You can't use a formula to look at the contents of D2 and then change D2 based on the contents of D2. You can't have a cell with both a formula and a value at the same time.
What are you trying to do?
If you are trying to achieve a result in another cell bases on the contents of D2...
=IF(LEFT(Sheet1!$D2,3)="C/O","M/S","")
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