CAMBRIDGE TECHNOLOGY ENTERPRISES LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-1(2), HYDERABAD

In response to the show cause notice, the assessee vide letter dated 14.02.2019 submitted that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue, on the issue of deduction claimed towards impairment loss on absolute plant and machinery, reduction of prior period income, which was credited into Profit & Loss account and reduced while computing the tax liability, exclusion of notional gain on foreign exchange, while computing the income and also estimation of notional commission on corporate guarantee, because all these Cambridge Technology Enterprises Limited issues have been examined by the Assessing Officer/TPO while completing the assessment u/s 143(3) r.w.s. 144C of the Act. Therefore, it cannot be said that the assessment order passed by the Assessing Officer is erroneous, in so far as it is prejudicial to the interest of the Revenue.

The Ld.PCIT, after considering the relevant submissions of the assessee, held that, although the assessee contends that the issues mentioned at para 2(ii) and 2(iii) of show cause notice with regard to prior paid income and notional gain on foreign exchange have been verified, but as regards the issues mentioned at para 2(i) and 2(iv) with regard to deductibility of impairment loss on assets and not examining the issue of corporate guarantee adjustment, the assessee has impliedly accepted that these two issues were not inquired into and verified by the Assessing Officer. Further, on perusal of assessment record, it is noticed that the Assessing Officer did not examine the issue of impairment loss debited to Profit & Loss account and similar issue of corporate guarantee adjustment and therefore, the assessment order passed by the Assessing Officer on these two issues is erroneous, in so far as it is prejudicial to the interest of the Revenue within the meaning of explanation 2 of sub section (1) of section 263 of the Act. Therefore, by virtue of powers vested with him u/s 263 of the Act, held that the assessment order passed by the Assessing Officer u/s 143(3) dated 29.11.2016 is erroneous and prejudicial to the interest of the Revenue and thus, directed the

Aggrieved by the Ld.PCIT order, the assessee is now in appeal before the Tribunal.

The learned counsel for the assessee submitted that the Ld.PCIT is erred in setting aside the assessment order passed by the Assessing Officer by exercising powers conferred u/s 263 of the Act, without appreciating the fact that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue, on the issues discussed in the show cause notice. The learned counsel for the assessee further submitted that the assessment in the present case has been passed in pursuant to the directions of the Dispute Resolution Panel (“DRP”) issued u/s 144C(5). The section empowers the DRP to make any further enquiry or cause any further enquiry to be made by the Income Tax authorities, as it thinks fit and also to enhance the assessment. Further section 144C(13) provides that upon receipt of directions issued by the DRP, the Assessing Officer, shall in conformity, with the directions complete the assessment without providing any further opportunity of being heard to the assessee. Therefore, the version of the Ld.PCIT is accepted that the Assessing Officer has not caused enquiries on the issues discussed in the notice, the same would be contrary to law as per section 144C(13) of the Act, because, the Assessing Officer Cambridge Technology Enterprises Limited does not have any power to go beyond the directions issued by the DRP. Therefore, there is no question of the Ld.PCIT, holding that the final assessment order is erroneous so as to come within the ambit of section 263 of the Act. In this regard, he relied upon the decision of ITAT Mumbai in the case of Barclays Bank PLC Vs CIT in ITA No.827/Mum/2021.

The learned counsel for the assessee further submitted that the Ld.PCIT erred in invoking jurisdiction u/s 263 of the Act, without appreciating the fact that during the assessment proceedings, the Assessing Officer has thoroughly examined all the issues, including the issues in question before the Ld.PCIT and passed assessment order, by duly applying his mind. In so far as the issue of impairment loss on assets, reduction of prior period income from computation of total income and notional gain on foreign exchange, the assessee has submitted relevant details, in response to the specific notice issued by the Assessing Officer u/s 143(1) of the Act and explained the issues. In so far as the issue of corporate guarantee adjustment, the assessment is subjected to TP proceedings, where the assessee has submitted complete financial statements along with TP study and also explained the queries raised by the TPO. The TPO has accepted the financial statements and also TP study conducted by the assessee, subject to modification of TP adjustment, however, not disputed the issue of corporate guarantee and therefore, the observation of the Ld.PCIT that non examination of corporate guarantee issue caused prejudice Cambridge Technology Enterprises Limited to the interest of the Revenue is incorrect. In this regard, he relied upon the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co.Ltd. Vs. CIT (2000) 109 Taxman.com 66 (SC) and also the decision of Hon'ble Delhi High Court in the case of D.G.Housing Project Ltd. (2012) 20 taxmann.com 587. The assessee had also relied upon the decision of Hon'ble High Court of Andhra Pradesh in the case of Spectra Shares & Scripts (P) Ltd. (2013) 36 taxmann.com 348.

