INTERNATIONAL FLAVOURS & FRAGRANCES INDIA PRIVATE LIMITED,CHENNAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, CHENNAI

Subsequently, the ld.PCIT invoked juri iction u/s.263 of the Act and sought to revise the assessment order with respect to the allowability of royalty payments amounting to Rs.16,74,65,000/- made to International Flavours & Fragrances Inc. (‘IFF USA') and International Flavors & Fragrances (Greater Asia) Pte. Ltd. (’IFF Singapore') (together referred to as the ‘associated entities'). In return of income, the said royalty payments had been treated and claimed by the assessee as revenue expenditure, which was also accepted as such by the AO while passing the assessment order.

However, according to the ld.PCIT, the said payments were in the nature of capital expenditure and had been allowed without proper verification by the Assessing Officer as allowable expenditure. Accordingly, a Show Cause Notice dated 28.08.2024 was issued (Page Nos.165-167 of the Paper Book) which was duly responded to by the assessee.

The ld.PCIT, after considering the submissions filed by the assessee, passed an order u/s.263 of the Act holding that the AO had erred in allowing the claim of royalty payment as revenue expenditure. According to the ld.PCIT, the payment represented capital expenditure and only depreciation thereon was allowable. He accordingly held that the assessment order passed u/s.143(3) r.w.s. 144C(13) dated 05.05.2022 was erroneous and prejudicial to the interests of the Revenue. The assessment order was therefore partly set aside with a direction to the AO to make necessary inquiries on the said issue and to pass a fresh order after providing due opportunity to the assessee.

Aggrieved by the order of the ld.PCIT, the assessee is in appeal before this tribunal.

The ld.AR for the assessee Mr.Percy Pardiwalla, Senior Advocate, assailing the action of the ld.PCIT, submitted that the order u/s.263 of the Act is bad in law and without juri iction. The ld.AR submitted that Section 263 of the Act makes it clear that the pre-requisite to exercise juri iction by the ld.PCIT is that the order of the AO should be erroneous and prejudicial to the interests of the revenue. The ld.PCIT has to be satisfied of twin conditions, namely, the order of the Assessing Officer sought to be revised is erroneous; and it is prejudicial to the interests of the revenue. If any one of the conditions mentioned above is absent, recourse cannot be had as per mandate of Section 263 of the Act.

The ld.AR stated that the aforesaid principle has been reinforced in the following judicial precedents:

It is therefore clear that the AO had exercised his quasi-judicial discretion after examining the material placed before him. The ld.PCIT cannot now allege lack of enquiry or substitute his own opinion on the adequacy of enquiry. As laid down by the Hon'ble Supreme Court, such an order cannot be treated as both "erroneous" and “pre¡udicial to the interests of the Revenue” so as to warrant revision u/s.263 of the Act. 10. Equally, the “prejudicial" element is missing. The AO adopted one of the possible views after examining the assessee’s documents and material on record. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. and Max India Ltd. has settled that when two views are possible and the AO has taken one, the order cannot be revised merely because the Commissioner prefers another.

Further, as provided vide Explanation 2(a) to section 263 of the Act, an order is deemed to be erroneous so far as it is prejudicial to the interest of revenue if in the opinion of the ld.PCIT one such assessment order is passed without making inquiries or verification which should be made. In this regard, ld.AR submitted that the AO while framing the assessment proceedings, did make requisite inquiries and the ld.PCIT is hence fundamentally wrong in initiating revisionary proceedings.

The ld.AR further submitted that in response to the notices u/s.142(1), the assessee had submitted the Form 3CEB, TP Study report details of Foreign AE and TP Study Report and taken on record by the AO in the course of assessment proceedings.

The ld.AR pointed out that the aforesaid submissions and documents were not only filed but were also duly considered by the AO, as reflected in the assessment order passed u/s.143(3) of the Act which acknowledges the submissions taken on record. Further, the detailed transfer pricing assessment was undertaken, which included scrutiny of various international transactions undertaken by the assessee and eventually led to huge transfer pricing adjustment being made in the final assessment order. Thus, it stands established that the relevant material was examined and the matter was adjudicated upon after due application of mind, specifically the fact that the assessee had transactions with its foreign associated enterprises including the royalty sum, currently under dispute (para 4 and 5 of page no. 124 of the factual paper book).

