Assessee’s Contentions

Revenue’s Contentions

Tribunal’s Judgment

The assessee contended that the instruments are contractually debt obligations carrying a fixed 9% p.a. interest with no voting or dividend rights prior to conversion.

The Revenue contended that the lack of a repayment obligation and the 10-year compulsory conversion timeline make the instrument equity in substance.

The TPO has no jurisdiction to recharacterize CCDs as equity. The lender-borrower relationship is preserved under the contractual terms. The nomenclature and commercial reality of the instrument must be respected.

The assessee contended that the TPO arbitrarily determined the ALP of the interest at Nil without applying any prescribed statutory benchmarking methods.

The Revenue maintained that because the transaction resembled advance share capital, an independent enterprise would not pay interest on it.

The ITAT rejected the TPO's ad-hoc approach, ruling that interest on valid debt instruments cannot be summarily disregarded or disallowed at Nil.

The assessee contended that the interest expenditure is fully allowable as a revenue deduction under established judicial precedents.

The Revenue maintained that since the instrument is equity in substance, interest could not be allowed as no independent enterprise would pay interest on equity.

The ITAT deleted the entire adjustment, applying the rule of consistency by following binding jurisdictional High Court and coordinate bench precedents.