INDOSPACE BOMMASANDRA LOGISTICS PARK PRIVATE LIMITED,MUMBAI vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT, MUMBAI

The assessee is a company engaged in the business of leasing modern industrial real estate and logistics/warehousing facilities. For the assessment year under consideration, it filed its return of income on 29.11.2022 declaring total income of Rs.2,65,86,351/-. The case was selected for scrutiny under CASS. One of the issues identified for examination related to the provisions of section 94B and the international transaction involving payment of interest to the associated enterprise.

During the relevant previous year, the assessee reported an international transaction of payment of interest amounting to Rs.4,76,60,340/- on Compulsorily Convertible Debentures [hereinafter referred to as “CCDs”], issued to its associated enterprise, ILP Core Ventures I Pte. Ltd., Singapore. The matter was referred to the Transfer Pricing Officer [hereinafter referred to as “the TPO”]. The TPO, vide order dated 27.01.2025 passed under section 92CA(3) of the Act, treated the CCDs as being in the nature of equity and determined the arm’s length price [hereinafter referred to as “ALP”], of the interest payment at Nil, thereby proposing an adjustment of Rs.4,76,60,340/-.

The Assessing Officer incorporated the aforesaid adjustment in the draft assessment order dated 28.02.2025 passed under section 144C(1) of the Act. The assessee filed objections before the DRP challenging, inter alia, the re-characterisation of the CCDs as equity, determination of ALP of interest at Nil, rejection of the benchmarking adopted by it, and the consequential treatment of the interest expenditure.

The DRP, vide directions dated 14.10.2025, sustained the principal transfer pricing adjustment. The DRP also directed, in the alternative, that the interest be examined under sections Logistics Park Private Limited 36(1)(iii)/37(1) of the Act on the premise that the CCDs did not constitute “capital borrowed” and that the expenditure lacked the requisite business nexus. The DRP further observed that the question relating to carry forward of any disallowance under section 94B would not arise if the ALP of interest itself was held to be Nil.

Pursuant to the directions of the DRP, the Assessing Officer passed the impugned final assessment order dated 28.11.2025 and made the transfer pricing adjustment of Rs.4,76,60,340/-, thereby determining the total income at Rs.7,42,46,691/-.

Aggrieved, the assessee is in appeal before us. The grounds, in substance, assail the re-characterisation of the CCDs as equity, determination of ALP of interest at Nil, rejection of the assessee’s benchmarking, reliance upon regulatory treatment under statutes other than the Income-tax Act, alternative disallowance under sections 36(1)(iii)/37(1), and consequential levy of interest.

Specific grounds of appeal are: Ground No. 1 – Assessment order is non est and barred by limitation as per section 153 of the Act On the facts and in the circumstances of the case and in law, the assessment order dated 28 November 2025 passed by the Ld. AO under section 143(3) r.w.s 144C(3) read with section 144B of the Act is barred by limitation, void-ab-initio and therefore, ought to be quashed and set aside in toto. Ground No. 2 – General Ground On the facts and in the circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (‘Hon’ble DRP’)/ Transfer Pricing Officer (‘Ld. TPO’) have erred in making an addition of INR 4,76,60,340 to the total income of the Appellant by re-characterizing the (Compulsorily Convertible Debentures (‘CCDs’) as ‘Equity’ and thereby re-determining Arm’s Length Price (‘ALP’) of interest on CCDs at Nil. Ground No. 3 – Recharacterizing CCD into equity is not permissible. The Hon’ble DRP/ Ld. AO / Ld. TPO has erred in re-characterizing the CCDs as ‘Equity’, treating the CCDs on par with advance share capital (akin to share application money), thereby disregarding the contractual Logistics Park Private Limited terms governing the CCDs and consequently determining the ALP of the interest on CCDs as Nil. 3. 1. Ignoring that CCDs are debt Instruments until converted into Equity The Hon’ble DRP/ Ld. AO/ Ld. TPO have erred in disregarding the fact that CCDs are debt instruments until their actual conversion into equity by ignoring binding and persuasive judicial precedents which hold that CCDs constitute debt until conversion and that interest paid thereon is allowable.

Erroneous finding that ‘Conversion Ratio’ was decided in advance The Hon’ble DRP/ Ld. AO / Ld. TPO erred in law and on facts by alleging that the ratio of conversion of CCDs into equity shares is decided in advance i.e., at the time of issuance of CCDs, while in reality, the terms of issue as per CCD subscription agreement clearly provides that conversion will be at Fair Market Value determined by an independent valuer at the time of conversion and the same was not decided in advance .

