The Income Tax Appellate Tribunal (ITAT), Bangalore held that Interest paid on convertible debentures is not interest on equity and allowable as expenditure under Section 36(1)(iii).
The only issue raised by assessee, M/s. CAE Flight Training (India) Pvt Ltd is in respect of treating Compulsory Convertible Debentures (CCDs) as equity and holding that no interest is payable on equity capital thereby computing the ALP (Arm Length Price) of interest as Nil.
The AR, Ketan Ved submitted that identical issue on similar facts have been considered by Coordinate Bench of this Tribunal for Assessment Years. 2009-10 to 2013-14 in case of M/s. CAE Flight Training (India) Pvt Ltd. The Counsel further submitted that for the year under consideration, it is the same CCD that is continuing and has not yet been converted into equity shares. He submitted that the Dispute Resolution Panel (DRP) has not considered the view adopted by this Tribunal.
On the contrary, the DR, Sumer Singh Meena relied on orders passed by authorities below.
The bench consisting of Chandra Poojari, Accountant Member and Beena Pillai, Judicial Member held that “We note that in the preceding assessment years, the issue has been considered in favour of the assessee by observing that before the date of conversion, the interest paid on convertible debentures cannot be treated as interest on equity and that such interest paid on the debentures are allowable as expenditure under Section 36(1)(iii) of the Act.”
The Tribunal also observed that “Further the determination of ALP of the transaction has also been remanded by the Coordinate Bench of this Tribunal. Respectfully following the same, we also direct the AO/TPO to compute the ALP of the interest for the year under consideration in accordance with the transfer pricing provisions.”
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