Ad Hoc Tenure Filters for Transfer Pricing and Section 94B

Ad Hoc Tenure Filters for Transfer Pricing and Section 94B Recomputation Are Unjustified

Issue

Whether the Transfer Pricing Officer (TPO) can introduce an ad hoc minimum tenure filter of 10 years into an external CUP study without economic justification to alter the arm’s-length interest rate on Non-Convertible Debentures (NCDs).
Whether additional disallowance under Section 94B should be computed strictly by considering interest paid to Associated Enterprises (AEs) under Section 94B(1), avoiding double disallowance with transfer pricing adjustments.

Facts

NCD Issuance & Benchmark: The assessee issued 30-year secured NCDs worth $\text{Rs. } 128 \text{ crore}$ to its AE and paid interest at $14.299\%$ , totaling $\text{Rs. } 18.30 \text{ crore}$ for AY 2022-23. Using the external CUP method with 161 comparables (arm’s-length range $10\%$ to $14.50\%$ ), the assessee found its rate to be at arm’s length.
TPO’s TP Adjustment: The TPO arbitrarily applied a minimum 10-year tenure filter to the comparable set, recalculated the arm’s-length rate, rejected the alternate benchmark (SBI PLR + 300 bps), and made a TP adjustment of $\text{Rs. } 6.36 \text{ crore}$ .
Section 94B Disallowance: The assessee had made a suo motu disallowance of $\text{Rs. } 13.03 \text{ crore}$ under Section 94B. The AO made an additional disallowance of $\text{Rs. } 5.28 \text{ crore}$ under Section 94B in addition to the TP adjustment on the same interest payment.

Decision

Rejection of Ad Hoc Filter: The Tribunal held that the TPO cannot introduce a 10-year tenure threshold on an ad hoc basis without showing economic necessity or proving a direct, uniform relationship between tenure and coupon rates.
Alternate Benchmark: The TPO erred in ignoring the assessee’s alternate benchmark (SBI PLR + 300 bps), making the TP adjustment unsustainable on the TPO’s basis.
Remand for Section 94B Recomputation: The additional disallowance under Section 94B must consider only AE interest under Section 94B(1). The AO was directed to recompute the Section 94B disallowance after adjusting for the Transfer Pricing findings to prevent double disallowance.

Key Takeaways

No Arbitrary Filters in Transfer Pricing: TPOs cannot apply arbitrary tenure or size filters in CUP benchmarking without economic justification backed by reliable data.
Scope of Section 94B Disallowance: Disallowance under Section 94B(2) must be restricted strictly to AE-related debt specified under Section 94B(1).
Prevention of Double Jeopardy: Tax authorities cannot make overlapping additions by applying both transfer pricing adjustments and Section 94B disallowances on the same underlying interest expense without reconciliation.

IN THE ITAT ITAT MUMBAI BENCH “K”

Loma Co-Developers 1 (P.) Ltd.

Dy. CIT

ANIKESH BANERJEE, Judicial Member
and Ms. Ratna Dasgupta, Accountant Member

IT Appeal No. 8952 (MUM)OF 2025
[Assessment Year: 2022-23]

SEPTEMBER 9, 2026

T Suryanarayana, Sr. Adv. and Jeet Kumar, Adv. for the Appellant. Ms. Ajay Uke, Sr. AR for the Respondent.

ORDER

Anikesh Banerjee, Judicial Member.-The instant appeal of the assessee filed against the order of the Assessment Unit, Income Tax Department [for brevity “Ld. AO”], order passed under Section 143(3) r.w.s. 144C (13) r.w.s. 144B of the Income Tax Act, 1961 (for brevity ‘the Act’), date of order 15.10.2025. The impugned order originated by pursuing to the order of the Ld. Commissioner of Income Tax (DRP-1) Mumbai-2 (for brevity ‘Ld. DRP’), order passed under Section 144C(5)of the Act, date of order 30.09.2025.

