Indorama Ventures Oxides Ankleshwar Private Limited Vs Assessment Unit (ITAT Mumbai)
The assessee appealed against the final assessment order passed under Sections 143(3), 144C(13), and 144B of the Income Tax Act for Assessment Year 2020-21. The appeal challenged transfer pricing adjustments relating to an alleged embedded call option in Compulsorily Convertible Debentures (CCDs), acquisition of a business undertaking, and disallowance of interest paid on CCDs.
The assessee, engaged in the manufacture of surfactants, acquired the surfactants business of Huntsman International (India) Private Limited (HIIPL) through a slump sale as part of a global acquisition. The purchase consideration was approximately ₹174.02 crore. To finance the acquisition, the assessee issued CCDs worth ₹80 crore to its associated enterprise, Indorama Netherlands B.V. (INBV), carrying interest at 9.7%, with compulsory conversion into equity after one year unless converted earlier by mutual option. The CCDs were issued under the Reserve Bank of India’s automatic route.
The Assessing Officer, following the directions of the Dispute Resolution Panel (DRP), made a transfer pricing adjustment of ₹38.88 crore by treating the CCD subscription agreement as involving the sale of an embedded call option to the associated enterprise. The Tribunal noted that the assessee had not entered into any contract for the sale of a call option. Under the CCD agreement, both the assessee and the CCD holder could opt for conversion before one year, and if neither exercised the option, conversion would occur compulsorily after one year. The Tribunal held that CCDs could not be equated with call options and that no option premium arose from the transaction. It further observed that the issuance of CCDs was a capital account transaction and that the Revenue had failed to establish any income element. Since transfer pricing provisions are not charging provisions and no taxable income arose from the alleged option premium, the adjustment was held to be unsustainable and was directed to be deleted.