Further, he submitted that such enquiries cannot be termed as inadequate or absent merely because the ld.PCIT now holds a differing view, more so when the same is based merely on a verdict of the Hon'ble Supreme Court clearly not applicable to the facts of the present case. The statutory revisionary power u/s.263 of the Act cannot be exercised on the ground of alleged inadequacy of enquiries when it is clear that the AO took cognizance of the relevant facts and applied his mind accordingly. Thus, the ld.AR prayed to hold that the revision u/s.263 of the Act on grounds of inadequacy of enquiry is unsustainable in the facts and circumstances of the case.

Thus, the AO carried out the requisite inquiry and took on record the assessee's explanations and supporting documents. Despite this, the ld.PCIT failed to consider the submissions made during course of assessment and proceeded to revise the assessment order on conclusory grounds. The ld.AR hence submitted that the revision power cannot be exercised by ignoring or overlaying the AO's bona fide conclusion without adequate reasoning. The revision of order u/s.263 of the Act cannot merely lead to remand of proceedings to the AO, recording that there was failure to investigate and inadequate inquiry by the AO does not lead to invocation of revisionary proceedings u/s.263 of the Act.

Further, the ld.AR brought to our attention that u/s.263 of the Act, a duty is cast upon the ld.PCIT to himself examine the records, arrive at definite conclusions, and pass an order modifying, enhancing, or cancelling the assessment. It is not envisaged that the matter be simply remanded to the AO without such findings being recorded. It is further submitted that the statute requires the revisionary juri iction to be exercised by the ld.PCIT after application of mind to the available material and only after providing the Assessee an opportunity of being heard. A mere direction to the AO "to make inquiries afresh" is not contemplated under the provisions of the Act. It is further submitted that in the assessee’s case, it has been directed by the ld.PCIT that the assessment order be partly set aside and the matter be remitted back to the AO for fresh enquiry and passing of a fresh order after providing the Assessee an opportunity of being heard. (para 8 of the impugned PCIT order in page 208 of the factual paper book). Such a direction to merely remit the matter back for further enquiry without the ld.PCIT himself recording any definite findings on the merits is completely untenable in law. The revisional juri iction vested in the ld.PCIT u/s.263 of the Act is required to be exercised by passing a reasoned order and cannot be delegated by way of a mere remand back. Various judicial pronouncements have clarified that the power u/s.263 of the Act cannot be exercised merely to instruct the AO to conduct inquiries that were not conducted earlier. Such an approach would amount to an abdication of the statutory responsibility vested with the ld.PCIT, who is required to pass a reasoned and speaking order himself. In this regard, ld.AR relied on the decision in the case of PCIT vs V-Con Integrated Solutions Pvt. Ltd [SLP (Civil) Diary No.13205/2025] (Supreme Court) (2025) 173 taxmann.com 774 (refer page 40 of the case law paper book on juri ictional grounds) where Apex Court held that: “The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee.

The jurisprudence on section 263 has consistently drawn a vital distinction between lack of enquiry and inadequate enquiry. The ld.PCIT can assume revisionary juri iction only in cases where the AO has failed to conduct any enquiry whatsoever on a relevant issue. However, once the AO has made an enquiry, it is subsumed that he had applied his mind and taken a plausible view that the order cannot be treated as erroneous merely because the ld.PCIT believes that a more exhaustive or detailed enquiry should have been made. 18. In the assessee’s case, the ld.AR submitted that the AO had issued detailed notices u/s.142(1) of the Act, obtained and examined the assessee’s Form 3CEB, the transfer pricing study report, and complete details of all transactions with the associated enterprises. These enquiries were fully conducted and considered before the assessment order was passed. Once the AO had undertaken these enquiries, it is subsumed that he applied his mind and took a plausible view. Therefore, the order cannot be treated as “erroneous” merely because the ld.PCIT believes that a more exhaustive or detailed enquiry could have been made. The facts of the assessee’s case clearly demonstrate that there was no lack of enquiry, and at best, the Commissioner may allege inadequacy, which, as settled by judicial precedents, is insufficient to invoke section 263 of the Act. Further he placed reliance on the decision of the Hon'ble Delhi High Court in the case of ITO vs DG Housing Projects Ltd, 343 ITR 329 (Del), wherein the Court at paragraph 16 and 17 of the order (page 46 and 47 of the case law paper book) held that: “Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of juri iction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.”

