Income Tax Appellate Tribunal - Bangalore
Deputy Commissioner Of Income-Tax, ... vs Adamas Builders Pvt. Ltd, Bangalore on 15 April, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH: BANGALORE
BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT
AND
SHRI KESHAV DUBEY, JUDICIAL MEMBER
IT(TP)A No. 2624/Bang/2024
Assessment year: 2014-15
The Deputy Commissioner Vs. Adamas Builders Pvt. Ltd.,
of Income Tax, Tower A, Ground Floor,
Central Circle 2(2), Global Technology Park,
Bangalore. Devarabeesanahalli,
Bengaluru - 560 103.
PAN: AAJCA7789C
APPELLANT RESPONDENT
Appellant by : Dr. Divya K J, CIT(DR)(ITAT), Bengaluru.
Respondent by : Shri Chavali Narayan, CA
Date of hearing : 05.02.2026
Date of Pronouncement : 15.04.2026
ORDER
Per Prashant Maharishi, Vice President
1. This appeal is filed by The Deputy commissioner of Income tax , Central Circle 2 (2), Bangalore (The ld AO / appellant) for the assessment year 2014-15 against the appellate order passed by the CIT(Appeals)-12, Bangalore [ld. CIT(A)] dated 07.10.2024 wherein the appeal filed by Adamas Builders Pvt. Ltd.,[ The Assessee/ IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 2 of 27 respondent] against the assessment order passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act] dated 29.01.2018 by the Ld AO, was allowed.
2. In short, the issue is that assessee has paid interest to its AE on Compulsorily convertible debentures [ CCD] issued of Rs 100 Cr 15 %, Arms' length price of Which is Determined by the ld. TPO at Rs Nil, Considering the CCD as Equity Instrument. On Appeal to the ld CIT (A), appeal of assessee was allowed on the basis of judicial precedents and held that interest is allowable to the assessee u/s 36 (1)
(iii) of the Act. Therefore, ld AO is in appeal.
3. The ld. AO is aggrieved and has preferred the appeal raising the following grounds of appeal :-
"(i) Whether on the facts and circumstances of the case, the ld.
CIT(A) has erred in determining that the CCDs are debt instruments till date of conversion to equity without verifying the economic substance of the instrument.
(ii) Whether on the facts and circumstances of the case, the ld. CIT(A) has erred in determining that the CCDs are debt instruments when no third party would have provided debt to the assessee with low debt capacity.
(iii) Any other grounds which may be urged at the time of hearing."
4. The brief facts show that assessee company is engaged in the business of real estate as a builder, developer, filed its return of income on 29.11.2014 at a loss of Rs. 21,02,19,360/- which was picked up for IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 3 of 27 scrutiny and notice u/s. 143(2) as well as 142(1) of the Act were issued to the assessee.
5. The assessee has entered into international transaction of interest on Compulsorily Convertible Debentures [CCDs] of Rs 15 crores which is in dispute. In the Transfer Pricing Study Report [TPSR] in para 4.1, assessee has stated that during the FY 2011-12 assessee had issued CCDs to Golden Bella Holdings Ltd., Cyprus amounting to Rs 100 crores which carry a coupon rate of 15%. During the FY 2013-14, Golden Bella Holdings Ltd., Cyprus transferred these to Mapletree BG Pte limited Singapore. From FY 2013-14 interest of Rs 15 crores accrued on the above transaction. The assessee stated that these CCDs have a face value of Rs. 2 lakhs each and the holders of the CCD are entitled to receive interest at a coupon rate of 15% p.a. on the face value. It can also be paid cumulatively at the discretion of the Board of Directors of the asse. The same were compulsorily convertible into equity shares at the rate of 1 Equity Share = 1 CCD not later than 10 years from the date of issuance. The CCDs shall not carry any voting rights till they are converted into equity shares and are transferred only with prior written consent of the Board of the assessee company.
6. To benchmark this transaction of payment of interest of Rs 15 crores, assessee adopted assessee as a Tested party [sic. as MAM is CUP same is not required] as it does not own any significant intangible and its profitability can also be reliably ascertained. The assessee selected the comparable uncontrolled price method [CUP] as the most appropriate IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 4 of 27 method for benchmarking this transaction. The assessee carried out search on Prowess, Capitaline and ACE TP databases. The assessee found only 3 comparable companies wherein (1) Mysore Polymers & Rubber Products Ltd. having a debenture value of Rs. 2,88,57,000 crores and interest rate on debentures is 12% (2) Religare Enterprises Ltd. where the debenture value is Rs. 404,83,54,000 and the interest rate is 15%, and (3) Varun Beverages Ltd. where the debenture value is Rs. 41 crores and the interest rate on debenture is 18.50%. The assessee stated that the arithmetic mean of the interest rate is 15.17% and therefore the interest paid by the assessee of 15% is at arm's length.