2. The assessee has raised the following grounds of appeal:

“1. General grounds

1.1 On the facts and circumstances of the case and in contrary to law, the Deputy/Assistant Commissioner of Income Tax, Transfer Pricing Officer – 3(3)(1), Mumbai (hereinafter referred to as ‘Ld. TPO’) and the Assessment Unit, National Faceless Assessment Centre, Income tax department (hereinafter referred to as ‘Ld. AO’) pursuant to the directions issued by the learned Dispute Resolution Panel (‘Ld. Panel’/ ‘DRP’) erred in making a transfer pricing adjustment of INR 6,36,07,108 and corporate tax adjustment of INR 5,27,56,728 to the Assessee’s income and thereby determining a total assessed loss of INR 4,44,52,808.

1.2 The Ld. AO has passed an order without taking cognizance of the facts, information and documents submitted during the course of scrutiny assessment and DRP proceedings for the subject AY.

1.3 The Ld. AO has erred in facts and in law by upholding the adjustment as made in the draft assessment order passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act.

2. Transfer pricing grounds

2.1 The Ld. AO/Ld. TPO/Ld. Panel has erred both in law and in facts in rejecting the benchmarking analysis conducted by the Assessee undertaken in accordance with the provisions of the Act read the Rules in the TP study for the purpose of determination of the ALP payment of interest on Non-Convertible Debentures (‘NCDs’) without providing any cogent reasons and applying an ad-hoc tenure filter to select the comparables.

2.2 The Ld. AO/Ld. TPO/Ld. Panel has erred in not considering the fact that the benchmarking analysis undertaken with regard to the international transaction of interest on NCDs has been considered to be at arm’s length during AY 2021-22 by Ld. TPO itself and the facts relating to international transaction have remained similar in the current year.

2.3 The Ld. AO/Ld. TPO/Ld. Panel have erred in disregarding the Assessee’s approach of benchmarking using internal comparable uncontrolled (‘CUP’) method.

2.4 The Ld. AO/Ld. TPO/Ld. Panel have erred in computing arm’s length range in the TP order basis comparables engaged in creation of airports, metro and companies engaged in fraudulent activities and not considering only the comparables which have a tenor of 15 years or more which is more aligned to the Assessee’s tenor.

2.5 Without prejudice to the above objections, the Ld. AO/Ld. TPO/Ld. Panel erred in not considering SBI PLR plus spread during the year of issue as an alternate benchmark in relation to the international transaction of interest on NCD.

2.6 The Ld. AO/Ld. TPO/Ld. Panel have erred in fact and law by determining a TP adjustment despite the subscriber of the instrument not being a related party/Associated Enterprises (‘AE’) of the Assessee at the time the terms and conditions were agreed, merely on the contention that the parties were ‘closely related’ and were ‘subsequently classified as AEs’.

2.7 On the facts and circumstances of the case and in contrary to law, the Ld. AO, Ld. TPO and the Ld. Panel erred in making adverse transfer pricing adjustment and causing double taxation without appreciating the fact that the Assessee has already withheld taxes on the said transaction while making payment to AE at the rates applicable and the same has been duly deposited with the Government.

2.8 Without prejudice, the Ld. AO/Ld. TPO/Ld. Panel erred in making a TP adjustment on Interest on NCDs where the Assessee has already disallowed such interest u/s 94B of the Act in its return of income (‘ROI’) leading to double disallowance of the same interest expenditure.

3. Corporate tax grounds – Disallowance under Section 94B of the Act

3.1 The Ld. AO has erred in law by computing the additional disallowance amounting to INR 5,27,56,728 under section 94B of the Act, based on the recommendation of the TPO in the TP order dated January 20, 2025 passed under section 92CA(3) of the Act, in a manner and extent that is not in accordance with the provisions of the law.

3.2 The Ld. AO has erred in law in considering all interest expenses (including other finance costs and interest paid/payable to unrelated parties i.e. other than AEs) in the computation of ‘total interest’ under sub-section (2) of section 94B of the Act; as against only interest paid/payable to non-resident AEs.

