DY COMMISSIONER OF INCOME TAX ,CIRCLE 2(1), HYDERABAD vs. GREENKO RAYALA WIND POWER PRIVATE LIMITED , HYDERABAD

2. Assessee filed the Cross-Objections for both the assessment years with a delay of 613 days and 215 days respectively. In this connection, assessee filed affidavits for both the assessment years and places reliance on the order of the Hon'ble Supreme Court in the Suo Motu proceedings in the case of Miscellaneous Application No. 665/2021 in SMW(C) No.3 of 2020 has held that in computing the period of limitation for any suit, appeal, application or proceeding, the period from 15 March, 2020 till 02 October, 2021 shall be excluded. The same is accepted and the delay is condoned.

Brief facts of the case as could be culled out from the record are that the assessee is a company engaged in the business of generation of wind power. They have filed their return of income for the assessment year 2015-16 on 30/11/2015 declaring an income of Rs. 1,27,87,370/- under normal provisions of the Income Tax Act, 1961 (for short “the Act”) and book profit at Rs. 44,83,16,926/-. During the course of assessment proceedings, learned Assessing Officer noticed that the assessee entered

Ld. CIT(A) deleted the entire addition in appeal. Hence the Revenue is in this appeal before us. Assessee filed the cross objections aggrieved by the non-adjudication of the ground relating to the credit rating for the aspect of spread on the ground that it would be fatal in the benchmarking of the transaction - interest on NCD to its AE, and, therefore, added requisite markup to the base rate.

It is contended by the Ld. DR that the Ld. CIT(A) erred in deleting the addition made towards excise interest on non-convertible debentures. Learned DR, while heavily relying upon the assessment order, he argued that inasmuch as the transaction was between the associated enterprises, there was no risk because it is only the debenture but not alone, the recipient of the amount has substantial losses and, therefore, was not liable to tax on this ground, the transaction is quasi-capital as the associated enterprise get the debentures the learned Assessing Officer/Ld. TPO is justified in treating the transaction as a loan transaction and in determining the Arm’s Length Price (ALP) of interest at 9.88% as against the 11% paid by the assessee.

Per contra, the counsel submitted that the Ld. CIT(A) considered the contentions of the assessee in the light of the material available before him and reached a reasonable conclusion that as a matter of fact, there is risk involved in the transaction because the assessee has BBB - rating which itself indicates the risk involved in lending amounts to the assessee. Further the Ld. CIT(A) after considering the details of interest rates of corporate above Rs. 5 Crores with the BBB rating, SBI lending rates as on 01/04/2006 came to a reasonable conclusion that the best credit rating which is SB 1 is charged the spread of 2.5% on the MCLR rate on which the Ld. CIT(A) based his conclusion that the appellant is out of purview of adjustment. He submitted that an error had crept in, in the approach of the Ld. CIT(A), inasmuch as, though the Ld. CIT(A) granted relief to the assessee on merits, but the Ld. CIT(A) ignored the benchmarking approach adopted by the assessee and did not give any finding on that aspect. Ld. DR, however, submits that this issue taken up in the cross objections would be academic so long as the findings of the Ld. CIT(A) are not disturbed.

We have gone through the record in the light of the submissions made on either side. It is apparent from the assessment order that during the year the assessee entered into the international transactions relating to the issue of nonconvertible debentures and interest on nonconvertible debentures, adopted “any other method” and “Comparable Uncontrolled Price (CUP method)” as the most appropriate method for computation of the ALP of the international transactions of the issue of nonconvertible debentures and interest thereon. Ld. TPO, on examination of the TP document, found that the assessee relied upon the coupon rate benchmarking for bonds issued, but failed to furnish the details of such ITA (TP) Nos. 51 & 776/Hyd/2020 C.O.Nos. 12 & 13/Hyd/2021 process, comparables, specific details of the instruments, nature of agreements, terms and conditions mentioned in the agreements, credit ratings and moreover clubbed two different instruments to arrive at the ALP; and the assessee adopted CUP method as the most appropriate method and accepted comparables that are issued for a tenure of 5 years though the actual tenure of the NCDs issued is for 10 years and the assessee failed to demonstrate the comparability of instrument with reference to its specifications and in production of documentary evidence in support of the claim for verification. On this ground Ld. TPO rejected the CUP method as the most appropriate method, but it treated the transaction on par with loan and determined the ALP by applying LIBOR to benchmark the interest payment transaction and thereby fixed the same as LIBOR +200 basis points.

