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Judgment
PER SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER:
This bunch of seven appeals have been preferred by the appellant/assessee against respective orders dated 26.09.2025, 30.09.2025, 09.10.2025, 23.10.2025, 30.10.2025 and 25.11.2025 of the Assessing officer arising out of direction of learned Dispute Resolution Pannel, (in short ‘ld. DRP’) all dated 19.09.2025 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 pertaining to all Assessment Year 2022-23. The word ‘Act’ herein this order would mean Income Tax Act, 1961.
As per the information provided by ld. Counsel for the assessee, all the above seven appeals are of the same assessee group hovering around a common issue and hence for the purposes of convenience were heard together and are being adjudicated by this common order. The ld. Counsel requested that the appeal in ITA No.TPA-15/Del/2025 for AY 2022-23 be taken as a lead case and that the facts of all other appeals are identical. Ld. CIT-DR did not object to the said proposal. Consequently, the decision taken in ITA No.TPA-15/Del/2025 shall apply mutatis mutandis in all the other appeals.
The appellant assessee has raised following grounds of appeal in ITA No.TPA-15/Del/2025 :-
1.That the learned AO has erred on facts and in law by computing the total income of the Applicant amounting to Rs. 20,66,04,200/- as per the Assessment Order dated 30, September 2025 vis-à-vis the Total Income "Nil" reported in the Return of income (Rol) as filed by the Applicant for the subject Assessment Year (AY)
2.The learned AO have erred, in law and on facts and circumstances of the case, in making an addition of Rs. 20,66,04,196/- on substantive basis in respect of international transaction pertaining to Interest Expense on Rupee denominated External Commercial Borrowings("ECB") by wrongly re-characterizing the External Commercial Borrowings of the applicant as Equity Investment.
3.The learned AO have erred, in law and on facts and circumstances of the case, in making an adjustment of Rs. 8,24,08,226/- on Protective basis in respect of international transaction pertaining to Interest Expense on Rupee denominated External Commercial Borrowings by benchmarking the domestic interest rates with interest rates denominated in foreign currency.
4.The learned AO have erred, in law and on facts and circumstances of the case, in making an adjustment of in respect of international transaction pertaining to Interest Expense on Rupee denominated External Commercial Borrowings without considering the fact that out of interest expenses of Rs. 20,66,04, 196/- debited to statement of profit & loss, an amount of Rs. 15.01 crores was already suo moto disallowed u/s 94B and therefore any adjustment if at all to be proposed should be basis the net Interest expenses claimed by the assessee amounting to Rs. 5.65 crores.
The ld. Counsel for the assessee took us through brief factual matrix of the case in ITA No.TPA-15/Del/2025 for AY 2022-23. Return declaring NIL income was filed by the assessee on 29.06.2022. Its case was selected for scrutiny in CASS module for following reasons:-
1.International Transaction(s) in respect of lending or Borrowing of Money IT.P Risk Parameter.
2.High Interest Expenditure and huge advances in excess of total proprietor/Partner Fund.
3.High Liabilities as compared to Law income / receipts.
The ld. Assessing Officer had referred the case u/s 92CA to the Ld. TPO for determination of Arm’s Length Price. The ld. TPO passed his Order No. ITBA/TPO/F/92C/A3/2024-25/1072697347(1) dated 29.01.2025 recommending transfer pricing adjustment to the tune of Rs. 20,66,04,196. Relevant part of the TPO’s report is reproduced hereunder:-
“….5.18. The observation, analysis, and comments of TPO are discussed below:
The assessee's arguments on geography-based differences do not invalidate the TO's selection of comparables for the following reasons:
1.Global Nature of Financing: The ECB was raised through. a Mauritius-based associated enterprise, relying on global capital markets for funding. This necessitates the use of international benchmarks, as the pricing of the ECB reflects global financing conditions rather than purely domestic factors.
2.Risk Adjustments: The TO's analysis includes adjustments for global risks and currency differences, ensuring that the comparables reflect arm's length terms relevant to the assessee's international financing structure.
