M/S.US TECHNOLOGY INTERNATIONAL P. LTD,TRIVANDRUM vs. THE JCIT, TRIVANDRUM

Per George George K., JM

This appeal at the instance of the assessee is directed against Commissioner of Income-tax’s order dated 27.03.2017. The relevant assessment year is 2009-2010.

ITA No.247/Coch/2017. 2 M/s.US Technology International P.Ltd. income had claimed deduction u/s 10B of the I.T.Act. Intimation u/s 143(1) of the I.T.Act was received by the assessee-company on 28.09.2010. Thereafter draft assessment order was issued u/s 144C of the I.T.Act disallowing the deduction u/s 10B of the I.T.Act and interest expenses on funds advanced. In response to the draft assessment order, the assessee filed submissions before the Assessing Officer intimating its inability to file objections before the Dispute Resolution Panel (DRP) in the absence of transfer pricing adjustment in the draft assessment order. The final assessment order was passed on 26.04.2013. The assessee, however, claims that the final assessment order was not received by it. Thereafter reassessment notice was issued and orders u/s 143(3) r.w.s. 147 of the I.T.Act was passed on 27.03.2015. The Assessing Officer in the reassessment completed, disallowed the amount claimed by the assessee, both u/s 10A and 10B of the I.T.Act. Against the reassessment order, the assessee-company had filed appeal before the CIT(A).

3.2 On 09.10.2016, the Commissioner of Income-tax initiated proceedings u./s 263 of the I.T.Act, proposing to revise the reassessment order u/s 143(3) r.w.s. 147 of the I.T.Act. Against the notice issued by the CIT to revise the reassessment order, the assessee filed objections on 19.12.2016. It was submitted that the proposal for revisionary proceedings u/s 263 of the I.T.Act was barred by limitation and the same may be dropped. However, the CIT rejected the

ITA No.247/Coch/2017. 3 M/s.US Technology International P.Ltd. contentions raised and passed an order u/s 263 of the I.T.Act vide order dated 27th March, 2017.

3.3 Aggrieved by the order of the CIT passed u/s 263 of the I.T.Act, the assessee has filed the present appeal before the Tribunal raising the following grounds:-

“The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: Ground No.1 - Revision proceedings are barred by limitation of time 1.1 On facts and in the circumstances of the case, the learned Commissioner of Income Tax ('CIT') has erroneously taken into consideration the reassessment order dated 17 March 2015 for revision under section 263 of the Act. The learned CIT has erred in not considering the Supreme Court ruling the case of Alagendran Finance Ltd [(2007) 162 Taxman 465 (SC) wherein it was held that the period of limitation for the purpose of subsection (2) to section 263 of the Act would comment with reference to the original order of assessment with respect to those issues which did not for the subject matter of the reassessment proceedings. This position was also upheld by the Bombay High Court in the case of CIT v ICICI Bank Limited [2012] 343 ITR 74. 1.2 On facts and in the circumstances of the case, the learned CIT has erred in not considering the fact that the Appellant is not in receipt of the order under section 143(3) (dated 26 April 2013 as p Department records). In absence of the same, the valid order for revision would be the intimation dated 22 January 2011 issued under section 143(1) of the Act. In such an instance, the learned CIT failed to consider that the time limit for passing the revision order under section 263 of the Act (i.e. 2 years from the end of the financial year in

ITA No.247/Coch/2017. 4 M/s.US Technology International P.Ltd. which the order sought to be revised was passed) had already lapsed. 1.3 Without prejudice to paragraph 1.2 above, the learned CIT has failed to consider that even if the order under section 143(3) dated 26 April 2013 is presumed to be in force-the time limit for revision of such order would have expired by 31 March 2016.

1.4 In view of the above grounds, the dates of intimation / order received by the Appellant, has been tabulated below for reference.

