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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 ..... ppeal for Asst. Year 2018-19 in ITA No.158/RJT/2023 was taken as a lead case, and arguments made based on the facts and circumstances relating to the order passed by the ld.CIT in the said year. We shall, therefore, be dealing with the appeal of the assessee in ITA No.158/RJT/2023 and our decision rendered therein will apply mutatis mutandis to other appeal of the assessee in ITA No.159/RJT/2023 also. ITA No.158/RJT/2023 - Asst. Year : 2018-19 4. A perusal of the order of the ld.CIT(IT-TP) reveals that the revisionary jurisdiction was exercised on the order passed under section 92CA of the Act by the Transfer Pricing Officer (TPO) for the impugned year, finding it erroneous and prejudicial to the interest of the Revenue for not having made necessary inquiries with respect to the determination of Arm's Length Price (ALP) of the international transaction of interest paid by the assessee on Compulsorily Convertible Debentures (CCD) issued to its AE which as per the ld.CIT required an upward adjustment, basis the facts on record. 5. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts but hybrid instrument rather almost akin to equity having salient features i.e. the so called debt instrument will be compulsorily converted into equity shares after 10 years., of its issue and that too at a price determined on the date of issue of CCD itself by completely ignoring the inherent value of equity shares on the date of conversion. Apart from the above, it is further important to highlight here that for A.Y. 2014-15 to A.Y. 2017-18, the TPO has proposed upward adjustment on identical issue. 4. In view of the above facts, prima-facie it appeared that an upward adjustment with respect to the interest paid on Compulsorily Convertible Debenture (CCD) was required to be made, but the then Transfer Pricing Officer (TPO ) has failed to do so and hence the order dated 26.07.2021 passed u/s. 92CA(3) of the Income-tax Act for AY 2018-19 is considered as / erroneous and prejudicial to the interests of Revenue. As per provision of section 263 of the I.T. Act, the competent authority may call for and examine the record of any proceedings 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee furnished its reply in response, making several contentions, i.e on the legal aspect of absence of jurisdiction to revise order of TPO ;of there being no error in the order of the TPO having examined the issue thoroughly and on the merits of the issue that the transaction was rightly found to be at arms length and required no upward adjustment. The ld.CIT found no merit in the contentions of the assessee rejecting all of them and held the order passed by the TPO under section 92CA(3) of the Act to be erroneous causing prejudice to the Revenue for having accepted the ALP of international transaction of interest paid on CCDS without making inquiries or verification necessary in this regard. The ld.CIT, as a result, set aside the order of the TPO for de novo assessment directing him to determine ALP of the interest paid on CCDs afresh, after considering his finding, and after giving due opportunity of hearing to the assessee, keeping in mind, the issue raised by him in his order. 8. Aggrieved by this order of the ld.CIT, the assessee has come up in appeal before us raising several grounds. Oral arguments at length were made before us and a brief synopsis of arguments ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Apex Court in the case of Hitendra Vishnu Thakur Vs. State of Maharashtra, TS-5034-SC-1994-O for the proposition that a statute which affects substantive rights is presumed to be prospective in operation unless specifically made retrospective . Copy of the order was placed before us, and our attention was drawn particularly to para-26 of the order laying down the aforesaid proposition as under: "6. The Designated Court has held that the amendment would operate retrospectively and would apply to the pending cases in which investigation was not complete on the date on which the Amendment Act came into force and the challan had not till then been filed in the court. From the law settled by this Court in various cases the illustrative though not exhaustive principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operation may be culled out as follows: (i) A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of a contrary provision, be affected by the law in force in another assessment year. A right claimed by an assessee under the law in force in a particular assessment year is ordinarily available only in relation to a proceeding pertaining to that year. Therefore, inasmuch as the provisions of section 24(2), as amended in 1957, govern the assessment for the assessment year 1960-61, the High Court is right in affirming that the unabsorbed loss of Rs. 15,50,189 of the assessment year 1950-Sl cannot be carried forward for more than eight years, and consequently cannot be set off against the business income of the assessment year 1960-61." 