Transfer Pricing Adjustment on Same Terms CCD Interest

Transfer Pricing Adjustment on Same Terms CCD Interest Unustified; Section 94B Recomputation Remanded

Issue

Whether TP adjustment treating ALP of interest on CCDs as Nil is sustainable when issued to AE and non-AE on identical terms.
Whether the AO should re-verify and compute disallowance under Section 94B based on the assessee’s revised working.
Whether brought-forward business losses should be allowed set-off after factual verification by the AO.

Facts

Transfer Pricing Issue: The assessee, a real estate developer, issued Compulsorily Convertible Debentures (CCDs) at 15% p.a. to its foreign Associated Enterprise (AE) and an unrelated entity (HDFC-managed trust) under the same Debenture Subscription Agreement (DSA).
The assessee benchmarked the 15% interest using the internal comparable (HDFC trust).
The TPO recharacterized the CCDs as equity and determined the Arm’s Length Price (ALP) of the interest as Nil.
In the immediately preceding assessment year, the Tribunal had accepted this internal comparable based on substantially identical contractual terms.
Section 94B Issue: The assessee paid interest of ₹20.82 crores on AE CCDs and originally made a suo motu disallowance of ₹13.14 crores under Section 94B.
Claiming an inadvertent error in calculation, the assessee submitted a revised working before the authorities for correct recomputation of Section 94B disallowance.
Set-off of Losses: The assessee claimed set-off of brought-forward business loss for AY 2018-19, which required factual verification of availability and compliance with appellate orders.

Decision

Issue I (In favor of Assessee): Yes. Since the terms of the underlying DSA remained unchanged from the preceding year and no material shift was established by the Revenue, the tribunal’s precedent was followed. The TP adjustment making the ALP of interest Nil was deleted.
Issue II (Matter Remanded): Yes. The matter was remanded to the AO with directions to verify the revised computation and correctly determine the Section 94B disallowance in accordance with the law.
Issue III (Matter Remanded): Yes. The set-off of brought-forward business loss was remanded to the AO to verify the eligible quantum and give effect to relevant appellate orders.

Key Takeaways

Internal CUP Rules Superior: An internal comparable transaction under the same agreement with an independent party on identical terms is preferred over external benchmarks or arbitrary recharacterization.
No Arbitrary Recharacterization: TPOs cannot recharacterize debt instruments (CCDs) as equity solely to reduce ALP to Nil when genuine third-party transactions support the debt terms.
Right to Correct Tax Computations: Inadvertent errors in statutory disallowances (Section 94B) can be rectified upon remand if verified through true underlying figures.

IN THE ITAT MUMBAI BENCH ‘K’

Bellissimo Healthy Construction and Developers (P.) Ltd.

ACIT

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

IT Appeal No. 8027 (Mum) of 2025
[Assessment year 2018-19]

SEPTEMBER 17, 2026

Niraj Sheth for the Appellant. Ajay Uke, Sr. AR for the Respondent.

ORDER

Anikesh Banerjee, Judicial Member. – The instant appeal is preferred by the assessee against the order of the Ld. Assistant Commissioner of Income Tax, CC-7(3), Mumbai [for brevity, the “Ld. AO”], order passed u/s 144C(13) r.w.s. 147 of the Income Tax Act, 1961 [for brevity, the “Act”], for Assessment Year 2018-19, date of order 30/09/2025. The impugned order emanated by pursuing the order of the Ld. CIT (DRP-1), Mumbai-1 [for brevity, the “Ld. DRP”] order passed u/s 144C(5) of the Act date of order 11/09/2025

2. The brief facts of the case are that the assessee is engaged in the business of construction and development of real estate projects. For A.Y. 2018-19, the assessee had issued 13,87,85,714 Compulsorily Convertible Debentures (“CCDs”) of Rs.10/- each to its Associated Enterprise (“AE”), Russard Holdings Ltd. (“RHL”), under the Debenture Subscription Agreement (“DSA”) dated 16.04.2008, carrying interest @ 15% per annum. Under the same DSA, 62,14,286 CCDs of Rs.10/- each were also subscribed by HDFC Venture Trustee Company Limited on behalf of HDFC Investment Trust (“HDFC”), an unrelated third party, on substantially identical terms. The funds so raised were utilised for acquisition, construction and development of the real estate projects.