Particulars Date of Last date by which the intimation / order should have been order passed under section 263(2) Intimation under 22 January 31 March 2013 section 143(1) 2011 Order under 26 April 2013 31 March 2016 section 143(3) (not received by the Appellant) Order under 17 March 2015 Since the subject section 143(3) matter of revision read with section proceedings under 147 section 263 is not covered under the reassessment order, the reassessment order cannot be considered for time limit purposes under section 263(2) of the Act.

Ground No.2 - Without prejudice, revision proceedings have been initiated on account of issues that are neither erroneous nor prejudicial to the interests of revenue 2.1 The learned CIT has erred in not considering the fact that the issues relied on for initiating the revision proceedings neither appears to be a mistake in law nor prejudicial to the interests of revenue. The learned CIT has erred in initiating the revision proceedings under section 263 without taking

ITA No.247/Coch/2017. 5 M/s.US Technology International P.Ltd. into consideration the settled position of law that such proceedings can be invoked only if the order passed by the AO is both erroneous and prejudicial to the interests of the revenue. 2.2 On facts and in the circumstances of the case, the learned CIT has erred in not considering the fact that the service tax payable, amounting to INR 2,74,43,077 which was neither routed through the profit and loss account (as disclosed in clause 21 (i)(B) and enclosure VII of the tax audit report) nor claimed as deduction while computing taxable income of A Y 2009-10, does not fall under the ambit of section 43B of the Act. Such position was upheld by the Delhi High Court in the case of CIT v. Noble & Hewitt (I) (P) Ltd [2008] 166 Taxman 48. Further, without prejudice, the CIT has failed to appreciate the fact that such service tax amounts was not received by the Appellant during the year and accordingly, not payable as per clause (a) to section 43B of the Act. Hence, the contention of the learned CIT that the order is erroneous and prejudicial to the interests of revenue on this count is incorrect in law. 2.3 The learned CIT has failed to consider the fact that prior period income of INR 1,75,37,448 on account of service tax refund receivable pertains to AYs 2006-07, 2007-08 and 2008-09 and is not assessable in A Y 2009-10. Hence, the contention of the learned CIT that the order is erroneous and prejudicial to the interests of revenue on this count also, is incorrect in law. Ground No.3 - Without prejudice, the impugned order issued by the CIT under section 263 is not justified 3.1 On facts and in the circumstances of the case and in law, the learned CIT has wrongly assumed that the AO has not applied his mind in the case of taxability of service tax amounts of INR 2,74,43,077 under section 43B of the Act, taxability of prior period income of INR 1,75,37,448 and the consequential tax

ITA No.247/Coch/2017. 6 M/s.US Technology International P.Ltd. holiday benefits available to the Appellant under section 10A / 10B of the Act. 3.2 Without prejudice to the above grounds, the learned CIT has erred in not considering the fact that the Appellant is eligible for tax holiday benefits under section 10A / 10B of the Act. The CIT has failed to consider that any disallowance or addition which increases the profits and gains of the Appellant for A Y 2009-10 would have a cascading effect on the tax holiday benefits available under section 10A / 10B of the Act. The same is in line with the CBDT circular 37/2016 dated 02 November 2016 and was also upheld by the jurisdictional Cochin Tribunal in the case of Sun Tee Business Solutions Private Limited (IT(TP)A 01/Coch/2013). Ground No.4 - Relief 4.1 The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto; and 4.2 The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.”

ITA No.247/Coch/2017. 7 M/s.US Technology International P.Ltd. [(2012) 349 ITR 482 (Bom.)] . The learned Departmental Representative, on the other hand, supported the order passed u/s 263 of the I.T.Act.

