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2014 (5) TMI 112 - AT - Income TaxValidity of order u/s 263 of the Act Allowability of deduction u/s 10B(3) of the Act Suomoto Adjustment made under Transfer pricing provisions Non-reference to TPO Turnover exceeds RS. 5 Crores on international transactions Held that - The AO enquired about the export turnover and total turnover and called for details u/s 10B(3) of the Act - it is not on record nor it can be deduced from the record whether he has formed any opinion in allowing the deduction of section 10B on the suomoto income/adjustment made by the assessee as seen from the computation of income - The amount was added in the computation of income only while arriving at the income on the STPI unit - Obviously, this working is before the AO - there is nothing on record that AO has applied his mind to the issue as at the point of time there was dispute about the allowance and non-allowance of deduction under section 10B of the Act on the suomoto adjustment. The issue was not decided on merits by the CIT at all - There is no direction given to the AO to do in a particular manner - The issue was analysed only in arriving at the reasoning to establish that the order is erroneous and prejudicial - He simply set aside the order with a direction to refer the matter to the TPO first and then complete the assessment keeping in mind the above issues - It cannot be stated that the CIT has decided the issue on merits - Since the order is to be upheld on the issue of non-reference to the TPO in violation of the Board circular, the order of CIT u/s 263 is upheld - Decided against Assessee. As the CIT has not decided the first issue on merits and left it to the AO for his consideration in re-assessment proceedings, the merits and demerits of the assessee s claim of deduction u/s 10B of the Act cannot be adjudication - This can be examined afresh in the consequential proceedings, which are pending with the ITAT thus, there is no need for adjudication - Even though the assessee s export turnover received in foreign exchange was which the CIT also accepts in the order u/s 263 of the Act, AO wrongly reduced the suomoto adjustment made by the assessee as foreign exchange not realized and reduced the actual sales turnover - this is more erroneous than the original order passed by the AO - This indicates non application of mind by AO even in reassessment proceedings, even after invocation of jurisdiction by CIT u/s 263 Decided against Assessee.
Issues Involved:
1. Validity of the order under Section 263 of the Income-Tax Act. 2. Allowance of deduction under Section 10B of the Act. 3. Non-reference to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO). Detailed Analysis: Validity of the Order under Section 263: The assessee challenged the validity of the order passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income-Tax Act. The CIT considered the order of the AO to be erroneous and prejudicial to the interest of the revenue. The CIT's decision was based on two main issues: the allowance of deduction under Section 10B of the Act and the non-reference to the TPO for international transactions exceeding Rs. 5 crores. The CIT directed the AO to refer the question of determination of Transfer Price to the TPO and finalize the assessment de novo. Allowance of Deduction under Section 10B: The assessee, a software development company, claimed an exemption under Section 10B for income from its STPI Unit. The CIT noted that the additional income offered by the assessee was a "notional adjustment" and not received in convertible foreign exchange, a requirement under Section 10B. The CIT concluded that the AO erred in allowing the exemption under Section 10B for this amount, as it was against the provisions of the Income Tax Act. The CIT's view was supported by the Hon'ble Gujarat High Court decision in CWT v. Shmatilal Popatlal (HUF). Non-reference to the TPO: The CIT observed that the AO failed to refer the matter to the TPO, as required by Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes (CBDT), because the value of international transactions exceeded Rs. 5 crores. This failure made the AO's action erroneous and prejudicial to the interest of the revenue. The CIT's decision was supported by the Hon'ble ITAT Special Bench in Aztech Software & Tech Ltd. v. Asstt. CIT and the Hon'ble Delhi High Court in Ranbaxy Laboratories Ltd. v. CIT. Judgment: The Tribunal upheld the CIT's order under Section 263, agreeing that the AO's order was erroneous and prejudicial to the interest of the revenue due to the non-reference to the TPO. The Tribunal noted that the AO did not apply his mind to the issue of allowing deduction under Section 10B on the suo moto adjustment made by the assessee. The Tribunal decided not to adjudicate the merits of the assessee's claim under Section 10B, as the CIT had not decided this issue on merits and left it to the AO for reconsideration in re-assessment proceedings. Observations: The Tribunal observed that the AO's handling of the assessment proceedings indicated non-application of mind, even in the reassessment proceedings following the invocation of jurisdiction by the CIT under Section 263. The Tribunal highlighted an instance where the AO erroneously reduced the export turnover by considering the suo moto adjustment as 'foreign exchange not realized,' which was more erroneous than the original order. Conclusion: The appeal of the assessee was dismissed, and the order of the CIT under Section 263 was upheld. The Tribunal emphasized the need for assessing officers to apply their minds during assessment proceedings to avoid erroneous and prejudicial actions.
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