Income Tax Appellate Tribunal – Kolkata
Kritika Wires Ltd., Kolkata vs Pr.C.I.T.-2, Kolkata on 19 February, 2020 आयकर अपील य अधीकरण, यायपीठ – “ए” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH “A” KOLKATA Before Shri S.S.Godara, Judicial Member and Dr. A.L. Saini, Accountant Member ITA No.709/Kol/2019 Assessment Year :2014-15 Kritika W ires Ltd., V/s. Principal Commissioner 1A, Bonfield Lane, of Income Tax-2, 3 r d Kolkata-700 001 Floor, Aayakar Bhawan, [P AN No. AACCK 5615 P-7, Chowringhee N] Square, Kolkata-700 069 अपीलाथ /Appellant .. यथ /Respondent अपीलाथ क ओर से/By Appellant Shri Dilip S. Damle, FCA यथ क ओर से/By Respondent Shri Ram Bilash Mena, CIT-DR सन ु वाई क तार ख/Date of Hearing 27-01-2019 घोषणा क तार ख/Date of Pronouncement 19-02-2020 आदे श /O R D E R PER S.S.Godara, Judicial Member:- This assessee’s appeal for assessment year 2014-15, arises against
the Principal Commissioner of Income Tax-2, Kolkata’s order dated
26.02.2019 passed in case M.No. Pr.CIT-3/Hqrs.-3/Kol/u/s.263/Kritika
Wires./2018-19/11146-49, involving proceedings u/s 263 of the Income Tax
Act, 1961; in short ‘the Act’.
Heard Shri Damle; learned authorized representative and Sri Meena, learned CIT-DR appearing at the Revenue’s behest. Case file perused.
2. We advert to the basic relevant facts. This assessee is a company
manufacturing and trading in wire rods. It filed its return on 23.09.2014 stating ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 2 nil income. The Assessing Officer framed his regular assessment on
23.11.2016 making various disallowance(s) / addition(s). He further observed
in assessment order that as per the CBDT’s instruction No.3/2016, the
transfer price issue had not been examined at all.
3. We proceed further to notice that the PCIT sought to assume his sec.
263 revision jurisdiction by treating the foregoing regular assessment as
erroneous causing prejudice to the interest of the Revenue as follows:-
“Sub: Show cause notice u/s 263 of the Income Tax Act, 1961 in the case of M/s Kritika Wires Pvt. Ltd. (PAN: AACCK5615N) for the A.Y.2014-15 – matter reg.
This refers to the above.
On examination of the assessment records of above mentioned assessment year 2014-15, it transpires prima facie that there was failure on part of the AO to assess the income correctly and as such, the instant order u/s 143(3) dated 23.11.2016 appears erroneous in so far as it is prejudicial to the interest of the revenue within the ambit of sec. 263 of the Income Tax Ac, 1961.
In this case one of the reasons for scrutiny was “Large specified domestic transaction(s) (3CEB)”. Therefore, it was mandatory to refer the matter to the Transfer Pricing Officer (TPO) for conducting transfer pricing Audit to ascertain ALP adjustment potential. But the AO completed assessment without necessary legal verification or investigation by way of referring the case to Transfer Pricing Officer.”
4. The assessee appears to have filed its reply vehemently contesting the
PCIT’s revision proposal. The same stands rejected in the PCIT’s order under
challenge as under:-
“5. The issue under consideration in this case is that the AO failed to refer the matter to the Transfer Pricing Officer (TPO) for conducting Transfer Pricing Audit to ascertain as to whether there were any transfer risk parameters. But the AO completed assessment without necessary legal verification or investigation by the Transfer Pricing Officer.
6. The assessee in his submission has failed to provide any corroborative evidence in support of his claim that the assessment order is snot erroneous in so far as it is prejudicial to the interest of revenue. As no proper explanation has been furnished and it has been stated by the AO that the matter should have been referred to the TPO., I am of the considered opinion that the mater needs to be restored back to the file of the AO so that reference can be made to the TPO and calculation of tax under MAT-provision can be done as penalty law.
ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 3
6.1 It is imperative on the part of the Assessing Officer to examine each and every document and conduct necessary inquiry/scrutiny in order to assess correct income of the assessee. In this case, the assessment order was passed without considering the corroborative material, available at the disposal of the AO and accordingly, the AO failed to carry out necessary inquiry.
