TaxTMI 
TaxTMI 
2021 (9) TMI 1119
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.... (b) Low income shown by large contractors. (c) Mismatch 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 ....
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....ion of mind used the discretion vested on him as per the provisions of section 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 sect....
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....d to be prejudicial to the interests of revenue. In the present case, the case was selected for scrutiny for the 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 sele....
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....ied are that (i) the order of the Assessing Officer must be erroneous and(ii) as a consequence of passing an erroneous order, prejudice is caused 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 rea....
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....u/s. 263 of the Act. For better understanding of this aspect, we can take help of the judgment of the Hon'ble jurisdictional Calcutta High Court 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....
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.... officer had considered the double taxation avoidance agreement on the basis whereof the claims were made by the assessee. Therefore, that was a clear case to show that the assessment order was passed without 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 t....
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....ds. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the 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 th....
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.... for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines 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....
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....ords: "Assessing Officer accepted the explanation without raising any further questions, and as stated earlier, completed the assessment at the returned income." 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The 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 maki....
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.... of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.] [Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial 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 financia....
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....ficer passed the order which is not in accordance to the decision of the Hon'ble Jurisdictional High Court or the Hon'ble Supreme Court, which is prejudicial to the assessee, which is rendered either in the assessee's case or any other person. 14. The amendment brought by the Finance Act, 2015, by way of insertion of Explanation-2, can come to the aid of the ld. Pr. CIT or ld. CIT only when any one or more of the four conditions, is satisfied and a clear finding of fact to that effect 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 re....
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.... Supreme Court in Bihta Cooperative Development Cane Marketing Union Ltd. Vs. Bank of Bihar, AIR 1967 SC 389 and M/s. Oblum Electrical Industries Pvt. Ltd., Hyderabad vs. Collector of Customs, Bombay - AIR 1997 SC 3467 at page 3471 and also see Justice G.P. Singh, Principal of Statutory Interpretation 234 Lexus 2016. It has to be kept in mind that while the Commissioner is exercising his revisional jurisdiction over the assessment order, he has to exercise his power in an objective manner and not arbitrarily 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 asses....
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....roneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent's computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction 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 ....
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.... We note that this aspect was specifically enquired into by the AO at the time of assessment. The assessee by its letter dated 09.12.2016 [Pages 17 to 21 of paper book] had brought to the AO's attention that in fact there was no mismatch in turnover. The Ld. AR brought to our attention that in Part A of the return of income, the assessee had reported it's Turnover at Rs. 1153.407 crores which matched fully with the net sales/turnover figure which appeared on Page 37 of the annual printed accounts. From these figures, we note that the CASS reason was examined by the AO 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 rec....
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....taling Rs. 972 Lacs were fully accounted in the assessee's books of the relevant year but merely restored the issue for fresh examination by the AO. The order of the Ld. Pr. CIT with reference to issue in clause (a) is therefore set aside. Ground Nos. 3 & 4 are accordingly allowed. 22. In Ground Nos. 5 to 7, the assessee has objected to Ld. Pr. CIT's finding with reference to reasons set out in Clause 3(b) of the SCN which read as follows: "One of the reasons for selection of scrutiny was mismatch in amount paid to related persons u/s. 40A (2) (b) reported in Audit report (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 r....
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....ment reference to TPO on transfer pricing risk parameter was mandatory in terms of Para 3.2 of the CBDT Instruction No. 3 of 2016. 25. Having considered rival submissions we find merit in the ld. AR's primary contention that the SCN proceeded on the wrong presumption that the assessee's case was selected on a transfer pricing risk parameter. We note that the parameter for selection was as follows: "Mismatch in amount paid to related persons u/s. 40A (2) (b) reported in Audit report and ITR" 26. It is thus noted that nowhere the CASS reason stated the selection of the assessee's case was on the 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 '....
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....ordance with the CBDT's annual instructions in this regard for example. Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected 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) wher....
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....cted in violation of the CBDT Instruction No. 3 of 2016 and for that reason the AO's order was erroneous and prejudicial to the interests of the Revenue. 29. Even with regard to CIT's allegation that in complete scrutiny case, the AO did not conduct any enquiries whatsoever with regard to transactions referred to in Section 40A(2)(b) as well as Section 92CA of the Act, we find that prior to completion of assessment the AO had indeed conducted enquiries with regard to CASS reason as also the assessee's international transactions with the AEs. We note that before completion of assessment, the assessee was asked to provide explanation even with regard to its international 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....