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TMI Blog2024 (5) TMI 1240X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment 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 proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts 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 prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld.CIT noted from the records that the assessee had issued CCDs ( 5,99,924 in number, of face value Rs. 1000/-) to its AE, and as per the terms of the agreement for issue of the same, these CCDs were to be compulsorily converted into equity at the end of a specified period, at a pre-determined rate, the rate being determined on the date of issue of CCDs itself. On the basis of the said facts, he inferred that the CCDs were not pure debt instruments, but were hybrid instruments. He noted that interest at the rate of 9% was agreed to be paid on CCDs till the date of conversion into equity. The records further revealed that the assessee had justified the ALP of interest paid on these CCDs by comparing with pure debt instruments, which was accepted by the TPO. The Ld.CIT accordingly found that the TPO had not examined the justification of the ALP of this transaction in the light of the correct facts relating to the CCDs and the acceptance therefore by the TPO of interest paid by the assessee on these CCDs, to be an Arm s Length Price (ALP) was found by him to be in error. He noted that in the preceding four years, i.e Asst. Year 2014-15 to 2017-18 the TPO had made an upward adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon. 5. Reliance is placed on explanation 2 to section 263 of the Act, in which it is clearly mentioned that any order passed by the TPO shall be deemed to be erroneous in so far as it is prejudiced to the interests of the revenue, if the order is passed without making inquiries or verification which should have been made or if the order is passed allowing any relief without inquiring into the claim. For clarity sake explanation 2 to section 263 is produced as under: Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, (a) the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal before us raising several grounds. Oral arguments at length were made before us and a brief synopsis of arguments made was filed in writing by both the parties along with copies of judgements referred. A factual and legal paper book was filed by the Ld.Counsel for the assessee. Taking into consideration all of the above we shall now proceed to deal with the various grounds raised by the assessee before us. 9. Ground No.1 reads as under: 1. GROUND NO. 1; ORDER PASSED UNDER SECTION 263 OF THE ACT IS WITHOUT JURISDICTION: 1.1. On the facts and in the circumstances of the case and in law, the Id. CIT was not justified and grossly erred in revising the order passed by the Deputy Commissioner of Income Tax, Transfer Pricing DC/ACIT TP 2, Ahmedabad ( the TPO ) dated July 26, 2021. 1.2. In doing so, the Id. CIT has erred, inter alia, in not appreciating that the amendment in section 263 with respect to revision of order passed by transfer pricing officer was brought about by Finance Act, 2022 and accordingly, only those orders passed by the transfer pricing officer post April 1,2022 could be revised u/s. 263 of the Act. 1.3. The Appellant prays that since the impugned order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which merely affects procedure, unless such a construction is textually impossible, is presumed to be retrospective in its application, should not be given an extended meaning and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature. (iii) Every litigant has a vested right in substantive law but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. 13. Reliance was also placed on the decision of the Hon ble Apex Court in the case of Reliance Jute Industries Ld. Vs. CIT, (1979) 2 Taxmann 417 (SC) for the proposition that it is a cardinal principle of tax laws that law to be applied is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2012) 28 taxmann.com 232 (Mum); ii) Tata Communication Ltd. Vs. DCIT, (2014) 14 taxmann.com 486 (Mum-Trib); iii) Tetra Pak India P.Ltd. Vs. CIT, (2017) 78 taxmann.com 259 (Pune-Trib.) 15. It was therefore stated that clearly prior to amendment made to section 263 of the Act by Finance Act, 2022, the position of law was very clear that orders passed under section 92CA could not be subjected to revision in terms of section 263 of the Act; that therefore the assessee had vested right to finality to orders passed by the TPO under section 92CA of the Act, and the amendment to section 263 of the Act, including orders passed by the TPO under section 92CA of the Act for revision, clearly affected the substantive right of the assessee and therefore, the amendment was intended to have prospective operation only. 16. The ld.DR countered all the arguments of the ld.counsel for