GOLDMAN SACHS (INDIA) FINANCE PRIVATE LIMITED,MUMBAI vs. ASSESSMENT UNIT, INCOME-TAX DEPARTMENT, NEW DELHI

The brief facts of the case are that the assessee is a non-deposit taking systematically important Non-Banking Finance Company (“NBFC”) registered with the Reserve Bank of India (“RBI”) and is engaged in the business of (A.Y. 2021-22) 2 lending and investing in pass-through certificates, public sector/corporate bonds, debentures, certificate of deposits and commercial paper. For the year under consideration, the assessee filed its return of income on 15.03.2022, declaring a total income of Rs. 301,29,64,840/-. The return filed by the assessee was selected for complete scrutiny through CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Pursuant to the reference by the AO under section 92CA(1) of the Act, the Transfer Pricing Officer (“TPO”) vide order dated 29.10.2023 passed under section 92CA(3) of the Act made a total transfer pricing adjustment of Rs.11,38,42,717/- on account of interest on Compulsory Convertible Debentures (“CCDs”). The AO vide draft assessment order dated 13.12.2023 passed under section 144C(1) of the Act computed the total income of the assessee at Rs. 306,69,55,510/-, inter alia, after taking into consideration the transfer pricing adjustment made by the TPO. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order dated 25.10.2004 assessing the total income of the assessee at Rs. 440,41,38,683/-. Being aggrieved, the assessee is in appeal before us.

In this appeal, the assessee has raised the following grounds: “

Ground No. 4: Reduction in amount of carried forward interest on Compulsory Convertible Debentures ('CCDs') under section 94B(4) of the Act Based on the facts and circumstances of the case, the learned AO/ TPO have erred, in law and on facts, in re-computing the arm's length price ('ALP') under the 'Other Method" for the international transaction relating to interest paid on CCDs and making an inadvertent downward adjustment of INR 133,71,83,173 thereby, restricting the amount of carried forward interest under section 94B(4) of the Act to INR 106,99,90,216. In relation to the above, the learned AO/TO erred, inter-alia, on the following grounds: (A.Y. 2021-22) 4 4.1 Rejecting the transfer pricing documentation maintained by the Appellant in accordance with provisions of the Act read with the Income-tax Rules, 1962 (Rules'), wherein, the learned AO/ TPO has erred in: 4.1.1 Rejecting the benchmarking analysis undertaken by the Appellant using Comparable Uncontrolled Price (CUP) method; and 4.1.2 Adopting 'Other method' as the most appropriate method for determining the ALP for the international transaction in relation to payment of interest on CCDs issued during FY 2019-20, FY 2018-19 and FY 2017-18. 4.2 Recharacterizing a debt instrument into equity, wherein, the learned AO/ TPO has erred in: 4.2.1 Disregarding the facts that CCDs are debt instruments until its actual conversion and the accounting treatment as per IND-AS of CCDs into equity component and debt component should not have a bearing on the way the same is being treated for tax purposes; 4.2.2 Rejecting the Appellant's contention that Rules cannot override the provision of law; 4.2.3 Treating the nature of CCDs issued by the Appellant as hybrid instruments without appreciating the actual terms of the CCDs; 4.2.4 Rejecting the Appellant's contention that value for the 'option to subscribe to equity' embedded in CCD is Nil; and 4.2.5 Rejecting the Appellant's contention that recharacterizing a debt instrument into equity is not permissible. 4.3 Not considering the Appellant's contention that there has been no base erosion on interest paid on CCDs. 4.4 Not considering the Appellant's contention that the CCDs have been issued for the purpose of mobilizing funds and have been used to make investments at far attractive returns as compared to the interest rate paid on CCDs. 4.5 In disallowing INR 1,33,71,83,173 under section 94B(4) of the Act, resulting in an incorrect reduction of carried forward interest losses.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that the assessee had debited a sum of Rs. 1,70,61,399/- to its profit and loss account under the head “occupancy expenses”. In response to the notice issued under section 142(1) of the Act seeking details and explanation regarding the claim

The AO, vide draft assessment order passed under section 144C of the Act, disagreed with the submissions of the assessee and held that for availing the benefit of depreciation under section 32(1) of the Act, the primary condition is the ownership of the asset which the assessee has failed to comply, and therefore, it is not eligible to claim the depreciation. The AO further held that the present case also does not fall within the ambit of the provisions of Explanation-1 to section 32(1) of the Act, as the expenditure on improvement of leasehold premises was not incurred by the assessee. The AO further held that a change in nomenclature of expenditure, i.e., occupancy charges, and thereby changing the section for availing deduction under section 37(1) of the Act instead of the correct section 32 of the Act, does not change the real character of allowance of this account. Thus, it was held that, as per the assessee’s own submission, the depreciation has been given the colour of occupancy expenses and therefore the same is not covered under the provisions of section 37(1) of the Act. Accordingly, the AO disallowed the (A.Y. 2021-22) 8 amount of Rs. 5,03,462/- paid by the assessee to GSISPL and added the same to the total income of the assessee.

