NEOVANTAGE BIO-TECHNOLOGY PRIVATE LIMITED,HYDERABAD vs. ACIT., CIRCLE 5(1), HYDERABAD

4. Aggrieved with the draft assessment order of Ld. AO, the assessee preferred objections before the Ld. DRP, which issued directions under section 144C(5) of the Act on 26.06.2024. In accordance with the directions of Ld. DRP, the Ld. AO passed the final assessment order on 19.07.2024 under section 143(3) r.w.s.

144C(13) r.w.s. 144B of the Act, making TP additions of Rs.13,28,00,656/- on account of interest paid on NCDs and Rs.86,88,495/- on account of interest paid on CCDs and non‑TP addition of Rs.37,75,420/- on account of disallowances under section 14A of the Act and Rs.11,66,42,462/- on account of disallowance of set off of unabsorbed depreciation. Accordingly, the Ld. AO computed the total income of the assessee at Rs.12,04,17,883/-.

10.1 In their first contention the Ld. AR submitted that the lender is a foreign bank in the business of financing, the negotiations were conducted on principal-to-principal basis, and on the date of agreement dated 16.08.2016, the condition under section 92A(2)(c) of the Act was not satisfied since the loan advanced did not constitute 51% of the book value of total assets on the date of agreement. Accordingly, the lender and the assessee cannot be treated as Associated Enterprises (“AEs”), and no benchmarking is permissible. In their second contention, the Ld. AR submitted that the credit rating of the assessee was BB–, and therefore under Rule 10TD, safe harbour rate of SBI lending rate + 475 basis points should be applied. It was also submitted that grossing up of TDS should not be considered for benchmarking. In their third contention the Ld. AR argued that the redemption premium of Rs.10,95,99,615/- pertains to the entire tenure of NCDs and the same has already been disallowed proportionately in earlier years. Hence, the addition of the entire redemption premium of Rs.10,95,99,615/- in this year will amount to double addition in the hands of the assessee. In their fourth contention, it was submitted that while giving effect to the Tribunal’s order, the Ld. TPO may be directed to considered the effect of benchmarking while making adjustment under section 94B of the Act.

12.1 On perusal of above, we find that this Tribunal has held that the assessee and the lender are to be treated as AEs and benchmarking of the transaction is justified. Therefore, respectfully following the same reasoning, we reject this first contention of the assessee.

12.2 On the second contention, the Ld. AR has submitted that the credit rating of the assessee was BB–, and therefore under Rule 10TD, safe harbour rate of SBI lending rate + 475 basis points should be applied. It is also prayed before the bench that the grossing up of TDS should not be considered for benchmarking. In this regard, we have gone through para no. 6.4.2 of page no. 13 of the order of the Ld. TPO, which is to the following effect :

“6.4.2 Accordingly, considering the credit rating of the taxpayer being BBB- and the MCLR being 7.90, vide show cause notice it was proposed to apply / benchmark the transaction of interest on NCDs (including premium of redemption) at 9.65% (7.90 + 1.75) under CVUP method as against the 13.18% rate adopted by the taxpayer.” 12.3 On perusal of above, we find that the Ld. TPO has stated the credit rating of the assessee at BBB–. Therefore, the contention of the Ld. AR that it was BB– is factually incorrect. Further, we found that this Tribunal in assessee’s own case for A.Ys. 2017-18 & 2018-19 (supra) has dealt with the identical issue at para no. 18.3 of the order, which is to the following effect :

12.4 On perusal of above, we find that this Tribunal has adopted a consolidated rate of 12.275% for interest and redemption premium of NCDs including grossing up of TDS, considering safe harbour rules and section 194LD of the Act. Therefore, respectfully following the same and applying the principle of consistency, we direct the Ld. TPO to benchmark the impugned transaction at 12.275%.

12.5 On the third contention, the facts have not been disputed that the redemption premium of Rs.10,95,99,615/- relates to the entire tenure of NCDs and has been apportioned in earlier years also, wherein corresponding adjustments have already been made by the Ld. TPO. We, therefore, direct the Ld. AO/TPO to exclude such portion of redemption premium which has already been considered in earlier years to avoid double addition.

12.6 On the fourth contention, we direct the Ld. AO/TPO to give effect to the benchmarking adjustment made in the remand proceedings in accordance with law while computing disallowance, if any, under section 94B of the Act.

