Delhi High Court
M/S Huawei Telecommunications (India) … vs Assistant Commissioner Of Income Tax, … on 30 March, 2026
Author: V. Kameswar Rao
Bench: V. Kameswar Rao
$
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 18.12.2025
Judgment delivered on: 30.03.2026
Judgment uploaded on: As per Digital Signature~
+ W.P.(C) 15970/2023, CM APPL. 64257/2023
+ W.P.(C) 13572/2024, CM APPL. 56719/2024
+ W.P.(C) 13553/2024, CM APPL. 56682/2024
+ W.P.(C) 14898/2024, CM APPL. 62466/2024
M/S HUAWEI TELECOMMUNICATIONS
(INDIA) COMPANY PVT. LTD. .....Petitioner
versus
ASSISTANT COMMISSIONER OF INCOME
TAX, CENTRAL CIRCLE-2, DELHI & ANR .....Respondents
Advocates who appeared in this case
For the Petitioner : Mr. Arvind Datar and Mr. Tarun Gulati,
Senior Advocates with Mr. Kishore Kunal,
Ms. Ankita Prakash and Mr. Anuj Kumar,
Advocates.
For the Respondents : Mr. Indruj Singh Rai SSC, Mr.Sanjeev
Menon, Mr. Rahul Singh JSCs and Mr.
Gaurav Kumar, Mr.Siddharth Burman,
Advocates.
CORAM:
HON'BLE MR. JUSTICE V. KAMESWAR RAO
HON'BLE MR. JUSTICE VINOD KUMAR
JUDGMENT
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V. KAMESWAR RAO, J.
S.No. Particulars Page Nos. 1. INTRODUCTION 2 2. FACTUAL MATRIX 4 3. SUBMISSIONS ON BEHALF OF THE PETITIONER 3.1 RE : SPECIAL AUDIT 11 3.2 RE : REASSESSMENT 21 4. SUBMISSIONS ON BEHALF OF THE RESPONDENTS 4.1 RE : SPECIAL AUDIT 28 4.2 RE : REASSESSMENT 36 5. REJOINDER SUBMISSIONS 54 6. SUR-REJOINDER 60 7. REBUTTAL 67 8. ANALYSIS AND CONCLUSION 73 8.1 REASSESSMENT 73 8.2 SPECIAL AUDIT 103 9. OPERATIVE DIRECTIONS 107 INTRODUCTION
1. The captioned petitions have been filed challenging the directions of
the respondent/Revenue requiring special audits to be carried out on the
accounts of the petitioner- Huawei Telecommunications (India) Company
Private Limited (hereinafter referred to as the petitioner and the assessee
interchangeably) for the Assessment Year (AY) 2013-14 and 2015-16 under
Section 142 (2A) of the Income-tax Act, 1961 (the Act), and also
challenging the decision of the respondents/Revenue to initiate reassessment
proceedings against the petitioner for AY 2013-14 and AY 2015-16,
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pursuant to a search and seizure carried out on 15.02.2022 under Section
132(1) of the Act.
2. By way of W.P.(C) 13553/2024 and W.P.(C) 14898/2024, the
petitioner is impugning the audit direction dated 13.09.2024 along with
notices dated 10.06.2024 and 05.07.2024 relatable to AY 2013-14 and the
audit direction dated 08.10.2024 along with notices dated 10.06.2024 and
05.07.2024 relatable to AY 2015-16 respectively.
3. W.P.(C) 13572/2024 and W.P.(C) 15970/2023 have been filed
impugning the following respectively:
i. Notice dated 31.03.2024 issued under Section 148 of Act and
notice dated 24.05.2024 issued under Section 143(2) of the Act
and reasons recorded dated 29.05.2024, for the Assessment
Year (AY) 2013-14.
ii. Notice dated 31.03.2023 under Section 148 of the Act and
notice dated 25.05.2023 issued under Section 143(2) of the Act
along with the reasons recorded, for AY 2015-16.
iii. Explanation 2 to Section 148 of the Act and the proviso to
Section 148A of the Act, to declare them unconstitutional,
being in violation of Part III of the Constitution of India.
4. The petitioner is a company incorporated in 2002 under the provisions
of the Companies Act, 1956, engaged in the business of assembly and
trading of telecom network equipment and providing installation,
commissioning and other support services to various customers in India. It
also renders business support services to its various overseas associated
companies.
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FACTUAL MATRIX
5. In W.P.(C) 13553/2024 and W.P.(C) 13572/2024 for AY 2013-14, it
has been submitted that on 29.11.2013, the petitioner filed its Return of
Income declaring a loss of Rs. 311,04,30,235/-. Further on 30.03.2015, the
petitioner filed its revised Return of Income declaring a loss of
Rs.310,39,86,024/-. On 28.10.2016, the Transfer Pricing Officer passed an
order under Section 92 of the Act proposing certain adjustments. Further on
29.12.2016, the draft assessment order was passed, assessing the total
income at Rs.287,16,50,257/- and proposing the following adjustments:
Particulars Amount
S.No. (INR)
1. Transfer Pricing adjustment on 1,97,84,000
account of Intra Group Services
2. Disallowance under Section 88,62,908
36(1)(va) of the Act on
employee provident fund
3. Advertisement Expenses 6,89,16,793
4. Provision for Customer Claims 12,86,11,894
5. Advance written off 61,60,172
Total adjustment /disallowance proposed 22,23,35,767
in the draft order
6. On 20.09.2017, certain directions were passed by the Dispute
Resolution Panel. Consequently, on 03.10.2017 the jurisdictional Assessing
Officer passed the final assessment order assessing the total loss of the
petitioner at Rs. 2,94,03,55,100/-. Thereafter, the petitioner filed an appeal
before the Income Tax Appellate Tribunal (the Tribunal) against the
assessment order. The Tribunal allowed the appeal of the petitioner for AYs
2012-13 and 2013-14 and decided the issue raised by the petitioner
regarding provisions for customer claims in favor of the petitioner.
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7. In W.P.(C)14898/2024 and W.P.(C)15970/2023 for AY 2015-16, it
has been submitted that the petitioner filed its Return of Income, declaring
an income of Rs.235,80,79,340/-. Further, on 31.03.2017, it filed a revised
Return of Income declaring an income of Rs.2,35,79,73,090/- and claimed a
refund of Rs.48,45,960/-.
8. Thereafter, on 15.02.2022, a search and seizure operation was
undertaken by the Revenue in exercise of powers under Section 132 (1) of
the Act at the registered office of the petitioner. On 17.02.2022 and
19.02.2022, the bank accounts and trade receivables of the petitioner were
provisionally attached by the Revenue under Section 132(9B) of the Act.
During the course of the search, various documents, gadgets including
electronic records from the laptops, hard drives and mobile phones of the
employees of the petitioner were seized and further, statements of various
officials of the petitioner company were recorded on several occasions
between 15.02.2022 to 22.02.2022.
9. During the search, 42 items of information/material were submitted
by the petitioner, including the laptop of one Mr. Zhaolei (who is an
employee of the petitioner) having the Enterprise Resource Planning (ERP)
accounting system access along with its username and password. ERP
accounting system is a comprehensive accounting system which contains all
data required for preparation of balance sheet, profit and loss account,
ledgers etc. and can be accessed using a user ID and password. Thus, the
entire books of accounts and necessary details are available on the ERP
systems which can also be downloaded in a format suitable (i.e., Microsoft
Excel) for the ERP software access. During the search, the Revenue sought
backup raw data/ data dump, which formed the basis of entries on the ERP
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system and also for transactional level data. Accordingly, the same was
downloaded by the representatives of the petitioner for Financial Years (FY)
2014-15, 2019-20 and 2020-21 and submitted the same on 18.02.2022.
Thereafter, for FY 2015-16 to FY 2018-19, the data was provided on
19.02.2022. However, during the process of copying the relevant ERP data
in Microsoft Excel (as per the requirements of the Revenue) some of the
entries (for FY 2016-17 and FY 2017-18) were inadvertently copied twice/
overwritten due to the numerous entries in the excel sheets. By way of
emails dated 06.05.2022, 10.05.2022, 22.03.2023 and 01.04.2023, the
petitioner also submitted reconciliation before the respondent No.1. No
issues were either raised or communicated to the petitioner thereafter.
10. Meanwhile, the petitioner filed a writ petition bearing WP(C)
No.6352/2022 before this Court challenging the provisional attachment of its
bank accounts and trade receivables. This Court, vide order dated
30.08.2022 lifted the provisional attachment subject to certain conditions.
Later, the petitioner, by way of CM Appln. No. 46949/2023, sought liberty
to repatriate royalty and dividend outside India. By order dated 09.02.2024,
this Court, while allowing repatriation of royalty and deferring decision on
payment of dividend, inter alia directed the Revenue to ensure that the
search assessments are completed with due expedition and preferably by
31.12.2024.
11. On 31.03.2024 and 24.05.2024 the respondents issued the notices
under Section 148 and Section 143(2) of the Act for AY 2013-14. On
31.03.2023 and 25.05.2023 the notices under Section 148 and Section
143(2) of the Act were issued for AY 2015-16.
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12. The preliminary objection raised is that the impugned notices are
time-barred as the time-limit of three years prescribed under Section
149(1)(a) of the Act, as amended by the Finance Act, 2021, to reopen the
assessment for AYs 2013-14 and 2014-15 stands expired on 31.03.2017 and
31.03.2019 respectively. Further, the jurisdictional pre-condition to reopen
an assessment beyond 3 years and up to 10 years under Section 149(1)(b)
i.e., escapement of income amounting to Rs. 50 lakh or more, represented in
the form of an „asset‟ is not satisfied in the present case, as no income
relating to an „asset‟ has even been pointed out by the Revenue which has
escaped assessment. Therefore, no fresh incriminating material has been
unearthed by the Revenue during the search proceedings and thus, the
impugned notices are ex facie time-barred, without jurisdiction and are liable
to be quashed.
13. A challenge has also been mounted to Explanation 2 to Section 148 of
the Act as well as proviso to Section 148A of the Act (the impugned
provisions) as being in violation of Part III of the Constitution of India,
inasmuch as, the procedural safeguards laid down by the Supreme Court in
GKN Driveshafts v. ITO, [2003] 259 ITR 19 (SC) and statutorily prescribed
under Section 148A of the Act have not been made applicable to search
cases. Further, in view of the impugned provisions, even in absence of any
incriminating material/information available, the Assessing Officer is
deemed to have information which suggests that income chargeable to tax
has escaped assessment for issuing a notice under Section 148 of the Act,
thereby granting unbridled power to the Revenue in search cases, which is
manifestly arbitrary, discriminatory and does not have any rational nexus
with the object sought to be achieved by the Finance Act, 2021. The
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impugned provisions also fail to distinguish between cases where
incriminating material is found vis-à-vis those cases where no such
incriminating material is found during the search. Even on this basis on
account of failure to treat these two separate categories differently, the
impugned provisions are discriminatory and are liable to be struck down as
ultra vires the Constitution of India.
14. On 10.06.2024, the respondents issued the notice under Section 142
(2A) of the Act to the petitioner to show cause as to why the accounts of the
petitioner should not be audited by an accountant as defined in the
Explanation to Section 288(2) of the Act, on the basis of the following:
i. During the search, the petitioner provided only the ERP dump
without providing the details as required. There are certain
issues relating to the correctness of the ERP data provided by
the petitioner;
ii. ERP data submitted cannot be treated as necessary compliance
for providing adequate facility to inspect the books of accounts
during the search;
iii. Significant differences were found in two financial years (i.e.,
for FYs 2016-17 and 2017-18) in the data provided during the
search and the final data provided by the petitioner post search;
and
iv. Correctness of the ERP data provided by the petitioner is
doubtful and that there are duplicate and missing entries as per
the petitioner.
15. On 05.07.2024, the petitioner replied to the notice inter-alia submitted
the following:
i. The show-cause notice is completely vague and does not even
refer to any specific jurisdictional ingredient of Section 142
(2A) which is sought to be invoked;
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ii. In the absence of examination of accounts, the same cannot be
treated as „complex‟ for the purpose of making reference under
Section 142(2A) of the Act.
iii. No independent finding in the show-cause notice for the subject
AY;
iv. Missing/ duplicate entries for FY 2016-17 and FY 2017-18
were due to an error while copying the data and was duly
pointed out by the petitioner:
v. No discrepancies found in the accounts in the other years;
vi. The pre-condition laid down in Section 142(2A) of the Act is
not fulfilled in the present case;
vii. Roving and fishing enquires cannot be made through special
audit in absence of any specific defects in the books of account;
viii. Extend the timeline for completion of the post-search
assessment proceedings in view of the directions of this Court
dated 09.02.2024;
16. On 05.07.2024, the respondents issued a revised notice under Section
142(2A) of the Act to show cause as to why the accounts of the petitioner
should not be audited, reiterating the grounds mentioned in the notice dated
10.06.2024 and additionally raising doubts regarding the allowability of the
provision for customer claims. The revised notice also contained the Terms
of Reference, which are as follows:
i. To construct books of accounts of the petitioner from the ERP
data dump seized during the search action for AY 2013-14;
ii. The petitioner failed to provide its books of accounts and rather
only provided the transaction level details as downloaded from
their ERP system in excel format, which needs to be reconciled
with the audited financials and ledgers of receipts and expenses
needs to be prepared and reconciled with the Profit & Loss of
the petitioner;
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iii. For determining Arm‟s Length Price of different transactions,
the petitioner has prepared different segments in different years;
iv. In terms of Companies (Accounts) Fourth Amendment Rules,
2022 (vide Gazette Notification dated 05.08.2022), the
company is required to keep back up of the digital books of
accounts in India which is accessible all the times and back up
needs to be taken daily. Therefore, any argument about non-
availability of back up of digital books of accounts may be
pointed out.
v. The petitioner has created and claimed the provision of
customer claims as deduction for the purpose of income tax
calculation. The said provision was created by the petitioner
due to the probable deduction that the customer might make on
account of potential delay in supply of goods or provision of
services. The petitioner has not clarified if such liquidated
damages are recovered by the petitioner from its overseas
Associated Enterprise. Hence, it may also be ascertained
whether the petitioner should incur these expenses by itself or
get them reimbursed from the Associated Enterprise based on
Functions Assets Risks Analysis (FAR Analysis) as per the
Transfer Pricing Report submitted for the year.
17. On 12.07.2024, the petitioner replied to the notice, inter alia stating
that the allowability of items of expenses (customer claims) for AY 2013-14
has already been the subject matter of scrutiny in the original assessment
proceedings before the Assessing Officer and the Transfer Pricing Officer.
With respect to AY 2015-16, it submitted that the validity of any inter-
company transaction is a subject matter of verification to be done by the
Transfer Pricing Officer during the course of re-assessment proceedings and
the same cannot be referred to the special auditor.
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SUBMISSIONS ON BEHALF OF THE PETITIONER
RE: SPECIAL AUDIT
18. Mr. Arvind Datar and Mr. Tarun Gulati, learned Senior Counsel for
the petitioner company have submitted at the outset that the impugned
notices and the consequential directions have been issued without
jurisdiction, inasmuch as the ingredients for invoking Section 142(2A) are
not satisfied in the present case. Section 142(2A) of the Act reads as under:
(2A) If, at any stage of the proceedings before him, the
Assessing Officer, having regard to the nature and complexity
of the accounts, volume of the accounts, doubts about the
correctness of the accounts, multiplicity of transactions in the
accounts or specialized nature of business activity of the
assessee, and the interests of the revenue, is of the opinion that
it is necessary so to do, he may, with the previous approval of
the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner, direct the assessee
to get either or both of the following, namely:–
(i) to get the accounts audited by an accountant, as
defined in the Explanation below sub-section (2) of
section 288, nominated by the Principal Chief
Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner in this behalf and to
furnish a report of such audit in the prescribed form duly
signed and verified by such accountant and setting forth
such particulars, as may be prescribed, and such other
particulars as the Assessing Officer may require;\
(ii) to get the inventory valued by a cost accountant,
nominated by the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or
Commissioner in this behalf and to furnish a report of
such inventory valuation in the prescribed form duly
signed and verified by such cost accountant and setting
forth such particulars, as may be prescribed, and such
other particulars as the Assessing Officer may require:
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Provided that the Assessing Officer shall not direct the assessee
to get the accounts so audited or inventory so valued unless the
assessee has been given a reasonable opportunity of being
heard.
19. Their contention is that before issuance of the impugned notices and
directions, the respondent No. 1 was required to formulate an opinion based
on the „complexity, voluminous, doubts about the correctness of the
accounts, multiplicity of transactions in the accounts or specialized nature
of business activities of the Assessee and in the interest of the revenue’.
However, in the present case none of the aforesaid jurisdictional conditions
have been satisfied by the respondent No. 1 before formulating an opinion
and the impugned notices and directions have been issued in a mechanical
manner without any application of mind. The impugned proceedings have
been initiated on the basis of vague and unsubstantiated allegations that the
books of accounts of the petitioner are not reliable and cannot be correlated
with ERP software, despite the fact that the books of accounts of the
petitioner have been scrutinized in detail by the assessing authority as well
as the appellate authority during the course of the regular assessment for the
relevant period. In any case, for the present relevant period, the books of
accounts of the petitioner were never sought by the Revenue and thus, never
examined. Therefore, the impugned directions have been passed without any
basis. Further, in the present case, the sole basis adopted by the Revenue for
direction of special audit under Section 142(2A) is duplication of entries for
FYs 2016-17 and 2017-18, which was merely a clerical error which arose
while copying the relevant data in Microsoft Excel wherein, some of the
entries were copied twice/overwritten due to the numerous entries in the
excel sheets as per the requirement of the Revenue. The said clerical error
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has duly been explained and rectified by the petitioner by furnishing the
correct ERP data dump culminating into trial balance and profit and loss
account for the relevant period through emails dated 06.05.2022,
10.05.2022, 22.03.2023 and 01.04.2023, and thereafter, no issues have been
raised or communicated by the Revenue. However, none of the explanations
contained in the aforesaid emails have been considered by the Revenue
while passing the impugned directions. The impugned notices and directions
are vague, cryptic and fail to justify the requirement of invoking the
provisions of Section 142(2A) of the Act. It is their contention that
therefore, the impugned notices and the directions are liable to be quashed.
20. They submitted that the respondent No. 1 has merely reproduced the
language of Section 142(2A) of the Act in the impugned directions as
evident from paragraph 20 wherein, it has been concluded that the necessity
for special audit has arisen on account of unstructured data and discrepancy
therein, satisfying the jurisdictional requirement of complexity and volume
of accounts and multiplicity of transactions, without actually analysing the
requirements of Section 142(2A) of the Act. Further, the approval given by
the respondent No. 2 is also mechanical in nature and the copy of the said
approval has not been provided to the petitioner. They have drawn our
attention to the judgment in Simplex Infrastructure Limited v. CCGST,
Kolkata, 2016 (42) STR 634, wherein it was held that proceedings initiated
by merely reproducing language of the jurisdictional provisions, cannot be
sustained.
21. It is also submitted that the books of accounts on which special audit
is being sought by the Revenue for AY 2013-14 have been duly scrutinized
at various earlier stages by the very same authorities and were never found
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to be discrepant or warranting a special audit at any of these earlier stages.
However, prior to issuance of the impugned notices, no attempt has been
made to examine the books of accounts of the petitioner and the same have
been arbitrarily termed as complex. The present special audit directions are
inter alia based on the very same additions which have already been made
by the Revenue and have been decided in favour of the petitioner by the
Tribunal.
22. They have also contended that the Revenue is attempting to conduct a
„fishing and roving enquiry‟ to extend the timeline to complete the
reassessment proceedings as the same has been directed to be completed by
31.12.2024 by this Court.
23. It is also submitted that the determination of Arms‟ Length Price in
respect of international transactions between the petitioner and its
Associated Enterprise is the jurisdiction of the Transfer Pricing Officer and
not the special auditor.