14. Substantiating his argument that the amendment was substantive and hence prospective in operation, the ld.counsel for the assessee contended that prior to the amendment made in section 263 of the Act, judicially accepted position was that orders passed under section 92CA of the Act could not be subjected to revision in terms of section 263 of the Act, and in this regard, our attention was drawn to the following decisions: i) Essar Steel Ltd. Vs. ACIT, (2012) 28 taxmann.com 232 (Mum); ii) Tata Communication Ltd. Vs. DCIT, (2014) 14 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt instruments, whereas, Ld. ITAT, Ahmedabad has considered them as quasi-capital instruments commanding nil interest; this view has thereafter been approved by Ld. ITAT Mumbai. (iv) The additional evidence being submitted by Ld. AR before Ld. ITAT did not form part of 'records' before CIT, while he reviewed the order of TPO. 4. On Jurisdiction: This issue has been specifically dealt with by Ld. CIT in the S. 263 order. In addition, It was submitted that the amendment u/s 263 is procedural/clarificatory and the orders of Ld. TPO are amenable to review u/s 263 by Ld. CIT (Intl Tax & TP) even for the assessment years prior to AY 2022-23. It was submitted that the date of amendment is to be seen with respect to the examination of records by Ld. CIT in cases of procedural amendments. A parallel was drawn with the decision of Hon. SC in case of Ashish Agarwal (SC 2022), wherein in the case of a similar procedural clarificatory amendment, Hon SC has held that amended provisions of Sec 148 were to be applied by the Revenue after the date of amendment even for reopening of cases of prior assessment years. On retrospective application of clarificatory amendments, reliance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined the record, the order of the TPO was not forming the part of such record or (b) the show cause notice is issued to the assessee prior to 1-4-2022, when revisionary authority was not authorized to revise the order of the TPO. [Para 26] Further Explanation l(a) to section 263 is also amended with effect from 1-4-2022 wherein the order passed by the Transfer Pricing Officer is also included and in sub-clause (iii) the order under section 92CA by the Transfer Pricing Officer is included. Therefore, even if such order is passed by the Transfer Pricing Officer prior to 1-4-2022, but is available before the Assessing Officer passing the draft assessment order or final assessment order and same is also part of the record at the time of examination by the Principal Commissioner (TP), he is empowered to invoke the provisions of section 263 by revising or directing the TPO to pass the order under section 92CA(3) afresh. [Para 27] * Further when the proposed amendment was made to the provisions of section 263 in the 'Notes on Clauses' it is mentioned that the Income-Tax Act authorizes the authority to revise the order if at the time of examination, such orders are on record. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act were not amenable to revision. Three decisions were referred to before us and noted above by us as under: i) Essar Steel Ltd. Vs. ACIT, (2012) 28 taxmann.com 232 (Mum); ii) Tata Communication Ltd. Vs. DCIT, (2014) 41 taxmann.com 486 (Mum-Trib); iii) Tetra Pak India P.Ltd. Vs. CIT, (2017) 78 taxmann.com 259 (Pune-Trib.) 22. We have gone through all the three decisions and we find that the said decisions do not lay down any such proposition of law. The lead decision out of the three above, is Essar Steel P.Ltd. (supra) which has been referred to in both the other decision of the ITAT. It is reproduced in the case of Tata Communication Ltd. (supra) at para-9 of its order as under: "9. We have heard the rival contentions, perused the findings of the authorities below as well as the order of the Tribunal relied upon by the learned Senior Counsel. In this case, the Commissioner has held that the order passed by the TPO is erroneous inasmuch as it is prejudicial to the interests of Revenue and, therefore, the assessment order passed by the Assessing Officer is also erroneous. Accordingly, he set aside the assessment order with direction to refer the issue of adjustment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 92CA(3) of the Act.". The order goes on to state that the Director IT should have initiated the proceedings u/s 263 of the Act instead of sending a proposal to the CIT for revising the order of the TPO. It also notes that there was no clarity about the authority who has power to modify the TPO's order and that the CIT cannot exercise jurisdiction over the TPO as the TPO functions separately under the Director of IT(TP). 