Appellate Merger and Transfer Pricing Clearance do not Bar Revision of Non-Inquired Cost Allocation under Section 263

The Appellant-Assessees operate Captive Power Plants (CPPs) qualifying for 100% tax deductions under Section 80-IA of the Income Tax Act.

Following a search and seizure operation, the Assessing Officer (AO) referred the inter-unit power transfers to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP).

The TPO reduced the unit price of power, and the AO subsequently disallowed the Section 80-IA deduction based on these revised figures.

On appeal, the CIT(Appeals) recalculated the profit and partially allowed the deduction.

However, the PCIT subsequently invoked revisionary powers under Section 263, alleging the assessment was "erroneous and prejudicial" because the AO failed to allocate common Head Office expenses (Finance and Personnel costs) to the power units.

The Tribunal upheld the PCIT’s revision, leading to these appeals.

1. Whether the PCIT possessed jurisdiction under Section 263 to revisit the quantum of a Section 80-IA deduction when the deduction had already been subject to adjudication by the CIT(Appeals)?

2. Whether Section 263 jurisdiction could be exercised to revisit cost-quantification after the matter had undergone Transfer Pricing proceedings under Section 92CA?

3. Whether the AO's acceptance of the "Direct Nexus" theory (non-allocation of Head Office costs) constituted a "plausible view" immune to revision?

Section 263 of the Income Tax Act regarding revisionary powers and Explanation 1(c) thereto, which stipulates that the Doctrine of Merger applies only to "matters" actually considered and decided in appeal.

Section 92CA regarding the specialized role of the TPO in determining ALP.

Precedential guidance drawn from CIT vs. Shri Amitabh Bachchan regarding the survival of revisionary powers on unexamined issues.

Malabar Industrial Co. Ltd. vs. CIT concerning orders passed without inquiry.

PCIT vs. Abhisar Buildwell P. Ltd. regarding the scope of "abated" search assessments under Section 153A.

The court reasoned that the Doctrine of Merger is "issue-specific" rather than monolithic; since the CIT(Appeals) only adjudicated the "revenue/rate" of power and not the "expenditure/allocation" of Head Office costs, the latter remained an investigative vacuum subject to revision.

Regarding Transfer Pricing, the court held that the TPO’s mandate is limited to valuation (ALP) and does not divest the AO of the primary duty to compute "Net Profit" by auditing internal cost distributions.

The court rejected the "Plausible View" defense, concluding that the AO’s total silence on unallocated Finance and Personnel costs constituted "non-inquiry" rather than a deliberate choice.

For the "abated" search year (AY 2018-19), the court held that the AO’s jurisdiction was restored to its full plenary strength, allowing for a total income determination independent of "incriminating material".

It held that the PCIT validly invoked Section 263 because the AO’s failure to investigate the apportionment of common costs rendered the order erroneous and prejudicial.

The appeals were dismissed, the revision was affirmed, and the AO was directed to conduct a fresh assessment limited to the proportionate allocation of Head Office expenses within six months.