M/S HUAWEI TELECOMMUNICATIONS (INDIA) COMPANY PVT. LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, DELHI & ANR.

Court: High Court of Delhi

Bench: CASES PERTAINING TO SPL.DIVISION BENCHES

Judgment date: 2026-03-30

Case summary

High Court of Delhi judgment dated 2026-03-30. M/S HUAWEI TELECOMMUNICATIONS (INDIA) COMPANY PVT. LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL...

Judgment text

$ * 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 Signature Not Verified Signed By:PRADEEP WP(C) No.

15970/2023 & Connected Page 1 of 108 Signing Date:30. 03. 2026 15:19:22 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, Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 2 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 3 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 4 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 5 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 6 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 7 of 108 Signing Date:30. 03. 2026 15:19:22 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; Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 8 of 108 Signing Date:30. 03. 2026 15:19:22 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; Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 9 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 10 of 108 Signing Date:30. 03. 2026 15:19:22 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: Signature Not Verified Signed By:PRADEEP WP(C) No.

15970/2023 & Connected Page 11 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 12 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 13 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 14 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 15 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 16 of 108 Signing Date:30. 03. 2026 15:19:22 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) Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 17 of 108 Signing Date:30. 03.

2026 15:19:22 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 accounts‖ has been interpreted in a very restrictive manner by Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 18 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 19 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 20 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 21 of 108 Signing Date:30. 03.

2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 22 of 108 Signing Date:30. 03.

2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 23 of 108 Signing Date:30. 03. 2026 15:19:22 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: Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 24 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 25 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 26 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 27 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 28 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 29 of 108 Signing Date:30. 03. 2026 15:19:22 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 return of his income or the income of any other person in Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 30 of 108 Signing Date:30. 03.

2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 31 of 108 Signing Date:30. 03. 2026 15:19:22 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: Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 32 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 33 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 34 of 108 Signing Date:30. 03. 2026 15:19:22 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. Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 35 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 36 of 108 Signing Date:30. 03. 2026 15:19:22 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 Limited Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 37 of 108 Signing Date:30. 03. 2026 15:19:22 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: Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 38 of 108 Signing Date:30. 03. 2026 15:19:22 ―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 Associated Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 39 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 40 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 41 of 108 Signing Date:30. 03. 2026 15:19:22 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 Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 42 of 108 Signing Date:30. 03. 2026 15:19:22 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 the Signature Not Verified Signed By:PRADEEP WP(C) No. 15970/2023 & Connected Page 43 of 108 Signing Date:30. 03. 2026 15:19:22 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

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