the assessee relying on the finding of the ld.CIT that the amendment was clarificatory, hence retrospective in operation. Reference was made to the decision of the Hon ble apex court in the case of Shree Shankaracharya University of Sanskrit and Others vs Dr Manu and others in C A No.3752 of 2023 dated 16-05-23, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective application of clarificatory amendments, reliance was placed on the discussion on interpretation in the case of Sree Sankaracharya (SC, 2023) and kind attention was invited to relevant provisions in FA 2022, wherein the term used is 'clear' This is also mentioned in the order of Id. CIT u/s 263. To substantiate that Ld. ITAT has held before such amendment to sec 263 that the order of TPO is amendable to action u/s 263, reliance was placed on the order of Agro Tech Foods (ITAT, Hyd). On the interpretation of clarificatory nature of amendment, reliance was placed on the order of Zenzi Pharmaceuticals (ITAT, Mumbai 2023) which deals with the issue directly and discusses the issue under consideration and holds that 'the the date of passing of the order, which is subject to revision, is irrelevant but what is relevant is the date of examination of such record by the Id CIT. the records, as well as order u/s 263 will show that the first notice u/s 263 was issued by Ld. CIT on 27.02.2023. Relevant extracts from Zenzi Pharmaceutical case: As per provisions of section 263, several authorities are authorized to 'call for and examine the 'record of any proceedings& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of examination, such orders are on record. Thus, the date of passing of the order, which is subject to revision, is irrelevant but what is relevant is the date of examination of such record. If on the date of examination of such record. The revisionary authority is vested with powers to revise such orders [i.e. after 1-4-2022]; the date on which such order subject to revision is passed is immaterial. [Para 30] 17. Counter arguments were made by both sides, with both the parties emphasizing their stand that the amendment was Substantive / clarificatory in nature 18. We have heard both the parties, gone through the orders of the ld.CIT, and also considered various judgments referred to by both the parties before us. We do not find any merit in the argument of the ld.counsel for the assessee that the order passed in the present case by the ld.CIT was without jurisdiction. 19. His contention was that the impugned order u/s 263 of the Act was passed prior to 01-04-22, when orders passed u/s 92CA of the Act were not amenable to revision since: the section (263 of the Act) was amended to include such orders passed by TPO s(u/s 92CA of the Act) only by Finance Act, 2022 w.e.f 01-04-22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of adjustment of arm's length value of international transaction to the TPO for re consideration and then to pass assessment order afresh in view of the findings and the directions of the TPO. We find that the co ordinate bench of the Tribunal, Mumbai Benches, in Essar Steel Ltd. (supra) has held that the Commissioner has no jurisdiction over the TPO administratively and he could not have revised the order passed under section 92CA(3) passed by the TPO. The relevant observations of the Tribunal in Essar Steel Ltd. (supra) are as under: 13. We are not considering the issue whether the TPO's order could be revised by the CIT or by the Director of IT as that issue is not before us at this moment. As seen from the provisions, the CIT has no jurisdiction over the TPO administratively and therefore, the CIT could not have revised the order u/s 92CA(3) passed by the TPO. Whether the Director of IT can revise the order which he himself has approved as per the Board circular can only be examined when such issue arises but for deciding this issue, we can safely conclude that the order of the CIT revising the assessment order dt. 1st Jan., 2008 passed u/s 143(3) is not erroneous or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 263 of the Act prior to amendment, relied upon by the ld.counsel for the assessee there is nothing to suggest that the TPO orders were held not amenable to revision u/s 263 of the Act. 26. On the contrary, the decision cited by the ld.DR in the case of Agro Tech Foods Ltd. Vs. DCIT, ITA No.775/Hyd/2016 ITA 1116/Hyd/2018 dated 17.12.2020 categorically holds that orders passed under section 92CA of the Act are part of the assessment orders and amenable to the jurisdiction of the ld.CIT under section 263 of the Act, as per the provision prior to amendment. 