3.Mauritius and Market Inefficiencies: The assessee's choice of Mauritius as the jurisdiction for raising funds suggests reliance on a limited financial market with suboptimal transparency and liquidity. Comparables from mature markets, such as the United States, provide more reliable benchmarks for risk-adjusted
4.Currency Neutrality in Comparability: The currency of the loan (INR) does not preclude the use of USD-denominated comparables. By applying necessary adjustments for currency risks and interest rate differentials, the comparables remain valid for transfer pricing purposes. In conclusion, the TPO's comparables, adjusted for geographic and currency-specific risks, provide a more accurate benchmark for the ECB than purely domestic or geographically restrictive options suggested by the assessee.
5.19.On-Lending through Green Bond Issuance, the assessee states that its Mauritius AE raised funds through Green Bonds listed on the Singapore Exchange (SGX), subscribed by unrelated lenders (58% Asian, 27% US, 15% EMEA). The proceeds were on-lent to group entities, including the assessee, with funds sourced from bondholders rather than AE profits or parent contributions. The bonds were issued under the Climate Bond Standards Initiative, supported by a post-issuance certificate.
5.19.1The observation, analysis, and comments of TPO are discussed below:
Arm's Length Nature of Green Bonds:
While the AE raised funds through a public process, there is no detailed evidence to suggest that the terms and conditions (e.g., pricing, tenure, covenants) of the bond issuance align with arm's length principles. The Climate Bond Standards Initiative does not automatically confirm the arm's length nature of the subsequent on-lending.
On-Lending from AE to Assessee:
The AE acts as a financial intermediary, raising funds and on-lending them to group entities. This arrangement introduces complexities on whether the interest rate charged to the assessee reflects the AE's actual borrowing cost plus a margin for the intermediary function and whether unrelated parties in the same circumstances would have accepted similar terms for the loan. Thus, without evidence of a transfer pricing study or comparable benchmarks to justify the on-lending rate, the arm's length nature of the ECB remains unsubstantiated.
Regional Bond Markets Comparison:
Bonds issued from Singapore Exchange (SGX) are priced competitively. However, Mauritius is not a recognized hub for green bond financing, raising questions about whether a more suitable location (eg., Europe or India) would have resulted in lower costs. This indicates that the AE may not have optimized its borrowing arrangements, which could have influenced the interest rate charged to the assessee.
Risk Transfer and Hedging Costs:
The source of funds being unrelated lenders does not mitigate the fact that the AE undertook hedging and incurred risks related to currency fluctuations. These costs, if passed on to the assessee, must be justified with adequate documentation.
Climate Bond Standards:
While the issuance under the Climate Bond Standards Initiative adds credibility to the process, this certification focuses on the sustainability of the project rather than its financial alignment with market rates or arm's length principles.
In light of the above discussion, the assessee's reliance on the Green Bond issuance process as evidence of arm's length pricing for the ECB is insufficient. The TPO observes:
* A lack of benchmarking against similar bond issuances and lending arrangements by unrelated entities.
* Uncertainty around whether Mauritius was the most efficient and logical choice • for the issuance.
* Insufficient evidence to support that the interest rate charged to the assessee accounts for the AE's actual costs and margins.
5.20.The assessee asserts that its fund-raising approach aligns with industry norms, with its AE issuing green bonds on the Singapore Exchange (SGX), secured by Indian project-specific assets. Referring to a CEEW publication, the assessee highlights that 13 of 21 international green bonds by Indian renewable energy developers were routed through foreign entities, supporting its claim of adherence to standard practices.
5.20.1The observation, analysis, and comments of TPO are discussed below:
The TPO observes that while the assessee claims adherence to international norms, this does not preclude the requirement to assess the arm's length nature of the on-lending arrangement. The use of a foreign-incorporated entity, such as Mauritius, raises concerns as it is not a recognized hub for green bond issuance. The AE's choice of jurisdiction and the absence of detailed benchmarking for on-lending margins undermine the claim of cost efficiency. Additionally, international green bonds carry inherent risks, such as currency volatility and reliance on project-specific cash flows, which typically demand higher interest rates from unrelated lenders. The relatively low financing rate provided by the AE suggests equity-like behavior.
