CIT can revise TPO orders under section 92CA after 2022 amendment, interest on CCDs requires proper arm's length analysis

ITAT Rajkot held that the 2022 amendment to section 263 was clarificatory and retrospective, enabling CIT to revise TPO orders under section 92CA. The amendment addressed jurisdictional lacuna identified in Essar Steels Ltd case regarding CIT's administrative authority over TPO. Regarding the substantive issue, ITAT confirmed CIT's finding that TPO erroneously accepted interest on compulsorily convertible debentures (CCDs) as arm's length without proper inquiry. The CCDs were hybrid instruments, not pure debt, making assessee's comparability exercise with debt instruments incorrect. TPO's acceptance contradicted treatment in four preceding years where identical transactions required upward adjustment. Appeal dismissed.

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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.

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