HCY INDUSTRIAL PARKS PRIVATE LIMITED,MUMBAI vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT, MUMBAI

ITA 1899/MUM/2026Status: DisposedITAT Bangalore01 October 2026AY 2022-2326 pages
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What were the facts?

The assessee, HCY Industrial Parks Private Limited, engaged in developing industrial parks, filed its return of income for the assessment year under consideration declaring nil total income. The case was selected for scrutiny. A key issue involved an international transaction of interest amounting to Rs. 3,40,27,280/- on compulsorily convertible debentures (CCDs) issued to its associated enterprise (AE). The Transfer Pricing Officer (TPO) treated the CCDs as equity, determined the arm's length price (ALP) of the interest at nil, and proposed an adjustment. The Assessing Officer (AO) incorporated this in the draft assessment order. The Dispute Resolution Panel (DRP) upheld the TPO's adjustment. The final assessment order added Rs. 3,40,27,280/- on account of interest on CCDs. The assessee is aggrieved by this order passed under section 143(3) read with sections 144C(13) and 144B of the Income-tax Act, 1961.

What did the Tribunal hold?

The Tribunal held that the determination of the ALP of interest at nil could not be sustained. The reasoning was that the current interest obligation was displaced by a conclusion about eventual equity ownership, material terms of conversion were inaccurately stated, and a nil price was not established through an asserted method. The Tribunal directed the deletion of the transfer pricing adjustment of Rs. 3,40,27,280/-. It clarified that it was not determining a universally applicable arm's length rate for CCDs. Grounds 1 to 3 and 8 were allowed to the extent stated. The Tribunal also set aside the DRP's alternative disallowance under sections 36(1)(iii) and 37(1), as it substantially rested on the proposition that CCDs already represented issued equity. The consequential direction to reduce the capital asset or work-in-progress base was also set aside as it was founded on the nil-ALP conclusion. The Tribunal directed the AO to verify the amount actually capitalized and apply governing provisions. Regarding Section 94B, the AO was directed to verify the original computation and give effect to the disallowance and any consequential carry-forward, ensuring the same amount is not disallowed twice. The Tribunal expressed no view on statutory interest or fees beyond directing recalculation. The issue concerning initiation of proceedings under section 270A was deemed premature. The operative directions included deleting the transfer pricing adjustment, setting aside the alternative disallowance, and giving consequential effect to directions concerning capitalization, Section 94B, and statutory levies.

What were the issues?

The Tribunal had to decide the following questions: 1. Whether the recharacterization of Compulsorily Convertible Debentures (CCDs) as 'Equity' by the DRP/TPO/AO, leading to the determination of the Arm's Length Price (ALP) of interest at Nil, was legally permissible under Section 92C of the Income-tax Act, 1961. 2. Whether the DRP/AO/TPO erred in disregarding the contractual terms of the CCDs and judicial precedents holding that CCDs constitute debt until conversion, and whether the alleged advance determination of the conversion ratio and the nature of CCDs were correctly assessed. 3. Whether the DRP/AO/TPO failed to demonstrate satisfaction under Section 92C(3) of the Act and incorrectly rejected the assessee's benchmarking analysis. 4. Whether making an adjustment in the case of the assessee amounts to double taxation in India, given that the interest income was offered to tax in India by the Associated Enterprise. 5. Whether the DRP erred in relying on Indian Accounting Standard (Ind AS) and 'Self-Recognition' by the Appellant for characterising CCDs as equity, when the applicability and recognition were disputed. 6. Whether the DRP/AO/TPO erred in disregarding the disallowance already made by the assessee under Section 94B of the Act for interest on CCDs. Assessee's Contentions: The assessee argued that CCDs are debt instruments until conversion, interest paid is allowable, and the DRP/AO/TPO erred in recharacterizing them as equity. They contended that the conversion ratio was not decided in advance and that CCDs are non-appreciating until conversion. They also argued that the absence of redemption does not justify recharacterization as equity. The assessee claimed the TPO failed to satisfy Section 92C(3) and incorrectly rejected its benchmarking. They further argued that the interest income was offered to tax in India by the AE, leading to double taxation. The assessee disputed the DRP's reliance on Ind AS and self-recognition of equity. Finally, they pointed out the double disallowance of interest under Section 94B. The assessee relied on judicial precedents regarding the characterization of CCDs. Revenue's Contentions: The judgment does not explicitly record the revenue's contentions on each specific ground, but it addresses the TPO's determination of ALP at nil and the DRP's upholding of this adjustment.

Which sections of the Income-tax Act were involved?

Section 94B,Section 143(3),Section 144B,Section 144C(5),Section 144C(13),Section 92C(3),Section 92CA(3),Section 36(1)(iii),Section 37(1),Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCHES, MUMBAI

For Appellant: Shri Vijay Mehta, Ld. A.R
For Respondent: Shri Pravin Salunkhe, Ld. Sr. D.R
Hearing: 21.07.2026Pronounced: 01.10.2026

PER: MAKARAND VASANT MAHADEOKAR, AM This appeal by the assessee is directed against the final assessment order dated 26.12.2025 passed under section 143(3) read with sections 144C(13) and 144B of the Income-tax Act, 1961[hereinafter referred to as “the Act”], pursuant to the directions dated 20.11.2025 issued by the Dispute Resolution Panel-1, Mumbai (“DRP”) under section 144C(5) of the Act.

2.

The assessee is engaged in the business of developing and operating industrial and logistics parks. For the assessment year under consideration, it filed its return of inc

The order continues below.

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