Ld. CIT(A) on reappraisal of the material before him found fault with the approach adopted by the learned Assessing Officer in as much as though the learned Assessing Officer/Ld. TPO calculated the risk free return of the ten year bound for the financial year 2014-15 of the Government of India at 8.28%, but failed to adopt the same in final calculation. Ld. CIT(A) took into consideration the fact that the credit rate of the assessee, being BBB itself shows and such classification provides that there is risk involved with regard to lending to the assessee. This classification of the assessee in credit rating missed the attention of the learned Assessing Officer when he observed that there was no risk involved in this transaction because it is not alone but a debenture and that too the transaction with the associated enterprise.

On a reading of the impugned order we find that the Ld. CIT(A) considered the details of interest rates of corporate above Rs. 5 Crores with BBB rating and other ratings of Union Bank of India, Marginal Cost of funds best Lending Rate (MCLR) effective on 01/04/2016 and basing these facts and figures, established that the best credit rating which is SB 1 was charged the spread of 2.5% on the MCLR rate coupled with the fact that the credit rating is the core issue and there is a premium of interest charged on account of the same.

There is no denial of the fact that the credit rating of the assessee falls in the category of BBB and as per the CARE, “credit rating of debt instruments – rating symbols and definition” the category BBB indicates the “instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations and such instruments carry moderate credit risk”. It is, therefore, not open for the learned Assessing Officer to say that absolutely there is no risk involved in this transaction firstly because it is a debenture not a loan and secondly because the transaction was with an AE.

Further according to the Ld.TPO, the transaction is a quasi-capital as the AE gets debentures and has to be treated as a loan. After reaching this conclusion, Ld.TPO considered the risk-free return ten year Govt. of India bond yields for the assessment year 2014-15 and calculated the same at 8.283667% but did not adopt the same for final calculation and on the other hand, Ld.TPO said that it would be prudent to benchmark the rate based on the base rate of State Bank of India and examined the prime base rate of the bank for the period between April, 2014 and March, 2015 to determine the prime lending rate of SBI at 9.88%.

On this aspect it is pertinent to note that Ld. CIT(A) on an examination of the details of interest rate of corporate above Rs. 5 Crores with BBA rating and other rating of Union Bank of India, found that the banks charge a premium of 2.9% (Sic 1.9%?) to the MCLR rate, if the internal credit rating of the borrower is best, apart from 0.5% is charged on account of the tenure of the debt which is 10% as in the case of the assessee. Ld. CIT(A) noted that this implies that for the credit rating of BBB, it would be a minimum of 3.4% above the MCLR rate of the bank. Ld. CIT(A) also as a matter of fact found that all the banks provide for a premium and in the case of the best rating with AAA the premium would be 2.4% over and above the MCLR rate and definitely it would be 1% more in case of the entity with BBB rating.

Further on a comparison of the figures relating to the available date of SBI for lending as on 01/04/2016 the Ld. CIT(A) drew the inference that the best credit rating which is SB 1 commands the spread of 2.5% on the MCLR. Basing on these facts and figures, Ld. CIT(A) rightly concluded that to consider only the base rate and to ignore the credit rating would be fatal in benchmarking of the transaction. After reaching this conclusion, Ld. CIT(A) opined that because the assessee paid the interest at 11% and the difference that would arise considering the interest rates of corporate above Rs. 5 Crores with BBB rating and also the MCLR rate on the basis of the available date of SBI for lending as on 01/04/2016 would be less than 1% keeping away the assessee from the purview of adjustment.

We do not see any perversity in the order of the Ld. CIT(A), and as a matter of fact, the approach of the Ld. CIT(A) is very pragmatic having regard to the lending rates prevailing in the market he benchmarked the ITA (TP) Nos. 51 & 776/Hyd/2020 C.O.Nos. 12 & 13/Hyd/2021 transaction at 11.13% to say that because of the smallness of difference, the assessee is out of purview of adjustment. We, therefore, uphold the findings of the Ld. CIT(A). On the face of the approach adopted by the Ld. CIT(A), the grounds of cross-objection are infructuous.

In the result, both the appeals of the Revenue and the cross-objections of assessee for both the years are dismissed.