3.3 The Ld. AO has erred in law in failing to appreciate that the intent of the legislature in introduction of Section 94B of the Act was to restrict only such interest expense of an Indian entity as is payable to its non-resident AEs, to a maximum of 30 percent of its Earnings Before Interest, Taxes, Depreciation and Amortisation (‘EBITDA’).”

“3.4 The Ld. AO has erred in law in disregarding Assessee’s submission that the computation of ‘excess interest’ under the provisions of sub-section (2) of section 94B of the Act cannot extend beyond the meaning of interest as referred to in sub-section (1) of section 94B, which is, non-resident AE interest only.

3.5 The Ld. AO has erred in law by disregarding the reliance placed by the Assessee on the memorandum explaining the provisions of the Finance Act 2017, Circular No. 2/2018 [F.No.370142/15/2017-TPL] dated 15 February 2018 issued by the CBDT and the implementation guide on tax audit issued by Institute of Chartered Accountants of India, in support of its computation mechanism.

3.6 The Ld. AO has erred in fact and law in not considering that pursuant to the Transfer Pricing adjustment w.r.t interest payable to non-resident AE of the Assessee amounting to INR 6,36,07,108; the Assessee shall in-turn be eligible for a relief of INR 1,08,50,380 under Section 94B of the Act on the disallowance considered in the ROI filed for subject A Y.

3.7 Without prejudice to the above, the Ld. AO has erred in not taking cognizance of the fact that finance expenses relating to ‘lease liability’, ‘interest to MSME enterprises’, ‘interest on late payment of statutory dues’ and ‘Others’ (relating to Ind AS adjustment) as captured in the financial statements of the Assessee of the subject AY, ought not be subjected to disallowance under Section 94B of the Act, given that the said amounts were never claimed as a deduction while arriving at taxable income under the head ‘Profits and Gains from Business or Profession’.

4. Other Grounds

4.1 The Ld. AO has erred in facts by inadvertently considering the total additions amounting to INR 11,63,63,836 made in the Assessment order under the head ‘Income from Other Sources’ as against the head ‘Income from Business or Profession’ in the computation sheet issued along with the subject Assessment order.

5. Initiation of penalty proceedings

5.1 On the facts of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act.

5.2 Without prejudice, the penalty proceedings cannot be initiated where appropriate grounds or the specific clause under which such proceedings are to be initiated are not mentioned, rendering the initiation invalid in law. “

3. The assessee is a private limited company incorporated in the year 2017 and is engaged in the business of development of Special Economic Zones and is a co-developer of an existing SEZ under construction. The assessee is part of the CapitaLand Group. For the assessment year under consideration, the assessee filed its return of income on 30.11.2022 declaring total income at Nil after showing current-year business loss of Rs.16,08,16,644/-. The case was selected for scrutiny. During FYs 2018-19 and 2019-20, the assessee had issued 12,800 NCDs having face value of Rs.1,00,000/- each in five tranches, aggregating to Rs.128 crore, to Ascendas Property Fund (FDI) Pte. Ltd. (“APFF”). The NCDs had the tenure of 30 years. During FY 2021-22 relevant to AY 202223, the assessee paid interest of Rs.18,30,38,447/- on the NCDs at a coupon rate of 14.299% and benchmarked the transaction under CUP method.

4. The Ld. TPO, vide order dated 20.01.2025 under section 92CA(3), determined a TP adjustment of Rs.6,36,07,108/- in respect of payment of interest on NCDs. The TPO also computed the alleged excess interest under section 94B and recommended examination thereof by the Ld. AO. The Ld. AO consequently made an additional disallowance of Rs.5,27,56,728/- under section 94B, apart from the assessee’s suo motu disallowance of Rs.13,02,81,719/-. The objections filed before the Ld. DRP were rejected and the final assessment order dated 15.10.2025 incorporated the aforesaid adjustments.

