Compulsory Convertible Debentures remain debt instruments until actual conversion and cannot be re-characterized as equity for transfer pricing purposes; interest on them is allowable.

PER PADMAVATHY.S, A.M:

This appeal by the assessee is against the order of the Income Tax Officer, Corporate Ward-1(3), Chennai passed u/s. 143(3) r.w.s 144B(8) r.w.s 260A of the Income Tax Act, 1961 (in short "the Act") dated 22.12.2025 for Assessment Year (AY) 2022-23. The assessee raised the following grounds of appeal:

“1. For that the order of the Learned Assessing Officer ("Learned AO") passed u/s. 143(3) r,w.s.1448(8) r.w.s.260A of the lncome Tax Act, 1961 ("the Act") pursuant to the directions of the Dispute Resolution Panel ("DRP") is erroneous and bad in law as it is passed on:

a. inaccurate appreciation of facts;

b. references / conclusions are contrary to the documentation / materials on record;

c. non-consideration of the documentation / materials on record and

d. in any case passed in violation of natural justice.

2. General ground on Transfer Pricing issues:

For that the Hon'ble DRP, the Learned Transfer Pricing Officer ('TPO') and the Learned AO (hereinafter collectively called as "the Revenue") grossly erred in making a total adjustment of Rs. 87,26,743l- to the Taxable lncome on account of Arm's Length Price determination of its lnternational Transactions with Associated Enterprises ("AEs").

3. Transfer Pricing issue - Downward adjustment of Rs.72.60.510/- in respect of interest paid on fully and 9ompulsorilv Convertible Debentures:

3.1 For that the Revenue erred in disallowing Rs. 72,60,510/- on account of a downward adjustment in respect of interest paid on Fully and Compulsorily Convertible Debentu res ("FCCD"). (Tax effect - Rs.18,27, 470/-

3.2 For that the Revenue has grossly erred, both in law and on facts, in re-characterizing the FCCDs as equity instruments instead of debt, disregarding the contractual terms, accounting treatment, commercial substance, consistent conduct of the parties, and well-settled legal principles governing the characterization of FCCDs prior to conversion.

4. Transfer Pricing issue - Upward adjustment of Rs.14.66.233/- on account of interest on trade receivables from AEs:

4.1. For that the Revenue erred in adding Rs.14,66,233/- on account of an upward adjustment in respect of interest on trade receivables from AEs (Tax effect - Rs.3,69,050/-).

4.2. For that the Revenue ought to have appreciated the fact that the TNMM provides most reliable measure to evidence Arm's Length Price and no separate benchmarking for trade receivables was required, as the TNMM inherently accounts for notional costs included therein.

4.3. For that the Revenue erred in law and on facts in treating 'trade receivables' as a standalone international transaction, ignoring that such receivables are merely a consequence of the primary international transaction. Since they are directly linked to the provision of services, they should have been examined together with the main transaction and not separately for transfer pricing purposes.

4.4 For that the Revenue failed to appreciate the undisputed fact that the Appellant does not charge any interest on delayed collection of receivables from non-AE customers as well, and therefore, in the absence of any differential treatment between Associated Enterprises and non-Associated Enterprises, notransfer pricing adjustment could have been made on the ground of notional interest on receivables.

4.5. For that Revenue arbitrarily adopted a uniform credit period of 30 days for computing the alleged delay in realization of trade receivables, without examining the facts and circumstances of the case, rendering the adjustment factually erroneous and legally unsustainable.

4.6 Without prejudice