M/S NIRVANA BUSINESS SOLUTIONS PRIVATE LTD.,,BANGALORE vs. CIT, BANGALORE

PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER :

“1.1 The learned CIT, Bangalore III, Bangalore has erred in assuming jurisdiction u/s 263 of the IT Act, 1961 and in passing the revisional order. The conditions precedent for assumption/exercise of jurisdiction u/s 263 not being satisfied, the order passed u/s 263 is bad in law and liable to be quashed. 1.2 The learned CIT, B’lore III, B’lore has erred in assuming jurisdiction u/s 263 of the IT Act, 1961 and in passing the revisional order without appreciating that for the year under consideration, the appellant had filed objections before the Hon’ble Dispute Resolution Panel and the AO has passed the order in conformity with the directions of the Hon’ble Panel in accordance with provisions of sec. 144C. The order of the AO having been passed in conformity with the directions of the DRP cannot be treated either as erroneous or prejudicial in nature. The order of the CIT u/s 263 being bad in law is liable to be quashed. 1.3 The learned CIT, B’lore III, B’lore has erred in not appreciating that the DRP is a committee of three Commissioners on whose directions the assessment order is framed and a single Commissioner cannot ‘sit over’ the decision of three Commissioners. 1.4 The learned CIT, B’lore III, B’lore has erred in not appreciating that whether payment towards data link charges is liable to withholding tax is a debatable issue and order of the AO cannot be termed as erroneous on this count. 1.5 The learned CIT, B’lore III, B’lore’s presumption that the non-resident payee’s may have substantial presence in India based on contact information available on the website/internet is a only surmise or conjecture on the basis of which it cannot be concluded that the order of the AO is erroneous in nature or prejudicial to the interest of the revenue. 1.6 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT, B’lore III, B’lore be quashed.”

On going through the grounds raised (Supra) we find that the grievance raised in the grounds is that the learned CIT has erred in taking cognizance u/s 263 of the Act and in setting aside the order of assessment for asst. year 2006-07 passed u/s 143(3) rws 144C of the Act vide order dated 18/10/2010.

3.1 The assessee, a company in the business of software development services, filed its return of income for asst. year 2006- 07 on 29/11/2006, declaring loss of Rs.9,79,37,638/-. The return was processed and the case was taken up for scrutiny. The assessment was concluded by order passed u/s 143(3) rws 144C of the Act dated 18/10/2010 wherein the income of the assessee was determined at Rs.2,71,30,061/- as against declared loss of Rs.9,79,37,638/-. The operative portion of the order of assessment read as under:-

“In response to notices issued, Sri Sachin Accounts Manager and Authorized Representative appear from time to time. The case was discussed and the relevant details have been brought on records.

I. During the course of assessment proceedings, it was noticed that the assessee has filed return claiming loss of (-)Rs.9,79,37,638/- despite the fact that the loss arrived at as per the computation statement filed by it is only Rs.6,51,91,941/- On a closer verification it is found that, what the assessee has returned is loss as per the profit and loss account and not adjusted total loss which is arrived at after the required addition and allowances to the book loss as without in the computation of income statement submitted by the assessee during the course of assessment proceedings.

Accordingly, the loss claimed in the return of income is ignored hereby as incorrect and the net loss of Rs.6,51,191,941/- which is the correct loss is adopted for computation of taxable income. The international transaction of the assessee, as specified in 92(B) of the Income-tax Act 1961 and reported in Form 3CEB exceeded Rs.5 crore. The case was therefore referred to Additional Director of Income-tax(Transfer Pricing) vide Reference No.TP/ITO-W-12(1)/2008-09 dated 14.5.2008, after receiving approval for the reference from the Commissioner of Income-tax, Bangalore-III, vide No.TPO/CIT-B.III/2008-09 dated 12.12.2008, with a view to examine the international transaction of the assessee and suggest any adjustment in respect of arms length price u/s 92CA.

