account and paid to AE in respect of the portion of CCDs classified as equity. Thus ground no 4.1 to 4.3 are allowed.”

10.6 Therefore, in view of the above, we are also of the opinion that the actual interest paid on subsisting CCD cannot be disallowed by the TPO. However, the TPO and DRP have rendered a finding that there has been actual conversion of CCD into equity, therefore in the interest of justice and fair play we direct the Assessee to furnish necessary document to establish the fact that during the subject A.Y. there is no actual conversion/redemption of CCD into equity and it is only a mere reclassification as per the mandate of Ind-AS. In case there has been no actual conversion/redemption of CCD into equity then the actual interest paid should be allowed as deduction. Accordingly, this ground of appeal No.9 is allowed in principle subject to verification by TPO. Hence, the ground no.9 is allowed for statistical purpose.”

9.

The Ld. AR brought to our attention that the department has not preferred any further appeal against the above decision of the Tribunal and therefore the revenue cannot object to the claim for the year under consideration ignoring its own stand for the earlier year. The Ld. AR also submitted that in the following case the Tribunal has rejected the TPO’s

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 8 -:

reclassification of CCDs as equity and held that until the CCDs are converted, the same constitutes as Debt. • TE Connectivity Services India Pvt Ltd [IT(TP)A No. 921/Bang/2022] • Stahl India Pvt. Ltd., [IT(TP)A No. 52/CHNY/2024] • WeWork India Management (P.) Ltd. [IT(TP) A No. 819/Bang/2022] • CAE Flight Training (India) Pvt. Ltd. [IT(TP)A No.48/Bang/2023]

10.

We further notice that the impugned disallowance is made on the outstanding CCD which was originally issued during the FY 2016-17 and the Ld. DR during the course of hearing did not bring any new material on record in support of the downward adjustment made by the TPO. Therefore, respectfully following the above decisions of the Coordinate Benches, we remit the issue back to the AO/TPO with a similar direction. Ground No.2 raised by the assessee is allowed for statistical purposes.

Upward adjustment towards interest on receivables – Ground No.3 11. The TPO treated overdue receivables as a separate international transaction, stating that the assessee has extended credit beyond 30-day period. The TPO accordingly imputed interest at 6-month LIBOR + 350 bps after allowing a 30-day credit period to make an upward adjustment of Rs. 85,68,038/-.

12.

We heard the parties and perused the material on record. The primary contention of the Ld. AR with regard to the impugned adjustment is that the assessee which is having similar receivables from third party customers do not charge any interest and therefore imputing interest only for AE receivables is not correct. In this regard we notice that the Hon’ble Bombay High Court in the case of Indo American Jewellery Ltd - Hon’ble Bombay

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 9 -:

High Court [ITA No. 1053 of 2012] while considering an identical issue has held that – “5. On appeal filed by the Revenue, the ITAT upheld the order of CIT(A). While, up holding the order of CIT(A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opin ion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging debtors and the delay in realisation of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realised belatedly cannot be faulted.”

13.

We further notice that a similar view has been taken in the case of Elgi Rubber Co. Ltd. IT(TP)A NO. 07 (CHNY) OF 2026 where it is held that – “103. We find merit in the contention of the assessee that delayed realization of receivables is ordinarily a consequence of the underlying business transaction and commercial considerations governing the relationship between the parties. In commercial practice, enterprises frequently factor the cost of credit into the pricing mechanism and do not necessarily charge interest separately for delayed realization. The material available on record demonstrates that the assessee has consistently not charged interest on delayed receivables not only from its AEs but also from certain non-AE customers. Such uniformity in business conduct lends credence to the plea that the assessee has adopted a consistent commercial policy applicable across categories of customers.”

“108. Having regard to the entirety of the facts and circumstances of the case, the consistent conduct of the assessee in not charging interest from both AEs and non-AEs, the acceptance of the primary international transactions under TNMM, and the judicial precedents cited before us, we are of the considered opinion that no separate transfer pricing adjustment is called for in respect of outstanding receivables from the AEs.”

14.

It is also brought to our attention that a similar view is taken in following cases by the coordinate bench of the Tribunal – • Newgen Digitalworks Private Limited [TS-274-ITAT-2025(CHNY)-TP] • Turbo Energy Private Limited – [TS-09-ITAT-2026CHNY]

IT(TP)A No.53/Chny/2026 Movate Technologies Pvt. Ltd. :- 10 -:

• Stanadyne India Private Limited – [TS-303-ITAT-2025CHNY] • Integra Software Services P. Ltd – [TS-724-ITAT-2022CHNY]

15.

The Ld. AR also submitted that the nature of transactions between the AE and non-AE transactions are similar and hence the principle of commercial uniformity is to be applied while examining the impugned adjustment. Considering that the facts in assessee’s case being identical, respectfully following the above judicial precedence, we direct the AO/TPO to delete the adjustment made towards interest on receivables. The ground raised by the assessee in this regard is thus allowed.

16.

In result the appeal of the assessee is allowed.

Order pronounced on 02nd day of September, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा सद�य /Accountant Member �या�यक सद�य / Judicial Member चे�नई/Chennai, �दनांक/Dated: 02nd September, 2026. EDN, Sr. P.S EJTADA Digitally signed by EJTADA DURGA NARESH आदेश क� ��त!ल"प अ#े"षत/Copy to: DURGA Date: 2026.09.04 1. अपीलाथ�/Appellant NARESH 17:37:26 +05'30' 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

More judgments on Section 144C(13)

All 3,426 judgments and leading authorities on Section 144C(13) →

Recent GST High Court judgments

Search GST case law →