A. MENARINI INDIA PVT. LTD.,,AHMEDABAD vs. THE PR. CIT-1,, AHMEDABAD

The instant appeal filed by the assessee is directed against the order dated 29.03.2016 passed by the Pr. Commissioner of Income Tax – 1, Ahmedabad arising out of the order dated 25.03.2014 passed by the DCIT, Circle – 4, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2011-12.

However, the Learned PCIT found such assessment order erroneous and prejudicial to the interest of the Revenue for the following reasons: “(1) Scrutiny of the assessment records revealed that the assessee had claimed tax deducted at source (TDS) of Rs.3,00,08,514/- on professional service income for the F. Y.2010-11 relevant to A. Y.2011- 12. Further, it was also noticed from the Schedule M income form Operation of P&L account that the assessee had offered to tax of Rs.23,97,76,136/- under the head 'Service Income', Total service income with support of TDS of Rs.3,00,08,514/- claimed by the assessee would be Rs.30,00,85,140/-. This clearly indicated that the income were shown less to the extent of Rs.6,03,09,004/- alongwith the assessee had also claimed refund of Rs.3,01,67,360/-. Thereafter, the case was rectified u/s 154 and the TDS of Rs.3,01,67,362/- was given and alongwith thereon interest u/s 244A of Rs.22,38,818/- was also granted to the assessee. This resulted in under assessment of Rs.6,03,09,004/- and consequential taxes/interest.

(2) The scrutiny of records revealed that while finalizing the scrutiny assessment, the AO disallowed the expenditure of non achievement of targets amounting to Rs.22,74,380/- as the same were disallowed during the scrutiny assessment finalized for A.Ys.2008-09, 2009-10 and 2010-11. When the full expenditure of non achievement of targets was disallowed, the deduction of Rs.19,94,560/- claimed by the assessee

A Menarini India Pvt. Ltd. vs. PCIT Assessment Year 2011-12 - 3 - during A.Y. 2011-12 was also required to be disallowed. This has resulted in under assessment of income of Rs.19,94,560/- (3) Further scrutiny of records revealed that' the assessee has debited an amount of Rs.5,50,92,026/- in P&L account under Schedule R operating and administrative expenses which includes profession fees of Rs.14,52,503/- which was paid to non-residents without deducting TDS u/s 195 of the Act. Failure to deduct TDS on the amount of Rs.14,52,503/- attracts the provisions of section 40(a)(1) under which any sum payable to a foreign company on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted was required to be disallowed. In view of the above, professional fees of Rs.14,52,503/- was required to be disallowed. However, no such disallowance was made in assessment order. This has resulted in under assessment of income of Rs.14,52,503/-.”

Accordingly, show-cause dated 08.03.2016 was served upon the assessee as to why appropriate order u/s 263(1) of the Act should not be passed. Thus, it appears that the Learned PCIT has invoked jurisdiction u/s 263 in respect of the following three issues: i. Total Service Income on the basis of TDS Rs.3,00,08,514/- would be Rs.30,00,85,140/- against which the assessee has declared service income of Rs.23,97,76,136/- and thus there is an under assessment service income of Rs.6,03,09,004/- (30,00,85,140 - 23,97,76,136). ii. Provision of Rs.19,94,560/- for non achievement of targets and needs to be disallowed. iii. Sum of Rs.14,52,503/- needs to be disallowed u/s 40(a)(i) since assessee fail to deduct tax at source u/s 195 of the Act.

In response to the said show-cause, the assessee by and under a reply dated 28.03.2016 explained the entire situation before the Learned PCIT stating that presumption of the Revenue that income should also be indirect proportion to the amount of TDS is not correct. At times there are some timing difference between Revenue recognition and deduction tax at source. The assessee’s case is this that the deductor has effected TDS on account of “service tax” to the A Menarini India Pvt. Ltd. vs. PCIT Assessment Year 2011-12 - 4 - tune of Rs.2,46,96,942/- which is included in the Bill. The service tax collected by the service provider is not the income of the assessee and hence the same is not reflected in his Profit and Loss account. Further that the deductor has also effected TDS on “reimbursement” expenses of Rs.1,46,78,806/- which is also not income of the assessee and thus is not reflected in the Profit and Loss account. Apart from that the difference on account of timing difference was of Rs.2,32,16,538/-. More so the reconciliation statement of difference between service income as per Profit and Loss account and as worked out based on TDS was also furnished by the assessee before the Learned PCIT. However, such submission rendered by the assessee was not found acceptable by the Learned PCIT. He, therefore, held the assessment order passed u/s 143(3) of the Act dated 25.03.2014 was erroneous and prejudicial to the interest of Revenue. The Learned AO has also been directed by the Learned PCIT to make fresh assessment of the total income respect of the issues as mentioned hereinabove after giving an opportunity of hearing to the assessee and also to make necessary verification and enquiries if required.