27. Clearly, therefore even prior to the amendment to section 263 of the Act, orders passed by TPO s were amenable to revision. The assessee s therefore had no right to finality of orders of TPO s prior to amendment, as contended by the Ld.Counsel for the assessee. The amendment to section 263 of the Act hence did not effect any substantive right of the assessee. The reasoning of the Ld.Counsel for the assessee for stating that the amendment to section 263 of the Act was substantive in nature therefore, we hold, fails and so also , as a corollary, his contention that the amendment is prospective in operation 28. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This argument is not acceptable for the reason that as per Circular No. 23/2022 F. No. 370142/48/2022-TPL of Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) dated 3rd of November, 2022 Explanatory notes to the provisions of the Finance Act, 2022 have been issued of which the relevant portion regarding section 263 is reproduced below:- 43 Amendment in the provisions of section 263 43.1 ............................. 43.2 As per provisions of section 92CA, if the Assessing Officer considers it necessary or expedient, he may, with the approval of the Principal Commissioner or Commissioner refer the computation of arm's length price (ALP) in relation to the international transaction or specified domestic transaction entered into by an assessee, to the Transfer Pricing Officer (TPO). The TPO passes an order determining the ALP in an international transaction or specified domestic transaction under the provisions of section 92CA and sends it to the Assessing Officer for final income determination. However, it is not clear as to who has the power under section 263 to revise the order of the TPO passed under section 92CA. 43.3 Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, 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 (supra), Shree Sankaracharya University (supra). 34. 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. Ground No.1 of the assessee is accordingly dismissed. 35. Ground No.2 3 raised by the assessee need to be dealt together since they are interrelated. In ground no.3 the assessee has challenged the findings of the Ld.CIT on merits that the international transaction of interest paid on CCD s was not at arms length and needed upward revision, while in ground no 2 his contention is that the TPO had examined the transaction during TP proceedings and taken a plausible view of finding the transaction to be at arms length. Since it is necessary to first adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had taken a plausible view accepting the transaction being at arms length. Necessary documents evidencing the contention were pointed out to us from the paper book filed before us. That the transaction was at arms length and no upward adjustment was warranted to the same. 38. There is no dispute with respect to the facts relating to the transaction in question which were noted by the Ld.CIT from the records before him. The agreement of issue of CCD s mentions the same to be unsecured, unrated, unlisted, fully paid-up, nonmarketable and non-redeemable, fully and compulsorily convertible debentures of the face value of Rs. 1000/- each, on which interest is agreed to be paid at 9% per annum, for a period of ten years, after which they would be compulsorily converted into equity at predetermined price of Rs. 556 for each equity shares . The CCDs after conversion into equity would be equal to the shares of the company. The copy of the agreement for the issue of CCDs by the assessee to its AE, which is placed before at PB Page No.150 to 161. mentions debentures being unsecured, unrated etc. on a value of Rs. 1000/- carrying coupon rate of 9% per annum at point no.4 as under: 39. It ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CCDs, being hybrid instruments, the true consideration was not interest simplicitor on the amount advanced but also an opportunity to own capital that too on certain favourable terms in the present case. The true reward, he pointed out, of the hybrid instruments was the privilege to own borrowed capital on certain favourable terms of conversion at a predetermined rate at the time of issue of CCD s . The Ld.CIT he pointed out noted that after conversion of CCD s into equity after 10 years, the AE becomes entitled to share in all the earnings of the assessee in these years without charging of any premium for the same, since the conversion rate was decided at the time of issue of CCD s itself. 