Ignoring the fact that CCDs are not appreciating in nature until conversion The Hon’ble DRP/ Ld. AO / Ld. TPO erred in ignoring the fact that the CCDs are non-appreciating in nature i.e., AE, being the CCD holder, will only get such number of equity shares based on the Fair Market Value of the Company on the conversion date and therefore, not entitled to any appreciation in equity value until conversion.

Mere absence of redemption does not justify re- characterisation of CCDs as equity The Ld. AO / Ld. TPO / Ld. DRP have erred in law in holding that absence of redemption or traditional cash repayment renders CCDs as equity from the date of issuance, ignoring that conversion into equity itself results in extinguishment of the debt obligation and hence akin to repayment/redemption. Ground No. 4 – Failure to record satisfaction under section 92C(3) of the Act and incorrect rejection of benchmarking analysis by Appellant The Hon’ble DRP/ Ld. AO/ Ld. TPO have failed to demonstrate that any of the conditions specified u/s 92C(3)(a) to (d) of the Act were satisfied before disregarding the Appellant’s Transfer Pricing Study Report (‘TPSR’) and erred in rejecting the benchmarking analysis undertaken by Appellant using SBI PLR under Other Method. Ground No. 5 – Double taxation of interest on CCDs in India as there is no motive for shifting profits outside of India The Hon’ble DRP/ Ld. AO / Ld. TPO erred in failing to appreciate the fact that the interest income arising from the CCDs has been offered to tax in India by the Associated Enterprises and hence, there was no Logistics Park Private Limited intention to shift profits outside of India. Consequently, making an adjustment in the case of the Appellant is tantamount to double taxation in India. Ground No. 6 – Factual error in DRP’s reliance on Indian Accounting Standard (Ind AS) The Hon’ble DRP has erred in law in faulting the Appellant for not bifurcating CCDs into equity and debt components as per Ind AS, when Ind AS itself is admittedly not applicable to the Appellant, rendering the impugned reasoning perverse and unsustainable Ground No. 7 – Factual error in DRP’s reliance on ‘Self-Recognition’ by the Appellant of equity component On the facts and circumstances of the case and in law, the Ld. DRP has erred in holding, without due application of mind, that the Appellant has ‘self-recognized’ an equity component in respect of the CCDs, without appreciating that no such equity component has been recognized or recorded in the Appellant’s audited financial statements. The Appellant has in fact recognised the CCDs as long-term borrowings in the financial statements. Ground No. 8 – Failure to consider the disallowance already made for interest on CCDs as per Section 94B of the Act The Hon’ble DRP/ Ld. AO / Ld. TPO erred in disregarding the disallowance of interest expenses amounting to INR 70,92,650/- already made by the Appellant under Section 94B of the Act in its computation of income for the year under consideration, resulting in double disallowance of the same interest expenses to the tune of INR 70,92,650/- Ground No. 9 – Characterisation of CCD as per judicial precedents and definition under other statutes is not relevant for Income-tax The Ld. DRP erred in treating the CCDs as being in the nature of equity by relying on the definition/explanation under FEMA and judicial precedents by Hon’ble Supreme Court rendered under other statutes (Insolvency and Bankruptcy Code, 2016, Capital Issues (Control) Act, 1947/Capital Issues (Exemption) Order, 1969, Companies Act, 1956, Securities and Exchange Board of India Act, 1992, Electricity Supply Act, 1948) , while ignoring the fundamental principle, as consistently upheld by judicial precedents, that interpretations from other statutes cannot be imported for Income-tax purposes unless expressly provided under the Income-tax law. Ground No. 10 – Incorrect alternate disallowance of interest under Section 36/Section 37 of the Act On facts and circumstances of the case, Ld. DRP erred in making an alternative disallowance of interest on CCDs under Section 36(1)(iii)/Section 37(1) of the Act. Ground No. 11 – Levy of interest and fee without any specification of underlying sections of the Act in the computation sheet On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest without specifying the relevant sections of the Logistics Park Private Limited Act under which the same is levied, rendering the levy unsustainable in law. Ground No. 12 – Penalty Proceedings Under Section 270A of the Act On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act. The grounds stated above are independent of, and without prejudice to one another. The Appellant craves leave to add, amend, vary, or withdraw any of the above grounds at the time of hearing.