We find that the observation regarding non-deduction of tax at source u/s 195 on payments of Rs.14,52,503/- by the assessee as made by the Ld. PCITis not correct since the assessee has already deducted tax at source on such payments the details whereof was furnished before the Learned PCIT which is also available on record at Page 92-103 of the paper book submitted before us. Further that the same was also examined at original assessment stage which is evident from point no.16 of questionnaire to notice dated 12.08.2013 issued u/s 142(1) of the Act available at page 34 to 39 of the paper book. When an issue has been examined at the original assessment stage but the same has not been reflected in the final assessment order, then that, by itself, would not lead to a conclusion that order of AO calls for interference by the Learned CIT u/s 263 of the Act. The judgment passed by the Hon’ble Supreme Court in the case of Malabar Industrial Co.Ltd. was again relied upon by the Learned Counsel appearing for the assessee in support of his argument. Last but not the least it was argued that “inadequacy” of inquiry of the AO cannot be considered to be ground for proceedings u/s 263 of the Act by the Revenue authority. Reliance in this regard was placed in the matter of CIT-vs-Vikas Polymers reported in 341 ITR 537 (Delhi). On the other hand, Learned DR relied upon the order passed by the Learned PCIT u/s 263 of the Act.

A Menarini India Pvt. Ltd. vs. PCIT Assessment Year 2011-12 - 6 - 4. Heard the respective parties and perused the relevant materials available on record. It appears from the records that the case of the assessee is this that the service tax calculated by the service provider since not the income of the assessee it is not been reflected in the P&L account. Similarly, TDS effected on “reimbursement” of expenses of Rs.1,46,78,806/- is neither the income of the assessee, hence not reflected in P&L account.So far as the difference on account of timing difference of Rs.2,32,16,538/- is concerned we find that reconciliation statement of difference between service income as per P&L account and as worked out on the basis of the TDS was also furnished before the appellate authority but the same was not taken into consideration in its proper prospective. Merely because there was some difference in the service income as per P&L Account and as worked out based on TDS the assessment order cannot be said to be erroneous and prejudicial to the interest of the Revenue. Further that while framing assessment u/s 143(3) by an order dated 25.03.2014 the Learned AO specifically mentioned in para 11 that the credit for “prepaid tax” (i.e. TDS) has been given after verification and its calculation as per ITNS 150. Thus the issue was already examined by the Learned AO. Apart from that, the legal point being fulfillment of twin conditions that the order of the AO be erroneous and also prejudicial to the interest of Revenue has not been satisfied before invoking jurisdiction u/s 263 of the Act. In this regard we have gone through the judgment passed by the Hon’ble Supreme Court in the matter of Malabar Industrial Co. Ltd. So far as the issue regarding provision of non-achievement of target is concerned the same was examined at the original assessment stage as submitted by the Learned AR before us is also reflected from the records before us. Further that, the assessee has deducted tax at source on payment of Rs.14,52,503/-. Though the details in respect of the same was provided to the Learned CIT(A) the same was not considered. The issue has been duly examined by the Assessing Officer during the original

A Menarini India Pvt. Ltd. vs. PCIT Assessment Year 2011-12 - 7 - assessment proceeding but in the absence of any reflection of the same in the order passed by the Assessing Officer would not lead to a conclusion that the order of Learned AO calls for interference by the Learned CIT u/s 263 of the Act. The alternative submission made by the Learned assessee’s counsel is this respect that when two views are possible as regards a particular issue and the AO adopts either of two such views then jurisdiction u/s 263 cannot be invoked by the Learned CIT is also acceptable.We take inspiration from the judgment passed in the matter of Malabar Industrial Co. Ltd. as been relied upon in this respect.Hence, we find that order impugned u/s 263 of Act cannot satisfy any of the conditions envisaged in the provision of law as discussed above. Fulfillment of twin conditions so as to the claim of the order being erroneous or prejudicial to the interest of Revenue also fails as already been discussed by us hereinabove. Thus the order impugned does not justify/fulfill any of the conditions within the four corners of law and hence liable to be quashed. Resultantly, the impugned addition upon invocation of jurisdiction u/s 263 of the Act by the Learned CIT is deleted.