ORDER
D. Manmohan, Vice-President - This is an appeal against the order of the Assessing Officer u/s. 143(3) r.w.s. 144C of the Income Tax Act [Act] consequent to the directions of the Dispute Resolution Panel [DRP]-I, Bengaluru. The issue in this appeal is with reference to Transfer Pricing adjustments made by the Assessing Officer [AO]/Transfer Pricing Officer [TPO] on the Compulsorily Convertible Debentures (CCDs) issued in Indian currency.
2. During the year under consideration, the assessee has issued Rs. 4,62,00,000/- CCDs of Rs. 10/- each convertible into one equity share for every debenture held to Celcius Property BV of Rs. 10/-. Appellant had paid interest @ 12% on the CCDs amounting to Rs. 5,22,64,414/-. During the transfer pricing proceedings, the assessee benchmarked the weighted average rate of Prime Lending Rate (PLR) as per the State Bank of India (SBI), which was at 12.26%. Since the rate of interest paid by it is lesser than SBI PLR, Assessee has maintained that its rate of interest paid is consistent with arm's length standard from the Indian TP Regulations perspective. The Ld. TPO however, did not agree with assessee's contentions. He has considered the CCDs as loan and benchmarked the interest rate at LIBOR plus 200 basis points, thereby determining Arm's Length Price [ALP] at Rs. 1,29,10,335/- and made an adjustment of Rs. 3,93,54,079/-.
3. The AO made the above addition in the draft order and also issued a demand notice U/s. 156 raising a demand as well as initiating penalty proceedings.
4. Assessee preferred an appeal before the CIT(A) considering that as a final order and also preferred objections before the DRP. Since the DRP accepted the objections, the assessee withdrew the appeal before the Ld. CIT(A). However, the DRP rejected the assessee's contentions with reference to the TP adjustment made. On the objection that the assessment order passed U/s. 143(3) r.w.s. 92CA(3) dt. 19-03-2015 was invalid, the DRP however, considered that it is a mistake committed by the AO in issuing a notice U/s. 156 but since the order on the face of it clearly stated as draft assessment order, the DRP rejected the objections. It confirmed the TP adjustments made by the TPO rejecting the assessee's detailed contentions. Hence the present appeal. Assessee has raised the following grounds:
"1
The Learned Assessing Officer ('AO') erred in passing a final assessment order under section 143(3) r.w.s 92CA(3) of the Income-tax Act, 1961 ('Act') dated 19 March 2015 without passing a draft assessment order under section 144C of the Act and the Learned Dispute Resolution Panel ('DRP') erred in upholding the said order.
2.
On the facts and circumstances of the case and in law, the assessment order passed by the Ld. AO dated 19th March 2015 is contrary to law and is liable to be set aside.
Without prejudice to ground no. 1 and 2, the Appellant raises the following grounds of appeal:
3.
On facts and in the circumstances of the case and in contrary to law, the Learned transfer Pricing Officer ('TPO')/Ld. AO has erred in going beyond the scope to re-characterize the Compulsory Convertible Debentures ('CCD') as loan for benchmarking the international transaction of interest payments on CCD and the Hon'ble DRP has further erred in upholding the action of Ld. TPO/Ld. AO.
4.
On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO/Ld. AO erred and subsequently Hon'ble DRP further erred in upholding the action of Ld. TPO/Ld. AO by not appreciating the fact that CCDs are consumed in India and interest on CCDs should be benchmarked using State Bank of India ('SBI') Prime Lending Rate ('PLR') rather than London Inter-Bank Offered Rate ('LIBOR') rate.
5.
The Ld. TPO/Ld. AO erred and subsequently DRP further erred in upholding the action of Ld. TPO/Ld. AO in considering LIBOR plus 200 basis points i.e. 2.91 %, s an arm's length interest on CCD on ad hoc basis which is complete violation of transfer pricing provisions and against the principles of law.
6.
The Ld. TPO/Ld. AO erred on facts and in law in disregarding the independent alternative analysis carried out by the Appellant based on the data available from public database i.e., NSDL website; and subsequently DRP further erred in not providing any directions/findings by completely ignoring the independent analysis undertaken by the Appellant in this regard.
7.
The Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961".
5. Ld. Counsel made detailed submissions with reference to the order dt. 19-03-2015 and the final order passed by the AO dt. 27-01-2016 to submit that issuance of notice and initiation of penalty proceedings indicate that the order was a final order and, therefore the subsequent proceedings are bad in law. When it was pointed out that assessee withdrew the appeal before the CIT(A) and accepted the objections before the DRP, Ld. Counsel fairly admitted that assessee withdrew the appeal. However, Counsel relied upon the following case law in support of the stand that the AO was not justified in treating the draft assessment order as a final order and such a course of action is not a curable irregularity; therefore, the draft assessment order should be treated as bad in law:
i.