12.7 In view of our above directions, the issue of addition made on account of interest paid on NCDs under ground No.6 of the assessee is partly allowed for statistical purposes.

DCIT (ITA No.1189/Hyd/2024 for A.Y. 2021-22 dated 18.03.2025), wherein following the Special Bench, it was again held that CCDs are to be benchmarked by applying SBI PLR. The Ld. AR further invited our attention to page no.665 of the case law paper book wherein SBI PLR rates for different periods are placed, showing that for the relevant year the SBI PLR ranged between 12.90% to 13.45%. Since the assessee paid interest only at 10%, which is significantly lower than the SBI PLR, it was contended that the transaction is at arm’s length and therefore, no adjustment is warranted.

13.1 In their alternate contention, the Ld. AR further submitted that the assessee had not deducted tax at source on the payment of interest on CCDs. Consequently, while computing its taxable income, the assessee itself disallowed the said expenditure under section 40(a)(i) of the Act. Reference was drawn to the computation of income placed at page no.38 of the paper book. It was further pointed out that in subsequent years, no deduction was claimed since the lender had waived the interest. Hence, as the assessee has not been allowed any deduction, no transfer pricing adjustment can be made on such disallowed expenditure. In support, reliance was placed on the decision of the Coordinate Bench of Tribunal in Eaton Technologies Pvt. Ltd. v. DCIT (ITA No.1621/PN/2011, AY 2007–08, order dated 11.01.2013), wherein the Tribunal held that where the assessee had suo motu added back certain expenditure while computing its taxable income and had not derived any benefit either by capitalising it or by claiming depreciation, no adjustment could be made to determine the ALP in respect of such transaction.

“23. In view of this matter and considering the facts of the present cases, and also by considering ratios of various High Courts, we are of the considered view, that once the CCDs issued by the appellant are denominated in Indian currency, the interest payment on the said CCDs is to be benchmarked with reference to the rate of interest applicable to the loans extended in currency concerned. Since the CCDs issued by the appellant are in the nature of rupee denominated loan, in our considered view, FCCD/CCD cannot be construed on par with the foreign currency loan for the purpose of benchmarking. Further, LIBOR plus 200 basis points being the interest rate prevalent in the international market and applicable to foreign curreny loans cannot be applied to benchmark interest on the appellants CCDs. Further, the said interest has to be benchmarked against the interest rates prevailing in the domestic market and similar debt instrument, such as the domestic prime lending rate (PLR). Therefore, we are of the considered view that as regards TP adjustment made in respect of interest paid / payable on CCD/NCD/other debentures, which are denominated in Indian currency, the benchmark is to be by applying PLR against LIBOR. Accordingly, we answer the question referred to for the Special Bench as under :

Whether as regards TP adjustment (i) Yes, in favour of the assessees. made in respect of interest paid / (ii) Interest paid / payable on payable on FCCDs / NCDs / other FCCDs / NCDs / other debentures, debentures, which are denominated in which are denominated in Indian Indian currency the benchmarking is currency to be bench marked by to be made by applying PLR as against applying PLR rates. LIBOR?” 15.1 On perusal of above, we find that the Special Bench of Tribunal has categorically held that if the CCDS are denominated in Indian Currency, the arm’s length rate of interest has to be determined with reference to the SBI PLR rates and not international LIBOR rates. This view has been consistently followed by this Tribunal in subsequent decisions, including Sanchore Renewable Pvt. Ltd. Vs. DCIT (supra), wherein it was held that interest on CCDs should be benchmarked with SBI PLR. In the present case, there is no dispute about the facts that the CCDs issued by the assessee are not denominated in Indian Currency. Therefore, respectfully following the decision of Special Bench of Tribunal in the case of Hyderabad Infratech Pvt. Ltd. Vs. DCIT (supra), we hold that the interest on CCDs in the case of the assessee should be benchmarked with SBI PLR. Further, we find that, in the present case, the SBI PLR for the relevant year was between 12.90% to 13.45%, whereas the assessee had paid interest only at 10%. Since the rate paid is below the applicable PLR, the payment of interest is at arm’s length. Accordingly, we hold that the adjustment made by the Ld. AO/TPO is liable to be deleted.

