Transfer pricing adjustment under section 92BA unsustainable for domestic transactions covered by section 40A(2)(b); ALP adjustment deleted

ITAT KOLKATA - AT held that transfer pricing adjustment under section 92BA cannot be sustained for a domestic transaction covered by section 40A(2)(b) for the relevant assessment year, as the statutory provision enabling reference to the TPO was omitted by the Finance Act, 2017 and must be treated as never having existed for that year. Consequently the Tribunal deleted the ALP adjustment and allowed the assessee's grounds, finding no addition on account of TP adjustment sustainable.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a transfer-pricing adjustment under section 92BA(1)(i) in respect of domestic transactions covered by section 40A(2)(b) can be sustained after clause (i) of section 92BA was omitted by the Finance Act, 2017 w.e.f. 01.04.2017.

2. If clause (i) of section 92BA is omitted, whether proceedings, references to the TPO and consequential orders initiated or passed under that clause prior to omission survive, having regard to the General Clauses Act (sections 6 and 6A) and judicial precedents.

3. If the omission renders the TP exercise invalid, what is the appropriate remedial course for the Assessing Officer (AO) in relation to claims of expenditure falling within the ambit of the omitted clause?

ISSUE-WISE DETAILED ANALYSIS - Issue 1: Applicability of section 92BA(1)(i) after its omission

Legal framework: Section 92BA(1) defined "specified domestic transactions" and clause (i) brought certain payments under that definition (notably those covered by section 40A(2)(b)); the Finance Act, 2017 omitted clause (i) w.e.f. 01.04.2017, removing that category from the statutory definition of specified domestic transactions.

Precedent treatment: Coordinate Bench decisions of the Tribunal (including Texport Overseas (Bangalore) and subsequent Kolkata coordinate bench decisions such as DVC Emta Coal Mines Ltd. and Raipur Steel Casting India) have held that omission of clause (i) means it is to be treated as never having been on the statute-book for purposes where no saving provision was enacted.

Interpretation and reasoning: The Tribunal reasoned that where a clause is omitted and no saving clause is provided to preserve pending or past proceedings, the legal effect is that the clause is to be treated as if it never existed; consequently, transactions which would have been specified domestic transactions solely by virtue of the omitted clause do not fall within the statutory definition and cannot be subjected to ALP determination under chapter X (i.e., sections 92BA/92CA/92CB and related machinery) after omission.

Ratio vs. Obiter: Ratio - omission of clause (i) without a saving provision removes statutory basis for TP adjustments under that clause; therefore such TP adjustments are unsustainable. This forms the binding reasoning of the Tribunal in the present judgment (followed as precedent by the Tribunal in the same coordinate bench decisions).

Conclusions: TP adjustments made pursuant to clause (i) of section 92BA in respect of payments under section 40A(2)(b) are not sustainable where clause (i) was omitted without a saving provision; such transactions cannot be treated as specified domestic transactions for ALP determination under the omitted clause.

ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of omission on pending or completed proceedings and interplay with General Clauses Act (sections 6 and 6A)

Legal framework: General Clauses Act, section 6 (effect of repeal) and section 6A (repeal of text-amending enactment) govern consequences of repeal/omission; established judicial authorities address whether omission equates to repeal for the purpose of preserving prior actions.

Precedent treatment (followed/distinguished): The Revenue relied on later Supreme Court decisions (cited before the Tribunal) which treat omission and repeal as having similar consequences in certain contexts (i.e., Shree Bhagwati Steel Rolling Mills and Fibre Boards). The Tribunal, however, followed coordinate bench decisions that interpreted omission as effecting obliteration where no saving clause existed (and earlier Supreme Court pronouncements such as Kolhapur Canesugar and General Finance were also discussed). The Tribunal expressly followed the line of authority holding that omission (in absence of a saving provision) means the clause is to be treated as never enacted for the purposes of continuing or sustaining proceedings initiated under it.

Interpretation and reasoning: The Tribunal examined the General Clauses Act and authorities and concluded that where an omission occurs without any express provision preserving pending proceedings, the omitted provision cannot be relied upon to validate prior or pending actions. The Tribunal observed that section 6 of the General Clauses Act preserves actions in case of repeal but does not automatically operate where an enactment was omitted unless there is a specific saving provision; accordingly, pending or consequential proceedings predicated solely on the omitted clause lapse.

Ratio vs. Obiter: Ratio - omission without a savings provision extinguishes the statutory basis for continuing or upholding proceedings initiated under the omitted clause; therefore references to the TPO and consequent TP orders made under that clause cannot stand.

Conclusions: Proceedings and adjustments instituted under clause (i) of section 92BA, where that clause has been omitted and there is no saving provision, are invalid and must be set aside; sections 6/6A of the General Clauses Act do not save such proceedings in the absence of express statutory saving.

ISSUE-WISE DETAILED ANALYSIS - Issue 3: Remedial course for the AO once clause (i) is omitted

Legal framework: Where a TP reference or ALP computation is found unsustainable for lack of statutory basis, the AO's duties and powers under the Act to determine income by reference to other applicable provisions remain.

Precedent treatment: The coordinate bench decisions relied upon direct that, where the TP route becomes unavailable by virtue of omission, the AO must adjudicate claims (e.g., of expenditure) in the normal course under general provisions of the Income-tax Act, after affording opportunity of hearing.

Interpretation and reasoning: Since the statutory mechanism for ALP determination in relation to such domestic transactions no longer exists, the Tribunal held that the AO ought to re-adjudicate the claim of expenditure under the regular provisions (for example, section 40A/other applicable sections), making necessary enquiries and providing the assessee hearing, rather than relying on the invalid TP machinery.

Ratio vs. Obiter: Ratio - where TP adjustment is set aside due to omission of the enabling clause, the correct procedure is to remit the matter to the AO to examine the expenditure claim afresh under the ordinary provisions and principles of law.

Conclusions: The appropriate remedial course is to delete the TP additions made under the omitted clause and remit the matter to the AO to re-examine the expenditure claim in accordance with law after affording opportunity to the assessee; consequential TP orders are to be set aside.

FINAL CONCLUSIONS (as applied in this judgment)

1. The Tribunal held that clause (i) of section 92BA having been omitted by the Finance Act, 2017 w.e.f. 01.04.2017, and in the absence of any saving provision, transactions falling within that clause cannot be treated as specified domestic transactions for transfer-pricing purposes; therefore ALP adjustments made under that clause are unsustainable and are deleted.

2. References to the TPO and consequential orders passed under the omitted clause are invalid; the AO is directed to re-adjudicate the claim of expenditure in the normal course under applicable non-TP provisions after providing the assessee an opportunity of being heard.

3. The appeal was accordingly partly allowed by deleting domestic TP adjustments arising solely from the omitted clause (i) of section 92BA and remitting the matter to the AO for readjudication where appropriate.

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