Alfanar Energy Private Limited Vs DCIT (ITAT Delhi)
Alfanar Energy Pvt. Ltd., an Indian renewable energy company, had issued Compulsorily Convertible Debentures (CCDs) to its AEs and paid interest at 13%. The interest was not claimed as an expense but was capitalised into work-in-progress. The TPO re-characterised the CCDs as equity on the ground that conversion was at the discretion of parties and therefore treated the arm’s length price of interest as Nil. DRP upheld this view.
Before the ITAT, the assessee argued that capitalised interest does not affect profit & loss and hence no international transaction exists. The Tribunal rejected this, holding that capitalised interest will ultimately impact profits when WIP is reversed or assets are put to use. Therefore, interest on CCDs remains an international transaction u/s 92B.
The Tribunal then held that CCDs legally remain debt until actual conversion, and recharacterising them as equity was unjustified. However, it noted that the AO/TPO had not determined any proper arm’s length rate of interest and had simply fixed ALP at Nil. The issue was therefore remanded back to AO/TPO to benchmark the interest correctly. Further, only the excess interest (if any) over ALP is to be disallowed in the years when the capitalised WIP is amortised.
Thus, CCDs were held to be debt, not equity; interest is an international transaction; ALP must be determined afresh; and only proportionate disallowance (if any) will apply in future years. The appeal was partly allowed with directions.
FULL TEXT OF THE ORDER OF ITAT DELHI