Further, we would like your Honour's kind attention in the case of CIT vs Gabriel India Ltd: [1993] 203 ITR 108 (Bonn), wherein the Hon'ble High Court of Bombay in para 13 (refer para 13 in page no. 37 of case law paper book on juri ictional grounds) held that 13. “We, therefore, hold that in order to exercise power under sub-section (1) of section 263 there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as it is prejudicial to the interests of the revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the ITO without making an enquiry in undue haste. We have also held as to what is prejudicial to the interest of the revenue. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the laws in consequence whereof the lawful revenue due to the State has not been realised or cannot he realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo moto revision under such circumstances will amount to arbitrary exercise power.”

Additionally, reliance is also placed in the case of CIT vs Sunbeam Auto Ltd [2011] 332 ITR 167 (Del) wherein the Hon'ble High Court of Delhi held that (refer para 12 in page no. 58 of the case law paper book on juri ictional grounds)

“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 itseIf, 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 be open.”

In light of the above arguments, the ld.AR pleaded that assumption of juri iction u/s.263 is not justified in the facts and circumstances of this case, since this is not a case of lack of inquiry but of inquiries being specifically conducted and responded to during assessment which indeed included details of international transactions undertaken.

Further, the ld.AR submitted that Explanation 2 to Section 263 of Act was introduced to clarify the scope of revisionary powers. Explanation 2 states that an order passed without making inquiries or verification which should have been made, in the opinion of the Commissioner, shall be deemed to be erroneous and prejudicial to the interests of the Revenue. The Explanation 2 is confined strictly to cases where the AO has failed to carry out any enquiries or verifications that a reasonable and prudent officer would have conducted. It is not intended to broaden the scope of Section 263 to permit revision merely because the issue before the Assessing Officer is debatable or because the Commissioner disagrees with the view taken by the AO. The Commissioner's opinion about what inquiry should have been genuine failure of inquiry.

The ld.AR submitted that in the present case, the issue raised involves debatable view, where the AO had made enquiries by seeking for data, considered submissions from the Appellant and applied his mind conscientiously before passing the assessment order. Therefore, the matter is not one of lack of enquiry but a question of opinion on the facts, which cannot attract the rigour of Explanation 2. The Ld.AR stated that in the impugned order, the very basis and argument of the learned PCIT is the comparison of the facts of the present case with the decision rendered by the Hon'ble Supreme Court in the case of Honda Siel Cars India Ltd [2017] 82 Taxmann.com 212 (SC). It is solely basis the reliance placed on Honda Siel Cars (supra) has the learned PCIT alleged that the royalty under question is capital in nature and hence, the assessment order passed by the learned AO is erroneous and prejudicial to that extent.

The Ld.AR stated that such comparison is made on a pre-conceived notion that the facts in the Honda Siel Cars India case supra) is identical or closely analogous to the factual matrix of the present case.

However, despite detailed and multiple submissions / representations made by the assessee during the revisionary proceedings clearly explaining the unique factual circumstances, contractual arrangements, and nature of the royalty payments in the present case, the ld.PCIT has proceeded to pass such order on an incomplete and selective appreciation of facts. The factual matrix of the assessee's case differs significantly from the Honda Siel case, particularly with regard to the non-exclusive licensing, periodic renewal of royalty agreements and absence of creation of enduring capital assets (page no.186-190 of the factual paper book).

