REVISION UNDER SECTION 263 QUASHED: COMPUTER PERIPHERALS ARE REVENUE EXPENDITURE IN COST+ MODEL

ISSUE

Whether the Principal Commissioner (PCIT) can validly invoke Section 263 to treat the cost of computer peripherals (such as mouse and headsets) as Capital Expenditure instead of Revenue Expenditure, specifically when the assessee operates on a “Cost Plus” model where such expenses are fully recovered from Associated Enterprises (AEs) with a markup.

FACTS

Nature of Business: The assessee-company is engaged in the business of providing Information Technology and IT-enabled services (ITES) to its Associated Enterprises (AEs) operating outside India.
Pricing Model: The company operates on a “Cost Plus” pricing model, specifically billing its services at Cost + 14.5% markup. This means all operating expenses, including repairs and maintenance, are part of the cost base and are fully recovered from the AEs along with a profit margin.
The Dispute: The Assessing Officer (AO) completed the scrutiny assessment accepting the return. Subsequently, the Principal Commissioner (PCIT) invoked Section 263, alleging that the AO failed to verify “Repairs and Maintenance” expenses.
Allegation: The PCIT proposed that expenditure on items like mouse and headsets should be capitalized (treated as assets) rather than claimed as revenue expenditure, citing the accounting policy.
Assessee’s Defense: The assessee argued that in the ITES industry, such peripherals undergo frequent replacement due to wear and tear and are rightly claimed as revenue expenditure. Furthermore, since these costs were recovered with a markup, the revenue interest was already secured.

DECISION

No Prejudice to Revenue: The Tribunal held that since the repairs and maintenance expenditure was fully recovered from the AEs with an appropriate markup (14.5%), the profit element on these expenses had already been offered to tax.
Revenue vs. Capital: Implicitly accepting the nature of the industry, the argument that low-value peripherals are consumables was accepted in the context of the pricing model.
Section 263 Invalid: For Section 263 to apply, the order must be both erroneous and prejudicial to the interest of the revenue. Since the “Cost Plus” mechanism ensured the Revenue received its tax on the profit margin, the order was not prejudicial.
Verdict: The impugned order passed under Section 263 was held to be unsustainable and was set aside. [In Favour of Assessee]

KEY TAKEAWAYS

The “Cost Plus” Defense: For captive service providers, demonstrating that an expense forms part of the “Cost Base” recovered with a markup is a strong defense against disallowances. If the expense is disallowed, the corresponding revenue (reimbursement) would theoretically also have to be reduced, neutralizing the tax effect.
Consumables: In IT/ITES sectors, short-life peripherals like headsets and mice are generally accepted as revenue expenditure (consumables) rather than capital assets.
Scope of Section 263: The Commissioner cannot invoke revisionary powers merely to substitute their opinion if there is no actual loss of tax revenue (prejudice) involved.

IN THE ITAT PUNE BENCH ‘B’

UBS Business Solutions (India) (P.) Ltd.

Principal Commissioner of Income-tax

Ms. Astha Chandra, Judicial Member
and DR. DIPAK P. RIPOTE, Accountant Member

IT APPEAL No.1407 (PUN) OF 2025
[Assessment year 2020-21]

NOVEMBER 28, 2025

Rajendra Agiwal, AR for the Appellant. Amit Bobde, CIT(DR) for the Respondent.

ORDER

Dr. Dipak P. Ripote, Accountant Member.- This appeal is filed by the Assessee against the order of ld.Principal Commissioner of Income Tax, Pune-1 passed under section 263 of the Income Tax Act, 1961 for A.Y.2020-21, dated 31.03.2025 emanating from Assessment Order u/s.143(3) r.w.s 144B of the Income Tax Act, 1961 dated 06.09.2022. The Assessee has raised following grounds of appeal :

“General Ground

Grounds of Appeal

1. On the facts and circumstances of the case and in law the order passed by the Ld. PCIT U/s 263 is bad in law and invalid.

