Tribunal Invalidates Transfer Pricing Adjustment, Remands for Assessment under Income-tax Act

The Tribunal held that the Transfer Pricing adjustment for Specified Domestic Transactions (SDT) under the omitted clause (i) of section 92BA was invalid following the decision of the High Court of Karnataka. The addition made by the Assessing Officer based on this reference was to be deleted. However, the matter was remanded to the Assessing Officer to examine expenditures under section 40A(2) of the Income-tax Act for fair assessment practices. The appeal by the assessee was allowed for statistical purposes.

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Issues Involved:
1. Legality of Transfer Pricing adjustment for Specified Domestic Transactions (SDT) under the omitted clause (i) of section 92BA of the Income-tax Act, 1961.
2. Validity of assessment proceedings initiated under the omitted clause (i) of section 92BA.
3. Examination of expenditures under section 40A(2) of the Income-tax Act.

Detailed Analysis:

1. Legality of Transfer Pricing Adjustment for SDT:
The primary issue contested in this appeal is the Transfer Pricing adjustment concerning Specified Domestic Transactions (SDT). The assessee argued that the adjustment was made under clause (i) of section 92BA of the Income-tax Act, which was omitted by the Finance Act 2017, effective from 1.4.2017. The assessee cited the case of Texport Overseas Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, where it was held that the omission of clause (i) should be treated as if it never existed on the statute. This view was upheld by the Hon’ble High Court of Karnataka, making the Transfer Pricing adjustment in the instant case liable to be deleted.

2. Validity of Assessment Proceedings Initiated Under the Omitted Clause (i) of Section 92BA:
The Tribunal examined the impact of the omission of clause (i) of section 92BA. It referenced the case of M/s Cauvery Aqua Private Limited, which followed the decisions in Texport Overseas Pvt. Ltd. and the Hon’ble High Court of Karnataka. The Tribunal reiterated that the omission of a provision means it is considered never to have existed unless there is a saving clause. Consequently, any proceedings or actions initiated under the omitted clause (i) of section 92BA are invalid and unsustainable.

3. Examination of Expenditures Under Section 40A(2) of the Income-tax Act:
Despite the invalidity of proceedings under the omitted clause, the Tribunal noted that the coordinate bench in Texport Overseas Pvt. Ltd. had restored the matter to the Assessing Officer (AO) to examine the expenditures under section 40A(2) of the Act. This section pertains to the disallowance of excessive or unreasonable payments to related parties. The Tribunal directed the AO to re-adjudicate the issue of expenditures in accordance with section 40A(2), ensuring the assessment is conducted lawfully and fairly.

Conclusion:
The Tribunal, following the binding decision of the Hon’ble High Court of Karnataka, held that the reference to the Transfer Pricing Officer (TPO) for SDT under the omitted clause (i) of section 92BA is invalid. Consequently, the addition made by the AO based on this reference is to be deleted. However, the matter is restored to the AO to examine the expenditures under section 40A(2) of the Act. The appeal filed by the assessee is allowed for statistical purposes, ensuring compliance with legal provisions and fair assessment practices.

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