The learned DRP, vide its direction, rejected the objections raised by the assessee on this issue and held that depreciation is a statutory deduction and the same is not a service expense, and as such, this transaction cannot be allowed as a recharge. The learned DRP held that the expenditure claimed by the assessee relates to the leasehold premises owned by GSISPL, and therefore, the classification of the amount as depreciation by the AO is correct, and the same is governed by the provisions of section 32 of the Act. The learned DRP further held that the claim that the GSISPL’s total expenditure has been reduced due to reimbursement, and the same has resulted in no loss to the Revenue, is not pertinent, and the primary issue is the correct classification of the expenditure and its allowability. Accordingly, the learned DRP upheld the findings of the AO. In conformity, the AO passed the impugned final assessment order and disallowed the amount of Rs.5,03,462/- claimed as occupancy expenditure by the assessee. Being aggrieved, the assessee is in appeal before us.

We have considered the submission of both sides and perused the material on record. In the present case, the assessee leveraged on the employees and other infrastructure of its group companies in India. Accordingly, it operated from the space rented on lease by its group entity, i.e. GSISPL. In this regard, the assessee entered into a Cost Allocation and Recharge Agreement with GSISPL, whereby the assessee reimbursed the expenditure incurred by GSISPL with respect to the cost allocated to the (A.Y. 2021-22) 9 assessee. As GSISPL had incurred expenditure on the improvement of leasehold premises, which was capital in nature, such expenditure was capitalised by GSISPL, and the depreciation cost on the same was allocated to the assessee on the basis of allocation factors, such as the number of employees of the assessee, common space usage, etc. During the year under consideration, the assessee reimbursed an amount of Rs.1,70,61,397/-, which was recharged by GSISPL from the assessee. During the assessment proceedings, it was observed that out of the aforesaid amount of Rs.1,70,61,397/-, which was debited to the profit and loss account by the assessee under the head “occupancy expenses”, an amount of Rs.5,03,462/- pertains to depreciation which was recharged by GSISPL from the assessee. In the present case, there is no dispute amongst the parties regarding the aforesaid basic facts pertaining to this issue.

The AO/learned DRP, on the basis that the assessee is not the owner of the asset and also does not satisfy the other conditions in respect of the claim of depreciation in case of leasehold premises, held that such a claim is nothing but a claim of depreciation by the assessee, which is not permissible under the Act. On the other hand, as per the assessee, the reimbursement towards depreciation amounting to Rs.5,03,462/- should be allowed as a deduction under section 37 of the Act, as the said premises was used by the assessee for its business purpose and the rental cost and depreciation on leasehold premises was allocated to the assessee based on various factors.

Before delving into the issue involved, it is necessary to understand the meaning of the term “depreciation”. As per Kanga and Palkhivala’s (A.Y. 2021-22) 10 Commentary on the Law and Practice of Income Tax, 11th edition, the term “depreciation” means wear and tear of the assets used for the purpose of earning revenue and usage of the assets. Accounting Standard-6 issued by the Institute of Chartered Accountants of India has defined the term “depreciation” as follows: - “3.1 Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.”

Thus, the depreciation is a diminution in the value of assets on account of wearing out, consumption, damage, efflux of time, technological advancement, innovation or change in market sentiments.

Section 32 of the Income Tax Act deals with the manner of computation of depreciation of tangible and intangible assets owned and used for the purposes of business. Explanation-1 to section 32 of the Act also allows depreciation to the taxpayer in a case where expenditure is incurred on the construction of any structure or doing of any work by way of renovation, extension, or improvement to the building which is held by the taxpayer on a lease. From the perusal of the provisions of section 32 of the Act, it is evident that though the term “depreciation” in general parlance is considered to be a mere wear and tear of the asset, however such wear and tear or diminution in value of asset is not a condition precedent for claiming depreciation as per the provision of section 32 of the Act. Therefore, under the Act, depreciation is a statutory allowance as was held by the Hon’ble Gujarat High Court in CIT vs. Elecon Engineering Co. Ltd., reported in (1974) 96 ITR 672 (Guj.). The (A.Y. 2021-22) 11 relevant observations of the Hon’ble Gujarat High Court, in the aforesaid decision, are reproduced as follows: - “However, the position is entirely different under section 32 of the Income-tax Act. The depreciation allowance thereunder is a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear and the assessee is thereunder entitled as of right to the full amount of prescribed allowance once the conditions laid down therein are satisfied irrespective of whether there has in fact been any depreciation in the value of the asset by wear and tear or otherwise.”