The learned Authorised Representative [hereinafter referred to as “the AR”], submitted that the assessee had benchmarked the international transaction under the “Other Method” by reference to the State Bank of India Prime Lending Rate. According to the assessee, having regard to the five-year moratorium, the effective interest rate worked out to 10.50% per annum whereas the effective SBI PLR for financial year 2021-22 was 12.23%.

The learned AR submitted that the TPO proceeded on an erroneous factual basis in treating the conversion ratio as having been determined at inception. He pointed out that the conversion price is linked to fair market value as on the conversion date. It was further contended that until conversion, the CCD holder did not acquire voting rights or dividend rights as a shareholder and the stipulated interest obligation continued to operate.

The learned AR relied, inter alia, upon the decisions in CIT v. Secure Meters Ltd. 321 ITR 611 (Raj.), CIT v. ITC Hotels Ltd. 334 ITR 109 (Karn.), Ebixcash World Money Ltd. v. DCIT, Summit Developments Pvt. Ltd., CAE Flight Training (India) Pvt. Ltd., Hyderabad Infratech Pvt. Ltd., and other decisions referred to in the written synopsis.

The learned AR also distinguished IFCI Ltd. v. Sutanu Sinha [2023] 156 taxmann.com 681 (SC) on the ground that the said Logistics Park Private Limited decision arose in the context of the Insolvency and Bankruptcy Code and upon materially different contractual arrangements. He further submitted that the TPO could examine the price of the reported interest transaction but could not first substitute an equity investment for the actual CCD transaction and thereafter determine the interest at Nil.

Per contra, the learned Departmental Representative [hereinafter referred to as “the DR”], relied upon the order of the TPO and the directions of the DRP. The learned DR submitted that the exercise of the TPO was not an impermissible re- characterisation, but an arm’s-length pricing inquiry under sections 92(1) and 92(2) read with Rule 10AB.

Relying upon CIT v. EKL Appliances Ltd. 345 ITR 241 (Del.), the learned DR submitted that where economic substance differs from legal form or where independent parties would not have entered into the arrangement in the manner adopted, the transfer pricing authority is not invariably bound by the nomenclature given by the parties.

The learned DR further submitted that absence of an obligation to repay the principal in cash was an important characteristic of the CCDs. He relied upon IFCI Ltd. v. Sutanu Sinha and submitted that compulsory conversion at FMV merely postponed determination of the number of shares and did not alter the certainty that the subscriber would ultimately become an equity holder.

At the course of hearing before us, both the learned AR and the learned DR fairly admitted that the material facts, the terms of the CCDs and the principal controversy in the present appeal are Logistics Park Private Limited similar to those arising in the case of HCY Industrial Parks Pvt. Ltd. in ITA No. 1899/Mum/2026 for the same assessment year.

The appeal in the case of HCY Industrial Parks Pvt. Ltd. has since been disposed of by this Bench by order dated 01.10.2026. The issue therein concerned the determination of ALP at Nil in respect of interest paid on CCDs on the premise that the CCDs were, in substance, equity instruments. The Bench examined in detail the contractual terms, the future compulsory conversion, FMV-linked conversion price, absence of ordinary cash redemption, the pre-conversion interest obligation, and the decisions relied upon by both sides. The Bench ultimately held that the NIL ALP determination could not be sustained because the current interest obligation had been displaced merely on the basis of eventual equity ownership and without establishing the Nil price by application of the prescribed transfer pricing methodology.

We have heard the rival submissions and perused the material available on record. In view of the admitted similarity of facts, the controversy is substantially covered by our decision in HCY Industrial Parks Pvt. Ltd. Nevertheless, having regard to the importance of the issue, we briefly record the reasons for applying the said decision to the present case.

The material placed before us shows that during financial year 2015-16 the assessee issued in aggregate 3,40,431 CCDs, comprising 3,00,431 CCDs allotted on 16.06.2015 and 40,000 CCDs allotted on 29.10.2015, at a face value of Rs.1,000/- each, aggregating to Rs.34,04,31,000/-. The relevant terms governing the CCDs provide as under: “Tenor: The Compulsorily Convertible Debentures (‘CCDs’) shall be issued for a period of 20 years or such earlier period as at the option of either majority CCD holder(s) or the Company.”

