INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Interest paid to its AE on debentures - Re-characterization of transaction of debt into equity

Assessee-company claimed deduction of interest paid on debentures to its AE. TPO made upward adjustment of interest paid holding that debentures issued by assessee were, in essence, equity and no interest was payable on the same. Held: Both borrowing and raising of equity share capital are well-recognized modes of funding business requirements. Every businessman has to take several circumstances into consideration before deciding as to whether he needs to borrow or issue capital. There is no legal bar in accepting loans from shareholders/related concerns in the same way in which it is open to issue fresh shares to its existing lenders who are non-shareholders. TPO changed complexion of transaction from borrowing to equity by resorting to thin capitalization rule and the GAAR. Section 94B containing specific thin capitalization Rules and GAAR came into force with effect from 1-4-2018. The assessment year under consideration was 2013-14. Obviously, these provisions were not applicable and resultantly TPO could not have altered the form of the transaction. Debentures issued by the assessee to its AE were never converted into equity and stood redeemed as such. Accordingly, issue of determination of ALP of interest paid was remanded to TPO for adjudication afresh after analyzing relevant documents on record.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2013-14

SUBSCRIBE FOR FULL CONTENT