Transfer pricing adjustments under section 92CA(3) deleted for domestic transactions post-Finance Act 2017 amendments

ITAT Raipur ruled on transfer pricing adjustments under section 92CA(3) for interest payments to related parties. The tribunal held that since TPO and assessment orders were passed after April 1, 2017, following Finance Act 2017 amendments excluding specified domestic transactions from transfer pricing regulations per section 92BA(1) read with 40A(2)(b), the addition was unsustainable and directed deletion. However, the tribunal upheld section 40A(3) disallowance for cash payments to villagers and confirmed 5% adhoc disallowance on various expenses supported by self-made vouchers, dismissing the assessee's appeal on these grounds.

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Issues Involved:

1. Upward adjustment by Transfer Pricing Officer under Section 92CA(3) for interest paid to a related party.
2. Disallowance under Section 40A(3) for cash payment made for land purchase.
3. Adhoc disallowance of 5% of various expenses due to lack of proper documentation.

Detailed Analysis:

1. Upward Adjustment by Transfer Pricing Officer:

The key issue was the disallowance of Rs. 80,06,666/- due to an upward adjustment made by the Transfer Pricing Officer (TPO) under Section 92CA(3), concerning the arm's length price of interest paid to a related party. The TPO rejected the external Comparable Uncontrolled Price (CUP) method used by the assessee, favoring an internal CUP method, and benchmarked the interest rate at 15% instead of the 18% paid by the assessee. The assessee's argument that the provision of Section 92BA(i) was omitted by the Finance Act, 2017, making the adjustment unsustainable, was upheld. The Tribunal followed the precedent set by the Karnataka High Court in PCIT vs. M/s Taxport Overseas Pvt. Ltd., which held that the omission of a statutory provision without a saving clause renders any action under it invalid. Consequently, the adjustment was deemed unsustainable, and the disallowance was deleted.

2. Disallowance under Section 40A(3):

The disallowance of Rs. 8,00,000/- was related to cash payments made for the purchase of land. The assessee argued that the payment was not claimed as an expense but was part of the work-in-progress, thus not subject to disallowance under Section 40A(3). The Tribunal noted that if the expenditure was not claimed in the Profit & Loss account, Section 40A(3) would not apply, referencing the case of PCIT vs. Prosperous Buildcon Pvt. Ltd. However, since this argument was raised for the first time at the Tribunal, the matter was remanded back to the Assessing Officer for verification of whether the expenditure was indeed not claimed as a deduction.

3. Adhoc Disallowance of 5% of Various Expenses:

The Assessing Officer had disallowed 10% of certain expenses totaling Rs. 61,46,226/- due to the use of self-made vouchers and lack of supporting bills, which raised concerns about the veracity of these expenses. The CIT(A) reduced the disallowance to 5%, acknowledging the potential for personal expenses to be included. The Tribunal upheld the CIT(A)'s decision, noting that the nature of the expenses and the lack of proper documentation justified a partial disallowance. The Tribunal found no infirmity in the CIT(A)'s decision to sustain the disallowance to the extent of 5%.

Conclusion:

The Tribunal allowed the appeal partly, deleting the disallowance related to the upward adjustment by the TPO due to the omission of Section 92BA(i) and remanding the Section 40A(3) issue for verification. However, it upheld the 5% disallowance of various expenses due to inadequate documentation.

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