24. The learned Senior Counsel for the petitioner also submitted that the
impugned proceedings are a clear change of opinion, as the books of
accounts of the petitioner have been consistently been accepted by the
Revenue. A reading of the impugned directions would reveal that the
proceedings have been sought to be justified for two reasons- (1) as the ERP
data dump submitted by the petitioner during the course of search as well as
ERP data software discloses that the books of accounts are complex and
voluminous; and (2) the transactions customer claim undertaken with AEs
requires closer analysis by a special auditor. It is submitted that however,
both of the above factors existed even at the stage of scrutiny assessment for
AY 2013-14 as well as the appellate stage. No new factor other than the
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ones already raised during the scrutiny assessments has been reflected in the
impugned notices and direction to justify invocation of Section 142(2A) of
the Act. That apart, the issues relating to the transactions of customer claims
undertaken with the Associated Enterprise have already been decided by the
Tribunal in favour of the petitioner.
25. It is also their submission that Section 142(2A) of the Act cannot be
invoked in those cases where reassessment proceedings have already been
initiated. The purpose of Section 142(2A) of the Act is to provide an aid at
the stage of assessment proceedings and the same cannot be invoked at the
stage of reassessment. The scope of reassessment proceedings are limited
only to the extent of escaped income and therefore, the special audit
directions cannot be permitted to audit the entire books of accounts of the
petitioner beyond the reasons/information based on which reassessment
proceedings have been initiated. Reliance in this regard is placed on the
judgment of the Supreme Court in CIT v. SUN Engineering, (1992) 4 SCC
12 363, as well as of the Bombay High Court in Ritz Ltd. v. CIT, (1995) 216
ITR 138 wherein it has been categorically said that the jurisdiction of
Income-tax officer is confined only to bring to charge the income which has
escaped assessment or was under assessed.
26. It is also submitted that even assuming all the allegations in the
impugned notices as well as the directions to be correct, there is no
discrepancy for the present relevant period as mapping from ERP dump to
trial balance, profit and loss account to audited financials for FY 2016-17
and FY 2017-18 were done to the satisfaction of the authorities by way of
emails dated 06.05.2022, 10.05.2022, 22.03.2023 and 01.04.2023 and no
issues were either raised or communicated to the petitioner after the said
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communication. Secondly, in any event, even these allegations are
completely misplaced and perverse. Thirdly, the alleged discrepancies do
not automatically establish the requirement of complex or voluminous books
of accounts. Therefore, the impugned directions have assumed jurisdiction
in an erroneous manner and are thus, liable to be quashed.
27. Mr. Datar has submitted that without examining the books of
accounts of the petitioner for the relevant period, „complexity‟ or „doubts
about the correctness of the accounts‟ cannot be presumed. Further,
duplication of entries while copying data also cannot lead to such
presumption of „complexity‟ or „doubts about the correctness of the
accounts‟, making the impugned notices and directions bad in law. The
duplicate entries were nothing but clerical errors occurred during the
copying of data and correct set of data along with detailed reconciliation of
ERP data dump (provided during the search proceedings) vis-à-vis the trial
balance, profit and loss account, etc. mapped with the audited financial
statements and the necessary documents were shared vide email dated
06.05.2022, 10.05.2022, 22.03.2023 and 01.04.2023. However, despite
providing categorical explanation, the impugned directions erroneously
observed that differences were noted between the data provided during the
search and the final data provided by the petitioner. Further, the books of
account of the petitioner were otherwise available and accessible and even
the said differences which arose on account of copying the data stood fully
explained as well as supplemented with the Chartered Accountant‟s
certificate. Therefore, there is no basis for assuming that there were any
discrepancies in the same.
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28. He stated that Section 142(2A) of the Act requires the Assessing
Officer to demonstrate the complexity of the accounts of the assessee which
an ordinary prudent person, reasonably informed about accounts and law is
not in a position to comprehend, as a condition precedent. He has referred
the judgment of the Supreme Court in the case of Rajesh Kumar and Others
v. DY CIT and Others. (2007) 2 SCC 181, wherein, it was held that:
―13. The expression ―complexity‖ would mean the state or
quality of being intricate or complex or that it is difficult to
understand. Difficulty in understanding would, however, not
lead to the conclusion that the accounts are complex in nature.
No order can be passed on whims or caprice.‖
29. He contended that complexity of accounts cannot be equated with
giving raw ERP data which was later converted into Trial Balance and was
duly provided to the respondents for FY 2014-15 to 2020-21. Though the
Revenue is repeatedly alleging that the ERP data dump provided by the
petitioner are complex in nature, nowhere in the impugned notices and
directions has it been specified that on what basis it arrived at the conclusion
that the books of accounts of the petitioner is complex and voluminous in
nature, requiring special audit. In the absence of proper examination of the
ERP data dump along with the other documents, it cannot be concluded
merely on a cursory glance that the books of accounts are complex in nature.
It is his case that thus, the impugned notices and the impugned directions are
illegal and without jurisdiction. Reference in this regard is also made to the
judgments in Swadeshi Cotton Mills Co. Ltd. v. CIT, 1988 (171) ITR 634,
Sahara India (Firm), [2008] 300 ITR 403 (SC), and Delhi Development
Authority v. Union of India, [2013] 350 ITR 432 (Delhi)
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30. Further, he stated that no specific findings have been made relating to
the AYs under challenge herein, making it obvious that no independent
discrepancy has been found for the relevant period, or other years except
FYs 2016-17 and 2017-18.
31. Another submission of the learned Senior Counsel for the petitioner is
that voluminous accounts and multiplicity of accounts cannot be merely
presumed on account of lakhs of line items in the ERP data or on number of
transactions. This is for the reason that the words “volume of the accounts,
doubts about the correctness of the accounts, multiplicity of transactions in
the accounts or specialized nature of business activities of the Assessee”
have been inserted after the words “the nature and complexity of the
accounts” in Section 142(2A) of the Act by the Finance Act, 2013, w.e.f.
01.06.2013. Prior to the amendment, special audit under Section 142(2A) of
the Act could have been directed only in case where the accounts of the
assessee were “complex” in nature and having regard to the interests of the
Revenue. The rationale for the aforesaid amendment has been explained in
the Memorandum explaining provisions in the Finance Bill, 2013, in the
following words:
―Direction for special audit under sub-section (2A) of section
142 The existing provisions contained in sub-section (2A) of
section 142 of the Income-tax Act, inter alia, provide that if at
any stage of the proceeding, the Assessing Officer having
regard to the nature and complexity of the accounts of the
assessee and the interests of the revenue, is of the opinion that
it is necessary so to do, he may, with the approval of the Chief
Commissioner or Commissioner, direct the assessee to get his
accounts audited by an accountant and to furnish a report of
such audit. The expression ―nature and complexity of the
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various courts. It is, therefore, proposed to amend the aforesaid
sub-section so as to provide that if at any stage of the
proceedings before him, the Assessing Officer, having regard
the nature and complexity of the accounts, volume of the
accounts, doubts about the correctness of the accounts,
multiplicity of transactions in the accounts or specialized
nature of business activity of the assessee, and the interests of
the revenue, is of the opinion that it is necessary so to do, he
may, with the previous approval of the Chief Commissioner of
the Commissioner, direct the assessee to get his accounts
audited by an accountant and to furnish a report of such
audit.‖
32. The contention raised by the learned Senior Counsel for the petitioner
based on the above is that it is evident from the above that special audit
reference can be made only if the concerned Officer believes that it is not
possible for him to form an opinion on the correctness of accounts of the
Assessee keeping in mind the nature, volume and complexity of accounts.
Based on such audited accounts, the Assessing Officer has to himself form
an opinion and arrive at conclusions regarding tax implications, if any, and
this function cannot be delegated to the special auditor. Thus, even today
complexity of account has to be established by the Revenue before making a
reference under Section 142(2A) of the Act, which has not been done in the
present case and the impugned notices and directions have been issued
mechanically.
33. It is also stated that the expressions “volume of the accounts” does not
refer only to the sheer number of transactions or the turnover of an assessee
but has reference to the multitude of transactions or integrated transactions
in respect of one single financial transaction, which make the accounts
complex. Similarly, the expression “multiplicity of the transactions in
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accounts” again does not refer to the number of transactions undertaken in
the books of accounts but refers to multiple transactions undertaken in
respect of one single financial transaction. Thus, the interpretation adopted
by the Revenue that since the ERP data dump consists of lakhs of
transactions, the same is complex in nature, is completely erroneous.
34. They have also contested the stand of the Revenue that the petitioner
undertakes “a very specialized nature of business activity” by stating that the
petitioner undertakes its business in a manner similar to any other
multinational telecom equipment supplier and merely because the goods
supplied by the petitioner is telecom equipment does not lead to the
assumption that the business activity is „specialized‟. In any case, the nature
of business cannot lead to complexity of accounts, requiring special audit.
35. That apart, it is submitted that „interest of the Revenue‟ is one of the
jurisdictional criteria for invoking Section 142(2A) of the Act. However, the
same cannot be read unilaterally but has to be read conjointly with other
jurisdictional factors provided under the Act.
36. It has also been stated that for AY 2013-14, regular assessment
proceedings were already completed and in fact, on the very same issues as
raised in the Terms of Reference of the impugned directions, there exists an
order of the Tribunal. Even otherwise, the issues raised in the impugned
notices and directions are regular routine issues which do not require
appointment of a special auditor. The issue pertaining to allowability of
customer claims has been decided in favour of the petitioner by the Tribunal
vide order dated 24.02.2021 in AYs 2012-13 and 2013-14. The issue of
allowability of warranty expenses is decided in the favour of the petitioner
by Tribunal in the petitioner‟s case for AYs 2008-09 and 2009-10 vide
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orders dated 07.05.2018 (reported as 2018 (171) ITD 19) and 06.06.2019.
Therefore, the issue has been finally settled by the Tribunal and the
impugned notices and direction have been issued ignoring the same and
thus, are liable to be quashed.
37. Yet another submission is that the Terms of Reference are beyond the
scope of Section 142(2A) of the Act, as the Assessing Officer does not have
any authority to direct preparation of fresh books of accounts for the
assessee. To buttress this argument, reliance is placed on the judgment in the
case of CIT v. Bajrang Textiles, [2007] 294 ITR 561 (Rajasthan).
RE: REASSESSMENT
38. The learned Senior Counsel for the petitioner have submitted that the
reopening of the two assessment years are beyond the six years limitation
provided under Section 153A(1)(b) of the Act read with first proviso to
Section 149(1) of the Act, and is also barred by limitation because the
jurisdictional requirements of Section 153A of the Act are not satisfied. The
fourth proviso to Section 153 A requires that reopening beyond six years is
permissible only if there is evidence that reveals that income which has
escaped assessment is represented in the form of an “asset” and the income
escaping assessment should exceed Rs.50 lakhs in the relevant year.
39. They have submitted that from a bare perusal of the impugned
notices, it is clear that the sole basis for the initiation of reassessment
proceedings was information “that a search was initiated u/s 132“. Further,
the reasons furnished by the Revenue do not disclose any incriminating
material indicating escapement of income amounting to Rs. 50 lakhs or
more, represented in the form of an „asset‟. As per Section 148 read with
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Section 149(1)(b) of the Act, where more than 3 years (but not more than 10
years) have elapsed from the end of the relevant AY, notice under Section
148 can be issued only if the following conditions are cumulatively satisfied:
a. AO has in his possession books of account or other
documents or evidence;
b. Such document/evidence/books of accounts shall reveal that
some income chargeable to tax has escaped assessment;
c. Such income which has escaped assessment should have
been represented in the form of „asset‟; and
d. Amount of escaped income is or is likely to be more than Rs.
50 lakhs for that year.
40. In the present case, the impugned notices and the reasons recorded do
not even allege, let alone establish, the satisfaction of any of the above stated
mandatory jurisdictional preconditions. The Revenue has neither alleged nor
referred to any document/evidence in the reasons which reveals that income
represented in the form of „asset‟ had escaped assessment and the quantum
of such escapement was Rs. 50 lakhs or more.
41. Explanation 2 to Section 153A of the Act, which is applicable to
searches conducted on or before 31.03.2021, defines the term “asset” and
which shall include immovable property being land or building or both,
shares and securities, loans and advances, deposit in bank account. It is their
contention that in the absence of any information found during the course of
search and as recorded in the reasons furnished by the Revenue suggesting
escapement of income amounting to Rs. 50 lakhs or more, represented in the
form of an asset, the entire proceedings initiated under Section 148 read with
Section 149(1)(b) are vitiated for want of jurisdiction.
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42. Section 153A of the Act which was inserted with effect from
01.06.2003 replaced the erstwhile provisions of Section 158BB etc. which
had the concept of „block assessment years‟, which has now been done away
with. It is submitted that each assessment year has to be dealt with
separately and for reopening an assessment, incriminating material in each
year has to be seen separately as held by the Supreme Court in Principal
Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.)
Ltd.,[2023] 454 ITR 212 (SC), and this Court in Saksham Commodities
Ltd. v. Income Tax Officer, [2024] 464 ITR 1 (Delhi). Absent incriminating
material unearthed on account of search, the reopening of assessment under
Section 153A of the Act cannot be sustained. Even otherwise, with respect
to searches conducted after 01.04.2021 and before 01.09.2024, opening or
re-opening of assessment can be undertaken only by issuance of notice
under Section 148 of the Act, which has to be issued for each year
separately. Therefore, absent incriminating material leading to reasons to
believe for a concerned year, opening or re-opening of assessment for such
year is barred by jurisdiction.
SUBMISSIONS FOR AY 2013-14
43. Mr. Datar and Mr. Gulati have submitted that for AY 2013-14, the
allegation of the Revenue is that the expenses on account of „provision for
customer claims‟ amounting to Rs. 12,86,11,894/- were wrongly claimed as
deductible expense, and this has resulted in income escaping assessment.
This is the solitary reason mentioned in the reasons recorded for reopening.
However, the reasons do not refer to any incriminating material unearthed
on account of search. Regarding the issue of disallowance of provision for
customer claims, the exact same amount of Rs. 12,86,11,894/- was initially
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disallowed by the Assessing Officer and confirmed by the DRP in the
original assessment proceedings conducted under Section 143(3) of the Act.
This issue was then considered by the Tribunal for AYs 2012-13 and 2013-
2014 which set aside the said disallowance on the ground that the
petitioner/taxpayer had furnished adequate evidence to show that the
provision for customer claims were “ascertained liability” and deductible.
The issue of disallowance of provision for customer claims has since
attained finality. It is their contention that an issue which has already been
decided by the Tribunal cannot be reopened by the Assessing Officer under
Section 148 of the Act, more so when the finding of the Tribunal was not
challenged in appeal.
44. They have also stated that apart from the impermissibility of seeking
to reopen a settled issue, there is no question of any escaped income
represented in the form of an asset, or of any „receivables‟ with regard to the
provision for customer claims, In fact there is no reference to „receivables‟
even in the reasons recorded.
45. Heavy reliance is placed by the learned Senior Counsel for the
petitioner upon the judgment of this Court in the case of Smart Chip Private
Ltd. v. ACIT, 2025:DHC:2834-DB to contend that disallowance of an
expense cannot be a ground to invoke Section 148 of the Act.
46. They have also contested the stand of the Revenue that the issue of
provision for customer claims was also existent in AY 2015-16 but was not
picked up during reassessment by relying upon the following table:
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47. It is their submission that the Revenue, in order to justify the illegal
and arbitrary reopening of assessment, has adopted inconsistent stand for the
sole reason to reopen the assessment beyond six years limitation provided
under Section 153A of the Act. Therefore, without the existence of an asset,
AY 2013-14 being beyond 6 years, the impugned notice dated 31.03.2024 is
time barred and is liable to be quashed on the basis of limitation, In any
event, there is no incriminating material disclosed as a result of search.
Therefore, the reassessment proceedings are liable to be quashed even
otherwise.
SUBMISSIONS FOR AY 2015-16
48. According to the learned Senior Counsel for the petitioner, the sole
ground for reopening the assessment for AY 2015-16 is that the provision
for warranty expenses incurred by the petitioner is reimbursed by the
Associated Enterprise, and therefore the notional receivables on this account
amounts to an asset. However, they stated that the Distribution Agreement
relevant for AY 2015-16 does not have any clause for reimbursement of the
provision for warranty expenses. Therefore, when there is no right to receive
any reimbursement, the theory of “receivables” must collapse, and the
reopening of assessment is liable to be quashed.
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49. Further, disallowance of provision for warranty expenses is also
impermissible, as held by the Supreme Court in the judgment in Rotork
Controls Pvt. Ltd. v. CIT, (2009) 314 ITR 62, wherein a warranty claim
based on an estimate of 1.8% of the turnover was upheld. That apart,
requiring the provision for warranty claim to be an asset is contrary to the
accrual method of accounting principles mandated by the Companies Act,
1956/2013.
50. Mr Datar has submitted that the provision for warranty is based on a
percentage which is determined based on the historical evidence of defects
that have occurred. After ascertaining the actuals, the unutilised provision
will be added back to the income of the petitioner in the tax returns and no
reimbursement is required at all as it would be automatically credited to the
profit and loss account as well as increased taxable profits. Further,
assuming without admitting, if the Associated Enterprise actually reimburses
the warranty expenses, such amount will be added to the taxable income in
the year of such receipt, not in the year when the provision is made. Thus,
there is no question of escapement of income represented in the form of
receivables.
51. He stated that in the absence of a contractual provision for
reimbursement, there is no “receivable” and consequently, no “asset”. The
alleged receivables are a complete assumption of the Revenue which is not
based on any contractual obligation between the parties. Further, the
Revenue is in possession of all the records and if the receivables are shown
as an asset, it must have been reflected so in the balance sheet. In the present
case, the receivables on account of warranty are not shown as an asset at all.
Further, merely stating an item of liability or expense to be in the form of an
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asset is completely against the intent and letter of pre-conditions provided in
the fourth proviso to Section 153 A of the Act read with first proviso to
Section 149(1) of the Act, which clearly mandates the existence of
“documents or evidence that revealed that income, represented in the form
of asset”. It is submitted that receivables, as argued by the Revenue, is
nothing but a notional or fictional asset and the law only contemplates the
existence of a real or tangible asset.
52. That apart, since the petitioner and its Associated Enterprises are
subject to transfer pricing, the Arms‟ Length Price is determined by
applying the Transaction Net Margin Method (TNMM) approach which
takes into account the profit margins that is determined by the Revenue.
Thus, once the profit margin is determined, no further addition can be made
because all eligible items of expenditure and all amounts includible as
income are already taken into account while determining the Arms‟ Length
Price and the Net Margin, and there is no requirement to recover each and
every transaction entered with its Associated Enterprises. Therefore, the
warranty expenses, even if receivable, will not form an asset in transfer
pricing cases. Moreover, these receivables are not shown in the balance
sheet as an asset, in view of the approval of transfer pricing assessments.
53. According to the learned Senior Counsel for the petitioner, the
Revenue has taken an inconsistent stand for AY 2015-16 by considering the
provision for warranty expenses as an asset, whereas for subsequent AYs
2016-17, 2017-18, and 2018-19, the same has been considered as entries in
the books of accounts. This contradictory stand reflects the attempt of the
Revenue to vaguely justify the reopening beyond six years as provided
under Section 153A of the Act.
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54. They have also stated that the issue of disallowance of provision of
warranty expenses has already been decided in favour of the petitioner by
the Tribunal vide order dated 07.05.2018 for AY 2008-09 and order dated
06.06.2019 for AY 2009-10 in the petitioner’s own case.
55. In view of the above, they have sought the prayers as made in the
petitions.