7. The ld. AO referred the matter u/s. 92CA to the JCIT(TP) 1(1), Bangalore,[ the ld. TPO ] for determination of the ALP of the above interest payment, who on examination of the TP document found that originally the CCDs were issued to Golden Bella Holdings Ltd. which was a Cyprus entity and subsequently in FY 2013-14 the same were transferred to Mapletree BG Pte Ltd., Singapore which is the Associated Enterprise [AE] of the assessee. He found that the TP document is not acceptable as the payment of Rs 15 crores is not interest in nature because CCD issued by the assessee is not a debt, but is in the nature of equity capital and investment in equity, therefore he proposed to determine the ALP of such interest at Rs. Nil for the reason that there cannot be any return on equity in the form of interest. He issued show cause notice to the assessee.
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8. The assessee furnished the reply on 1.8.2017 wherein the assessee objected with the main contention that the Foreign Direct Investment (FDI) policy issued by the RBI has mentioned that CCD should be treated as FDI and are governed by such policy and therefore recharacterization of CCD considered as equity is not appropriate. The assessee also objected that attempt to recharacterize the CCD as equity is not correct. The assessee relied upon several judicial precedents. The assessee also challenged that the TPO does not have any power to question the commercial rationale and business decision expediency of the assessee. It was stated that it was a genuine business decision of the assessee. On the issue of determination of ALP, the assessee also objected that it cannot be considered as Rs. Nil. Thus the assessee objected and stated that the CCDs are to be considered as a debt, CUP method applied by the assessee correctly determines the ALP and further the attempt of the TPO to determine the ALP at Nil is also not proper.
9. The ld. TPO held that the taxpayer has paid interest on CCDs which are hybrid instrument and not a debt simplicitor. He further held that the search process adopted by the assessee is also flawed, it is not the comparison of similar instrument. He stated that the taxpayer has referred to different financial year for the comparables, thus period of comparison and the product of comparison also differ. The taxpayer has not carried out benchmarking in the relevant financial year with similar product. He further stated that the CCD is issued in Rupee denomination and the assessee has not considered similar products IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 6 of 27 which is the basic requirement of the CUP method. He held that CCDs are equity as per law referring to the RBI regulation and as it is an equity investment, no interest is payable. He relied upon the decision of the Hon'ble Supreme Court in the case of Narendra Kumar Maheshwari v. UOI [1989] SC 2138 and also the decision of the Coordinate Bench in the case of Ashima Syntex v. ACIT 100 ITD 247 wherein it is held that CCDs are at par with share capital and akin to share application.
10. He further stated that it is hybrid financial instrument. He referred the fact that assessee has issued CCDs originally to Golden Bella Holdings Ltd., Cyprus for Rs 100 crores with interest rate of 15% p.a. during the FY 2012-13. During the FY 2013-14 this CCD was transferred to Mapletree BG Pte Ltd., Singapore which has 99.5% shareholding of the assessee and the intention of the assessee to use the hybrid instrument for shifting the profits from India. Thereafter, he referred to the India- Singapore DTAA and provisions of section 115A of the Act along with the provisions of Singapore taxation. In para 12, he held that CCDs are nothing but colourable instruments used to erode the base for taxation which leads to double non-taxation. Accordingly he determined the ALP of interest payment of Rs 15 crores as Rs. Nil.
11. The final assessment order was passed by the ld. AO on 29.12018 where the above TP adjustment of Rs 15 crores was made and the total income of the assessee was assessed at a loss of Rs. 6,02,19,360.
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12. The assessee aggrieved with the same preferred appeal before the ld. CIT(A). Before him the assessee contended that the DRP in its order for AY 2013-14 as held that CCDs are debt instruments till they are converted into shares and further for AY 2015-16, the TPO himself has not made any adjustment. The assessee relied on the decision of the Coordinate Bench in the case of Summit Developers Pvt. Ltd.
