2024 (5) TMI 1240 - AT - Income Tax

Revision u/s 263 - scope of amendment made to section 263 - order u/s 92CA challenged - as argued prior to amendment made to section 263 of the Act by Finance Act 2022 the position of law was very clear that orders passed u/s 92CA could not be subjected to revision in terms of section 263 HELD THAT - No infirmity in the above finding of the CIT. The explanatory notes clearly point out that the purpose of the impugned amendment to section 263 of the Act was only to clarify the officer with whom the jurisdiction to revise such orders lay. CIT we hold has rightly inferred therefrom that the power of revision of TPO orders always was available in law. In fact the explanatory notes addresses the lacuna noted in the case of Essar Steels Ltd. 2014 (4) TMI 809 - ITAT MUMBAI wherein the CIT was noted to have no jurisdiction administratively over the TPO and therefore his order passed u/s. 263 revising TPO s order was held to be without jurisdiction and hence invalid. The amendment to section 263 of the Act was merely clarificatory made only to address the administrative irregularity in the provision clarifying the correct jurisdictional officer to exercise jurisdiction for revision of orders passed by TPO s u/s 92CA of the Act a lacuna in the existing provision as noted by the ITAT in the case of Essar Steel Ltd. (supra). We have no hesitation in confirming the order of the Ld.CIT holding the amendment to section 263 of the Act including orders passed u/s 92CA of the Act for revision a clarificatory/procedural amendment and therefore retrospective in operation in conformity with the principles laid down by the Hon ble Supreme Court in the case of Hitendra Vishnu Thakur 1994 (7) TMI 343 - SUPREME COURT Shree Sankaracharya University 2023 (5) TMI 1246 - SUPREME COURT The exercise of jurisdiction u/s 263 of the Act in the present case by the Ld.CIT on an order passed u/s 92CA of the Act is not without jurisdiction we hold. All arguments raised by the assessee in this regard are dismissed. International transaction of interest paid on CCD s at arms length and needed upward revision - Whether TPO had examined the transaction during TP proceedings and taken a plausible view of finding the transaction to be at arms length? - HELD THAT - CIT s finding of the CCD s being in the nature of hybrid instruments is based on appreciation of facts before him of the CCD s being compulsorily convertible into equity after 10 years that too at a predetermined rate determined at the time of issue of CCD s of Rs. 556/-. He has rightly noted the distinction between the CCD s and debt instruments of the reward in the case of debt in instruments being only interest earned while in case of CCD s besides interest the reward by way of their conversion into equity at favourable terms by way of the conversion rate being determined at the time of issue of CCD s thus entitling the CCD holders to all earnings of the assessee prior to conversion into equity without an appropriate charge for the same. The last attempt of assessee for demonstrating that the CCD s were pure debt instruments by pointing out that subsequent events showed that the CCD s were converted at the prevailing market rate of Rs. 27, 154/- per share and the CIT had wrongly interpreted the conversion clause of the agreement to revealing their conversion at a predetermined price of Rs. 556/- we hold merits no consideration. The addendum notes that it is clarificatory in nature so as to bring out the clear intention of the parties that the price at which the equity shares were issued upon conversion would be higher of the agreed price or the price determined as per the FEMA Regulations in force at the time of actual conversion. This addendum to the debenture subscription agreement dated 3.10.2013 is executed on 14.3.2023 which is the date of issue of the certificate of stamp duty issued. The order under section 263 of the Act was passed on 22.3.2023. The addendum therefore was entered into during and at fag end of the revisionary proceedings. This addendum was not before the ld.CIT when he passed his order and more importantly was not even in existence when the TPO passed order u/s. 92CA of the Act. Therefore there can be no question of considering the same for the purpose of adjudicating the correctness of the order passed by the ld.CIT under section 263 of the Act before us. The assessee we may add is at liberty to furnish these documents to the TPO in the set aside proceedings. No hesitation in confirming the findings of the Ld.CIT based on facts before him that the instrument issued by the assessee CCD was a hybrid instrument and not a pure debt instrument. The records reveal that the assessee had justified the ALP of interest paid on these hybrid instruments by adopting CUP as the most appropriate method and comparing the same with interest paid on pure debt instruments. There is no dispute vis-a-vis this fact. Clearly the comparability exercise done by the assessee was incorrect and the Ld. CIT we hold has rightly found so. CIT we hold was right in finding the TPO to have not conducted necessary inquiries on the issue and as a consequence wrongly accepted the transaction to be at arm s length. The view taken by the TPO was not a plausible view. The fact that in the preceding four years this instrument has been treated as hybrid instrument by the TPO and upward adjustment made to the ALP of the transaction of interest paid of CCD s in no uncertain terms makes the TPO s order passed in the impugned year erroneous causing prejudice to the Revenue for having accepted the transaction as being at arm s length. The fact that the order for the four preceding year were passed subsequent to the TPOs order in the present case does not alter the position and the fact remains that this identical transaction was found not to be at arm s length by the TPO in the said four years and while in the impugned year was accepted to be at arm s length without making necessary inquiry. CIT has we hold rightly held the TPO s order erroneous and causing prejudice to the Revenue. Decided against assessee.

Summary

Issues Involved:
1. Jurisdiction of CIT under section 263 to revise the order passed by the TPO.
2. Determination of Arm's Length Price (ALP) of interest paid on Compulsorily Convertible Debentures (CCDs).

Summary:

Issue 1: Jurisdiction of CIT under section 263 to revise the order passed by the TPO

The assessee contended that the CIT lacked jurisdiction to revise the TPO's order under section 263 of the Income Tax Act, 1961, as the amendment to section 263, which included orders passed by the TPO, was brought about by the Finance Act, 2022, and thus applied prospectively from April 1, 2022. The assessee argued that the amendment was substantive, affecting vested rights, and thus could not apply to orders passed before the amendment. The CIT and the Revenue countered that the amendment was clarificatory and procedural, and thus retrospective in nature. The Tribunal found no merit in the assessee's argument, holding that the amendment was indeed clarificatory, addressing administrative irregularities, and thus applicable retrospectively. The Tribunal noted that the CIT had the jurisdiction to revise the TPO's order under section 263, even for orders passed before April 1, 2022. The Tribunal upheld the CIT's jurisdiction, dismissing the assessee's ground on this issue.

Issue 2: Determination of Arm's Length Price (ALP) of interest paid on Compulsorily Convertible Debentures (CCDs)

The CIT found that the TPO's order was erroneous and prejudicial to the interests of the Revenue because the TPO had accepted the ALP of interest paid on CCDs without making necessary inquiries. The CIT noted that the CCDs were hybrid instruments, not pure debt instruments, and thus the comparison with pure debt instruments was incorrect. The CIT held that the TPO had failed to appreciate the correct facts and had not conducted adequate inquiries, leading to an incorrect determination of the ALP. The assessee argued that the TPO had made inquiries and taken a plausible view, and that the CCDs were pure debt instruments. The Tribunal found no infirmity in the CIT's order, holding that the TPO had not conducted necessary inquiries and had incorrectly accepted the ALP determined by the assessee. The Tribunal also noted that in the preceding four years, the TPO had made upward adjustments to the ALP of interest paid on CCDs, reinforcing the CIT's finding that the TPO's order was erroneous and prejudicial to the Revenue. The Tribunal dismissed the assessee's grounds on this issue, upholding the CIT's order for de novo assessment by the TPO.

Conclusion:
The Tribunal dismissed the appeals of the assessee, upholding the CIT's jurisdiction under section 263 to revise the TPO's order and confirming the CIT's findings on the incorrect determination of the ALP of interest paid on CCDs.