Therefore, it cannot be disputed that unless and until the conditions as laid down in the provisions of section 32 of the Act are satisfied, no assessee can claim the depreciation under the Act. Section 32 of the Act requires fulfilment of two conditions for claiming the depreciation, i.e., ownership (wholly or partly) by the assessee and usage of the asset for the purpose of business or profession. As noted above, Explanation-1 to section 32 of the Act provides an exception to the first pre-condition, i.e. ownership, and grants depreciation to the assessee also in case of a leasehold premises, if the assessee incurs expenditure on the construction of a structure, renovation or improvement of the premises.

Now the issue arises whether depreciation is an expenditure, and therefore, can it be recharged? We find that the Hon’ble Delhi High Court in PCIT vs. Central Warehousing Corporation, reported in (2017) 399 ITR 212 (Del), after considering the decision of the Hon’ble Supreme Court in Nectar Beverages Pvt. Ltd. vs. DCIT, reported in (2009) 314 ITR 314 (SC), held that irrespective of the provision in which the word “depreciation” is used, owing to the very nature of the word, it is not a loss or an expenditure or a trading liability.

Therefore, in light of the aforesaid analysis, we find merit in the findings of the learned DRP that depreciation is a statutory deduction and not a service expense. In the present case, since GSISPL had taken the premises on lease and incurred the expenditure thereon on improvements, it is only in the case of GSISPL that it can be examined whether any depreciation is allowable in its hands. We are of the considered view that, in the guise of cost allocation and recharge, such a claim of depreciation cannot be allocated to the assessee merely due to the fact that the assessee is operating from the space rented by GSISPL. As depreciation is not an expenditure or trading liability on GSISPL, we are of the considered view that the same cannot be recharged from the assessee, and the assessee cannot claim a deduction by claiming it to be an expenditure incurred for the purpose of business or profession under section 37(1) of the Act. Insofar as the income and expenditure offered by GSISPL, the same can only be examined while determining the taxable income of GSISPL. We are of the considered view that the same has no significance insofar as deciding the allowability of any claim in the hands of the assessee. Since the assessee was not the owner of the premises and neither incurred the expenditure on the leasehold premises, we are of the considered view that the assessee can also not claim the amount as depreciation under section 32 of the Act. Accordingly, the addition of Rs.5,03,462/- made by the AO in the hands of the assessee is upheld. As a result, Ground no.1 raised in the assessee’s appeal is dismissed.

The issue arising in Ground no.2, raised in the assessee’s appeal, pertains to the disallowance of expenditure on account of Restricted Stock Unit (“RSU”) granted to the employees of the assessee.

The brief facts of the case pertaining to this issue as emanating from the record are: During the assessment proceedings, it was noticed that the assessee had claimed an amount of Rs.2,46,38,347/- under the head “Employees Stock Option Plan” (“ESOP”) in its return of income. The assessee was asked to furnish the details and explanation of such a claim along with documentary evidence. In response, the assessee submitted that Goldman Sachs Group Inc. (“GSGI”) has a Global Stock Plan wherein the benefits of such plan have been extended to the employees of the subsidiaries/associated companies. It was further submitted that under this plan, the assessee grants RSU to its employees, which is part of the compensation program of the employees of the assessee. The RSU entitled the employees of the assessee, on the fulfilment of certain conditions, to receive shares of GSGI. As per the plan, after the expiry of the period, shares of GSGI would be delivered to the employees, for which the assessee would be required to make a payment to GSGI. Thus, the sum payable by the assessee to GSGI is determined with reference to the value of the shares of GSGI as on the date of delivery of the shares of GSGI to the employees. Under this compensation program, the payment by the assessee to GSGI reflects the difference in cost between the share value on the date of delivery and the price received from employees. In its submission, the assessee also placed reliance upon the decision rendered (A.Y. 2021-22) 14 by the Tribunal in the case of its group entity, wherein the RSU cost was allowed as a deduction.

The AO, vide draft assessment order passed under section 144C of the Act, disagreed with the submission of the assessee and held that the expenditure incurred on ESOP is capital expenditure in view of the provisions of section 37 of the Act. The AO further held that the ESOP loss is a notional loss and by issuing shares at a discounted premium, nothing is paid out by the company, and therefore, section 37(1) of the Act cannot be activated as no expenditure was incurred. The AO in support of his conclusion placed reliance upon the decision of the Delhi Bench of the Tribunal in ACIT vs. Ranbaxy Laboratory, in and 3871, wherein it was held ESOP debited to the profit and loss is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/lesser security premium. Accordingly, the AO disallowed the ESOP expenditure amounting to Rs.2,46,38,547/- claimed by the assessee and added the same to the total income of the assessee.

