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Income Tax Appellate Tribunal, DELHI ‘I’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(TP), Delhi – 2, dated 24.01.2024 pertaining to A.Y. 2020-21.
The grievances of the assessee read as under:
“1. That on facts and in law the order dated 24th January 2024 passed by the Commissioner of Income Tax (TP), Delhi-2 {hereinafter referred to as “CIT”} u/s 263 of the Act is void ab initio and unsustainable in law.
2. That on facts and in law, the CIT has erred in assuming and exercising jurisdiction in respect of an ineffective order which could not result in any prejudice.
2A.That on facts and in Law, the CIT erred in observing in para 7.4.1-
“Assessee has called the invocation of section 263 provisions at this stage as premature since the assessment order is yet to be passed and there is no ‘proceeding' existent as on date. Since the TPO order has not attained finality on account of pendency of DRP proceedings, invocation of section 263 proceeding is premature.”
3. That on facts and in law the order passed by the CIT u/s 263 is bad in law as it grossly violates applicable rules of natural justice in as much as inter alia:
(a) not providing an opportunity of being heard in person,
(b) passing the impugned order in haste
(c) not allowing the appellant adequate time to prepare and represent. has thereby violated the settled principles.
4. That on facts and in law the CIT has erred in cancelling order dated 25th July 2023 passed by the TPO and directing the TPO to pass the order afresh.
5. That on facts and in law the CIT has erred in holding that order dated 25th July 2023 passed by the Addl/JCIT TP 2(3) - Mumbai {hereinafter referred to as “TPO”} is erroneous and prejudicial to the interest of revenue.
6. That on facts and in law the CIT has erred in holding that TPO has accepted Arm’s Length Price of International Transactions reported in Transfer Pricing Study without any enquiry.
6.1 That on facts and in law the CIT has erred in invoking provisions of Explanation 2 to section 263 of the Act.
7. That the CIT erred in observing and assuming on facts that the:
(a) TPO has not examined the correct FAR profile of the appellant. (b) TPO has not examined the “customer invoices” of export Sales in bill-to-ship model.
(c) TPO has not verified the cost base of price at which goods were sold to the AE’s.
(d) TPO has not examined comparability of comparables.
(e) TPO has made no enquiry in respect of International Transactions for Software Development.
(f) TPO has made no enquiry in respect of International Transactions for Technical and Business Support Services.
(g) TPO has made no enquiry in respect of International Transactions for Purchase of Raw Materials.”
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Judicial decisions relied upon duly considered.
Briefly stated, the facts of the case are that the TPO framed order u/s 92CA(3) of the Income-tax Act, 1961 [the Act, for short] on 25.07.2023 and in the impugned order, an adjustment of Rs. 29,32,71,747/- was made on the issue of availing of management and I.T. Services. The other international transactions were accepted to be at arm’s length. Assuming jurisdiction conferred upon him by provisions of section 263 of the Act, the ld. CIT(TP) issued a notice to the assessee.
The sum and substance of the notice is that other international transactions were accepted to be at arm’s length without conducting necessary enquiry/verifications of the facts. Strong emphasis was placed on the fact that in the FAR analysis done in Transfer Pricing Study Report, the assessee has characterized itself as a manufacturer of SIM Card and Smart Card, bearing routine risk. However, in the submissions dated 29.06.2023, the assessee has characterized itself as “Contract Manufacturer”, bearing limited risk.
The assessee attended the proceedings and made elaborate submissions, which did not find any favour with the ld. CIT(TP) who was of the firm belief that the impugned order of the TPO dated 25.07.2023 was passed without making enquiries or verification, which should have been made in this case and, therefore, such an error is erroneous in so far as it is prejudicial to the interest of the Revenue.
The ld. CIT(TP) went on to cancel the order of the TPO dated 23.07.2023 and directed the TPO to pass order afresh after examining available record and after making necessary enquiries as deemed fit for determination of arm’s length price of international transactions of the assessee.