6.2 In this connection it is pertinent to note that the failure on the part of the Assessing Officer to make an enquiry on a relevant issue/point would render the assessment erroneous and prejudicial to the interest of the revenue as decided in the following cases by various courts:
(1968) 67 ITR 84 (SC) Ram Pyari Devi Saraogi (1973) 88 ITR 323 (SC) Tara Devi Aggarwal (1975) 99 ITR 375 (Del) Gee Vee Enterprises (1966) 220 ITR 657 (Mad) K.A. Ramaswami Cheettiar & Another (1966) 220 ITR 456 (Del) Duggal and Co.
(1966) 220 ITR 167 (MP) Mahavar Traders (1995) 213 ITR 843 (Raj) Emery Stone Mfg. Co. (1992) 198 ITR 611 (Ker) Malabar Industrial Co.
– Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC)
– CIT vs.Max India Ltd. 268 ITR 128 (P&H) [affirmed in 295 ITR 282 (SC)]
– CIT vs. Kwalaity Steel Suppliers Complex 395 ITR
– CIT vs. Amitabh Bachchan 384 ITR 200 (SC)
– CIT vs. Hindustan Lever Ltd. 343 ITR 161 (Bom)
– CIT vs. Vikas Plymers 341 ITR 537 (Del)
– CIT vs. Sunbeam Auto Ltd 332 ITR 167 (Del)
– CIT vs. Development Credit Bank Ltd 323 ITR 206 (Bom)
– Vimgi Investment (P) td 290 ITR 5050 (Del)
– Hari Iron Trading Co. vs. CIT 263 ITR 437 (P&H)
– CIT vs. Gabriel India Ltd 203 ITR 108 (Bom) 6.3 It may be further noticed that in order to provide clarity on the issue of “erroneous in so far as it is prejudicial to the interest of the revenue”, a new Explanation has been inserted to clarify that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the Principal Commissioner or Commissioners.
‘(a) The order is passed without making inquiries or verification which, should have been made,
(b) The order is passed allowing any relief without inquiring into the claim;
(c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. This amendment takes effect from 1-6-2015.’ 7. Having regard to the facts and circumstances of the case and in the light of the aforesaid decisions of Hon’ble Supreme Court and Hon’ble High Court and in accordance with the amendment made to Section 263 of the ‘Act’ with effect from 01.06.2015, I hold that the impugned assessment order dated 23.11.2016 passed by the AO is erroneous in so far as it is prejudicial to the interests of revenue. Therefore, after giving the assessee an opportunity of being heard, that the impugned ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 4 assessment order dated 23.11.2016 is quashed with the directions given in this order separately.
8. Accordingly, in view of the facts and circumstances of the case as stated above, and also respectfully following the judgments cited above, I am of the considered view that it is deemed fit and appropriate in the interest of justice to restore the matter to the file of the AO for de novo assessment with a direction to the AO to refer the case to the Transfer Pricing Officer for required verification / investigation at his end. Accordingly, I direct the AO to re-assess the income of the assessee for the relevant AY 2014-15 on the issues as discussed supra.”
This leaves the assessee aggrieved.
5. We have given our thoughtful consideration to rival contentions against
and in support of the PCIT’s revision directions under challenge that the
Assessing Officer ought to have made mandatory reference to the “TPO” for
determining arm’s length price of the large specified domestic transactions(s)
recorded in Form 3CEB. We find that that this tribunal’s co-ordinate bench’s
decision in ITA No.1332/Kol/2019 AIC Iron Industries Pvt. Ltd., Principal
Commissioner of Income Tax-1, Kolkata decided on 31.12.2019 for very
assessment year 2014-15 has held that such an in a claim at the Assessing
Officer does not render the corresponding regular assessment to be
erroneous causing prejudice to the interest of the Revenue as per statutory
amendment in the Act as follows:-
“4. We have given our thoughtful consideration to rival contentions reiterating both the parties’ respective stands against and in support of the impugned revision jurisdiction. We find that Id. PCIT has exercised his section 263 revision jurisdiction only on account of the Assessing Officer’s alleged inaction in not making reference to the TPO for determining arm’s length price of assessee’s specific domestic transactions. This tribunal’s coordinate bench’s decision in Eveready Industries India Ltd. vs. PCIT ITA No.805/Kol/2019 dated 13.12.19 holds that such a reference prescribed in section 92BA(i) regarding “any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub- section (2) of section 40A” stands omitted by the Finance Act 2017 w.e.f 01.04.17 and therefore, the foregoing omission is applicable with retrospective effect in the impugned assessment year 2014-15 as well. Learned coordinate bench’s decision to this effect reads as under:
“22. In Ground Nos. 5 to 7, the assessee has objected to Ld. Pr. CIT’s finding with reference to reasons set out in Clause 3(b) of the SCN which read as follows:
“One of the reasons for selection of scrutiny was mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report (Form 3CEB) and ITR. However, the case was not referred to TPO. As per para 3.2 of CBDT’s. Instruction No. 3 of 2016, the instant case had to be mandatorily referred to the TPO (the Transfer Pricing Officer) by ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 5 the A.O after obtaining the approval of Principle CIT. However, the A.O has completed assessment u/s 143(3) of the Act on 29-12-2016 without referring the matter to Transfer Pricing Officer.”