The learned DRP, vide its directions, rejected the objections filed by the assessee on this issue on the basis that the Revenue’s SLP against the Hon’ble High Court’s decision, which is in favour of the taxpayer, is pending consideration before the Hon’ble Supreme Court, and this issue has not attained finality. In conformity, the AO passed the impugned final assessment order disallowing the ESOP expenditure claimed by the assessee. Being aggrieved, the assessee is in appeal before us.

Having considered the submission of both sides and perused the material on record, we find that the Co-ordinate Bench of the Tribunal in case of assessee’s sister concern in Goldman Sachs (India) Securities Pvt. Ltd. vs. DCIT in for assessment year 2015-16, vide order dated 12.12.2019, allowed the ESOP expenditure in respect of RSU, by observing as follows: - “7. The Ground No.1 of the appeal is in respect of ESOP Cost. Similar addition was made in asessee's own case in assessment year 2009-10. The Tribunal deleted the addition by observing as under:- "12. Ground No. 5 & 6 relate to the grievance related to ESOP cost. 12.1. The AO has considered this issue at para-6 of his order. While scrutinizing the return of income, the AO found that the employee costs include the cost of restrictive stock unit and stock option's plant under the Goldman Sachs Group Inc. amended and Restated Stock Incentive Plan, which is being charged to the profit and loss accounts over the period of vesting. The assessee was asked to submit the copies of the said agreement and the details of such expenditure. The assessee filed a detailed reply dated 18.2.2013, the contents of which are extracted at para-6.2 of the assessment order. 12.2. The submissions made by the assessee were considered but not found convincing. The AO proceeded by disallowing the net amount on account of amortization which was confirmed by the DRP. 12.3. Before us, the Ld. Senior Counsel drew our attention to the decision of the Special Bench of the Bangalore Tribunal in the case of Biocon Ltd 144 ITD 21 (Bang) wherein on similar facts the discount on issue of ESOP was allowed as deduction. 12.4. The Ld. DR could not bring any distinguishing decision in favour of the Revenue. Respectfully following the decision of the Special Bench (supra), we hold that discount on issue of employee’s stock options is allowable as deduction in computing the income under the head profits and gains of business of profession. Ground No. 5 & 6 are accordingly allowed."

The learned Departmental Representative (“learned DRP”) could not bring any material on record to deviate from the conclusion so reached by the (A.Y. 2021-22) 16 Co-ordinate Bench of the Tribunal in the aforesaid decision. Accordingly, respectfully following the decision of the Co-ordinate Bench of the Tribunal cited supra, the addition made on account of the expenditure relating to the RSU granted to the employees of the assessee is deleted. As a result, Ground no.2 raised in assessee’s appeal is allowed.

The issue arising in Ground no.3, raised in assessee’s appeal, pertains to the addition of Rs.2,88,48,661/- made vide intimation issued under section 143(1) of the Act.

We have considered the submission of both sides and perused the material on record. Vide intimation dated 25.10.2022 issued under section 143(1) of the Act, the return filed by the assessee was processed and total income of the assessee was assessed at Rs.304,18,13,501/- after making an addition of Rs.2,88,48,661/- being the difference in claim between return filed and audit report towards leave encashment of Rs.27,35,623/- and bonus and commission of Rs.2,65,13,038/-. It is evident from the record that no inquiry in this regard was raised during the scrutiny assessment proceedings. Thus, this issue does not arise from the scrutiny assessment proceedings resulting in the present appeal. We find that the learned DRP, while rejecting the assessee's objections on this issue, also noted this aspect and refused to render any findings on the impugned addition, as it does not emanate from the draft assessment order. The learned DRP further observed that the assessee is not left without any remedy and is free to pursue the matter under section 154 of the Act before the AO. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee has (A.Y. 2021-22) 17 filed a rectification application under section 154 of the Act on this issue, which is pending consideration. Accordingly, in view of the aforesaid observations, we are not expressing any findings on the merits of the addition as the same does not emanate from the orders in appeal before us. However, we direct the AO to decide the rectification application filed by the assessee at the earliest in accordance with the law. As a result, Ground no.3 raised in assessee’s appeal is allowed for statistical purposes.

We have considered the submissions of both sides and perused the material on record. The brief facts pertaining to this issue are that during the year under consideration, the assessee entered into international transaction of payment of interest in respect of CCDs issued to its associated enterprises during the financial years 2017-18 to 2019-20. The key terms of the CCDs subscription agreement entered into between the assessee and its associated enterprises are as follows: - “CCDs issued during F.Y. 2019-20 Sr. Particulars Details No. 1 Face Value per CCD INR 100 2 Tenure Upto 10 years 3 Nature of security Unsecured 4 Coupon/Interest rate 9.75 percent per annum