3. The assessee had reported interest on CCDs in Form No. 3CEB at Rs.23,99,98,959/-. During the transfer-pricing proceedings, the assessee explained that the said amount had been inadvertently reported and that the actual interest pertaining to RHL for the year was Rs.20,81,78,571/-. The assessee benchmarked the transaction by applying the internal comparable, namely, the CCDs subscribed by HDFC at the same rate of 15%. The Ld. TPO, however, recharacterised the CCDs as equity and determined the ALP of the interest at Nil, resulting in a transfer-pricing adjustment of Rs.23,99,98,959/-. Since the assessee had already made a suo motu disallowance of Rs.13,14,31,658/- u/s 94B of the Act, the balance amount of Rs.10,85,67,301/-was ultimately added to the income. The Ld. DRP upheld the action of the Ld. TPO/AO. Being aggrieved, the assessee is in appeal before us.

4. The Ld. AR argued and has filed a paper book comprising pages 1 to 189, which has been placed on record. The Ld. AR submitted that the controversy relating to benchmarking of interest on the very same CCDs is squarely covered by the order of the Coordinate Bench in the assessee’s own case, Bellissimo Healthy Constructions and Developers (P). Ltd. v. Dy. CIT [IT Appeal No. 2255 (Mum) of 2022, dated 28-3-2023] A.Y. 2017-18.

The Ld. AR contended that there is no material change in the underlying transaction during the year under consideration. The CCDs held by the AE as well as the unrelated HDFC investor arose from the same DSA dated 16.04.2008. The relevant contractual conditions, interest rate of 15%, tenure and other material features were identical. Thus, the transaction with HDFC constituted a direct internal comparable and could not have been disregarded merely because the volume of CCDs subscribed by the AE was higher.

5. The Ld. AR further submitted that in A.Y. 2017-18, the Coordinate Bench examined this very internal comparable and held that internal comparables ordinarily deserve preference over external comparables because their quality and reliability are higher. The Coordinate Bench further observed that the difference in volume did not adversely affect the assessee’s benchmarking because both the AE and non-AE were paid interest at the same rate notwithstanding the AE having made a substantially larger investment.

6. It was further argued that the Ld. TPO could not disregard the actual character of the transaction and determine the ALP at Nil merely by treating the CCDs as equity. The assessee relied upon the decision in its own case wherein the Coordinate Bench, after examining the DSA and the nature of the CCDs, ultimately directed the Ld. AO/TPO to delete the TP adjustment and accept the interest rate actually paid @ 15% as being at arm’s length.

7. The Ld. AR further submitted that the actual interest pertaining to RHL during the relevant year was Rs.20,81,78,571/- and not Rs.23,99,98,959/- as inadvertently reported in Form No. 3CEB. Regarding section 94B, the Ld. AR submitted that the assessee had inadvertently computed the disallowance at Rs.13,14,31,658/- in the return. A revised working was furnished before the Ld. AO, according to which the correct disallowance u/s 94B(1) works out to Rs.4,89,57,804/-. The revised computation was stated to have been filed before the Ld. AO at APB pages 180 to 189.

8. As regards the brought-forward business loss of Rs.1,65,82,611/-, the Ld. AR submitted that the corresponding issue arising from the original assessment had subsequently been decided by the Ld. CIT(A) with a direction to the Ld. AO to allow the set-off after due verification.

9. The Ld. DR relied upon the orders of the revenue authorities and supported the approach adopted by the Ld. TPO and the Ld. DRP. It was contended that the CCDs carry an inherent and compulsory conversion feature and ultimately result in equity ownership; therefore, the Ld. TPO was justified in examining their true character and determining the ALP accordingly.

10. The Ld. DR further submitted that the transfer-pricing analysis has to be undertaken independently for each assessment year and the order for A.Y. 2017-18 cannot automatically govern the assessment for the year under consideration. It was accordingly contended that the adjustment made by the Ld. AO/TPO and sustained by the Ld. DRP does not call for interference.

11. We have heard the rival submissions and perused the material available on record, including the paper book filed by the assessee and the order of the Coordinate Bench in the assessee’s own case for the immediately preceding assessment year.

Ground No. 1 — Validity of Reassessment

12. At the time of hearing, the assessee has sought adjudication of the appeal on merits and has requested that the question concerning validity of the reassessment proceedings be kept open. The written submissions also specifically record this request.