23. We find that the assessee’s case was selected under CASS inter alia on the parameter that “Mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report and ITR”. We note that with reference to this CASS reason the assessee was required to provide its explanation about the alleged mismatch of the figures reported in terms of Section 40A(2)(b) in ITR and Tax Audit Report. We note that explanation in that regard was furnished vide Para 9 of assessee’s letter dated 09.12.2016 [Page 109 of paper book]. It was explained before the lower authorities as also before us that in clause 9A of Part A-01 of the Income-tax Return in ITR-6, the assessee was required to specify the quantum of the amounts debited to the Profit & Loss Account to the extent disallowable u/s 40A, to the persons specified in Section 40A(2)(b) of the Act. In other words in the ITR the assessee was expected 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 Id. AR therefore submitted that the intent and purport of information disclosed in clause 9A of Part A- 01of 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 Id. 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 figures mentioned in income-tax return. The CASS reasons did not make reference to the ‘transfer pricing audit report’ furnished in Form 3CEB, as wrongly alleged by the Ld. Pr. CIT in his SCN. He therefore submitted that when the reason for selection under CASS was examined and the AD was satisfied with the explanation furnished for the same, the Ld. Pr. CIT could not justify invocation of power u/s 263 on the ground that before completion of assessment reference to TPO on transfer pricing risk parameter was mandatory in terms of Para 3.2 of the CBDT Instruction No. 3 of 2016.
25. Having considered rival submissions we find merit in the Id. AR’s primary contention that the SCN proceeded on the wrong presumption that the assessee’s case was selected on a transfer pricing risk parameter. We note that the parameter for selection was as follows:
“Mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report and ITR” 26. It is thus noted that nowhere the CASS reason stated the selection of the assessee’s case was on the ground of there being “large value of specified domestic transactions” or “large value of international transactions” so as to warrant an inference that the case was selected on transfer pricing risk ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 6 parameter. On the contrary, the CASS reason merely claimed that there was mismatch in the amount paid to related persons u/s 40A (2)(b) of the Act reported in Audit report and ITR. From plain reading of the said CASS reason, we are of the view that no prudent person properly instructed in law would have inferred that the aforesaid parameter constituted ‘transfer pricing risk parameter’ so as to warrant mandatory reference u/s 92CA of the Act in terms of the Para 3.2 of CBDT Instruction No. 3 of 2016 and failure to make TP reference made the assessment order erroneous. We further find that once the incorrect presumption on Ld. Pr. CIT’s part was highlighted by the assessee in it’s submission then in the impugned order the Ld. Pr.CIT himself completely digressed from the reason set out in the SCN but none the less justified his action on the ground that the reference to TPO was necessary because the assessee’s case was selected for scrutiny under the category of ‘complete scrutiny’. We are however unable to accept an altogether new case made out by the Ld. Pr. CIT 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 Id. 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 this contention of the Ld. Pr. CIT is in fact contrary to the extant instructions of the CBDT contained in Paras 3.2 to 3.3 of Instruction No. 3/2016 wherein the Board have set out the following specific situations/instances where the reference to TPO has been made mandatory:
“3.2 All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT’s annual instructions in this regard -for example. Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT.
ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 7
3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances:
(a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant’s report under section 92E at all or has not disclosed the said transactions in the Accountant’s report filed;
(b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have 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 Jell 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 transactions or specified domestic transactions during the relevant year. Instead in Para 3.3 the Board has enumerated only three specific instances/ situations when the reference to TPO has been made mandatory even though as per the CA SS, the case of an assessee is not selected on “transfer pricing risk parameter”.
We find that in the impugned order the Ld. Pr. CIT has not brought on record any material to show that the AO had acted in violation of the CBDT Instruction No. 3 of 2016 and for that reason the AO’s order was erroneous and prejudicial to the interests of the Revenue.