13. The ld. CIT(A) held that respectfully following the decision of the Coordinate Bench, the CCDs are debt instruments till they are converted into equity and accordingly interest on CCD is an allowable expenditure and the appeal of the assessee was allowed. The finding and decision of the ld. CIT(A) in para 5 is as under:-
IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 8 of 27 IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 9 of 27
14. Aggrieved with the same, the ld. AO is in appeal. The ld. CIT(DR), Dr. Divya K J, vehemently submitted that the ld. CIT(A) has not looked into the various aspects raised by the AO/TPO that the above instrument is a hybrid instrument and the methodology adopted by the assessee is a colourable mechanism which has resulted into double non-taxation which is never the object of this issue. She further submitted that the assessee has issued CCDs to a holding company itself at 15% interest. The tenure of the CCD which was to expire in 2022 and 2024 has now been extended to 2032 and 2034 @ 15% interest. According to her no independent person would have paid a foreign investor return of capital as well as return on capital of 15 % p.a. She further stated that the decision of the Hon'ble Supreme Court in the case of Narendra Kumar Maheshwari (supra) stated by the ld.
IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 10 of 27 TPO has not at all been considered and further the Hon'ble Supreme Court decision in the case of IFCI Ltd. v. Sutanu Sinha [2023] 156 taxmann.com 681] which has also dealt with the CCDs holding that CCDs cannot be considered as financial debt and therefore necessarily it will be an equity. She also referred to the RBI guidelines and policies which say that this is an equity and therefore same cannot carry any interest. She further referred to the finding of the ld. TPO stating that CCDs have been issued by the assessee company as colourable device to reduce its taxation and as a mode of profit shifting. The ld. CIT(A) has failed to pass a speaking order and allowed the appeal of the assessee without giving any reasoning on the findings of the ld. TPO. She further stated that ld CIT (A) has failed to appreciate that he was determining the ALP of the international transaction of interest payment and not about allowability of interest expenses. Thus, the ld CIT (A) has failed to decide on transfer pricing issue at all. Thus, it is not sustainable in law.
15. The ld. AR, Shri Chavali Narayan, CA, also placed on record a paper book containing 117 pages wherein the various orders coordinate benches along with copy of CCD agreement filed before the ld. CIT(A) at page 94-109 of the paper book was also submitted. He also submitted a chart referring to several judicial precedents of the Coordinate Benches wherein it is held that CCDs are debt instruments and cannot be characterized as equity instrument.
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16. He further referred to his Synopsis to support his case that CCDs are debt and not an equity. He further stated that the decision of the Hon'ble Supreme Court in the case of Narendra Kumar Maheshwari (supra) was in the regulatory context of capital structuring and not under the Income-tax Act. With respect to the decision of Ashima Syntex where the issue was related to allowability of expenditure incurred on issuance of debentures. He further submitted that the ld. CIT(A) has followed the decision of the Coordinate Bench in the case of Summit Developers Pvt. Ltd. in IT(TP)A No. 794/Bang/2022 and therefore there is no infirmity in the appellate order. He further stated that the reference by the ld. TPO to guidelines of OECD BEPS principles is unsupported by Indian Tax Laws. In the end, he relied upon several judicial precedents of Coordinate Benches as under:-
CAE Flight Training (India) Private Limited vs DCIT-- AY 2017-18 [IT(TP)A 48/BANG/2023] Kolte Patil Developers Limited vs DCIT--AY 2013-14 [ITA 1980 & 2111/PUNE/2017] WeWork India Management Private Limited vs DCIT (TP) -- AY 2018-19 [IT(TP)A 819/BANG/2022] Amanora Future Towers Private Limited vs DCIT -- AY 2013-14 [ITA 722/PUNE/2018] Stahl India Pvt Ltd vs DCIT --AY 2020-21 [IT(TP)A 52/CHYN/2024] Praxair India (P.) Ltd. vs DCIT--AY 2017-18 [IT(TP)A 187/BANG/2023]
17. We , at the time of hearing asked the ld. CIT(DR) as well as the ld. AR that whether the ld. CIT(A) has held that the ALP of the international transaction of payment of interest determined by the ld. TPO or the IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 12 of 27 assessee is correct or not and it is at arm's length. Both the parties agreed that the ld. CIT(A) has not held so.
