CCDs Cannot Be Treated As Equity For Disallowing Interest: ITAT Mumbai Deletes ₹76.45 Crore TP Addition

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a transfer pricing adjustment of ₹76.45 crore made on interest paid by EBIXCASH World Money Limited on compulsorily convertible debentures (CCDs).

The tribunal held that precedents consistently recognise CCDs as debt instruments and that interest paid on them cannot be disallowed by treating them as equity.

“We find that the grounds of appeal raised by assessee is in fact covered by a series of decisions of Tribunal and High Courts wherein it is consistently held that CCDs cannot be treated as equity and interest in respect of CCD cannot be disallowed by TPO,” the tribunal observed.

A coram comprising Judicial Member Pawan Singh and Accountant Member Makarand Vasant Mahadeokar passed the order while allowing the company's appeal for the assessment year 2022-23.

The assessee, which is engaged in the business of money exchange and foreign exchange services, had issued CCDs aggregating ₹849.49 crore to its associated enterprise, Ebix Asia Holding Inc., Mauritius.

The CCDs carried interest at 9% per annum. During the relevant year, the company paid interest of ₹76.45 crore on the instruments and reported the transaction in Form 3CEB.

The Transfer Pricing Officer (TPO) proposed to recharacterise the CCDs as equity. The TPO took the view that the instruments were compulsorily convertible after 10 years, carried no repayment obligation and resembled advance share capital rather than a loan.

The TPO accordingly determined the arm's length price of the interest transaction at nil. This resulted in a transfer pricing adjustment of ₹76.45 crore. The Dispute Resolution Panel (DRP) subsequently upheld the adjustment.

Before the Tribunal, the assessee contended that the CCDs were debt instruments carrying a contractual obligation to pay interest. It submitted that the debenture holders had no voting rights and no entitlement to dividends until conversion. The assessee further argued that the relationship between the parties remained that of borrower and lender.

The Tribunal noted that the TPO had disregarded the assessee's benchmarking analysis and proceeded on the basis that the CCDs were equity-like instruments.

Referring to earlier decisions, the tribunal observed that courts had consistently accepted that convertible debentures could not be treated as equity merely because they were capable of being converted into shares in the future.

“We further find that Hon'ble Bombay High Court followed the decision of Delhi High Court in CIT Vs Havells India (352 ITR 366 Delhi) wherein it was held that expenditure incurred on issue of debentures is to be allowed as revenue expenditure despite indications to effect that debentures are to be converted in near future into equity shares,” the tribunal observed.

Holding that the issue was covered by precedent, the tribunal directed the Assessing Officer and the TPO to delete the entire transfer pricing adjustment of ₹76.45 crore made on account of interest expenditure. The appeal was accordingly allowed.

For Appellant: Ved Jain & Nishay Kantoor, Advocates, Navneet Sighal & Ms Kanishka Garg CA's (virtually)

For Respondent: Miss Neena Jeph, CIT-DR