Saturday, February 18, 2017

TPO couldn't benchmark convertible debentures on basis of LIBOR when such debentures were issued in INR


a) Assessee-company issued Compulsorily Convertible Debentures (CCDs) convertible into one equity share for every debenture held. It had paid interest at the rate of 12 per cent on the CCDs.

b) Assessee benchmarked weighted average rate of Prime Lending Rate (PLR) as per the State Bank of India (SBI), which was at 12.26 per cent. Since the rate of interest paid by it was lesser than SBI PLR, assessee stated that its rate of interest paid was consistent with arm's length standard from the Indian TP Regulations perspective.

c) Transfer Pricing Officer (TPO) however, did not agree with assessee's contentions. He considered the CCDs as loan and benchmarked the interest rate at LIBOR plus 200 basis points. Accordingly, certain addition was made to assessee's ALP.

d) DRP upheld order of TPO. Aggrieved-assessee filed instant appeal before the Tribunal. Tribunal held in favour of assessee as under:

1) There was no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, TPO had wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature.

2) It was to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO had erred in considering LIBOR as benchmark rate which was in complete contradiction to the principles on the issue.

3) Thus, assessee's contentions, that the CCDs could not be categorised as a loan and LIBOR plus two hundred basis points benchmark couldn’t be accepted on the facts of the case, were accepted. [2017] 78 75 (Hyderabad - Trib.)

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