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Facts
The assessee company engaged in exhibition business filed a return declaring Nil income. The Transfer Pricing Officer (TPO) proposed an adjustment of Rs. 9,35,08,334/- on account of interest paid on Compulsorily Convertible Debentures (CCDs) issued to its associated enterprise, alleging it did not conform to arm's length price requirements.
Held
The Tribunal held that the interest paid on CCDs denominated in Indian currency should be benchmarked using domestic prime lending rates (PLR) and not LIBOR. The adjustment made by the AO/TPO was therefore considered unjustified.
Key Issues
Whether the interest paid on Indian Rupee denominated CCDs should be benchmarked using domestic PLR or international LIBOR rates for transfer pricing adjustment.
Sections Cited
143(3), 143(3A), 143(3B), 92, 92CA(1), 92CA(3), 92D, 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, H: NEW DELHI
Before: Ms. MADHUMITA ROY & Ms. RENU JAUHRI
ORDER PER RENU JAUHRI, AM:
This appeal by the assessee is directed against the order of the Assessing Officer dated 30.03.2021 passed u/s 143(3) r.w.s 143(3A) & 143(3B) of the Income
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. Tax Act, 1961 (hereinafter ‘the Act’) arising out of order of Dispute Resolution Panel directions dated 17.11.2020 pertaining to Assessment Year 2016-17.
2. The grounds of appeal
raised by the assessee reads as under: - “1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at Rs. 9,35,08,334/- as against the returned income of Rs. NIL.
2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ("DRP") Transfer Pricing Officer ("TPO") erred in making a transfer pricing adjustment of Rs. 9,35,08,334/- to the income of the Appellant by alleging that the interest paid by the Appellant in relation to the compulsorily convertible debenture ("CCD") issued to its non-resident associated enterprise ("AE") did not conform with the arm's length price requirements under Section 92 of the Act.
3. That on the facts and circumstances of the case and in law, the Ld. DRP/ Ld. TPO erred in disregarding the comprehensive benchmarking analysis carried out by the Appellant (which included extracting data of interest paid by 65 other Indian companies on CCDs issued by them and eliminating instruments which were not comparable to the CCDs issued by the Appellant) without giving any cogent reasons.
4. That on the facts and circumstances of the case and in law, the Ld. TPO erred in adopting SBI Base rate of 9.71% to benchmark the payment of interest by the Appellant to its non-resident AE without providing for addition/premium basis points for the risk borne by the Appellant.
5. That on the facts and circumstances of the case and in law, the Ld. DRP grossly erred in directing the TPO to use London Interbank Offered Rate ('LIBOR') based interest rate to benchmark the payment of interest by the Appellant to its non-resident AE by completely ignoring the fact that CCDs issued by the Appellant were INR denominated and by misinterpreting the judgment of the Hon'ble High Court in CIT v. Cotton Naturals (1) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) wherein it was held that for benchmarking the lending transactions the interest rate applicable to the currency in which the loan is repaid must be applied.
6. That on the facts and circumstances of the case and in law, the Ld. DRP/TPO have erred in not appreciating various judgments of this Hon'ble Tribunal wherein it was held that SBI Prime Lending Rate ("PLR") (and not LIBOR based interest rate) must be considered for benchmarking the payment of interest on rupee-denominated CCDs issued by an Indian company.
7. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, 2
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.”
Brief facts of the case are that the assessee company is engaged in the business of exhibition in the entertainment sector which consists of operating movie theatres, on screen advertisements and sale of food and beverages items in the cinema halls. Return for A.Y. 2016-17 was filed on 30.11.2016 declaring Nil income. Subsequently, the assessee revised its return on 31.10.2017 again declaring Nil income. The case was selected for scrutiny and a reference u/s 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO), for determining the Arm’s Length Price (ALP) u/s 92CA(3) of the Act of the transactions with its AEs. The TPO proposed adjustment on account of ALP in respect of following international transactions:
Sr. No. Nature of transaction Adjustment u/s 92CA(Rs.) 1. Interest on CCDs 9,35,08,334/- 2. Payment of Royalty 3,11,30,473/- Total adjustment u/s 92CA 12,46,38,807/- 3.1 Based on above, a draft order was issued by the Ld. AO against which the assessee filed objections before the Ld. DRP. In view of the directions of the Ld. DRP issued vide order dated 17.11.2020, the assessment was finalised after making the addition on account of ALP in respect of interest on CCDs amounting to Rs.
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. 9,35,08,334/-, and the assessment was completed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act, vide order dated 30.03.2021.
Aggrieved, the assessee preferred an appeal before the Tribunal.