18. We find that the whole appeal of the assessee before the ld. CIT(A) was on the TP adjustment made by the ld. AO considering the CCDs on which the interest @ 15% was paid by the assessee treated by the ld. TPO as NIL stating that the CCDs are in the nature of equity and not debt, has not at all been dealt with by the ld. CIT(A). Therefore, there is no finding in the order of the ld. CIT(A) that whether the interest paid of Rs 15 crores on the issue of CCD of Rs 100 crores is at arm's length or not.
19. In Aztec Software & technology P Ltd V ACI T [2007] 162 Taxman 119 (Bangalore - Trib.) (SB) affirmed by the Honourable Karnataka high court in [2012] 23 taxmann.com 413 (Karnataka) in para no 133 has held that :-
"Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 13 of 27 transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case."
20. Therefore, we are prima facie of the view that the order of the ld. CIT(A) is not sustainable in law as it failed to adjudicate on the TP issues.
21. A diverse array of alternative financing options is available globally, enabling corporations to meet their financial requirements efficiently. Likewise, investors seek opportunities to optimize their returns. To achieve an appropriate balance between equity risk and capital return, hybrid securities are frequently utilized for intra-group financing purposes. Convertible bonds represent a prominent form of such hybrid instruments. These bonds typically feature (1) interest rates lower than conventional bonds, (2) specified maturity dates, (3) the option to convert into equity at maturity, (4) conversion provisions, (5) defined conversion ratios, and (6) conversion premiums, among other characteristics.
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22. The need to analyse such transactions has been recognised globally, resulting in the inclusion of relevant chapters in the OECD Guidelines for Transfer Pricing concerning financial transactions. The guidelines propose a four-step approach for benchmarking financial transactions. Steps 1 and 2 focus on identifying the commercial or financial relationships and accurately delineating the transaction undertaken. Steps 3 and 4 involve the selection and application of the most appropriate transfer pricing method. For benchmarking transactions involving the issuance of convertible debentures, various option pricing models are available, including the Black-Scholes model, the binomial model, Monte Carlo simulation, among others. Each model outlines specific procedures for benchmarking the equity component of these instruments, with the remaining value attributed to the debt component. Accordingly, when conducting a transfer pricing analysis--such as the issue of compulsorily convertible debentures--benchmarking can be supported by alternative valuation methods and interest coupon rates, applying the Comparable Uncontrolled Price (CUP) method where appropriate.
23. The ongoing dispute between taxpayers and revenue authorities regarding these matters has persisted over time. The assessee has classified compulsorily convertible debentures as debt when interest is charged and as equity when no interest is payable. This approach has frequently shifted depending on whether the issuer of the bond is an Indian entity (debt classification) or a foreign entity (equity classification). Conversely, revenue authorities have adopted differing IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 15 of 27 positions: if the issuer is an Indian assessee, they treat it as equity; however, for further investors who are Indian assesses, they classify it as debt.
24. The coordinate benches have determined interest payment based on either the State Bank of India prime lending rate or, if agreed by the revenue for the inclusion of such hybrid instruments, have advocated for LIBOR plus an appropriate markup. Both benchmark rates are relevant, if at all, only for straightforward loan transactions[ plain vanilla] and not for hybrid instruments like compulsorily convertible debentures.
25. A significant flaw in applying such interest rates is that they pertain to loans repayable in cash, whereas such loan instruments do not possess any features of optional or mandatory convertibility into equity. There are further distinctions: (1) Repayment--loans typically have a fixed repayment date, while compulsorily convertible debentures (CCDs) lack a defined repayment schedule; (2) Term--these rates are relevant for short- or medium-term loans, but CCDs generally have a tenure exceeding 20 years or are perpetual; (3) Obligation--loans require repayment, whereas CCDs obligate the issuer to convert the instrument into equity at an agreed rate and manner; (4) Interest--loan interest is calculated based on internal rate of return or a fixed rate, while CCDs usually offer minimal or nominal interest; (5) Enforcement--the right to enforce payment exists with standard loans, but is not applicable to CCDs; (6) Liquidation--CCDs, if unconverted, hold a lower claim IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 16 of 27 compared to secured debt during liquidation. This differentiation arises because CCDs fundamentally differ from conventional loan transactions due to their inherent equity component.
26. Given the aforementioned considerations, benchmarking the interest rate on convertible debentures against either the SBI PLR or LIBOR rate with an additional markup is unwarranted, unjustified and not sustainable.
