The Hyderabad bench of Income Tax Appellate Tribunal (ITAT) has recently held that unsecured FCCDs issued to holding companies for business operations in India are debts which are not equity instruments.
Fairfield Developments Limited assessee is a foreign company incorporated in Cyprus and engaged in the business of real estate and development. Assessee filed its return electronically for assessment year 2014-15 on 30.09.2014.
Thereafter, the assessee case was selected for scrutiny .Then notices under Section 142(1) of the Income Tax Act were served to assesse.
Accordingly the case was referred to the TPO for determination of Arm’s Length Price (ALP) and the TPO on examination of international transactions rejected the Transfer Pricing analysis but did not propose for any adjustment of income as the same has been proposed in case of WRPL on the same transaction to benchmark the interest paid/ payable on FCCD’s denominated in INR at LIBOR plus 200 basis points.
The AO issued a show cause notice to assessee and asked why excess interest income of Rs. 13,98,41,656/ – be not taxed at 40% plus surcharge relying on article 11(7) of India – Cyprus DTAA.
The assessee contended that since the FCCD’s are in the nature of equity instruments and are denominated in INR and interest on the same is payable in INR, the same has to be benchmarked at the currency specific interest rate benchmark of SBI PLR.
Eventhough the AO had adopted LIBOR plus 200 basis points as more appropriate to determine the arm’s length price, he rejected the SBI PLR plus 300 basis points adopted by the appellant.
Finally, the Assessing Officer had taxed the excess interest at 40% and ALP taxed at DTAA rate of 10% and passed an assessment order under Section 143(3) read with section 144C of the Income Tax Act.
Aggrieved with the final assessment order, assessee carried the matter before CIT(A), who granted partial relief to the assessee.
Against his order the assessee filed an appeal before the tribunal.
Akshay Surana counsel for the assessee submitted that the assessee was raising funds for such investments through issuance of debentures to its AEs. TPO could not recharacterize the nature of FCCD as equity to loan.
K.P.R.R. Murthy counsel for the revenue submitted that the assessee has not brought any notice of any guidelines / regulation issued by the RBI treating the CCD / FCCD as equity before TPO. TPO had benchmarked the transaction after treating the FCCDs as debt.
The tribunal while considering the appeal observed that “Assessee before the CIT(A) had stated in reply dated 15/6/2017 that FCCD are in the nature of equity instruments and are denominated in INR and interest is payable in INR. Thus the assessee had changed its stand before CIT(A), which is contrary to terms of issuance of FCCD, its financials and TP study, which is not permissible.”
Two members bench of R.K. Panda, Accountant Member and Laliet Kumar, Judicial Member dismissed the appeal filed by the assessee and held that “FCCDs are debt, therefore, the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points, which is in consonance with the RBI guidelines issued for the purposes of FDI.”
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