AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2021 (9) TMI 1119
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....tch in sales turnover reported in Audit report and ITR. 3. Notice u/s. 142(1) was also issued on 9.6.2017 calling for details of Large Specified Domestic Transactions (Form 3CEB) for limited scrutiny proceedings and the details and explanations were provided by the assessee vide letters dated 9.10.2017 & 12.10.2017. Assessment was completed u/s. 143(3) on 30.10.2017. 4. The PCIT noticed that one of the parameters was Transfer Pricing Risk Parameter which was not referred by the AO to TPO in accordance with CBDT Instruction No. 8 of 2015. He was accordingly of the view that the assessment order was prima facie erroneous insofar as it is prejudicial to the interests of revenue. Notice u/s. 263 was issued to the assessee and after considering the submissions of the assessee, the PCIT observed that risk parameter was not disputed by the assessee at the time of assessment proceedings. The payments to related persons specified in section 40A(2)(b) being in the nature of commission, related fees, managerial remuneration, interest on loan, management fees, purchase of assets and reimbursement of expenses are TP issues listed in Form 3CEB and Form 3CD filed by the assessee. The assessee c....
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....tion 92CA of the Act and therefore his order was neither erroneous nor prejudicial to the interests of revenue. 7. The ld. AR for the assessee submitted that in Form 3CEB under Part B (International Transactions) the form has been left blank pertaining to international transactions entered by the assessee. However in Form 3CEB the details relating to Large Specified Domestic Transactions entered into during the year was duly filled in. Thus, the PCIT erred in concluding that assessee had entered into international transactions. There was no justification to hold that assessee's case was selected for limited scrutiny on the basis of transfer pricing risk based parameters. It is submitted that all the specified domestic transactions have been reported by the assessee are transactions entered by the assessee with related persons u/s. 40A(2) within the ambit of section 92BA(i) which were amended by the Finance Act, 2017 w.e.f. 1.4.2017 wherein clause (i) of section 92BA relating to expenditure in respect of which payment made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A has been omitted. In other words, transactions covered u/s. 40A(2) o....
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....he following reasons:- (a) Mismatch in amount paid to related persons u/s. 40A(2)(b) reported in Audit Report and ITR; (b) Low income shown by large contractors. (c) Mismatch in sales turnover reported in Audit report and ITR. 11. Now the finding of the PCIT is that in view of the case selected for scrutiny to consider the mismatch in the amount paid to related persons u/s. 40A(2)(b) reported in audit report and the international transactions entered by the assessee with AE referred to in section 92A(2) reported in Form 3CEB, the AO should have referred the matter to the TPO so as to ascertain the ALP of specific domestic transactions with related parties. According to him, the AO failed to follow the CBDT Instruction No. 3/16 dated 10.3.2016, which expressly provides for determination of ALP of international transactions as well as specific domestic transactions. However, we observe that the case was not selected for limited scrutiny of specified domestic transactions or international transactions so as to draw inference that the case was selected on Transfer Pricing risk parameter. On the other hand, the case was selected for limited scrutiny one of the reasons being misma....
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....sed to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S. 263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon'ble Supreme Court, held that for invoking powers confe....
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....in the case of CIT Vs J.L. Morrison (I) Ltd. (366 ITR 593), wherein their Lordships explained the difference between the two as follows:- "86. Whether the assessment order dated 28th March, 2008 was passed without application of mind is basically a question of fact. The learned Tribunal has held that the assessment order was not passed without application of mind. The records of the assessment including the order sheets go to show that appropriate enquiry was made and the assessee was heard from time to time. In deciding the question Court has to bear in mind the presumption in law laid down in Section 114 Clause - e of the Evidence Act:-- "that judicial and official acts have been regularly performed;" 87. Therefore, the Court has to start with the presumption that the assessment order dated 28th March 2008 was regularly passed. There is evidence to show that the assessing officer had required the assessee to answer 17 questions and to file documents in regard thereto. It is difficult to proceed on the basis that the 17 questions raised by him did not require application of mind. Without application of mind the questions raised by him in the annexure to notice under Section ....