The Jt. Director (Transfer Pricing)-II, B’lore vide order u/s 92CA dated 20.10.2009 determined the ‘arms length price’ in respect of the software service at Rs.21,49,71,327/- as against Rs.12,08,02,549/- shown by the taxpayer. The difference of Rs.9,41,68,778/- was determined as an adjustment u/s 92CA. In this regard a communication was issued to the assessee company to file its objections, if any, for the proposed above adjustments in arms length price. The submissions against the proposed adjustments filed by the assessee company on 20.11.2009 were examined. All the submission made by the assessee company was already considered by the Transfer Pricing Authority while passing the order u/s 92CA. Hence, a order u/s 144C was passed on 21.12.2009 adopting the ‘arms length price’ in respect of international transactions dealt in by the assessee company with its associated enterprises to the tune of Rs.9,41,68,778/- as suggested by the TPO in his report u/s 92CA as discussed above. In accordance with the provisions of sec. 144C of the Income-tax Act 1961 the assessee was asked to file it’s acceptance to variation of income determined consequent to the adjustment in ‘Arms length price’ and to file its objection before the Dispute Resolution Panel on the above issues and any other eligible issues in the said order within 30 days of the receipt of the same. Consequent to which the assessee filed its objections before the Dispute Resolution Panel. The said Dispute Resolution Panel after hearing the case has given direction u/s 144C(5) r.w.s 144C(8) dated 27.9.2010.

The assessment in the case is concluded adopting the direction given by the Dispute Resolution Panel as under:

Total loss as per return of income (-) Rs.9,79,37,638 Assessed Loss as discussed in Para I of this order (-)Rs.6,51,91,941 Add: Difference on account of ‘Arms length price’ suggested by the TPO and subsequently reworked out in accordance with the directions of the Dispute Resolution Panel in its direction dated 27.09.2010. Rs,9,41,68,778 Total Taxable Income Rs.2,89,76,837 Assessed Income Rs. 18,46,776 Rs.2,71,30,061”

3.2 The learned CIT on an analysis of the records of assessment for asst. year 2006-07 observed from Point No.17f of the report filed in Form No.3CD that the assessee has debited an amount of Rs.3,41,52,529/- on account of data link charges paid/payable outside India and claimed that the said amount is not chargeable to tax in India based on the decision of Wipro Ltd., Vs. ITO (2005) 378 ITR (57) and therefore, the provision of sec. 40(a)(i) of th e Act are not attracted. According to the learned CIT, it is evident from the records of assessment that the Assessing Officer ought to have, but failed to examine the same and verify the aspect as to which parties there payments were made and whether the provisions of sec. 40(a)(i) of the Act were attracted or not for deduction of tax at source.

3.2 In this view of the matter, the learned CIT issued a show cause notice requiring the assessee to show cause why proceedings u/s 263 of the Act should not be initiated in its case and calling upon the assessee to file objections if any to these proposed proceedings us/ 263 of the Act. In response thereto, the assessee filed written submissions in the course of hearings on 26/3/2012, 4/6/2012 and 22/10/2012. As there was a change in incumbent in office, the assessee was afforded fresh opportunity of being heard on 6/2/2013, wherein the assessee restricted the arguments put forth in the earlier proceedings.

3.3 The learned CIT, then made an analysis of the records in paras 10 to 11 of the impugned order and thereafter came to the conclusion that the assessing officer ought to have, but did not carry out any examination/investigation/verification on the issue of whether the payments amounting to Rs.3,41,92,524/- being data link charges and issuance charges paid/payable outside India to 4 parties, namely MCI World Com Communication Inc (USA), Novatel (USA), Verizon Communication Inc (USA) and Singapore, Telecommunications (Singapore) were liable for TDS thereon as the incomes were chargeable to tax in India; whether or not, these Non Residents to whom payments have been made had permanent establishment in India (PE); the applicability of provisions of Articles 5,7 etc. of the DTAA between India and the concerned counties, examination of the applicability of the provision of sec. 9(1)(vii) rws 195(i) and 40(a)(i) of the Act. In view of the above, the learned CIT at para 12 of the order held that the order of assessment for asst. year 2006-07 passed u/s 143(3) rws 144C of the Act dated 18/10/2010 was erroneous and prejudicial to the interest of revenue as per the provisions of sec. 263 of the Act and consequently cancelled the said order of assessment. The learned CIT then at para 13 of the impugned order directed the Assessing Officer to make a denovo order of assessment after examining and verifying the issue and considering the disallowance of the payments made by the assessee company for data link charges and issuance charges paid/payable to the parties outside India without making TDS thereon, after affording the assessee adequate opportunity of being heard in the matter.