Ground No. 1 & 2- TP Adjustment

5. The Ld. AR filed a paper book in three volumes along with a written note. The Ld. AR challenged the TP adjustment principally on the ground that the benchmarking analysis adopted by the assessee was rejected by applying an ad hoc tenure filter of ten years. The assessee had identified 161 comparables; the 35th percentile was 10%, the 65th percentile 14.50% and the median 12%. Since the actual coupon rate of 14.299% fell within the range, the assessee treated the transaction as being at arm’s length. The Ld. AR contended that the TPO did not dispute the external CUP method itself but proceeded to make the adjustment by introducing the ten-year tenure filter.

6. The Ld. AR submitted that tenure, by itself, was not determinative of the rate of interest. It was pointed out from the set of 161 comparables that instruments having different tenures carried identical interest rates, whereas instruments having identical tenures carried materially different interest rates. Alternatively, even if tenure were considered relevant, the ten-year filter adopted by the TPO had no cogent basis when the assessee’s NCDs had a tenure of 30 years. The assessee contended that comparables having tenure of more than 15 years were substantially closer to the economic characteristics of its NCDs. Reliance was placed onCIT v. Cotton Naturals (I) (P.) Ltd. (Delhi) for the proposition recorded in the written submission that arm’s-length interest is required to be determined with reference to the market rate applicable to the transaction.

7. Without prejudice, the Ld. AR submitted that SBI PLR plus 300 basis points constituted an appropriate alternate benchmark. It was submitted that in AY 2021-22, the TPO had accepted the assessee’s benchmarking of interest on NCDs at SBI PLR plus 300 bps. The SBI PLR prevailing when the NCD issue was approved was stated to be 13.45%; after adding 300 bps, the benchmark worked out to 16.45%, whereas the actual coupon rate was only 14.299%. Reliance was also placed uponAssotech Moonshine Urban Developers (P.) Ltd. v. Dy. CIT [2021] 186 ITD 600 (Delhi – Trib.),

Granite Gate Properties (P.) Ltd. v. Asstt. CIT (Delhi – Trib.)andHacienda Projects (P.) Ltd. v. Asstt. CIT (Delhi – Trib.).

The Ld. AR further submitted that the assessee had already made a suo motu disallowance of Rs.13,02,81,719/- under section 94B and, therefore, to the extent the TP adjustment related to the very same interest expenditure, it would result in duplication of the disallowance.

8. The Ld. DR relied upon the orders of the revenue authorities and specifically invited our attention to paragraphs 5.1.3.1 and 5.1.3.2 of the TPO’s order, which are reproduced below:

“5.1.3.1 Reply of the Assessee:

The assessee submitted its reply in response to show cause notice vide letter dated 17/01/2025. The assessee has submitted following key points in response to show cause notice:

(a) The Assessee requests that the international transaction of interest on Non-Convertible Debentures (NCDs) be considered at arm’s length for AY 2022-23, as it was for AY 2021-22, given that the facts and circumstances are identical.

(b) The Assessee proposes using the SBI Prime Lending Rate (PLR) plus a 300 basis point spread as an alternate benchmark for determining arm’s length interest on NCDs, referencing RBI guidelines and judicial precedents. Various cases support this methodology, including decisions from the Delhi ITAT, which upheld the application of SBI PLR 300 basis points for INR-denominated debt instruments. The Assessee cites the fact that the interest rate of 14.299% paid on NCDs is below the relevant benchmark of 16.45% (SBI PLR of 13.45% plus 300 basis points).

(c) The Assessee explains that it did not apply a tenure filter because no comparable instruments with a 30-year tenure were available in public databases.

(d) The Assessee has claimed that the 10 year tenure filter applied by the TPO is adhoc and has resulted in only few comparable.

(e) The Assessee argues that the issue of NCDs to an associated enterprise (AE) was an internal matter, and since the NCDs were not credit-rated, applying a credit rating filter is inappropriate.

(f) The Assessee submitted that the NCDs were issued to Ascendas Property Fund (APFF) during FY 2018-19 and FY 2019-20, and the terms were negotiated independently. APFF was not a related party at the time of issuance, and the relationship under transfer pricing rules (Section 92A) arose only later. Hence, the transaction should not be treated as a controlled transaction, and the effective interest rate of 14.299% meets the arm’s length standard.