27. The OECD Transfer Pricing Guidelines for Multinatinal Enterprises and Tax Administrators [ OECD guidelines ] (2022) chapter X Transfer pricing aspects of Financial Transactions provide explicit guidance on this matter, stating that the actual delineation of financial transactions is essential when benchmarking interest payments on hybrid instruments. This process requires careful consideration of the contractual terms of the tested instrument, functions performed, assets utilised, and risks assumed by both parties. It involves assessing purpose of the instrument, its relationship with other intragroup transactions, the economic circumstances of both borrower and lender, the relevant industry and market, as well as the business strategies and conditions within the group, alongside the actual conduct of the parties involved.
28. Furthermore, transfer pricing provisions under Rule 10B of the Income Tax Rules 1962, specifically sub-rule (2), mandate that when determining the arm's-length price by comparing an international transaction with an uncontrolled transaction, specific characteristics of IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 17 of 27 the property transferred and the functions performed must be considered, taking into account the assets employed and risks assumed by each party. An examination of the contractual terms is required, which explicitly or implicitly outlines how responsibilities, risks, and benefits are allocated between the entities. These factors should also be analysed in light of prevailing market conditions, including geographic location, market size, and relevant statutory provisions.
29. Therefore provision of law and OECD guidelines are in sync with each other so far on this issue.
30. The learned CIT(A) passed the order after the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators were published in January 2022 were available in public domain. Notably, Chapter X was introduced in these guidelines to address transfer pricing aspects of financial transactions. As the OECD guidelines possess persuasive value and are to be followed provided they do not conflict with the provisions of the Income Tax Act and Rules--as affirmed by the Honourable Supreme Court in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax (2021) 125 taxmann.com 42 (SC)--the CIT(A) should not have limited his judgement solely to determining whether the compulsorily convertible debenture is classified as equity or debt. Such discussion is futile as labels of the instruments do not matter but actual delineation of the international transaction matters. Even otherwise, the issue of IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 18 of 27 allowability of interest was not before him but determination of ALP of such Interest payment.
31. In this case, neither the assessee, the transfer pricing officer, nor the CIT(A) have fully considered all relevant factors in determining the arm's-length price for interest payments on compulsorily convertible debentures issued by the assessee to its foreign associated enterprises. Additionally, it should be noted that CIT(A) is obligated to adjudicate specifically on the transfer pricing aspects of the international transaction, rather than addressing the allowability of disallowance of interest expenses related to such convertible debentures.
32. The ld. Transfer Pricing Officer has also addressed certain aspects regarding the issuance and transfer of these debentures. However, the learned CIT(A) did not reference these facts in his order. Additionally, he omitted to consider paragraph 10.5 of the OECD Guidelines on Transfer Pricing in Chapter X, which requires an assessment of whether a prima facie loan should be classified as a loan or as another type of payment.
33. The learned CIT - A further failed to note paragraph No. 10.11 of the OECD guidelines that a particular label or description assigned to a financial transactions do not constrain the transfer pricing analysis. He has to examine the issue on its own merits and subject to the actual delineation of the transaction.
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34. The learned authorised representative has referred to several judicial precedents. The initial decision cited is Sumit Developments Private Limited (ITA No. 794/Bangalore/2022 for Assessment Year 2018-19, dated 10 November 2022), wherein the coordinate bench deleted the transfer pricing adjustment by relying on an earlier judgment involving CAE Flight Training India Private Limited (2019 (8) TMI 554), among other precedents also referenced by the representative. In paragraph 7.5, the bench concluded that, based on these decisions, the transfer pricing adjustment concerning interest on CCD--contending that CCD constitutes equity--should be eliminated. However, there was no finding regarding the accuracy of the assessee's transfer pricing analysis or the actual delineation of the transaction. Additionally, the bench addressed provisions of Section 94B of the Act and determined that the disallowance under Section 94B was warranted, issuing an order accordingly. The facts of the present case are significantly different; thus, reliance on these precedents does not advance the assessee's position.
35. Furthermore, the learned authorised representative referred to the decision of the honourable Karnataka High Court in Commissioner of Income Tax v. ITC Hotels Ltd (2010) 190 Taxmann 430 (Karnataka) (334 ITR 109) (238 CTR 447). Upon careful examination of that judgment, it is evident that the ruling pertains to the allowability of expenditure incurred on the issuance of convertible debentures as revenue expenditure. It does not address transfer pricing considerations regarding interest paid on compulsorily convertible debentures;
IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 20 of 27 therefore, reliance on this decision does not advance the assessee's position.
