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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ NEW DLEHI
Before: SHRI R.S. SYAL & SHRI K. NARASIMHA CHARY
ORDER PER K. NARASIMHA CHARY, JM Challenging the assessment order dated 23.10.2017 pursuant to the directions dated 15.09.2017 issued by the learned Dispute Resolution Panel-I, Delhi, assessee preferred this appeal.
The only issue involved in this matter is relating to the benchmarking of the interest paid by the assessee to its AEs on the Fully and Compulsory Convertible Debentures (FCCDs) issued by it. Assessee is a part of 3C group of companies and was incorporated on 16.5.2007. They are engaged in the business of construction and development of real estate projects. For the purpose of their business they 2 have issued fully compulsorily convertible debentures (FCCDs) during the financial years 2008-09, 2009-10 and 2011-12 and interest at the rate of SBI PLI rate plus 300 basis points p.a. to its Associated Enterprises (AEs) as per the share subscription agreement dated 11.12.2008. During the year under consideration, assessee paid the interest in the following way: Interest Associated rate as Interest International transactions Enterprise charged amount (Rs) Twilzon Ltd. 16% p.a 21,03,28,320 Interest on fully and compulsorily convertible debentures (FCCDs) as issued during FY 2008-09 Twilzon Ltd. 14.75% 16,63,71,062 Interest on fully and compulsorily convertible debentures (FCCDs) p.a as issued during FY 2009-10 Twilzon Ltd. 17.75% 1,19,79,213 Interest on fully and compulsorily convertible debentures (FCCDs) p.a as issued during FY 2011-12 3. For the AY 2012-13 assessee filed their return of income on 27-11-2012 declaring a total income of Rs.62,20,62,060/- which they revised subsequently on 27.6.2013 declaring an income of Rs.62,11,39,113/-. However, there was a search and seizure operation u/s 132 of the Income-tax Act, 1961 (for short “the Act”) on 3C group of companies on 29.10.2013 in which the assessee was also covered. In compliance with the notice dated 11.11.2014 issued u/s 153A of the Act, the assessee filed their return declaring an income of Rs.62,11,39,110/-. Assessee contended that even though there was no incriminating material unearthed during the search operation, AO made a reference u/s 92CA(1) of the Act to the learned Transfer Pricing Officer (TPO).
3 4. Before the learned TPO, the assessee submitted that the rate of interest at 16%, 14.75% and 17.75% p.a. respectively was justified as agreed on FCCDs issued to its AEs and it is on arm’s length basis, as the same was fixed by the parties after considering the SBI PLR rate of 13% as prevalent at the time of its issue of FCCDs in FY 2008-09, at 11.75% for FCCDs issued in FY 2009-10 and at 14.75% for FCCDs issued in FY 2011-12 which was prevalent at such time and after adding 300 basis points each on such PLR as permitted under the Foreign Exchange Control Regulations.
Learned TPO, however, restricted the interest to 12.25% in respect of the FDRs issued during the FY 2008-08, 11.75% in respect of FCCDs issued during financial year 2009-10 and 14.75% in respect of FCCDs issued during the financial year 2011-12 and thereby disallowing the 300 basis points, and proposed an adjustment of Rs.8,51,58,538/-.
When objections were raised before the learned DRP, Ld. DRP felt that no interference was called for in TPO’s order, as such, by upholding the TPO’s order, ld. DRP refused to interfere with the rate of interest.
Assessee is, therefore, preferred this appeal before us stating that the authorities below ignored the fact that the interest paid by the assessee has been in accordance with the Security Holders Agreement entered into by the assessee and the AEs and the same was at arm’s length rate. Assessee further contends that the economic analysis undertaken by the assessee for justifying such rates of interest was correct and acceptable but the authorities below failed to appreciate the fact that FCCDs being hybrid instruments i.e. a mix of debt and equity, carried a higher risk and hence could not be compared with a plain vanilla loan or bond 4 instruments/arrangements. It is further contended that the interest rate by adopting PLR of SBI plus 300n basis points was in accordance with FEMA regulations.
Further contention of the assessee is that the specific provisions of the Act in accordance with which the transfer pricing adjustment could be made specify that only in case of variation of interest rate on FCCDs between the arm’s length price/rate as determined and the price/rate at which the international transaction has actually been undertaken exceeds 5% then only the interference is warranted. However, in the case of the assessee, there is no such variation exceeding 5% or 3%, as the case may be.
At the outset, learned AR submitted that insofar as the learned TPO and for that matter the learned DRP accepted the SB PLR rate in respect of the FYs 2009- 10 and 2010-11, there is no dispute on that aspect. However, he submitted that during the FY 2008-09, the FCCDs was issued by the assessee in four installments, namely, 8.12.2008, 16.12.2008, 22.12.2008 and 2.1.2009. As per the interest rates prescribed by SBI to benchmark premium lending rate, it is clear that for the period upto 1.1.2009, the rate of interest was at 13% whereas for the last transaction on 2.1.2009, it was 12.25%. He further submitted that the case of the assessee is squarely covered by the decision of a coordinate bench of this Tribunal for the Asstt. Year 2009-10 to 2011-12, to 7024/Del/2017 in assessee’s own case and by way of order dated 29.5.2018, the Tribunal accepted the contention of the assessee and deleted the addition made by the learned TPO.
5 10. Learned DR submitted that the assessee applied the rate of interest at 13% for all the four transactions during the Asstt. Year 2008-09 but insofar as the issuance of FCCDs on 2.1.2009 is concerned, they are covered by the interest rate of 12.25% whereas the earlier three transactions were covered by the interest rate of 13%. On this score, she justifies restrictions by the learned TPO at 12.25%.
At the outset, on consideration of the facts admitted by both the parties, we are of the considered opinion that the learned TPO made a factual mistake in taking the interest at SBI PLR at 12,.25% in respect of the FCCDs issued on 8.12.2008, 16.12.2008, 22.12.2008 and 2.1.2009. However, in respect of FCCDs issued on 2.1.2009, learned TPO had rightly taken the SBI PLR at 12.25%, as such, the application of the interest at 12.25% for the FCCDs issued on 8.12.2008, 16.12.2008, 22.12.2008 must be taken at 13%.
The next contention raised by the learned DR is that there is no justification for the assessee to include 300 points basis for calculating the interest is not justified since no risk factor is involved nor any loss of funds of administrative cost is proven in the absence of which learned TPO is justified in disallowing the same. On this aspect learned AR submits that even if we admit for a while this contention of the learned DR, still the fact remains that in respect of the AY 2008- 09 the variance permissible under law to determine the arm’s length price was 5%, as such, even for the last batch of FCCDs issued on 2.1.2009, the variance is only 3.75% whereas in respect of all other FCCDs either for the year 2008-09 or the years 2009-10 and 2011-12, such a variance is only 3%. He submits that this aspect is fairly covered by the decision of a coordinate bench in to 7024/Del/2017.