2021 (2) TMI 793 - AT - Income Tax

Transfer pricing adjustment in respect of specified domestic transactions - HELD THAT - As relying on case of Texport Overseas Pvt. Ltd. 2019 (12) TMI 1312 - KARNATAKA HIGH COURT Reference to the TPO in respect of specified domestic transactions mentioned in clause (i) of sec.92BA is not valid as the said provision has been omitted. Accordingly we direct the AO to delete the addition relating to specified domestic transactions made u/s 92CA of the Act. Restore this issue to the file of the AO with the direction to examine the claim of expenditure mentioned above in terms of the provisions of section 40A(2) of the Act.

Summary

Issues Involved:
1. Validity of Transfer Pricing Adjustment under Section 92BA(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Transfer Pricing Adjustment under Section 92BA(i) of the Income Tax Act, 1961:

The assessee, engaged in the manufacture and supply of animal feed supplements, challenged the assessment order for the year 2015-16, which included a transfer pricing adjustment of Rs. 2.23 Crores. This adjustment was made by the Assessing Officer (A.O.) based on the directions given by the Dispute Resolution Panel (DRP). The specified domestic transactions in question were initially included under clause (i) of Section 92BA of the Act, which was later omitted by the Finance Act, 2017, effective from April 1, 2017.

The assessee argued that the omission of clause (i) should render the proceedings initiated under this clause invalid. The legal effect of this omission was examined in the case of Texport Overseas Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, where it was held that the omission of a provision from the statute implies that it was never in effect unless there is a saving clause or provision indicating otherwise. The Tribunal in Texport Overseas Pvt. Ltd. concluded that any proceedings or actions taken under the omitted clause would not survive, making the reference to the Transfer Pricing Officer (TPO) invalid.

The Tribunal's decision in Texport Overseas Pvt. Ltd. was upheld by the High Court of Karnataka, reinforcing that the omission of clause (i) of Section 92BA means it should be treated as if it never existed. Consequently, any assessment or adjustment made under this clause would be invalid.

The Department's Representative (D.R.) referenced a contrary decision by the Mumbai Bench of the Tribunal in the case of Firemenich Aromatics India Pvt. Ltd. Vs. ACIT, which relied on Supreme Court judgments in Fiber Boards Pvt. Ltd. and M/s. Shree Bhagawati Steel Rolling Mills Ltd. These judgments held that the omission of a provision should be treated as a repeal, and actions taken under the repealed provision should be saved by Section 6 of the General Clauses Act.

However, the Tribunal followed the binding precedent set by the Karnataka High Court, which had upheld the decision in Texport Overseas Pvt. Ltd. The High Court had determined that the omission of clause (i) of Section 92BA without a saving clause rendered any actions taken under it invalid.

Therefore, the Tribunal held that the reference to the TPO for specified domestic transactions under the omitted clause (i) of Section 92BA was invalid. Consequently, the addition of Rs. 2.23 Crores made by the A.O. based on the TPO's report was directed to be deleted.

Additionally, the Tribunal restored the matter to the A.O. to examine the claim of expenditure under Section 40A(2) of the Act, as per the provisions of the Income Tax Act, after affording the assessee an opportunity of being heard.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, directing the A.O. to re-examine the claim of expenditure in accordance with Section 40A(2) of the Income Tax Act, following the legal precedent set by the Karnataka High Court.