5.1.3.2 Analysis of the Assessee’s Reply

The reply submitted by the assessee has been thoroughly reviewed and discussed as follows:

(i) The Assessee’s argument that no adjustment should be made as the facts of the current year are identical to those of AY 2021-22, where the international transaction of interest on NCDs was determined to be at arm’s length, is not valid. The principle of Res Judicata is not applicable to the TP proceedings. Even in the said TP order, it was clearly stated that the findings and discussions made in this order are applicable only in respect of reference received for A.Y. 2021-22 and not for subsequent assessment years.

(ii) While the Assessee proposes an alternative benchmark of SBI PLR + 300 basis points (bps) based on prior jurisprudence, this approach is flawed. The Assessee’s reliance on SBI PLR + 300 bps is primarily based on past rulings where the applicability of such a spread was discussed in the context of specific types of debt instruments, like FCCDs or bonds. The NCDs in this case are different in terms of their features, including tenure and risk profile. These NCDs are further secured. A blanket reliance on the SBI PLR + 300 bps methodology is inappropriate given the unique nature of the NCDs under consideration here. Further, better comparable are available which are more alike to the NCDs compared to the SBI PLR. SBI PLR would have been useful for a general loan. In the case of assessee secured 30 years NCDs are there which cannot be compared to basic SBI PLR. “

9. We have heard the rival submissions and perused the material available on record. Ground No.1 is general in nature and does not require separate adjudication.

Ground No.2 relates to the transfer-pricing adjustment of Rs.6,36,07,108/- on account of interest paid on NCDs. The material placed before us indicates that the assessee benchmarked the transaction under the CUP method by selecting 161 comparables, with the arm’s-length range stated at 10% to 14.50%, whereas the actual interest paid by the assessee was at 14.299%. The principal modification made by the Ld. TPO was the introduction of a minimum ten-year tenure filter. We find force in the contention that the tenure filter applied by the Ld. TPO cannot be introduced on an ad hoc basis without demonstrating, on the basis of the economic characteristics of the transaction and reliable comparable data, why ten years constitutes the appropriate threshold. The assessee’s material also demonstrates that the relationship between tenure and coupon rate is not uniform: instruments of different tenures were stated to carry the same rate, while instruments having the same tenure carried materially different rates.

10. Further, the alternate benchmark furnished by the assessee deserves consideration. On the figures placed on record, SBI PLR of 13.45% plus 300 bps gives a rate of 16.45%, which exceeds the actual coupon rate of 14.299%. The assessee has also demonstrated that SBI PLR plus 300 bps had been accepted in the immediately preceding assessment year in relation to its NCD transaction. Ld. AR contended that the Ld. ACIT TP 3(1)(1), Mumbai, had duly considered the similar issue in AY 21-22 in its order dated 08.10.2023, which is annexed as APB Volume II, page 488 to 490, where the interest on NCDs issued to AE amounted to Rs. 1,65,20,217/- was duly considered and accepted.

Considering the totality of the facts and the benchmarking material placed on record, the impugned transfer-pricing adjustment cannot be sustained on the basis adopted by the Ld. TPO. Accordingly, Ground No.2 of the assessee is allowed and the TP adjustment of Rs.6,36,07,108/- is deleted.

Ground No.3 — Section 94B

11. Ground No.3 relates to the additional disallowance of Rs.5,27,56,728/-made under section 94B of the Act. The principal contention of the Ld. AR is that while determining the “excess interest” under section 94B(2), the Ld. AO has taken into account interest/finance costs beyond the interest falling within section 94B(1). The assessee contends that section 94B(2) begins with the expression “for the purposes of sub-section (1)” and, therefore, the computation under sub-section (2) has to be read in the context of the class of interest contemplated by sub-section (1). The Ld. AR submitted the chart related the amount disallowable under Section 94B of the Act would have be recomputed. The re-computation of disallowance under Section 94B of the Act is as under