Accordingly, Ground No. 1 is treated as academic at this stage and is kept open without expressing any view on merits.

Ground No. 2 — Transfer Pricing Adjustment on Interest on CCDs

13. The principal controversy is whether the Ld. TPO was justified in disregarding the assessee’s benchmarking and recharacterising the CCDs as equity so as to determine the ALP of interest at Nil. We find that the issue arising from the same DSA dated 16.04.2008 and the same CCDs was considered by the Coordinate Bench in the assessee’s own case for A.Y. 201718 in Bellissimo Healthy Constructions and Developers (P). Ltd. (supra). The Coordinate Bench specifically observed that an internal comparable is ordinarily preferable to an external comparable and found that the internal comparable selected by the assessee possessed similarity of contractual terms. It further held that the external comparables selected by the Ld. TPO were functionally dissimilar. Most importantly, the Coordinate Bench concluded as under:

“024. Thus, we allow ground number 1 of the appeal of the assessee and direct the learned AO/TPO to delete the arm’s-length price adjustment on account of interest paid to AE on compulsorily convertible debentures considering the interest rate actually paid at the rate of 15% at arm’s-length.”

14. The underlying DSA and the material terms of the CCDs remain the same for the year under consideration. Nothing has been brought before us to establish any material change in the relevant contractual terms so as to distinguish the decision of the Coordinate Bench for the immediately preceding assessment year.

Accordingly, respectfully following the decision of the Coordinate Bench in the assessee’s own case in ITA No.2255/Mum/2022 (supra), the transfer-pricing adjustment made by treating the ALP of interest on CCDs as Nil cannot be sustained. The interest rate of 15% on the CCDs is to be considered at arm’s length in terms of the aforesaid Coordinate Bench decision.

Accordingly, Ground No. 2 is allowed.

Ground No. 3 — Alternate Ground u/s. 36(1)(iii) and 37(1)

15. Ground No. 3 is an alternate ground concerning the allowability of interest expenditure u/s. 36(1)(iii) and 37(1) of the Act. The assessee itself has raised this contention as an alternative to its principal challenge to the TP adjustment.

In view of our finding allowing Ground No. 2, Ground No. 3 being alternate in nature does not require separate adjudication.

Ground No. 4 — Disallowance u/s 94B

16. The assessee contends that while filing the return, the disallowance u/s 94B was inadvertently computed at Rs.13,14,31,658/-. The revised computation furnished before the Ld. AO works out the disallowance at Rs.4,89,57,804/-, based upon EBITDA of Rs.53,07,35,889/- and interest pertaining to the foreign AE of Rs.20,81,78,571/-. Since this issue involves verification of the revised computation and the underlying figures, we direct the Ld. AO to verify the revised computation furnished by the assessee and determine the disallowance u/s 94B strictly in accordance with law after considering the correct amount of interest pertaining to the AE. The assessee is directed to furnish all necessary details and supporting documents before the Ld. AO.

Subject to the aforesaid verification and direction, Ground No. 4 is allowed.

Ground No. 5 — Set-off of Brought-forward Business Loss

17. The assessee seeks set-off of brought-forward business loss amounting to Rs.1,65,82,611/-. The material placed before us indicates that the corresponding claim in the proceedings arising from the original assessment has been allowed by the Ld. CIT(A), subject to verification by the Ld. AO. Considering the factual verification required, Ground No. 5 is set aside to the file of the Ld. AO with a direction to verify the quantum and availability of the brought-forward business loss and allow the eligible set-off in accordance with law, while also giving effect to the relevant appellate order, if applicable. Needless to say, the assessee shall furnish the necessary particulars before the Ld. AO.

Accordingly, Ground No. 5 is allowed for statistical purposes.

Ground No. 6 — Penalty u/s 270A

18. Ground No. 6 challenges the initiation of penalty proceedings u/s 270A of the Act. At the present stage, the ground is premature and does not call for adjudication.

Accordingly, Ground No. 6 is dismissed as premature.

Ground No. 7 — General

19. Ground No. 7 is general in nature and requires no separate adjudication.

20. In the result, the assessee’s appeal bearing ITA No. 8027/Mum/2025 is partly allowed for statistical purposes.