2023 (2) TMI 1403 - AT - Income Tax

ITAT rules TPO reference for domestic transactions under Section 92BA invalid due to omitted provisions since inception

Sri Maharaja Refineries, Maharaja Sivam Industries (P) Ltd, S. Saradha, K. Paramasivam, K.P.S Oil Mills, Sivam and Company Versus ACIT Circle-1, Erode.

Sri Maharaja Refineries, Maharaja Sivam Industries (P) Ltd, S. Saradha, K. Paramasivam, K.P.S Oil Mills, Sivam and Company Versus ACIT Circle-1, Erode. - ... The core legal questions considered by the Tribunal in these appeals pertain primarily to the validity of reference to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) in respect of specified domestic transactions (SDT) under the erstwhile clause (i) of Section 92BA of the Income Tax Act. The issues can be summarized as follows:1. Whether the reference to the TPO under Section 92CA(2) for determination of ALP in respect of SDT covered under clause (i) of Section 92BA is valid, given the omission of clause (i) of Section 92BA by the Finance Act, 2017, effective from 01.07.2017.2. Whether the consequential transfer pricing adjustments made by the Assessing Officer (AO) based on the TPO's determination can be sustained in law.3. The appropriate course of action for the AO in dealing with the allowability of expenditure arising from such domestic transactions, particularly with reference to Section 40A(2)(b) of the Income Tax Act.Issue-wise detailed analysis:Validity of Reference to TPO under Section 92CA(2) for Specified Domestic Transactions (SDT) under Clause (i) of Section 92BAThe Tribunal examined the legal framework governing the transfer pricing provisions related to specified domestic transactions. Clause (i) of Section 92BA defined certain domestic transactions to be treated akin to international transactions for transfer pricing purposes. However, this clause was omitted effective 01.07.2017 by the Finance Act, 2017.The Tribunal relied heavily on the authoritative pronouncement of the Hon'ble Karnataka High Court in PCIT vs. Texport Overseas (P.) Ltd., which addressed the effect of omission of a statutory provision without a saving clause. The Court referred to the Supreme Court's ruling in Kolhapur Canesugar Works Ltd. v. Union of India, which clarified that when a statutory provision is omitted without any saving clause, it is deemed never to have existed for the purposes of pending proceedings. Consequently, any action taken under such omitted provisions would be invalid.The Tribunal noted that since clause (i) of Section 92BA was omitted without any saving clause, the reference to the TPO under Section 92CA(2) for determination of ALP in respect of SDT covered by this clause was invalid and bad in law. The Tribunal further cited co-ordinate bench decisions and Mumbai Tribunal rulings (Mahindra Two Wheelers Ltd. and Giraffe Developers Pvt. Ltd.) that followed the same principle.The Revenue's argument that the Supreme Court's decision in CIT vs. Glaxo Smithkline Asia (P.) Ltd. mandated bringing such transactions under transfer pricing scrutiny was distinguished on the basis that the legislative omission of clause (i) of Section 92BA had effectively nullified the statutory basis for such reference post 01.07.2017.Consequential Transfer Pricing Adjustments and Their ValidityGiven the invalidity of the reference to the TPO, the Tribunal held that the transfer pricing adjustments made by the AO based on the TPO's determination were unsustainable in law. The Tribunal affirmed the principle that any assessment or adjustment made under a provision that has been omitted without a saving clause cannot be sustained.The Tribunal emphasized that since the ALP determination by the TPO was the foundation for the adjustments, the entire exercise was vitiated by the lack of jurisdiction.Examination of Allowability of Expenditure under Section 40A(2)(b)While invalidating the transfer pricing adjustments, the Tribunal recognized that the underlying transactions-purchase of edible oil from associated entities-still required scrutiny under the general provisions of the Income Tax Act, particularly Section 40A(2)(b). This section empowers the AO to disallow expenditure if it is excessive or unreasonable.The Tribunal, following the precedent set by the Bangalore Tribunal in the Texport Overseas case, restored the matter to the file of the AO for factual determination of the allowability of the expenditure in accordance with Section 40A(2)(b). The Tribunal refrained from expressing any opinion on the merits of this issue, leaving it to the AO's discretion based on facts.Treatment of Competing ArgumentsThe Tribunal carefully balanced the arguments of the appellant and the Revenue. The appellant contended that the transfer pricing provisions could not be invoked post omission of clause (i) of Section 92BA and that consequential adjustments were invalid. The Revenue relied on Supreme Court precedents to justify transfer pricing scrutiny over domestic transactions.The Tribunal distinguished the Revenue's reliance on Supreme Court decisions by highlighting the legislative amendment that removed the statutory basis for such references. The Tribunal also noted the absence of any saving clause preserving pending proceedings under the omitted clause.ConclusionsThe Tribunal concluded that:The reference to the TPO under Section 92CA(2) for determination of ALP in respect of SDT under clause (i) of Section 92BA was invalid and bad in law.The consequential transfer pricing adjustments made by the AO based on the TPO's order could not be sustained.The matter was restored to the AO for examination of the allowability of expenditure under Section 40A(2)(b) of the Act.This reasoning and outcome applied mutatis mutandis to all other appeals involving similar facts and issues.Significant holdings and core principles established include the following verbatim excerpt from the Karnataka High Court's ruling, as relied upon by the Tribunal:'37. The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this rule, an exception is engrafted by the provisions of section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in section 6 or in special Acts may modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision.'The Tribunal's final determinations on the issues were:Dismissal of appeals challenging the invalidity of the TPO reference.Affirmation of the invalidity of transfer pricing adjustments made under the omitted clause.Restoration of the matter to the AO for factual examination under Section 40A(2)(b).Application of the same principles to all similar appeals arising from the same facts and issues.