Particulars	Computation disallowance as per the TP order (please see pages 14 -15 of the TP order)	Re-computation of the disallowance
EBITDA (A)	Rs. 17,58,55,760/-	Rs. 17,58,55,760/-
30% EBITDA (B)	Rs. 5,27,56,728/-	Rs. 5,27,56,728/-
Total Interest (includes interest paid to both AEs and Non-AEs) (C)	Rs. 32,45,54,783/-	Rs. 26,09,47,674/- (Rs. 32,45,54,783 – Rs. 6,36,07,108 (TP adjustment))
Excess Interest (D= C-B)	Rs. 27,17,98,055/-	Rs. 20,81,90,947/-
Total AE Interest (E)	Rs. 18,30,38,447/-	Rs. 11,94,31,339/- (ALP as per the TPO in the TP order)
Disallowance under Section 94B (Lower of (D) or (E))	Rs. 18,30,38,447/-	Rs. 11,94,31,339/-
Suo-moto disallowance	Rs. 13,02,81,719/-	Rs. 13,02,81,719/-
Difference	Rs. 5,27,56,728/-	(Rs.1,08,50,380/-)

12. The Ld. AR has also invited our attention to the Explanatory Notes to the provisions of the Finance Act, 2017, enclosed at APB Volume-I, page 364. Paragraph 46.4 thereof is reproduced below:

“46.4 The provisions of the section 94B of the Income-tax Act shall be applicable to an Indian company, or a permanent establishment of a foreign company being the borrower who pays interest in respect of any form of debt issued to non-resident or to a permanent establishment of a non-resident and who is an ‘associated enterprise’ of the borrower. Further, the debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.”

13. We have considered the statutory provision together with the above explanatory note. We also note that the assessee had already made a suo motu disallowance under section 94B and has specifically raised the issue of recomputation consequent to the determination of the transfer-pricing ground. The assessee’s computation also indicates that, after giving effect to the TP adjustment, the quantum under section 94B would require consequential recomputation.

14. Accordingly, Ground No.3 is disposed of with a direction to the Ld. AO to recompute the disallowance under section 94B in accordance with law, after giving effect to our finding on Ground No.2 and after duly considering the scope of section 94B(1) and 94B(2), the aforesaid Explanatory Note to the Finance Act, 2017, and the assessee’s contention regarding the interest expenditure actually falling within the ambit of section 94B. So, the interest paid to non-AE should be excluded and excess disallowance of Rs. 1,08,50,380/-be deleted. The Ld. AO shall also ensure that there is no double disallowance of the same interest expenditure and shall grant consequential relief, if found admissible, after verification of the relevant computation and records.

Ground No. 4 — Error in Computation Sheet

15. Ground No.4 relates to the assessee’s grievance that the aggregate additions/disallowances of Rs.11,63,63,836/- have been reflected in the computation sheet under the head “Income from Other Sources” instead of “Income from Business or Profession.” Since the issue requires verification of the computation sheet and the appropriate head under which the respective adjustments are required to be reflected, Ground No.4 is set aside to the file of the Ld. AO for reconsideration and necessary correction in accordance with law, after verification of the relevant records and after giving reasonable opportunity to the assessee.

Ground No.5 — Penalty Proceedings

16. Ground No.5 challenges the initiation of penalty proceedings under section 270A of the Act. Since the penalty proceedings are only at the stage of initiation and no final penalty order is the subject matter of the present appeal, Ground No.5 is premature and is accordingly dismissed as such. The assessee’s rights and contentions, if any, in appropriate proceedings remain unaffected.

17. So, Ground No.1 is general in nature; Ground No.2 is allowed; Ground No.3 is disposed of with the aforesaid directions to the Ld. AO & allowed; Ground No.4 is set aside to the file of the Ld. AO for reconsideration & allowed for statistical purposes; and Ground No.5 is dismissed as premature.

18. In the result, the appeal of the revenue bearing ITA No.8952/Mum/2025 is partly allowed for statistical purposes.