AI Drafter 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2024 (5) TMI 1240
X X X X Extracts X X X X
X X X X Extracts X X X X
....rder. 3. For the sake of convenience, the appeal 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 va....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of CCDs, it can be inferred that these are not pure debt instruments 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T assumed jurisdiction for revision of the order of the TPO u/s 263 of the Act , issuing a show cause notice to the assessee. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was passed on 26.7.2021, and therefore, could not be subjected to revision under section 263 of the Act. 12. In this regard, reliance was placed on the decision of 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ovision as amended by the Finance (No. 2) Act, 1957. There is no question of the assessee possessing any vested right under the law as it stood before the amendment. The assessment for one assessment year cannot, in the 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee, more specifically the benchmarking of the transactions done in TP Study Report by comparing it with the pure debt instruments, and thus this is a case of non-application of mind. (iii) That on merits of the issue, Ld. TPO considered the CCDs as pure debt 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....also found therein which is erroneous and prejudicial to the interest of the revenue, it can be modified or it can be cancelled and directing a fresh order under that section by the revisionary authority. [Para 20] It is not the case of the assessee that (a) the date on which the revisionary authority examined 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....section 263 of the Act was substantive. The contention of the ld.counsel for the assessee that amendment effected the substantive right of the assessee to finality to the orders of the TPO is based on several judicial decisions wherein he has contended it has been held that prior to amendment made to section 263 of the Act, orders passed under section 92CA of the 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 or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, the order of CIT holding the order of AO under s. 143(3), dt. 1st Jan., 2008 as erroneous and prejudicial to the interests of Revenue cannot be upheld." 23. A perusal of the above would reveal that what the ITAT held in the case of Essar Steel Ltd. (supra) is that "the Commissioner had no jurisdiction over TPO administratively, and therefore, Commissioner cannot revise order passed by TPO under section 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore the CIT as on 01-04-22, amenable to revision even if such orders are passed prior to 01-04-22. The ITAT noted that accepting the contention of the assessee that the amendment was applicable to orders passed u/s 92CA of the Act after 01-04-22 , would result in an absurdity putting the powers given to revisionary authorities in abeyance till the time such orders come up before them, which as per law would be atleast 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndment clearly suggests that the power of revision was always available with the PCIT/CIT. The amendment only clarified that the power to revise the order passed u/s 92CA by the TPO shall rest with the CIT who is assigned the jurisdiction of transfer pricing. In the instant case, the undersigned is assigned the jurisdiction of transfer pricing and therefore, the power of revision u/s 263 have been rightly exercised as per the provisions of the Act read with the clarification issued by the Finance 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2.1.3. assessment made by the then TPO was neither erroneous nor prejudicial to the interest of the revenue. 2.2. The Appellant prays that the action of the Id. CIT invoking the revision proceedings and revising the order of the TPO be held as invalid. GROUND NO. 3: UPWARD ADJUSTMENT IN RESPECT OF THE ARM'S LENGTH PRICE OF INTEREST PAID ON COMPULSORILY CONVERTIBLE DEBENTURES TO THE ASSOCIATED ENTERPRISE 3.1. On the facts and in the circumstances of the case and in law, the Id. CIT erred in holding that the interest paid on 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with the said regulations)." The Ld.Counsel for the assessee drew our attention to the justification given by the assessee of the transaction being at arm's length to the TPO being Annexure A-7, placed at PB Page no.184 - 186 before us as under: 40. Referring to the same he pointed out that the interest rate of 9% paid on CCD's was justified comparing it to the interest paid on other similar instruments. The comparable instruments being rated, further adjustment to their average coupon rate was made for premium attributable to unrated bonds, i.e CCD's, and thus the arm's length price of interest to be paid on unrated CCD'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 understan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued for a period of 120 months (10 years) and the interest rate payable was 9% p.a. As per agreement, the CCDs would be compulsorily converted into equity at Rs. 556/- for each Equity Shares. The CCDs are unsecured and can be converted prior to the Conversion Date on mutual agreement. The CCDs after conversion into equity, would be equal to the shares of the company. ii. Above characteristics of CCDs indicate that these are not pure debt instruments but hybrid instrument rather almost akin to equity having salient features as discussed in preceding para 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. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the CCDs at the same original price, the subscriber of CCDs, who is assessee's AE has been also given a right in the accumulated earnings of those 10 years/goodwill, etc. as well as has been additionally compensated by way of interest @ 9% on CCDs. This clearly indicates that the transaction of payment of interest to its AE i.e., the CCD holders is not done at arm's length because under similar circumstances i.e. at same price the original subscriber of equity shares is having rights only in the accumulated earnings/goodwill, etc. of the company whereas the CCD owner has been given this right in accumulated earnings/goodwill, etc as well as interest @ 9 %. This 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the TPO resulting in his acceptance of the ALP." 46. Ld. Counsel for the assessee countered by stating that courts have held CCDs to be pure debt instruments and the Ld.CIT was therefore wrong in characterizing them as hybrid instruments. He referred to the following decisions; CIT Vs. Secure Meters Ltd. ( 2008) 175 Taxman 567(Raj) CIT Vs. ITC Hotels Ltd.(2010) 190 Taxman 430 (Kar). Ld.Counsel for the assessee also contended that the Ld.CIT could not have recharacterized the nature of the instrument and referred to the following decisions for drawing support. 47. Another argument made by the ld.counsel for the assessee before us justifying that its CCDs were pure debt instrument, and not hybrid instrument 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CD's to be in the nature of hybrid instruments distinct from debt instruments; * the assessee to have incorrectly justified their ALP by adopting CUP method and comparing with completely different instruments i.e debt instruments; * the TPO to have not conducted necessary inquiries vis a vis the determination of ALP of the international transaction of interest paid on CCD's to the AE of the assessee in the light of the facts on record before him and finally and most importantly; * the TPO's order to be erroneous causing prejudice to the Revenue for having accepted the transaction to be at arm's length. 52. The Ld.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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onversion (the "Conversion price") would be minimum of Rs. 556/- for each Equity Shares unless the valuation as per the relevant Foreign Exchange Management Act Regulations as would be in force at the time of actual conversion would be higher." 57. 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 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... May, 2024 at Ahmedabad. ============= Document 1 The Company / Issuer Borrower / SSIPL shall mean Swiss Singapore India Private Limited, a cany incorporated under the Companies Act, 1956 and having its Registered Office at A-1, Aditya Bara Centre, S.K. Ahire Marg, Worli, Mumbai - 400 030 Offer shall mean the Issue of 5,99,924 (Five lac Ninety Nine Thousand Nine Hundred Twenty For only) unsecured, unrated, unlisted, fully paid-up, non-marketuble, non-redeemable, fully and Suborily Convertible Debentures of Rs. 1,000/- (Rupees One Thousand only) each aggregating Rs. 5.000 24 lakhs (Rupees Fifty Nine Crores Ninety Nine Lakhs and Twenty Four Thousand only) on Placement basis. The Act shall refer to The Companies Act, 1956 as amended from time to time. & The Debenture/(s) shall mean unsecured, unrated, unlisted, fully paid-up, non-marketable, non- deemable, fully and compulsorily Convertible Debentures of Rs.1000/- each carrying a coupon rate of 5. Debenture Holder/(s) shall mean The Holder(s) of the Debenture(s) whose names are mentioned in the Register of Debenture Holders which the Issuer will keep at its registered office. 6. Day shall me....
X X X X Extracts X X X X
X X X X Extracts X X X X
....below) Total Spread 0.70% 2.2. Steps following for the above working are as under: 2.2.1. Step 1: Compute the Interest Coverage Ratio of SSIPL for FY 2012-13. For the purpose of computing interest coverage ratio, the interest expense for FY 2012-13 was adjusted by adding the amount of interest on CCDs. 2.2.2. Step 2: To arrive at the synthetic rating for the CCDs based on the Adjusted Interest Coverage Ratio. This synthetic rating is based on the data available on Damodaran website. Since the data is based on the US Market, appropriate adjustments were made to make it suitable for Indian Market. [The adjustment is made by proportionately reducing the interest coverage ratios given in the data. In other words, based on the Interest Coverage Ratio of company of 2.36, the relevant rating as per the table given in the Damodaran Database works out to B2/B. However, since the Indian Risk Free Rate is 8.8902% and US Treasury Yield is 2.36% (i.e. Indian rated are 3.77 times the rates in US, there is a downward pressure on the Interest coverage ratios in India when compared to the US companies. Hence, the interest coverage ratios given i....