During the year under consideration, the assessee paid interest amounting to Rs. 62,93,75,000/- in respect of CCDs issued during the financial year 2017-18, interest amounting to Rs.31,63,42,010/- in respect of CCDs issued during the financial year 2018-19 and interest amounting to Rs.39,14,66,163/- in respect of CCDs issued during the financial year 2019- 20 to its associated enterprises. The assessee benchmarked this transaction by adopting the Comparable Uncontrolled Price (“CUP”) Method as the most (A.Y. 2021-22) 19 appropriate method and considered the information published by Bombay Stock Exchange (“BSE”), National Stock Exchange (“NSE”), and National Securities Depository Ltd. (“NSDL”) for corporate debt instruments for the financial year. As per the assessee, in order to identify a comparable debt instrument, various criteria were adopted, such as date of issue, credit rating, etc. As the interest rates and CCDs issued to the associated enterprises were within the arm’s length range, the assessee considered the international transaction to be at arm’s length price (“ALP”).

During the transfer pricing assessment proceedings, pursuant to the reference by the AO under section 92CA(1) of the Act to the TPO for the determination of the arm’s length price of the international transactions entered into by the assessee, it was observed that the credit ratings have been wrongly considered while selecting the comparables by the assessee. Further, it was observed that the instruments selected by the assessee for comparability analysis are non-convertible debentures, and the tenure of the same is different from the tenure of CCDs issued by the assessee. It was also observed that the terms and conditions of the CCDs subscription agreements are identifiable to features of an equity instrument as per Indian Accounting Standard (“Ind AS”)-32, and the essential nature of these instruments is equity in nature, and such instruments are required to be identified as equity instruments. On the basis that no independent entity would have made interest payments on an instrument having features similar to the CCDs issued by the assessee, the assessee was asked to show cause as to why the benchmarking using CUP method adopted by the assessee should not be (A.Y. 2021-22) 20 rejected and as to why the interest paid on account of CCDs issued in the financial years 2017-18 to 2019-20 should not be benchmarked by adopting “Other Methods” under Rule AB of the Income Tax Rules, 1962 (“the Rules”). In response, the assessee submitted that the CCDs issued by the assessee, which is an NBFC, for the purpose of mobilising funds, and have been used to make investments at far attractive rates than the interest rate paid on CCDs. The assessee further submitted that till the time CCDs are converted, they are debt in nature. It was submitted that re-characterising a debt instrument into equity is not permissible under the Act, and the presentation of financial statements is merely to reflect the accounting principles laid down in Ind AS -32, and cannot be used as a reference point to disregard the commercial reality of the transaction.

The TPO, vide order dated 29.10.2023 passed under section 92CA(3) of the Act, disagreed with the submissions of the assessee and held that as per the RBI Policy, the CCDs instrument is classified as equity. In this regard, the TPO also placed reliance upon the SEBI guidelines and circular issued by the Department of Industrial Policy and Promotion, Government of India. The TPO further referred to the balance sheet of the assessee and held that the assessee has characterised the equity and the debt component of the CCDs. By referring to the guidance note issued by ICAI relating to Ind-AS, the TPO held that the CCDs are more equity in nature as these instruments are compulsory convertible to equity shares of the company. On the basis that sufficient comparable data is not available publicly to determine the ALP using the CUP method, and other methods are not appropriate for benchmarking (A.Y. 2021-22) 21 the international transaction on payment of interest on CCDs, the TPO adopted “Other Method” to benchmark this international transaction. By considering the debt and equity component of the CCDs, as declared by the assessee in its financials, the interest rate on debt component of CCDs was considered to be at ALP by the TPO. However, the TPO held that the interest on equity component would not have been paid by any non-associated enterprises in an uncontrolled transaction. Accordingly, the TPO made the downward adjustment to the price of interest transaction on equity component of CCDs as follows: - Amounts in INR Sr. Name of the AE Interest Issue Year Equity Downward TP No. rate Component Adjustment on interest (in Rs.) 1 Goldman Sachs 9.75% FY 2019-20 26,81,61,538 2,61,45,749,92. (Mauritius) NBFC L.L.C 2 Goldman Sachs 10.75% FY 2018-19 45,06,45,389 4,84,44,379.29 (Mauritius) NBFC L.L.C 3 Goldman Sachs 13.25% FY 2017-18 29,62,45,947 3,92,52,587.98 Strategic Holdings Pte. Total 1,01,50,52,873 11,38,42,717.19

The learned DRP, vide its direction, rejected the objections raised by the assessee and held that the assessee itself has computed the equity component embedded in the CCDs and it is not a case, wherein the TPO has re-characterized the transaction at his own. The learned DRP further held that the method provided in Ind AS and adopted by the assessee itself has been utilized by the TPO for the ALP determination. The learned DRP further held that the transaction of funding by the assessee through the issue of debentures is liable to be considered as issue of shares inasmuch as it was in the nature of shareholding activity as per the OECD guidelines. Further, the (A.Y. 2021-22) 22 learned DRP upheld the findings of the TPO that no independent third party would have invested in the equity portion of CCDs issued by the assessee except by way of participation in equity. Accordingly, the determination of ALP on payment of interest on equity portion of CCDs was upheld to be at ‘Nil’. Accordingly, the learned DRP upheld the downward adjustment of Rs.11,38,42,717/- made by the TPO.