Moreover, while the prevalence of similar practices among Indian renewable energy developers is noted, this alone does not confirm arm's length compliance. As emphasized in OECD Guidelines (Paragraph 10.27), the focus must remain on the economic substance of the transaction and its comparability with market norms, rather than its mere form.
10.27.In some instances, the functions of the lender and the borrower may be undertaken by the same entity in different transactions. That could be the case, for example, of centralised treasury activities within an MNE group where the treasury entity raises and provides funds to other members of the MNE group.
In those circumstances, the functional analysis should consider the applicability of the guidance in Section C of this chapter, and, in particular, paragraphs 10.44 [Unquote]
Thus, the assessee's reliance on industry practices and international green bond issuance trends does not absolve it from proving that the ECB terms meet arm's length conditions. The TPO concludes:
* The use of Mauritius as the jurisdiction for the A raises questions about cost optimization.
* The absence of detailed benchmarking for the AE's on-lending margin remains a critical gap in the assessee's submission.
* The TPO is justified in questioning whether the ECB terms reflect those that unrelated parties would have agreed upon under similar circumstances.
6.Notwithstanding the above observation and analysis done by the TPO,based on the reply to the show cause given by the assessee it is also noteworthy to give comments on the following points of the bond deed.
Analysis of "Available Surplus" in the Bond Deed
The term "Available Surplus" is a critical concept in the bond deed, defined as the surplus cash available to the issuer after meeting various obligations. It is used as a determinant for partial redemption of bonds under the Mandatory Cash Sweep (MCS) Structure. Here is a detailed breakdown:
As per the bond deed, the "Available Surplus" means the surplus cash available to the issuer after the following have been met:
i)Payment of taxes and statutory dues
ii) Payment of operating costs and expenses, which includes Utilities, Salaries and administrative overheads, Insurance premiums, Costs of operation, management, and maintenance of the project, Professional, consultancy, and trustee fees
iii) Debt service obligations, which includes early redemptions, interest payments
The bond deed states that the redemption of bonds via the MCS structure is tied to the Available Surplus. Specifically if the MCS account has not been established, bond redemption depends on the surplus available. Clause 4.7.1 explicitly ties partial redemption to surplus availability, indicating that the issuer is not obligated to redeem the bonds unless there is an "Available Surplus" for the applicable MCS amount. By making redemption contingent on surplus cash, bondholders bear the risk of financial underperformance, a feature more akin to equity instruments than debt.
6.2 Payment Subordination
The bond deed explicitly states that the bonds rank paripass with other unsecured debts of the issuer.
However, repayment is contingent on "Available Surplus," which subordinates the bonds in practice to operational and financial expenses (Clause 4.7.1).
The issuer's financial losses and significant liabilities suggest that operational expenses and secured creditors could consume available funds before bondholders are paid.
7.In view of the discussion above, it is determined that the ECBs issued by the assessee are in the nature of equity. Since there is no interest payment associated with equity instruments, the ALP of interest payment is determined to be NIL, by using the "Any Other Method"
8.Accordingly, the Arm's Length Price for the International Transaction is determined as under:-
Particulars Amount (In INR) Interest payment on account of ECBs by the assessee to its AE @8.85% 20,66,04,196/- Arm’s Length Interest payment by the assessee to its AE @0% 0 Adjustment u/s 92CA 20,66,04,196/- The above amount Rs.20,66,04,196/-as adjustment u/s.92CA in this case.
9.Without prejudice to the above, the Arm's Length Price of the above International Transaction is determined on protective basis as under:
In further response to the above show-cause notice, the assessee argues that the proposed adjustment based on an interest rate of 2.82% in USD terms is not comparable to the company's situation, as its interest rate is in INR terms. They contend that the adjustment should be dropped due to factual inaccuracies in the show cause notice and inappropriate benchmarking methodologies used by the TPO.
9.1The observation, analysis, and comments of TPO are discussed below:
Base Rate (USD Terms): The base rate of 2.82%, as identified in the Show Cause Notice (SCN), reflects the global benchmark for similar debt issuances during the loan initiation period, ensuring reliability.
