Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER S. BALAKRISHNAN, Accountant Member :
This appeal is filed by the assessee against the final assessment order passed U/s. 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act] vide DIN No.
2 ITBA/AST/S/143(3)/2021-22/1040122408(1), dated 25/02/2022 for the AY 2017-18.
Brief facts of the case are that the assessee is engaged in the business of Solar Power generation filed its return of income on 30/11/2017 declaring NIL income and by claiming brought forward loss of Rs. 7,64,78,335/-. The return was summarily processed U/s. 143(1) of the Act. Subsequently, the case was selected for complete scrutiny and notice U/s. 143(2) dated 28/08/2018 was duly served to the assessee through email.
Subsequently, notice U/s. 142(1) was issued from time to time and served on the assessee. In response, the assessee submitted details through ITBA portal. Considering the international transaction entered into by the assessee, the Ld. AO made a reference to the Ld. Transfer Pricing Officer [TPO] by ACIT, Circle-1, Kakinada vide letter dated 16/09/2019 after obtaining approval of the Ld. Pr. CIT-2, Visakhapatnam. The Ld. TPO observed that the assessee entered into the following transactions with the Associated Enterprises [AEs] as per the 3CEB filed by the assessee:
International Amount Received / Amount paid / transactions Receivable payable (Amount in INR) (Amount in INR) INR Denominated _ Non-convertible 27,00,00,000 Debentures Interest payable on _ INR Denominated 69,23,836 Non-convertible Debentures The Ld. TPO observed that the assessee has issued Non- convertible Debentures (NCDs) amounting to Rs. 27 Crores to the AEs and has been benchmarked following the other method. The Ld. TPO also observed that with respect to the payment of interest on the issue of NCDs and was benchmarked following the CUP method. The assessee in order to identify similar uncontrolled transactions made search in the following Websites viz., BSE, NSDL, CDSL. After applying the relevant filters, the assessee arrived 20 comparable uncontrolled transactions wherein the coupon rate for NCDs ranging from 8% to 14.30% .
Since the number of comparables is more than six, the Arm’s Length Price [ALP] range as per the Indian TP Regulations is the beginning from the 35th percentile of the data set and ending on the 65th percentile of the data set. The assessee based on the data set found that the instruments at 35th percentile and 65th percentile of the data set are carrying interest rates of 10.68% and 14.25% . The assessee considered the interest rate of 13% paid by the assessee is within the arm’s length range which is below the 65th percentile. It was also observed by the Ld. TPO that as per the debenture subscription agreement the NCDs unlisted, unrated, unsecured, redeemable, taxable. As per the agreement the interest rate was fixed @ 13% per annum. The assessee received the subscription on 18/01/2017 and hence paid interest for the period of 72 days commencing from 18/1/2017 to 31/3/2017 @ 13% amounting to Rs. 69,23,836/- and deducted the TDS of Rs. 10,67,625/-. On examination of the TP documents for benchmarking the transaction, the Ld. TPO concurred with the CUP method as the most appropriate method under the given facts of the case. The Ld. TPO also observed that the assessee’s selection of final comparables is inappropriate and arbitrary. The Ld. TPO rejected the ALP determined by the assessee and then proceeded to determine the ALP in accordance with section 92C(1) and 92C(2) of the Act. The Ld. TPO selected the comparables based on the following criteria:
Step Description No. of companies 1 List of privately placed debt 10194 instruments 2 Debt instruments pertaining to 7456 PPNCD category
3 Instruments that were issued in the 1557 period FY 2016-17 4 Instruments having valid coupon 961 rate (after excluding zero coupon rate) 5 Instruments pertaining to energy 64 sector 6 Debt instruments as comparables 8 after FAR analysis and excluding Govt / PSU issued instruments The Ld. TPO then aggregated the list of comparables from BSE, NSDL and CDSL as follows:
S.No Company ISIN Number Coupon Source Rate 1. Cleantech Solar Energy INE850S08116 8% NSDL (India) Private Limited 2. Cleantech Solar Energy INE850S08108 8% NSDL (India) Private Limited 3. Cleantech Solar Energy INE850S08124 8% NSDL (India) Private Limited 4. Welspun Renewables Energy INE296N08022 8% NSDL Private Limited 5. Omc Power Private Limited INE240W08013 8% NSDL 6. Nabha Power Ltd 8.3% CDSL 7. Jsw Energy Limited INE121E07320 8.65% BSE 8. Jhajjar Power Limited INE165K07050 8.7% BSE 9. Jhajjar Power Limited INE165K07068 8.7% BSE 10. Jhajjar Power Limited INE165K07035 9.91% BSE 11. Jhajjar Power Limited INE165K07043 9.91% BSE 12 Marikal Solar Parks Private INE469T08022 10% NSDL Limited 13. Marikal Solar Parks Private INE469T08030 10% NSDL Limited 14 Reliance Power Limited 10.2% CDSL 15 Reliance Power Limited INE614G08061 10.2% BSE 16 Reliance Power Limited INE614G07022 10.6% BSE 17 Reliance Power Limited INE614G07030 10.6% BSE 18 KnBijapura Solar Energy INE137W08011 10.75% NSDL Private Limited 19 Kn Indi Vijayapura Solar INE138W08019 10.75% NSDL Energy Private Limited 20 KnMuddebihal Solar Energy INE139W08017 10.75% NSDL Private Limited
21 KnSindagi Solar Energy INE147W08010 10.75% NSDL Private Limited 22 Sei Sun Power Private INE596W08018 13.25% NSDL Limited 23 Amplus Power Solutions INE596W08040 13.25% NSDL Private Limited 24 Amplus Power Solutions INE154W08032 13.25% NSDL Private Limited 25 Vena Energy Solar India INE018V08072 14.30% NSDL Power Resources Private Limited
35th percentile 8.7% 65th percentile 10.6% Median 10% The Ld. TPO thereafter arrived at the 65th percentile or 10.60% and since the assessee was paying interest @ 13% , issued a show cause notice dated 4/3/2020 requesting the assessee to show cause as to why the interest rate of 10.60% should not be considered as ALP for calculating the interest payable on NCDs.
The assessee in its reply to show cause notice raised objection for the two comparables and the Ld. TPO considering the objections of the assessee, conducted a fresh search and concluded with the following 25 comparables:
S.No ISIN Number Company Name Interest Rate 1. INE203U07025 Essel Green Energy Private 6.00 Limited 2 INE774O07010 Atria Brindavan Power 6.00 Limited 3. INE240W08013 OMC Power Private Limited 8.00 4. INE296N08022 Walwhan Renewable Energy 8.00 Limited
INE850S08108 Cleantech Solar Energy 8.00 (India) Private Limited 6. INE850S08116 Cleantech Solar Energy 8.00 (India) Private Limited 7 INE850S08124 Cleantech Solar Energy 8.00 (India)Private Limited 8 INE607M07024 Tata Power Renewable 8.30 Energy Limited 9 INE607M08022 Tata Power Renewable 8.30 Energy Limited 10. INE211W08204 Amplus Solar Power Private 8.50 Limited 11 INE813H07085 Torrent Power Limited 8.95 12 INE813H07093 Torrent Power Limited 8.95 13 INE813H07101 Torrent Power Limited 8.95 14 INE473U07024 SEI Venus Private Limited 9.50 15 INE474U07030 SEI Diamond Private 9.50 Limited 16 INE614G08061 Reliance Power Limited 10.20 17 INE003S07155 Renew Power Private Limited 10.30 18 INE139S07017 Renew Solar Power Private 11.35 Limited 19 INE154W08040 Amplus Power Solutions 14.25 Private Limited 20 INE420T08207 Amplus Power Solutions 14.25 Private Limited 21 INE018V08072 Vena Energy Solar India 14.30 Power Resources Private Limited 22 INE154W08032 Amplus Power Solutions 14.30 Private Limited 23 INE154W08057 Amplus Power Solutions 14.30 Private Limited 24 INE154W08107 Amplus Power Solutions 14.30 Private Limited 25 INE420T08181 Amplus Power Solutions 14.30 Private Limited
Value Value Number of comparables 25 25 35th Percentile 9th Entry 8.30% Median 13th Entry 8.95% 65th Percentile 17th Entry 10.30%
8 The Ld. TPO thereafter arrived at a Median of 8.95% and issued a show cause notice dated 4.3.2020 requesting the assessee to show cause as to why the interest rate of 8.95% should not be considered as ALP for calculating interest payable on NCD.