The ld.AR stated that the application of the Honda Siel ratio to the present case is therefore misplaced and amounts to an incorrect and superficial comparison. Furthermore, the issues involved remain debatable questions both on facts and law, which preclude any exercise of revisionary juri iction. The ld.PCIT’s reliance on such an incorrect analogical comparison without adequately considering the detailed submissions shows non-application of mind and an erroneous exercise of juri iction under section 263 of the Act. The Ld.PCIT’s reliance on Honda Siel is wholly misplaced. The facts, issues and legal questions decided in Honda Siel are materially different from the facts of the present case. A mere citation of Honda Siel without an application of its ratio to the distinguishing facts of the present matter is impermissible and cannot form the basis for revision, which hence makes the entire revisionary proceedings bad in law and liable to be set-aside. Further, the ld.AR submitted that while there is no reference made by the AO in the assessment order on the issue in particular, it cannot be said that there is no inquiry / application of mind by the AO. In this regard, the ld.AR relied on the following judicial precedents wherein it was held that if a query is raised during the assessment proceedings and if the assessee responds to the said query, merely because the said aspect is not dealt with in the assessment order, would not lead to a conclusion that the AO had not applied his mind to the response of the Assessee:

In the case of CIT vs Vikas Polymers [2010] 194 Taxman 57 (Delhi HC) (para 13 of page 83 of case law paper book) the Hon'ble Delhi High Court had held that :

Thus, the ld.AR prayed that Explanation 2 to Section 263 is not attracted in the present case, and the revision initiated on this ground is unsustainable and deserves to be quashed.

The ld.AR further submitted that the show cause notice issued by the ld.PCIT u/s.263 of the Act suffers from a fundamental infirmity inasmuch as it does not clearly specify the precise sub-section or the relevant Explanation under which the proceedings have been initiated. (page no. 165-167 of the factual paper book). The notice merely makes a general reference to section 263 without identifying the statutory clause or condition allegedly attracted in the present case. In the absence of such a specific reference, the assessee is left in doubt regarding the exact nature of the charge or the scope of revisionary powers purported to be exercised. It is a settled principle that a show cause notice must clearly bring out the grounds and the statutory provision relied upon so as to afford a fair and reasonable opportunity to the Assessee to respond. Failure to do so vitiates the proceedings ab initio. Therefore, the ld.AR stated that the impugned revision proceedings are vitiated at the very threshold because the SCN did not specify the statutory provision/sub-section and explanation under which the revision was being sought. The omission of the precise legal basis in the SCN deprived the Appellant of a meaningful opportunity to meet the allegations and thus violated the principles of natural justice.

Per contra the ld.DR Mr. Bipin C.N, ld.CIT(A), supported the order of the Ld.PCIT and submitted that the ld.PCIT arrived at a conclusion not because of the verdict of the Hon'ble Supreme Court in the case of Honda Seil alone but because of the Explanation 2 of section 263 of the Act is factually wrong. He also submitted that such royalty was disallowed during A.Y.2016-17 as well as A.Y.2018-19, hence for A.Y.2017- 18 revisionary proceeding was rightly initiated.

While rebutting the contentions of the ld.DR, the ld.AR submitted that the mere reason of the ld.PCIT to have initiated the revision proceedings was solely due to such precedent which is clearly distinguishable with the facts of the assessee’s case as well as the mere reason that such disallowance was made in the preceding previous and the subsequent year i.e. A.Y.2016-17 and A.Y.2018-19. This was done without appreciating the fact that full fledged assessment was carried on for the year under dispute i.e. A.Y.2017-18 with major additions made on account of transfer pricing as well as disallowance of tax holiday claimed u/s.80-IB of the Act. This can be evidenced from the assessment order passed by the AO for such year.

Further ld.AR submitted that one such miss or alternate view formed by the AO while framing assessment of A.Y.2017-18 could not later be subjected to revision merely because ld.PCIT relies on a distinguishable judgement nor because it was a legacy issue warranting revision. On the point of the Department Counsel that royalty was disallowed in other years, the ld.AR stated that in order to buy peace and avoid prolonged litigation, the Company opted to settle the matter under the Vivad se Vish was ('VSV’) scheme 2024 for A.Y.2016-17 since major transfer pricing adjustments were involved and the disallowance of royalty was a fraction to begin with. However, for AY 2018-19, the issue of royalty is pending adjudication before this tribunal as on date as well. Therefore, for AY 2017-18, the AO, after examining the records of other years and conducting enquiries, especially where detailed transfer pricing adjustment was made, consciously accepted the claim of royalty expenditure and made no addition.