ITA No.247/Coch/2017. 8 M/s.US Technology International P.Ltd. 5.1 The assessment which was completed u/s 143(3) of the I.T.Act was reopened by issuance of notice u/s 148 of the I.T.Act (notice dated 14.06.2013). At the request of the assessee, the Assessing Officer vide his letter dated 06.08.2013 had communicated the reasons recorded for reopening the assessment for assessment year 2009-2010. The reasons recorded for reopening the assessment is on account of the reimbursement income received from certain entities does not form part of the total income since it is not derived from eligible business, and therefore, was not entitled to the claim of deduction u/s 10B of the I.T.Act. The reasons for reopening as listed out by the Assessing Officer in his letter dated 06.08.2013 reads as follows:-

“2. For the period relevant to the AY 2009-10, in the case of US Technology International (P) Ltd., total reimbursement income received is as under:-

US Technology Resources (P) Ltd. Rs.9,78,14,121 UST Global Inc: Rs.2,17,71,768 ----------------------- Total Rs.11,95,85,889 =============== Since the receipt forms part of the total income and therefore claim of deduction u/s 10B of the IT Act is not found correct as the income is not derived from the eligible business and accordingly, the same is ought to have shown as income from other sources and taxed accordingly.

Since there is failure on the part of the assessee to disclose true and correct income, I have reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the

ITA No.247/Coch/2017. 9 M/s.US Technology International P.Ltd. IT Act. Therefore, the assessment for the AY 2009-10 is reopened u/s 147 of the IT Act.”

5.2 The reopening of assessment u/s 143(3) r.w.s. 147 of the IT Act was completed vide order dated 17.03.2015. In the reassessment completed, the exemption claimed u/s 10B / 10A of the I.T.Act was disallowed and also interest expenditure for the reason that there was diversion of funds not for the purpose of business. The CIT had invoked the revisionary jurisdiction u/s 263 for the following reasons:-

“(a) As per clause 21(i)(B) of the Tax Audit Report, service tax of Rs.2,74,43,077/- is seen as `not paid’ to the Government account before the due date for filing the return of income. This amount collected but not paid within the due date prescribed, should have been brought to tax, in terms of section 43B r.w.s. 145A of the Income-tax Act.

Disallowance should have been made for the tax liability remaining unpaid on the due date of filing of return.

(b) An amount of Rs.1,75,37,448/- being service tax input credit (prior period income) credited in the Profit & Loss account,w as not included for the computation of Taxable income.”

5.3 From the above narration of facts, it is clear that the subject matter of revision u/s 263 of the I.T.Act was un- connected with the issues which were subject matter of issuance of notice u/s 148 and completion of reassessment u/s 143(3) r.w.s. 147 of the I.T.Act. The Hon’ble Apex Court in the case of CIT v. Alagendran Finance Ltd. (supra) had

ITA No.247/Coch/2017. 10 M/s.US Technology International P.Ltd. categorically held that when the Commissioner of Income-tax exercises his revisionary jurisdiction on certain issues which are not the subject matter of reassessment proceedings, the period of limitation provided u/s 263(2) of the I.T.Act would begin to run from the date of original order of assessment and not from the date of reassessment order. The relevant finding the Hon’ble Apex Court reads as follows:-

(Para 15) “We, therefore, are clearly of the opinion that keeping in view the facts and circumstances of this case and, in particular, having regard to the fact that the Commissioner of Income-tax exercising his revisional jurisdiction reopened the order of assessment only in relation to lease equalisation fund which being not the subject of the reassessment proceedings, the period of limitation provided for under sub-section (2) of section 263 of the Act would begin to run from the date of the order of assessment and not from the order of reassessment. The revisional jurisdiction having, thus, been invoked by the Commissioner of Income-tax beyond the period of limitation, it was wholly without jurisdiction rendering the entire proceeding a nullity.” 5.4 Similar view was taken by the Hon’ble Bombay High Court in the case of CIT v. ICICI Bank Ltd. [(2012) 19 taxmann.com 142 (Bombay)]. In the case considered by the Hon’ble Bombay High Court, an order of assessment was passed on 10-3-1999 under section 143(3). The deduction claimed under clauses (vii) and (viia) of section 36(1) and the foreign exchange rate difference was allowed. A notice was issued under section 148 on 21-10-1999 following which the first reassessment was carried out on 22-2-2000 for reworking