In addition to the above, during the course of hearing, the learned DRP also asked the assessee to explain as to why the interest payment should not be disallowed under section 36/section 37 of the Act. In absence of any explanation from the assessee, the learned DRP held that apart from ALP of such interest payment being Nil, the AO is also liable to undertake the alternate disallowance of the payment as the same fails to fulfils the provisions of section 36(1)(iii) and section 37 of the Act. Accordingly, the learned DRP held that even if the transfer pricing adjustment are not upheld, the entire interest payment of Rs.133,71,83,173/- is disallowable under the provisions of section 36(1)(iii) / section 37 of the Act. In conformity with the direction issued by the learned DRP, the AO, vide final assessment order made a disallowance of the entire interest payment of Rs. 133,71,83,173/- under section 36/37 of the Act. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the interest on CCDs amounting to Rs.133,71,83,173/- was paid by the assessee to its associated enterprises in respect of CCDs issued to the associated enterprises (A.Y. 2021-22) 23 in the financial years 2017-18 to 2019-20. The TPO, vide order passed under section 92CA(3) of the Act, considered the CCDs to be a hybrid instrument and bifurcated the same into debt and equity. Accordingly, the TPO considering the ALP of the interest rate in respect of equity component of CCD to be Nil, made an adjustment of Rs.11,38,42,717/-, while the interest rate on debt component of the CCDs was accepted to be at ALP. It is pertinent to note that out of the total interest payment of Rs.133,71,83,173/- on CCDs, the assessee suo motu disallowed an amount of Rs.94,39,15,202/- under section 94B of the Act, while filing its return of income. Therefore, the TPO directed that the transfer pricing adjustment of Rs.11,38,42,717/- not be allowed to be carried forward to the following assessment years under section 94B(4) of the Act and further directed that no further addition would be warranted to the total income. In subsequent proceedings, the learned DRP not only upheld the findings of the TPO but also directed that the entire interest payment on CCDs be disallowed under section 36/section 37 of the Act. Accordingly, vide impugned final assessment order, the AO made the disallowance of the entire interest amount on CCDs of Rs.133,71,83,173/-.

For deciding the issue at hand, the first aspect which needs our consideration is whether the CCDs issued by the assessee to its associated enterprises in the Financial Years 2017-18 to 2019-20 has an equity component. As is evident from the perusal of the record, the TPO, as well as the learned DRP, has considered CCDs to also have an equity component by referring to the assessee’s own disclosure in its financial statement. As per the assessee, Ind AS-32, notified under section 133 of the Companies Act, (A.Y. 2021-22) 24 2013, mandates compound instruments to be bifurcated into equity and debt. Accordingly, the CCDs issued by the assessee were accounted for partly as debt, which has been determined based on the present value of future cash flows discounted using the prevailing market rate, and partly as an equity component, which would be the difference between the amount of funds received for CCDs and the fair value of CCDs derived. Thus, as per the assessee, following the requirement of Ind AS-32, the debt and equity component of CCDs were presented in the financial statement, and the same does not alter the legal nature of the instrument. Thus, it is the plea of the assessee that mere reclassification of the instrument in the books of account shall not have any bearing on the legal rights and obligations of the assessee, and the legal form only should be taken into consideration for taxation purposes. We find that the Hon’ble Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT, reported in (1971) 82 ITR 363 (SC), held that taxability of an item of income will be determined on the basis of the provision of law relating thereto and not on the existence or absence of the entries in the books of account maintained by the assessee. The relevant findings of the Hon’ble Supreme Court, in this regard, are reproduced as follows: “We are wholly unable to appreciate the suggestion that if a assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.”

Therefore, we are of the considered view that the TPO as well as the learned DRP erred in placing reliance upon the financial statement of the assessee, which was drawn as per the mandate of Ind AS-32, for arriving at the conclusion that the CCDs issued by the assessee include an equity component.

