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Income Tax Appellate Tribunal, ‘B’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice-(KZ) & Shri Rajesh Kumar
Per Rajpal Yadav, Vice-President (KZ):- The assessee is in appeal before the Tribunal against the order of ld. Principal Commissioner of Income Tax, Siliguri dated 17.03.2021 and Corrigendum in this order dated 31.03.2021 passed under section 263 of the Income Tax Act, 1961 in assessment year 2016-17.
The grievance of the assessee is that the ld. CIT has erred in taking cognizance under section 263 of the Income Tax Act and setting aside the assessment order dated 19.12.2018 passed under section 143(3) of the Income Tax Act. The ld. CIT further erred in directing the ld. Assessing
Assessment Year: 2016-2017 Zydus Healthcare Limited Officer to pass a fresh assessment order after making a reference to the ld. TPO under section 92C of the Income Tax Act.
Brief facts of the case are that the assessee has filed its return of income electronically on 26.11.2016 declaring total income at ‘NIL’ after claiming a deduction of Rs.411,07,12,348/- under Chapter VIA of the Act. The case of the assessee was selected for scrutiny assessment and thereafter the ld. Assessing Officer passed an assessment order under section 143(3) of the Income Tax Act. He accepted the returned income filed by the assessee.
On scrutiny of the assessment record, ld. Commissioner formed an opinion that the assessee had entered into specified domestic transaction with its Associated Enterprises, namely Cadilla Healthcare Limited. He made reference to such transaction and observed that the ld. Assessing Officer should have made a reference to the ld. TPO as per CBDT Instruction No. 3/2016. The show-cause notice issued by the ld. Commissioner has been reproduced in the impugned order from pages no. 2 to 5. In response to this show-cause notice, the assessee has filed its reply dated 15.12.2020, copy of such reply is available on pages no.25 to 30 of the paper book. The ld. CIT recognized this written submission in paragraph no. 4 of the impugned order. He thereafter observed that the assessee misconstrued the facts in contending that it was a limited scrutiny under CASS. According to the ld. CIT, it was converted into complete scrutiny and he observed that a specific notice to this effect was issued to the assesese on 24.02.2021. According to him, this notice was required to be complied with by the assessee by 05.03.2021, but the assessee failed to file reply. The ld. Commissioner thereafter passed the impugned order on 17.03.2021 by recording the following finding:- “6. There has been no response from the assessee to this letter by 05.03.2021 or even as on today. This indicates that the assessee has no objection to the Assessment Year: 2016-2017 Zydus Healthcare Limited proposed show cause to set aside the assessment order passed on 19.12.2018.
I have considered the facts of the case and the decisions of the superior Courts cited above. I have gone through the facts of the case, assessment order, records and reply filed by the assessee. The assessee could not rebut lack of enquiry and non-application of mind on the part of assessing officer. Though originally the case was selected under Limited Scrutiny Category, later it was changed to complete scrutiny. Since the return of the assessee for the assessment year 16-17 was selected for complete scrutiny under CASS, the contention of the assessee that the case was selected for non-transfer pricing risk parameter is not correct. The non-rebuttal of the factual position stated in the notice dated 24.02.2021 regarding change of scrutiny category from Limited to Complete Scrutiny by the assessee confirms the failure on part of the Assessing Officer in not referring the matter to the TPO as required by the Instruction No. 2 of 2016.
8. I am of the opinion that the action of the AO in not complying with the CBDT Instruction no. 2/2016 for making reference to the TPO has rendered the order erroneous and prejudicial to the interest of revenue. The order is, therefore, set aside and the AO is directed to make a de-novo assessment. The AO should send the matter to the TPO to examine whether, in terms of provisions of section 92 of the Income Tax Act, 1961, the various specified domestic transactions entered into with Associated Enterprise by the assessee during the Assessment Year: 2016-2017 Zydus Healthcare Limited relevant previous year, were at arm’s length price having regard to the Transfer Pricing Provisins”.