2. The order U/s 263 passed by the Ld. PCIT is bad in law and unsustainable for following:

On the facts and circumstances of the case and in law, the Ld. PCIT:

2.1. Revision of assessment order on the issue which was not forming part of reasons for selection of scrutiny under CASS

(a) Erred in assumption of jurisdiction U/s 263 to revise the assessment order issued under section 143(3) read with section 144B of the Act, on the issue which was beyond the scope of reasons for scrutiny as per CASS.

2.2. Selection for scrutiny was only for deduction under section 80G of the Act and refund out of self-assessment tax and not for repairs and maintenance or its nature as to whether it is a capital expenditure or revenue expenditure

(a) Failed to appreciate that the case was selected for scrutiny only for verification of claim of deduction under section 80G of the Act and claim of refund out of self-assessment tax. The learned Assessing Officer (‘Ld. AO’) has not only examined the above issues but has also conducted complete scrutiny vis-a-vis these points.

(b) In view of the above, the impugned assessment order cannot be held as erroneous and prejudicial for alleging lack of enquiry by the Ld. AO in respect of nature of repairs and maintenance expenses, whether being capital or revenue.

2.3. The assessment order cannot be held as erroneous and prejudicial just because initial computation of income for self-assessment tax was not called by Ld. AO

(a) Erred in holding that the assessment order is erroneous because the Ld. AO did not call for documents supporting tax computation made during June 2020 for the advance tax estimation. The Ld. PCIT failed to appreciate that the Ld. AO is not duty bound to call for such documents.

(b) Failed to appreciate that the discretion to call for such documents completely rests on the Ld. AO; the Ld. PCIT cannot impose his view on the Ld. AO and then hold that the assessment order is liable for revision.

2.4. Enquiry for refund out of SAT was conducted

(a) Failed to appreciate that the justification of refund out of selfassessment tax was very much enquired by the Ld. AO and therefore, the Ld. PCIT erred in alleging that the Ld. AO has not enquired into the same.

2.5. Ld. AO has taken plausible view on repairs expenses vis-a-vis Capital versus Revenue

(a) Erred in holding that the repairs and maintenance expenses to machinery of Rs.21,02,01,617 is huge and required to be held as capital in nature.

(b) Failed to appreciate that the aspect regarding whether repairs & maintenance expense is capital or revenue in nature is factual issue and when the Ld. AO has taken a plausible view of holding it as revenue expense, the assessment order cannot be held as erroneous and prejudicial to call for revision U/s 263.

(c) Without prejudice to above, the appellant had submitted detailed note on repairs and maintenance expenses indicating nature of expenses incurred claiming it as revenue and Ld. PCIT failed to point out any specific defect in the expenses of revenue nature.

2.6. The order passed by the Ld. AO is not unsustainable in law

(a) Erred in not appreciating that unless the order of the Ld. AO is unsustainable in law in allowing repairs and maintenance expense, it cannot be held as erroneous and prejudicial.

2.7. The audit report under Companies Act and under Income Tax Act is unqualified vis-a-vis Capital v. Revenue

(a) Failed to appreciate that the audit report is unqualified in terms of whether the repairs & maintenance expense is capital or revenue in nature and, therefore, the order of the Ld. AO cannot be faulted as erroneous and prejudicial.

2.8. The Ld. PCIT erred in alleging high proportion of repairs & maintenance expenses

(a) Erred in holding that the appellant has incurred high proportion of repairs & maintenance expenses vis-a-vis total value of assets without pointing out any benchmark for holding high proportion of repairs & maintenance expense.

2.9. When details were submilled the case cannot be regarded as lack of enquiry

(a) Failed to appreciate that all the details were provided to the Ld. AO and the attention of the Ld. PCIT was also drawn to the same vide submission dated 17.03.2025 and, therefore, it is not a case of lack of enquiry.