SUBMISSIONS ON BEHALF OF THE RESPONDENTS
RE: SPECIAL AUDIT
56. Mr. Indruj Singh Rai, learned Senior Standing Counsel for the
respondents/Revenue would contest the stand of the petitioner. He stated
that during the course of the search, the officials of the company were
inquired about the books of accounts of the company. Only audit report in
Form 3CA and Form 3CD were submitted by the assessee during the search.
As per Point 11(b) of Form 3CD, following books of accounts were
mentioned to be maintained at the Registered Office of the petitioner where
the search was carried out:
i. General ledger ( computerized),
ii. Journal Book (computerized)
iii. Monthly payroll records ( computerized),
iv. Inventory ledger (Computerized),
v. Fixed assets register (computerized),
vi. Other relevant documents, bills, vouchers, receipts, debit notes,
credit notes, inventory register, agreements, orders etc.
57. However, these were neither available at the mentioned address nor
provided by the petitioner during the search. Instead, it only provided the
ERP data dump without providing details as required. The ERP data
provided by the petitioner was segregated into years and further into months.
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The total value of credits and debits in various financial years were totaled
and a summary sheet was prepared. Significant difference was found in two
financial years from the data provided during the course of the search and
the final data provided by the petitioner thereafter. While enquiring about
the same during the search, the petitioner stated that certain values in the
ERP data and the final data need to be deleted and some were to be added.
58. It is his case that in such a scenario, the correctness of the ERP data
provided by the petitioner remains doubtful, more so when it is conceded by
the petitioner itself, that there exist duplicate and missing entries. As such,
the ERP data as provided cannot be relied upon to assess the correct income.
That apart, the statement of Mr. Lalit Kumar, statutory auditor of the
petitioner was recorded under Section 131(1) of the Act on 23.5.2022,
wherein he had stated that raw ERP data is not sufficient to audit the books
of the company and the same has to be reconciled with the financials. He
also stated that the completeness of the ERP data also needs to be
established by appropriate procedures. As per Mr. Rai, in view of the same,
the ERP data submitted cannot be treated as necessary compliance for
providing adequate facility to inspect the books of accounts during the
search.
59. He has drawn our attention to Section 128 of the Companies Act,
2013 to contend that a company is allowed to keep books of accounts or
other relevant papers in electronic mode, in the manner prescribed in Rule 3
of Companies (Accounts) Rules, 2014 and Sub Rule (5) thereof mandates
that a proper system for storage, retrieval, display or printout of the
electronic records is required to be kept and such records cannot be disposed
of or rendered unusable, unless permitted by law. It further prescribes that a
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back-up of the books of accounts and other books and papers of the
company maintained in electronic mode, including at a place outside India,
if any, shall be kept in servers physically located in India, on a periodic
basis. Neither was such location conveyed during the search nor in response
to the summons dated 31.05.2022. Moreover, the Companies (Accounts)
Rules, 2014, now prescribe that a daily backup of the digital books of
accounts is required to be kept in servers physically located in India. Even
the details of such backup servers were not provided by the petitioner. His
contention is that therefore, the discrepancies in linkages of ERP data
submitted with the final financials of the company, points towards failure of
necessary compliance.
60. Mr. Rai stated that the powers available under reassessment
proceedings are analogous to assessment proceedings once a notice under
Section 143(2) is issued. Once reassessment proceedings are triggered by
way of issuance of notice under Section 148 of the Act, the return filed in
response to such notice is to be treated as a return under Section 139 of the
Act and the provisions of the Act would accordingly be applicable. Thus, all
the powers that would be available during the course of regular assessment
are also available when the reassessment proceedings are carried. In order to
carry forward the aforesaid submission, he has referred to the provisions of
Section 148 of the Act which reads under:
―148. Before making the assessment, reassessment or
recomputation under section 147, and subject to the provisions
of section 148A, the Assessing Officer shall serve on the
assessee a notice, along with a copy of the order passed, if
required, under clause ( d) of section 148A, requiring him to
furnish within such period, as may be specified in such notice, a
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respect of which he is assessable under this Act during the
previous year corresponding to the relevant assessment year, in
the prescribed form and verified in the prescribed manner and
setting forth such other particulars as may be prescribed; and
the provisions of this Act shall, so far as may be, apply
accordingly as if such return were a return required to be
furnished under section 139: ….. ―
61. According to him, a perusal of the above would establish that:
i. Return filed in response to a notice under Section 148 would be
treated as a return under Section 139 of the Act.
ii. The proceedings, as would be applicable if a return under
Section 139 was actually furnished, would kick in and the
procedure to initiate assessment which would start by way of
issuance of notice under Section 143(2) of the Act would
similarly apply to the instances where reassessment
proceedings are initiated.
iii. Accordingly, all the powers that would be available to the
Assessing Officer that would normally be available in the
course of assessment would also be available during the
reassessment proceedings under Section 148 of the Act.
iv. Thus, the powers to call for information and make inquiries as
available under Section 142 of the Act would be available while
carrying out the reassessment proceedings.
62. He also submitted that a reading of Section 142 of the Act would
reveal that the powers available to the Assessing Officer thereunder are for
the purpose of making an assessment and the word assessment under Section
2(8) of the Act has been defined to include reassessment. He stated that the
above fact, along with a perusal of the judgments of this Court in Shaily
Juneja v. Assistant Commissioner of Income-tax, 2024 SCC Online Del
6310, and Principal Commissioner of Income Tax v. Dart Infrabuild (P)
Ltd., ITA 10/2022 would reveal that after the issuance of notice under
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Section 148 of the Act, a return is to be filed which is to be treated as a
return under Section 139, and since it is mandatory to issue a notice under
Section 143(2) of the Act, it flows from the aforesaid that the powers
available to the Assessing Officer in the course of regular/scrutiny
assessment are also available at the time of reassessment. Therefore, a
careful conspectus of the facts and circumstances of the case coupled with
the requirements mandated under Section 142(2A) of the Act would reveal
that this is a fit case for directing special audits to be undertaken.
63. He submitted that the words “volume of the accounts, doubts about
the correctness of the accounts, multiplicity of transactions in the accounts
or specialised nature of business activity of the assessee” that finds mention
in Section 142(2A) of the Act, were introduced by virtue of the Finance Act,
2013 to expand the scope of the powers available under Section 142(2A) of
the Act, because earlier the words “nature and complexity” were being given
a very restrictive meaning. The said words were added to the provision to
ensure that there is a wide ambit by way of which the interests of the
Revenue would be protected without hindering upon the rights that may be
available to the assesses. A challenge raised to the constitutional validity of
the amendment introduced by the Finance Act, 2013 to Section 142(2A) of
the Act was turned down by this Court in the case of Sahara India
Financial Corporation Ltd. v. Commissioner of Income Tax, (2017) 399
ITR 81.
64. It is the case of the Revenue, as propounded by Mr. Rai that the
conditions mandated for special audit with regard to the nature, complexity
and volume of accounts as well as the correctness of the same have arisen in
the case of the petitioner, as:
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i. Instead of providing the books of accounts, the assessee had
provided the ERP data dump which was voluminous in nature
and spread across various years.
ii. The ERP data was in itself erroneous as it was admitted by the
assessee, itself that there were duplication of data of FYs 2016-
17 and 2017-18 and therefore, some entries were to be added
whilst others were to be deleted.
iii. The Tax Head of the petitioner, Mr. Amit Duggal, had stated
that books of accounts were kept in the system of the Deputy
Manager, (Finance) and that he was not aware of the location of
the ERP system server and whether there was any backup
server in India.
iv. The Deputy CFO of the petitioner, Mr. Sandeep Bhatia, stated
that they could download the necessary reports, based on
requirement by raising a query in the ERP system and that he
was also not aware if the physical servers were located in India.
v. The statutory auditor of the petitioner, i.e. Mr. Lalit Kumar,
stated in his statement under Section 131(1) that raw ERP data
was not sufficient to audit the books of the company and the
same was to be reconciled with the financials of the company.
vi. The mandate of Section 128 of the Companies Act, 2013 was
also not met as the top officials of the company were not aware
as to whether any backup of books of accounts was maintained
on servers physically located in India.
vii. The petitioner only provided transaction level data and not the
books of accounts.
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65. Reliance in that regard is placed on the decision of the High Court of
Gujarat in Takshashila Realities Private Limited v. DCIT (SCA NO.
4613,4614, 4619 & 4620 of 2017 dated 21.03.2017 wherein the submission
that the Assessing Officer cannot direct special audit under Section 142 [2A]
of the Act before calling/or the accounts from the assessee in the assessment
proceedings and without doubting the accounts and/or considering the
complexity in the accounts, was negated and it was held that as per the
amended Section 142 [2A] of the Act, apart from the nature and complexity
of the accounts, etc., even in case of multiplicity of transactions in the
accounts or specialised nature of business activity of the assessee and the
interests of the Revenue, the Assessing Officer can pass an order for special
audit.
66. He submitted that the conditions specified in Section 142(2A) are to
be read in a conjunctive manner which is evident from the use of the word
“and‖ before the phrase “interest of the Revenue” and thus, objective
satisfaction is required to be reached by the Assessing Officer in light of the
facts of the case. Reliance in this regard is placed on the judgment of the
Supreme Court in the case of Rajesh Kumar v. Deputy Commissioner of
Income Tax, [2006] 287 ITR 91 (SC), which held as under:
―12. The formation of opinion of the Assessing Officer must be
on the premise that while exercising his power regard must be
had to the factors enumerated therein. The use of the word ‘and’
shows that it is conjunctive and not disjunctive. All the
aforementioned factors are conjunctively required to be read.
The formation of opinion indisputably must be based on
objective consideration.‖Signature Not Verified
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67. Mr. Rai has stated that the submission of the learned Senior Counsel
for the Revenue that the petitioner had duly provided its books of accounts,
is baseless as there was no definitive answer given by key personnel of the
petitioner when they were asked to produce the books of accounts. He
alleges that the petitioner is attempting to stall the proceedings by first
giving evasive answers to specific requests of the respondents and then
contending that the records were available on the laptop of the CEO, which
were made available. He has referred to the judgment of the High Court of
Judicature at Allahabad in Sahara India Mutual Benefit Co. Ltd. v.
Commissioner of Income Tax, [2004] 269 ITR 563 (Allahabad), wherein,
according to him, it was held that when the books of accounts are not
produced and the intent of the assessee is to deliberately stall the
proceedings, then they could not raise a hue and cry regarding the same.
68. That apart, he has submitted that a direction for special audit may
render serious civil consequences for an assessee and therefore, when the
determination of direction for a special audit is to be given, it should be
followed with the objective satisfaction of the Assessing Officer in
consonance with the interest of the Revenue. This is predicated on the
intention of the legislature to balance the rights of the assessee and the
interest of the Revenue, i.e., to determine taxable income and act on the
same accordingly, is not jeopardised.
69. He stated that it is trite law that when the conduct of an assessee is not
transparent and the details as called for are not provided, a special audit may
be required to be carried out. Reliance in this regard is made to the judgment
of this Court in DLF Limited. v. Additional Commissioner of Income Tax,
(2014) 366 ITR 390.
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70. It is his contention that in view of the above, the direction for special
audit was issued in accordance with law. He has sought dismissal of the
petitions.
RE: REASSESSMENT
71. Mr. Rai, has at the outset stated that during the course of the hearings,
the petitioner has specifically waived their challenge to the vires of
Explanation 2 to Section 148 in W.P.(C)15970/2023 and
W.P.(C)13572/2024, and have restricted their challenge to the singular issue
of whether or not there was income which has escaped assessment in the
form of an “asset” having value exceeding Rs. 50 lakhs for the purpose
limitation under Section 149 read with the fourth proviso to Section 153(A)
of the Act.
72. Before submitting on the law, he has endeavored to provide a factual
background of the present litigations.
AY 2015-16
73. He stated that, the petitioner did not fully cooperate during the search
proceedings and did not provide entire documents and data for the relevant
years. Rather, it merely provided an unorganised data dump and it was seen
that there were discrepancies and duplication of approximately Rs. 6,136
crore in the debit value of book entries and approximately Rs. 6,454 crore in
the credit value in the books of accounts. This was also categorically
admitted by the petitioner as noted in the reasons provided in AY 16-17.
74. Pursuant to the notice under Section 148 dated 31.03.2023, a note
sheet recording the satisfaction for issuing the notice was communicated to
the petitioner, wherein, it was stated that there was escapement of income in
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the nature of an “asset” being “receivables” on account of warranty claims
reimbursements that were due from the Associated Enterprise of the
petitioner. The factual background to such receivables have been stated to be
the following:
a. The assessee‟s parent entity, based in China, manufactures telecom
equipment;
b. The assessee acts as a distributor of such telecom equipment in India
and sells it to Indian telecom companies;
c. The assessee achieves the distribution by purchasing the equipment
from its parent entity and selling it onwards to Indian clients;
d. As part of the sale of the equipment, the assessee also provides a
warranty to Indian customers that would cover any losses towards
manufacturing defect in the equipment;
e. However, since the assessee was not the manufacturer of the
equipment, it had a back to back commitment from its parent entity to
reimburse the assessee for any amounts that it goes out of pocket for
towards the Indian customers. The evidence of such back to back
commitment was two-fold as also noted in the satisfaction note are as
follows:
i. The Transfer Pricing Study Report clearly recorded that all risk
with respect to warranty claims was to be borne by the foreign
parent of the assessee and not by the assessee.
ii. This aspect about the Transfer Pricing Report of the assessee
with respect to the claim of warranty expenses made by the
assessee was specifically noted by the Assessing Officer as under:
M/s Huawei Telecommunications (India)
Company Private LimitedSignature Not Verified
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AY 2015-16
Approval for issuance of order u/s 148 of the Act
―5.3.2 The company has claimed expenses as provision of
warranty in the various years. The Transfer Pricing Report of
HTICPL show that the claim of warranty expenses made by the
assessee is against the functional and risk profile detailed by the
assessee in its Transfer Pricing Report in view of the’ functional,
asset, risk analysis of this transaction. Year wise bifurcation of the
issue in monetary terms is as given below in Table form.
AY Provision Remarks
for warranty
claimed
2012-13 6,64,20517 Provision amount of ₹ 6,64,20,517 was
created as 2012-13 6,64,20,517 per
P&L Account
2013-14 No provision was created during the
previous year
2014-15 12,33,22,221 Provision amount of ₹12,33,22,221
was created as per P&L Account
2015-16 55,72,52,128 Provision amount of ₹ 55,72,52,128
was created as per P&L Account
2016-17 48,37,99,536 Provision amount of ₹48,37,99,536
was created as per P&L Account
2017-18 40,88,97,095 Provision amount of ₹20,39,44,418
was created as per P&L Account and ₹
20,49,52,676 was debited as per the
provision of ICDS (refer to the clause
Be of tax audit report)
2019-20 81,23,81,153 Provision amount of ₹ 70,50,27,509
was created as per P&L Account and
₹10,73,53,644 was debited as per the
provision of ICDS (refer to the clause
Be of tax audit report)
2020-21 19,75,18,259 Provision amount of ₹19,75,18,259
was created as per P&L Account
2021-22 16,88,49,299 Provision amount of ₹16,88,49,299
was created as per P&L Account
iii. Distribution agreement entered into between the assessee and
its parent entity stating that the assessee would be reimbursed for
any expenses towards the warranty claims made by the end Indian
customers, noted as below:
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―5.3.4. As per the Distribution agreement between assessee
and it’s Associated Enterprises i.e. M/s Huawei International
Pte Ltd, any expenditure incurred on account of warranty is
required to be borne by the supplier of the product i.e., the
Associated Enterprises. However, assessee has debited
warranty expenses and not shown any separate
compensation being received from the supplier in the books
of accounts. The argument of the assessee that the warranty
expenditure is required to be borne by it in terms of the
contract with the final client is fallacious. While the
provision of warranty for supply of a defective product might
be the obligation of the assessee, in terms of its supply
contract with the final client, in terms of the distribution
agreement, such warranty is finally required to be borne by
the supplier of the product. Thus, while the assessee may be
required to recognise the expenditure on warranty in its
books of accounts due to its obligations towards the final
client, reimbursement or compensation received from the
supplier is also required to be recognised in the same way.
The assessee cannot be in a worse position vis-a-vis
warranty, even after back to-back compensation being
provided by the supplier.‖
f. With respect to the tax treatment of the warranty claims, it was
observed that the assessee had made a provision on an estimate basis of
any future warrant claims and claimed expense deduction in the
relevant AY even though no such expense is incurred in the said AY.
g. It was in this light that it was specifically noted by the Assessing
Officer that while there were doubts with respect to the allowability of
the expense claims made by the assessee, especially with respect to the
accuracy of such provisioning, as to whether the assessee was claiming
expenditure deduction and reducing its taxable profits on account of
future expenses. If so, it must also reflect the receivables due from its
Associated Enterprise since the eventual liability was of the AssociatedSignature Not Verified
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Enterprise and any such receivable if shown would be the income of
the assessee to offset the expense claimed on provisioning basis. The
satisfaction note records as under:
―5.3.4. As per the Distribution agreement between assessee and
it’s Associated Enterprises i.e. M/s Huawei International Pte Ltd,
any expenditure incurred on account of warranty is required to be
borne by the supplier of the product i.e., the Associated
Enterprises. However, assessee has debited warranty expenses
and not shown any separate compensation being received from the
supplier in the books of accounts. The argument of the assessee
that the warranty expenditure is required to be borne by it in
terms of the contract with the final client is fallacious. While the
provision of warranty for supply of a defective product might be
the obligation of the assessee, in terms of its supply contract with
the final client, in terms of the distribution agreement, such
warranty is finally required to be borne by the supplier of the
product. Thus, while the assessee may be required to recognise
the expenditure on warranty in its books of accounts due to its
obligations towards the final client, reimbursement or
compensation received from the supplier is also required to be
recognised in the same way. The assessee cannot be in a worse
position vis-a-vis warranty, even after back to-back compensation
being provided by the supplier.‖
75. Based on the above discovery of the FAR analysis in the Transfer
Pricing Study and the back-to-back commitment in the Distribution
Agreement, it was noted by the Assessing Officer that an amount
commensurate to the amount of expense claimed towards provisioning of
the future warranty claims tantamount to receivable of INR 12,33,22,221/-
in the books of accounts of the assessee in the nature of an “asset”. The
satisfaction note in this regard records as under:
―5.3.7. As per discussion above, accounting treatment given by
the taxpayer in its books of accounts is the claim of Provision of
warranty expenses as an expenditure in profit and loss account,Signature Not Verified
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while there is no reimbursement/recoupment of expenses from the
associated enterprises. Therefore, the income which has escaped
assessment (Rs.12,33,22,221/-) should exist as a payment
receivable in the books of accounts of the taxpayer, which is in the
nature of an ‘asset’. Accordingly, I am satisfied that the books of
account seized during search suggest that the income chargeable
to tax of Rs.12,33,22,221/- has escaped assessment represented in
form of asset in the case of assessee for A.Y. 2015-16‖
76. The Principal Commissioner of Income-Tax (PCIT), while granting
its approval also noted that there was escapement of income reflected in the
form of an “asset” i.e., receivable and the conditions set out in section
149(1)(b) read with the 4th proviso to section 153A were met. It is also
stated that no assessment was carried out for AY 2015-16 under Section
143(3) and this was the first time the issue of warranty claims would be
examined by the Assessing Officer.
AY 2013-14
77. Mr Rai has submitted that for AY 2013-14, the issue is with regard to
provision for warranty claims made by the petitioner, which was reimbursed
by the Associated Enterprise. His contention is that therefore, income of the
petitioner has escaped assessment, in the nature of receivables for customer
claims.
78. Pursuant to the search and the notice issued under Section 148 of the
Act, a note sheet recording the satisfaction for issuance of the notice was
communicated to the petitioner, wherein it was stated that income
represented in the form of an asset as well as entry in books of account of
the assessee, as gathered from the seized material, amounting to at least Rs.
12,86,11,894/-, which is more than Rs. 50 lakh, has escaped assessment.