24. It is abundantly clear that the ITAT did not rule out orders passed under section 92CA of the Act being amenable to revision u/s 263 of the Act. What it only held was that the CIT had no power administratively over TPO orders and therefore could not exercise powers u/s 263 of the Act over TPO orders. The ITAT categorically notes that the Director IT ought to have initiated proceedings for revision, and this itself makes it abundantly clear that the said decision did not lay down any proposition to the effect that orders u/s 92CA of the Act were not amenable to revision u/s 263 of the Act prior to its amendment by Finance Act, 2022, as canvassed by the Ld.Counsel for the assessee before us. 25. Hence even as per the judicial interpretation of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 11 months. The relevant findings of the ITAT in this regard are given in the written submissions of the Revenue, which we have already reproduced hereinabove at para-16 of our order. 30. Moreover the ld.CIT, we have noted, has referred to the Explanatory notes to the provisions of Finance Act, 2022, issued by the CBDT pertaining to the amendment to section 263 of the Act and rightly derived the nature of the amendment therefrom to be clarificatory. 31. The relevant finding of the ld.CIT in this regard are as under: "7. I have gone through the reply of the assessee, it is considered and kept on record. However, the same is not found to be acceptable for the reasons summarized in subsequent paras wherein each of the contentions of the assessee have been dealt with. 7.1 The assessee has raised an argument that wordings "or the Transfer Pricing Officer, as the case may be" has been inserted in section 263(1) vide the Finance Act, 2022 w.e.f. April 01, 2022 and therefore, only orders passed u/s 92CA(3) of the Act on or after April 01, 2022 are amenable to revision u/s 263 of the AcLThe first argument of the submission dated 17.03.2023 is also on similar lines so dealt with here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance Act, 2022. This amendment is only a clarificatory amendment as mentioned above." 32. We do not find any infirmity in the above finding of the ld.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. The Ld.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 by the ITAT Mumbai Bench in the case of Essar Steels Ltd. (supra) wherein the ld.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. 33. Therefore, it is abundantly clearly that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the CCDs to the Appellant's AE is unwarranted and not at arm's length. 3 .2. The Id. CIT failed to appreciate that: 3.2.1. the CCD holders and the original subscriber to the equity shares of the Appellant is the same AE; 3.2.2. the CCDs, till the time of conversion, constitute debt instruments and interest expense thereon is a deductible expenditure. 3.3. The Appellant therefore prays that the addition made by the Id. CIT be deleted and the order of the TPO be restored. 36. The challenge raised by the assessee in the above grounds is with respect to the findings of the Ld.CIT of the TPO's order being erroneous causing prejudice to the Revenue for the reason that the TPO had accepted the international transaction of interest paid on CCD's issued to AE as being at arms length without making necessary inquiries when a correct appreciation of facts on record would undoubtedly have resulted in an upward adjustment to the transaction. 37. The argument of the Ld.Counsel for the assessee briefly put is that: * The TPO had made inquiries on the issue during proceedings before him. The assessee had filed all necessary documents, details and explanation justifying the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D's was arrived at @ 8.99% which compared favourably with the interest paid by the assessee @ 9%. 41. The Ld.Counsel for the assessee was asked to explain the working of the premium for unrated bonds, since it was noted to be very technically worded and not comprehensible to a common man. To which he fairly admitted to have no explanation to offer. The TPO also we find has asked for no explanation of the same, nor was any such explanation pointed out by the Ld.Counsel for the assessee to be given to the TPO during proceedings before him. We fail to understand, therefore, how the TPO was capable of forming a view that the ALP of the transaction was duly justified by the assessee, when the explanation itself was beyond comprehension. 