TMI Blog2021 (9) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons u/s. 40A(2)(b) reported in audit report and ITR. From a reading of these reasons, we are of the view that no prudent business person properly instructed in law would have inferred the TP risk parameter as a reason for scrutiny so as to mandatorily make reference u/s. 92C of the Act in terms of CBDT Instruction No. 3/16 and failure to make such reference made the assessment order erroneous. In our opinion, the TP risk parameter was not one of the reasons for limited scrutiny of the case and as such the PCIT was not justified in invoking jurisdiction u/s. 263 of the Act so as to direct the AO to refer the matter to the TPO in respect of international transactions and specified domestic transactions listed in Form 3CEB and Form 3CD. As relying on Eveready Industries Ltd [ 2019 (12) TMI 1033 - ITAT KOLKATA ] we are inclined to quash the impugned revisionary order passed by the PCIT u/s. 263 of the Act. - Decided in favour of assessee. - ITA No. 394/Bang/2020 - - - Dated:- 15-9-2021 - N.V. Vasudevan, Vice President And Chandra Poojari, Member (A) For the Appellant : V. Srinivasan, Advocate For the Respondents : Pradeep Kumar, CIT (DR-III) ORDER Per C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection to the AO to make a reference to the TPO in respect of international transaction. Against this, the revenue is in appeal before the Tribunal. 5. The ld. AR submitted that the AO had conducted enquiries and called for various information by issue of notice u/s. 143(2) and 142(1) along with complete details of the Large Specified Domestic Transactions (Form 3CEB) and all the details were provided during the course of assessment proceedings. After considering these details, the AO concluded the assessment proceedings by order dated 30.10.2017. There were no further proceedings taken by the assessee and the order of AO had become final. 6. It was further submitted that transfer pricing risk parameter was not one of the reasons for selecting the case for limited scrutiny. This parameter of Large Specified Domestic Transactions was added in the notice u/s. 142(1) dated 9.6.2017 which was not part of the original scrutiny notice dated 13.4.2016. It was contended that according to Para 3.2 of CBDT Instruction No. 3/2016 it mandatorily to refer the case to TPO only if it was a case selected for scrutiny with the transfer pricing risk as one of the parameters. It was argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Malabar Industries Ltd. v. CUT [2000] 243 ITR 83 (SC) CIT v. J.L. Morrison (I) Ltd. 366 ITR 593 CIT v. Sunbeam Auto Ltd. 332 ITR 167 8. The ld. AR accordingly prayed that the impugned order of the PCIT should be quashed. 9. On the other hand, the ld. DR submitted that apart from the reasons mentioned in para 2 hereinabove for scrutiny, there were payments to related persons specified in section 40A(2)(b) duly reported in audit report and ITR filed by the assessee filed by the assessee with the department. Certain TP issues were included in this report which are required to be decided after determining the ALP which were accepted by the AO without any examination. Further he submitted that CBDT Instruction No. 3/16 dated 10.3.2016 have been expressly issued u/s. 119 of the Act which relate to determination of ALP for international transaction or specified domestic transactions. It is mandatory for the AO to refer the TP transactions to the TPO for examination and adopt the income of assessee in terms of ALP determined by the TPO. In the present case, the AO failed to do so. As such, PCIT invoked jurisdiction u/s. 263 of the Act as there was failure of the AO to refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/16 and failure to make such reference made the assessment order erroneous. In our opinion, the TP risk parameter was not one of the reasons for limited scrutiny of the case and as such the PCIT was not justified in invoking jurisdiction u/s. 263 of the Act so as to direct the AO to refer the matter to the TPO in respect of international transactions and specified domestic transactions listed in Form 3CEB and Form 3CD. 12. Similar view was taken by the Kolkata Bench of the Tribunal in the case of Eveready Industries Ltd. v. PCIT in ITA No. 805/Kol/2019 by order dated 13.12.2019 and the relevant observations are as follows:- 8. Having heard both the parties, and on a careful consideration of the facts and circumstances, we find that in the case in hand the Ld. Pr. CIT invoked jurisdiction u/s. 263 of the Act principally on the broad allegation that there was failure to conduct enquiries which the facts of the case required the AO to make. According to Ld. Pr. CIT assessment order suffered from lack of enquiry application of mind to the facts as also by incorrect application of applicable legal provisions to the facts of the case. As a result, in the opinion of Ld. Pr. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. In the circumstances it was necessary for the Ld. Pr. CIT to show in the impugned order that the AO's order was erroneous because the view followed by him in respect of each of the reason set out in clauses (a) to (g) of SCN was unsustainable in law and therefore the order was liable for revision u/s. 263 of the Act. 9. We also note that both in the reasons set out in SCN as well as in the impugned order, the Ld. Pr. CIT observed that in respect of issues set out in clauses (a), (b), (d), (f) and (g), proper enquiry was not conducted by the AO which the circumstances of the case demanded and for absence of proper enquiry, the assessment order was considered by the Ld. Pr. CIT to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no obligation to justify as to why was he satisfied. On the top of that the Assessing Officer by his order dated 28th March, 2008 did not adversely affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons. 89. The fact, that all requisite papers were summoned and thereafter the matter was heard from time to time coupled with the fact that the view taken by him is not shown by the revenue to be erroneous and was also considered both by the Tribunal as also by us to be a possible view, strengthens the presumption under Clause (e) of Section 114 of the Evidence Act. A prima facie evidence, on the basis of the aforesaid presumption, is thus converted into a conclusive proof of the fact the order was passed by the assessing officer after due application of mind. 90. The judgments cited by Mr. Nizamuddin do not really support his contention. The judgment in the case of Meerut Roller Flour Mills (P.) Ltd. (supra) does not apply because the High court in that case was satisfied that the assessment order was passed without enquiry. 91. The judgment of Cochin Bench of Income Tax Appellate Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Poddar indicate that the Assessing Officer is not required to write an elaborate judgment. He contended that the assessing officer may not have any such obligation but it cannot be said, according to him, that the Assessing Officer is under no obligation to record anything in his assessment order. It is not in the first place a fact that he has not recorded anything. From the assessment order, the following facts and circumstances appear:-- Return was filed on 29/11/06 showing total income of ₹ 3,80,66,940/-. In response to notices u/s. 143(2) and 142(1) of the I.T. Act, 1961, Sri P.R. Kothari, A/r appeared from time to time and explained the return. Necessary details and particulars were filed. The business of the assessee is manufacturing and trading of cosmetics and dental care products as in earlier years. In view of above total income is computed is under: 98. Unless the aforesaid recital is factually incorrect or the computation is legally wrong, it is not possible to hold that the assessment order was passed without application of mind. On the top of that when the Assessing Officer accepted the contention of the assessee there was no occasion for him to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous insofar as it is prejudicial to the interests of the revenue'. It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the revenue must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard... (pp. 113-117) 13. When we examine the matter in the light of the aforesaid principle, we find that the Assessing Officer had called for explanation on this very items, from the assessee and the assessee had furnished his explanation vide letter dated 26-9-2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 3-11-2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner: The tools and dies have a very short life and can produce up to maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dies cost. The purchase orders indicating the costing includes the reimbursement of dies cost are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er this Act, and if he considers that any order passed therein by the Assessing Officer 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 an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [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 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 conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal Chief Commissioner or] Chief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stayed by an order or injunction of any court shall be excluded. 