Hedging Costs: Hedging costs are estimated at 2.0%. This accounts for the forward premium required to convert USD-denominated liabilities to INR. The conservative estimate reflects the historical rates of the Indian Rupee in comparison to USD for a 5 year period.
Risk Premium: A 1.0% risk premium is added to account for risks inherent to project-specific cash flow reliance, counterparty credit risk with the third party and limited collateral outside of project-specific assets.
Total INR-Equivalent Interest Rate Calculation:
1.Base Rate (USD Terms):2.82%
* Hedging Costs: 2.0%.
* Risk Premium: 1.0%.
* Total INR Rate: 5.82%.
Comparison with assessee's claimed Rate (8.85%): The assessee's claimed rate of 8.92% exceeds the recalculated arm's length IN rate of 5.82% by approximately 3.03 percentage points, highlighting a discrepancy in the arm's length context. This significant difference suggests favorable terms extended by the AE, potentially reflecting equity-like risk assumptions or non-arm's length behavior.
Economic Substance Analysis: The AE's willingness to extend the loan at 8.92%, despite market benchmarks supporting a lower rate, indicates risk-sharing behavior consistent with equity participation rather than pure debt financing. The lack of strict financial covenants or additional guarantees further supports this observation.
* The 2.82% base rate, as derived from comparable global bond yields during the relevant period, reflects the risk-free rate and aligns with prevailing market conditions.
2. Hedging Costs:
* A 2.0% hedging cost accounts for the forward premium required to convert USD liabilities to INR. This is a conservative estimate based on forward premium data and forex market trends, which adequately considers currency volatility over the loan tenure.
3. Risk Premium:
* An additional 1.0% risk premium is incorporated to account for:
* Third-party risks tied to the borrower's cash flows.
* Project-specific risks due to reliance on renewable energy revenue.
This premium ensures alignment with arm's length pricing for such risks.
4. Bond Discount Adjustment:
* The bond discount of 3% was granted during the issuance process. While such discounts may align with common market practices, only 0.5% is justified as a reasonable one-time adjustment to improve effective yield for initial subscription at arm's length.
* The remaining 2.5% discount reflects a concessional element that does not align with arm's length principles. This portion is proportionately distributed over the loan tenure (5 years), resulting in 0.5% annually and the ALP rate is adjusted accordingly.
Recalculated Arm's Length Rate:
Arm's Length Interest Rate (ALP) =2.82%+2.00% +1.00% - 0.5% =5.32%
11.Considering the above, the determination of Arm's Length Price of the International Transaction on Protective Basis is determined as under:
Particulars Amount (INR)
Interest paid @8.85% (A) 20,66,04,196
Arm’s Length Interest Rate (B) 5.32%
Arm’s Length Interest Expenses (C=A*5.32/8.85) 12,41,95,970/- Adjustment U/s92CA(D=A-C) 8,24,08,226 12.This calculation and adjustment of the interest rate are performed purely as a protective benchmarking exercise and do not preclude the treatment of ECB as equity for transfer pricing purposes on the substantive basis.
The TPO reserves the right to evaluate the economic substance over form of the ECB arrangement and treat the transaction as equity in this case. The above exercise of interest benchmarking on the protective basis in no way nullifies or supersedes the treatment of the ECB from the Associated Enterprise (AE) as quasi-equity.
13.Accordingly, the Assessing Officer will enhance the income of the taxpayer by Rs. 8,24,08,226/-on protective basis as adjustment u/s.92CA of the Act in this case.
The assessee was afforded reasonable opportunity of being heard, as mentioned in this order. The Assessing Officer may examine issue of initiation of penalty u/s 270A of the Act and any other applicable provisions of the Act….”
The assessee moved to the ld. DRP which passed its order dated 19.09.2025 confirming the findings of the ld. TPO with the following observation:-
“……5.2 At the outset, the Panel would like to point out that the figure substantive adjustment on account of interest on ECBs was Rs. 20,66,04,196/-while protective addition was to the tune of Rs. 8,24,08,226/- This ground relates to substantive addition proposed by the TPO. Hence, the correct figure of adjustment to be considered is Rs. 20,66,04,196/- and not Rs. 8,24,08,226/- as stated in this ground of objection.