Even the PCIT and Chief Commissioner of Income-Tax (CCIT) while
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according their approval, had noted that income has escaped assessment in
the form of assets, i.e., receivables of customer claims.
79. He stated that customer claims which were a liability of the assessee
towards liquidated damages i.e., delay or short delivery of telecom
equipment, were not disclosed by the assessee. The assessee again had
claimed expenses to reduce its taxable profits towards provisioning of
customer claims that may arise in the future. However, akin to warranty
claims, the eventual liability to bear the liquidated damages, on account of
the back to back commitment, was of the foreign Associated Enterprise of
the assessee. Therefore, the amount commensurate to customer claims
expense was receivable from the Associated Enterprise and since the
assessee did not reflect such amount as receivable assets in its books of
account or as income despite claiming deduction, there was escapement of
income in the form of an asset.
80. The information related to the same was derived from the Transfer
Pricing Report of the petitioner, from which it can be seen that the entire risk
towards the customer claims was towards the associated enterprise and not
the assessee. He stated that since the incriminating material was derived
from the same search, a more detailed background to the escapement in the
form of customer claims as receivable for AY 2013-14 itself was set out in
reasons articulated for AY 2016-17 (which is the subject matter of a
different writ petition bearing W.P.(C) 15972/2023), wherein it is clearly
stated that the FAR Analysis in the Transfer Pricing Report shows that the
assessee should be reimbursed for the customer claims by its Associated
Enterprise since the Transfer Pricing Report evidences that the entire risk
with respect to customer claims is borne by the foreign Associated
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Enterprise and not the assessee, which can only be achieved by the
Associated Enterprise reimbursing the assessee.
81. Mr. Rai submitted that while the draft assessment order for AY 2013-
14 has not been passed yet, the same for AY 2015-16 has been passed,
wherefrom it can be seen that the assessee has in fact, recovered an amount
of Rs. 69,81,40,820 towards reimbursement of customer claims from its
from Associated Enterprise as per its own statement made during the course
of reassessment. The relevant part of the draft assessment order for AY
2015-16 is reproduced below:
―13.1 In response, the assessee has furnished its response vide letter dated
22.04.2025, and the same has been reproduced as below:
―In this regard, it is submitted that the Assessee has created provision for customer
claim amounting to INR 88,51,14,056 during the subject AY, the working of the same
is enclosed as Annexure 4. The break-up of the same is provided as under:‖
Amount (in INR) Remarks
7,02,12,421 Refer Note 26 (other expenses) of the
audited financial statements
11,67,60,815 Refer Note 27 of audited financial
statements
69,81,40,820 Refer footnote below Note 27. In this
regard, it is submitted that the same
has already been recovered from the
Associated Enterprises and
therefore, there is no impact on the
Profit and Loss account to this
extent.
88,51,14,056 Total Amount
82. According to him, the above clearly establishes that the preliminary
reasoning of the Assessing Officer, in the reasons pursuant to search, are not
only based on incriminating material but also on the admission of theSignature Not Verified
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petitioner in the assessment subsequent to the reopening, that there have
been reimbursements.
83. The learned Senior Standing Counsel has submitted that the
assessment regime related to search and seizure proceedings underwent a
paradigm shift from 01.04.2021, prior to which assessments pursuant to a
search were carried out in accordance with Section 153A of the Act. Such
assessment/ reassessment was initiated by way of a notice under Section
153A itself, which permitted assessment to be carried out for six assessment
years immediately preceding the assessment year of the search and further
provided for an extended period of reopening of past years up to a maximum
of ten assessment years computed from the end of the assessment year from
which the search was carried out. From 01.04.2021 onwards until
01.09.2024, the assessment/ reassessment pursuant to search was to be
carried out under Section 147 of the Act. Such assessment/ reassessment
would be initiated by way of a notice under Section 148 (instead of Section
153A under the earlier regime). Further, Section 149 provided that such
assessment / reassessment pursuant to a search could be carried out within a
period of three years from the end of relevant assessment year, extendable to
ten assessment years from the end of the relevant assessment year.
84. His contention is that it is paramount to note that there is no
requirement for the Assessing Officer to have any information suggesting
escapement of income to reopen past years pursuant to a search. The
legislature has expressly achieved this by providing a deeming fiction in
Explanation 2 to Section 148 of the Act as it was in force then, stating that in
case of a search, the Assessing Officer shall be “deemed to have information
which suggests that the income chargeable to tax has escaped assessment”.
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Additionally, there is also no requirement for the Assessing Officer to
furnish any show-cause notice together with the reasons for reopening or to
provide any opportunity to the assessee prior to the reopening of past years
pursuant to a search. This flows from the proviso to Section 148A of the Act
as it was in force then. Therefore, in cases of search, pursuant to a specific
deeming fiction, past years can be reopened without the specific requirement
of furnishing of reasons or an opportunity to the assessee. The reason for
such deeming fiction is to ensure that assessments in serious cases of search
are not hindered on account of procedural requirements, particularly since a
search is only initiated on fulfillment of conditions as set out in Section 132
of the Act and on specific approval of superior authorities. As such, once a
search is carried out, then the Assessing Officer can reassess past years and
make the addition/disallowance based on the material available during or
post search. Even prior to 01.04.2021 the assessment under Section 153A,
pursuant to a search, was carried out without serving of any show-cause
notice and only on service of a notice under the said provision.
85. He has drawn our attention to the judgment in Principal
Commissioner of Income-tax v. Naveen Kumar Gupta [2024] 168
taxmann.com 574 (Delhi), wherein this Court while drawing a comparison
between Sections 153A and 148 regimes as they stood prior to 01.04.2021
explained the need to keep assessments pursuant to a search free from
procedural hurdles, stated as follows:
“59. The non obstante clause as used in Section 153C of the
Act cannot be read to completely exclude the provisions of
Sections 143 or 147 of the Act in cases where the assessee’s
income is sought to be assessed inter alia on the basis of the
information found during search proceedings. However, it willSignature Not Verified
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not be open for the AO to take recourse to Section 147 of the
Act, where the AO has taken steps under Section 153C of the
Act. Thus, if the conditions for exercise of jurisdiction under
Section 153C of the Act are satisfied and the AO issues a
notice as required under Section 153C of the Act, any
reassessment under Section 147 of the Act would obviously, be
impermissible. This is because the Act does not contemplate
parallel assessment proceedings. Where the AO is satisfied
that the assets, material and documents forwarded by the AO
of the searched person under Section 153C of the Act has a
bearing on determination of the income of the assessee for any
of the years, the AO shall proceed to issue a notice under
Section 153C of the Act. By virtue of non obstante clause, the
AO is not required to follow the procedural rigours of Section
148 of the Act. Subject to obtaining the approval under
Section 153D of the Act, if necessary, the AO is not required to
seek any approval from the specified authority, as required
under Section 148/151 of the Act for issuing a notice under
Section 153C of the Act and can proceed to assess / reassess
income for the concerned assessment years.
61. The assumption that provisions of Section 153C of the
Act precludes any proceeding under Section 147 of the Act by
virtue of the non obstante clause, is unpersuasive. The scheme
of Sections 153C of the Act indicates that the said provision
was enacted to simplify the procedure, while maintaining the
necessary safeguards, for assessment / reassessment in cases
where assets belonging to the assessee or books of account or
documents, which contain information pertaining to the
assessee are found pursuant to a search conducted under
Section 132 of the Act or requisition made under Section 132A
of the Act, in respect of a person other than the assessee. This
is subject to the same having a bearing on the determination
of income of the assessee. The AO is neither require to record
reasons for his belief that the income of the assessee for the
concerned assessment year has escaped assessment nor does
he require to seek further approvals as required under Section
148 of the Act. However, he must be satisfied that the assets
seized or requisitioned or the documents, books of accountSignature Not Verified
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or other material transmitted by the AO of the searched
person belongs to or contains information, which has a
bearing on the determination of the income of the assessee.
The reassessment must be predicated on material held to be
incriminating and the income assessed / reassessed must be
relatable to the material found as held by this Court in Kabul
Chawla and affirmed by the Supreme Court in Abhisar
Buildwell (P) Ltd. (supra).‖
86. It is stated that therefore, once the search assessment regime was
subsumed by Sections 147 and 148 of the Act reopening provisions (instead
of the erstwhile Section 153A), w.e.f. 01.04.2021, the deeming fiction was
specifically provided to ensure smooth implementation of search
assessments without the need of furnishing or providing reasons to reopen
by way of information suggesting escapement of income. He further stated
that in the present petitions, the petitioner has neither challenged the
initiation of search proceedings nor the vires of the deeming provisions (as
the petitioner specifically waived its challenge to the vires of the
deeming provisions). Therefore, the instant case is covered by the deeming
fiction and there was no specific requirement for the Assessing Officer to
furnish the reasons for reopening and thus there cannot now be a challenge
to the reopening in an indirect manner under Section 149 (1) read with the
fourth proviso to Section 153A that provides for an asset test for extending
the period of limitation. Even so, the assessing officer shared the reasons
as stated in the note sheet for internal approval for AY 2012-13, AY
2013-14 and AY 2015-16 to AY 2018-19 with the assessee. Separately,
AY 2014-15 was not reopened since no provisioning for customer claims or
warranty claims was made by the assessee and hence a commensurate
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amount was not receivable from the parent entity of the assessee in the said
assessment year.
87. Another submission of Mr. Rai is that the reasoning stated for
meeting the asset test set out in the fourth proviso to Section 153A only
needs to be preliminary and the asset test is to be met in aggregate over the
relevant assessment years. He has relied upon the judgment of this Court in
the case of Principal Commissioner of Income Tax v. Ojjus Medicare
Private Ltd, 2024 SCC Online Del 4451 wherein it was held that the
Assessing Officer at the stage of recording reasons for reopening assessment
pursuant to a search has not had the opportunity to undertake an in depth
examination of the evidence collected and hence the view formed at that
stage for the purposes of fourth proviso to Section 153A only needs to be
provisional and it was enough if the material was indicative of potential
escapement of income. It was further held that the Rs. 50 lakh asset test was
not to be viewed as being the qualifying criteria for each “relevant
assessment year” and the test was met if the test was met in aggregate or
cumulatively. He has also referred to the judgment in Ankit Gaur v. Income
Tax Officer, WP(C) 472/2023 dated 25.07.2024, which followed Ojjus
Medicare Private Ltd. (Supra) and held that the Rs. 50 lakh test in the
fourth proviso to Section 153A is merely a trigger and hence provisional in
nature.
88. According to him, in the present case, the six to ten year period from
the end of the relevant assessment year of search would include AY 2016-17
to AY 2013-14. Further, as the reasons recorded for AY 2016-17 also
include reasons for AY 2013-14 in addition to the independent finding in
AY 2013-14 of escapement of income in the nature of assets (receivables
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towards customer claims), the preliminary trigger on a cumulative and
independent basis for the relevant assessment years in aggregate is met.
89. It has been submitted that so long as reasons exist, recording in a
different format, i.e. elaborating reasons for AY 2013-14 in the reasons
recorded for AY 2016-17, does not vitiate the reassessment. In cases of
search there is a deeming of reasons for escapement of income to reopen the
past years and the procedure prescribed in Section 148A of the Act for
issuance of notice along with reasons is not applicable to reopenings
pursuant to a search. In such cases, where the Assessing Officer is sharing
the internally recorded reasons with the assessee, there is no prescribed
format, structure, or year-wise manner in which such reasons are required to
be recorded. Reliance in this regard is placed on the judgment of the
Supreme Court in CIT v. Calcutta Knitwears, (2014) 6 SCC 444, wherein,
in the context of post-search assessments under the erstwhile regime, the
Court has categorically held that while recording of satisfaction is
mandatory, the statute does not impose any restriction as to the stage,
manner, or form in which such satisfaction is to be recorded, so long as it
exists and is discernible from the record. Accordingly, once reasons and
satisfaction exist, mere variation in the manner or format of recording
cannot invalidate the proceedings. He stated that in fact, in the case of Super
Malls (P.) Ltd. v. PCIT, [2020] 115 taxmann.com 105 similar objections
were raised by the assessee therein with respect to the recording of the
satisfaction in the case of Section 153C by the Assessing Officer of the
searched person. Rejecting such technical objections, the Supreme Court
held that once substantive satisfaction is evident, procedural and actions
taken for administrative convenience cannot vitiate entire reassessment
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proceedings. This principle squarely applies to the present case, inasmuch as
elaboration of the reasons for AY 2013-14 while recording the reasons for
AY 2016-17, based on the same material, does not amount to absence of
reasons for any assessment year and is only a matter of administrative or
procedural exigency. Reliance in this regard is also placed on the judgment
of the Supreme Court in Dhanjibhai Ramjibhai v. State of Gujarat, (1965)
2 SCC 5 and this Court in Indian National Congress v. DCIT, W.P.(C)
4264/2024 dated 22.03.2024.
90. It is also stated that for the reasons recorded in AYs 2013-14 and
2015-16 while doubt has been casted on the allowability of expense claimed
on account of provisioning especially whether such estimation is accurate,
apart from the doubt on the allowability of expenses, clear reasoning has
been noted with respect to the existence of a right to reimbursement and
hence a receivable and escapement of income. Even assuming that the
reasoning doubting the expense allowability was to be decided against the
Revenue, as long as the reasoning i.e., preliminary view with respect to
receivables is upheld in favour of the Revenue, the reopening would be
permissible. In this regard, reliance is placed on Srikrishna Private Lt. &
Ors. v. I.T.O Calcutta & Ors., (1996) 9 SCC 534, wherein the Supreme
Court reiterated the settled law that when the notice can be upheld on even a
single ground, the entire reopening is to be upheld. There is a clear
preliminary factual finding that the assets in the form of receivables were
not disclosed by the assessee that resulted in the escapement of income. If
the receivables were reflected, they would be taken as income especially
since the assessee has claimed expenses on account of provisioning, and
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hence the assessee is attempting to reduce its taxable income by claiming
expenses despite having corresponding right to recover the reimbursements.
91. It is also his case that the asset test is in fact met, as the receivables
amount to asset for the purposes of the fourth proviso to Section 153A.
Explanation 2 to Section 153A reads as under:
―Explanation 2.– For the purposes of the fourth proviso, ―asset‖
shall include immovable property being land or building or both,
shares and securities, loans and advances, deposits in bank
account.‖
92. Mr. Rai has stated that as can be seen from the above, the definition
of asset is broad and inclusive and not exhaustive. Even ejusdem generis, it
can be seen that receivables are covered by the definition since loans are
specifically mentioned as an asset, which is nothing but a right to recover
money. Similarly, in the present case, the right to recover reimbursement
towards warranty claims or customer claims i.e. receivables, is as asset. The
evidence of existence of such right to recover clearly comes out from the
FAR Analysis set out in the Transfer Pricing Report prepared by the
assessee itself and is further supported by clauses in the Distribution
Agreement.
93. It is his submission that if the legislature wanted to provide a
narrower definition of asset, it would have done so by providing an
exhaustive class of the same. To buttress this argument, he has also referred
to the definition of asset contained in Section 281 of the Act.
―281. Certain transfers to be void.
(2) ……..
Explanation.–In this section, ―assets‖ mean land, building,
machinery, plant, shares, securities and fixed deposits in banks, to
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the extent to which any of the assets aforesaid does not form part
of the stock-in-trade of the business of the assessee.‖
94. That apart, it is also his case that the sample of the balance sheet as
set out in Schedule III of the Companies Act, 2013 (Item 2) clearly reflects
trade receivables as an asset. Reference is also made to the judgment in the
case of M.J. Exports (P.) Ltd. v. Joint Commissioner of Income-tax,
[2025] 176 taxmann.com 342 (Bombay) wherein the Bombay High Court,
while referring to the judgment of the Supreme Court in CIT v. HCL
Comnet Systems & Services Ltd., [2008] 174 Taxman 118, to hold that a
debt receivable is an asset.
95. Mr. Rai has vehemently contested that applicability of the judgment
in Smart Chip Private Ltd (supra) to the facts of the present case, since in
that case there was no allegation of income escaping assessment in the form
of an asset by the Revenue. It was on this basis that this Court held that the
test set out in the fourth proviso to Section 153A was not met. Relevant part
of the judgment as relied upon by Mr. Rai is reproduced below:
―17. It is clear from the above that there is no allegation that the
income which has escaped assessment was represented in the form
of an asset. Therefore, the conditions as stipulated in Clause (a) of
the fourth proviso to Section 153A(1) of the Act are not satisfied.
The AO does not have the possession any books of account, other
documents or evidence, which reveals that the petitioner’s income
that is represented in the form of an asset has escaped
assessment.‖
96. It has been further submitted that the assessee has not placed on
record the Distribution Agreement or any other document to demonstrate
that there was no clause providing for reimbursement. In the absence of any
such supporting document, the assertion that no reimbursement arrangement
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existed is unsupported by evidence. As against this, there is a factual finding
by the Assessing Officer in the reasons recorded that such a clause existed in
the Distribution Agreement. In any case, in addition to the reimbursement
clauses in the Distribution Agreement unearthed during the search, the
Assessing Officer has also relied upon the FAR Analysis prepared by the
assessee to reflect that the assessee was indemnified fully by its foreign
parent. Therefore, there is enough evidence for the Assessing Officer to
form a preliminary view to reopen assessment pursuant to the search. He has
also challenged the submission on behalf of the petitioner that the Revenue
could not show the receivables as assets from the balance sheet of the
assessee, by stating that the balance sheet is prepared by the assessee itself
and it ought to have reflected the receivables on the asset side when it has a
right to receive the amounts from its foreign parent. The whole intent of the
search is to uncover and unearth what has not been duly disclosed by the
assessee reflecting escapement of income. It was during the search that the
Revenue came across the arrangement of back to back reimbursement i.e.
receivables between the assessee and its Associated Enterprise on coming
across the clauses of the Distribution Agreement and the FAR Analysis
stated in the Transfer Pricing Report.
97. It is his submission that the present case is pursuant to a search, and
since the statute provides for deeming of reasons to reopen to past years, the
reopening should be upheld on this aspect alone. Further, the petitioner has
waived its challenge to the vires of the deeming provisions. Despite the
deeming provisions, the note sheet reflects sufficient reasons based on the
evidence unearthed during the search, resulting in formation of preliminary
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view of escapement of income represented in the form of an asset i.e.
receivables.
98. He has prayed the petitions be dismissed.
REJOINDER ON BEHALF OF THE PETITIONER
99. In rejoinder to the submissions on behalf of the Revenue, the learned
Senior Counsel for the petitioners stated that the reliance placed by the
Revenue on the reasons recorded for reopening assessment for AY 2016- 17,
to justify the reopening of assessment for AY 2013-14 is erroneous
inasmuch as, incriminating material has to be seen qua each assessment
year. It is a well-settled principle of law that each assessment year is a
separate and independent year and for the purpose of reopening an
assessment, incriminating material pertaining specifically to the relevant
assessment year must be identified. In this regard, they have referred to the
judgments in Commissioner of Income Tax v. Sinhgad Technical
Education Society, [2017] 84 taxmann.com 290 (Para 18-22), Principal
Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.) Ltd.
[2023] 454 ITR 212 (SC) (Para 12-14) and Saksham Commodities Ltd. v.
Income Tax Officer, [2024] 464 ITR 1 (Del.).