The Ld.CIT-DR, supporting the order of the Ld.PCIT submitted that there is no merit in the argument of the counsel for the that the Ld.PCIT has no jurisdiction over the TPO administratively and that he cannot revise the order u/s 92CA(3) of the Act passed by the Assessing Officer, because as per the decision of Hon'ble Madras High Court in the case of M/s Indian Textiles Vs. CIT (157 ITR Mad) (1986), it was held that if at least one in respect of many issues considered by the Assessing Officer and the PCIT is found to be prejudicial to the interest of the revenue, initiation of proceedings by the PCIT u/s 263 of the Act cannot be questioned. The Ld.CIT-DR further submitted that the assessment order passed by the Assessing Officer u/s 143(3) r.w.s.144C of the Act is erroneous, in so far as it is prejudicial to the interest of the revenue on four issues discussed by the Ld.PCIT, which is evident from the reasoning, where, the Assessing Officer has not examined the issues, in light of explanation 2 to section 263(1) of the Act. Further, the assessee has not reported international transactions, being Cambridge Technology Enterprises Limited corporate guarantee given to its AE, either in Form 3CEB or in its TP study. Therefore, the arguments that the TPO had considered the issue while passing the order u/s 92CA(3) of the Act is devoid of merit and cannot be accepted.

The Ld.CIT-DR further submitted that in so far as the issue of impairment loss on assets, although, it is capital in nature, the Assessing Officer has not examined the issue, even though the assessee has debited into Profit & Loss account. Further, the assessee has deducted prior paid income credited to Profit & Loss account, while computing the income. Similarly, the assessee has reduced notional gain on foreign exchange, while computing the income, even though the gain on foreign exchange is in the nature of income like loss on foreign exchange is an expenditure. Although the assessee claims that the Assessing Officer has examined the issues while completing the assessment, the fact remains that on perusal of the assessment order, there is no evidence of any discussion on the issue. Therefore, the Ld.PCIT is right in setting aside the assessment order by exercising the powers conferred u/s 263 of the Act, therefore, the order of the Ld.PCIT should be upheld. In this regard, he relied upon the decision of Hon'ble Supreme Court in the case of Smt.Tara Devi Aggarwal Vs. CIT [1973] 88 ITR 323 and in the case of Rampyari Devi Saraogi Vs. CIT [1968] 67 ITR 84 (SC), Hon'ble Delhi High Court in the case of Gee Vee Enterprises Ltd. Vs.Additional Commissioner of Income Tax [1975] 99 ITR 375 (Delhi) and Hon'ble ITAT Mumbai in the

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant case laws relied upon by both the parties in support of their arguments. There is no dispute with regard to the fact that the assessment in question is subjected to TP proceedings u/s 92CA of the Act, followed by objections filed by the assessee before the DRP and the directions of the DRP issued u/s 144C(5) of the Act. Therefore, the reasons given by the Ld.PCIT, to set aside the assessment order, by virtue of powers conferred u/s 263 of the Act needs to be examined, to ascertain whether, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. The provisions of section 263 of the Act, deal with the powers of the Commissioner to revise the assessment order, if the PCIT satisfies that the assessment order passed by the Assessing Officer is erroneous, in so far as it is prejudicial to the interest of the Revenue. In other words, in order to invoke jurisdiction u/s 263 of the Act, the PCIT himself satisfied that because of erroneous order passed by the Assessing Officer, the lawful taxes payable to the Revenue has not been paid and further, it caused prejudice to the interest of the Revenue. From the plain reading of provisions of section 263, it is undisputedly clear that the PCIT must satisfy with reasons that the erroneous order Cambridge Technology Enterprises Limited passed by the Assessing Officer caused prejudice to the interest of the Revenue and this principle is supported by the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co.Ltd Vs. CIT (supra). Therefore, in light of certain legal position and facts of the present case, we need to examine the reasons given by the PCIT to set aside the assessment order in terms of provisions of section 263 of the Act.

