2021 (9) TMI 1436 - AT - Income Tax

Revision u/s 263 - as per CIT assessment is erroneous as reference to TPO was not made - HELD THAT - The assessee has furnished all information as asked for by AO during the course of assessment proceedings and which have been duly considered by him as evident from the assessment order - AO had issued detailed questionnaire raising various issues which were also replied by the assessee from time to time. The assessee had also appeared personally and filed the detailed replies to all the queries raised and books of accounts were also produced. CIT has failed to specify as to how and on what ground the assessment order is erroneous and/ or which part of the CBDT instructions were not adhered to by the AO. Merely not recording the satisfaction AO on the records does not make the assessment order erroneous and prejudicial to the interest of revenue, as is decided in the various judicial pronouncement by various courts. We have also perused Instruction no 3/2016 and are of the opinion that it was not mandatory for the AO to make a reference to the TPO. Even as per the order and the show cause notice u/s 263 which has been issued it is evident that the selection of the case was for complete scrutiny and the issues was not on transfer pricing parameters risk factors.The Instruction No. 3 of 2016 in para 3.3 states that where cases are selected for scrutiny on non transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPO in specified circumstances. The clause (a) states where there are international transactions or specified transactions or both and the taxpayer has not filed any report required to be submitted under section 92E. This is not a situation in the case of the assessee and report was submitted and also during the assessment the same was submitted. The second situation where in previous assessments if any addition on account of transfer pricing adjustment of more than ten crores and addition being upheld in appellate proceedings is also not applicable in the case of the assessee, and this is not a case where search or seizure or survey operations had been carried out. In such a situation it cannot be said that the assessment is erroneous as reference to TPO was not made. As in relation to the query letter issued by the AO reply was duly submitted to the AO on various issues which were raised and the assesseehad also appeared personally and filed the detailed replies to all the queries raised and books of accounts were also produced. The PCIT has failed to specify as to how and on what ground the assessment order is erroneous and/ or which part of the query was not properly examined. As regards claim of bad debts and foreign exchange fluctuation the issue was duly examined by AO and we find nothing has been pointed out with regard to the allowability of the same or as to how the decision of the AO was erroneous or prejudicial to the interest of revenue. We hold that the order u/s 263 cannot be sustained as we find that the assessment order passed by the AO cannot be said to be erroneous orprejudicial to the interest of revenue, and accordingly the order made u/s 263 is quashed. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the order under Section 263 of the Income Tax Act, 1961.
2. Reference to Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP).
3. Examination of bad debts write-off.
4. Examination of foreign currency loan loss under Section 43A.
5. Inclusion of items in total income and/or book profit under Section 115JB.

Detailed Analysis:

1. Validity of the order under Section 263 of the Income Tax Act, 1961:

The assessee challenged the validity of the order passed under Section 263 by the Principal Commissioner of Income Tax (PCIT) on the grounds that it was "patently invalid, void, contrary to the provisions of law and also contrary to facts, material existing on records." The assessee argued that the original assessment order was neither erroneous nor prejudicial to the interest of revenue. The PCIT had invoked Section 263 on the basis that the Assessing Officer (AO) had not made proper inquiries during the assessment proceedings. The assessee relied on the Supreme Court judgment in Malabar Industrial Co. Ltd. (243 ITR 83) which states that both conditions of the order being erroneous and prejudicial to the interest of revenue must co-exist for Section 263 to be invoked. The assessee also cited various other judgments to support their claim that the PCIT's invocation of Section 263 was unwarranted and without jurisdiction.

2. Reference to Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP):

The PCIT directed the AO to make a reference to the TPO for the computation of ALP in respect of international transactions amounting to Rs. 725.42 crores. The assessee argued that the reference to the TPO was not mandatory as per CBDT Instruction No. 3/2016, which states that the AO shall make a reference to the TPO only under specific circumstances. The assessee contended that their case did not fall under these circumstances, and therefore, no reference was required. The Tribunal agreed with the assessee, stating that it was not mandatory for the AO to make a reference to the TPO and that the PCIT had failed to specify how the assessment order was erroneous or prejudicial to the interest of revenue.

3. Examination of bad debts write-off:

The PCIT directed the AO to examine the write-off of bad debts amounting to Rs. 23.99 crores. The assessee argued that the bad debts claimed were out of the provision made for doubtful debts in preceding years and had been added back in the computation of total income in those years. The assessee had provided detailed replies and underlying details to the AO during the assessment proceedings. The Tribunal found that the AO had duly considered the assessee's submissions and that the PCIT had failed to specify how the AO's decision was erroneous or prejudicial to the interest of revenue.

4. Examination of foreign currency loan loss under Section 43A:

The PCIT directed the AO to examine the net loss of Rs. 6.66 crores on account of foreign currency loan on fixed assets under Section 43A. The assessee argued that the foreign exchange fluctuation loss was related to the foreign term currency loan for working capital and should be charged to the profit and loss account. The Tribunal found that the AO had duly examined this issue during the assessment proceedings and that the PCIT had not provided any specific grounds to show how the AO's decision was erroneous or prejudicial to the interest of revenue.

5. Inclusion of items in total income and/or book profit under Section 115JB:

The PCIT directed the AO to make necessary additions to the total income and/or book profit under Section 115JB wherever required. The assessee argued that all queries raised by the AO were replied to and that the AO had considered all submissions and examined the books of accounts before making the assessment order. The Tribunal found that the AO had duly considered all relevant issues and that the PCIT had not specified any specific grounds to show how the AO's decision was erroneous or prejudicial to the interest of revenue.

Conclusion:

The Tribunal quashed the order made under Section 263, holding that the assessment order passed by the AO could not be said to be erroneous or prejudicial to the interest of revenue. The Tribunal emphasized that the PCIT had failed to conduct any minimal inquiry or specify how the assessment order was erroneous and prejudicial to the interest of revenue.