43. The Ld.DR contended that noting the difference in the nature of instrument issued by the assessee the Ld.CIT held their comparison with pure debt instruments, as done by the assessee, as incorrect and therefore wrongly accepted by the TPO. Our attention was drawn to para 7.6 of the order of the Ld.CIT holding the ALP of the transaction to be incorrectly determined by the assessee as under: 7.6 Lastly, the assesses has made arguments on merits of the case and stated that the ALP is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate as per law. 3. Also, the CCDs @ 9% were issued to its AE in the same year (2013- 14) with the right to convert them into equity shares after 10 years at the same rate i.e. @ Rs 556 per share. In this case, the true reward of the CCDs in the hand of holder (AE) is the opportunity and privilege to own portion of issuer's (assessee's) capital at the valuation of equity shares arrived at the time of issue of CCDs itself. In simple term, the CCDs will be converted in to the equity share at conversion date(10 years after issue date) at the valuation of equity shares on issue date. 4. In view of the above discussion, the reward for money lent by CCD holder in this case was opportunity to subscribe to the capital on favorable terms, unlike in a normal loan transaction where reward is only interest, which is measured as a percentage of the money loaned or advanced. In the case under consideration, the AE has been adequately compensated for its money by way of issue of equity shares at a value of Rs. 556/share which is pre-determined on the date of issue of CCD itself. Though the CCDs were converted into equity shares after 10 years but instead of charging premium from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction. This has led to the conclusion that the order of the TPO is not only erroneous but also it is prejudicial to the interests of the revenue. 45. Ld.DR contended that finding the ALP determination by the assessee to be incorrect, the Ld.CIT had rightly held that the view taken by the TPO, accepting the transaction to be at ALP, was not a plausible view. 46. He drew our attention to para 7.3 of the order of the Ld.CIT dismissing assesses contention of the view taken by the TPO being a plausible view as under: 7.3 The third argument of the assessee is that order u/s 263 cannot be passed where two views/diverging views are possible. This argument is also not acceptable for the reason that in the instant case, had the TPO conducted inquiries and verification of the transaction then the only inescapable conclusion would have been that the interest payment on the CCDs which are more of equity in nature is not at arm's length and therefore, an adjustment to the extent of interest payment on the said debentures was warranted. The characteristics of CCDs clearly indicate that these are not pure debt instruments but hybrid instrument rather almost akin to equity having salien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dendum dated 14.3.2023 49. Ld.DR vehemently objected to entertaining the above documents at this stage. He stated that all the document the came into existing much after the passing of the order of the TPO and at the fag end of the proceedings before the CIT. They were, he pointed out, never brought to the notice of the Ld.CIT. That therefore the documents could not be considered for adjudicating the correctness of the order passed by the Ld.CIT. The ld.DR also pointed out the fact noted by the ld.CIT that in preceding four years i.e. Asst. Year 2014-15 to Asst. Year 2017-18, upward adjustment to the ALP of this same transaction of interest paid on CCD s was done by the TPO. He contended that it was abundantly clear therefore that the TPO s order in the impugned year was erroneous for not having made this upward adjustment. That the adjustment was warranted following the principle of consistency. The ld.counsel for the assessee countered by stating that the adjustment in the preceding years was made in orders passed under section 147 of the Act subsequent to the passing of the order by the TPO in the impugned year. That principle of consistency was in favour of the assessee and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the assessee that convertible debentures are pure debt instrument. Similarly, the decision of the Hon ble Karnataka High Court in the case of ITC Hotels (supra) also addresses the same question of law on interest expenditure on debentures. The said decision also is no assistance to the proposition canvassed by the ld.counsel for the assessee before us. 54. The other contention of the Ld.Counsel for the assessee that Revenue authorities cannot recharacterize nature of instruments fails for the simple reason that it is not a case of recharacterization but on the contrary of determining the correct nature of the instrument. 55. The last attempt of the Ld.Counsel for the 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. 56. We have gone through the documents now filed before us, and we noted that addendum to the agreement rephrasing the clause relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the CCD s which revealed its true nature as being distinct from pure debt instruments. Therefore the Ld.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. 60. Moreover, 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. The Ld.CIT has, we hold, rightly held the TPO s order erroneous and causing prejudice to the Revenue. All arguments of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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