3. Erred in invoking explanation 2 to section 263

(a) On the facts and circumstances of the case and in law, the Ld. PCIT erred in invoking explanation 2 to section 263 when none of the clauses i.e. clause (a) to (d) of the said explanation is applicable to deem the assessment order as erroneous and prejudicial.

4. The order cannot be regarded as erroneous and prejudicial just because the discussion is not reflected in the assessment order

(a) On the facts and circumstances of the case and in law, the Ld. PCIT failed to appreciate that the order of the Ld. AO cannot be held as erroneous and prejudicial to Revenue just because the Ld. AO has chosen not to reflect any discussion in the order.

5. The Ld. PCIT failed to appreciate that expenses incurred by the appellant are recovered from its associated enterprise (‘AE’) with markup and, therefore, there is no case of loss of revenue

(a) Without prejudice to above, the Ld. PCIT erred in not appreciating that the appellant is a captive service provider and invoices to its group companies i.e. associated enterprises (AE) on cost plus basis.

(b) On the facts and circumstances of the case and in law, the Ld. PCIT failed to appreciate that in any case the entire cost incurred in running a business including repairs and maintenance is reimbursed by the AEs with markup of 14.5%. As per the Ld. PCIT’S view if the alleged capital nature of repairs are excluded from the expenses then the quantum of markup on expenses @ 14.5% would result in decrease of income which cannot be regarded as prejudicial to Revenue.

(c) The order passed by the Ld. PCIT is arbitrary and irrational when the Ld. PCITfailed to appreciate the issue of markup.

6. The Ld. PCIT erred in alleging that the expenses claimed are in violation of accounting policy which is irrelevant vis-a-vis computation under normal provisions of Act

(a) On the facts and circumstances of the case and in law, the Ld. PCIT erred in relying upon the accounting policy and directors’ report for capitalisation of certain expenditure without appreciating that the Act itself has self-contained code for allowability of expenditure and the accounting policies and directors’ report is not binding on the Revenue.

6.1. The Ld. PCIT failed to draw a distinction between normal provisions and computation under MAT by holding claim of expenses in violation of accounting policies

(a) Without prejudice, the Ld. PCIT failed to appreciate that the Act does not prohibit allowability of expenses even if in violation of accounting policies unlike section 115JB where the Minimum Alternate Tax (MAT) is to be computed in accordance with accounting policies. Such a mandate is not applicable when income is computed under normal provisions of the Act.

7. The Ld. PCIT erred in alleging short recovery of expenses from group companies

(a) On the facts and circumstances of the case and in law, the Ld. PCIT erred in holding that there is under recovery of expenses from the group companies and further holding that the Ld. AO has not conducted the enquiry which is factually incorrect.

8. The Ld. PCIT erred in directing fresh assessment

(a) On the facts and circumstances of the case and in law, the Ld. PCIT erred in restoring the matter to the Ld. AO for doing fresh assessment.

9. In view of the various above grounds, the order passed by Ld. PCIT may kindly be held as bad in law.

The appellant craves leave to add, alter, omit, delete, all or any of the grounds of appeal on or before hearing.

For UBS Business Solutions (India) Private Limited (Formerly known as Credit Suisse Services (India) Private Limited). “

Submission of Id.AR :

2. Ld.Authorised Representative(ld.AR) for the Assessee submitted paper book. 2. 1 Written Submission filed by the Assessee is as under :

“Brief background of the case:

2. The appellant is a private limited company in which public is not substantially interested. It is engaged in the business of providing information and IT enabled services to the associated enterprises operating outside India. The appellant has filed original return of income on 13.02.2021 declaring total income of Rs. 370,30,64,670 under normal provisions of the Act. (The computation of income is enclosed on page no. 87 to 90 of the factual paper book submitted on 02.07.2025). The appellant’s case was selected for complete scrutiny under Faceless Assessment Scheme through CASS (Please refer notice U/s 143(2) dated 29.06.2021 on page no. 392 of the Paper book). The case was selected for further clarification which initially for following two issues:

Issue No. 1-Refund Claim

Issue No. 2-Deduction from total income under chapter VIA of the Act

3. During the course of assessment, the Ld. AO issued various notices U/s 143(2), 142(1) followed by show cause notices and called for various details and explanation. The appellant complied with all the notices and submitted all the details called for. (Please refer assessment order page no. 2-Paper Book page no. 92). After perusing the details, the Ld. AO has discussed following three issues in the assessment order passed U/s 143(3) z.ws. 144B vide order dated 06.09.2022

3.1. Issue No.1: Allowability of claim of education cess of Rs.3,58,45,666

3.2. Issue No. 2: Allowability of deduction U/s 80G vis-a-vis CSR expenses of Rs.4,55,13,521.

4. The Ld.AO assessed the tax liability charging interest and initiated penalty proceedings U/s 270A.

5. The appellant had contested the additions on issue no. 2 i.e. deduction U/s 80G vis-a-vis CSR expenses before Ld. CIT(A) and further before Hon’ble Income Tax Appellate Tribunal. The Ld. CIT(A) decided the appeal vide order dated 10.11.2023 and allowed partial relief in respect of donation U/s 80G. The matter was further contested before the Hon’ble ITAT, Pune by the department and the Hon’ble ITAT allowed the appeal in favour of the respondent assessee and dismissed department’s appeal allowing relief U/s 80G of the Act vide ITAT order dated 15.05.2024 in ITA No. 44/pUN/2024. Thus, the original assessment has attainedfinality.

6.2 The Ld. PCIT has made second averment that on perusal on profit and loss account in ITR it is noticed that the appellant has debited an amount of Rs. 21.02,01,617 towards repairs to machinery which according to the PCIT is an exorbitant amount. The Ld. PCIT perused the block of asset as per clause no 18 of Tax Audit Report furnished by the appellant in form no. 3CA. The Ld. PCIT has held that the appellant does not have high opening value of block of machinery. Therefore, he raised a suspicion that as the company has claimed huge refund it would be pertinent to verify genuineness of expenditure and its nature whether it is a capital expenditure of revenue expenditure. The Ld. PCIT invoking explanation 2 of section 263(1) proposed revision of assessment order. The Ld. PCIT had issued second notice on 10.03.2025 (Please refer page no. 118 of the Paper Book).

14. The L.d. PCIT has held that the expenses on computer peripherals and furniture etc. are contrary to accounting policy as per annual report of the company. First of all, your honour’s attention is invited to the details of repairs, please refer page no. 26 to 32 of the paper book and page no 159 to 330 of the paper book and it will be appreciated that the expenses cannot be said incurred to create new asset or enhanced the capacity of existing asset resulting in benefit to the business for several years. There is no creation of new asset. All the expenses are of recurring nature and incurred for day-to-day running of the business.

15. The accounting policies are not relevant for computation of income under normal provisions of the Act. your honour is well aware that accounting policies are relevant only when income is computed under MAT provisions i.e. 115JB which provides that for the computation of MAT profit the accounting policies, accounting standards etc. should be the same as adopted the purpose of repairing accounts in accordance with companies Act 2013.

16. However, it is submitted that Ld. PCTT’s averment that the expenditure of repairs on computer peripherals such as headset and mouse on expenses on furniture like Mat is contrary to accounting policy is incorrect proposition for allowability of expenses on repairs. Therefore, the order of the Ld. PCTT u/s 263 is bad in law.

17. The Ld. PCIT has held that there is under recovery of expenses at markup of 14.5% is factually incorrect. It is submitted that the Ld. PCIT has picked up the figure of Rs.9,47,86,577 from page no. 42 of Transfer Pricing Report which is appearing on page no 373 in factual paper book. It is submitted that this is purely a figure of reimbursement of expenses. However, it was the submission of the assessee that when it provides services to associated enterprises the assessee recovers 14.5% markup on cost eligible for markup. Such as cost is to be seen cost which is debited to the profit and loss account and not only reimbursement of expenses.