During the hearing, the learned AR placed reliance upon various decisions, wherein it has been held that CCDs are in the nature of debt until the date of conversion. We find that the Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd., reported in (2010) 321 ITR 611 (Raj.), held that a debenture when issued, is a loan, and therefore, whether it is convertible or non-convertible, thus the same does not militate against the nature of the debenture being the loan. Accordingly, the Hon’ble Rajasthan High Court, following the decision of the Hon’ble Supreme Court in India Cements Ltd. Vs. CIT, reported in (1996) 60 ITR 52 (SC), allowed the expenditure incurred on the issuance of a debenture. We find that the Hon’ble Jurisdictional High Court in HDFC Bank Ltd. vs. DCIT, in of 2006, vide order dated 13.11.2024, concurring with a view taken by the Hon’ble Rajasthan High Court in the aforesaid decision, allowed the expenditure incurred on the issuance of a fully convertible debenture. We find that similar findings were rendered by the Hon’ble Jurisdictional High Court in PCIT vs. Reliance Natural Resources Ltd., in vide order dated 26.08.2019. We further find that the Hon’ble Delhi High Court in CIT vs. Havells India Ltd. reported in (2013) 352 ITR 376 (Del.) held that expenditure incurred in connection with the ITA No.6766/Mum/2024 (A.Y. 2021-22) 26 issuance of debentures or obtaining loan is a revenue expenditure even though debentures are to be converted in the near future in the equity shares.

On the other hand, the learned Departmental Representative (“learned DR”) placed reliance upon the decision of the Hon’ble Supreme Court in IFCI Ltd. vs. Sutanu Sinha & Ors., reported in (2023) INSC 1023, and submitted that the CCDs are equity in nature and has a defined timeline for conversion. From the perusal of the aforesaid decision of the Hon’ble Supreme Court, we find that in the factual scenario of the case, the National Highway Authority of India (“NHAI”) awarded a highway development project to IVRCL Chengapalli Tollways Ltd. (“ICTL”), which was a wholly owned subsidiary of IVRCL. The project was financed through a combination of debt (loan facility provided by a consortium of lenders to the ICTL) and equity. As part of the equity component of the project, the financing was to be obtained through CCDs, which were subscribed by IFCI Ltd. under a Debentures Subscription Agreement. Subsequently, the project ran into financial difficulties and corporate guarantees of IVRCL were invoked by IFCI Ltd. Thereafter, Corporate Insolvency Resolution Process was initiated by the IFCI Ltd. and the State Bank of India and claims were filed. The structure of the above financing arrangement, as recorded in the aforesaid judgment, is as follows: - a. As per Debenture Subscription Agreement ("DSA") dated 14th October, 2011 entered between ICTL/Corporate IRCL Limited (erstwhile Assets & Holdings Limited) and IFCI, Compulsorily Convertible Debentures ("CCDs") were to be treated as equity. The same is observed from the recording of the CCDs component as equity under Schedule III of the DSA. The CCDs are also approved as equity under the financial package for the Concession Agreement dated 25th March, 2010 executed between

Accordingly, in view of the aforesaid factual background, the Hon’ble Supreme Court, applying the principle of interpretation of commercial contracts that a contract should be read as it is as per its express terms, upheld the findings in the impugned judgment that considering CCDs to be debt would tantamount to the breach of the concessionaire agreement. In this regard, reference can be made to the following findings of the Hon’ble Supreme Court in the aforesaid decision: - “22. Suffice for us to say that the aspect of interpretation of commercial documents was in extenso analyzed in Nabha Private Limited v. Punjab State Power Corporation Limited MANU/SC/1291/2017 : 2017:INSC:1008 : (2018) (A.Y. 2021-22) 28 11 SCC 508. In respect of the factual scenario before us, it would suffice to extract para 72 as under: 72. We may, however, in the end, extend a word of caution. It should certainly not be an endeavour of commercial courts to look to implied terms of contract. In the current day and age, making of contract is a matter of high technical expertise with legal brains from all sides involved in the process of drafting a contract. It is even preceded by opportunities of seeking clarifications and doubts so that the parties know what they are getting into. Thus, normally a contract should be read as it reads, as per its express terms. The implied terms Is a concept, which is necessitated only when the Penta test referred to aforesaid comes into play. There has to be a strict necessity for it. In the present case, we have really only read the contract in the manner it reads. We have not really read into it any "implied term" but from the collection of clauses, come to a conclusion as to what the contract says. The formula for energy charges, to our mind, was quite clear. We have only expounded it in accordance to its natural grammatical contour, keeping in mind the nature of the contract.

A reading of the impugned judgment, specifically the rationale from para 19 onwards shows that the issue has been correctly crystallized as to whether CCDs could be treated as a debt instead of an equity instrument. In that sense, it was observed that treating them as a debt would tantamount to breach of the concessional agreement and the common loan agreement. The investment was clearly in the nature of debentures which were compulsorily convertible into equity and nowhere is it stipulated that these CCDs would partake the character of financial debt on the happening of a particular event.”