13. From bare reading of Section 263 of the Act and the Explanation thereto introduced through the Finance Act, 2015, w.e.f. 01.06.2015, we note that Explanation-2, is a deeming provision. The well settled position of law is that while construing a deeming provision, it has to be strictly interpreted and that the legal fiction should not be stretched beyond the purpose for which it is enacted and should not extend that legitimate field (Raymond Vs. State of Chhattisgarh AIR 20-07 SC 2854). It should be kept in mind that deeming provision should be in respect of facts, from which legal consequences will follow. However, the legal consequence cannot be deemed[DCM Vs. State of Rajasthan (1996) 2 SCC 449 : AIR 1996 SC 2930 (3 judges of Hon'ble Supreme Court) and same view reiterated in State of Karnataka Vs. State of Tamil Nadu (2017) 3 SCC 362. So when we look at Explanation-2, we note that deeming fiction of law that the order of the Assessing Officer is deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue only if in the opinion of the ld. CIT, which necessarily has to be a findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the principles of law. It cannot be an arbitrary opinion bereft of facts or law. The aforesaid clause only provides for situation where inquiries or verifications should be made by reasonable and prudent officer in the context of the case. Such clause cannot be read to authorize or give unfettered powers to the Commissioner to revise each and every assessment order. The applicability of the clause is thus essentially contextual. It has to be the opinion of a prudent person properly instructed in law. The Hon'ble Supreme Court in Maneka Gandhi Vs. Union of India reported in 1978 AIR (SC) 597 has laid down the law that a public authority should discharge his duties in a fair, just and reasonable, manner and the principle of due process of law was recognized by the Hon'ble Supreme Court. Therefore the opinion of the Ld. CIT has to be in consonance with that of the well settled judicial principles and cannot be arbitrarily made discarding the judicial precedent on the subject. The opinion of the Ld. Pr. CIT has to be reasonable and that of a prudent person instructed in law and which founded on the correct facts borne out from records. The CIT's opinion shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding proving that the explanations furnished by the assessee suffered from any factual or legal infirmity and because of which he found that the view adopted by the AO was unsustainable in law making his order as erroneous within the meaning of Section 263 of the Act. In our opinion, once the ld. CIT initiates the proceedings u/s. 263 of the Act for specific reasons and these reasons are met by the assessee, then it is incumbent upon the ld. CIT to himself independently deal with the objections and record his own satisfaction to prove that the AO's order is in fact erroneous and prejudicial to the interests of the Revenue for the reasons out in the SCN. The ld. CIT in such a situation cannot merely set aside the assessment order directing AO to pass the order of assessment afresh, effectively giving the AO a second innings without establishing that the initial order was erroneous as well as prejudicial to the interests of the Revenue. In this regard, it is pertinent to refer to the observations and the decision rendered by the Hon'ble Delhi High Court in the case of ITO vs DG Housing Projects Ltd. in 343 ITR 329, which is reproduced below: 19. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed erroneous and prejudicial to the interests of the Revenue necessitating his interference u/s. 263 of the Act with reference to each of the seven issues set out in the SCN. 19. In Ground Nos. 3 4 the assessee objected to Ld. Pr. CIT's finding with reference to reasons set out in Clause 3(a) of the SCN which read as under: One of the reasons for selection of scrutiny was mismatch in turnover. It is noticed from reply of assessee dated 16-12-2016 that receipts against deduction of TDS was disclosed at ₹ 9.72 Crs. However, as per accounts there were three categories of revenue earned by the assessee during the year viz. (i) sales of products (Sch. 18a of P L account), (ii) sales of scrap (Sch. 18b of P L account), and (iii) other income (Sch. 19 of P L account). Hence, incidence of TDS can apply only to other income, which as per the accounts was to the tune of ₹ 8.40 Crores (₹ 873.53L less foreign exchange gain of ₹ 33.82L). Thus, even if TDS was deducted on entire other income, there was a short credit income. The same was not properly verified by the A.O. 20. In the impugned order the Ld. Pr. CIT admitted that the assessee had filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing satisfied with the fact that the receipts reported in Statement 26AS fully reconciled with the receipts reported in the audited accounts, the AO had passed the assessment order u/s. 143(3) of the Act. We further find that in response to the SCN, the assessee had filed a statement, reconciling receipts which suffered tax deduction at source during the relevant year with receipts accounted under respective accounting heads and which were credited in the relevant year's Profit Loss Account. Copy of such reconciliation statement was furnished before us at Pages 119 to 121 of the paper book. On scrutiny of this statement, we find that the assessee had established before the AO as well as before the Ld. Pr. CIT that all receipts certified in the TDS certificates had been fully accounted in the assessee's books for the relevant year. Although these documents and explanations were admittedly filed before the lower authorities, no factual infirmity or falsity was shown by the Ld. Pr. CIT or by the ld. CIT, DR appearing on behalf of the Revenue. The