Before us, the assessee assailed the order of the ld. CIT(TP) questioning the very assumption of jurisdiction u/s 263 of the Act. It is the say of the ld. counsel for the assessee that the order of the TPO has not attained finality and, therefore, assumption of jurisdiction in respect of an order which has not attained finality is bad in law.
9. The ld. counsel for the assessee vehemently stated that after the TPO frames the order, the Assessing Officer passes a draft assessment order for which the assessee has an option to object before the DRP and if no objection is raised, the Assessing Officer frames the final assessment order against which the assessee can prefer an appeal before the ld. CIT(A).
10. It is the say of the ld. counsel for the assessee that in any case, the DRP/CIT(A) has the power to correct any error or omission in the orders of the authorities below. Therefore, the ld. CIT(TP} cannot jump into the wagon to correct any error or omission by assuming jurisdiction u/s 263 of the Act.
We have given thoughtful consideration to the contentions of the ld. counsel for the assessee and have considered various decisions relied upon. Section 263 of the Act reads as under:
“263. Revision of orders prejudicial to revenue.
(1)The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or 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 [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests 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,—
(i)an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii)an order modifying the order under section 92CA; or (iii)an order cancelling the order under section 92CA and directing a fresh order under the said section].
Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988] by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] 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 [or the Transfer Pricing Officer, as the case may be,] conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;[(iii) an order under section 92CA by the Transfer Pricing Officer;]
(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 Principal [Chief
Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer 92[or the Transfer Pricing Officer, as the case may be,] had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the* Principal Commissioner or 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.
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a)the order is passed without making inquiries or verification which should have been made;(b)the order is passed allowing any relief without inquiring into the claim;(c)the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or(d)the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
[Explanation 3.—For the purposes of this section, "Transfer Pricing Officer" shall have the same meaning as assigned to it in the Explanation to section 92CA.]
(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 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.”
It can be seen that Finance Act, 2022 w.e.f. 01.04.2022 has included order passed by the TPO. The contention of the ld. counsel for the assessee that the order of the TPO is not final order and has not attained finality cannot be accepted because the legislators were cautious about this fact while amending the relevant provision. The legislators were equally cautious about the fact that the DRP/ld.
CIT(A) has power of enhancement. Constitutional validity of the amendment has not been questioned. Therefore, the CIT(TP) was well within his powers to assume jurisdiction u/s 263 of the Act.
Coming to the merits of the case, the entire case of the Revenue revolves around improper enquiry/inadequate enquiry/framing order without making enquiries or verifications, which should have been made in this case. All that is required to be seen is whether during the transfer pricing assessment proceedings the TPO has raised specific queries to which the assessee has framed specific replies or not.
Under Rule 10- D of the Rules, every person who has entered into an international transaction shall keep and maintain information/ documents as mentioned therein and the assessee is required to substantiate on the basis of material available with him that income arising from international transactions entered into by him has been computed in accordance with section 92 of the Act.
Transfer Pricing proceedings start with TP study report and on the basis of TPSR, TPO conducts enquiry. In our considered opinion, there is no presumption that the officer proceeds on wrong facts.
Considering the relevant rule, read with relevant provision of the Act, the nature of enquiry of the TPO depends upon the requirements mentioned therein. In our considered opinion, past history of the assessee also helps the TPO to conduct enquiry and in the case of the assessee, since 2015, TPSR has been accepted as such and since there was no assumption of jurisdiction by the CIT(TP) since 2015, enquiry conducted by the TPO was in line with the past history of the assessee.