The ld.DR contention that because royalty was questioned in A.Ys.2016-17 and 2018-19, it should automatically have been disallowed in A.Y.2017-18 as well, is wholly misconceived. Each assessment year is a separate and independent unit of assessment. The mere fact that additions were made in two years does not create a legal presumption that the intervening year must also be disturbed. Such reasoning amounts to nothing more than a roving enquiry which is impermissible u/s.263 of the Act. It is well settled that revisionary powers can only be invoked where the assessment order is both erroneous and prejudicial to the interests of the revenue. In the present case, the AO's acceptance of the royalty expenditure was a plausible view arrived at after due consideration of facts. The ld.PCIT has not demonstrated any error of law or fact, nor any prejudice to the revenue, but has instead sought to substitute his own opinion for that of the AO. Such an exercise is beyond the juri iction conferred u/s.263 of the Act. Hence, the ld.AR prayed for set aside the order of the ld.PCIT.

We have heard the rival parties perused the material available on record and gone through the orders of the lower authorities along with the factual and case law paper books filed. The assessee filed its return of income for A.Y. 2017-18 on 30.11.2017, declaring total income of Rs.122,02,47,810/-. The case was selected for scrutiny, and the Assessing Officer conducted a complete inquiry. After going through various submissions filed by the assessee from time to time, the AO passed an order u/s.143(3) of the Act dated 05.05.2022 with the following additions:

Subsequently, the ld.PCIT invoked juri iction u/s.263 of the Act and sought to revise the assessment order with respect to the allowability of royalty payments amounting to Rs.16,74,65,000/- made to its AEs M/s.International Flavours & Fragrances Inc. (‘IFF USA') and M/s.International Flavors & Fragrances (Greater Asia) Pte. Ltd. (’IFF Singapore'). In return of income, the said royalty payments had been treated and claimed by the assessee as revenue expenditure, which was also accepted as such by the AO while passing the assessment order.

However, according to the ld.PCIT, the said payments were in the nature of capital expenditure and had been allowed without proper verification by the Assessing Officer as allowable expenditure. The ld.PCIT, after considering the submissions filed by the assessee, passed an order u/s.263 of the Act holding that the AO had erred in allowing the claim of royalty payment as revenue expenditure. According to the ld.PCIT, the payment represented capital expenditure and only depreciation thereon was allowable. He accordingly held that the assessment order passed u/s.143(3) r.w.s. 144C(13) dated 05.05.2022 was erroneous and prejudicial to the interests of the Revenue. The assessment order was therefore partly set to pass a fresh order after providing due opportunity to the assessee.

The juri iction u/s.263 of the Act by the ld.PCIT can be exercised only when both the following conditions are satisfied : (i) the order of the Assessing Officer should be erroneous and (ii) it should be prejudicial to the interest of the revenue,

These conditions are conjunctive, in the instant case, there was nothing erroneous and prejudicial. An order of assessment passed by the Assessing Officer should not be interfered with only because another view is possible Malabar 108) (Bom) as to when an order can be termed as erroneous: "From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of 'substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous……………… . There must be some prima facie decision is held to be erroneous material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statue on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed...”

Further, we note that as provided vide Explanation 2(a) to section 263 of the Act, an order is deemed to be erroneous so far as it is prejudicial to the interest of revenue if in the opinion of the ld.PCIT one such assessment order is passed without making inquiries or verification which should be made. We find that the AO while framing the assessment proceedings, has made requisite inquiries and the assessee has responded to the notices u/s.142(1) of the Act, by submitting the Form 3CEB, TP Study report details of Foreign AE and TP Study Report and taken on record by the AO in the course of assessment proceedings. These submissions and documents were filed and also duly considered by the AO, as reflected in the assessment order passed u/s.143(3) of the Act which acknowledges the submissions taken on record. It is also observed that the detailed transfer pricing assessment was undertaken, which included scrutiny of various international transactions undertaken by the assessee and eventually made huge transfer pricing adjustment made in the final assessment order. Therefore, it is established that the Assessing Officer has examined the relevant material and the matter was adjudicated upon after due application of mind, specifically the fact that the assessee had transactions with its foreign associated enterprises including the royalty. (para 4 and 5 of page no.124 of the paper book).

Thus, the PCIT has not noted any error in the assessment order or any prejudice caused to the Revenue by the assessment order. Further for revising the assessment, the ld.PCIT has to give a clear-cut finding that the order passed by the AO u/s.143(3) of the Act suffers from the twin conditions i.e., erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act.