100. They have also sought to controvert the stand of the Revenue that the
reassessment proceedings for AY 2013-14 do not get vitiated merely for
absence of reasons especially when elaborate reasons are recorded in AY
2016-17. Under Section 153A of the Act, recording of reasons for initiation
of reassessment proceeding is mandatory and cannot be bypassed. They
contended that the reliance placed on CIT v. Calcutta Knitwear, [2014] 362
ITR 673 (SC) is completely erroneous as it is confined to the recording of
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satisfaction in the case of a third person arising out of search proceedings
and only holds that such satisfaction may be recorded even after completion
of assessment of the searched person. The ratio of the said decision has no
application whatsoever to reassessment proceedings initiated against a
searched person. It is submitted that the proceedings under Section 153A in
the case of a searched person stand on a completely different footing and
cannot be equated with proceedings initiated against a non-searched person,
as sought to be done by the respondents. The reliance placed by Mr. Rai on
Super Malls (P.) Ltd. vs. PCIT, 8 New Delhi [2020] 423 ITR 281 (SC)[05-
03-2020] is also contested as incorrect inasmuch as, this judgment was
rendered in the context of Section 153C of the Act where satisfaction notes
are recorded by the Assessing Officer of the searched person and the
Assessing Officer of the non-searched person, both in case of reassessment
initiated under Section 153A of the Act, where recording of reason by the
Assessing Officer before assuming jurisdiction is mandatory. They also
stated that the submission of the respondent by relying upon the judgment in
Indian National Congress v. Deputy Commissioner of Income-tax, [2024]
463 ITR 431 (Delhi), that where the proceedings for multiple years have
arisen from a common search, a composite or common reading of
satisfaction note does not vitiate the jurisdiction is based on a complete
misreading of the judgment. According to the learned Senior Counsel for the
petitioner, the aforesaid judgment clearly holds that a composite satisfaction
note would suffice the requirement of Section 153C, provided, it embodies
details of material gathered in the course of search and pertaining to AYs
forming part of the block as whole. Thus, the ratio lays down that the
incriminating material qua each year has to be seen and not a common
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satisfaction note. In the present case there is no incriminating materials
pertaining to both AY 2013-14 and AY 2016-17. If the interpretation
adopted by the respondents is assumed to be correct, it will lead to
reopening of 10 years in a block without there being any specific
incriminating material qua each year, which will lead to an anomalous
situation.
101. In any case, the reasons for reopening for AY 2016-17 were recorded
a year back i.e., in 2023, and the reassessment notice under Section 148 for
the said year was issued on 31.03.2023, whereas, for AY 2013-14, the
reasons were recorded on 31.03.2024 and the reassessment notice was also
issued on 31.03.2024. Therefore, the respondent cannot rely upon reasons
recorded for a different AY in the past to justify the reopening done on a
subsequent date for a different AY, which is clearly an after-thought as
reasons much less, any incriminating reasons does not exist for reopening of
assessment for AY 2013-14.
102. Mr. Datar and Mr. Gulati also contest the submission of the Mr. Rai
that even if one reason from the various reasons survives, the reopening
should be upheld. In the case at hand, neither the liability of expenses on
account of provision for customer claim/warranty expenses nor the right to
receivables as claimed by the respondent satisfies the requirement of the
fourth proviso to Section 153A of the Act. Firstly, there is no receivable at
all as there is no contractual provision which requires the associated
overseas entity to pay these amounts to the petitioner for the relevant
assessment year. Further, a receivable does not constitute an asset as per the
explanation to Section 153A in as much as, the definition of the asset is
provided under fourth proviso to Section 153A of the Act. The principle of
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ejusdem generis cannot be applied to read „receivable‟ in the definition of
asset, as the aforesaid principle of statutory interpretation is applied to
interpret where general words are followed by a specific class of words. An
expense claim or a provision which is „receivable‟ cannot be equated with
„land or buildings‟, „shares and securities‟, „loans and advances‟, or
„deposits in bank account‟. They have stated that the judgment in M.J.
Exports (P.) Ltd. v. Joint Commissioner of Income-tax [2025] 176
taxmann.com 342 (Bombay) referred to by the Revenue in support of their
argument that a debt receivable constitutes an asset, has no application to the
instant matter. In that case, provisions for doubtful debts and advances were
created in circumstances where there existed a real and subsisting possibility
of recovery. This is clearly distinguishable from the present case, where no
receivable was in existence at all. Further, they submitted that the case of the
petitioner is covered by the judgment of this Court in Smart Chip Private
Ltd (supra).
103. Mr. Datar has also submitted that the reliance placed by the Revenue
on the Transfer Pricing Study for AY 2015-16, the Distribution Agreement
and the draft assessment order of AY 2015-16 is erroneous. It is stated that
the Agreement dated 01.04.2010 was the only agreement in force during the
relevant period viz. in AY 2015-16, and the same does not contain any
clause providing for reimbursement of expenses incurred on account of
provision of warranty expenses. Despite placing reliance on an alleged
reimbursement clause, the respondents failed to bring the said Distribution
Agreement on record. For this reason, the petitioner has placed the said
Agreement dated 01.04.2010 on record along with its written rejoinder
submissions. According to him, a perusal of the same demonstrates the
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absence of any such clause relating to reimbursement of provision of
warranty expenses. He stated that the Transfer Pricing Study Report for AY
2015-16 was never placed before this Court during the hearing but was only
produced along with the written submissions of the respondents. Transfer
Pricing Study is part of the statutory filing under the Act and was all along
available to the respondents and thus, cannot be an incriminating material
allegedly found during the course of the search. Further, in any case, the
Transfer Pricing Study clearly records that the petitioner shall be entitled to
claim damages from the Associated Enterprise to the extent agreed between
them. In the present case, there is no material on record to demonstrate that
any such damages were ever agreed to be recovered. In fact, as stated
hereinabove, the applicable Distribution Agreement expressly provides
otherwise. Lastly, the Transfer Pricing Study merely refers to the warranty
risk being that of the overseas Associated Enterprise. Once the margin is
deduced on the basis of Transaction Net Margin Method and identification
of comparable companies bearing similar risk profile, all the risks are
already considered and no further addition can be made because all the
eligible items of expenditure and all the amounts includible as income are
already taken into account while determining the Arms‟ Length Price and
the net margin, and there is no requirement to recover each and every risk
borne by the Associated Enterprises.
104. He has opposed the submission of the Revenue that the draft
assessment order passed for AY 2015-16 reflects that amounts were
recovered by the petitioner on account of reimbursement of customer claims.
Firstly, no such material is referred in the reasons and neither is this the
reason stated for reopening. Secondly, the reimbursement does not relate to
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AY 2013-14. Thirdly, mere reimbursement and that too, for another year,
cannot be considered as an „asset‟ for reopening assessment. Further it is bad
in law to rely on a draft assessment order for AY 2015-16 which did not
exist at all when the impugned notice for AY 2013-14 was issued, so as to
justify the re-opening for AY 2013-14. Fourth, once a provision is created, it
can either be utilised or written back. If it is written back, there is no
requirement of reimbursement as it would be automatically credited to the
profit and loss account as well as increase taxable profits. Therefore, in any
case it is untenable to request immediate back to back reimbursement once
the provision is made. Even otherwise, under the Transaction Net Margin
Method, there is no requirement to recover each and every risk borne by the
Associated Enterprises, so long as the Arm‟s Length Price can be achieved.
Further. The Transfer Pricing Study of AY 2015-16, produced by the
respondents, also clearly records that the petitioner shall be entitled to claim
damages from the Associated Enterprise only to the extent agreed between
them. Therefore, the reopening of assessment for AY 2013-14 cannot be
justified.
105. It is the submission of the learned Senior Counsel for the petitioner
that there is no allegation or finding in the draft assessment order that the
said amount should be treated as income represented in the form of an asset.
The said allegation is merely a weak attempt to satisfy the condition of
Section 153A of the Act. They reiterated that the respondent has taken an
inconsistent stand for AY 2013-14 and AY 2015-16 by considering the issue
as „asset‟ whereas for the subsequent years, same issue has been considered
as entries in the books of account. The inconsistent stand has been taken
only to invoke the condition prescribed in Section 153A of the Act.
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SUR-REJOINDER ON BEHALF OF THE RESPONDENTS
106. Mr. Rai, learned Senior Standing Counsel raised an objection that the
Distribution Agreement dated 01.04.2010 which has been filed by the
petitioner along with its rejoinder was neither relied upon during the
arguments nor placed on record earlier. His objections on the Agreement
are:
(i) The Distribution Agreement dated 01.04.2010 was not in force
during the previous year relevant to AY 2015-16 because as per
Section 9.1 of Article IX of the Agreement, it was to be in
effect for a period of 2 years, extendable to another 12 months,
i.e., until 31.03.2013 at best.
(ii) The respondents had relied on the Distribution Agreement
which was found during the search proceedings.
(iii) The Distribution Agreement of 2010 was not relied upon in the
Writ Petitions and therefore, reliance on the same is completely
misplaced.
107. He submitted that notwithstanding the above, a plain and holistic
reading of the Distribution Agreement dated 01.04.2010 clearly
demonstrates that the foreign Associated Enterprise has undertaken to
indemnify and hold harmless the Indian entity against any loss, cost, or
expense arising from non-performance, product defects, or product-related
issues. The Agreement expressly delineates the allocation of responsibilities
and risks between the parties. Clause 3.2(b) of the Distribution Agreement
unequivocally provides that Associated Enterprise shall assume risks
relating to product quality, order processing errors, mistakes in
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communication of product specifications, and other product-related matters,
insofar as such risks are not attributable to the petitioner. Further, the
indemnity obligation (Article VII of the Distribution Agreement dated
01.04.2010) is couched in wide and comprehensive terms, and when read in
its commercial context, necessarily encompasses warranty obligations,
customer claims, liquidated damages, and losses arising from manufacturing
or product defects. Consequently, when Clause 3.2(b) is read in conjunction
with the indemnity obligation under Article VII, it is evident that although
petitioner may initially discharge such claims vis-à-vis customers in India,
the financial burden of such payments is contractually borne by the foreign
Associated Enterprise. Consequently, any amount paid by the Indian entity
towards such claims gives rise to a corresponding right of recovery, which
constitutes a receivable and therefore an asset under Act. He has drawn our
attention to the Clauses III and VII of the Distribution Agreement dated
01.04.2010.
108. Mr. Rai reiterated that the petitioner has always been a limited-risk
distributor of the overseas Associated Enterprise. This is evident from the
FAR Analysis contained in the Transfer Pricing Study prepared by the
petitioner itself. Merely because the clauses in the earlier agreement are less
elaborately worded, and subsequent agreements may articulate the same
rights and obligations in more expressive terms, does not alter the
substantive nature of the arrangement between the petitioner and the
Associated Enterprise. The legal character of the transaction is determined
by its economic substance and not by variation in clauses of a contract. The
petitioner cannot, on the one hand, claim limited-risk status for transfer
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pricing purposes and on the other, deny the corresponding right of recovery
when such risks arise for contractual purposes.
109. It is a settled principle of income-tax law that contractual
arrangements are required to be examined having regard to their real nature,
commercial substance and economic effect, and not merely on the basis of
the form or drafting of individual clauses. The true character of a transaction
must be determined on the basis of its substance rather than its form,
particularly where the issue concerns the allocation of risks and financial
burden. It is submitted that the existence of a receivable in respect of
warranty and customer claims is borne out from two independent and
consistent pieces of evidence. The FAR Analysis contained in the Transfer
Pricing Study prepared by the petitioner itself clearly establishes that
product quality and warranty-related risks are not borne by the Indian entity
but rest with the foreign Associated Enterprise. In any event, the
Distribution Agreement confirms the same risk allocation through the
warranty and indemnity clauses. Read together, these demonstrate that
although the Indian entity may initially discharge such claims vis-à-vis
customers in India, the economic burden thereof is borne by the foreign
Associated Enterprise, giving rise to a corresponding right of recovery. Even
independently, the FAR Analysis itself is sufficient to establish the existence
of such a recoverable right and along with the Distribution Agreement, the
factum of receivables gets even more fortified.
110. Contesting he submission of the learned Senior Counsel for the
petitioner, he stated that the respondents are not seeking to justify the
reopening the assessment of AY 2013-14 on the basis of reasons recorded
for AY 2016-17. Separate reasons have been duly recorded for AY 2013-14,
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founded on incriminating material emanating from the search. Where
material found during a search evidences a continuing transaction or
arrangement giving rise to recurring tax consequences across multiple years,
such material is relevant and applicable to each of those assessment years.
The reasons recorded for AY 2016-17 clearly show that the incriminating
material unearthed during the search revealed the reimbursement of
customer claims quantified at Rs.12,86,11,894 pertaining to AY 2013-14.
What the statute requires is the existence of such material to the year sought
to be reopened, and not the timing or manner in which such material is first
recorded or articulated. He has contested the applicability of the judgments
in Sinhgad Technical Education Society (supra) and Saksham
Commodities Ltd. (supra) by stating that the judgments only require that
there must exist some incriminating material related to the relevant
assessment year. In the present case, such requirements are satisfied.
111. He submitted that jurisdiction of the respondents does not fail merely
because the incriminating material emanating from a common search is
elaborately analysed in the satisfaction note prepared and recorded in AY
2016-17. The jurisdictional requirement is the existence and applicability of
incriminating material to the relevant assessment year, not the manner and
form in which it is recorded.
112. Mr. Rai has further stated that the attempt of the petitioner to
distinguish Calcutta Knitwear (supra) and Super Malls (P.) Ltd. (supra) by
drawing a rigid distinction between searched and non-searched persons by
stating that these cases pertain to Section 153C and not Section 153A of the
Act, is misconceived. The petitioner is blowing hot and cold, as while
seeking to discard these judgments on the ground that they arise under
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Section 153C, the petitioner simultaneously places reliance on Sinhgad
Technical Education Society (supra) and Saksham Commodities Ltd.
(Supra),which are themselves rendered in the context of Section 153C and
not Section 153A. The principle flowing from Calcutta Knitwears (supra)
and Super Malls (supra) is not confined to Section 153C alone, but is of
general application to search-related provisions, namely that the substance
of satisfaction prevails over its form, timing or manner of recording, so long
as satisfaction based on incriminating material exists. While he is not
equating proceedings against searched and non-searched persons; reliance is
placed on these 4 judgments only for the settled proposition that jurisdiction
is not vitiated merely because satisfaction is recorded in a particular manner
or at a particular point of time.
113. It is also averred that the reasons recorded for AY 2016-17 merely
capture the incriminating material emanating from the common search in
detail, qua the relevant assessment years. The same material existed and was
duly applied while recording reasons for AY 2013-14. Reference to common
search material does not amount to bypassing the statutory requirement of
recording reasons, nor does it result in borrowing of reasons from another
year. This position is settled in Indian National Congress (supra) wherein it
was held that where proceedings arise from a common search, a composite
or common satisfaction is not impermissible, provided the material gathered
in the course of search has relevance to the assessment years sought to be
reopened. In other words, the case of the Revenue is that the incriminating
material evidencing a continuing contractual and functional arrangement
existed and was relevant to AYs 2013-14 and 2015-16.
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114. According to Mr. Rai, the apprehension expressed by the petitioner
that the interpretation of the Revenue would lead to the reopening of
multiple years without year-specific incriminating material is wholly
unfounded. The present case does not rest on a mere “block reopening”, but
on incriminating material emanating from a search which evidences a
continuing arrangement giving rise to recurring tax consequences across
years. The law does not require such material to be rediscovered or
rearticulated repeatedly for each year; rather, it requires that the material
exists and bears a live nexus to the year sought to be reopened, which
condition stands fully satisfied in the present case. The reopening flows
from the same search, the same material, and the same continuing
contractual and functional arrangement giving rise to recurring warranty and
customer-claim obligations.
115. He has vehemently contested the submission of Mr. Datar and Mr.
Gulati that a receivable is not an “asset” within the meaning of the fourth
proviso to Section 153A of the Act, by stating that the definition of “asset”
under the said proviso is inclusive and illustrative, and therefore cannot be
read in a restrictive or exhaustive manner. Once the definition is inclusive,
there is no requirement to invoke the principle of ejusdem generis at all. A
receivable, being a legally enforceable right to recover money, squarely falls
within the ordinary, commercial and legal meaning of an asset and cannot be
excluded merely because it is not expressly enumerated. Even otherwise, if
the principle of ejusdem generis is applied, the same operates in favour of
the Revenue. Loans are expressly included within the definition of “asset”,
and a loan is nothing but a right to recover money. A receivable is of the
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same genus and character. Accordingly, even on an ejusdem generis
construction, the issue of receivables stands squarely covered.
116. He submitted that attempt of the petitioner to equate a receivable with
a mere “expense claim” or “provision” fundamentally disregards settled
principles of tax jurisprudence and basic accounting concepts. A receivable
is an accrued and enforceable right, whereas a provision is contingent and
notional. This position is not only recognised under the Companies Act,
2013 and settled accounting principles, which treat receivables as assets
(Schedule III of the Companies Act, 2013), but has also been judicially
affirmed in CIT v. HCL Comnet Systems & Services Ltd., [2008] 174
Taxman 118, followed in M.J. Exports (P.) Ltd. (supra) which recognises
that a right to receive money constitutes an asset for the purposes of the Act.
If the stand of the petitioner is accepted, it would artificially narrow an
inclusive statutory definition, which should not be permitted.
117. He has contended that the draft assessment order is not relied upon to
substitute, supplement or retrospectively validate the reasons. The reasons
recorded stand independently and form the sole basis of jurisdiction. The
draft assessment order has been referred to only for two limited purposes:
firstly, to demonstrate that the contention of the petitioner that that no
amount was ever reimbursed/recovered is factually incorrect; and secondly,
to respond to a specific query of this Court as to whether additions were
proposed in respect of warranty or customer claims.
118. Contesting the stand of the petitioner, he stated that whether
reimbursement was actually received and whether margins under the
Transaction Net Margin Method already factor in the risks, pertain purely to
the merits of the reassessment and are wholly irrelevant for examining the
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validity of jurisdiction to reopen the assessment. The existence of an asset
for jurisdictional purposes is not contingent upon its disclosure in the
balance sheet. On the contrary, the very object of search and reassessment
proceedings is to bring to tax income and assets which have not been
disclosed in the books of account.
119. It is his case that the judgment of this Court in the case of Smart Chip
Private Ltd. (Supra) is distinguishable since in the said case there was no
issue with regard to existence of an asset, whereas in the present case, there
is clear preliminary reasoning in both AY 15-16 and AY 13-14 of there
being an asset in the form of receivables.
120. He submitted that the issues raised by the petitioner are inherently
factual and lie beyond the scope of writ jurisdiction, particularly at the stage
of examining the validity of notice under Section 148 of the Act, which is
clearly impermissible in the light of judgments of this Court in Principal
Commissioner of Income Tax v. Ojjus Medicare Private Ltd., 2024 SCC
Online Del 4451 and Ankit Gaur v. Income Tax Officer (Judgment dated
25.07.2024 in WP(C) 472/2023).
REBUTTAL ON BEHALF OF THE PETITIONER
121. In rebuttal to the rejoinder submissions of Mr. Rai, it is reiterated on
behalf of the petitioner that the challenge to the reopening of the
reassessment was required to be decided only on the basis of the reasons
recorded by the respondents at the time of issuance of the impugned notices
and the documents relied upon in such reasons. The subsequent draft
assessment order issued for AY 2015-16 has no bearing whatsoever on the
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issue of reopening of the assessment which has to be decided at the
threshold.
122. With regard to AY 2013-14, it is submitted that reasons recorded for
AY 2013-14 does not meet the test of „asset‟ as prescribed under fourth
proviso to Section 153A of the Act, inasmuch as the sole basis for reopening
of assessment is the alleged expense of Rs. 212,86,11,894/- on account of
provision for customer claim. There is no incriminating material which has
been referred in the impugned reasons and the disallowance of „provision for
customer claim‟ cannot be made the basis for reopening for the following
reasons:
a. Exact same amount was disallowed by the Respondent at the time
of scrutiny proceeding and the above addition was deleted by the
Tribunal.
b. There is no right with regard to receivables and neither such a basis
is provided in the Impugned Reasons.