Ld. Pr. CIT set aside the assessment order on this issue merely observing that the issue was not properly examined. Applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected to specify the amount which was disallowable in terms of Section 40A(2)(b) of the Act. On the other hand, in Clause 23 of the TAR read with Annexure - IX thereto, the auditor had reported the payments actually made by the assessee to the persons specified in Section 40A(2)(b) of the Act. It was explained that the tax auditor, while giving his report in conformity with the form prescribed by the Board u/s. 44AB of the Act, was required to report only the amounts paid to persons specified in S 40A(2) during the relevant reporting period and he was not required to express his opinion as to whether the payments to the specified persons were excessive and for that reason any part thereof was disallowable u/s. 40A(2) of the Act. The ld. AR therefore submitted that the intent and purport of information disclosed in clause 9A of Part A- OI of the Income-tax Return in ITR-6 and Clause 23 of the TAR being materially different, and the figures reported in ITR and in Clause 23 of TAR did not match. 24. The ld. AR submitted that the CASS parameter referred only to mismatch of the figures reported in tax audit report in relation to payments made to persons referred 40A(2)(b) with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while passing the impugned order, justifying his interference that for not making reference to the TPO, order of assessment was erroneous in terms of Section 263 of the Act. In the first instance, we note that the Ld. Pr. CIT himself gave up the reason set out in SCN viz., that one of the CASS reason for selection of scrutiny assessment was a transfer pricing risk parameter. Once it is established that the transfer pricing risk parameter was not the ground for selection of scrutiny assessment u/s. 143(3) of the Act, then we have to agree with the ld. AR's submission that Para 3.2 of the CBDT Instruction No. 3 of 2016 was not applicable in the given facts of the present case and therefore the AO's order could not have been held to be erroneous by the CIT for not making reference to the TPO in terms of the said CBDT Instruction 3 of 2016. 27. So far as the Ld. Pr. CIT's finding justifying his case that the AO's order became erroneous and prejudicial to the interests of the Revenue for not referring the assessee's case to the TPO u/s. 92CA of the Act on the ground that the assessee's case came with the category of 'complete scrutiny', we note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been recorded by the Investigation Wing or the AO. 28. From perusal of the above, it is noted that none of the conditions prescribed in these Paras necessitating mandatory reference to TPO were satisfied in the instant case. In fact, we find that in the impugned order, Ld. Pr. CIT himself did not to make out a case that the assessee's case fell under any of the situations prescribed in Paras 3.2 3.3 requiring mandatory reference u/s. 92CA(2) of the Act. The only ground on which the Ld. Pr. CIT ultimately justified his order requiring AO to make reference u/s. 92CA mandatorily was that the assessee's case was selected under complete scrutiny criteria and therefore all possible enquiries should have been made by the AO inter alia including making reference to the TPO. We find that although in support of such conclusion the Ld. Pr. CIT has placed reliance on the CBDT Instruction No. 3 of 2016, the said Instruction nowhere even suggests let alone provides that every case of an assessee selected on non-transfer pricing risk parameter but involving 'complete scrutiny', the reference must be made to the TPO if such an assessee had entered into international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Act, 2017 w.e.f. 01.04.2017 whereby clause (i) of sec. 92BA relating to any expenditure in respect of which payment have been made or is to be made to a person referred to clause (b) of sub-section (2) of section 40A of the Act was omitted. Now the question arises whether after the omission of clause (i) from the statute, the CIT can justifiably set aside the order of assessment for not making a reference to TPO for examining transactions coming within the ambit of Section 92BA(i) of the Act. In this regard, our attention was invited to the decision of the coordinate bench of this Tribunal in the case of DVC Emta Coal Mines Ltd. Ors Vs ACIT in ITA Nos. 2430-2432/Kol/2017 dated 01.05.2019 wherein it was held that the legal effect of clause (i) of Section 92BA being omitted by subsequent amendment, would mean that clause (i) never existed in the statute and consequently no adverse inference with reference to omitted provision can be drawn against an assessee. While omitting the clause (i) of section 92BA of the Act, nothing was specified whether the proceeding initiated or action taken on this count can continue. Therefore, this Tribunal held that any proceeding initiated or acti ..... 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