Watermarke Residency Limited Vs DCIT (ITAT Hyderabad)
In the present case, the TPO had benchmarked the transaction after treating the FCCDs as debt. This finding of TPO was based on Terms of issuance of FCCD and balance-sheets/ financials of the assessee as well as of it’s A.E, where both had mentioned FCCD as debt. We agree with the finding of lower authority that FCCD is a debt, as holder had a right to recover the debt and had a right to receive the interest on the debt from the payee. Further assessee during the hearing had also agreed that the FCCD are debt instrument till its conversion. Further assessee had capiatlised the interest, being prior period expenses, however it was admitted that the interest was allowable expenditure as per section 36 r/w 2(28A) of the Income Tax Act 1961. In view thereof, we find no fault in the finding returned by the TPO/ld.CIT(A).
In the present case, the issue involved is benchmarking of interest to be paid or payable of FCCDs before its conversion to equity. As mentioned elsewhere in the order, there would be no occasion for the assessee to repay the loan to it’s A.E (on account of the nature of FCCD), therefore, the currency in which loan was taken or to be paid would not be relevant for the purpose of determining the interest rate.
Even as per the assessee, the FCCDs are debt till it is converted into equity. Hence, there is no recharacterization by the Assessing Officer/TPO. Assuming the case of the assessee that FCCDs are equity then we must look into the substance over the form of the instrument, which can be ascertained by looking into its terms and conditions of allotment. As discussed hereinabove, the terms and conditions clearly show that the FCCDs are debt till its conversion. Yet another reason to above conclusion is that there is no recharacterization of the instrument by the Assessing Officer as there is no concept of paying the interest on the equity by the company to its holder under the Companies Act or under Income Tax Act or under the Accounting standards. The reliance of the assessee on the RBI policy for the non- convertible debenture is not relevant. In view of the above, we do not find any substance in the argument of the assessee that the Assessing Officer has recharacterized the nature of transaction.
Accordingly, we hold that FCCDs are debt, therefore, the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points, which is in consonance with the RBI guidelines issued for the purposes of FDI.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The captioned appeals filed by the assessee are against the separate orders passed by the learned Commissioner of Income Tax (Appeals), Hyderabad for the above-mentioned assessment years.
2. Here the assessee M/s. Watemarke Residency Limited, Hyderabad is a subsidiary company of M/s. Fairfield Development Limited, Hyderabad.
3. The assessee has raised the following grounds in ITA 740/Hyd/2019 for A.Y. 2013-14:
“1. The Order of CIT (A) is erroneous and contrary to the facts of the case and law on point.
2. The Learned CIT(A) has erred in sustaining the action of Ld. TPO/Assessing officer in proposing to compute the interest payable on fully convertible debentures of the assessee at by proposing a downward adjustment to the tune of Rs. 12,63,75,549/- to the international transactions, being expenditure incurred by the assessee in the nature of Interest on Fully Compulsory Convertible Debentures paid/payable by the assessee company to its associated enterprise.
3. The Learned CIT(A) has erred in sustaining the action of Ld. TPO/Assessing officer 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.
4. The Learned CIT(A) has erred in sustaining the action of Ld. TPO/Assessing officer in proposing to benchmark the interest rate on Fully Compulsory Convertible Debentures at LIBOR+200 basis points ignoring that the Fully Compulsory Convertible debentures were denominated in INR and interest for the same is appropriately benchmarked to SBI Prime lending Rate.”
4. Brief facts of the case :
The assessee has mentioned the following international transactions as per 3CEB / TP document :