The assessee in his submissions made reference to e-proceeding response acknowledgment, whose copies are placed on pages no. 24 to 33 of the paper book. On receipt of this order, the assessee filed a letter to the ld. CIT contending therein that it has not received copy of the alleged letter dated 24.02.2021. The ld. Commissioner immediately sent the copy of the notice and took cognizance of the reply of the assesese dated 26.03.2021. After considering this reply, ld. Commissioner has passed an order on 31.03.2021 under the Head- “CORRIGENDUM of the order under section 263 of the Income Tax Act, 1961”.
Before adverting to the submissions of the ld. Counsel for the assessee, we observe that the notice dated 25.11.2020 issued under section 263 of the Income Tax Act by the ld. Commissioner for taking proceeding under this section contained various arguments advanced by him along with a list of judgments. However, the reasons for taking such cognizance are confined in paragraph no. 2 of this notice and in rest of the parts, peripheral arguments in support of his reasons are being mentioned, which contained citation of number of judgments. To our mind, for the purpose of a show-cause notice, these large numbers of judgments are not necessary. The assessee in its reply has summarized the reasoning for taking cognizance against the assessee under section 263 as well as made reference to the relevant part of the CBDT Instruction No. 3/2016. The complete copy of the Instructions is placed on pages no. 44 to 50 of the paper book. Therefore, we deem it appropriate to take note of the written submissions filed by the assessee before the ld. CIT vide letter dated 15.12.2020, which reads as under:-
Assessment Year: 2016-2017 Zydus Healthcare Limited Assessment Year: 2016-2017 Zydus Healthcare Limited Assessment Year: 2016-2017 Zydus Healthcare Limited Assessment Year: 2016-2017 Zydus Healthcare Limited Assessment Year: 2016-2017 Zydus Healthcare Limited Assessment Year: 2016-2017 Zydus Healthcare Limited
7. On the strength of above submission, ld. Counsel for the assesese contended that for taking action under section 263, ld. Commissioner has briefly assigned the reason that a reference to the ld. TPO ought to have been made for a specific domestic transaction with assessee’s Associated Enterprises, namely Cadilla Healthcare Limited. Details of these transactions are available in paragraph no. 2 of the show-cause notice. According to the ld. Commissioner, as per CBDT Instruction No. 3/2016, 10
Assessment Year: 2016-2017 Zydus Healthcare Limited such reference was mandatory at the end of the ld. Assessing Officer. He took us through this Instruction available on pages no. 44 to 50 of the paper book. The relevant part of the Instruction has been reproduced by the assessee in its reply i.e. 15.12.2020 (extracted supra). He submitted that the assessee did not dispute in the present proceeding whether limited scrutiny was there or complete scrutiny was there. The case of the assesee is that these Instructions itself provide an exemption to this type of cases. For buttressing this contention, he specifically drew our attention towards para no. 3.3 of the Instruction. The Board has carved out specific circumstances under which a reference to the ld. TPO is to be made namely – (a) Where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant’s report under section 92E at all or has not disclosed the said transactions in the Accountant’s report filed; (b) Where there has been a transfer pricing adjustment of Rs.10 crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) Where search and seizure or survey operations have been carried out under the provisions of the Income Tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO”.
Explaining the above condition, he submitted that clause (a) of the Instructions under Serial No. 3.3 would be attracted if it came to the notice of the ld. Assessing Officer that tax payer has entered into International Transaction or Specific Domestic Transaction or both, but did not file the Accountant’s Report under section 92E at all or if filed but not disclosed the said transaction in the Accountant’s Report. He pointed out that this condition is not applicable upon the assessee because it has Assessment Year: 2016-2017 Zydus Healthcare Limited submitted the report under section 92E and also disclosed this specified domestic transaction.
As far as Clause (b) is concerned, he submitted that it postulates a condition that there has been a transfer pricing adjustment of Rs.10 crores or more in an earlier assessment order and such adjustment has been upheld by the Judicial Authorities or is pending in an appeal. With regard to this condition, it was contended by the ld. Counsel for the assessee that in earlier year, a reference was made to the ld. TPO but he did not make adjustment.