Thus, while conversion of the principal into equity is compulsory, the conversion ratio or number of shares is not fixed at the date of issuance. The number of shares ultimately issuable depends upon the fair market value determined on the conversion date, subject to the stipulated floor. At the same time, during the pre-conversion period the instrument expressly carries a coupon of 14% per annum, subject to the initial moratorium.

Two distinct characteristics of the instrument are required to be kept together. Firstly, the CCD holder has no ordinary right to demand cash repayment of the principal at maturity because the principal is compulsorily convertible into equity. Secondly, until such conversion, the contractual terms expressly provide for payment of interest at 14% per annum, subject to the moratorium. The first characteristic does not, by itself, answer the arm’s-length price of the second.

The Revenue has laid considerable emphasis on the absence of a cash redemption right. We accept that a compulsorily convertible debenture cannot be equated in all respects with an ordinary redeemable loan. The absence of repayment in cash, the tenor of twenty years, the conversion entitlement and the Logistics Park Private Limited conversion-price floor may all materially influence the price which an independent investor would require.

However, these are pricing characteristics. They may call for appropriate selection of comparables or adjustments to comparables. They do not, without further analysis, establish that the arm’s-length price of an express pre-conversion interest obligation is exactly Nil.

The conversion terms assume particular significance. The material before us does not support the premise that the number of shares was fixed at inception. Conversion itself was compulsory, but the conversion price was to be determined with reference to FMV on the conversion date, subject to the stipulated floor. Thus, the eventual quantum of equity participation was not predetermined at issuance.

In HCY Industrial Parks Pvt. Ltd., on substantially the same conversion clause, we held that the absence of ordinary cash redemption does not by itself justify assigning a NIL price to the stipulated coupon. We also observed that a future FMV-linked conversion may affect an investor’s eventual return and the price that an independent investor would demand, but such considerations are to be examined in the process of selecting and adjusting comparables and do not logically produce an ALP of Nil.

The Revenue’s reliance upon Narendra Kumar Maheshwari v. Union of India and IFCI Ltd. v. Sutanu Sinha was also considered in the earlier order. In IFCI Ltd., the Hon’ble Supreme Court examined the contractual arrangements in the context of insolvency proceedings and, materially, the obligations undertaken by the sponsor and the company concerned. The decision Logistics Park Private Limited undoubtedly gives weight to the absence of a principal repayment claim in examining the nature of a compulsorily convertible instrument. However, it did not determine the ALP under Chapter X of an interest obligation expressly undertaken by an issuer on its unconverted CCDs. That distinction was expressly recognised in the earlier order.

Similarly, decisions under securities law, company law or other regulatory enactments may illuminate particular characteristics of the instrument. They do not, without the necessary analysis under sections 92 to 92F and the applicable Rules, establish that the arm’s-length price of the impugned interest is Nil.

We have also considered the reliance of the Revenue upon CIT v. EKL Appliances Ltd. The proposition laid down therein does not authorise a TPO to disregard the actual transaction merely because another form of financing may, in his view, have been commercially preferable. Exceptional circumstances may justify departing from the transaction as actually structured where the economic substance differs from its form or the structure is such that an appropriate transfer price cannot practically be determined. However, the foundational facts for invoking such an exceptional course must be established.

In the present case, as in HCY Industrial Parks Pvt. Ltd., the TPO has proceeded from the proposition that an independent investor would have subscribed only as an equity participant and, from that premise, valued the whole of the stipulated coupon at Nil. There is no identified uncontrolled transaction demonstrating that an investor subscribing to a comparable long-term compulsorily convertible instrument would receive a NIL return before Logistics Park Private Limited conversion. Nor has the TPO shown why the relevant characteristics render determination of an arm’s-length interest rate impracticable.

Rule 10AB does not support a bare assumption of Nil. The “Other Method” requires regard to the price which has been charged or paid, or would have been charged or paid, for the same or a similar uncontrolled transaction under similar circumstances. The TPO has not identified such an uncontrolled transaction carrying a Nil pre-conversion return.

We may also refer to the subsequent transfer-pricing authorities considered in HCY Industrial Parks Pvt. Ltd. In Ebixcash World Money Ltd., the Mumbai Bench dealt with a similar attempt to determine the interest on CCDs at Nil by treating the instruments as equity. In Sthal India Pvt. Ltd., the Co- ordinate Bench emphasised the necessity of examining actual comparable data instead of substituting an unsupported Nil figure. The Special Bench in Hyderabad Infratech Pvt. Ltd. has also held that interest on rupee-denominated CCDs/debentures is to be benchmarked with reference to domestic PLR rather than LIBOR. The Special Bench formulated the principle that the currency of denomination is material for the benchmarking exercise.