42. Be that so, the Ld.DR countered by pointing out that the Ld.CIT had held that the CCD's were not pure debt instruments but were hybrid instruments, noting the peculiar characteristics of the CCD's , i.e being compulsorily convertible after 10 years at a price predetermined at the time of issue of CCD's itself. He pointed out that the Ld.CIT thereafter brought out the difference between the two types of instruments; that in the case of pure debt ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears of its issue and that too at a price determined on the date of issue of CCD itself by completely ignoring the inherent value of equity shares on the date of conversion. In the Transfer Pricing Study Report, CUP method is selected as the MAM for benchmarking of the interest on CCDs. Three instruments have been selected as comparables. On examination of instruments, it is seen that these are pure debt instruments. In a pure debt instrument, at the end of term, the money is returned and therefore the interest is. nothing but compensation for time value of money. However, the CCDs are attached with the obligation to issue share capital. The CCDs are in the nature of hybrid instrument in the sense that substantive reward, or true consideration, for such a transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favorable terms. The true reward of the transactions is the opportunity and privilege to own borrower's capital on certain favorable terms. Therefore, CCDs belonged to a different genus than the act of simply giving the money to the borrower, and fell in the category of Hybrid Instrument. In view of the above, the benchmarking o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proves beyond doubt that the payment of interest on CCDs by the assessee to its AE was unwarranted and is not at arm's length." 44. He contended that the case of the Ld.CIT was not that of no inquiry conducted at all by the TPO but of inadequate inquiry conducted without appreciating the facts before him in the correct perspective. Our attention was drawn to para 7.2 of his order as under: "7.2 The second argument of the assessee is that the TPO has duly applied his mind to the determination the ALP. This argument is also not acceptable for the reason that the records of the TPO clearly suggests that the TPO has passed his order without making any inquiries or verification which should have been made regarding issuance of CCDs and genuineness of interest payments thereon and therefore, the instance case is squarely covered by the provisions of explanation 2 to section 263 of the Act. Simply because the TPO has called for information regarding this transaction does not mean that the TPO has conducted inquiries or verification regarding this transaction. Rather, on perusal of the case records it is prima-facie discernible that the TPO has failed to conduct inquiries regarding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strument was that, the conversion of the CCDs into equity was actually done at the face value of the equity on the date of conversion i.e. on 3rd October, 2023 at the rate of Rs. 27,154/- per share and not at the price allegedly predetermined of Rs. 556/-. That therefore even as per the logic applied by the Ld.CIT no benefit accrued to the CCD holders, the AE, on conversion to equity since the rate of conversion took into consideration all benefits which could have accrued to the assessee during the period they were held as debentures. That therefore the CCD's before conversion were pure debt instruments and not hybrid instruments as held by the Ld.CIT. 48. The ld.counsel for the assessee stated that the conversion happened after passing of the order under section 263 of the Act, therefore could not be pointed out during the revisionary proceedings before the ld.CIT. He contended that the fact noted by the ld.CIT that the debentures were converted at a pre-determined rate of Rs. 556/- was incorrect, and far from the truth. He placed before us, following documents to support is its case - i) Letter filed with the RBI of intimation of such conversion; ii) Filings done with the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible 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. 53. The Ld. Counsel for the assesses counter to the same referring to certain case laws holding CCD's to be in the nature of debt instruments, we find, is of no consequence. We have gone through the decisions, and we find that they are not applicable to the issue on hand before us. In the case of Secure Meters Ltd. (supra) the issue was allowability of expenses incurred in relation to the debentures, whether revenue or not. This was the primary question before Hon'ble Court, which held that whether the nature of debenture is convertible or non-convertible, will make no difference to the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring 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. 58. In view of the above we have 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. 59. The TPO undoubtedly has accepted the apparently wrong justification of the ALP of the tra ..... 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