Embassy One Developers (P) Ltd. v. Dy. CIT [ITA
Nos. 2239 & 2240/Bang/2018, dt. 26-11-2020] : 2020 TaxPub(DT) 4999
(Bang-Trib)
Allowability of interest expense on compulsorily
convertible debentures under TP provisions
Facts:
Assessee had claimed interest on compulsorily convertible
debentures (CCD) which were issued to its AE as an expenditure. This was
referred to the TPO who disallowed the same on a stand that under FDI
regulations CCD's are considered as part of equity and not as borrowing thus
there was no genuine necessity of the assessee to pay the interest to its AE in
Cyprus. Commissioner (Appeals) upheld the views of the TPO. On higher appeal --
Held in favour of the assessee that they were entitled to
the deduction of interest on CCD. What is applicable for FDI regulations under
FEMA cannot be imposed in income tax law. There were no thin capitalization
provisions existing for the TPO to recharacterize the said debt transaction as
part of equity. Such recharacterization of the debt transaction into equity was
not permitted by the TPO.
Applied:
CAE Flight Training (India) Pvt. Ltd., vide Order, dated 25-7-2019 : 2019 TaxPub(DT) 5358 (Bang-Trib)
Besix Kier Dbhol, SA v. DDIT (2011) 131 ITD 299
(Mum-Trib) : 2010 TaxPub(DT) 2322 (Mum-Trib) upheld
by Bombay High Court 2013 TaxPub(DT) 1472 (Bom-HC) : (2013) 51 (I) ITCL 512
(Bom-HC)
Reference be also made to -- IMS Health Analytics
Services Private Ltd. [formerly IMS Health India Pvt. Ltd. since merged] v.
DCIT, ITA No. 1549/Bang/2019, Assessment Year 2015-16, rendered on 19-6-2020 :
2020 TaxPub(DT) 2607 (Bang-Trib)
Editorial Note: Even
today under section 94B disallows excess interest paid under thin
capitalization regulations, there is no provision other than GAAR which can
recharacterize the said debt transaction of CCD into an equity/quasi equity.
Article on Issue Expenses and Interest
on Compulsorily Convertible Debentures has comprehensively covered this
topic.