18. The Ld.CIT(A) without calling for the explanation has arrived at conclusion of short recovery of expenses. There is a factual misunderstanding of the issue which has led to erroneous conclusion drawn by the Ld. PCIT. Please refer page no. 383 of paper book for note regarding 14.90% markup on operating cost. Therefore, the Ld.PCIT observation is factually wrong. In view of this the order of PCIT passed U/s 263 is bad in law. Refer ground of appeal no. 7 of the appeal memo.

19. If the Ld. PCIT is setting a case for further enquiry that means it is a not case of lack of enquiry but case of inadequate enquiry. The said case cannot be taken a for revision U/s 263 by invoking explanation 2 of section 263(1).

20. The Ld. PCIT has pointed out thatexpenses on computer peripherals and Mat under furniture need to be capitalized as per the accounting policy. He has not cited. It is submitted that the accounting policies cannot override the law. Even when the question came of before the Delhi High Court in the context of ICDS-II regarding valuation of inventories it was held that if the ICDS is ultra virus of the Act, the ICDS has to be struck down. Refer decision of Chamber of Tax Consultants v. UOI (Delhi), Further your honour is aware that accounting entries are not relevant for allowability of claim under the Income Tax Act. The provision of law has to be followed and the accounting entry which is of course in pursuance of accounting policy cannot be decisive factor for allowability of expenses under the law. Please refer the landmark decisions that entries as well as method of accounting could not be regarded as conclusive Godhra Electricity Company Ltd v. CIT (SC), CIT v. Modi Rubber Ltd (Delhi)Kedarnath Jute Manufacturing Co Ltd v. CIT (1971) 82 ITR 363 (SC) (367)

21. It is submitted that the Ld PCIT has held that further verification is required. It is submitted that it is not a case of lack of enquiry. It has been held that the provision of section 263 does not authorise are give unfettered power to the Commissioner to revise each and every order if in his opinion the same has been passed without making enquiryshould have been made as held by the Mumbai ITAT in case of Narayan Tatu Rune v. ITO (Mumbai)

22. Further, all the details of the repairs were submitted before the PCIT. He just pointed out contradiction in accounting policy. However, he failed to point out whether any new asset came into existence and therefore, the repairs be held as capital expenditure. He simply set aside the assessment order partly for further verification of repairs. Such action of the Ld. PCIT is contrary to the law. Refer ITO v. D G Housing Projects Limited (Delhi).

23. As held by the Hon’ble Supreme Court for revision U/s 263 the order has to be erroneous as well as prejudicial. If both the conditions are not satisfied the order cannot be revised. Please refer Malabar

Industrial Company Ltd v. CIT 243 ITR 83(SC), CIT v. Gabrial India Ltd 203 ITR 108 (Bombay).”

Submission of Id.DR :

3. Ld.Departmental Representative(ld.DR) for the Revenue relied on the order of the Pr.CIT. Ld.DR pleaded that the expenditure on Computer mouse and other peripherals should have been capitalized.Ld.DR pleaded that the AO has not asked any question on this aspect during the assessment proceedings. Hence the Assessment is erroneous and prejudicial to the interest of revenue.

4. We specifically asked Ld.DR to explain when the Assessee earns revenue from its AE’s on Cost Plus 14% margin, how nonverification of a particular expenditure is prejudicial to the revenue? Ld.DR had no answer to the said question.

Findings &Analysis :

5. We have heard both the parties and perused the records. In this case, facts as mentioned in the assessment order are that Assessee company filed return of income for A.Y.2020-21 on 13.02.2021 declaring total income at Rs.3,70,30,64,670/-. The Assessee’s case was selected for complete scrutiny. Assessment Order was passed u/s.143(3) r.w.s 144B of the Act on 06.09.2022 assessing the total income at Rs.3,78,52,32,060/-.

