ARKHA SOLAR POWER PRIVATE LIMITED,RAJAHMUNDARY vs. DCIT-1 , KAKINADA

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.

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

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

Mistake in computing total income and tax thereon

Interest under 234B and 234D

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.”

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.

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.”

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.

Pronounced in the open Court on 22nd December, 2023.

Sd/- Sd/- (दु�वू�आर.एलरे�डी) (एसबालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER Dated :22.12.2023 OKK - SPS

आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–Arkha 1. solar Power Private Limited, Elakolanu Village, Rangampeta, Rajahmundry, Andhra Pradesh - 533294. राज�व/The Revenue –Deputy Commissioner of Income Tax-1, 4th 2. Floor, Sri Deepthi Towers, Main Road, Kakinada, Andhra Pradesh- 533001. 3. The Principal Commissioner of Income Tax, आयकरआयु�त (अपील)/ The Commissioner of Income Tax 4.

15 �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ 5. DR,ITAT, Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam