Loading judgment…
Facts
The assessee, Cisco Commerce India Pvt. Ltd., filed an appeal against an order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The PCIT held that the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the revenue due to insufficient examination of 'refund liabilities'. The assessee contested this, arguing that the AO had conducted due inquiry.
Held
The Tribunal found that the PCIT's order under Section 263 was justified because the AO had failed to conduct necessary inquiries into the basis and quantification of the refund liability. The Tribunal noted that the assessment order lacked proper verification, making it erroneous and prejudicial to the revenue's interests.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order due to the Assessing Officer's alleged failure to properly examine refund liabilities.
Sections Cited
263, 143(3), 144B, 40(a)(ia), 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.
Per Prashant Maharishi, Vice President
Cisco Commerce India Pvt. Ltd. has filed an appeal for the assessment year 2021-22 against the order passed under Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income-tax, Bengaluru-2, dated 29.3.2025. The PCIT found that the assessment order passed under Section 143(3) read with 144B was erroneous and prejudicial to Revenue because the issue of 'refund liabilities' was not properly examined by the Assessing Officer.
The assessee is dissatisfied with the revisionary order and has contested it on the grounds that the order issued by the learned PCIT is unsustainable. It is claimed that the assessment order contains no errors prejudicial to the interests of the Revenue, and that the learned Assessing Officer issued the order following due inquiry.
3. Assessee has raised following grounds of appeal:
“1. Ld. PCIT has erred in assuming jurisdiction under section 263 of the Act to revise final assessment order dated December 26, 2022 without jurisdictional preconditions being satisfied.
2. Impugned order failed to appreciate that deductibility of rebates, discount, refund liabilities and incentive is subject matter of appeal before CIT(A) as Ld. AO made disallowance of INR 83.64 Crores in final assessment order.
Ld. PCIT's suspicion of final order being 'erroneous' arises from baseless assumption of failure of AO to enquiry and is dehors and directly contrary to material on assessment record.
4. Ld. PCIT failed to appreciate that issue in question is a repetitive issue and further that inquires or verification that should have been made varies from case to case. Ld. PCIT failed to appreciate that inquiry / verification was indeed made during assessment on this issue and disallowance made which is subject matter of appeal.
Perfunctory and routine conclusions in Impugned order that Assessment order dated December 26,2022 is erroneous and/or prejudicial to revenue is without valid basis, ignores material filed/ explanations offered. Revisionary proceedings are unlawful and illegal and deserve to be held as unsustainable, invalid and bad in law.
6. Without prejudice to the above grounds, the Ld. PCIT has erred in law and in fact, in not taking into cognizance the fact that the Appellant has suo-motu considered the refund liabilities to the extent of INR 51.66 Cr for disallowance under Section 40(a)(ia) of the Act.
Without prejudice to the above grounds, the Ld. PCIT has also erred in setting aside the entire final assessment order dated December 26, 2022, despite invoking revisionary powers under section 263 of the Act only on the issue pertaining to allowability of refund liabilities.
8. Invocation of revisionary jurisdiction in present case is contrary to principles consistently applied by Hon'ble Courts for adjudicating validity of same in cases involving similar facts and law.
The brief facts of the case indicate that the assessee is a company earning income from business profits, gains, and other sources, primarily through the distribution and resale of products, service contracts, and the provision of export services to its Associated Enterprise (AE). The assessee filed its income tax return on 14.3.2022, declaring a total income of Rs.140,71,53,990, which was subsequently revised to Rs.140,73,20,270 under section 154 of the Act.
5. During the assessment proceedings, the Assessing Officer (AO) observed that, although the assessee reported significant receipts under section 194J, its net profit appeared low. In response to requests for clarification, the assessee provided various details. Upon review,
the AO issued a show cause notice after noting that the disclosed total turnover was Rs.2,852 crores—comprising Rs.2,002 crores from goods sales and Rs.850 crores from services. Citing the disclosure in Form 3CD, the AO further found, by examining Note No. 16 of the Financial Statements, that only Rs.643 crores were disclosed as domestic service sales. Thus, the AO concluded that the assessee failed to declare Rs.1,225 crores (the difference between Rs.1,868 crores and Rs.643 crores) as taxable service receipts.
After issuing a show cause notice for under-reporting and considering the assessee’s reply, the AO, in paragraph 4.2, made an addition of Rs.83,63,91,462 towards rebates and incentives given to channel partners as follows:
7. It should be noted that the assessee has appealed against this addition before the learned CIT(Appeals), specifically citing Ground No. 4. Furthermore, in the Statement of Facts submitted to the learned CIT(A), the assessee referenced the provision of relevant details.
On examination of the records, the ld. PCIT on 26.2.2025 issued the following notice to the assessee:-
The assessee submitted a letter dated 13 March 2025 to the learned PCIT, explaining adherence to the mercantile system of accounting. According to the matching principle, expenses should be recognized and reported in the same period as the corresponding income is earned. Consequently, the provision for incentive, which was examined by the Assessing Officer, has been accurately disclosed in the annual accounts, supported by a detailed list of incentives and liability claims. Therefore, there appears to be no justification for considering the assessment order as erroneous or prejudicial to the interests of the Revenue.
After careful consideration of the above reply, the learned PCIT issued an order under section 263 of the Act, determining that the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue. The PCIT observed that the assessee had claimed a refund of liabilities amounting to Rs. 105 crores, which was allowed by the AO with reference to Note No. 16 of Revenue from Operations, despite the absence of supporting details provided before the AO. The lack of necessary enquiries and proper quantification with respect to the amount of Rs. 105.6 crores rendered the assessment both erroneous and prejudicial to the interests of the Revenue.
Accordingly, in line with Explanation 2 to section 263 of the Act, the assessment order dated 26.12.2022 was held to be erroneous and prejudicial to the interests of the Revenue. The AO was consequently directed to revise the assessment after thoroughly verifying both the assessee’s claim of refund liability and the quantification thereof, including conducting the necessary enquiries and verifications for this purpose and providing the assessee with an opportunity to be heard. Thus, the order under section 263 was passed specifically to address the verification of refund liabilities amounting to Rs. 105.6 crores.
The assessee has appealed, arguing that since the AO thoroughly examined the issue, the PCIT's claim that the AO's order is erroneous and prejudicial to Revenue lacks merit.
The Learned Authorized Representative first referred to page No.689 of the paper book (PB) which is a notice issued by the AO on 20.12.2022. He further referred to Q.No.1.1 regarding the claim of incentive rebate allowed to channel partners on achieving predetermined milestones netted off from revenues in the audited financial statements of Rs.159.83 crores. He stated that the assessee replies to this show cause notice which is placed at page 660 of the PB vide letter dated 16.12.2022 wherein as per Appendix-II, the assessee explained the details of rebates incentive to reseller which is reduced from the total sales accounted in the financial statement. The assessee also put to the kind attention of the ld. AO Note No.16 being reconciliation of revenue recognized. He further referred to the show cause notice issued which is placed at page No. 669 of the paper book by the learned assessing officer on 14 December 2022 wherein the query was raised that that the assessee has shown total turnover of ₹ 28,524,332,018 which includes (1) sale of goods of ₹ 22,26,61,089 and sale of services of ₹ 8,501,670,929/–, however as per form No. 3CD at annexure C 1, the assessee has shown the sale of services as per income computation and disclosure standard [ ICDS] of ₹ 8,501,670,930 which include sale of services exports of ₹ 2,068,000,000. The learned assessing officer further referred to schedule 16 of the annual accounts and held that the assessee has disclosed only ₹ 6,433,670,930 on account of sale of services. Accordingly he was of the view that assessee has failed to offer receipts of ₹ 12,256,224,404/– being the difference between ₹ 1868 crores and Rs. 643 crores for sale of services to tax and thus there is an underreporting of the above receipt. Thereafter, it was shown to us that the assessee has replied to this show cause notice by letter dated 21 December 2022 which is placed at page No. 673 of the paper book and the learned authorized representative referred to the page No. 676 of the paper book wherein it was explained to the learned assessing officer about the details and supporting documents to substantiate the claim of rebates and incentive amounting to ₹ 159.83 crores allowed to channel partners which has been netted off from revenues. Thereafter the learned authorized referred to page No. 22 of the appeal set which is page No. 8 of 20 of the assessment order wherein on second paragraph the assessee has once again explained to the assessee about the rebates and incentive amounting to ₹ 159.83 crores allowed to channel partners which has been netted off from revenues in the form of breakup of rebate received incentive and refund liabilities. The assessee also offered the copies of the certain credit notes/invoices. He further referred to page No. 25 of the appeal set wherein in paragraph No. 4.10 the learned assessing officer has made the addition of ₹ 836,391,462 on the ground that that the breakup of rebate and incentive issued to the direct customers amounting to ₹ 54.22 crores and incentive to distribution and channel rebates amounting to ₹ 115.40 crores has certain negative rebates and therefore such negative rebates could not have been allowed for the purpose of reconciliation. Accordingly same was added to the total income of the assessee.
The learned authorized further referred to the fact that assessee has preferred an appeal against the assessment order before the learned CIT – A wherein the above addition is challenged before him. He referred to the ground No. 4 of the appeal wherein an addition in relation to the negative amounts reflected in the detailed breakup of rebates and discounts provided to channel partners and direct customers is contested. He also referred to statement of facts at serial No. 4 where the assessee has stated that the assessee has provided all the information and documents as required from time to time to the assessing officer as per the various submissions made during the course of assessment proceedings.
He additionally referenced the notice issued under section 263 of the Income Tax Act dated 26/2/2025 by the learned PCIT, specifically citing paragraph No. 2, where the learned CIT–A discusses the rationale for considering the assessment order passed by the learned AO as erroneous and prejudicial to the interests of the revenue. He highlighted this paragraph and submitted that since all relevant details were provided to the learned AO, there is no justification for revising the assessment.
The core of his argument is that the assessee provided detailed explanations regarding discounts and rebates to the assessing officer,
submitting all necessary details. These facts were also presented to the learned PCIT in response to the show cause notice for assessment revision (see pages 41–42 of the appeal set). He referenced a letter dated March 13, 2025, highlighting sections on incentives paid to channel partners and related accounting practices. Notably, note No. 16 indicates refund liabilities of ₹105.60 crores for incentives payable during FY 2020–21, consistent with the mercantile system of accounting and matching principle. The assessee argued that these provisions were appropriately recognized in FY 2020–21. Supporting documentation, such as invoices (page 159), was submitted, and the assessing officer duly verified these documents. Thus, the representative asserted that the PCIT cannot exercise powers under section 263, given proper verification was already completed. Additional invoice details for rebates and incentives were included as per annexure 5B (pages 602 and 607).
Challenging the revisionary order issued under section 263 of the Income Tax Act, he referenced paragraph six and argued that the learned CIT revised the order even though the assessing officer had thoroughly verified all details. He also noted that the learned PCIT conducted no enquiry, and that Explanation 2 to section 263 was invoked only in the revisionary order—not in the show cause notice provided.
Drawing on the judicial precedent set in Torrent Pharmaceuticals Ltd versus Deputy Commissioner of Income Tax (2018) 97 taxmann.com
671, the authorized representative argued, referencing paragraph eight of the coordinate bench’s order, that assessments of the assessee are conducted annually. Given the enormous turnover and scale of operations, it is practically impossible for any adjudicating authority to thoroughly examine all points each year as expected by the Principal Commissioner of Income Tax. The representative further noted that the assessee had filed a comprehensive response to address issues raised in the show cause notice, but the Principal Commissioner did not offer a convincing rebuttal explaining how supposed deficiencies in the enquiries impacted the assessment’s outcome. It was stated that the divisional Commissioner’s actions must be objectively justifiable and cannot simply rely on vague assertions. The Principal Commissioner should have performed some basic investigation himself to support claims of errors in the Assessment Officer’s order that allegedly prejudiced revenue.
Instead, the Principal Commissioner merely claimed there was insufficient enquiry and lack of diligence, without demonstrating any systematic effort to substantiate these allegations. Under these circumstances, the coordinate bench concluded that the order issued by the Principal Commissioner was invalid. The representative also pointed out that similar facts apply to the assessee’s case: the Assessing Officer made specific and detailed enquiries before disallowances were made. Referencing paragraph 9.229.5, he asserted that revisionary actions based on alleged inadequate enquiries in a general and sweeping manner should be avoided. He argued that when operations are large-scale and scrutinized annually, the assessee’s claim—that sufficient investigation was conducted— should be accepted. Finally, he stated that if the divisional Commissioner’s order is upheld under explanation 2, the Commissioner could potentially criticize every assessment without conducting any verification or inquiry or proving that the assessment is legally unsustainable. Therefore, he maintained that this issue is fully addressed by the referenced decision, rendering the Principal Commissioner’s order unsustainable.
He cited section 263(1) of the Act, arguing that the CIT failed to conduct the necessary enquiries to establish that the assessing officer's order was erroneous. He claimed the section 263 order was issued without proper consideration, despite the assessment being made with care and enquiry. Referring to Kedarnath Jute Manufacturing Co Ltd v. Commissioner of Income Tax (Central) Kolkata, he noted the Supreme Court upheld deductions for mercantile accounting. He also referenced the Karnataka High Court decision in Commissioner of Income Tax v. Addl F DeSilva, stating the tribunal cannot change the basis for revision, as the CIT-A only pointed out a lack of enquiry into the assessee's ₹105.69 crore refund liability. Thus, his sole contention was that the order issued by the learned PCIT under section 263 of the Income Tax Act is legally unsustainable.
The learned CIT DR strongly supported the principal Commissioner of Income Tax's order, arguing that the assessing officer only
investigated the reconciliation between turnover reported in Form No. 26AES and the annual accounts. She pointed out that the assessing officer's inquiry focused solely on matching turnover figures, particularly differences arising from incentives and refund liabilities, without raising any queries about how refund liability was deducted from turnover—a deduction claimed by the assessee from total income.
She cited pages 692 to 842 of the paper book submitted by the assessee, noting that a negative figure was merely added based on the enquiry regarding turnover differences. In these pages, details about distributor and channel rebates were provided; except for three items described as "open court Journal import created," there was no information about payment, refund claims, or quantification of amounts. The assessing officer never questioned the assessee on these matters. The total amount reduced by the assessee—₹ 1,154,010,728—is noted on page 842, but there is no evidence that its allowability was examined. The only inquiry made was about reconciling annual account turnover with amounts in Form No. 26AS; no investigation addressed the allowability of the expenditure or how the provision was made. The principal Commissioner held the assessing officer’s order to be erroneous and prejudicial to the revenue’s interests concerning this expenditure and its deduction. The representative did not provide any evidence regarding the allowability of the queried amount. Referring to paragraph 6 of the revisionary order, she highlighted that the PCIT questioned the assessee’s failure
to detail the basis for refund liability quantification, historical utilization trends, and whether unused provisions from previous years had been taxed. The assessing officer did not explore the basis for creating the provision or verify if the expenditure was actually incurred. The CIT DR further stated that these details had not been submitted during assessment proceedings. Therefore, the provision was deemed unascertained and not allowable under section 37 of the Act, as the assessing officer failed to make necessary inquiries or verify the quantification of the refund liability (₹ 105.60 crores). Accordingly, under Explanation 2 to Section 263 of the Act, the PCIT was justified in directing the assessing officer to conduct required inquiries and verifications, deeming the assessment order erroneous and prejudicial to revenue interests.
In response, the learned authorized representative asserted that the assessing officer conducted all necessary inquiries during the assessment proceedings. Furthermore, it was highlighted that the learned PCIT did not specify any particular inquiry that the assessing officer failed to undertake. Simply referring to and invoking the provisions of Explanation 2 to Section 263 of the Act does not, by itself, render the order of the learned PCIT legally sustainable.
We considered the rival arguments and the Ld. PCIT’s order dated 29/3/2025 under section 263 of the Income Tax Act, and also the assessment order dated 26/12/2022 which is held to be erroneous and prejudicial to the interest of revenue because it lacked
verification of the refund liability of ₹105.60 crores with respect to how the provision for refund liability was quantified and whether provisions which were not utilized in the previous year had been offered to tax. It is also the finding of the learned PCIT that the AO has not conducted enquiry into the basis of creation of the provision and has not verified whether the expenditure has actually been incurred by the assessee in the channel partners incentive agreement, in paragraph No. 6, are relating to return of rebates, where it is mentioned that the channel partners would be asked to return the rebates in case bookings are cancelled. It is also the finding of the learned PCIT that the AO has neither enquired nor assessee submitted any detail with respect to the above aspect of refund liability. It is also the finding that the provisions thereof is not an ascertained liability and hence not allowable under section 37 of the income tax act. Thus it is the case held by the learned PCIT of absence of any inquiries or verification with respect to the quantification, provisioning, utilization of the refund liability of Rs. 105.6 crore crores.
The assessee company specializes in wholesale trading of IT products and IT-enabled services for the Indian market, generating most revenue from customer contracts for goods and services. Products are sold to channel partners with a 28-day return right. When returns are possible, the company records both a refund liability and an asset for recoverable goods. The refund liability, included in other financial
liabilities, reflects expected incentives owed to channel partners and distributors on sales up to the reporting date.
Assessee has disclosed revenue recognition policy in note No. 2.3 to the annual accounts as under “A – general policies
The company derives its revenue primarily from contracts with customer for sale of goods and services. Revenue from sale of goods is that of returns, rebates and applicable goods and service tax (GST).
The company accounts for the contracts with the customers when (i) the contract is approved by the parties (ii) the parties are committed to perform their obligations, (iii) the right of parties, including payment terms are identified (iv) the contract has commercial substance and (v) the consideration is probable of collection.
The transaction price reflects the amount of consideration to which the company expects to be entitled in exchange for transferring products and services to the customer. If the consideration includes variable amount, the company estimates the amounts to which it expects to be entitled. Generally, variable consideration includes volume discounts, rebates and sales return that reduce the transaction price. When the company determines the transaction price it includes the variable consideration only to the extent it is highly probable that a significant reversal will not occur in the future.
The company sells its products to the channel partners with a right of return within 28 days. When such customers have a right to return the product the company recognises refund liability and an asset (via) recovery return goods). The cost to recover the products are not material.
Refund liability (included in other financial liabilities) is recognised to the extent of expected incentives payable to channel partners and distributors in relation to sales made until the end of the reporting period.
The company provides general product warranty to the customers for a period of 12 – 15 months upon the sale of products. The cost of general provision for product warranty is not material. The company also has back-to-back warranty and replacement arrangements with its suppliers (group companies).
When a contract includes multiple performance obligations, the transaction prices allocated to each performance obligation in an amount that the pics the consideration, to which the company expects to be entitled in exchange of transferring promised goods and services.
Revenue is recognised when the obligation under the terms of contract with customers are satisfied. Revenue is recognised as the overtime or at a point in time, depending on when the underlying products or services transferred to the customer. Revenue is recognised at a point in time for product upon transfer of control. Revenue is recognised overtime for various services.”
Note 16 of the financial statements details revenue from operations as follows:
The total revenue from operations recognized in the profit and loss statement amounts to ₹28,524 million. This figure corresponds with the contract price of ₹30,123 million, after accounting for rebate incentives of ₹543 million and refund liabilities of ₹1,056 million. Refund liabilities pertain to incentives provided to channel partners and distributors. Management has reviewed the agreements and determined that no goods were returned by channel partners during the year; consequently, no provision for returns has been recorded.
Note No. 14 covers refund liabilities, showing ₹1441 million for the year ended March 31, 2020. Refund liabilities are recognized for incentives owed to channel partners and distributors. Previous years as of March 31, 2020 and March 31, 2019 show figures at Rs Nil. Thus for the earlier years there were no such provisions outstanding.
During assessment proceedings, a notice under section 142(1) was issued on 20 December 2022 requesting details about incentives and rebates for channel partners totaling ₹159.83 crores. The actual rebate incentive was ₹54.30 crores, with refund liabilities amounting to ₹105.60 crores. The assessee responded, providing a breakdown of expenditure, showing distribution and channel rebates as ₹115,40,10,728, with certain reductions for marketing-related funds recognized as expenses. A list of customers receiving these rebates was submitted, but page 997 only addresses direct customer rebates of ₹542,274,168—not the distribution and channel rebates questioned by the learned PCIT. Thus, the assessee did not furnish the required
information in response to the show cause notice dated 20 December 2022, as alleged by the learned PCIT.
The show cause notice dated 14 December 2022 requested the assessee to reconcile receipts from Form No. 26AS with the annual accounts. However such inquiry does not have any relation with the issue of examining refund claim as raised by the ld. PCIT.
There is no evidence that the assessing officer requested details on how the refund liability provision was calculated or used. No inquiry was made regarding the basis for creating this provision, nor did the officer question its alignment with accounting policies or financial statement disclosures. This reflects a lack of any inquiry, not merely an inadequate one.
The ld. PCIT supported his order by relying on Explanation 2 to Section 263 of the Act, stating that the assessing officer did not conduct the necessary inquiries, making the assessment order erroneous and prejudicial to the interests of revenue. Since clause (a) applies—where an order is made without required inquiries or verification—the order is considered erroneous and prejudicial to the interest of revenue. The principal Commissioner of Income Tax shared this view, exercised jurisdiction under Section 263, and directed the assessing officer to issue a proper assessment order according to the law. Consequently, we uphold the ld. PCIT's decision under Section 263, confirming that the assessment order was both erroneous and prejudicial to the revenue.
Regarding the reliance on decision of Torrent Pharmaceuticals Ltd v. Deputy Commissioner Of Income Tax [97 taxmann.com 671] , that case involved the PCIT's dissatisfaction with the level of enquiry by the assessing officer. In contrast, the present case concerns a complete lack of enquiry into the provision, quantification, and use of refund liability. The cited facts are therefore distinguishable. Additionally, the authorized representative referred to observations from the that case without addressing that the PCIT's main concern there was the assessing officer’s alleged non-application of mind, as indicated in paragraph 4 of that order. Furthermore, paragraph 4.3 notes the assessee had submitted details relevant to section 263, making the circumstances materially different from those in the present case.
The next decision cited by the authorized representative of Commissioner of Income Tax v. Escorts Ltd, [198 Taxman 324] (Delhi). In that case, even though the revenue had previously accepted a particular view in earlier years, section 263 was still invoked. Regarding the refund liability for this assessee, the annual accounts show that no such expenditure had been charged to the profit and loss account in earlier years as well as no such provisions are outstanding in earlier years , As previously mentioned, this is evident from the financial statements.
The authorized representative additionally presented a copy of the Delhi High Court decision in CIT v. USHA International Limited, 348 ITR 485, which addressed the matter of change of opinion. In the proceedings before us, it has not been contended that there is a change of opinion regarding the approval of the specific refund claim.
The assessee also submitted a copy of the decision of the Honourable Karnataka High Court in case of CIT versus L F DeSilva[ 192 ITR 547 ] stating that Tribunal cannot alter the basis for initiation of revision proceedings. In that particular case the Honourable High Court held that the appellate tribunal was justified in not exceeding to the request of the revenue to remand the proceedings to the income tax officer. No such occasion arose before us and therefore the above decision do not apply to the facts of the present case before us.
The learned authorized representative further referred to the decision of the Honourable Supreme Court in case of Kedarnath jute Manufacturing Co Ltd versus CIT Central in [82 ITR 363] to canvas the issue that liability incurred or sales made during the accounting period is deductible even if such entries made in the books of accounts. We do not find that above decision apply to the facts of the case because here the provisions are made by the assessee in the books of accounts reducing the sales by the refund liability and the issue in appeal is only with respect to challenge to an order under section 263 of the income tax act where the assessing officer has carried out due enquiry before allowing the above claim or not.
We find no fault with the Principal Commissioner's order dated March 29, 2025, under section 263 of the Income Tax Act, which held that the assessment order from December 26, 2022, was erroneous
and prejudicial to revenue interests. Accordingly, all the grounds of appeal are dismissed.
In the result, the appeal by the assessee is dismissed.
Pronounced in the open court on this 05th day of March , 2026.