Vijay Television (P.) Ltd. v.
Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman 35/46 taxmann.com 100 (Mad.);
ii.
Lionbridge Technologies (P.) Ltd. v.
Dy. CIT [2015] 62 taxmann.com 48 (Mum. - Trib.);
iii.
Zuari Cement Ltd. v.
Asstt. CIT [WP No. 5557 of 2012]
Assessee submits that it is a legal issue and it can be taken at any stage even though the issue is not pressed before the CIT(A). At the same time, he urged that the issue arising out of Ground Nos. 3 to 6 is covered in favour of the assessee by catena of decisions and if a decision is taken in favour of the assessee, he may not be interested in pressing Ground Nos. 1 & 2. We therefore proceed to take up Ground Nos. 3 to 6.
Ground Nos. 3 to 6:
6. It was the submission of the Ld. Counsel that assessee has issued the CCDs to the AE which were wrongly categorised as loan by the TPO. Referring to the Ministry of Commerce and Industry, Govt. of India, FDI Policy Circular of 2014, it was submitted that CCDs are not loans and should be reckoned as 'capital instruments'. He further relied on the judgment of the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara India Real Estate Corpn. Ltd. v. SEBI [2012] 25 taxmann.com 18/115 SCL 478 to submit that Hon'ble Supreme Court has categorised the CCDs as 'hybrid instruments' and DRP was wrong in rejecting the principles laid down by the Hon'ble Supreme Court. It was further submitted that TPO has gone beyond the scope to re-characterise the CCD as loan ignoring the principles laid down by the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 and also the principles laid down by the Hon'ble High Court of Delhi in the case of Acit 3(1) Indore v. Mittal Appliances Ltd. . [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 . It was also submitted that TPO has no power to re-characterise the transaction as laid down by the Co-ordinate Bench at Ahmadabad in the case of Sun Pharmaceuticals Ind. Ltd. v. Asstt. CIT [IT Appeal Nos. 1589 & 1592/Ahd/2011, dated 10-5-2016]. It was further submitted that TPO also erred in benchmarking the transaction with reference to LIBOR plus when both TPO as well as DRP accepted that the loans were given in Indian Rupees. Accordingly, SBI's PLR rate should have been benchmarked rather than LIBOR plus. Ld. Counsel relied on the principles laid down by the Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax v. Tata Autocomp Systems Ltd. [2015] 374 ITR 516/230 Taxman 649/56 taxmann.com 206 to submit that rate of interest should be determined based on the country where the amount/loan is received/consumed. Ld. Counsel placed on record the comparison of facts between assessee's case and the above referred Tata Autocomp Systems Ltd. (supra). Referring to the decision of the Co-ordinate Bench, Mumbai in the case of India Debt Management (P.) Ltd. v. Dy. CIT [2016] 69 taxmann.com 125 , it was submitted that arm's length rate should be based on Indian Rupees in which denomination CCDs have been issued and were utilised.
7. Ld. DR, however, submitted that DRP has analysed the issues and has adopted the LIBOR plus two hundred basis points as an ALP and relied on the orders of TPO/DRP.
8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the principles laid down by the Co-ordinate Benches and the Hon'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corpn. Ltd. (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated:
i.
India Debt Management (P.) Ltd. (
supra);
ii.
Cotton Naturals (I) (P.) Ltd. (
supra);
iii.
Brahma Centre Development (P.) Ltd. v.
ITO [IT Appeal No. 373/Delhi/[2016].
By respectfully following the Co-ordinate Bench and Hon'ble High Court decisions, we agree with the assessee's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case.
9. Coming to the issue of adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, but also from the data from NSDL website in which average coupon rate ranged from 0.50% to 16.50% with an arithmetic mean of 12.50%. These rates were already before the TPO. Therefore, we are of the opinion that there is no need to restore the matter to the file of the AO for re-examination, when assessee has justified the issuance of CCDs at 12%. In view of that we are of the opinion that the rate at which the CCDs were given are within the range, therefore, no further addition can be considered under the TP provisions. In view of that, the addition so made is deleted and grounds of the assessee from 4 to 6 are accordingly considered allowed. Since the addition is deleted, we do not wish to consider Ground Nos. 1 & 2 as has already been indicated above.
10. Ground No. 7 is with reference to initiation of proceedings U/s. 271(1)(c). AO has only initiated the proceedings but has not finalised the penalty as such. Therefore, there is no need to adjudicate the same at this point of time. This ground is accordingly rejected.
11. In the result, appeal of the assessee is partly allowed.
sunil