Before us, at the outset, the Ld. AR has submitted that the issue now stands covered by the decision of the Hon’ble Special Bench in the case of Hyderabad Infratech (P.) Ltd. vs. Deputy Commissioner of Income-Tax, Circle-2 (2) [2025] 171 taxmann.com 385 (Hyderabad-Trib.).
4.2 Ld. AR has filed written submissions alongwith the paper book, wherein the factual background of the instant case has been submitted as under:
“1. …….
During AY 2016-17, the Appellant had entered into various international transactions with its Associated Enterprise ("AEs"). In compliance with Section 92D of the Income Tax Act, 1961 ("the Act") read with Rule 100 of the Income Tax Rules, 1962 ("the Rules"), the Appellant had duly maintained the prescribed Transfer Pricing ("TP") documentation containing detailed benchmarking analysis to establish the arm's length nature of its international transactions (refer page 715-716 of the paper book/internal page 5-6 of TP report for summary of international transaction) The TP report is at pages 711-795 of the paper book.
3. The Appellant had issued 1,22,50,000 Compulsorily Convertible Debentures ("CCDs") of the face value of INR 300 convertible into 1,22,50,000 equity shares of the face value of INR 10 each full paid-up for cash aggregating to the issue amount of INR 367,50,00,000/- through private placement to Thymelicus. (refer page 797 of the paperbook). The interest of INR 490,000,000 at the rate of 12% p.a. was paid to Thymelicus after grossing up the applicable withholding taxes in India (refer page 798 of the paperbook for the rate of interest). As is evident both the debentures and the interest paid on these debentures was INR denominated. 4 To determine the arm's length interest rate, the Appellant searched the website of National Securities Depositories Limited ("NSDL") (www.nsdl.co.m) to extract the data of interest rates on CCD issuances by Indian companies The search on NSDL resulted in a sample of 65 listings of corporate data flotation. The average interest
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. rate of the sample worked out to be 13.35%. Since the interest rate paid by the Appellant was less than the average rate of interest of comparable companies, i.c., 13.35%, the international transaction undertaken between the Appellant and Thymelicus was determined to be at arm's length (refer pages 752-753 of the paperbook/internal pages 42-43 of TP report for arm's length analysis and refer pages 783-786 of the paperbook/internal pages 73-76 of TP report for data of comparable companies). 5. ………… 6. The Ld. TPO rejected the benchmarking approach of the Appellant without providing any cogent reason and applied the SBI Base Rate of 9.71% for benchmarking of the interest rate without allowing for any additional basis points because the Ld. TPO was of the opinion that the CCDs were secured. (refer page 44 of the appeal set/internal page 12 of the TPO order) 7. The Ld. TPO placed reliance on safe harbour rules inserted in the rules vide notification no. 73/2013 dated September 18, 2013 to justify the adoption of SBI base rate for benchmarking of interest in case of intra-group loans (refer page 46-47 of appeal set/internal page 14-15 of TPO order)……”
4.3 Ld. AR has submitted that the issue regarding adoption of PLR vs. LIBOR is covered by the decision of the Hon’ble Special Bench in the case of Hyderabad Infratech (P) Ltd. (supra) wherein under similar facts, it has been held as under:
“ 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 currency 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: 5
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. Whether as regards TP adjustment (i) Yes, in favour of the made in respect of interest paid / assessees. payable on FCCDs / NCDs / other debentures, which are (ii) Interest paid / payable denominated in Indian currency on FCCDs /NCDs / other the benchmarking is to be made by debentures, which are applying PLR as against LIBOR?" denominated in Indian currency to be bench marked by applying PLR rates.
4.4. The Ld. AR further submitted that the Revenue’s reliance on safe harbour rules was erroneous as these are applicable to an assessee only if it applies for the same. Even otherwise, SBI base rate being 9.7%, further 300 basis points are required to be added as the amount in question (Rs. 367 crores) exceeds the threshold of Rs. 50 crores. As a result, the ALP would work out to 12.71% as against which the assessee has paid only 12% interest to its AE.
On the other hand, the Ld. DR has strongly relied upon the order of the DRP and has argued that the addition made by the Ld. AO deserves to be upheld.
We have heard the rival submissions and perused the material available on record. We find that the issue in question is squarely covered by the decision of the Hon’ble Special Bench in the case of Hyderabad Infratech (P.) Ltd. (supra). Respectfully following this decision, we hold that the interest paid on CCDs which are denominated in Indian currency have to be benchmarked by applying PLR rates. In view of the facts and circumstances discussed hereinbefore the addition 6
ITA No.-829/Del/2021 Cinepolis India Pvt. Ltd. /adjustment of Rs. 9,35,08,334/- on account of the ALP computed w.r.t. the interest on CCDs by the Ld. AO /TPO is unjustified and the same is hereby deleted.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 16th December, 2025.