Optionally Convertible Debentures (OCDs) aren’t debentures rather in the nature of quasi-capital; throws light on the relevance of the concept of “Quasi Capital” in the context of transfer pricing by relying on the decision given by co-ordinate bench; therefore, no TP adjustment is required where interest-free OCDs are issued by Foreign AE.
Facts:
- TV 18 Broadcast Limited (The assessee) is a domestic company engaged in the business of television broadcasting, production of related media software, distribution services and allied activities.
- During the relevant previous year, the assessee subscribed to optionally convertible debentures issued by its associated enterprises, namely IBN 18 Mauritius, to the tune of US $2,30,000.
- During the transfer pricing assessment proceedings, the assessee submit with the Ld. TPO that the issuance of interest free optionally convertible debenture is routinely done by many public listed companies, for their independent investors, and, as such, this is an arm’s length transaction.
- The assessee has also submitted that this transaction is in the nature of quasi capital, hence the transaction being benchmarked as a borrowing transaction will not be appropriate.
However, Ld. TPO brushed aside all above contentions/submissions of the Assessee.
TPO’s views and action:
- That debenture is a debt and should be benchmarked as loan/borrowings.
- Computed the rate at 3.20% (weighted average cost of capital) as an arm’s length consideration after granting reduction of .01% notional coupon rate of the assessee
- Made an transfer pricing adjustment of Rs. 2,46,40,344
CIT (A)’ s views and action:
- That the Assessee has subscribed to OCDs of its wholly owned subsidiary company, viz. IBN 18 (Mauritius) Ltd. which will ultimately be converted in to Equity shares in FY 2015-16.
- Since the OCDs were not converted during the current financial year, the nature of funding remained as a loan only. Hence, Ld. TPO is justified in treating the said OCDs as a loan.
- However rejected the benchmarking approach adopted by Ld. TPO being ad-hoc and arbitrary.
- Direct Ld. AO to adopt LIBOR plus 150 bps by relying on the decision given in Reliance Industries Limited for AY 2016-17, dated 17.02.2021.
ITAT Ruling:
- Honorable ITAT state that though the Ld. TPO discussed at length the nature of ‘debenture’ being a debt instrument, it, however, missed out the fact that OCDs are materially different vis-à-vis a debentures simplicitor and that fact is the opportunity to subscribe to equity which, in such a case, becomes predominant motive for subscription of OCDs.
- Relied upon the decision given by the coordinate bench in Cadila Healtcare Ltd. vs ACIT [(2017) 80 taxamann.com 24 (Ahd)] wherein similar notional interest adjustment on optionally convertible loan to overseas AE was deleted by holding that assessee’s transaction was in the nature of quasi capital and cannot be characterized as debt.
- Also, relied upon the decisions given in Soma Textile & Industries Ltd Vs ACIT [(2015) 154 ITD 745 (Ahd)] and Honorable Delhi High Court, in the case Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)] wherein the concept of “Quasi Capital” in the context of transfer pricing and its relevance in ascertainment of the arm’s length price of a transaction is very well defined.
Honorable Delhi High Court in respect of concept of “Quasi Capital”
9. The expression „quasi capital‟, in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of „quasi capital‟, these cases referred to the situations in which (a) advances were made as capital could not subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. Clearly, the advances in such circumstances were materially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm‟s length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.
- Therefore, in the present case, Honorable ITAT relying on the above decisions of co-ordinate bench allows the assessee’s appeal and deletes the transfer pricing adjustment made by Ld. TPO.