The Ld.PCIT invoked jurisdiction and set aside the assessment order on four issues. The first and foremost issue considered by the learned PCIT is impairment loss on assets debited into Profit & Loss account in terms of Accounting Standards issued by the Institute of Chartered Accountants of India (“ICAI”). The assessee had debited impairment loss to Profit & Loss account and disclosed the reasons for ascertaining loss in notes to account in the financial statements. The assessee had also given the reasons for ascertaining the fair value of the asset as on date and according to the assessee, impairment loss on reusable components were arrived at after deciding the carrying value of recorded cost and this was due to shift in business focus and change in industry trend. Going by the Accounting Standards issued by ICAI, there is no dispute with regard to the fact that the assesse has to provide for impairment loss in respect of various assets in their books of accounts. The assesse had also reported the reasons in their financial statements. From the reasons given by the PCIT, in light of material available on record, we find that the PCIT Cambridge Technology Enterprises Limited referred to the financial statements of the assesse for the year under consideration, which was already on record before the Assessing Officer, while passing the final assessment order. Once those records are available to the Assessing Officer, it is presumed that the Assessing Officer has looked into the issue, while completing the assessment and has taken one plausible view. Therefore, unless the PCIT brings out the reasons that the said issue has not been examined by the Assessing Officer and further it caused prejudice to the interest of the Revenue, in our considered view, merely because the assessee has debited the loss to the Profit & Loss account, is not the reason for PCIT to assume jurisdiction. Similarly, the Ld.PCIT considered the prior period income and notional gain on foreign exchange and observed that, although the assessee reduced the income while computing taxable income, but the Assessing Officer has not examined the issues. In our considered view, the Ld.PCIT has discussed the issue in light of computation of total income furnished by the assesse, along with financial statements for the relevant financial year. If we go by the decision of PCIT in their order, we find that the PCIT referred to notes to accounts, where the assesse has explained the reasons for reducing the income while computing taxable income. These financial statements were before the Assessing Officer. In fact, the Ld.PCIT has accepted in his order, that in respect of issue No.2, i.e., prior period income and issue No.3, i.e. notional gain on foreign exchange, the Assessing Officer has considered the issue and taken one view. The Ld.PCIT, having noticed the fact that the Cambridge Technology Enterprises Limited Assessing Officer has considered and taken one view, in our considered view, he ought not to have set aside the assessment order on these two issues, by holding that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.

Coming back to the issue of corporate guarantee adjustment. The Ld.PCIT quantified corporate guarantee adjustment of Rs.1,29,48,000/- @2% on total corporate guarantee given by the assesse to its AE. It is observed that in Form 3CEB, the assessee did not report transaction and further, no information called for by the Assessing Officer. The issue of corporate guarantee, whether it is international transaction or not for the purpose of benchmarking in terms of section 92B of the Act was debatable at that point of time when the Assessing Officer has passed final assessment order. There are divergent issues on this aspect, where some judicial forum has taken a view that it is not international transaction and does not require to be benchmarked. Further, when it comes to rate of interest also, there are divergent views. If we look at the issue on this perspective, we find that this issue is highly debatable and always two views are possible. Therefore, going by the proceedings for the year under consideration, including the proceedings u/s 92CA, in our considered view when the assessee has furnished relevant details including the financials for the year under consideration during the TP proceedings, we are of the considered view that the Assessing Officer has taken Cambridge Technology Enterprises Limited one plausible view on the issue by considering the explanation of the assesse, therefore, in our considered view, the PCIT, without giving any reasons as to how the assessment order passed by the Assessing Officer on the same issue is erroneous, cannot come to the conclusion that the assessment order is erroneous and prejudicial to the interest of the revenue. This is because, as per the provisions of section 263, PCIT needs to give reasons for coming to the conclusion that the assessment order passed by the Assessing Officer is erroneous, which caused prejudice to the interest of the Revenue. In the present case, the Ld.PCIT simply discussed the issue in light of financial statements filed by the assesse, however, not arrived at a definite conclusion, that because of non-verification of corporate guarantee, prejudice is caused to the interest of the Revenue. Therefore we are of the considered view that invocation of jurisdiction by the Ld.PCIT u/s 263 of the Act is incorrect.