With regard to the conditions enumerated under Serial No. (C), it has been provided that where a search & seizure or survey operation have been carried out under the provisions of the Income Tax Act and finding regarding transfer pricing issue in respect of international or specific domestic transaction have been recorded by Investigation Wing. But in the case of assessee, neither any survey nor any search has been carried out. He emphasized that at the most, only clause (b) can be attracted, because under clause (a), the failure at the end of the assessee is for non-submission of Accountant’s report under section 92E or non- disclosure of the specified domestic transaction in that report. Under Condition No. C, there should be search and survey, but both these aspects are factually not available. The assessee has submitted the Accountant’s report also disclosed the transaction and no search and seizure was carried out. The condition under clause (b) could be applied, if a transfer pricing adjustment of Rs.10 crores or more in earlier assessment year was made, but it is not made in the case of the assessee. Therefore, no reference to the ld. TPO was required. He submitted that this aspect has duly been brought to the notice of ld. CIT but in the impugned order, except for recognizing the filing of this reply in paragraph no. 4, ld. Commissioner has nowhere touched the points demonstrated by the assessee. He further took us through the alleged Corrigendum issued by the ld. Commissioner while considering the submissions of the assessee dated 26.03.2021. He
Assessment Year: 2016-2017 Zydus Healthcare Limited explained that nowhere ld. Commissioner has appreciated the Instructions of CBDT in right perspective and, therefore, his order is not sustainable. Apart from the above, he also submitted that there is no concept of Corrigendum of such a nature. Under the garb of alleged Corrigendum, ld. Commissioner cannot extend the scope of his reasoning. He has passed the impugned order on 17.03.2021. Thereafter he cannot buttress the reasoning given by him with the help of alleged so-called Corrigendum.
On the other hand, ld. CIT(DR) relied upon the order of the ld. CIT and submitted that under the Instructions, the ld. Assessing Officer was supposed to make a reference to the ld. TPO.
We have heard the ld. Representatives and with their assistance gone through the record carefully. Before we embark upon an enquiry on the facts and issues agitated before us to find out whether the action u/s 263 of the Act, deserves to be taken against the assessee or not, it is pertinent to take note of this section. It reads as under:- “263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
Assessment Year: 2016-2017 Zydus Healthcare Limited (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;
(b) “record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the 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.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Assessment Year: 2016-2017 Zydus Healthcare Limited Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
A bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental
Assessment Year: 2016-2017 Zydus Healthcare Limited tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.
(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.
(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.
(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.
(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law.
(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to Assessment Year: 2016-2017 Zydus Healthcare Limited substitute his estimate of income in place of the income estimated by the AO.
(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.
(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.
(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.
In the light of above, let us examine the facts and circumstances of the case. The sole controversy before us is, whether ld. Assessing Officer has ignored CBDT Instruction 3/2016 for not making reference to the ld. TPO of the domestic specified transaction entered by the assessee with its Associated Enterprises. The ld. Commissioner was of the view that under these Instructions, it was mandatory for the ld. Assessing Officer to make a reference to the ld. TPO. Since he failed to make a reference, therefore, his order is erroneous and caused prejudice to the interest of Revenue. At the cost of repetition, we would like to make a reference to paragraph no. 3.3 of the Instruction, which reads as under:- “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:-
Assessment Year: 2016-2017 Zydus Healthcare Limited (d) Where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant’s report under section 92E at all or has not disclosed the said transactions in the Accountant’s report filed; (e) Where there has been a transfer pricing adjustment of Rs.10 crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (f) Where search and seizure or survey operations have been carried out under the provisions of the Income Tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO”.
