HCY Industrial Parks Private Limited Vs Assessment Unit (ITAT Mumbai)
Future Equity Does Not Mean Present Interest Is Nil!
Summary: Mumbai ITAT deleted a ₹3,40,27,280 transfer pricing adjustment for interest on compulsorily convertible debentures (CCDs) issued by HCY Industrial Parks Private Limited to its Singapore associated enterprise. The TPO had treated the instruments as equity and determined the arm’s length price (ALP) of their pre-conversion coupon at nil. The Tribunal held that a future obligation to convert principal into shares did not, without further analysis, eliminate the issuer’s current interest obligation. The authorities had misstated the term as fifteen rather than twenty years, incorrectly assumed a fixed share-conversion ratio, and identified no sufficiently analysed uncontrolled transaction bearing a nil return. It therefore directed deletion of the adjustment and set aside the alternative disallowance based on treating unconverted CCDs as already-issued equity. Importantly, the Tribunal did not affirm that the 14% coupon or claimed 10.50% effective rate was independently arm’s length. The Assessing Officer was directed to verify capitalisation, section 94B interest restrictions and carry-forward, and consequential statutory interest and fees. The challenge to initiation of section 270A penalty proceedings was premature. The appeal was partly allowed.
The Controversy
Can interest on compulsorily convertible debentures (CCDs) be assigned a nil arm’s length price merely because they ultimately convert into equity? The Mumbai Tribunal rejected that approach and directed deletion of a ₹3,40,27,280 adjustment. It distinguished a future share entitlement from an existing coupon obligation and did not certify the claimed interest rate as arm’s length.
The Funding Arrangement
The assessee operated industrial and logistics parks and issued 2,43,052 CCDs of ₹1,000 each, totalling ₹24,30,52,000, to ILP Core Ventures III Pte. Ltd., Singapore. A 14% annual coupon was subject to a moratorium to 31 December 2020. The assessee claimed a 10.50% effective rate, compared with 12.23% SBI PLR under the Other Method. The CCDs were to convert after twenty years or earlier, at conversion-date fair market value subject to a floor.
The Revenue’s Approach
The TPO classified the CCDs as equity and priced interest at nil; the DRP sustained the adjustment and alternatively proposed disallowance under sections 36(1)(iii) and 37(1). The final assessment added ₹3.40 crore while reversing ₹41,33,106 already disallowed under section 94B to avoid duplication. The Revenue characterised its decision as pricing under rule 10AB rather than impermissible recharacterisation.
Contractual Rights and Pricing
The Tribunal found neither actual allotment of shares nor current voting or dividend rights nor termination of the pre-conversion coupon. The TPO used a fifteen-year tenure instead of twenty; the DRP assumed a fixed share ratio although the agreement used future fair market value. These features required suitable comparables and adjustments rather than an unsupported nil price. Relying on the exceptional-transaction framework in EKL Appliances, the Tribunal concluded the requisite exceptional circumstances had not been established.
Relief and Consequential Directions
The Tribunal deleted the adjustment but expressly did not validate either the 14% stated coupon or claimed 10.50% effective rate. It set aside the alternative disallowance and ordered lawful verification of capitalisation and section 94B carry-forward. TDS and recipient taxation were not proof of ALP; consequential interest and fees were to be recomputed. Initiation of section 270A proceedings was premature. The appeal was partly allowed.
Author’s Comments
Characterisation, pricing and deductibility are distinct inquiries. Mandatory future conversion does not by itself nullify a present coupon, but it also does not establish that any selected coupon is arm’s length. The agreed currency, tenor, credit quality, conversion terms, moratorium and benchmarking must be documented. Section 94B is a statutory interest restriction, not a substitute for the transfer pricing method.
Cases Discussed
Ebixcash World Money Ltd. v. DCIT, [2026] 187 taxmann.com 346 (ITAT Mumbai) — Considered on the impropriety of pricing interest at nil merely by categorising CCDs as equity.
HDFC Bank Ltd. v. DCIT, (2025) 477 ITR 197 (Bom.) — Distinguished because the decision concerns convertible-debenture issue costs, not pricing a recurring coupon.
