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Tax Publishers Assotech Moonshine Urban Developers (P) Ltd. v. DCIT [ITA No. 1749/DEL/2017, dt. 26-8-2020] : 2020 TaxPub(DT) 3389 (Del.-Trib.) Transfer pricing interest benchmarking on Fully and Compulsorily Convertible Debentures (FCCD) denominated in INR *Facts:* Assessee in the real estate business issued FCCD denominated in INR to its AE in Cyprus with the interest rate @ 17.75% (SBI PLR + 300 basis points). The TPO benchmarked it to LIBOR and made an addition of Rs. 1.86 crores which was upheld by the DRP. It was the case of the assessee that the FCCD denominated in INR were equity instruments under FDI regulations and should not be treated as debt instruments thus were outside the scope of Arms length price (ALP) benchmarking. Besides that the FCCD was denominated in INR and not in any foreign currency so the interest benchmarking if at all ought to have been done considering the domestic interest rates which being PLR + 300 basis points was in line with market realities. Held in favour of the assessee that the FCCD since being denominated in INR ought to be benchmarked only in Rupee bond market interest rates. Since their pricing was already at market rates no additions could be saddled on the assessee. *Editorial Note:* The case assumes importance for the fact there are innumerable cases where FCCD/FCCB issued in USD or in other foreign currencies have all been subject to TP additions using LIBOR rate benchmarking. LIBOR itself being a cartelized rate (Google search - alternate rate lending mechanism to LIBOR) has had its limitations which till now has not been argued so as to breach the departmental logic in sustaining these additions. With interest rates dropping also in India it is not a bad idea to issue Rupee denominated instruments with AE's as in this case thereby insulating the exchange risk besides getting away from the risk of TP additions. RBI's permission granted to corporates issue Masala bonds is a classic example to fit into this theory. The above also insulates exchange risks in the hands of the Indian entity as exchange risk is borne by the lender - within AE entities exchange risk would eventually be neutral except due to the price arbitrage across the individual country markets besides offshore markets having strong NDF (Non-Deliverable Forward) markets as well.

Tax Publishers

Assotech Moonshine Urban Developers (P) Ltd. v. DCIT [ITA No. 1749/DEL/2017, dt. 26-8-2020] : 2020 TaxPub(DT) 3389 (Del.-Trib.)

Transfer pricing interest benchmarking on Fully and Compulsorily Convertible Debentures (FCCD) denominated in INR

Facts:

Assessee in the real estate business issued FCCD denominated in INR to its AE in Cyprus with the interest rate @ 17.75% (SBI PLR + 300 basis points). The TPO benchmarked it to LIBOR and made an addition of Rs. 1.86 crores which was upheld by the DRP. It was the case of the assessee that the FCCD denominated in INR were equity instruments under FDI regulations and should not be treated as debt instruments thus were outside the scope of Arms length price (ALP) benchmarking. Besides that the FCCD was denominated in INR and not in any foreign currency so the interest benchmarking if at all ought to have been done considering the domestic interest rates which being PLR + 300 basis points was in line with market realities.

Held in favour of the assessee that the FCCD since being denominated in INR ought to be benchmarked only in Rupee bond market interest rates. Since their pricing was already at market rates no additions could be saddled on the assessee.

Editorial Note: The case assumes importance for the fact there are innumerable cases where FCCD/FCCB issued in USD or in other foreign currencies have all been subject to TP additions using LIBOR rate benchmarking. LIBOR itself being a cartelized rate (Google search - alternate rate lending mechanism to LIBOR) has had its limitations which till now has not been argued so as to breach the departmental logic in sustaining these additions. With interest rates dropping also in India it is not a bad idea to issue Rupee denominated instruments with AE's as in this case thereby insulating the exchange risk besides getting away from the risk of TP additions. RBI's permission granted to corporates issue Masala bonds is a classic example to fit into this theory. The above also insulates exchange risks in the hands of the Indian entity as exchange risk is borne by the lender - within AE entities exchange risk would eventually be neutral except due to the price arbitrage across the individual country markets besides offshore markets having strong NDF (Non-Deliverable Forward) markets as well.