These are detailed Instruction and other parts are not relevant for the purpose of the controversy in hand. They relate to the other procedural issues. The ld. CIT in the impugned order nowhere construed the meaning of condition provided at Serial nos. (a), (b) & (c) of Para 3 of these instructions. He simply made a mention in the show-cause notice. Thereafter there is no analytical finding either in the order dated 17.02.2021 in paragraphs no. 6 to 8 (extracted supra) or in the alleged Corrigendum. The assessee has filed specific replies and demonstrated as to how no reference was required to be made to the ld. TPO under this Instruction. The impugned order is silent on this submission. With the assistance of ld. Representative, we have gone through carefully and we find that under Clause (a) of Para no. 3.3 of the Instruction, a reference to the ld. TPO is to be made when the assessee failed to file Accountant’s report under section 92E or it has not disclosed the alleged specified international/domestic transaction entered by it with its Associated Enterprises. According to the assessee, it has filed the Accountant’s report and there is no allegation at the end of the ld. CIT that the assessee has not filed such report. Under Clause (b), a reference could be Assessment Year: 2016-2017 Zydus Healthcare Limited made if there has been a transfer pricing adjustment of Rs.10 crores or more in an earlier assessment year and such adjustment has been upheld by the Judicial Authority or is pending in appeal. The assessee contended in its submission that in A.Y. 2015-16, a reference was made, but no adjustment was made by the ld. TPO. It was also brought to the notice of the ld. CIT that in A.Y. 2015-16, the case of the assessee was selected for scrutiny and one of the specific parameters was in relation to payment to related person mismatched. On the basis of this transaction, a reference was made to the ld. TPO on 11.05.2017 in view of the prevailing CBDT Guidelines issued on 10.03.2016. The ld. TPO did not recommend adjustment and this order under section 92CA was passed on 30.10.2018. The assessment in A.Y. 2015-16 was passed by the same Assessing Officer on 26.12.2018, i.e. after the assessment passed in this year, i.e. 19.12.2018. In other words, the ld. Assessing Officer, who happened to be the same Officer, was well-versed with the issue in dispute. He was also aware that TPO has not recommended adjustment in earlier years. Both the orders are passed within a span of one week from each other. Thus it cannot be said that something must have been escaped from the mind of the ld. Assessing Officer. When this aspect was brought to the notice of the ld. CIT, it failed to take cognizance of this aspect analytically in the impugned order. Apart from that, it is subject matter of the assessment record. The ld. Commissioner could easily call for that record for verification.
The third condition contemplated in the Instruction is, there should be search and survey, which is missing in the case of assessee. Therefore, the case of the assessee does not fall in any of the conditions of the Instructions. The assessee further pointed out the judgment of ITAT, Pune rendered in the case of Shyama Healthcare –vs.- DCIT 118 taxmann.com 90 to the notice of ld. Commissioner and contended that in case, a reference is being made in violation of the CBDT Instruction, then it is not valid and no TPO’s order would be passed. Such adjustment deserves to be rejected simply on the reason that reference was made in violation
Assessment Year: 2016-2017 Zydus Healthcare Limited to the CBDT Instruction. Thus in violation of the CBDT Instruction, no reference could be made and if that be so, there cannot be any error committed by the ld. Assessing Officer, which can brand his order erroneous.
We find that the ld. Commissioner failed to take cognizance of all these facts and did not record any analytical finding in the impugned order. Thus it is not sustainable and we quash both the orders, i.e. order dated 17.03.2021 as well as Corrigendum dated 31.03.2021 passed in A.Y. 2016-17 by the ld. CIT under section 263 of the Income Tax Act.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on October 20, 2022. Sd/- Sd/- (Rajesh Kumar) (Rajpal Yadav) Accountant Member Vice-President (KZ) Kolkata, the 20th day of October, 2022 Copies to : (1) Zydus Healthcare Limited, (Successor to Zydus Healthcare Sikkim), 4th floor, ‘D’ Wing, Zydus Corporate Park, Scheme No. 63, Survey no. 536, Khoraj (Gandhinagar), Nr. Vaishnodevi Circle, Ahmedabad, Gandhinagar, Gujarat-382481