Sthal India Pvt. Ltd. v. DCIT, IT(TP)A No. 52/Chny/2024 — A comparative CCD interest case in which uncontrolled transaction evidence undermined nil ALP.
Hyderabad Infratech Pvt. Ltd. v. DCIT, ITA-TP No.1856/Hyd/2019 — Considered on the choice of domestic PLR rather than LIBOR for rupee instruments.
IFCI Ltd. v. Sutanu Sinha, [2023] 156 taxmann.com 681 (SC) — Distinguished: financing obligations and insolvency creditor status arose from a different contract.
CAE Flight Training (India) Pvt. Ltd. v. DCIT, IT(TP)A No.2060/Bang/2016 — Considered for pre-conversion obligations and interest treatment.
CIT v. EKL Appliances Ltd., (2012) 345 ITR 241 (Delhi) — Applied to exceptional circumstances justifying departure from an actual international transaction.
Embassy One Developers Pvt. Ltd. v. DCIT, ITA Nos.2239 and 2240/Bang/2018 — Separates pre-conversion interest rights from FEMA equity classification and independent pricing.
CIT v. Secure Meters Ltd., (2010) 321 ITR 611 (Raj.) — Considered and distinguished as an issue-expenditure decision.
CIT v. ITC Hotels Ltd., (2011) 334 ITR 109 (Karn.) — Considered concerning issue expenditure, not the arm’s length price of a recurring coupon.
Narendra Kumar Maheshwari v. Union of India, AIR 1989 SC 2138 — Considered on the mandatory-conversion principal repayment distinction.
Sahara India Real Estate Corporation Ltd. v. SEBI, [2012] 26 taxmann.com 176 (SC) — Distinguished as a securities-regulation decision.
Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board, 1993 Supp (4) SCC 136 — Distinguished from contractual interest on CCDs.
Ashima Syntex Ltd. v. ACIT, (2006) 100 ITD 247 (Ahd. SB) — Considered concerning expenditure on convertible instrument issuance.
Brooke Bond India Ltd. v. CIT, (1997) 225 ITR 798 (SC) — Considered concerning expenditure to raise share capital.
India Cements Ltd. v. CIT, (1966) 60 ITR 52 (SC) — Considered concerning expenses of raising loan funds.
IMS Health Analytics Services Pvt. Ltd. v. DCIT, ITA No.1549/Bang/2019 — Cited regarding pre-conversion CCD interest rights.
Religare Finvest Ltd., ITA No.4796/Del/2017 — Cited in the parties’ arguments concerning interest and CCD classification.
TE Connectivity Services India Pvt. Ltd., IT(TP)A No.191/Bang/2022 — Considered on issuer interest obligations before conversion.
Praxair India Pvt. Ltd., IT(TP)A No.200/Bang/2021 — Considered on rupee-denominated CCD pricing benchmarks.
WeWork India Management Pvt. Ltd., IT(TP)A No.819/Bang/2022 — Considered distinguishing transfer pricing from section 94B.
Indorama Ventures Oxides Ankleshwar Pvt. Ltd., ITA No.4023/Mum/2024 — Considered for identification of the specific priced transaction.
Vodafone International Holdings B.V. v. Union of India, (2012) 341 ITR 1 (SC) — Cited by assessee concerning legal form of genuine transactions.
S.A. Builders Ltd. v. CIT, (2007) 288 ITR 1 (SC) — Cited on commercial expediency.
Cotton Naturals, [2015] 55 taxmann.com 523 (Delhi) — Cited by assessee regarding commercial expediency.
Summit Developments Pvt. Ltd. v. DCIT, IT(TP)A No.794/Bang/2022 — Cited on CCD characterisation and pricing.
DCIT v. Mahindra Homes Pvt. Ltd., [2025] 178 taxmann.com 498 (ITAT Mumbai) — Revenue citation distinguished by assessee.
Ranbaxy Laboratories, Havells India, Faze Three and Reliance Natural Resources — Mentioned as authorities discussed in HDFC Bank; full case citations not printed in the present order.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT MUMBAI
