TPO reference for specified domestic transactions under Section 92BA(i) invalid after Finance Act 2017 omission without saving clause

The ITAT Mumbai held that reference to TPO for specified domestic transactions under Section 92BA(i) became invalid after the clause was omitted by Finance Act 2017 w.e.f. 01/04/2017. Following Karnataka HC in Texport Overseas and SC precedent in Kolhapur Canesugar Works, the tribunal ruled that omission without saving clause means the provision never existed. The department's argument that reference was valid at the time was rejected. Transfer pricing adjustments on specified domestic transactions under the omitted clause were deemed impermissible. Assessee's cross objection was allowed and revenue's appeal dismissed.

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Issues Involved:
1. Deletion of Transfer Pricing Adjustment
2. Calculation of Arm's Length Price using the CUP method
3. Application of 3% variation at transactional or aggregate level
4. Validity of Transfer Pricing proceedings post-omission of Clause (i) to Section 92BA
5. Reference to TPO without sanction of CIT

Summary:

1. Deletion of Transfer Pricing Adjustment:
The Revenue contended that the CIT(A) erred in deleting the Transfer Pricing adjustment due to the difference between the purchase price paid by the assessee to its AE and its Arm's Length Price (ALP) for a Specified Domestic Transaction (SDT). The Tribunal upheld the CIT(A)'s decision, noting that the variation was less than 3%, thus no adjustment was necessary as per the second proviso to Section 92C(2).

2. Calculation of Arm's Length Price using the CUP method:
The Revenue argued that the CIT(A) incorrectly concluded that the ALP calculated by the assessee was in accordance with the CUP method, suggesting that monthly averages should be used instead of an aggregate basis due to price fluctuations. The Tribunal upheld the CIT(A)'s approach, emphasizing that the CUP method applied on an aggregate basis was appropriate.

3. Application of 3% variation at transactional or aggregate level:
The Revenue claimed that the CIT(A) should have applied the 3% variation at the transactional level rather than the aggregate level. The Tribunal supported the CIT(A)'s application of the 3% variation on an aggregate basis, affirming that no adjustment was needed as the variation was within the permissible range.

4. Validity of Transfer Pricing proceedings post-omission of Clause (i) to Section 92BA:
The assessee argued that the initiation of Transfer Pricing proceedings was invalid since Clause (i) of Section 92BA, under which the reference was made, was omitted by the Finance Act, 2017. The Tribunal agreed, referencing the Karnataka High Court's decision in PCIT vs. Texport Overseas (P) Ltd., which held that an omitted provision is considered as if it never existed. Consequently, the Tribunal ruled that any reference to the TPO for SDT under the omitted clause was invalid, and no Transfer Pricing adjustment could be made on such SDT.

5. Reference to TPO without sanction of CIT:
The assessee also contended that the reference to the TPO was made without the previous sanction of the CIT, violating Section 92CA of the Act. The Tribunal did not explicitly address this issue, as the primary issue regarding the omission of Clause (i) of Section 92BA rendered the proceedings invalid.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, ruling that the omission of Clause (i) of Section 92BA invalidated the Transfer Pricing proceedings and adjustments. The Tribunal's decision was pronounced on 30th October, 2023.

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