123. Even though separate reasons have been recorded by the Revenue for
AY 2013- 14, there is no incriminating material which is present justifying
the reopening of assessment. The Revenue cannot rely upon the reasons
recorded for AY 2016-17 to reopen the assessment for AY 2013-14. In any
event, even the reasons for AY 2016-17 do not justify reopening of
assessment for AY 2013-14. If any tangible material existed satisfying the
jurisdictional precondition under Section 148 of the Act, the same ought to
have been recorded particularly in a situation where the reasons for AY
2013-14 was recorded at a later point in time.
124. The expenses on account of customer claims which were initially
disallowed in the regular assessment, and later allowed by the Tribunal for
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AY 2013-14, were the sole liability of the petitioner. There was no case of
the respondents at the time of regular assessment that any amount was
receivable from the Associated Enterprise. It is stated that this argument is
merely a change of opinion to justify re-opening of assessment and to find
an asset where there exists none. Even otherwise, the amount of customer
claims was never receivable, and as such there is no question of referring to
that amount as an asset.
125. It is also submitted that the respondent‟s reliance on Calcutta
Knitwear (Supra) and Super Malls (P.) Ltd. (Supra) is misleading as the
ratio of these judgments cannot be applied mechanically without there being
any incriminating material in the present relevant year. The present
assessment being made under Section 147 of the Act is akin to search
assessment under Section 153A (under the erstwhile provisions) and not
under Section 153C of the Act. There is no separate satisfaction note which
is to be prepared under Section 153A and therefore, the ratio of those
judgments have no application whatsoever to the facts of the present case.
Subsequent to the search, separate reasons have been recorded for AY 2013-
14. Once such reasons have been recorded separately for each year, the
question of referring to any material does not arise. In any event, there is no
incriminating material found as a consequence of the search, which has been
referred to which justifies reopening of assessments.
126. It is also averred that the respondents have failed to rebut the
submission of the petitioner that an inconsistent stand has been taken by the
Revenue inasmuch as „provision of customer claims‟ are being termed as
„asset‟ for AY 2013-14 and as „entries in the books of account‟ for AY
2016-17.
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127. Insofar as AY 2015-16 is concerned, the following points have been
advanced:
a. In the impugned reasons for AY 2015-16, a reference has been made
to a purported Distribution Agreement which purportedly states that the
expenditure incurred by the petitioner on account of warranty is
required to be borne by the supplier viz. Associated Enterprise. Such a
clause did not exist in the Agreement prevalent during AY 2015-16 and
this assumption (drawn only in AY 2015-16 and not in AY 2013-14)
was based on a subsequent Agreement which was not in existence
during the relevant assessment years, as specifically pointed out during
the course of hearing.
b. The respondents, without disputing the above position during the
course of the hearing, have in their post-hearing written submissions,
reiterated the existence of the said Agreement to support their illegal
reasons. However they have failed to point out any specific clause
relating to reimbursement of warranty expenses in the Distribution
Agreement which was applicable to AY 2015-16. This is the reason
why though a statement was made in the oral arguments, the relevant
Distribution Agreement was not produced by the respondents. Once the
petitioner placed on record the relevant Distribution Agreement which
discloses that there is no such clause in relation to reimbursement of
warranty expenses, the respondents have altered their stand and have
adopted a new argument by referring to a general indemnity clause
which has no application to the issue. Such an indemnity clause was
not even referred to in the reasons recorded for AY 2015-16 and is aSignature Not Verified
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fresh attempt to justify reopening of assessment for AY 2015-16 which
goes beyond the reasons recorded.
128. It is submitted that the stand of the Revenue in their rejoinder
submissions that the said Distribution Agreement dated 01.04.2010 was not
in existence during the relevant AY 2015-16 is completely misconceived
inasmuch as, a bare perusal of the Clause 9.1 of the said Agreement
establishes that the Agreement is automatically renewed unless a notice is
provided by any of the parties. Thus, the Agreement dated 01.04.2010 was
the only Distribution Agreement in force during the relevant AY 2015-16
and was only substituted by a later Agreement w.e.f. 01.01.2017 which is
after AY 2015-16. It is thus clear that the respondents were basing their
entire case on an incorrect agreement which had no application on AY 2015-
16 and the reassessment ought to be quashed on this short ground alone.
129. Further, the respondents in their written submission dated 15.01.2026
claim that the Agreement dated 01.04.2010, which is the only applicable
Distribution Agreement prevalent during AY 2015-16, is not applicable to
that year. This implies that the Agreement dated 01.04.2010 was not referred
by the respondents at the time of recording of reasons for re-opening.
Therefore, any interpretation of the Agreement dated 01.04.2010 now
cannot support the re-opening of assessment for AY 2015-16 because the
same has to be decided at the threshold.
130. Further, it is submitted that the reliance placed by the respondents on
the „indemnity‟ clause and „responsibility‟ clause to support its contention
that the petitioner had a right to recover expenses borne out by it on account
of customer claims and warranty obligation is a mere assumption. Firstly, it
is evident that at least insofar as the conclusion in the impugned reasons that
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the Associated Enterprise is bearing the expenditure incurred on account of
warranty and obligation of reimbursement is now admittedly incorrect. The
attempt to now interpret the general indemnity clause and responsibility
clause is clearly not supported by reasons and ought to be rejected on this
ground alone. Secondly, the provision of expenses relating to warranty by
the petitioner cannot be extended on account of the said general indemnity
clause and responsibility clause. The general indemnity clause is with
respect to non-performance of the product supplied and cannot be stretched
to include provisions created by the petitioner based on scientific data. The
responsibility clause also cannot support the alleged reimbursement. Lastly,
such an expansion of the indemnity clause and responsibility clause will in
fact be beyond the contractual scheme inasmuch as, if that is the position, all
expenses incurred in the regular course of business would also become
recoverable, which would never be the intention of the Distribution
Agreement of the specified product imported by the petitioner.
131. It has been further averred that the respondents‟ attempt to equate a
limited-risk distributor with an unconditional right of reimbursement is
misconceived, as limited risk does not mandate recovery of every
commercial cost from the Associated Enterprise. In the present case, the
reliance of the respondents on the FAR Analysis in the Transfer Pricing
Study is completely irrelevant as the petitioner is remunerated at Arm‟s
Length Price under which all operational risks stand subsumed. Once the
Arm‟s Length Price is computed and accepted in the original assessment
proceedings, it has taken into account all the risks assumed by the petitioner
and no further addition can be made by making reference to different
obligations arising under Distribution Agreement as all such risks have
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already been considered by computing the Arm‟s Length Price. In the
absence of any contractual obligation requiring separate recovery of
warranty-related expenses, the Respondent‟s contention is untenable.
132. It is also submitted that the respondents themselves in paragraph 15 of
their rejoinder have admitted that a receivable is an accrued and enforceable
right, whereas a provision is contingent and notional. Therefore, in the
absence of any enforceable right of recovery, the respondent cannot assume
jurisdiction to reopen assessment.
ANALYSIS AND CONCLUSION
133. Having heard the learned counsel for the parties and perused the
record, the primary issues which arise for consideration are the following:-
a) Whether the notices under Section 148 of the Act issued by the
respondents for AYs 2013-14 and 2015-16 are beyond limitation
as there is no income in the nature of an asset escaping assessment.
b) Whether the respondents are justified directing special audits of
the accounts of the petitioner for AYs 2013-14 and 2015-16.
134. The challenge mounted to the validity of Explanation 2 to Section 148
of the Act, was waived off by the learned Senior Counsel for the petitioner
during the course of the hearing and as such, we need not examine the same.
REASSESSMENT
135. At first we intend to deal with the first issue as noted above, i.e.,
whether the impugned notices for AY 2013-14 and AY 2015-16 are barred
by limitation inasmuch as they have been issued after the expiry of three
years from the end of the relevant assessment years, without any evidence to
show that income in the nature of assets has escaped assessment.
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136. The submissions of Mr. Arvind Datar and Mr. Tarun Gulati on this
aspect are summarised below:-
1) The reasons provided by the Revenue in support of the impugned
notices do not disclose any incriminating material indicating
escapement of income represented in the form of an asset;
2) There are no receivables due to the petitioner as alleged by the
Revenue;
3) There is no contractual agreement between the petitioner and the
Associated Enterprise for reimbursement of the provisions for
customer claims or warranty;
4) The issue related to disallowance of provision for customer claims
and warranty have been decided in favour of the petitioner by the
Tribunal;
5) Even if it is assumed that there are receivables due to the
petitioner, they cannot construed to be assets as per Explanation 2
to Section 153A of the Act;
6) Any unutilised provision for customer claims or warranty will be
written back and credited to the profit and loss account of the
petitioner, increasing taxable profits;
7) Even if it is assumed that receivables are due from the Associated
Enterprise, the same would be shown in the accounts of the
petitioner only when it is actually received; and
8) Reliance cannot be placed on draft assessment order or on the
reasons recorded for AY 2015-16 to justify reopening of the
assessment for AY 2013-14.
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137. On the other hand, the contentions of Mr. Indruj Singh Rai can be
summed up as under:-
1) There is no requirement for the Assessing Officer to have any
information suggesting escapement of income to reopen
assessments pursuant to a search, owing to a deeming fiction in
Explanation 2 to Section 148 of the Act as was in force then;
2) Pursuant to the search under Section 132 of the Act, information
came to the fore that there is an escapement of income of the
petitioner in the nature of an asset, being receivables on account of
counter claims and warranty;
3) From the Transfer Pricing Report of the petitioner, it can be seen
that the entire claims towards customer claims and warranty are to
be borne by the Associated Enterprise and not the petitioner;
4) The petitioner in its reply to a query raised by the Revenue during
the draft assessment proceedings for AY 2015-16 conceded that
subsequent to the reopening, there have been certain
reimbursements;
5) Any receivables would amount to asset for the purpose of Section
153A, as can be seen from the wording of Explanation 2 therein;
6) Even applying the principle of ejusdem generis, receivables would
have the same meaning as „loans and advances‟ mentioned in the
Explanation 2;
7) Where material found during a search evidences a continuing
transaction or arrangement giving rise to recurring tax
consequences across multiple years, such material is relevant andSignature Not Verified
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applicable to each of those assessment years. As such, the reasons
recorded for both AYs 2013-14 & 2015-16, are justified.
138. For initiating reassessment beyond three years but up to ten years, it
is a necessary pre-condition that income which has escaped assessment must
be in the nature of an asset. The stand of the Revenue is that in view of the
Distribution Agreement between the petitioner and the Associated
Enterprise, the petitioner is a limited risk distributor of the Associated
Enterprise, and the provisions made anticipating customer claims and
warranty claims are to be reimbursed by the Associated Enterprise. In that
sense, the provisions are receivables at the hand of the petitioner, in the
nature of assets. However, as per the petitioner, there is no contractual
agreement for any reimbursement of the provisions made for customer
claims and warranty. When there is no right to receive any reimbursement,
there cannot be any receivables.
139. It is a conceded position that the Distribution Agreement dated
01.04.2010, has been executed between the petitioner and the Associated
Enterprise. The same was in existence during the relevant assessment years.
Relevant parts of the said agreement, on which much reliance is placed by
the Revenue, are reproduced hereunder:
―WITNESSETH:
WHEREAS, Huawei India has been established as a
distribution support organisation in the Territory acting as a
limited risk distributor in respect of various Huawei products
and equipment manufactured outside equipment
manufacturers (‘OEM products’)….
……
ARTICLE III RESPONSIBILITIES
Section 3.2 Responsibilities of Seller. Huawei Singapore shall
at all times during the term of this Agreement.
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…….
b. Assume risks relating to Product quality, order processing
errors, mistakes in the communication of P specifications, or
other Product related matters as long as such risks, errors or
mistakes were not considered attributable to Huawei India.
ARTICLE VII
INDEMNIFICATION
Huawei Singapore shall hold Purchaser harmless and shall
indemnify Huawei India from and again loss, cost or expense,
including reasonable attorneys’ fees, related to any act or
omission in connection the non-performance of the Products
supplied under the terms of this Agreement.‖
140. A perusal of the above reveals that the Associated Enterprise shall
assume the risk related to product quality or other related matters, as long as
such risk, error or mistake is not attributable to the petitioner, and also that
the Associated Enterprise is to indemnify the petitioner from and against any
loss, cost or expense incurred by the petitioner related to any act or omission
in connection with the non-performance of a supplied product.
141. When the petitioner has a right to be indemnified for any expense
incurred by it for non-performance of the product, it cannot contend that
there is no contractual agreement for reimbursement, as the creation of
provisions for customer claims and warranty would amount to an “act… in
connection with the non-performance of the Products supplied…”
142. It is also to be noted that the petitioner in its reply dated 22.04.2025 to
the query raised by the Revenue with respect to the draft assessment
proceedings of AY 2015-16 has admitted that an amount of
Rs.69,81,40,820/- has been recovered from its Associated Enterprise on
account of customer claims. If that be so, the submission of Mr. Datar andSignature Not Verified
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Mr. Gulati that there is no agreement between the petitioner and the
Associated Enterprise for reimbursement of the provisions is unmerited. As
such, it must be held that the provisions claimed for customer claims and
warranty are reimbursable to the petitioner, and are as such „receivables‟.
143. Now the question arises whether such receivables are in the nature of
“assets”, and also whether the same should be shown in the profit and loss
account for the relevant assessment years for which deductions have been
sought.
144. To decide the same, we need to examine Explanation 2 to Section
153A of the Act, which we reproduce again for ready reference:
―Explanation 2.– For the purposes of the fourth proviso, ―asset‖
shall include immovable property being land or building or both,
shares and securities, loans and advances, deposits in bank account.‖
145. The provision states that the word “asset” shall include immovable
property being land or building or both, shares and securities, loans and
advancements, deposits in bank account. The words “shall include” used
imply that the words provided thereafter are illustrations, and not exhaustive
definitions of “asset”. It is an inclusive provision inasmuch as it
contemplates even the words not provided therein. We agree with the
submission of Mr. Rai that if the intention of the legislature was to limit the
scope of “asset” to only those words mentioned, it would have expressly
done so, as it did while drafting the Explanation to Section 281 of the Act
which, in contrast, provides an exhaustive definition of the same word
“asset”.
146. Even in general parlance, the word “asset” represents resources with
economic value that an individual or business owns or controls with theSignature Not Verified
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expectation that they will provide a future benefit. In other words, an asset is
a tangible or intangible resource that can be used to enhance the economic
stature of the holder. An asset cannot be narrowly confined to the specific
expressions employed within the above explanatory provision, as sought to
be contended by the learned Senior Counsel for the petitioner. To impose
such a restrictive interpretation would unduly curtail the scope of its
meaning, thereby leading to an anomalous situation whereby the Revenue
would be precluded from bringing to assessment those forms of income,
which, though not expressly enumerated, fall within the broader conceptual
ambit of an asset and would otherwise escape assessment.
147. That apart, the Conceptual Framework for Financial Reporting under
Indian Accounting Standards (Ind AS) issued by the Indian Accounting
Standard Board defines an asset as a present economic resource controlled
by an entity as a result of past events. An economic resource is further
defined as a right that has the potential to produce economic benefits. It
describes three aspects of an asset viz. right, potential to produce economic
benefits, and control. Relevant portion of the Framework is reproduced as
under:-
―Definition of an asset
4.3 An asset is a present economic resource controlled by
the entity as a result of past events.
4.4 An economic resource is a right that has the potential to
produce economic benefits.
4.5 This section discusses three aspects of those definitions:
(a) right (see paragraphs 4.6-4.13);
(b) potential to produce economic benefits (see
paragraphs 4.14-4.18); and
(c) control (see paragraphs 4.19-4.25).
Right
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4.6 Rights that have the potential to produce economic
benefits take many forms, including:
(a) rights that correspond to an obligation of another party
(see paragraph 4.39), for example:
(i) rights to receive cash.
(ii) rights to receive goods or services.
(iii) rights to exchange economic resources with another
party on favourable terms. Such rights include, for
example, a forward contract to buy an economic resource
on terms that are currently favourable or an option to buy
an economic resource.
(iv) rights to benefit from an obligation of another party
to transfer an economic resource if a specified uncertain
future event occurs (see paragraph 4.37).
xxx xxx xxx
Potential to produce economic benefits
4.14 An economic resource is a right that has the potential
to produce economic benefits. For that potential to exist, it
does not need to be certain, or even likely, that the right will
produce economic benefits. It is only necessary that the
right already exists and that, in at least one circumstance, it
would produce for the entity economic benefits beyond those
available to all other parties.
4.15 A right can meet the definition of an economic
resource, and hence can be an asset, even if the probability
that it will produce economic benefits is low. Nevertheless,
that low probability might affect decisions about what
information to provide about the asset and how to provide
that information, including decisions about whether the
asset is recognised (see paragraphs 5.15-5.17) and how it
is measured.
4.16 An economic resource could produce economic
benefits for an entity by entitling or enabling it to do, for
example, one or more of the following:
(a) receive contractual cash flows or another economic
resource;…
xxx xxx xxx
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4.46 A present obligation can exist even if a transfer of
economic resources cannot be enforced until some point in
the future. For example, a contractual liability to pay cash
may exist now even if the contract does not require a
payment until a future date. Similarly, a contractual
obligation for an entity to perform work at a future date
may exist now even if the counterparty cannot require the
entity to perform the work until that future date.‖
(emphasis supplied)
148. Even from the above, it becomes apparent that an asset can be said to
be a present right that has the potential to produce economic benefits even in
the future. It can include a right that corresponds to an obligation of another
party, a right to receive cash, or a right to benefit from an obligation of
another party to transfer an economic resource, if a specified uncertain
future event occurs. Such a right only has to exist and it need not be certain
that it will produce economic benefits, for it to be termed as an asset.
Further, a present obligation can exist for an entity even if transfer of the
economic resource cannot be enforced until some point in the future.
149. In the present case, by virtue of the Distribution Agreement, the
petitioner has acquired a right to be indemnified by the Associated
Enterprise for the expenses it incurs on customer claims/warranty. Even if
the actual indemnification/reimbursement happens only in the future, it does
not take away the fact that such a right has arisen in the relevant assessment
year when the provisions for customer claims/warranty were made. Such a
right to receive reimbursement in the future would certainly enhance the
economic stature of the petitioner, and as such, would amount to an asset.
150. Going by the above, we are of the view that the amounts receivable by
the petitioner by way of reimbursement of the provisions made for customer
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claims and warranty, are to be treated as assets and shown in the accounts of
the petitioner for the relevant assessment years. Though the said amounts
may accrue in the future, the right to receive the same emanates from the
Distribution Agreement and ensues to the petitioner when it made the
provisions and claimed deductions, and must be shown as assets in the
accounts of the petitioner for the relevant years.
151. Therefore, the issue as to whether receivables at the hands of the
petitioner are in the nature of an asset is answered in favour of the Revenue
and against the petitioner/assessee.
152. In view of the above conclusion, we shall now proceed to decide
whether the impugned notices are justified. Insofar as the notice dated
31.03.2024 for AY 2013-14 is concerned, we have seen the reasons recorded
in support of the notice under Section 148 of the Act, the same read as
under:-
―1. The assessee, M/s Huawei Telecommunications (India)
Company Private Limited (HTICPL) (PAN-AABCHI1376E) is
as company. HTICPL is a Private Limited company
incorporated on 23 July 2002. It is classified as pon-govt
Company and is registered at Registrar of Companies, Delhi.
The objective of the company is to carry out business
manufacture, assembly, software design, development and
activities, development and integration of all types of
communications, networks products and solutions, dealing in
all equipment products and solutions related to telecom
networks and services.
2. The Return of income for AY 2013-14 was filed by the
assessee u/s 139(1) of the Act on 29.11.2013 declaring loss of
Rs.311,04,30,235/- and revised the return on 30.03.2015
declaring loss of Rs.310,39,86,024/. The return was processed
u/s 143(1) of the Act. After that the case was picked up for
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03.10.2017 u/s 143(3)/144C is the total loss of
Rs.294,03,55,100/-. Apart from other additions made by the
AO, an addition of Rs. 12,86,11,894 was made on account of
provision for customer claims under section 37 or 40a(in) of
the Act. This issue is also involved under consideration.