Accordingly, the Ld. TPO proposed an adjustment by computing the difference between the interest adopted by the assessee @13% and the median computed @ 8.95% , thereby arriving at an addition of Rs. 21,67,041/- [Rs. 69,23,836 – Rs. 47,66,795]. The assessee did not respond to the show cause notice and therefore another notice was issued to the assessee on 16/12/2020 by providing an opportunity to file any objection on or before 22/12/2020. Since there was no response from the assessee, the Ld. TPO made an adjustment of Rs. 21,57,041/- u/s. 92CA(3) of the Act. Based on the order of the Ld. TPO, the Ld. Assessing Officer passed the draft assessment order vide DIN and Order No. ITBA/AST/F/144C/2021-22/1032686293(1), dated 26/04/2021.
Aggrieved by the Draft Assessment Order, the assessee raised its objections before the Ld. Dispute Resolution Panel [DRP]. The Ld. DRP considering the objections raised by the assessee observed that the NCDs are issued to the controlling entity of the assessee-company and hence whether it is unguaranteed or unsecured it will not make any difference and thereby dismissed
9 the objections raised by the assessee in this regard. Aggrieved by the order of the Ld. DRP, the assessee is in appeal before us with the following grounds of appeal:
“Payment to interest on NCDs
On the facts and circumstances and in law, the Ld. AO and the Ld. TPO under the directions of the Hon’ble DRP, erred in rejecting the appellant’s benchmarking analysis which demonstrated that payment of interest on NCDs was at arm’s length and conducting a fresh benchmarking exercise.
2. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO, under the directions of the Hon’ble DRP, erred in selecting comparable instances for determining arm’s length price for the payment of interest on NCDs, which were in-fact not comparable to the appellant. Once the incorrect comparable instances are rejected from the fresh benchmarking exercise conducted by the Ld. TPO, the appellant’s transaction is at arm’s length.
Mistake in computing total income and tax thereon
On the facts and circumstances of the case and in law, the Ld. AO erred in computing the appellant’s total taxable income and tax thereon.
Interest under 234B and 234D
4. On the facts and circumstances of the case and in law, the Ld. AO erred in computing the interest under section 234B and section 234D of the Act while calculating the appellant’s payable demand.
Initiation of penalty under section 270A
10 5. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings U/s. 270A of the Act.
The above grounds are independent and without prejudice to one another. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide this appeal according to law.”