15.2 On the alternative contention, we have gone through the computation of income of the assessee placed at page no.38 of the paper book, which is to the following effect :

15.3 On perusal of above, we find that the assessee has suo motu disallowed the interest on CCDs under section 40(a)(i) of the Act, on account of non-deduction of TDS. It is also not in dispute that in subsequent years, no deduction was claimed as the lender waived the interest. Thus, the assessee has not derived any tax benefit from the impugned payment. Further, the principle laid down by the Coordinate Bench of Tribunal in Eaton Technologies Pvt. Ltd. v. DCIT (supra) squarely applies here. In that case, the Tribunal held that once an assessee has voluntarily disallowed an expenditure and has not derived any benefit, either by claiming deduction or by capitalisation, there is no occasion to benchmark such transaction under transfer pricing provisions. Respectfully following the same, we hold that no adjustment is warranted in the present case.

15.4 In view of the above findings, we hold that the adjustment made by the Ld. AO/TPO in respect of interest on CCDs is unsustainable both on primary as well as on the alternative ground. Accordingly, the issue of addition made on account of interest paid on CCDs under ground No.6 of the assessee is allowed.

18.1 On perusal of above, we find that this Tribunal has held that when no exempted income has been earned by the assessee from the investment made by it, no disallowance under section 14A of the Act can be made by Ld. AO. Therefore, respectfully following the aforesaid decision in assessee’s own case (supra), and applying the principle of consistency, we hold that no disallowance can be made in the present year also under section 14A of the Act, as there is no exempt income earned by the assessee. Accordingly, the Ld. AO is directed to delete the disallowance of Rs.37,75,420/-.

19.1 As regards the second contention, the Ld. AR submitted that in AY 2017–18, the assessee had entered into a scheme of demerger wherein Takshila Tech Park & Incubators India Pvt. Ltd. and Genome Valley Tech Parks & Incubators Pvt. Ltd. were demerged, and the assessee is the resultant company. As per section 72A of the Act, the assessee is entitled to carry forward and set-off of unabsorbed depreciation pertaining to the demerged companies which stands transferred to the assessee. He therefore prayed for necessary direction to the Ld. AO to allow the set-off and carry forward of such depreciation in accordance with section 72A.

21.1 On the second contention, the assessee has contended that pursuant to the scheme of demerger in AY 2017–18, the unabsorbed depreciation of the demerged companies, namely Takshila Tech Park & Incubators India Pvt. Ltd. and Genome Valley Tech Parks & Incubators Pvt. Ltd., stood transferred to the assessee as the resultant company, and therefore, the assessee is entitled to its set-off under section 72A of the Act. This claim requires factual verification. We accordingly direct the Ld. AO to verify the demerger scheme and the quantum of unabsorbed depreciation pertaining to the demerged undertakings that are legally transferable, and allow the assessee’s claim in accordance with the provisions of section 72A of the Act.

21.2 In view of the above discussion, ground no.8 of the assessee’s appeal is allowed for statistical purposes, with the directions to the Ld. AO as set out hereinabove.

24. At the outset, the Ld. AR submitted that, the ground nos. 1 & 8 of the assessee are general in nature and the assessee is not pressing ground nos.3, 4 & 5. Accordingly, the ground nos.1, 3, 4, 5 & 8 are dismissed as no separate adjudication is required on the same.

25.1 Further, in view of above discussion, the issue of addition made on account of interest paid on NCDs/CCDs under ground No.6 of the assessee is partly allowed for statistical purposes.

The Ld. AO has made an addition of Rs.1,01,52,000/- towards notional interest, treating it as income of the assessee. The Ld. AR further submitted that the advance to MN Science was a strategic investment aimed at securing long-term business advantages, and there was no stipulation for charging of interest. Relying on the decision of the Hon’ble Supreme Court in CIT v. Excel Industries Ltd. (358 ITR 295), it was submitted that income cannot be taxed on a hypothetical basis unless there is a real accrual of income in the hands of the assessee and obligation to pay the same on the part of MN Science. Further reliance was placed on CIT Vs. Dalmia Cement Pvt. Ltd. (254 ITR 377), wherein it was held that commercial expediency lies within the domain of the assessee, and business decisions are not to be substituted by the Revenue. Accordingly, the Ld. AR prayed before the bench to delete the addition made by the Ld. AO.

Order pronounced in the open Court on 10th Sept., 2025.