Coming back to another aspect of the issue. Admittedly, the final assessment order passed by the Assessing Officer, is in conformity with the directions issued by the DRP u/s 144C(5) of the Act. As per the provisions of section 144C(13) of the Act, the Assessing Officer, on receipt of directions issued by the DRP, shall, in conformity with the directions, complete the assessment, without providing any further opportunity of being heard to the assesse. A plain reading of the said provisions makes it clear that the Assessing Officer does not have any power to deviate from directions issued by the DRP and also Cambridge Technology Enterprises Limited does not require to give any opportunity to the assesse to explain its case. Further, as per the provisions of section 144C(5), the DRP shall have powers to call for relevant information and also cause or make enquiry it deems fit and also to enhance the assessment. Since the DRP has issued directions u/s 144C(5) after carrying out necessary enquiries and called for information and has not observed anything on the issues questioned by the Ld.PCIT in his show cause notice u/s 263 of the Act, in our considered view, the allegation of the Ld.PCIT that the Assessing Officer has not carried out any enquiries, which he ought to have carried under the provisions of explanation 2 to section 263 of the Act is devoid of merit and cannot be accepted. Further, once the law does not permit the Assessing Officer to go beyond the directions of the DRP, in our considered view, the final assessment order passed by the Assessing Officer, in conformity with the DRP directions cannot be held to be erroneous on various issues, which is not considered by the DRP in their proceedings u/s 144C(5) of the Act. Therefore in our considered view, when the Assessing Officer could not have directly make any changes in the final assessment order after the directions of the DRP, then the PCIT cannot make any changes, so as to circumvent the provisions of section 144C(13) of the Act. Therefore, on this issue also Ld.PCIT erred in assuming jurisdiction u/s 263 of the Act and set aside the assessment order passed by the Assessing Officer. This issue is supported by the decision of ITAT Mumbai in the Cambridge Technology Enterprises Limited case of Barclays Bank PLC Vs. CIT, where in it is held as under : “26. The case of Devas Multimedia Pvt. Ltd.(supra) by the Hon'ble Karnataka High Court was in connection with the writ petition filed by the assessee, where assessee has objected to the notice issued u/s 263 of the Act. Furthermore, Hon'ble High Court has expounded that writ court cannot examine the validity of notice on merits. Furthermore, the said decision has distinguished following decision of Hon'ble Bombay High Court, i) Vodafone Services Pvt.Ltd.(supra) wherein Hon'ble Bombay Court has expounded that proceedings before the DRP is not on appeal proceedings, but correction mechanism in the nature of a second look at the proposed assessment order by high functionaries of revenue (ii) Vodafone India Services Pvt. Ltd. Vs.Union of India (2014) 368 ITR 1 (Bom.). In the present case, this Tribunal is under the jurisdiction of Hon'ble Bombay High Court. Hence, we do not have any authority whatsoever to deviate from the exposition of the Hon'ble jurisdictional High Court that the proceedings at DRP is not an appeal proceedings, but a correcting mechanism. Furthermore, the ratio from the Hon'ble Bombay High Court in the case of Virendra Kumar Jamb (supra) also support this case. Hence, the submission of Ld.DR that subject under discussion here has not been subject matter of Hon'ble jurisdictional High Court elaboration is not acceptable. Once, this is accepted, that the assessment order having been corrected by collegium of three commissioner of income tax, the same can by no stretch of imagination be subject to revision by commissioner of income tax sitting alone. More so, in light of provision of section 144C(13) which clearly mandates that Assessing Officer has to pass an order in accordance with the direction of the DRP without giving any opportunity to the assessee to so in the present case. If this order passed by the Ld.CIT is upheld and Assessing Officer starts giving opportunity of hearing to the Assessing Officer in accordance with the direction of the CIT, the same will be in violation of the sanguine provision of section 144C(13).

Hence, in light of the aforesaid discussions and precedents from Hon'ble jurisdictional High Court, we set aside the orders of Ld.CIT and hold that he cannot legally assume jurisdiction u/s 263 of the Act on an order passed by the Assessing Officer pursuant to the direction of DRP. This is over and above our other observations in para ‘14’ of this order, where Cambridge Technology Enterprises Limited we have noted that Ld.CIT has passed this order without properly appreciating the assessment order. Since, we have quashed assessment order on jurisdiction itself, we are not dealing with the merits of the case.”

Coming back to various case laws relied upon by the Ld.CIT-DR. The Ld.CIT-DR relied upon the decision of Hon’ble High Court of Madras in the case of M/s Indian Textiles Vs..CIT (supra) and argued that, if at least one issue out of many issues in the order of the Assessing Officer is found to be prejudicial to the interest of the revenue, the initiation of proceedings by the CIT u/s 263 cannot be questioned. We find that there is no dispute, in so far as the ratio laid down by the Hon’ble Madras High Court on this issue, but the fact remains that the invocation of jurisdiction by the Ld.PCIT on all four issues found to be incorrect, going by the discussions and therefore, in our considered view, the case laws relied upon by the Ld.CIT-DR is not applicable to the facts of the present case. The Ld.CIT-DR also relied on the decision of Hon’ble Supreme Court in the case of Smt.Tara Devi Aggarwal Vs. CIT (supra) and Rampyari Devi Saraogi Vs. CIT (supra). We find that the facts of the above two cases are different from the facts of the present case and therefore, cannot be applicable to the case of the assesse. Similarly, the Ld.CIT-DR also relied upon the decision of Hon'ble Delhi High Court in the case of Gee Vee Enterprises Ltd. Vs. Additional Commissioner of Income Tax (supra) and on going through the facts of the said case, the facts are entirely different from the facts of the assessee’s case and cannot be

In view of this matter and considering the facts of the present case and also by following the ratios of case laws discussed herein above, we are of the considered view that the assessment order passed by the Assessing Officer u/s 143(3) r.w.s.144C of the Act is neither erroneous nor prejudicial to the interest of the Revenue on all four issues discussed by the Ld.PCIT in his show cause notice. The Ld.PCIT, without appreciating the relevant facts, simply set aside the order passed by the Assessing Officer u/s 143(3) r.w.s.144C of the Act. Thus, we quashed the order passed by the Ld.PCIT u/s 263 of the Act.

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