The entire case of the revenue revolves around the following:
“3.1 The assessee company is primarily engaged in manufacturing and sale of SIM cards and smart cards in India. It was observed that the assessee has made export sales of SIM cards to its AEs in FY 2019-20. It was also noticed that the assessee is following bill to-ship to model for export sale of SIM cards wherein the invoice is raised on AE while the goods are directly shipped to the end customers. From the records, it has been observed that all the global orders are placed by the final customers mandatorily with the AEs and export sales are routed mandatorily with the AEs and export sales are routed mandatorily with the AEs and export sales are routed through AEs at a pre through AEs at a pre-determined margin as provided in the determined margin as provided in the Group Group transfer transfer pricing pricing policy. policy. The The assessee assessee has to mandatorily sell goods goods at budgeted cost-plus dictated mark mark- up to its foreign AEs. its foreign AEs.
3.2 Further, the assessee has submitted in its reply dated Further, the assessee has submitted in its reply dated Further, the assessee has submitted in its reply dated 29.06.2023 that apart from some specific cases, where the 29.06.2023 that apart from some specific cases, where the 29.06.2023 that apart from some specific cases, where the customer has requested a customer has requested a fulfillment step (often packaging) step (often packaging) to be performed, there is no further processing done by to be performed, there is no further processing done by AEs. This is also obvious f AEs. This is also obvious from the fact that when goods are rom the fact that when goods are shipped from India, the final destination is that shipped from India, the final destination is that of the customer. This means means the assessee is aware of the final customer but only bills are routed through foreign AEs to only bills are routed through foreign AEs to only bills are routed through foreign AEs to reduce incidence of tax. reduce incidence of tax. Therefore, when goods are being eing sent directly to end customer and there is no value addition sent directly to end customer and there is no value addition sent directly to end customer and there is no value addition done by the AE, the final sale price to end customer should done by the AE, the final sale price to end customer should done by the AE, the final sale price to end customer should be similar to sale price to AE as shown in the invoice. be similar to sale price to AE as shown in the invoice.
3.3 However, it has been observed from the records that that when the goods are are shipped to the destination of the end end- customer, the same same is accompanied with another invoice i.e. customer invoice indicating actual value of goods. The TPO customer invoice indicating actual value of goods. The TPO customer invoice indicating actual value of goods. The TPO has not asked for the submission of these customer invoices. has not asked for the submission of these customer invoices. has not asked for the submission of these customer invoices. TPO also did not call for the TPO also did not call for the details of price received by the details of price received by the AE from the end customers in such cases. The information is AE from the end customers in such cases. The information is AE from the end customers in such cases. The information is crucial to understand the arrangement of transaction and crucial to understand the arrangement of transaction and crucial to understand the arrangement of transaction and value addition done by the AE, if any. value addition done by the AE, if any. Any difference Any difference between the price shown in the invoices and actual p between the price shown in the invoices and actual price at rice at which goods were sold to end customer may lead to profit shifting out of India when the AE has not added any value to the goods.
3.4 Further, the TPO has also not asked for reconciliation of total sale value of goods to AEs as per invoices vis-à-vis as per books of accounts. This was crucial to identify whether there is any difference between the quantum of actual sale and revenue recognized in the books on account related to sale of goods to AEs. Any suppression of revenue in the books may lead to reduction of tax liability of the assessee and profit shifting out of India.
3.5 In the FAR analysis done in the TP study report, assessee has characterized itself as a manufacturer of SIM cards and Smart cards bearing routine risk. However, in the submission dated 29.06.2023,the assessee has characterized itself as a contract manufacturer bearing limited risk. The assessee has also submitted that there is no written agreement between the assessee and AEs for supply of products manufactured by the assessee and same is governed by long-lasting business relationship. However, as discussed, the assessee is earning a dictated mark-up as provided in the Group Transfer Pricing Policy. Therefore, it is seen that the mark-up charged by the assessee has been deliberately kept low and not commensurate with the FAR profile of the assessee. The actual characterization of assessee in respect of sales of manufactured goods was required to be determined based on correct FAR analysis. However, the TPO did not called for sufficient evidences to ascertain actual functions performed, risk borne and assets employed by AE and the assessee respectively with respect to underlying international transaction which is necessary for determination of arm’s length price of the transaction.”