Having carefully analysed the aforesaid decision of the Hon’ble Supreme Court, we are of the considered view that the same has been rendered in a different factual matrix, wherein by the express agreement inter se the parties, the CCDs issued were ab initio considered as equity, without any dispute regarding the nature of the investment. However, in the present case, the CCDs were issued by the assessee, being a non-deposit taking NBFC, as a part of routine financing arrangements, where the instruments were treated (A.Y. 2021-22) 29 as debt until conversion. Therefore, we are of the considered view that the decision of the Hon’ble Supreme Court in IFCI Ltd. (supra), placed reliance upon by the learned DR, is not applicable to the present case, as the same has been rendered in a different factual matrix. Therefore, respectfully following the decisions of the Hon’ble High Courts, including the Hon’ble Jurisdictional High Court, as noted in the foregoing paragraph, we are of the considered view that till the time a debenture is converted into shares the same continues to be a debt and it does not partake the character of equity, and therefore, the interest on such debenture is an allowable deduction. Accordingly, we do not find any merits in the additional disallowance directed to be made by the learned DRP under section 36/section 37 of the Act.

Insofar as the benchmarking of the international transaction of payment of interest on CCDs issued by the assessee to its associated enterprise, it is evident from the record that the assessee adopted the CUP method and considered the information published by BSE, NSE, NSDL for corporate debt instruments issued by the Indian Companies for benchmarking the international transaction. However, the TPO found infirmity in the benchmark analysis, inter alia, qua the credit rating of comparable companies and rejected the benchmarking analysis using the CUP method, and instead, considered “Other Method” as provided in Rule 10AB of the Rules for benchmarking this international transaction.

In this regard, it is pertinent to note that the provisions of Rule 10AB of the Income Tax Rules, 1962, which provide as under: -

Thus, as per the provisions of the aforesaid Rule, the “Other Method” shall be the method which takes into account the price which has been or would have been charged or paid for the same or similar uncontrolled transaction between non-associated enterprises. However, in the present case, the TPO, without searching for similar uncontrolled transactions between non-associated enterprises, proceeded to benchmark the international transaction. As we have arrived at the conclusion that the CCDs issued by the assessee are in the nature of debt, we are of the considered view that the interest paid on the same should be benchmarked as per the applicable transfer pricing provision after applying the most appropriate method considering the availability of data and other prerequisite factors. Therefore, for determining the ALP of this international transaction, we restore the issue to the file of the TPO/AO for de novo benchmarking, after providing an appropriate opportunity of hearing to the assessee. As this issue is restored for fresh consideration, the assessee shall be at liberty to justify the applicability of the CUP method as the most appropriate method by furnishing a fresh set of comparable companies in strict compliance with the requirements of the CUP method. In the alternative, the assessee shall also be at liberty to furnish an alternative benchmarking analysis as per the Indian Transfer Pricing Regulations in respect of this international transaction. (A.Y. 2021-22) 31 Accordingly, the addition of Rs.133,17,83,173/- made by the AO under section 36/section 37 of the Act is deleted. Before concluding, we may further note that since the issue of determination of ALP of this international transaction is restored to the file of the TPO/AO, the contentions of the assessee as regards the applicability of the provisions of section 94B of the Act are kept open. As a result, Ground No.4 raised in assessee’s appeal is allowed for statistical purposes, while Ground No.5 raised in assessee’s appeal is allowed.

The issue arising in Ground no.6, raised in the assessee’s appeal, pertains to the short grant of TDS credit. Accordingly, we deem it appropriate to restore this issue to the file of the Jurisdictional AO with a direction to grant the credit of taxes deducted at source in accordance with law, after conducting the necessary verification. We order accordingly. As a result, Ground no.6 raised in assessee’s appeal for statistical purposes.

The issue arising in Ground No.7, raised in assessee’s appeal, pertains to the levy of interest under section 234A of the Act.

During the hearing, the learned AR submitted that the assessee filed the original return of income for the year under consideration within the statutorily prescribed time limit. Accordingly, the learned AR submitted that the AO erred in levying the interest under section 234A of the Act in the year under consideration.

We have considered the submissions of both sides and perused the material available on record. The interest under section 234A of the Act is (A.Y. 2021-22) 32 levied for default/delay in furnishing the return of income. In the present case, it is not in dispute that the assessee filed the return of income for the relevant assessment year. Thus, the only aspect which needs examination is whether there is any delay in filing the return of income in order to levy interest under section 234A of the Act. In view of the above, we deem it fit to direct the Jurisdictional AO to carry out necessary verification whether the return of income was filed by the assessee within time and levy interest under section 234A of the Act, in case of delay, in accordance with law. Accordingly, Ground no.7 raised in assessee's appeal is allowed for statistical purposes.

The issue arising in Ground no.8, raised in the assessee’s appeal, pertains to the levy of interest under section 234B of the Act, which is consequential in nature and, therefore, needs no separate adjudication.

The issue arising in Ground no.9 pertains to the levy of penalty under section 270A of the Act, which is premature in nature. Therefore, the said ground is dismissed.

In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 22/08/2025