ITAT Deletes TP Adjustment as CCDs Remain Debt Until Conversion

Stahl India Pvt. Ltd. Vs DCIT (ITAT Chennai)

The assessee appealed against the final assessment order dated 19.07.2024 for Assessment Year 2020-21 passed under Sections 143(3), 144C(13), and 144B of the Income Tax Act. During the hearing, the assessee restricted its challenge to the transfer pricing adjustment relating to interest on Compulsorily Convertible Debentures (CCDs) and the disallowance of depreciation on goodwill arising from a slump sale.

The assessee had issued CCDs worth ₹146 crore to its Associated Enterprise carrying interest at 11% per annum. The Transfer Pricing Officer (TPO) treated the CCDs as equity, determined the arm’s length price of interest as nil, and made a transfer pricing adjustment of ₹9.58 crore, which was upheld by the Dispute Resolution Panel (DRP). The Tribunal held that the TPO exceeded his jurisdiction by recharacterising CCDs as equity. Relying on judicial precedents, it observed that CCDs remain debt instruments until conversion into equity and that interest payable during the pre-conversion period is deductible. It further held that the DRP’s reliance on the Supreme Court decision in Narendra Kumar Maheshwari and the RBI’s FDI policy and FEMA regulations was misplaced, as those provisions operated in different contexts. The Tribunal also noted that the assessee had benchmarked the 11% coupon rate under the Comparable Uncontrolled Price (CUP) method, showing it to be within the arm’s length range, while the TPO had rejected the analysis without conducting any independent benchmarking. The Tribunal, however, left it open to the Assessing Officer to examine the applicability of Section 94B, if required.