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Issues: (i) Whether the Principal Commissioner could invoke revisionary jurisdiction under Section 263 of the Income-tax Act, 1961 in relation to the quantum of deduction under Section 80-IA of the Income-tax Act, 1961 after appellate proceedings before the Commissioner (Appeals); (ii) Whether the specialized transfer pricing proceedings under Section 92CA of the Income-tax Act, 1961 excluded revision on the issue of allocation of head office expenses; (iii) Whether acceptance of the Direct Nexus theory amounted to a plausible view so as to bar revision under Section 263 of the Income-tax Act, 1961.
Issue (i): Whether the Principal Commissioner could invoke revisionary jurisdiction under Section 263 of the Income-tax Act, 1961 in relation to the quantum of deduction under Section 80-IA of the Income-tax Act, 1961 after appellate proceedings before the Commissioner (Appeals).
Analysis: The deduction under Section 80-IA was treated as involving distinct components, namely the valuation of receipts and the apportionment of expenses. The appellate authority had addressed the valuation side, but the allocation of common head office expenses was neither raised nor decided in appeal. On that basis, the bar of merger under Explanation 1(c) to Section 263 was held to be issue-specific and not a blanket prohibition against revision of unadjudicated matters.
Conclusion: The revisionary jurisdiction was not barred by merger and this issue was decided in favour of the Revenue.
Issue (ii): Whether the specialized transfer pricing proceedings under Section 92CA of the Income-tax Act, 1961 excluded revision on the issue of allocation of head office expenses.
Analysis: The transfer pricing officer's function was confined to valuation of the specified domestic transaction and arm's length price determination. The allocation of corporate overheads for computing eligible profits under Section 80-IA remained the primary duty of the assessing officer. Silence of the transfer pricing order on internal cost apportionment was not treated as a finding that bound the assessing officer. The assessment was also treated as abated for search purposes, giving the assessing officer plenary power to examine total income.
Conclusion: Transfer pricing proceedings did not bar revision on the expense allocation issue and this issue was decided in favour of the Revenue.
Issue (iii): Whether acceptance of the Direct Nexus theory amounted to a plausible view so as to bar revision under Section 263 of the Income-tax Act, 1961.
Analysis: A plausible view was held to require actual inquiry and application of mind. The record showed no meaningful scrutiny of the absence of head office expense allocation despite substantial corporate overheads. The Court treated this as non-inquiry rather than a permissible choice between two views, and held that a view unsupported by inquiry cannot attract protection from revision.
Conclusion: The Direct Nexus acceptance did not constitute a plausible view and this issue was decided in favour of the Revenue.
Final Conclusion: The revision under Section 263 survived, the assessee's appeals failed, and the matter was sent back for fresh assessment confined to proportionate allocation of common head office expenses.
Ratio Decidendi: Under Section 263 of the Income-tax Act, 1961, merger is confined to matters actually considered and decided in appeal, and an assessment founded on non-inquiry into a material component of a profit-linked deduction remains revisable notwithstanding transfer pricing proceedings or a claimed plausible view.
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