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2025 (5) TMI 1862 - AT - Income TaxScope of Transfer Pricing - Arm s Length Price (ALP) - Specified domestic transaction - Adjustments u/s 92BA - affect of omission of clause (i) of section 92BA by the Finance Act 2017 effective from 01.04.2017 - scope of omission or repeal in act - HELD THAT - In the instant case it is an admitted position that the reference was made to the TPO after 01.04.2017 i.e. the date when the clause (i) of section 92BA was omitted by Finance Act 2017. Under identical facts the coordinate bench of ITAT in the case of DCIT Vs. DLF Urban Pvt. Ltd 2024 (4) TMI 451 - ITAT DELHI and SMR Automative Systems (I) Ltd. 2022 (5) TMI 1541 - ITAT DELHI held the reference made to the TPO u/s 92CA of the Act to be invalid and bad in law. Clause (i) of section 92BA has been omitted w.e.f. 01.04.2017 thus the same is to be considered as has never been part of the statute and accordingly no transfer pricing adjustment can be made for domestic specified transactions. Decided in favour of assessee.
The core legal questions considered in this appeal primarily revolve around the validity and jurisdiction of the Assessing Officer (AO) and the Transfer Pricing Officer (TPO) to make adjustments under the provisions of section 92BA of the Income Tax Act, 1961 (the Act), particularly in light of the omission of clause (i) of section 92BA by the Finance Act, 2017, effective from 01.04.2017. The issues include:
1. Whether the omission of clause (i) of section 92BA by the Finance Act, 2017, effectively nullifies the jurisdiction of the AO to refer specified domestic transactions to the TPO for determination of Arm's Length Price (ALP) for assessment years commencing on or after 01.04.2017. 2. Whether the transfer pricing adjustment made by the TPO and confirmed by the AO on account of specified domestic transactions is valid and sustainable in law. 3. The applicability and interpretation of the General Clauses Act, 1897, particularly section 6, regarding the effect of omission or repeal of statutory provisions on pending proceedings and past actions. 4. The binding nature of judicial precedents, including decisions of the Hon'ble Supreme Court and various High Courts, and their impact on the present case. 5. The treatment of competing arguments regarding retrospective applicability of amendments and the effect on substantive rights and liabilities. Issue-wise Detailed Analysis: Issue 1: Jurisdiction of AO and TPO after omission of clause (i) of section 92BA The legal framework involves section 92BA of the Act, which defined specified domestic transactions subject to transfer pricing regulations. Clause (i) of section 92BA was omitted by the Finance Act, 2017, effective from 01.04.2017. The question is whether this omission means that the provision never existed for the relevant assessment year and thus the AO's reference to the TPO for determination of ALP of specified domestic transactions is invalid. The assessee contended that since clause (i) was omitted without any saving clause, it is as if the provision never existed, rendering all subsequent proceedings under it void. Reliance was placed on the coordinate bench decision in Panacea Biotech Ltd., which held that no transfer pricing adjustment can be made on domestic transactions referred after the omission. Further, the assessee relied on the Karnataka High Court's decision in PCIT vs. Taxport Overseas Pvt. Ltd. and several ITAT decisions (e.g., DLF Urban Pvt. Ltd., Yorkn Tech Pvt. Ltd.) which uniformly held that omission of clause (i) of section 92BA means the provision never existed and thus no reference to TPO or transfer pricing adjustments can be sustained for specified domestic transactions for assessment years commencing on or after 01.04.2017. The Revenue argued that the amendment applies prospectively from AY 2017-18 and that section 6 of the General Clauses Act, 1897, preserves the validity of proceedings initiated before the amendment. The Revenue relied on the Hon'ble Supreme Court's decisions in Fibre Boards Pvt. Ltd. and Shree Bhagwati Steel Rolling Mills, which clarified the applicability of section 6 of the General Clauses Act to repeals and omissions, and submitted that omission does not necessarily invalidate pending proceedings or actions taken prior to the amendment. The Revenue also cited the Delhi High Court decision in Madhu Koda vs. State, which applied section 6(d) of the General Clauses Act to uphold liabilities incurred before the amendment of the Prevention of Corruption Act. The Court examined the judicial precedents in detail, including:
Applying these precedents, the Court noted that omission of clause (i) of section 92BA without any saving clause means the provision is deemed never to have existed for the relevant period. Consequently, the AO's reference to the TPO after 01.04.2017 was without jurisdiction, rendering all subsequent proceedings and adjustments invalid. The Court also considered the principle of judicial discipline and hierarchy, giving binding effect to the jurisdictional High Court decision in Taxport Overseas and the coordinate bench ITAT decisions following it. It distinguished the Mumbai Tribunal's contrary decision in Firemenich Aromatics (India) Pvt. Ltd., noting differences in facts and the nature of omitted provisions, and held the Delhi coordinate bench decisions as more applicable. Issue 2: Validity of transfer pricing adjustments and reference to TPO Since the jurisdiction to refer specified domestic transactions to the TPO was found to be lacking post-omission, the transfer pricing adjustments made by the TPO and confirmed by the AO were held to be without legal basis. The Court observed that the AO was required to adjudicate the claim of expenditure in the normal course of assessment without invoking section 92BA(1) or making any reference to the TPO. Accordingly, the upward adjustment of Rs. 68,80,48,216/- on account of collaboration expenses paid to the associated enterprise was set aside. The Court refrained from adjudicating other grounds of appeal on merits as they became academic in view of the legal conclusion on jurisdiction. Issue 3: Effect of omission under General Clauses Act and retrospective effect The Court analyzed the effect of omission under section 6 of the General Clauses Act, which generally preserves the validity of acts done under repealed laws unless a contrary intention appears. It emphasized the distinction between repeal and omission and noted that omission without saving clauses leads to the provision being treated as never having existed. The Court held that since clause (i) of section 92BA was omitted without any saving clause, the proceedings initiated under it post-omission are invalid. The Court also distinguished cases where section 6 applied to preserve rights or liabilities incurred before repeal, noting that the present case involves a substantive charging provision omitted without saving. Issue 4: Treatment of judicial precedents and binding effect The Court extensively discussed the binding nature of judicial precedents, emphasizing that decisions of the jurisdictional High Court bind the Tribunal and lower authorities within its territorial jurisdiction. Decisions of non-jurisdictional High Courts have persuasive value but are not binding. The Court followed the jurisdictional Karnataka High Court decision in Taxport Overseas and the coordinate bench ITAT decisions that followed it, rejecting the Revenue's reliance on non-jurisdictional Mumbai Tribunal decisions. The Court underscored the importance of judicial discipline and hierarchy in following binding precedents. Issue 5: Competing arguments on retrospective applicability and substantive rights The Court considered the Revenue's argument that the amendment should not invalidate proceedings initiated before the amendment's effective date, relying on section 6 of the General Clauses Act and Supreme Court decisions. However, the Court found that the omission of clause (i) of section 92BA was substantive and without saving clauses, thus not preserving any pending proceedings or rights under the omitted provision. The Court distinguished the Madhu Koda case relied upon by the Revenue on facts and legal context, noting that the present case concerns omission of a substantive charging provision, whereas Madhu Koda involved criminal law amendments with different retrospective principles. Conclusions: The Court concluded that the omission of clause (i) of section 92BA by the Finance Act, 2017, effective 01.04.2017, means that the provision never existed for the relevant assessment year. Consequently, the AO had no jurisdiction to refer specified domestic transactions to the TPO for determination of ALP for assessment years commencing on or after that date. All proceedings, references, and adjustments made under the omitted provision post-01.04.2017 are invalid and unsustainable in law. The Court allowed the appeal on this legal ground and set aside the transfer pricing adjustment of Rs. 68,80,48,216/- made on account of collaboration expenses. Other grounds of appeal were not adjudicated as they became academic. Significant Holdings: "Once a particular provision of section is omitted from the statute, it shall be deemed to be omitted from its inception unless and until there is some saving clause or provision to make it clear that action taken or proceeding initiated under that provision or section would continue and would not be left on account of omission." "The omission of clause (i) of section 92BA by Finance Act, 2017 w.e.f. 01.04.2017 is without any saving clause of General Clauses Act thus the said clause never existed in statute books and therefore transfer pricing reference and impugned subsequent proceedings become invalid in law even for earlier assessment years." "The cognizance taken by the AO under section 92BA(1) and reference made to TPO under section 92CA is invalid and bad in law. Therefore, the consequential order passed by the TPO and DRP is also not sustainable in the eyes of law." "Decisions of jurisdictional High Courts bind the Tribunal and lower authorities within their territorial jurisdiction, while decisions of non-jurisdictional High Courts have persuasive value but are not binding." "The omission of a substantive charging provision without any saving clause results in the provision being treated as never having existed and proceedings under it lapse."
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