29. Even with regard to CIT’s allegation that in complete scrutiny case, the AO did not conduct any enquiries whatsoever with regard to transactions referred to in Section 40A(2)(b) as well as Section 92CA of the Act, we find that prior to completion of assessment the AO had indeed conducted enquiries with regard to CASS reason as also the assessee’s international transactions with the AEs. We note that before completion of assessment, the assessee was asked to provide explanation even with regard to its international transactions with its associated enterprises. By its letter dated ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 8 16.12.2016 [Pages 87 to 89 of paper book] the assessee had furnished its explanation in respect of its international transactions. In the said letter it was particularly brought to the AO’s attention that based on the Transfer Pricing Audit report in Form 3CEB, wherein the auditors had certified ALP of international transactions, the assessee had suo moto offered adjustments in the computation of income on account of corporate guarantee fees and interest on loan to AEs which were not actually charged. We therefore find that it was not even a case where the order of the AD suffered from the charge of failure to conduct enquiry into the relevant issue as alleged by the Ld. Pr. CIT in the impugned order.
30. Lastly, as pointed out by the Id. AR. in the SCN, the Ld. Pr.CIT had justified invocation of power u/s 263 with reference to assessee’s transactions with persons specified in Section 40A(2)(b) of the Act. In other words in CIT’s opinion assessee’s specified domestic transactions coming within the ambit of Section 92BA(i) of the Act should have been referred for transfer pricing scrutiny. We however note that the relevant provisions of Section 92BA were amended by Finance 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 92BAm 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 action taken under that clause would not survive at all and any reference made to TPD under section 92CA in respect of transactions referred to in clause (i) of Section 92BA of the Act shall be invalid and bad in law.
31. Applying the ratio laid down in the foregoing decision to the facts of the present case. we note that when the impugned order was passed by the Ld. Pr. CIT. clause (i) of section 92BA of the Act had already been omitted by the Finance Act. 2017 and in that view of the matter the Ld. Pr. CIT could not set aside the order for alleged non-compliance with provision of law which no longer existed in the statute as on the date of order. The Ld. Pr. CIT’s direction requiring the AD to consider making a reference to the TPD in the set aside proceedings is also contrary to the view expressed in the foregoing decision of the coordinate bench (supra). For all the foregoing reasons therefore, we hold that the AO’s order did not suffer from any error for the reason that he did not make reference to the TPO. Accordingly the Ld. Pr. CIT’s order for the reason set out in clause 3(b) of the SCN and for the entirely new set of reasons contained in the impugned order, is set aside. Ground Nos. 5 to 7 are accordingly allowed. ”
5. We adopt the above detailed discussion mutatis mutandis and conclude that the PCIT has erred in law and as well as on facts in terming the above regular assessment dated 19.12.16 as erroneous causing prejudice to interest of the ITA No.709/Kol/2019 A.Y. 2014-15
Kritika Wires Ltd. vs. PCIT-2, Kol. Page 9 revenue qua the assessee’s specified domestic transaction not having subjected to section 92CA reference to the Transfer Pricing Officer. We make it clear that learned coordinate bench has already held in assessment year 2014-15 itself that the Finance Act 2017’s omission of section 92BA(i) carrying retrospective effect and therefore, such an inaction in not making reference to the TPO does not render the assessment erroneous causing prejudice to interest of the revenue. We accordingly reverse the PCIT’s revision directions therefore.”
6. We adopt the above extracted detailed discussion mutatis mutandis and
hold that since the Finance Act, 2017 omitted sec. 92BA(i) from retrospective
effect, the Assessing Officer’s inaction in not making reference to the TPO
does not render the assessment erroneous causing prejudice to interest of the
Revenue. The PCIT’s revision directions under challenge are accordingly
reversed. The Assessing Officer’s regular assessment dated 23.11.2016 is
restored. Ordered accordingly.
7. This assessee’s appeal is allowed.
Order pronounced in the open court 19/02/2020 Sd/- Sd/- (लेखा सद&य) ( या(यक सद&य) ( A.L.Saini) (S.S.Godara)
(Accountant Member) (Judicial Member)
)दनांकः- 19/02/2020 कोलकाता ।
आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
1. अपीलाथ /Appellant-Kritika Wires Ltd., 1A, Bonfield Lane, Kolkata-700 001
2. यथ /Respondent-PCIT, Cir-2, 3rd Fl, Aayakar Bhawan, P-7, Chowringhee Sq. Kol-69
3. संब4ं धत आयकर आय5 ु त / Concerned CIT Kolkata
4. आयकर आय5 ु त- अपील / CIT (A) Kolkata
5. 8वभागीय (त(न4ध, आयकर अपील य अ4धकरण, कोलकाता / DR, ITAT, Kolkata
6. गाड= फाइल / Guard file.
By order/आदे श से, /True Copy/ सहायक पंजीकार आयकर अपील य अ4धकरण, कोलकाता ।