36. Ultimately, the learned authorized representative referred to the special bench decision in Hyderabad Infratech Private Limited v. Deputy Commissioner of Income Tax (2025) 171 taxmann.com 385, which determined that for fully and compulsorily convertible debentures denominated in Indian currency, interest payments should be benchmarked using the State Bank of India Prime Lending Rate rather than LIBOR. Upon careful review, we note that the issue before the special bench was whether, with respect to transfer pricing adjustments related to interest paid or payable on fully and compulsorily convertible debentures, non-convertible debentures, or other debentures denominated in Indian currency, benchmarking should be conducted using the prime lending rate instead of LIBOR. The coordinate bench answered affirmatively, concluding that when such bonds are denominated in Indian currency, the relevant benchmarking rate is the PLR.
37. We further observe that the special bench rendered its decision on January 29, 2025, at which point the revised OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (issued January 2022) were available. However, neither counsels brought to the attention of the coordinate bench that Chapter X had been introduced, incorporating comprehensive benchmarking measures for financial transactions based on the report on transfer pricing aspects IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 21 of 27 adopted by the Committee on Fiscal Affairs on January 20, 2020. The coordinate bench itself also did not recognize the existence of these guidelines, which are pari Materia with the provisions of Income Tax Rule 10 B of The Income tax Rules 1962.
38. Moreover, as previously discussed, both SBI PLR and LIBOR are benchmarks for plain vanilla loans, whereas compulsorily convertible debentures do not require repayment in cash but are settled through conversion to equity. The coordinate bench cited the decision of the Honourable Delhi High Court in CIT v. Cotton Naturals Private Limited (2015) 55 taxmann.com 523, which held that the applicable interest rate in India should be based on market-determined rates for the currency in which the loan is repayable. We find it difficult to reconcile this approach with foreign compulsorily convertible debentures, which are not subject to repayment but must be converted into equity. The Honourable Delhi High Court decision pertained to a straightforward loan [ plain vanilla] provided to a foreign entity (GPC Vestry and Inc., US$ 1,050,000 by an Indian entity, not to a hybrid instrument like CCD.
39. Additionally, it was not put to the notice of the special bench that compulsorily convertible debentures are hybrid instruments--a determination already made by the coordinate bench in Hyderabad Infratech Private Limited v. Deputy Commissioner of Income Tax (2020) 122 taxmann.com 262 (Hyderabad), holding that compulsorily convertible debentures are hybrid in nature, akin to equity, and cannot IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 22 of 27 be regarded as loans. Therefore, given the differing and distinguishing facts, reliance on the special bench decision by the learned authorized representative is respectfully rejected.
40. It is also a fact the ALP of the international transaction is required to be determined every year unless status gives a relaxation for number of Years Like APA or safe harbours or block TP Assessments. Thus the claim that ld DRP or Ld. TPO has determined ALP of similar international transaction in a particular manner is not a matter of consideration to not to determine the same for the impugned year, those assessments may have persuasive value.
41. In the end that arguments of the ld CIT DR also merits serious consideration that whether an independent party would have accepted the same terms and conditions i.e. payment of interest for almost 20 years @ 15 % on the issue price and then also give the investor an equity of 1 share for one CCD.
42. Therefore, for all the above stated reasons, the order of the learned CIT
- A is not sustainable at all.
43. As the assessee, the learned transfer pricing officer both have also failed to actually delineate the actual transaction , based on several factors as pointed out above, we restore the whole issue back to the file of the learned assessing officer with a direction to the assessee to benchmark the transaction of payment of interest on compulsorily IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 23 of 27 convertible debentures looking at the provisions of rule 10 B (2) of the income tax rules and the OECD guidelines contained in Chapter X .
44. There are other reasons also for restoring back to the file of the learned assessing officer the above issue as under: -
(1) The filters selected by the assessee are also startling wherein 496 companies were rejected. Some of the filters was that the companies issued debentures at abnormal rates, companies that have issued debentures with differential rates and companies that have issued debentures with 0% interest. The alarming filter was also that companies that have issued non-comparable instruments.
(2) We find that there is no mention about the terms & conditions of 3 comparables selected by the assessee viz., Mysore Polymers & Rubber Products Ltd., Religare Enterprises Ltd. and Varun Beverages Ltd.