According to the ld. CIT(TP), sufficient enquiry has not been done to verify FAR analysis of the assessee and its AEs with respect to various international transactions. This observation of the CIT(TP) itself shows that the TPO has made enquiries but according to the CIT(TP), sufficient enquiries were not made. This is not permissible for assuming jurisdiction u/s 263 of the Act.
The bone of contention is mentioned in the TP-SR as the assessee engaged in the manufacturing and sale of SIM Card and Smart Card in India and in one of its replies, the assessee has mentioned itself to be a ‘Contract Manufacturer’. ‘Contract Manufacturer’ has not been defined in the Income-tax Act. However, the definition of ‘Contract Manufacturer’ as per OECD Guidelines, 2022 reads as under:
“Contract manufacturer” has though not been defined under the Income-tax Act, 1961, however, the definition of contract manufacturer, as per OECD Guidelines, 2022 (para 7.40), reads as follows:-
“7.40. Another example of an activity that may involve intra- group services is manufacturing or assembly operations. The activities can take a variety of forms including what is commonly referred to as contract manufacturing. In some cases of contract manufacturing the producer may operate under extensive instruction from the counterparty about what to produce, in what quantity and of what quality. In some cases, raw materials or components may be made available to the producer by the counterparty. The production company may be assured that its entire output will be purchased, assuming quality requirements are met. In such a case the production company could be considered as performing a low-risk service to the counterparty, and the cost plus method could be the most appropriate transfer pricing method, subject to the principles in Chapter II.”
20. The assessee is a Contract Manufacturer of SIM Card and Smart Card for IDFEMIA Syscom group and it is not in dispute that the assessee is a manufacturer. In our considered opinion, any difference in nomenclature will not change the picture.
21. Vide notice dated 09.12.2021, the TPO had directed the assessee to submit its TPSR alongwith other documents. Vide notice dated 02.09.2022, the TPO directed the assessee to explain with documentary evidences and relevant working a justification of its NCP Margin of 6.80% vis a vis its manufacturing activities.
22. The assessee filed detailed reply and explained that information sought is duly documented in the TP Study report.
23. After considering the reply of the assessee, vided notice dated 16.06.2023, the TPO specifically asked the assessee to clarify whether any value addition is done by the AEs to the product sold to the AEs before sale of such products to final customer.
24. The assessee replied that vis a vis AE sales, it is a contract manufacturer and explained the steps involved in the process of SIM manufacturing, collection of orders and making of sale. It was clarified that post manufacturing, no value addition is done by the AE other than packaging.
25. Vide notice dated 16.06.2023, the TPO also directed the assessee to furnish details of sales made to AE and non-AEs. Details were furnished by the assessee.
26. Apprehensions of the ld. CIT(TP) in his order have all been addressed by the TPO during his enquiries/investigations before framing the TP order. In our considered opinion, if the ld. CIT(TP) was of the firm belief that the TPO has not conducted proper enquiries, nothing prevented him to conduct enquiries as held by the Hon'ble High Court of Delhi in the case of DG Housing Projects 343 ITR 329. The relevant findings read as under:
“Section 263 has been enacted to empower the CIT to exercise power of revision and revise any order passed by the Assessing Officer, if two cumulative conditions are satisfied. Firstly, the order sought to be revised should be erroneous and secondly, it should be prejudicial to the interest of the Revenue. The expression „prejudicial to the interest of the Revenue‟ is of wide import and is not confined to merely loss of tax. The term „erroneous‟ means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law.
The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word „erroneous‟ includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits.
In cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by www.taxguru.in ITA 179/2011 Page 14 of 19 conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.
This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible.
An order is not erroneous, unless the www.taxguru.in ITA 179/2011 Page 16 of 19 CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.
In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that “order passed by the Assessing Officer may be erroneous”. The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent‟s computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is “erroneous”. The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”
27. It would not be out of place to refer to the judgment of the Hon'ble High Court of Delhi in the case of CIT Vs Clix Finance India Pvt Ltd ITA 1428/2018 order dated 01.03.2024. The relevant findings read as under:
“19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two- pronged test to exercise the revisional authority i.e., firstly, the assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.
Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order.
Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the present appeal, would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent-assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. However, this whether the mandate of law for−leads us to an ancillary question invoking the powers under Section 263 of the Act includes the cases where either an adequate enquiry has not been made and the same has not been recorded in the order of assessment or the said authority is circumscribed to only consider the cases where no enquiry has been conducted at all.
Reliance can be placed on the decision of this Court in the case of CIT v. Sunbeam Auto Ltd. [2009 SCC OnLine Del 4237], wherein, it was held that if the AO has not provided detailed reasons with respect to each and every item of deduction etc. in the assessment order, that by itself would not reflect a non- application of mind by the AO. It was further held that merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. The relevant paragraph of the said decision reads as under:-
“17. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-t axAct. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of “lack of inquiry” that such a course of action would be open. In Gabriel India Ltd. (1993) 203 ITR 108 (Bom), law on this aspect was discussed in the following manner
A similar view was taken by this Court in the case of CIT v. Anil Kumar Sharma [2010 SCC OnLine Del 838], wherein, it was held that once it is inferred from the record of assessment that AO has applied its mind, the proceedings under Section 263 of the Act would fall in the category of Commissioner having a different opinion. Paragraph 8 of the said decision reads as under:-
“8. In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of “lack of inquiry” and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : “that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter.”
No substantial question of law arises for our consideration.”
In Ashish Rajpal as well, this Court was of the view that the fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee.
Further, the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., enunciates the meaning and intent of the phrase “prejudicial to the interests of the Revenue”, in the following words:-
“8. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain [(1957) 31 ITR 872 (Cal)], the High Court of Karnataka in CIT v. T. Narayana Pai [(1975) 98 ITR 422 (Kant)], the High Court of Bombay in CIT v. Gabriel India Ltd. [(1993) 203 ITR 108(Bom)] and the High Court of Gujarat in CIT v. Minalben S. Parikh [(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to the interests of the Revenue.
Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT [(1987) 163 ITR 129 (Mad)] interpreting “prejudicial to the interests of the Revenue”. The High Court held:
“In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration.”
In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.
The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue.(See Rampyari Devi Saraogi v. CIT [(1968) 67 ITR 84 (SC)] and in Tara Devi Aggarwal v. CIT [(1973) 3 SCC 482 : 1973 SCC (Tax) 318 : (1973) 88 ITR 323].)” [Emphasis supplied]
Recently, the Hon’ble Supreme Court in the case of CIT v. Paville Projects (P) Ltd. [2023 SCC On Line SC 371], while relying upon Malabar Industrial Co. Ltd., has discussed the sanctity of two- fold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under:-
“27. Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd. (supra). It is true that in the said decision and on interpretation of Section 263 of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1) of the Income tax Act, the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***”
Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.”
The ld. DR has filed written submissions. We have carefully gone through the contents of the written submissions made by the ld. DR. We find that the ld. DR has submitted more or less the same thing which he has presented in his oral arguments. All the issues raised in the written submissions have been duly considered by us elsewhere.
Considering the facts of the case in totality, we are of the considered view that the TPO has made specific enquiries to which the assessee has given specific replies. Therefore, it cannot be said that no enquiry was made by the TPO and as held by the Hon'ble High Court of Delhi in the case of Clix Finance India Pvt Ltd [supra], inadequacy of enquiry by the Assessing Officer with respect to certain claim would not in itself be a reason to invoke powers enshrined in section 263 of the Act.
On merits, the ld. CIT(TP) erred in assuming jurisdiction u/s 263 of the Act. We, accordingly, set aside his order and restore that of the TPO dated 25.07.2023.
In the result, the appeal of the assessee in is partly allowed.
The order is pronounced in the open court on 28.03.2024.