More recently, in Andromeda Sales and Distribution Pvt. Ltd. v. ACIT, the Co-ordinate Bench has reiterated, after Ebixcash and Indorama Ventures Oxides considering Ankleshwar Pvt. Ltd., that CCDs cannot be re-characterised as equity merely because they are compulsorily convertible at a future date and that the TPO cannot determine interest at Nil merely upon such re-characterisation.

We therefore see no reason to take a different view merely because the principal is ultimately converted into equity. The eventual conversion of the principal and the pricing of a subsisting pre-conversion coupon are conceptually distinct. Once an express interest obligation is shown to subsist, its ALP must be determined in accordance with the prescribed transfer pricing provisions and cannot be reduced to Nil merely by treating the instrument, in substance, as future equity.

At the same time, as was clarified in HCY Industrial Parks Pvt. Ltd., deletion of the Nil-ALP adjustment should not be understood as laying down that a coupon of 14%, or the assessee’s asserted effective rate of 10.50%, is universally an arm’s-length rate for CCDs. The finding is confined to the adjustment actually made. The TPO has not demonstrated, through an appropriate prescribed method, an ALP of Nil.

Since the facts and terms in the present appeal are admittedly similar to those considered in HCY Industrial Parks Pvt. Ltd., and both parties have accepted such similarity before us, judicial consistency requires us to follow the said decision.

Respectfully following our order dated 01.10.2026 in HCY Industrial Parks Pvt. Ltd., ITA No. 1899/Mum/2026, we hold that the determination of the ALP of interest of Rs.4,76,60,340/- at Nil cannot be sustained. We accordingly direct the Assessing Officer/TPO to delete the transfer pricing adjustment of Rs.4,76,60,340/-.

The DRP has further directed an alternative disallowance under sections 36(1)(iii)/37(1) principally on the footing that the CCDs were quasi-equity and did not constitute capital borrowed.

No independent and supported finding has been brought to our notice demonstrating that the entire interest expenditure lacks business nexus or that the borrowed funds were utilised for a purpose which independently warrants disallowance of the whole amount under section 36(1)(iii) or section 37(1). Following the decision in HCY Industrial Parks Pvt. Ltd., the alternative disallowance, as reasoned by the DRP, is therefore set aside.

The DRP treated the issue concerning section 94B as consequential to its conclusion that the ALP of the entire interest was Nil. Once the transfer pricing adjustment is deleted, such consequential reasoning cannot survive. The Assessing Officer shall, while giving effect to this order, verify the assessee’s computation under section 94B and grant the permissible consequential treatment, including carry forward, if any, strictly in accordance with law. It shall be ensured that the same expenditure is neither allowed twice nor disallowed twice.

The assessee has further challenged the levy of interest aggregating to Rs.26,06,478/-, stating that the computation does not furnish the necessary section-wise bifurcation.

Levy of statutory interest is consequential and is to be recomputed with reference to the assessed income as finally determined pursuant to this order. The Assessing Officer shall specify the provision under which such interest is levied and Logistics Park Private Limited recompute the same in accordance with law after giving effect to the relief granted herein. This ground is disposed of accordingly.

In view of the foregoing discussion and, in particular, following our decision dated 01.10.2026 in HCY Industrial Parks Pvt. Ltd., ITA No. 1899/Mum/2026, involving admittedly similar facts and the same substantive controversy, we direct the Assessing Officer/TPO to: (i) delete the transfer pricing adjustment of Rs.4,76,60,340/- made by determining the ALP of interest on CCDs at Nil; (ii) delete the alternative disallowance under sections 36(1)(iii)/37(1) founded upon treating the unconverted CCDs as presently issued equity; (iii) give appropriate consequential effect under section 94B in accordance with law, without duplication of disallowance; and (iv) recompute the consequential statutory interest, identifying the relevant charging provisions.

The grounds relating to the principal transfer pricing adjustment and the alternative disallowance are accordingly allowed. The consequential grounds are disposed of in the terms indicated above.

In the result, the appeal filed by the assessee is allowed in the terms indicated above.

Mumbai 6. गाड" फाईल / Guard file.