(3) In the whole TP Study Report, the terms, conditions, tenure of the instrument and the nature of the instrument issued by them are not at all discussed.
(4) Therefore, the adoption of the CUP method without demonstrating that the instruments are comparable with the assessee cannot be sustained.
(5) Furthermore, the document submitted at page 90-109 of the PB which is stated to be the CCD agreement, these are in fact minutes IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 24 of 27 of the board of the directors of the assessee company. Thus, the correct and exact terms and conditions entered into by both the parties were not available.
(6) On the careful consideration of the resolution of the board of directors dated 28th of March 2012 of the assessee company clearly shows that it has also issued equity share capital of Rs. 115 crores on 21 October 2011 to Greenwald developments Limited Mauritius.
Thus, the nature of debt and equity invested in the company and its mix is also required to be taken into consideration for determination of the arm's-length price of interest paid by the assessee because of the reason that that assessee is a company in which 99.5% shares are held by Mapple tree PG PTE Ltd which is 100% subsidiary of maple tree global PTe Ltd which also holds 0.5% equity in the assessee. There is a change in the shareholding during the year wherein now Greenwald developments Limited Mauritius is holding 99% and 1% is held by golden Bella holdings Ltd Cyprus.
(7) further, during the course of the appellate proceedings before the learned CIT - A wide letter dated 3 October 2024, when the learned CIT - A asked whether the compulsorily convertible debentures issued by the assessee to its associated enterprises have been converted into equity or not, the assessee submitted that it issued the above instrument to Adamas Singapore in two tranches wherein the first French was issued on 28th of March 2012 totalling to Rs 100 crores and second tranche issued on 15 April 2014 of ₹ 60 IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 25 of 27 crores. The CCD initially carried the coupon rate of 15% for a maximum period of 10 years until the conversion. However subsequently the board of directors of the assessee held on 25 March 2022 the coupon rates of both the above trenches have been revised from 15% to 12 1/2% pursuant to a TP study conducted by an independent consultant. Further the tenure of these instruments have been further extended for a term of another 10 years. Thus it was stated that these compulsorily convertible debentures have not been converted into equity and shall not also be eligible for conversion until 27th of March 2032 and 14 April 2034. Thus, the conduct of both the parties clearly shows that there is a payment of interest on these bonds almost perennially.
(8) There is no discussion as well as consideration 'options realistically available' to both the parties while benchmarking this transaction.
(9) Look at the financial health of the Indian entity , considering para no 10.18 of The OECD Guidelines which provides as under :-
"10.13. For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 26 of 27 party would not be willing to provide such a loan to company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C's loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower in comparable circumstances would have been willing to borrow from Company C, including the possibilities of not lending or borrowing any amount (see comments upon "The lender's and borrower's perspectives"
in Section C.1.1.1 of this chapter). Consequently, the remainder of Company C's advance to Company B would not be delineated as a loan for the purposes of determining the amount of interest which Company B would have paid at arm's length."
Neither the assessee, nor the ld TPO has analysed the credit rating or the financial capability of the Indian Entity to ever repay the above sum. Further on analysis of any other transaction between associated enterprises, in applying the arm's length principle to a financial transaction it is necessary to consider the conditions that independent parties would have agreed to in comparable circumstances.
45. Thus the appeal of the learned assessing officer is allowed and the issue is restored back to the file of the learned assessing officer for making necessary reference to the learned transfer pricing officer for determination of the arm's-length price of the interest paid by the assessee of ₹ 15 crores on compulsorily convertible debentures to its associated enterprises and the assessee is directed to show the benchmarking of such interest in terms of the provisions of the act as well as the guidelines issued by the OECD as indicated above. The Assessee and Ld. TPO is also directed to consider the 'options realistically available' to both the parties in terms of para no 10.18 and IT(TP)A No. 2624/Bang/2024 DCIT Circle 2 (2) Bangalore V Adamas Builders P Ltd A Y 2014-15 Page 27 of 27 10.19 of those guidelines while benchmarking. The Ld. AO on receipt of The report of ld. TPO, is directed to pass a draft assessment order in pursuance of provisions of section 144(1) of the Act.
Pronounced in the open court on this 15th day of April, 2026.
Sd/- Sd/-
(KESHAV DUBEY) (PRASHANT MAHARISHI)
JUDICIAL MEMBER VICE PRESIDENT
Bangalore,
Dated, the 15th April, 2026.
/Desai S Murthy /
Copy to:
1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.