3. The only issue arising out of the above grounds is with respect to benchmarking of the interest rate on NCDs, whereas the other issues are consequential. In this regard, the Ld. AR argued that the Non-Convertible Debentures were unsecured and hence higher rate of interest of 13% is applied considering the risk factors involved. The Ld. AR vehemently objected to the filters selected by the Ld. TPO and submitted that the Ld. TPO failed to apply filter, i.e all secured / unsecured while determining the list of comparables. The Ld. AR further submitted that the Ld. TPO failed to distinguish between the rate of interest applicable for secured and unsecured debt instruments. The Ld. AR further submitted that these objections were raised before the Ld. DRP and the Ld. DRP has failed to consider the same. Further, the Ld. AR also submitted that the Ld. TPO also erred in considering the comparable companies in 11 the Wind Sector whereas the assessee operates in Solar Power Sector. The Ld. AR placed reliance on the ratio laid down in the decision of the Coordinate Bench of ITAT, Bangalore in the case of Vena Energy KM Wind Power (P.) Ltd vs. DCIT reported in [2022] 141 taxmann.com 557 (Bangalore – Trib.) [07-07-2022] wherein it was held that “one of the key criteria for determining the interest rate is the risk involved. When the loan is unsecured, the risk in higher and there would be a higher rate of interest charged for the loan.” The Ld. AR also relied on the decision of ITO vs. VR Surat Pvt Ltd by coordinate Bench of Surat reported in 152 taxmann.com 679 (Surat Trib.). The Ld. AR therefore pleaded that benchmarking done by the assessee shall be accepted as its ALP.
Per contra, the Ld. DR submitted that the NCDs were issued to 100% holding companies and hence whether it is a secured or unsecured will not make any difference. The Ld. DR also further submitted that it shall be considered as secured NCDs only and therefore the Ld. TPO has rightly considered the same.
Countering the arguments of the Ld. DR, the Ld. AR submitted that the AEs should be considered as a third party and it is illogical to consider the relationship of the holding and 12 subsidiary companies for the purpose of secured and unsecured transactions.
We have heard the rival contentions and perused the material available on record, including the written submissions by the assessee. It is an admitted fact that there is no dispute between the Revenue and the assessee with respect to adoption of CUP Method as the most appropriate method. The dispute is only with respect to selection of comparables wherein the assessee’s contention was that the Ld. TPO has selected the comparable companies having secured debentures and / or not in the Solar Power Sector. It is also not disputed by the Revenue that the assessee has issued NCDs as unsecured and had agreed the rate of interest of 13% . The key criteria for determining the interest rate is the risk involved. When the loan given is unsecured, the risk is higher and there would be a higher rate of interest. In our considered view, the relationship of a holding / subsidiary is not the criteria for determining the interest with respect to secured / unsecured debt instruments. We find from the submissions of the Ld. AR that when the filters of secured or guaranteed are applied in the list of comparables, the rate of interest and the 65th percentile worked out to 14.25% which is over above the interest rate paid by the assessee. Further, when the companies in the Wind / Thermal Power Sectors are excluded, the 65th percentile worked to 14.25% which is over and above the interest rate paid by the assessee company. The Coordinate Bench of Surat in the case of ITO vs. V R Surat (P.) Ltd reported in [2023] 152 taxmann.com 679 (Surat. Trib.) held as follows:
“Where the assessee issued FCCDs which were unsecured in nature, company which issued debenture which was secured in nature could not be included in the list of comparables of the assessee company.”
Further, the Bangalore Tribunal in the case of Vena Energy KN Wind Power (P.) Ltd (supra) has held as follows:
“12……One of the key criteria for determining the interest rate is the risk involved. When the loan is unsecured the risk is higher and there would be a higher rate of interest charged for the loan. Applying this logic the assessee has justified the interest charged at 14.70% with that of the third party borrowings where the interest is charged between 11.05% to 12.50%. This contention of the assessee has merits as the assessee has taken loan in the form of non-convertible unsecured debentures which has a higher risk factor as it is unsecured. Even applying the contention of the of the TPO that debenture has repayment on maturity and loan has periodical repayment justifies higher rate of interest charged for debenture in the commercial sense.”
5. The Revenue has not brought any material / case / any contrary decision before us. Therefore, respectfully following the above decisions, we are of the considered view that the rate of interest charged by the assessee company is at Arm’s Length
14 basis and therefore the ground No. 1 & 2 raised by the assessee are allowed. The additional evidence filed by the assessee which was not pressed by the Ld. AR and therefore not considered while adjudicating the issues involved in the appeal. Grounds No. 3, 4 & 5 are consequential and therefore they need no separate adjudication.
In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 22nd December, 2023.