We also find that the ld.PCIT has mechanically applied Honda Siel to the current facts of the case without analysing differences in royalty agreements, considering its non-exclusive nature, examining absence of enduring benefit and evaluating periodic renewal. The issue is highly debatable, and a debatable issue cannot be revised u/s.263 of the Act. Further, the additions in other years cannot justify invoking section 263 of the Act by the ld.PCIT. We note that each assessment year is an independent unit and the Royalty was disallowed in A.Y.2016-17 & 2018- 19 due to different considerations. The AO’s acceptance of these expenditure in A.Y.2017-18 after full enquiry cannot be faulted on that basis.

We, after going through the provisions section 263 of the act and facts of present case, are of the view that the factual matrix stares in the face of the record in the light of the legal requirement of a satisfaction that for invoking the powers u/s.263 of the Act, necessarily presupposes the statutory satisfaction that although there is some error with regard to the completed assessment but the order passed by the officer has to be erroneous in so far as prejudicial to the interest of the Revenue. The plain language of the provision is more than abundantly clear that it is not every error or mistake that should induce the ld.PCIT to resort to exercising the powers u/s.263 of the Act. Where the factual matrix shows that it is a marginal situation and when by careful and cautious judgment the AO has considered the issue in hand, the exercise of the power u/s.263 of the Act by the ld.PCIT is not proper. For invoking the revisionary powers u/s.263 of the Act, it is necessary for the ld.PCIT to state in what manner he considers the assessment order as erroneous and prejudicial to the interest of Revenue and what the basis and material for such conclusion. In the present case the ld.PCIT merely states that the royalty is capital in nature based on Honda Siel but no factual comparison is made, submissions of assessee explaining distinctions were ignored, no analysis of royalty agreement is undertaken, no material to show capital nature is brought on record. Thus, the condition of “error” found in the order of the Assessing Officer is not satisfied.

Further, the ld.AR brought to our attention that u/s.263 of the Act, a duty is cast upon the ld.PCIT to himself examine the records, arrive at definite conclusions, and pass an order modifying, enhancing, or cancelling the assessment. It is not envisaged that the matter be simply remanded to the AO without such findings being recorded. It is further submitted that the statute requires the revisionary juri iction to be exercised by the ld.PCIT after application of mind to the available material and only after providing the Assessee an opportunity of being heard. A mere direction to the AO "to make inquiries afresh" is not contemplated under the provisions of the Act. It is further submitted that in the assessee’s case, it has been directed by the ld.PCIT that the assessment order be partly set aside and the matter be remitted back to the AO for fresh enquiry and passing of a fresh order after providing the Assessee an opportunity of being heard. (para 8 of the impugned PCIT order in page 208 of the factual paper book). Such a direction to merely remit the matter back for further enquiry without the ld.PCIT himself recording any definite findings on the merits is completely untenable in law. The revisional juri iction vested in the ld.PCIT u/s.263 of the Act is required to be exercised by passing a reasoned order and cannot be delegated by way of a mere remand back. In the case on hand the ld.PCIT has not recorded any finding of capital nature, held that AO’s conclusion is wrong on law, demonstrated prejudice. Thus, his order is contrary to Supreme Court’s binding precedent in the case of PCIT vs V-Con Integrated Solutions Pvt. Ltd [SLP (Civil) Diary No.13205/2025] (Supreme Court) (2025) 173 taxmann.com 774 (refer page 40 of the case law paper book on juri ictional grounds) where Apex Court held that:

The jurisprudence on section 263 has consistently drawn a vital distinction between lack of enquiry and inadequate enquiry. In the present case the AO has made an enquiry and called for Form 3CEB, examined the TP study, scrutinized all international transactions including royalty, made substantial TP additions, acknowledged consideration of submissions in the assessment order and taken a the ld.PCIT believes that a more exhaustive or detailed enquiry should have been made.

In light of the above discussion and reasoning we are of the considered view that the ld.PCIT has failed to establish lack of enquiry, and the order of the AO is erroneous and prejudice to the interest of revenue. Therefore, the revisionary order passed by the ld.PCIT u/s.263 of the Act is quashed.

In the result, the appeal filed by the assessee is allowed.