Considering the above-mentioned recommendation of the ld. TPO, the ld. Assessing Officer proceeded to pass final assessment order making addition of Rs.20,66,04,196/- so as to determine taxable income of the assessee at Rs.20,66,04,196/- vide his order u/s 143(3) r.w.s. 144C dated 30.09.2025. The assessee is in appeal before us assailing the impugned decision of the ld. DRP.
We have heard rival submissions in the light of material placed on records. We have noted that the only issue arising from the impugned grounds of appeal raised by the appellant is regarding the upward adjustment made by the ld. TPO qua the External Commercial Borrowings (ECBs) received from its AEs as Pseudo Equity. Simply put the appellant has taken ECBs from its Mauritius based AEs and the same were treated as a transaction of Equity investment by the Ld. TPO. The ld. TPO considering, inter alia, the factors like the 51% Equity investment by AE with appellant, offering of collateral security of immovable property held that there were no borrowing transactions and that the actual transaction between the appellant and its AE was that of an equity investment.
It is the case of the ld. Counsel for the assessee, the ld TPO has totally misread the facts of the case and that the ld. DRP has also not come to its rescue on this point. The ld. Counsel argued that the arguments put-forth by the ld. TPO are hovering around the arena of conjectures and surmises. The ld. Counsel submitted that the financial transaction of ECB entered by it is purely one of the natures of borrowing. It was submitted that the ECBs are secured with first charge by way mortgage over movable and immovable property as well as hypothecation over project documents of the appellant company. Further as a second ranking charge, all the current asset of the appellant company were hypothecated and lastly with pledge of 51% of the shares of the appellant by its holding company. The ld. DR further submitted that the funds with which, the AE has subscribed to the ACB were raised by the AE through the issue of Green Bonds on the Singapore Exchange which in turn were subscribed by 56 unrelated institutional investors. It was submitted that the list of bond holders, bond covenants, the climate bond initiative post issuance certificate and the audited financial statement of the AE have all been placed on records. Reliance has also been placed upon the decision of the Hon’ble Delhi High Court in the case of Cotton Natural (India) Pvt. Ltd. 55 taxmann.com 523. The ld. Counsel argued that in the above backdrop, the conclusion drawn of the transaction being a Pseudo Equity or Quasi Equity is patently wrong. The ld. Counsel further submitted that on identical facts in respect of another group company, the ld. TPO of Rajkot has allowed the transaction and did not make any upward adjustment.
The ld. CIT-DR, Shri Mahesh Kumar vehemently argued in favour of the order of the lower authorities. It was argued that the authorities have rightly held that the impugned transaction was one of equity and not of debt.
We have noted that the conclusion drawn by the ld. TPO are not based upon correct understanding and interpretation of the facts of the case. The entire hypothesis of ld. TPO is based upon a flawed understanding of the facts of the case. We find force in the argument of the appellant that the hypothecation of movable and immovable properties and of current assets merely adds an assurance to the lender about the safe return of its money. We have also noted that the ld. DRP has also based its decision on incomplete and incorrect facts. We have noted that the findings are sketchy and cryptic. We therefore set-aside the order of ld. DRP and direct the ld. Assessing Officer to delete the impugned addition based upon the recommendation of the ld. TPO. The appeal of the assessee in ITTPA No.15/Del/2025 for AY 20022-23 is therefore allowed.
As the facts of the case in assessee’s appeal in IT(TP)A No.15/Del/2025 for AY 2022-23 are identical to those in IT(IT)A No.61/DEL/2025, IT(IT)A No.66/DEL/2025, IT(IT)A No.67/DEL/2025, IT(IT)A No.68/DEL/2025, IT(IT)A No.70/DEL/2025 and ITA No.7598/Del/2025 for Assessment Year 2022-23, the decision taken therein shall apply mutatis mutandis to these appeals also.
In the result, assessee’s appeals in IT(TP)ANo.15/Del/2025, IT(IT)A No.61/DEL/2025, IT(IT)A No.66/DEL/2025, IT(IT)A No.67/DEL/2025, IT(IT)A No.68/DEL/2025, IT(IT)A No.70/DEL/2025 and ITA No.7598/Del/2025 are allowed.