2017 (12) TMI 189 - AT - Income Tax

Revision u/s 263 - proof of AO s order erroneous and prejudicial to the interest of revenue - non reference of matter to TPO - Held that - We are of the view that the AO had issued a detailed questionnaire raising various queries. The appellant had appeared from time to time and filed the detailed replies to all the queries raised. Books of account were produced along with the supporting vouchers which were examined by the AO. The confirmed copies of account with PAN numbers of the parties to whom sales and purchases were made, were filed before the AO. The details of commission expense alongwith PAN numbers and TDS deducted were duly filed before the AO. The AO had raised a specific query about fresh loans raised during the year and reply was filed that no fresh loans were raised. The sales made to four/five parties as referred in the order u/s 263 of the Act has been made with profit margin of 19% which is more than the industry norm. A note was given alongwith the balance sheet that s AS 11 is not applicable to the assessee. The foreign exchange fluctuation is duly recorded in the books of account. It is not the case of the ld. PCIT that Books of account have not been examined by the AO. The interest relating to the capital WIP is already capitalized by the Assessee. The assessee had made purchases/imports from two parties on CIF basis. It is not the case of the LD. PCIT that purchase vouchers and books of account were not produced before the AO during the course of assessment proceedings. Hence it cannot be said that this is a case of no enquiry made by the AO. Merely because the ld. PCIT feels that further enquiry should have been made does not make the order of the AO erroneous. We are also of the view that as per instruction no. 3 of 2016, it was not mandatory for the AO to make a reference to TPO. The assessee had explained before the ld. PCIT that its case does not fall under the conditions referred to in the instruction no. 3 of 2016 and as such it wasn t obligatory for the AO to make a reference to TPO. The ld. PCIT has not dealt with this contention of the assessee and has given a bald finding that AO should have referred to TPO as per instruction no. 3 of 2016. The ld. PCIT has not specified under which condition of instruction No. 3 of 2016, the AO should have referred to TPO. The assessee had filed various replies to the ld. PCIT in response to notice u/s 263 of the Act stating that all the issues raised by the ld. PCIT have been examined by the AO during the course of assessment. The ld. PCIT has ignored the replies of the assessee. He merely states that the reply has been filed by the assessee but he nowhere discusses the contentions raised by the assessee and why he does not agree with the contentions of the assessee. The ld. PCIT has merely remitted the matter back to the AO without making any enquiry himself. The ld. PCIT has mentioned that the fresh loans have not been examined by the AO. The ld. PCIT has not considered the contentions of the assessee that there is no fresh loan. Similarly, the other replies of the assessee filed during the course of assessment and in response to notice u/s 263 of the Act have been totally ignored. No enquiry has been made by the ld. PCIT. - Decided in favour of assessee.

Issues Involved:
1. Legality and jurisdiction of the notice issued under Section 263.
2. Mandatory reference to the Transfer Pricing Officer (TPO).
3. Adequacy of inquiries and verification by the Assessing Officer (AO).
4. Examination of trading results, purchases, and sales.
5. Examination of forward contracts and foreign exchange fluctuations.
6. Examination of commission expenses and capital work in progress.
7. Examination of unsecured loans and interest capitalization.

Detailed Analysis:

1. Legality and Jurisdiction of the Notice Issued Under Section 263:
The assessee argued that the notice issued under Section 263 and the subsequent order by the Principal Commissioner of Income Tax (Pr. CIT) were illegal, bad in law, and without jurisdiction because the assessment order passed under Section 143(3) was neither erroneous nor prejudicial to the interest of the Revenue. It was contended that the Pr. CIT did not consider the detailed replies filed by the assessee in response to the notice, violating the principles of natural justice. The Tribunal found that the Pr. CIT had indeed ignored the assessee's responses, making the order under Section 263 illegal and bad in law.

2. Mandatory Reference to the Transfer Pricing Officer (TPO):
The Pr. CIT held that the AO should have referred the matter to the TPO as per CBDT Instruction No. 3 of 2016. The assessee contended that its case did not fall under the conditions stipulated in the said instruction, making such a reference unnecessary. The Tribunal agreed with the assessee, noting that the case was not selected on transfer pricing risk parameters and, therefore, the AO was not bound to refer the transactions to the TPO.

3. Adequacy of Inquiries and Verification by the Assessing Officer (AO):
The Pr. CIT argued that the AO had not made proper inquiries or verification before accepting the trading results and other issues, rendering the assessment order erroneous and prejudicial to the interest of Revenue. The assessee countered that the AO had issued detailed questionnaires and conducted thorough inquiries, which were duly responded to. The Tribunal found that the AO had indeed conducted detailed inquiries and that the Pr. CIT had ignored these facts.

4. Examination of Trading Results, Purchases, and Sales:
The Pr. CIT questioned the acceptance of trading results without thorough examination. The assessee provided detailed explanations, including the submission of purchase/sales bills, vouchers, and stock records. The Tribunal noted that the AO had examined these details and found no fault, thus rejecting the Pr. CIT's contention that further inquiry was needed.

5. Examination of Forward Contracts and Foreign Exchange Fluctuations:
The Pr. CIT held that the AO did not examine the nature of forward contracts and foreign exchange fluctuations. The assessee argued that these were not covered by AS-11 and were exempt from disclosure requirements. The Tribunal accepted the assessee's explanation and noted that the AO had examined these issues during the assessment proceedings.

6. Examination of Commission Expenses and Capital Work in Progress:
The Pr. CIT claimed that the AO had not examined the details of commission expenses and capital work in progress. The assessee provided detailed responses, including the party-wise details of expenses and interest capitalization. The Tribunal found that the AO had examined these details and that the Pr. CIT's order was based on assumptions and lacked independent inquiry.

7. Examination of Unsecured Loans and Interest Capitalization:
The Pr. CIT argued that the AO had not examined the identity, genuineness, and creditworthiness of fresh additions to unsecured loans. The assessee contended that no fresh loans were obtained during the year and provided supporting documents. The Tribunal noted that the AO had examined these issues and that the Pr. CIT had ignored the assessee's explanations.

Conclusion:
The Tribunal concluded that the Pr. CIT had exercised jurisdiction under Section 263 without proper basis, as the AO had conducted adequate inquiries and verification. The order under Section 263 was set aside, and the appeal of the assessee was allowed. The stay application filed by the assessee was dismissed as infructuous.

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