ITA No.247/Coch/2017. 11 M/s.US Technology International P.Ltd. a deduction under section 80M. An appeal against the order under section 143(3) was decided by the Commissioner (Appeals) on 28-3-2001. Thereafter a second notice was issued under section 148 on 28-3-2001. Following that on 26-3-2002 a second order of reassessment was passed for reworking of the deduction under section 36(1)(viii). This order was set aside by the Tribunal on 27-8-2010 and an appeal was pending. On 28-3-2003 an order was passed by the Commissioner under section 263 for disallowance under section 36(1)(vii), (viia) and in respect of foreign exchange rate difference. On further appeal, Tribunal held that order of the Commissioner dated 28-3-2003 passed under section 263 setting aside the assessment order dated 26-3-2002 passed under section 143 read with section 147 by the Assessing Officer was barred by limitation under section 263(2).

5.5 On appeal filed by the Revenue u/s 260A of the I.T.Act, the Hon’ble Bombay High Court held as under:-

“Sub-section (2) of section 263 stipulates a period of limitation of two years within an order under sub-section (1) has to be passed. Under sub-section (2) no order under section 263(1) can be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. The order of assessment under section 143(3) in the instant case allowed the deduction which was claimed under section 36(1)(vii), and in respect of foreign exchange rate difference. Neither in the first order of reassessment dated 22-2-2000 nor in the second order of reassessment dated 26-3-2002 were these aspects determined. In other words on the aforesaid three issues, the original order of

ITA No.247/Coch/2017. 12 M/s.US Technology International P.Ltd. assessment dated 10-3-1999 passed under section 143(3) continued to hold the field. Once that is the position, then clearly the doctrine of merger would not apply. The order under section 143(3) passed on 10-3-1999 cannot stand merged with the orders of reassessment in respect of those issues which did not form the subject-matter of the reassessment. Consequently, Explanation 3 to section 147 will not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice under section 148(2). This, however, will not obviate the bar of limitation under section 263(2). Where the jurisdiction under section 263(1) is sought to be exercised with reference to an issue which is covered by the original order of assessment under section 143(3) and which does not form the subject-matter of the reassessment, as in the instant case, limitation must necessarily begin to run from the order under section 143(3). Before concluding it must also be taken note of that the second order of reassessment dated 26-3-2002 has been set aside by the Tribunal. An appeal against the order of the Tribunal is pending before this Court for admission. However, this appeal is considered independently and it is concluded that the invocation of the jurisdiction under section 263 was barred by limitation.”

5.6 The Hon’ble Madras High Court in the case of M/s.Indira Industries v. Pr.CIT [WA No.1092 of 2017 & CMP No.15224 of 2017 – order dated 14.06.2018] had taken a similar view. The Hon’ble Madras High Court held that when Commissioner invokes his revisionary jurisdiction u/s 263 on issues which are not considered in the reassessment order, the time limit for invoking the revisionary jurisdiction will run from the date

ITA No.247/Coch/2017. 13 M/s.US Technology International P.Ltd. of the original assessment order and not from the reassessment order.

5.7 In the instant case, since the subject matter of revisionary proceedings u/s 263 of the I.T.Act are not covered under the reassessment order dated 17.03.2015, the reassessment order cannot be considered for the time limit purpose u/s 263 of the I.T.Act, going by the judicial pronouncements cited supra. Therefore, if the assessment order u/s 143(3) of the I.T.Act dated 26.04.2013 is reckoned , the Commissioner’s order dated 27.03.2017 passed u/s 263 was time barred and same cannot be sustained. It is ordered accordingly.

Sd/- Sd/- (Chandra Poojari) (George George K.) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cochin ; Dated : 23rd July, 2018. Devdas* Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The Pr.CIT Thiruvananthapuram. 4. DR, ITAT, Cochin 5. Guard file.

BY ORDER,

(Asstt. Registrar) ITAT, Cochin