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....out considering the relevant pieces of evidence. 93. The judgment in the case of Anusayaban. A. Doshi (supra) does not apply because the High Court in that case was dealing with the need on the part of the learned Tribunal to give reasons in support of its order. 94. The judgment in the case of Hindusthan Tin Works Ltd. (supra) also does not apply because there the Delhi High Court was dealing with the duty of the learned Tribunal to disclose reasons in support of its appellate order. 95. The judgment in the case of S.N. Mukherjee (supra) is clearly distinguishable. The point for consideration in that case was whether it was incumbent for the Chief of Army Staff while confirming the findings and the sentence of the General Court Martial, and for the Central Govt. while rejecting the post confirmation petition of the appellant, to record reasons for the orders passed by them. 96. The function of an Assessing Officer is to estimate the income of the assessee and to recover tax on the basis of such estimate as laid down by the Apex Court in the case of S.S Gadgil (supra). Their Lordships opined that the income tax proceedings do not partake the character of a judicial proceedi....
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....Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would ....
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....s the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.... There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. ****** We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in reg....
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.... grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the explanation. Therefore, it cannot be said that it is a case of 'lack of inquiry'. 11. Before us the ld. CIT, DR supported the invocation of revisionary jurisdiction by the Ld. Pr. CIT u/s. 263 of the Act, by relying on the amendment to Section 263 whereby Explanation 2 to sub-section (1) of sec. 263 of the Act was inserted with effect from 01.06.2015. The said amendment inserted the words "in the opinion of Principal Commissioner or Commissioner". According to ld. CIT, DR, after this amendment was brought into statute, the order passed by the AO can be deemed to be erroneous insofar as prejudicial to the interest of the revenue if in the opinion of the Pr. CIT or CIT, the order has been passed without making enquiries or verification which should have been made. According to us, however, the insertion of the amendment which introduced the words 'in the opinion of Principal commissioner or Commissioner" cannot be read in isolation. It has to be kept in mind that "Explanation" cannot over-ride the substantive provision of the law which the Explanati....
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....cial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.] [(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.] (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, [National Tax Tribunal,] the High Court or the Supreme Court. Explanation.-In computing the period o....
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....fect is recorded by the Ld. CIT. It is only after the CIT records a clear finding of fact bringing the assessee's case within the ambit of any one or more condition specified in the explanation, only then the legal consequence envisaged in the explanation can be deemed or else it cannot be deemed. Only in the case where the CIT records a clear finding of fact establishing any of the four conditions postulated above is satisfied then the order framed by the Assessing Officer can be deemed to be erroneous insofar as prejudicial to the interest of the Revenue, and not otherwise. To say it differently, the "opinion of Ld. Pr. CIT or CIT" cannot be read in isolation, and it has to be read co-jointly with the four conditions stipulated under Explanation-2 clauses (a) to (d). it is only in the event that any one of the situation is satisfied and there is a finding of fact by the Ld. CIT to that effect in his revision order, then only the deeming provision of Explanation-2 can be pressed into service for rendering an assessment order as erroneous, insofar as prejudicial to the Revenue, which is the jurisdictional fact & law required for the ld. Pr. CIT/CIT to invoke revisional jurisdic....
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.... or subjectively since he is discharging quasi judicial powers vested in him while doing so. Thus according to us, Explanation (2) inserted by the Parliament u/s. 263 cannot override the main section i.e. sec. 263(1) of the Act. The Ld. CIT can exercise his revisional jurisdiction in the event the assessment order is erroneous as well as prejudicial to the interest of the Revenue as discussed above and not otherwise. 16. In the instant case we find that in the SCN, the Ld. Pr. CIT set out seven specific reasons for which he had considered the AO's order to be erroneous in so far as prejudicial to the interests of the Revenue. We also note that in response, the assessee had submitted before the Ld. Pr. CIT detailed explanations supported by tangible documentary evidence to prove that the SCN had proceeded on assumption of some incorrect facts and wrong interpretation of applicable legal provisions. The assessee also explained with cogent material that before completion of assessment, the AO had indeed made enquiries with reference to specific issues raised in the SCN and the order u/s. 143(3) of the Act was passed only after considering the outcome of the enquiry. According to....
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....n must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not." 17. The above view is also supported by the following decisions: - DIT vs Jyoti Foundation reported in 357 ITR 388 (Del) - CIT vs Ashish Rajpal reported in 320 ITR 674 (Del) - CIT vs R.K. Construction Co. reported in 313 ITR 65 (Guj) 18. Having broadly discussed and set out above the settled judicial principles for usurpation of jurisdiction u/s. 263 of the Act, we now proceed to e....
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....and did not find any factual infirmity in the assessee's explanation. Nor any falsity was found by the Ld. PCIT in the impugned order. 21. We further find that having made a reference to CASS reason the Ld. Pr. CIT's notice proceeded to highlight an alleged mismatch between gross receipts of Rs. 972 lacs reflected in TDS certificates with the amount credited in the P&L A/c under the head 'Other Income', reported at Rs. 873.88 lacs. We find merit in the ld. AR's submission that the ld. Pr. CIT proceeded on an erroneous assumption that the tax was deducted at source only from the receipts, reported in the appellant's P&L A/c under the head 'Other Income' and no tax was deducted from receipts reported under other accounting heads in the P&L A/c. On the contrary, we find that in the course of assessment the assessee was specifically required by the AO to reconcile the receipts reported in Statement 26AS with the amounts certified in the TDS certificates as also with receipts reported in the audited accounts for the relevant year. In response, a statement of reconciliation was provided to the AO under the cover of assessee's letter dated 16.12.2016 ....
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.... (Form 3CEB) and ITR. However, the case was not referred to TPO. As per para 3.2 of CBDT's. Instruction No. 3 of 2016, the instant case had to be mandatorily referred to the TPO (the Transfer Pricing Officer) by the A.O after obtaining the approval of Principle CIT. However, the A.O has completed assessment u/s. 143(3) of the Act on 29-12-2016 without referring the matter to Transfer Pricing Officer." 23. We find that the assessee's case was selected under CASS inter alia on the parameter that "Mismatch in amount paid to related persons u/s. 40A (2) (b) reported in Audit report and ITR". We note that with reference to this CASS reason the assessee was required to provide its explanation about the alleged mismatch of the figures reported in terms of Section 40A(2)(b) in ITR and Tax Audit Report. We note that explanation in that regard was furnished vide Para 9 of assessee's letter dated 09.12.2016 [Page 109 of paper book]. It was explained before the lower authorities as also before us that in clause 9A of Part A- OI of the Income-tax Return in ITR-6, the assessee was required to specify the quantum of the amounts debited to the Profit & Loss Account to the extent disa....
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.... ground of there being "large value of specified domestic transactions" or "large value of international transactions" so as to warrant an inference that the case was selected on transfer pricing risk parameter. On the contrary, the CASS reason merely claimed that there was mismatch in the amount paid to related persons u/s. 40A(2)(b) of the Act reported in Audit report and ITR. From plain reading of the said CASS reason, we are of the view that no prudent person properly instructed in law would have inferred that the aforesaid parameter constituted 'transfer pricing risk parameter' so as to warrant mandatory reference u/s. 92CA of the Act in terms of the Para 3.2 of CBDT Instruction No. 3 of 2016 and failure to make TP reference made the assessment order erroneous. We further find that once the incorrect presumption on Ld. Pr. CIT's part was highlighted by the assessee in it's submission then in the impugned order the Ld. Pr. CIT himself completely digressed from the reason set out in the SCN but none the less justified his action on the ground that the reference to TPO was necessary because the assessee's case was selected for scrutiny under the category of &#....
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....lected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT. 3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues....
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....nal transactions with its associated enterprises. By its letter dated 16.12.2016 [Pages 87 to 89 of paper book], the assessee had furnished its explanation in respect of its international transactions. In the said letter it was particularly brought to the AO's attention that based on the Transfer Pricing Audit report in Form 3CEB, wherein the auditors had certified ALP of international transactions, the assessee had suo moto offered adjustments in the computation of income on account of corporate guarantee fees and interest on loan to AEs which were not actually charged. We therefore find that it was not even a case where the order of the AO suffered from the charge of failure to conduct enquiry into the relevant issue as alleged by the Ld. Pr. CIT in the impugned order. 30. Lastly, as pointed out by the ld. AR, in the SCN, the Ld. Pr. CIT had justified invocation of power u/s. 263 with reference to assessee's transactions with persons specified in Section 40A(2)(b) of the Act. In other words in CIT's opinion assessee's specified domestic transactions coming within the ambit of Section 92BA(i) of the Act should have been referred for transfer pricing scrutiny. We ....