3. Thereafter, a search and seizure operation was conducted
on Huawei Group and related entities on 15.02.2022. Assessee
was one of the persons covered under search action.
Accordingly, for the purpose of better coordination, effective
investigation and meaningful investigation, the case of the
assessee was centralized with the office of the undersigned
vide order u/s 127 of the Income Tax Act, 1961 (hereinafter
referred to as “the Act”) bearing number F. No. Pr.
CIT/FBD/Tech/127/Cent/2022-23 dated 09.11.2022 passed by
the Pr. CIT, Faridabad.
4. During the search proceedings certain incriminating digital
evidences, loose sheets, diaries etc were found and seized from
the business premise of HTICPL 19, 10 and 11th Floor,
Capital Cyberscape, Gurugram Manesr, Urban Complex,
Sector-59, Ullahwas, Gurugram, Haryana-122011‖
5. 5. As per submitted audit report dated 08.06.2020 in Form
3CA for FY 2019-20, as per Form 3CD, point 11(b), following
books of accounts were mentioned to be maintained at 9th
Floor, Capital Cyberscape, Gurugram Manesar, Urban
Complex, Sector-59, Ullahwas, Gurugram, Haryana-122011,
viz
i. General ledger (computerized)
ii. Journal Book (computerized),
iii. Monthly payroll records (computerized),
iv. Inventory ledger (Computerized),
v. Fixed assets register (computerized),
vi. Other relevant documents, bilis, vouchers,
receipts, Debit note, Credit note, Inventory register,
Agreements, orders etc.
6. During the course of the Search, the officials of the
company were inquired about the books of accounts of the
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company. However, during search, HTICPL only provided the
dump ERP data without providing details as required. The
data provided was analysed and there are issues relating to
the correctness of the ERP data provided by the company.
7. The finances of the company provided during the course of
Search is incoherent, unsegregated, voluminous and required
significant amount of further processing to come to a form
that can be examined. The functionaries of the company based
in India could not explain the rationale of the various
transactions entered by the company and have made post facto
submissions. The ERP data itself in two financial years is not
matching with the final trial balance of the company on
account of duplication and missing data The company has
neither provided backup of the digital books of accounts,
required to be kept at servers physically located in India nor
provided the address of such physical servers. Based on such
circumstances, the accounts of the company are clearly
complex, voluminous and in certain years incorrect.
Accordingly, I am satisfied that the books of account seized
during search suggest that the income chargeable to tax has
escaped assessment in the case of Assessee.
8. The assessee company has created and claimed the
provision of customer claim as deduction for the purpose of
Income Tax calculation. The said provision was created by the
assessee company due to the probable deduction that the
customer might make on account of potential delay in supply
of goods or provision of services. The material available on
record, pursuant to search, does not justify the allowability of
the same especially the reliability of estimate for provisioning
of these expenses on scientific basis. It is seen from the
financial statements and documents discovered during the
search proceedings, the Assessee Company has been claiming
huge provisions on account of customer claims as a deduction.
The assessee claimed that the said provision is created by the
Assessee due to probable deduction that the customer might
make on account of customer claims as a deduction. The
assessee claimed that the said provision is created by the
Assessee due to probable deduction that the customer might
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make on account of potential delay in supply of goods or
provision of services. Based on the search and post search
investigation carried out in the case it became clear that the
said provision is not an ascertained liability. Further, it
appears the Assessee does not have any present obligation to
discharge such liquidated damages, the provision made on
this account appears to be a contingent liability which lacked
reasonable certainty and possible quantification. Therefore,
the same do not constitute expenditure and cannot be the
subject matter of deduction. In light of this new fact emerged
during search proceedings and post search investigation that
assessee does not have any obligation to discharge such
liquidate damages, the allowability of provision customer
claim without scientific basis should be investigated and
nature of transaction. The issue in monetary terms for the year
under consideration is given below:
AY Amount of provision of customer claims created
(in INR)
2013-14 12,86,11,894
9. The undersigned shall be deemed to have information which
suggests that the income chargeable to tax has escaped
assessment in the case of Assessee Company for AY 2013-14,
within the meaning of section 147 of the 1.T. Act. Further, it
appears the assessee does not have any present obligation to
discharge such liquidated damages, the provision made on
this account appears to be a contingent liability which lacked
reasonable certainty and possible quantification. Therefore,
the same do not constitute expenditure and cannot be the
subject matter of deduction even under the mercantile system
of accounting followed by the assessee company. The expenses
booked by assesse company are not less than Rs. 50 Lakh. …‖
(emphasis supplied)
153. Similarly, the relevant reasons recorded for AY 2015-16, are the
following:-
―5.3.1 Issues related to Warranty expenses:
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5.3.2 The company has claimed expenses as provision of
warranty in the various years. The Transfer Pricing Report of
HTICPL show that the claim of warranty expenses made by the
assessee is against the functional and risk profile detailed by
the assessee in its Transfer Pricing Report in view of the
functional, asset, risk analysis of this transaction. Year wise
bifurcation of the issue in monetary terms is as given below in
Table form.
AY Provision for Remarks
warranty
claimed
2012-12 6,64,20,517 Provision amount of ₹ 6,64,20,517 was
created as per P&L Account.
2013-14 - No provision was created during the
previous year.
2014-15 - No provision was created during the
previous year.
2015-16 12,33,22,221 Provision amount of 12,33,22,221 was
created as per P&L Account.
2016-17 55,72,52,128 Provision amount of 55,72,52,128 was
created as per P&L Account.
2017-18 48,37,99,536 Provision amount of %48,37,99,536
was created as per P&L Account.
2018-19 40,88,97,095 Provision amount of X20,39,44,418 was
created as per P&L Account and X
20,49,52,676 was debited as per the
provision of ICDS (refer to the clause
13e of tax audit report)
2019-20 81,23,81,153 Provision amount of %70,50,27,509
was created as per P&L Account and %
10,73,53,644 was debited as per the
provision of ICDS (refer to the clause
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13e of tax audit report)
2020-21 19,75,18,259 Provision amount of %19,75,18,259
was created as per P&L Account.
2021-22 16,88,49,299 Provision amount of X16,88,49,299 was
created as per P&L Account.
5.3.4 As per the Distribution agreement between assessee and
it’s Associated Enterprises i.e. M/s Huawei International Pte
Ltd, any expenditure incurred on account of warranty is
required to be borne by the supplier of the product i.e., the
Associated Enterprises. However, assessee has debited
warranty expenses and not shown any separate compensation
being received from the supplier ii n the books of accounts.
The argument of the assessee that the warranty
expenditure is required to be borne by it in terms of the
contract with the final client is fallacious. While the provision
of warranty for supply of a defective product might be the
obligation of the” assessee, in terms of its supply contract with
the final client, in terms of the distribution agreement, such
warranty is finally required to be borne by the supplier of the
product. Thus, while the assessee may be required to recognise
the expenditure on warranty in its books of accounts due to its
obligations towards the final client, reimbursement or
compensation received from the supplier is also required to be
recognised in the same way. The assessee cannot be in a worse
position vis-a-vis warranty, even after back-to-back
compensation being provided by the supplier.
5.3.5 Further, during the post search enquiry, the Assessee was
asked to explain how ‗warranty fee rate’ for the purpose of
computing provision for warranty is arrived at. However, the
reply given by the Assessee was found to be vague as it was
informed that fee rate calculated based on global analysis
which took into account the costs incurred by the Group on
rectifying defaults in similar products sold to customers.
However, the reply of the assessee was not found to be tenable
because of following reaons:
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a) There is no prescribed methodology which has obtained
global recognition in the financial accounting on the
determination of the ―warranty free rate‖
b) Such practice of calculating the rate based on global
analysis tantamount to imposing the global average to the
Indian market which might not be the case as Indian
geographic market might not behave in the same manner as the
assessee assumed to do so.
c) Such methodology would also fail in those products which
are launched for the first time in the market, or which do not
have any precedent to arrive at the “warranty fee rate”
d) Huawei not only provides B2C products but also many B28
product and services which requires high level of personalized
customization based on the end user requirement, and therefore
in such sales, calculation of provision of warranty would be
difficult if not impossible.
5.3.6 Furthermore, the provision for warranty expense is not an
allowable deduction as it is a contingent liability. The test to
ascertain the nature of liability is whether a provision provides
for a liability for which the amount can be determined with
substantial accuracy. The Assessee has submitted that liability
of warranty provision is determined on the basis of costs liable
to be incurred in relation to warranty obligation contracted
with respected. customers, which apparently is not on a
scientific basis. The contentions of the Assessee are not
acceptable.
5.3.7 As per discussion above, accounting treatment given by
the taxpayer in its books of accounts is the claim of Provision
of warranty expenses as an expenditure in profit and loss
account, while there is no reimbursement/recoupment of
expenses from the associated enterprises. Therefore, the income
which has escaped assessment (Rs. 12,33,22,221/-) should exist
as a payment receivable in the books of accounts of the
taxpayer, which is in the nature of an ‘asset’.
Accordingly, I am satisfied that the books of account
seized during search suggest that the income chargeable to tax
of Rs. 12,33,22,221/- has escaped assessment represented in
form of asset in the case of assessee for Α.Υ. 2015-16.‖
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(emphasis supplied)
154. A perusal of the notice under Section 148 of the Act dated 31.03.2024
and the satisfaction note containing the reasons recorded for AY 2013-14
would reveal that the re-assessment is being initiated pursuant to the search
dated 15.02.2022 under Section 132 of the Act. However, unlike the reasons
recorded for AY 2015-16, it does not state that the provision was
reimbursable by the Associated Enterprise, making it an asset. It also does
not make any reference to the Distribution Agreement or the Transfer
Pricing Study. Though the said notice and reasons recorded for AY 2013-14
were issued after the search and also after the notice dated 31.03.2023 for
AY 2015-16 was issued, the Assessing Officer has not made any reference
whatsoever to any receivables amounting to assets.
155. We must state that the fourth proviso to Section 153A of the Act lays
down the conditions precedent for issuance of notice for reassessment. It is
only upon fulfillment of such conditions that the Assessing Officer assumes
jurisdiction to issue a notice under Section 148 of the Act. Since satisfaction
of the conditions therein is a jurisdictional requirement, it is incumbent upon
the Assessing Officer to demonstrate in writing as to how the conditions
have been satisfied for him to assume jurisdiction. Therefore, initiation of
re-assessment has to be examined on the basis of the notice and the
subsequent satisfaction note containing the reasons recorded.
156. The Assessing Officer has stated in the reasons recorded for AY
2013-14 that the material discovered during the search proceedings show
that the provision made for the customer claims is not an ascertained
liability, but a contingent one. It is also stated that the allowability of the
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provision should be investigated. In other words, the reasons for the
Assessing Officer to issue the notice has to do with the genuineness of the
expense claimed.
157. The issue as to whether an assessment can be reopened on the sole
basis that allowability or genuineness of the expense need to be investigated
or verified is no more res integra. This Court in Le Passage to India Tours
& Travels Pvt. Limited v. Additional Commissioner of Income Tax,
2014:DHC:2015-DB has held as under:-
―5. In the present case the ―reasons to believe‖ – extracted
above – nowhere reveal as to what tangible material which
the AO came to obtain to justify the reassessment notice. In
the previous instance, the reassessment notice was based on
the assumption that a much larger income had accrued to
the assessee whereas only a fraction of its was offered in the
P & L account. In the present case, a somewhat similar, if
not identical, ground has been made out i.e. that of expenses
incurred abroad have not been revealed. This was an aspect
which was known to the AO at the time of the original
assessment; the explanations by the assessee appear to have
been taken into account. At the time when the first
reassessment notice was issued a facet of this was taken into
consideration and in fact cited in the ―reasons to believe‖.
A virtual assertion of the same reasons in different words
does not clothe the reassessment notice, in the opinion of
the Court, with any more sanctity, nor does it take away the
vice of lack of jurisdiction noticed in the order in WP
8685/2010. Moreover, an assessment cannot be reopened
merely to verify the genuineness of the expenses as that
would amount to an impermissible fishing or rowing
enquiry without any tangible material to show escapement
of income.
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For the above reasons it is held that the impugned notice is
not justified and beyond the authority of law. It is
accordingly quashed and the writ petition is allowed.‖
(emphasis supplied)
158. It is pertinent to note here that the allowability of the provisions made
for customer claims for AY 2013-14 as well as the methodology used for
arriving at the amounts so claimed, was subject matter of an appeal before
the Tribunal, in ITA No.7510/Del/2017, wherein while relying upon the
judgment of the Supreme Court in Rotork Controls India (P) Ltd. (supra),
the Tribunal has held as under:-
―42. Evidence brought on record by the taxpayer shows that
aforesaid conditions have been fulfilled and as such,
provision made qua the amount provided by the taxpayer
pertaining to actual delays and defaults occurred in terms
of the contract entered into between the taxpayer and its
customers is to be considered as ―ascertained liability‖. So,
AO/DRP have erred in making disallowance on account of
provision for customer claims. So, it is ordered to be deleted
subject to verification of data brought on record by the
taxpayer as discussed in the preceding paras. Consequently,
grounds no.4 to 4.3 of ITA No.7509/DEL/2017 &
7510/DEL/2017 for Assessment Years 2012-13 & 2013-14
respectively are determined in favour of the taxpayer.‖
159. As seen from the above, the Tribunal has given a categorical finding
that the provisions made for customer claims for AY 2013-14 is an
ascertained liability. The order of the Tribunal has not been challenged. If
that be so, the Assessing Officer cannot be permitted to reopen the
assessment, based on the same issue. Mr. Datar is justified in relying upon
the judgment in Smart Chip Private Ltd. (supra) wherein it was held as
under:-
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―16. It is apparent from the above that the AO believed that the
petitioner’s income had escaped assessment for AY 2016-17 on
essentially three grounds. First, that the petitioner had deducted
expenses relating to amounts paid to certain persons who had not
filed their income tax returns and the AO thus doubted the
genuineness of the said transactions. Second, that the petitioner
had booked expenses, which according to the AO, were personal
expenses of its directors and had not been incurred wholly and
exclusively for the purpose of the petitioner’s business. And third,
that the petitioner had paid certain amounts as expenses for
availing contractual manpower services and the AO doubted the
genuineness of the said payments.
17. It is clear from the above that there is no allegation that the
income which has escaped assessment was represented in the form
of an asset. Therefore, the conditions as stipulated in Clause (a)
of the fourth proviso to Section 153A(1) of the Act are not
satisfied. The AO does not have the possession any books of
account, other documents or evidence, which reveals that the
petitioner’s income that is represented in the form of an asset has
escaped assessment.
18. In terms of Explanation 2 to Section 153A(1) of the Act, the
term ‗asset’ is defined to include immovable property being land
or building or both, shares and securities, loans and advances,
deposits in bank accounts.
19. The AO seeks to disallow expenses on account of doubting the
genuineness for the reason that the same were not incurred wholly
or exclusively for the purpose of the petitioner’s business. Absent
any further material to establish that such expenses had resulted
in the acquisition of any asset, the conditions stipulated in the
fourth proviso to Section 153A(1) of the Act would remain
unsatisfied.‖
(emphasis supplied)
160. Since the genuineness or allowability of expenses cannot be the sole
reason to initiate reassessment, we must hold that though the notice for AY
2013-14 was issued subsequent to the notice in AY 2015-16, the Assessing
Officer failed to specify as to how the provision made for customer claims
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would amount to income escaping assessment in the nature of an asset, for
him to assume jurisdiction. Therefore the reasons recorded by the Assessing
Officer to reopen the assessment for AY 2013-14 do not satisfy the fourth
proviso to Section 153A(1) of the Act.
161. The argument of Mr. Rai is that the reasons provided for AY 2016-17
(subject matter of a separate writ petition W.P.(C) 15972/2023), that
incriminating material derived from the search reveal that there is an
escapement of income in the form of customer claims as receivables, should
be read in conjunction with AY 2013-14 as both notices emanate from the
same search proceedings and material gathered. His argument is that so long
as reasons exists, elaborating such reasons for AY 2013-14 in the reasons
recorded for the AY 2016-17 does not vitiate the reassessment, as in cases of
search, since the Assessing Officer is deemed to have incriminating
evidence, the procedure prescribed under Section 148A of the Act, i.e.
issuance of notice along with the reasons, is not applicable. We are not in
agreement with the above submission of Mr. Rai, for the reason that even in
cases of search, the jurisdictional requirement set out in Section 153A of the
Act needs to be fulfilled, by way of recording of reasons detailing as to how,
income in the nature of an asset has escaped assessment.
162. Mr. Rai has referred to the judgment in the case of Indian National
Congress (supra) in support of his contention that since Section 153A does
not mandate separate reasons recorded for each assessment year, the reasons
recorded in the satisfaction note for AY 2016-17 which encapsulates
incriminating material pertaining to the assessment years in question, would
suffice. We are not impressed by the submission, for the reason that in
Indian National Congress (supra), this Court while dealing with Section
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153C of the Act, was examining the validity of a common satisfaction note
issued by the Revenue for the assessment years forming part of a block as a
whole. The issue before the Court was whether the composite and common
satisfaction note would suffice for the years in the block. However, in the
present case, notices and satisfaction notes containing the reasons recorded
have been issued for both AY 2013-14 and AY 2016-17 separately. There is
nothing before us to suggest that either of the notices were in the nature of a
composite or common satisfaction note referring to the block as a whole.
The endeavour of Mr. Rai is to say that the reasons recorded for AY 2016-
17, emanating from the same search and materials gathered, evidence a
continuing transaction or arrangement giving rise to recurring tax
consequences across multiple years, and therefore should be read to be
applicable to AY 2013-14 also. However, it is not his case that the notice or
the satisfaction note for AY 2016-17 make any reference to incriminating
material found qua AY 2013-14 or a block period. In the absence of such
reference by the Assessing Officer, the notice / satisfaction note for AY
2016-17 cannot be considered as a common or composite satisfaction note
resting on incriminating material pertaining to the AY 2013-14. For this
reason, the above submission of Mr. Rai and his reliance on the judgment in
Indian National Congress (supra) warrant rejection.
163. We are of the view that reliance was rightly placed by the learned
Senior Counsel for the petitioner on the judgment of this Court in the case of
Saksham Commodities Limited (supra) to say that the Assessing Officer
needs to necessarily identify the assessment years to which the material
gathered in the course of a search may relate to before issuing the notice.
The judgment in the case of Saksham Commodities Limited (supra) though
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delivered in the context of Section 153C of the Act dealing with abatement
of pending assessment and reassessment pursuant to a search, contains ratio
applicable to the facts of the present case. We reproduce the relevant part of
the judgment as under:-
―48. In terms of the Second Proviso to Section 153A, all
assessment or reassessment proceedings relating to the six AYs’
or the ―relevant assessment year‖ pending on the date of search
are statutorily envisaged to abate. Abatement is envisioned to be
an inevitable consequence of the initiation of action under Section
153A. Neither issuance of notice nor abatement are predicated
upon a formation of opinion by the AO of the searched person that
the material is likely to impact the total income of that assessee.
However, the spectre of abatement insofar as the ―other person‖
is concerned would arise only after the jurisdictional AO has
formed the requisite satisfaction of the material having ―a
bearing on the determination of the total income of such other
person‖ and having formed the opinion that proceedings under
Section 153C are liable to be initiated. It would be pertinent to
bear in mind that Kabul Chawla was a decision rendered in the
context of Section 153A. It was in the aforesaid backdrop that the
Court significantly observed that once a search takes place under
Section 132 of the Act, notice under Section 153A(1) would
mandatorily issue. The abatement of assessment and reassessment
pending on that date would, in the case of a Section 153A
assessment, be a preordained consequence. However, and in light
of what has been observed hereinabove, it is apparent that Section
153C constructs a subtle and yet significant distinction insofar as
the question of commencement of proceedings or assumption of
jurisdiction is concerned.