4.1 We have heard the learned DR in the matter and perused and carefully considered the material on record. Before embarking upon an inquiry about the facts available on record and how to construe them, we deem it pertinent to take note of the fundamental principles for judging the action of the CIT taken u/s 263. The ITAT in the cse of M/s Khatiza |S Oomerbhoy Vs. IT, Mumbai reported in 101 TTJ 1095, analyzed in details various authoritative pronouncements including the decision of the Hon’ble Supreme Court in the case of Malabar Industries Co. Vs. CIT 243 ITR 83 and propounded the following broader tests:

(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 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 sec. 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. It 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 u/s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his 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 u/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.

4.2 Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Sun Beam Auto reported in 227 CTR 113 wherein the Hon’ble High Court has propounded a distinction between lack of inquiry and inadequate inquiry. If there is a lack of enquiry, then the assessment order can be branded as erroneous. The following observations of the Hon’ble Delhi High Court are worth to note:

“12. 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 CIT u/s 263 of the Income-tax Act. As note above, the submission of learned counsel for revenlue was that while passing the assessment order, the AO 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 AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO 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 only inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders u/s 163 of the Act, merely because he has different opinion in the matter. It is only in cases of ‘lack of inquiry’, that such a course of action would be open.”

4.3 The Hon’ble Delhi High Court in the case of Gee Vee Enterprise Vs. Addl. CIT & Ors. (1975) 99 ITR 375 (Del.) has propounded the role required to be played by the AO. “The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court in neutral. It simply gives decision on the basis of pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word ‘erroneous’ in sec. 263 emerges out of this contract. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word ‘erroneous’ in sec. 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”

4.4 In the light of the above proposition, if we peruse and consider the material on record, it would reveal that in the period under consideration as per the details in 17f of the Form 3CD Report, the assessee has debited an amount of Rs.3,41,92,529/- on account of data link charges and insurance charges paid/payable to parties outside India, which it has claimed as not chargeable to tax in India based on the decision of Wipro Ltd., Vs. ITO (Supra) and, that therefore the provisions of sec. 40(a)(i) are not attracted in its case. From a perusal of the order of assessment, it is evident that the assessing officer has neither examined and nor verified this issue nor that he has applied his mind to the matter. Passing the order of assessment is the prerogative of the assessing officer and assessee has no control over the officer for passing the order of assessment in a specific manner.

However, if the examination of the specific issue is not discernable from the order of assessment, then the higher forum can go through the show cause notice, if any, issued to the assessee and the reply thereto which would indicate that though the order of assessment is silent on the issue, it must have been discussed during the assessment proceedings. No such material is available before us, even in the assessee’s reply to the show cause notice issued by the learned CIT in revisionary proceedings u/s 263. The Hon’ble Apex Court in the case of Malabar Industries Co. Vs CIT reported in 243 ITR 83 has observed that the acceptance of accounting entries as it is without causing enquiries by the Assessing Officer would render the order of assessment erroneous and prejudicial to the interest of revenue. In the light of the facts and circumstances of the case as discussed above, we are of the view that the learned CIT has rightly considered all these aspects before taking action u/s 263 of the Act. We, therefore, find no merit in the appeal of the assessee, dismiss the same.

Order pronounced in the open court on 7th Oct, 2015.