Transfer pricing adjustment under section 92C invalid after section 92BA(i) omission by Finance Act 2017

ITAT Pune held that transfer pricing adjustment under section 92C was unsustainable as section 92BA(i) was omitted by Finance Act 2017 with effect from 01.04.2017. Following Karnataka HC precedent in Texport Overseas case, the tribunal ruled that since TPO reference was made on 18.09.2017 and TP order passed on 30.10.2018 (both after omission), the adjustment was invalid. AO/TPO was directed to delete the adjustment. Additionally, tribunal rejected revenue's attempt to invoke section 40A(2)(b) as AO had not invoked this provision in the assessment order, and CIT(DR) cannot improve assessment order at appellate stage.

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Issues Involved:
1. Adjustment under section 92C due to the omission of section 92BA(i) by the Finance Act 2017.
2. Validity of reference to the Transfer Pricing Officer (TPO) under section 92CA(1).
3. Confirmation of addition of Rs. 4,00,00,000 by the Assessing Officer.
4. Rejection of segmental profitability certified by the Statutory Auditor.
5. Addition of two new companies into the set of comparable companies.
6. Use of Profit Level Indicator (PLI) by aggregating related and unrelated party transactions.
7. Validity of the final assessment order passed beyond the time limits prescribed under section 153(1) r.w.s 153(4).

Issue-wise Detailed Analysis:

1. Adjustment under section 92C due to the omission of section 92BA(i) by the Finance Act 2017:
The assessee argued that the adjustment under section 92C is invalid as section 92BA(i) was omitted by the Finance Act 2017, w.e.f. 01.04.2017, without a saving clause. The Tribunal noted that the omission of section 92BA(i) implies that it never existed in the statute book. The Tribunal relied on the decision of the Hon'ble Karnataka High Court in Texport Overseas Pvt. Ltd., which held that proceedings initiated under the omitted clause do not survive. Consequently, the reference to the TPO and the subsequent adjustment of Rs. 4,00,00,000 were deemed unsustainable in law. The Tribunal directed the AO/TPO to delete the adjustment.

2. Validity of reference to the Transfer Pricing Officer (TPO) under section 92CA(1):
The assessee contended that the reference to the TPO was void ab initio since section 92BA(i) was omitted. The Tribunal upheld this argument, stating that the reference made on 18/09/2017, after the omission of section 92BA(i), was invalid. The Tribunal emphasized that the omission of the section meant it never existed, rendering the TPO's order unsustainable.

3. Confirmation of addition of Rs. 4,00,00,000 by the Assessing Officer:
The Tribunal found that the addition of Rs. 4,00,00,000 based on the TPO's order was invalid due to the omission of section 92BA(i). The Tribunal directed the deletion of the adjustment, rendering the addition unsustainable.

4. Rejection of segmental profitability certified by the Statutory Auditor:
The Tribunal did not specifically address this issue as the primary ground regarding the omission of section 92BA(i) was decided in favor of the assessee, making other grounds academic.

5. Addition of two new companies into the set of comparable companies:
Similar to the issue of segmental profitability, this ground was not adjudicated as the primary issue was resolved in favor of the assessee.

6. Use of Profit Level Indicator (PLI) by aggregating related and unrelated party transactions:
This issue was also rendered academic due to the resolution of the primary ground in favor of the assessee.

7. Validity of the final assessment order passed beyond the time limits prescribed under section 153(1) r.w.s 153(4):
The assessee raised an additional ground that the final assessment order was passed beyond the prescribed time limits, making it invalid. However, since the primary ground was decided in favor of the assessee, the Tribunal did not adjudicate this additional ground, deeming it unnecessary.

Conclusion:
The appeal was partly allowed. The Tribunal directed the deletion of the adjustment of Rs. 4,00,00,000 and did not adjudicate the other grounds as they were rendered academic by the resolution of the primary issue. The order was pronounced on 30th May, 2024.

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