ITAT Deletes ₹76.45 Crore Transfer Pricing Addition Against EbixCash, Rules CCDs Cannot Be Treated as Equity

June 4, 2026 : In a significant ruling for transfer pricing litigation and cross-border financing structures, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a transfer pricing adjustment of ₹76.45 crore made against EbixCash World Money Limited, holding that Compulsorily Convertible Debentures (CCDs) cannot be arbitrarily recharacterized as equity for disallowing interest payments.

The decision provides important clarity on the tax treatment of CCDs and reinforces the principle that tax authorities cannot disregard the legal character of a financial instrument without statutory authority or proper economic analysis.

The dispute arose for Assessment Year 2022-23 when EbixCash World Money Limited, a Reserve Bank of India-authorized foreign exchange and money exchange service provider, reported international transactions with its associated enterprises and furnished the prescribed transfer pricing documentation. During scrutiny proceedings, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for examination of interest payments made on CCDs issued to its associated enterprise.

According to the record, the company had issued CCDs to its Mauritius-based associated enterprise, Ebix Asia Holding Inc., carrying an interest rate of 9 percent per annum. During the relevant financial year, the company paid interest amounting to ₹76.45 crore on CCDs aggregating approximately ₹849.49 crore.

The TPO took the view that although the instrument was described as a Compulsorily Convertible Debenture, its real substance was that of an equity instrument. The department argued that because the CCDs were mandatorily convertible into shares after a specified period and did not carry a repayment obligation, they resembled advance share capital rather than debt. On that basis, the TPO determined the Arm’s Length Price (ALP) of the interest payment at nil and proposed a transfer pricing adjustment of ₹76.45 crore.

The company challenged the adjustment, contending that the CCDs were valid debt instruments carrying a contractual obligation to pay interest until conversion. It argued that the transaction had already been benchmarked under transfer pricing provisions and that the tax authorities had neither rejected the benchmarking analysis nor conducted any independent comparability study as required under the Income-tax Act and the Income-tax Rules.

The assessee further submitted that the TPO lacked jurisdiction to recharacterize CCDs as equity and that such an approach was contrary to settled judicial precedents. It emphasized that the debenture holders had no voting rights, no entitlement to dividends before conversion, and were treated as lenders rather than shareholders during the life of the instrument.

After examining the record and rival submissions, the Tribunal found merit in the taxpayer’s arguments. The Bench noted that the transfer pricing authorities had disregarded the assessee’s benchmarking analysis and determined the ALP at nil solely on the assumption that CCDs were equity-like instruments.

The Tribunal observed that judicial authorities have consistently held that CCDs cannot be treated as equity merely because they are compulsorily convertible at a future date. Referring to a series of Tribunal and High Court decisions, the Bench reiterated that interest payable on CCDs remains a legitimate debt-related expenditure until conversion takes place.

In a key observation, the Tribunal held that “CCDs cannot be treated as equity and interest in respect of CCD cannot be disallowed by TPO.” The Bench further noted that courts have repeatedly recognized that expenses incurred in relation to convertible debentures retain their debt character despite future conversion into equity shares.

The Tribunal relied upon several precedents, including decisions in Indorama Ventures Oxides Ankleshwar Pvt. Ltd., Embassy One Developers Pvt. Ltd., Religare Finvest West Ltd., and judgments of the Bombay, Delhi, Rajasthan and Karnataka High Courts. It also referred to the Bombay High Court’s ruling in HDFC Bank Ltd., where expenditure relating to fully convertible debentures was allowed as a deductible expense.

Explaining the legal position, the Tribunal emphasized that transfer pricing adjustments under Sections 92C and 92CA of the Income-tax Act must be supported by recognized benchmarking methods and economic analysis. Determining the ALP at nil without identifying comparable uncontrolled transactions or conducting a proper FAR (Functions, Assets and Risks) analysis was found to be unsustainable.

The ruling reinforces an important principle in Indian transfer pricing law: tax authorities cannot disregard the legal form of a genuine commercial transaction merely because they believe its economic effect resembles equity. Unless specific statutory provisions permit recharacterization and proper transfer pricing methodology is followed, interest paid on CCDs cannot be denied solely on the basis of perceived substance.

The judgment is expected to have wider implications for multinational groups, foreign investors and Indian companies that use CCDs as a financing mechanism. The decision provides greater certainty regarding the tax treatment of hybrid instruments and may limit aggressive transfer pricing adjustments based on recharacterization theories.

Allowing the appeal in full, the Tribunal directed the Assessing Officer and the Transfer Pricing Officer to delete the entire addition of ₹76.45 crore made on account of interest expenditure relating to CCDs, thereby granting complete relief to EbixCash World Money Limited.

Case Reference: EBIXCASH World Money Limited v. DCIT, Circle-2(1)(1), ITA No. 8607/MUM/2025 (AY 2022-23)