Section 92BA(1) not applicable for AY 2013-14; AO to reassess Section 40A(2) expenditure and remand high-seas loss

ITAT Mumbai (AT) held that transfer-pricing adjustments under section 92BA(1) could not be invoked for AY 2013-14 after the provision was omitted, and directed the AO to re-examine allowance of the expenditure under section 40A(2). The Tribunal remanded the disallowance of loss on high-seas sales of crude palm oil for de novo adjudication, finding the AO used incorrect figures and ordering the assessee to supply supporting details. The appeal by the assessee was allowed for statistical purposes.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1. Whether the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) could lawfully determine arm's length price (ALP) of specified domestic transactions (SDTs) under Chapter X (sections 92CA / 92BA) for the assessment year when section 92BA(1) had been omitted without a saving clause.

2. Whether, notwithstanding the deletion of section 92BA(1), the Assessing Officer (AO) may examine allowability of expenditures arising from SDTs under section 40A(2) of the Income Tax Act.

3. Whether the disallowance of alleged loss on high-seas sales of crude palm oil (amounting to a specified sum) was sustainable where there is a material discrepancy between purchase/sale figures relied on by the AO and those claimed by the taxpayer.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of transfer pricing adjustments under Chapter X / section 92BA(1)

Legal framework: Chapter X (sections 92 to 92F and related provisions) empowers transfer pricing adjustment and determination of ALP for international and specified domestic transactions; section 92BA(1) (as inserted w.e.f. 1/4/2013) specifically brought certain specified domestic transactions within Chapter X. Section 92CA provides for reference to the TPO for determination of ALP.

Precedent treatment: A coordinate Bench and the Karnataka High Court (as referenced in the Tribunal's reasoning) held that deletion of section 92BA(1) without a saving clause meant that the provision could not be applied retrospectively for the relevant assessment year; the coordinate Bench in Mahindra Two Wheelers (citing Texport overseas) held that adjustments under Chapter X for SDTs were not sustainable once 92BA(1) stood omitted.

Interpretation and reasoning: The Court applied the principle that legislative omission without a saving clause nullifies the statutory basis for subjecting SDTs to Chapter X for the period after omission; hence invoking section 92BA(1) to make transfer pricing adjustments for the assessment year in question is not tenable. The Tribunal followed the coordinate Bench decision, finding no reason to deviate from that view and accordingly held the TP adjustments aggregating to the stated amount not sustainable under Chapter X.

Ratio vs. Obiter: Ratio - where a provision creating jurisdiction (section 92BA(1)) has been omitted without a saving clause, that provision cannot be invoked to make TP adjustments for the impugned period; accordingly, adjustments under Chapter X in respect of SDTs are not sustainable. Obiter - any observations about the correctness of TPO's factual findings characterizing transactions as bogus (without benchmarking) are ancillary to the statutory jurisdictional finding.

Conclusion: Transfer pricing adjustments made under Chapter X / section 92BA(1) in respect of specified domestic transactions are not sustainable in view of the omission of section 92BA(1); the TP adjustments are set aside.

Issue 2 - Applicability of section 40A(2) for allowability of expenditures arising from SDTs

Legal framework: Section 40A(2) governs disallowance of unreasonable payments to related parties and restricts allowability of expenditure to the extent not genuinely attributable or not at arm's length, independent of Chapter X.

Precedent treatment: Coordinate Bench decisions (including reference to Texport overseas and Sobha City) have held that although Chapter X cannot be invoked post-omission of section 92BA(1), section 40A(2) continues to exist and may be the statutory provision to examine allowability of such expenditures; this approach has not been successfully challenged before the High Court in the cited contexts.

Interpretation and reasoning: The Tribunal emphasized that deletion of section 92BA(1) does not revive or affect the continued applicability of section 40A(2). Where SDTs remain in dispute after Chapter X is found inapplicable, the appropriate course is to remit the matter to the AO to examine allowability under section 40A(2). The Tribunal rejected the contention that remand would improperly grant a "second chance" to the revenue, noting factual distinctions (e.g., relationships between parties) which make section 40A(2) potentially applicable and require fresh factual inquiry.

Ratio vs. Obiter: Ratio - matters which were previously addressed under Chapter X may be re-examined under section 40A(2) and should be remitted to the AO for adjudication in accordance with that provision. Obiter - comments distinguishing other High Court decisions (e.g., VS Dempo) are fact-specific and not general dicta.

Conclusion: The TP adjustments are set aside, but the AO is directed to examine allowability of the disputed expenditures under section 40A(2); remand for that purpose is warranted.

Issue 3 - Disallowance of loss on high-seas sales: factual sufficiency and need for remand

Legal framework: AO's power to examine and disallow losses/expenditures is subject to factual verification of transactions, supporting documents and reconciliation of purchase/sale figures; appellate forum may remit for de novo adjudication where factual discrepancies materially affect the conclusion.

Precedent treatment: The Tribunal followed established practice to remit issues requiring fresh fact-finding or reconciliation to the AO rather than decide on incomplete or conflicting records at the appellate stage.

Interpretation and reasoning: The Tribunal examined the record and found conflicting figures: taxpayer's paper-book showed purchases and sales of crude palm oil leading to a profit, whereas the AO, in draft assessment, used different purchase/sale magnitudes to compute a loss disallowed by the AO. Given this material discrepancy and the taxpayer's offer to furnish documents, the Tribunal concluded that the issue could not be finally decided on the existing record and should be restored to the AO for de novo adjudication, verification of correct figures, and consideration of supporting material.

Ratio vs. Obiter: Ratio - where the AO's disallowance is based on figures not matching the taxpayer's records and verifiable documents exist, appellate tribunal should remit for fresh adjudication rather than uphold disallowance. Obiter - ancillary comments on the adequacy of DRP's consideration of submissions are procedural observations tied to the remand rationale.

Conclusion: The disallowance of the alleged high-seas loss is set aside and the issue is restored to the AO for verification and fresh adjudication; the ground is allowed for statistical purposes pending AO's de novo determination.

Cross-references and final disposition

Cross-reference: Issues 1 and 2 are interrelated - invalidity of Chapter X adjustments (Issue 1) leads directly to remand under section 40A(2) (Issue 2). Issue 3 is separate and factual; it is remitted for verification.

Final disposition: TP adjustments under Chapter X in respect of SDTs are not sustainable and are set aside; AO directed to examine allowability under section 40A(2). Disallowance of alleged high-seas loss is remitted to AO for de novo adjudication after verification of purchases/sales and documentary evidence.

---