49. That takes us to the principal question and which pertains to
the nature of the incriminating material that may be obtained and
the years forming part of the block which would merit being
thrown open. Regard must be had to the fact that while Section
153C enables and empowers the jurisdictional AO to commence
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being reached that the books of accounts, documents or assets
seized ―have a bearing on the determination of the total income of
such other person‖. We in this regard bear in mind the well
settled distinction which the law recognizes between the existence
of power and the exercise thereof. Section 153C enables and
empowers the jurisdictional AO to assess or reassess the six AYs’
or the ―relevant assessment year‖. The Act thus sanctions and
confers an authority upon the AO to exercise the power placed in
its hands for up to a maximum of ten AYs’. Despite the conferral
of that power, the question which would remain is whether the
facts and circumstances of a particular case warrant or justify the
invocation of that power. It is the aforesaid aspect which bids us
to reiterate the distinction between the existence and exercise of
power.
50. What we seek to emphasise is that merely because Section
153C confers jurisdiction upon the AO to commence an exercise
of assessment or reassessment for the block of years which are
mentioned in that provision, the same alone would not be
sufficient to justify steps in that direction being taken, unless the
incriminating material so found is likely to have an impact on the
total income of a particular AY forming part of the six AYs’
immediately preceding the AY pertaining to the search year or for
the ―relevant assessment year‖.
51. Ultimately Section 153C is concerned with books, documents
or articles seized in the course of a search and which are found to
have the potential to impact or have a bearing on an assessment
which may be undergoing or which may have been completed.
The words ―have a bearing on the determination of the total
income of such other person‖ as appearing in Section 153C would
necessarily have to be conferred pre-eminence. Therefore, and
unless the AO is satisfied that the material gathered could
potentially impact the determination of total income, it would be
unjustified in mechanically reopening or assessing all over again
all the ten AYs’ that could possibly form part of the block of ten
years.
52. The decisions which hold that an assessment is liable to be
revised only if incriminating material be found, even if rendered in
the context of Section 153A, would clearly govern the question
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that stands posited even in the context of Section 153C. It would
be relevant to recall that the Division Bench in Kabul Chawla had
observed that in the absence of any incriminating material, a
completed assessment may be reiterated and the abated
assessment or reassessment be concluded. The importance of
incriminating material was further underlined in Kabul Chawla
with the Court observing that completed assessments could be
interfered with, only if some incriminating material were
unearthed. This aspect came to be reiterated in RRJ Securities
when the Court held that it would be impermissible to either
reopen or reassess a completed assessment which may not be
impacted by the material gathered in the course of the search and
which may have no plausible nexus. The aforesaid position also
comes to the fore when one reads para 17 of ARN Infrastructure
and which annulled an action aimed at reopening assessments for
years to which the incriminating document which was found did
not relate.
53. Sinhgad Technical Education Society also constitutes a
binding precedent in respect of the aforesaid proposition as
would be evident from the Supreme Court noticing that the
material disclosed pertained only to AY 2004-05 or thereafter and
that consequently the Section 153C action initiated for AYs’
2000-01 to 2003-04 would not sustain. It was this position in law
as enunciated in that decision which came to be reiterated by our
Court in Index Securities.
54. In any case, Abhisar Buildwell, in our considered opinion, is a
decision which conclusively lays to rest any doubt that could have
been possibly harboured. The Supreme Court in unequivocal
terms held that absent incriminating material, the AO would not
be justified in seeking to assess or reassess completed
assessments. Though the aforesaid observations were rendered in
the context of completed assessments, the same position would
prevail when it comes to assessments which abate pursuant to the
issuance of a notice under Section 153C. Here too, the AO would
have to firstly identify the AYs’ to which the material gathered in
the course of the search may relate and consequently it would
only be those assessments which would face the spectre of
abatement. The additions here too would have to be based on
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material that may have been unearthed in the course of the
search or on the basis of material requisitioned. The statute thus
creates a persistent and enduring connect between the material
discovered and the assessment that may be ultimately made. The
provision while speaking of AYs’ falling within the block of six
AYs’ or for that matter all years forming part of the block of ten
AYs’, appears to have been put in place to cover all possible
contingencies. The aforesaid provisions clearly appear to have
been incorporated and made applicable both with respect to
Section 153A as well as Section 153C ex abundanti cautela.
Which however takes us back to what had been observed earlier,
namely, the existence of the power being merely enabling as
opposed to a statutory compulsion or an inevitable consequence
which was advocated by the respondents.
55. Take for instance a case where the material gathered in the
search is contemplated to have an adverse impact on the
declarations and disclosures made by an assessee pertaining only
to AYs’ 2016-17 and 2017-18. What we seek to emphasise is that
pending assessments for those two years could validly form
subject matter of action under Section 153C and pending
assessments in that respect would surely abate. However, that by
itself would not be sufficient to either reopen or issue notices in
respect of AYs’ prior to or those falling after those two AYs’ and
which may otherwise fall within the maximum block period of ten
years merely because the statute empowers the AO to do so.
Unless the material gathered and recovered is found to have
relevancy to the AY which is sought to be subjected to action
under Section 153C, it would be legally impermissible for the
respondents to invoke those provisions. Consequently, the AO
would be bound to ascertain and identify the year to which the
material recovered relates. The years which could be then
subjected to action under Section 153C would have to necessarily
be those in respect of which the assessment is likely to be
influenced or impacted by the material discovered. Section 153C
neither mandates nor envisages a mechanical or an en blanc
exercise of power, or to put it differently, one which is
uninformed by a consideration of the factors indicated above.
56. We also bear in mind the pertinent observations made in RRJ
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Securities when the Court held that merely because an article or
thing may have been recovered in the course of a search would
not mean that concluded assessments have to ―necessarily‖ be
reopened under Section 153C and that those assessments are not
liable to be revised unless the material obtained have a bearing on
the determination of the total income. This aspect was again
emphasised in para 38 of RRJ Securities with the Court laying
stress on the existence of material that may be reflective of
undisclosed income being of vital importance. All the aforenoted
judgments thus reinforce the requirement of incriminating
material having an ineradicable link to the estimation of income
for a particular AY.
57. It becomes pertinent to note that both Sections 153A and 153C
require the assessee upon being placed on notice to furnish ROIs’
for the six AYs’ or the ―relevant assessment year‖. All that the two
provisions mandate is that notwithstanding the submission of
those ROIs’, the AO would frame one assessment order in respect
of each of the years which were made subject matter of the notice
and which would deal with both disclosed and undisclosed
income. This too reinforces our view that Section 153C would
apply only to such AYs’ where the jurisdictional AO is satisfied
and has incriminating material for those AYs’ and which may be
concerned with disclosed and undisclosed income.
xxxx xxxx xxxx
61. A reading of the aforesaid Satisfaction Notes would establish
that jurisdictional AOs’ appear to have proceeded on the premise
that the moment incriminating material is unearthed in respect of
a particular AY, they would have the jurisdiction and authority to
invoke Section 153C in respect of all the assessment years which
could otherwise form part of the ―relevant assessment year‖ as
defined in Section 153A. In our considered opinion, the aforesaid
understanding of Section 153C is clearly erroneous and
unsustainable. As explained hereinabove, the discovery of
material likely to implicate the assessee and impact the
assessment of total income for a particular AY is not intended to
set off a chain reaction or have a waterfall effect on all AYs’
which could form part of the ―relevant assessment year‖. This,
more so since none of the Satisfaction Notes record any reasons of
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how that material is likely to materially influence the computation
of income for those AYs’.
62. Hypothetically speaking, it may be possible for the material
recovered in the course of a search having the potential or the
probability of constituting incriminating material for more than
one assessment year. However, even if such a situation were
assumed to arise, it would be incumbent upon the AO to duly
record reasons in support of such a conclusion. The Satisfaction
Notes would thus have to evidence a formation of opinion that the
material is likely to be incriminating for more than a singular
assessment year and thus warranting the drawl of Section 153C
proceedings for years in addition to those to which the material
may be directly relatable.‖
(emphasis supplied)
164. As seen from the above, even when the Assessing Officer is in
possession of material which is likely to be incriminating for more than one
assessment year, he has to necessarily record the reasons to reopen
assessment qua each of the assessment years. It is only through such reasons
recorded that a co-relation can be made between the material gathered
during the search, and a particular assessment year. Any issuance of notice
without fulfilling such jurisdictional mandate would amount to a „fishing
and roving enquiry‟, which cannot be permitted.
165. Since the reasons stated in the satisfaction note for AY 2013-14 are
devoid of merit and as the Revenue cannot be permitted to justify issuance
of notice for AY 2013-14 by relying upon the reasons recorded for the AY
2016-17, it must be stated that the impugned notice for AY 2013-14 contains
no reasons alleging the existence of income escaping assessment in the form
of an asset. As such, the impugned notice dated 31.03.2024 under Section
148 of the Act for AY 2013-14, is bad in law and needs to be set aside.
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166. Insofar as, AY 2015-16 is concerned, we have already reproduced the
reasons provided for issuing the notice dated 31.03.2023 under Section 148
of the Act, which clearly reveal that the reassessment has been initiated
pursuant to evidence that has been unearthed during the search that suggest
that there are receivables in the nature of reimbursement of the provisions
for warranty. It has been stated that since such receivables have not been
recorded in the books of the assessee, income has escaped assessment in the
nature of an asset. We have already held that the receivables at the hand of
the petitioner would be an asset for the purpose of Section 153A of the Act.
As such, the notice dated 31.03.2023, for AY 2015-16 being within ten
years of the end of the relevant assessment year 2015-16, meets the
requirement under Section 153A and also Section 149(1) of the Act.
Therefore, the said notice cannot be said to be beyond limitation. The
challenge to the notices dated 31.03.2023 and 25.05.2023 along with the
satisfaction note for AY 2015-16, therefore, cannot be sustained.
167. Some of the arguments raised by the learned Senior Counsel for the
petitioner with regard to the issue of receivables go into the merits of the
case. The said arguments are enumerated as under:
1) After ascertaining the actual expenses incurred for warranty
claims, any unutilised portion of the provision would be written
back to the profit and loss account of the petitioner;
2) Even if the Associated Enterprise reimburses the provision for
warranty or any part thereof, the same would be added to the
taxable income of the petitioner for the year in which such
reimbursement is actually made;
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3) As the petitioner and the Associated Enterprise have been subject
to transfer pricing, all the risks associated with the entities have
been considered, and it is not necessary to consider anything
further. Therefore, even if it is assumed that there were receivables
due to the petitioner, it would not be an asset in transfer pricing
cases;
4) Since Arm‟s Length Price of the petitioner has been determined by
way of Transaction Net Margin Method, which takes into account
all eligible income before deciding the profit margin, there is no
scope for further additions; and
5) The Revenue has categorised provisions made for customer claims
and warranty for subsequent AYs 2016-17, 2017-18 and 2018-19,
as entries in books of accounts, and not as assets.
168. Suffice it to state, we have decided issues raised by the petitioner
within this narrow compass, i.e., whether the issuance of the notices for
reassessments are bad in law being beyond limitation. Any adjudication on
the submissions enumerated would require detailed examination of the
accounts of the petitioners, and appreciation of evidence, which squarely fall
within the domain of the Assessing Officer. It is not for this Court to step
into the shoes of the Assessing Officer and decide these issues on merits
under writ jurisdiction. As such, the petitioner may raise all these
submissions before the Assessing Officer during the reassessment
proceedings.
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SPECIAL AUDIT
169. Now we take up the challenges to the direction dated 13.09.2024 and
08.10.2024 for special audits to be carried out on the accounts of the
petitioner for AY 2013-14 and AY 2015-16. The reason provided by Mr.Rai
justifying the impugned directions is that pursuant to the search under
Section 132 of the Act, certain ERP data submitted by the petitioner
revealed that there is significant contradiction between the data for two
financial years. Further, there are lakhs of line items in the data dump, which
have not been segregated into ledgers, making it voluminous and complex.
170. There is no dispute that the special audits have been directed for the
purpose of reassessment initiated for AY 2013-14 and AY 2015-16, as
would be clear from the submissions of Mr. Rai noted in the paragraph Nos.
60 to 62 above. If that be so, as we have set aside the notice for reassessment
under Section 148 of the Act for AY 2013-14 for the want of jurisdiction/
limitation, the direction and notice for special audit for that assessment year
serve no purpose, and would not survive.
171. Now we may examine the issue with regard to the direction for
special audit for AY 2015-16. The primary submission of Mr. Datar and Mr.
Gulati is that the purpose of Section 142(2A) of the Act is to provide an aid
at the stage of assessment proceedings and the same cannot be invoked at
the stage of re-assessment. According to them, the scope of re-assessment
proceedings are limited to the extent of the scope of escaped income and
therefore, special audit directions cannot be issued to audit to the entire
books of account of the petitioner beyond the reasons/ information based on
which such reassessment proceedings have been initiated.
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172. We are not in agreement with the above submission for the reason that
Section 2(8) of the Act defines „assessment‟ to include „reassessment‟.
Further, it is settled law that once a notice under Section 143(2) of the Act is
issued, the powers available to the Assessing Officer under re-assessment
proceedings are analogous to those under assessment proceedings. Mr. Rai
is justified in relying upon the judgment of this Court in the case of Shaily
Juneja (supra) and Dart Infrabuild Pvt. Ltd. (supra), that since a return
filed pursuant to a notice under Section 148 will be treated as a return under
Section 139 and also since it is mandatory to issue a notice under Section
143(2) of the Act even for reassessment, it needs to be inferred that all the
powers are available to the Assessing Officer during the course of regular
assessment are also available during reassessment proceedings.
173. Another submission of the learned Senior Counsel for the petitioner is
that the clerical error that had crept in the ERP data, i.e., duplication of
entries for the financial years 2016-17 and 2017-18 was duly explained and
rectified by the petitioner by furnishing the correct EPR data dump
culminating into trial balance and profit and loss account, through e-mails
dated 06.05.2023, 10.05.2022, 22.03.2023 and 01.04.2023. They have also
claimed that alleged discrepancies do not automatically establish the
requirement of „complexity‟ or „voluminous books of account‟. Further
without examining the books of the accounts of the petitioner for the
relevant period „complexity‟ or „doubts about the correctness of the
accounts‟ cannot be presumed. Per contra, the submission of the learned
Senior Standing Counsel for the Revenue is that the very words „volume of
the accounts, doubts about the correctness of the accounts, multiplicity of
transaction of the accounts or specialised nature of business activity of the
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assessee’ that find mention in Section 142(2A) of the Act was introduced
by the Finance Act, 2013 to expand the scope of the powers available to the
Assessing Officer to ensure that there is a wide ambit by way of which the
interests of the Revenue would be protected without hindering upon the
rights of the assessee. He has substantiated his argument by reasons which
we have already reproduced in paragraph no. 64 above.
174. Additionally, it has also been stated in the notice dated 05.07.2024
that while provisions made for warranty has been deducted, the petitioner
had not clarified weather such liquidated damages are actually recoverable
from the Associated Enterprise. It has also been stated that such expenses on
account of warranty, according to Transfer Pricing Report is liability of the
Associated Enterprise. We have already held that by virtue of the
Distribution Agreement, the provisions for warranty claimed by the
petitioner would be reimbursed by the Associated Enterprise.
175. It has also been alleged that the petitioner has failed to provide its
books of accounts, instead providing transactional level ERP data in
Microsoft Excel format. It had also failed to keep a back-up of the digital
books of accounts in India, accessible at all times and backed up daily, as
required by law.
176. The contention of the learned Senior Counsel for the petitioner that
volume of accounts and multiplicity of transactions cannot be presumed
merely on account of lakhs of line items in the ERP data, is completely
unmerited, in view of the words ―volume of the accounts, doubts about the
correctness of the accounts, multiplicity of transactions in the accounts or
specialized nature of business activities of the Assessee‖ that find mention in
Section 142(2A) of the Act.
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177. The relevant Memorandum explaining provisions in the Finance Bill,
2013, on which reliance has been placed by the petitioner itself, reads as
under:
―Direction for special audit under sub-section (2A) of section
142
The existing provisions contained in sub-section (2A) of section
142 of the Income-tax Act, inter alia, provide that if at any stage
of the proceeding, the Assessing Officer having regard to the
nature and complexity of the accounts of the assessee and the
interests of the revenue, is of the opinion that it is necessary so to
do, he may, with the approval of the Chief Commissioner or
Commissioner, direct the assessee to get his accounts audited by
an accountant and to furnish a report of such audit.
The expression ―nature and complexity of the accounts‖ has been
interpreted in a very restrictive manner by various courts.
It is, therefore, proposed to amend the aforesaid sub-section so as
to provide that if at any stage of the proceedings before him, the
Assessing Officer, having regard the nature and complexity of the
accounts, volume of the accounts, doubts about the correctness of
the accounts, multiplicity of transactions in the accounts or
specialized nature of business activity of the assessee, and the
interests of the revenue, is of the opinion that it is necessary so to
do, he may, with the previous approval of the Chief Commissioner
of the Commissioner, direct the assessee to get his accounts
audited by an accountant and to furnish a report of such audit.‖
178. It is clear from the above extract that as contended by Mr. Rai, the
intent of the legislature in introducing the words ―volume of the accounts,
doubts about the correctness of the accounts, multiplicity of transactions in
the accounts or specialized nature of business activity of the assessee‖ was
to expand the scope of the powers available to the Assessing Officer under
Section 142(2A) of the Act, because the words ―nature and complexity‖
which existed earlier were being given a restrictive meaning. As such, the
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facts that the accounts of the petitioner are voluminous, and there is
multiplicity of transactions in the accounts of the petitioner, would be
sufficient for the Assessing Officer to exercise the power under Section
142(2A) of the Act and direct the petitioner to have its accounts audited. Mr.
Rai is justified in relying upon the judgment in the Takshashila Realities
Private Limited (supra) wherein it was held that apart from the nature and
complexity of accounts, even in case of multiplicity of transactions, in the
accounts or specialised nature business activity of the assessee and the
interests of the Revenue, the Assessing Officer can pass an order for special
audit in exercise of powers conferred under Section 142(2A) of the Act.
179. Additionally, since we have already held that the reassessment
proceedings initiated under Section 148 of the Act for AY 2015-16 are not
barred by limitation and have upheld the notice for the same, we are of the
view that the challenge raised to the direction for special audit for AY 2015-
16, is devoid of merit and needs to be rejected.
180. Though the parties have referred to a host of judgments as noted
above, in support of their contentions, in the facts of this case and in view of
our discussion and conclusion above, the need is not felt to refer to them.
OPERATIVE DIRECTIONS
181. In view of the foregoing discussion, we direct the following:
1. The notice dated 31.03.2024 issued under Section 148 of the Act and
the notice dated 24.05.2024 issued under Section 143(2) of the Act
along with the satisfaction note dated 29.05.2024, for initiating
reassessment for AY 2013-14 are set aside.
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2. Notice dated 31.03.2023 under Section 148 of the Act and notice
dated 25.05.2023 issued under Section 143(2) of the Act along with
the satisfaction note for initiating reassessment for AY 2015-16 are
sustained.
3. The special audit direction dated 13.09.2024 along with notices dated
10.06.2024 and 05.07.2024 relatable to AY 2013-14 are set aside.
4. The special audit direction dated 08.10.2024 along with notices dated
10.06.2024 and 05.07.2024 relatable to AY 2015-16 are sustained.
182. Consequently, W.P.(C) 13553/2024 and W.P.(C) 13572/2024 are
allowed. W.P.(C) 14898/2024 and W.P.(C) 15970/2023 are dismissed.
183. Interim orders, if any, stand vacated. The pending applications are
disposed of.
V. KAMESWAR RAO, J.
VINOD KUMAR, J.
MARCH 30, 2026
M
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