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The Tax Publishers Recharacterizing Compulsorily Convertible Debentures (CCD) into Equity on Thin capitalization reasoning - Disallowing interest to AE in TP *Facts:* Assessee was a joint venture of Emirates Airline and a Mauritian entity. They had issued CCD to their AE and were paying interest on the same. They returned NIL income due to expenses being more than income besides claiming accumulated carry forward and set off of losses. Looking at the Balance sheet having only very meagre share capital (Thin capitalization) of the assessee the TPO disallowed the entire interest on CCD paid to AE taking its Arm's Length Price (ALP) as Nil. Plea of the TPO was that the assessee was claiming interest thereby cloaking Equity investment as CCD was claiming interest deduction in their returns. RBI/FEMA also treat CCD as part of Equity investment under FDI regulations and not under ECB regulations. The Interest rate was also benchmarked with ongoing market interest rates. DRP upheld the interest disallowance of the assessee. On higher appeal - Held in favour of the assessee that the interest was an allowable expense in the absence of thin capitalization regulations in India. *Applied :* Assessee's own case of earlier assessment years. Besix Kier Dabhol, SA v. DDIT (I Tax), Circle3(2), Mumbai, ITAT, Mumbai in their order in ITA No. 4249/Mum/07 dated 20-11-2010 *Ed. Note :* GAAR is applicable from AY 2018-19. Threshold is Rs. 3 Crores for GAAR trigger. Whether this case will fall into it in the next year or otherwise will need to be seen. Section 94B also is capable of disallowing excess interest payment but is a limited provision. The article titled - Issue expenses and interest on compulsorily convertible debentures published by Tax Publishers may also be referred to for further details. *Case:* CAE Flight Training (India) Pvt. Ltd. v. Dy. CIT 2023 TaxPub(DT) 1930 (Bag-Trib)

The Tax Publishers

Recharacterizing Compulsorily Convertible Debentures (CCD) into Equity on Thin capitalization reasoning - Disallowing interest to AE in TP

Facts:

Assessee was a joint venture of Emirates Airline and a Mauritian entity. They had issued CCD to their AE and were paying interest on the same. They returned NIL income due to expenses being more than income besides claiming accumulated carry forward and set off of losses. Looking at the Balance sheet having only very meagre share capital (Thin capitalization) of the assessee the TPO disallowed the entire interest on CCD paid to AE taking its Arm's Length Price (ALP) as Nil. Plea of the TPO was that the assessee was claiming interest thereby cloaking Equity investment as CCD was claiming interest deduction in their returns. RBI/FEMA also treat CCD as part of Equity investment under FDI regulations and not under ECB regulations. The Interest rate was also benchmarked with ongoing market interest rates. DRP upheld the interest disallowance of the assessee. On higher appeal -

Held in favour of the assessee that the interest was an allowable expense in the absence of thin capitalization regulations in India.

Applied :

Assessee's own case of earlier assessment years.

Besix Kier Dabhol, SA v. DDIT (I Tax), Circle3(2), Mumbai, ITAT, Mumbai in their order in ITA No. 4249/Mum/07 dated 20-11-2010

Ed. Note : GAAR is applicable from AY 2018-19. Threshold is Rs. 3 Crores for GAAR trigger. Whether this case will fall into it in the next year or otherwise will need to be seen. Section 94B also is capable of disallowing excess interest payment but is a limited provision.

The article titled - Issue expenses and interest on compulsorily convertible debentures published by Tax Publishers may also be referred to for further details.

Case: CAE Flight Training (India) Pvt. Ltd. v. Dy. CIT 2023 TaxPub(DT) 1930 (Bag-Trib)