6. The Principal Commissioner of Income Tax(Pr.CIT)-1, Pune after verifying the record issued notice u/s.263 of the Act on 20.02.2025. The Assessee filed elaborate submission before Pr.CIT-1, Pune. However, Pr.CIT-1, Pune passed an order u/s.263 of the Act on 31.03.2025. The Pr.CIT held that assessment order dated 06.09.2022 was erroneous and prejudicial to the interest of the Revenue. The main issue in the order of Pr.CIT is that according to the Pr.CIT the Assessing Officer has not verified the details of repairs and maintenance expenditure amounting to Rs.21,02,01,615/-. Ld.Pr.CIT after going through the replies filed by the Assessee, came to the conclusion that certain items called Computer Peripherals like Headsets, Mouse etc, should have been capitalised as per the accounting policy of the assessee mentioned in the Audit Report. The Assessee pleaded that in the ITES Industry, computer peripherals have to be replaced frequently due to wear and tear. Therefore, Assessee pleaded that these expenditures were revenue in nature.Ld.Pr.CIT also held that the expenditure for replacement of tiles was not revenue expenditure.

7. During the proceedings u/s.263 of the Act, Assessee had submitted before Pr.CIT that Assessee’s entire revenue is from its Associated Enterprises. Assessee had also submitted before ld.Pr.CIT that the Associated Enterprises are charged at cost + mark up, therefore, there is no question of disallowance of any expenditure as every expenditure is considered for cost + mark up. However, ld.Pr.CIT has erroneously referred in the order to reimbursement of expenses mentioned in Form 3CEB.

7.1 In this case, the most important fact is that as per the Transfer Pricing Report(page 338), Assessee has entered into following transactions.

1.3 Summary of the international transactions analyzed in this report is tabulated as follows :

International transactions	Method selected	CS India (Tested party)		Whether at arm ‘s length?
International transactions	Method selected	Transfer Price (INR)	Rate / margin	Whether at arm ‘s length?
Provision of software development services	TNMM using OP/pC as a PLI	7,79,44,49,592	14.90%	At ALP
Provision for information technology enabled services	TNMM using OP/pC as a PLI	11,83,87,01,942	14.90%	At ALP
Guarantee fees paid to AE	Other Method	26,43,995	0.20%	At ALP
Reimbursement of expenses	Other Method	44,35,42,233	Not applicable	At ALP
Recovery of expenses	Other Method	9,47,86,577	Not applicable	At ALP

7.2 Thus, the total receipts of the Assessee from provision of software development services and ITES to its AEs is Rs.19,63,31,51,534/- which is same as Revenue Receipts appearing in Profit and Loss Account which is at page no.50 of the paper book. Thus, entire Revenue Receipts are from Associated Enterprises(AE). In the Transfer Pricing Study Report, it is specifically mentioned that Assessee charges cost + 14.5% to its AEs for the services provided. There is no adverse inference regarding the facts mentioned in the Transfer Pricing Study Report of the Assessee. In these facts and circumstances of the case, it is clear that Expenditure debited in the Profit and Loss Account is charged to the AEs with appropriate mark up. The repairs and maintenance expenditure of Rs.21,02,01,615/- have been classified as Operating Expenditure by the Assessee and hence considered for the cost charged to the AEs.

8. In these facts, once the entire repairs and maintenance expenditure have been recovered from the AEs with the appropriate mark up, it is not as per law to state that Assessment Order is erroneous and prejudicial to the interest of the Revenue. Therefore, Assessment Order is not erroneous and prejudicial to the interest of the Revenue. Therefore, the order u/s.263 is not sustainable as both the twin conditions for invoking of Section 263 are not fulfilled in the instant case. Accordingly, Ground No.5 raised by the Assessee is allowed.

9. Since we have held that order u/s.263 is not maintainable, all other grounds become academic in nature. Accordingly, remaining grounds of appeal raised by the assessee are dismissed as unadjudicated, being academic in nature.

10. In the result, appeal of the Assessee is allowed.