Revenue's appeal dismissed as Section 92BA clause (1) omission renders transfer pricing adjustment invalid

ITAT Chennai dismissed revenue's appeal regarding transfer pricing adjustment under Section 92BA clause (1) for specified domestic transactions. Following ITAT Kolkata precedent in DVC Emta Coal Mines Ltd., the tribunal held that Finance Act 2017's omission of the sub-clause rendered it as never existing in statute. Consequently, Assessing Officer's cognizance under Section 92CA was invalid, making TPO and DRP orders unsustainable. CIT(A)'s deletion of addition was upheld based on judicial precedents.

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The core legal questions considered in this appeal pertain to the validity and applicability of transfer pricing adjustments related to specified domestic transactions (SDTs) under section 92BA of the Income Tax Act, particularly in light of the retrospective omission of clause (i) of section 92BA by the Finance Act, 2017. Specifically, the issues are:

1. Whether the Commissioner of Income Tax (Appeals) was correct in deleting the transfer pricing adjustment related to specified domestic transactions under section 92BA(1) based solely on judicial precedents without considering the merits of the case.

2. Whether the retrospective application of the amendment omitting clause (i) of section 92BA to the Assessment Year (AY) 2014-15 was appropriate, given that the amendment is effective from 01.04.2017.

The first issue revolves around the transfer pricing adjustment made by the Assessing Officer (AO) and the Transfer Pricing Officer (TPO) to disallow management fees paid by the appellant to a related domestic entity. The AO, relying on the TPO's order, disallowed Rs. 4,04,49,600/- as an arm's length price (ALP) adjustment under section 92CA read with section 92BA. The TPO's rationale was that the management fees were for shareholder or stewardship activities, which do not warrant such payments under OECD guidelines, and no evidence was provided to justify the fees or demonstrate cost-benefit. The appellant contested this, submitting evidence of services rendered and arguing that the related company was not a holding company and that the services were valuable and genuine.

The CIT(A) examined the facts and the legal framework, noting that the management fees fall under specified domestic transactions governed by section 92BA. However, the CIT(A) relied heavily on the judicial pronouncements, particularly the decision of the Hon'ble High Court of Karnataka in PCIT-7 vs Texport Overseas (P.) Ltd., which held that clause (i) of section 92BA was omitted by the Finance Act, 2017 with effect from 01.04.2017, and that this omission means the clause is deemed never to have existed. Consequently, any reference made to the TPO under section 92CA for transactions covered by this clause was invalid and bad in law. The CIT(A) accordingly deleted the transfer pricing adjustment of Rs. 4,04,49,600/-, clarifying that this deletion only pertained to ALP determination under section 92CA and did not affect the AO's powers under section 40A(2)(b) to examine the payments on other grounds.

The appellant's counsel supported this view by citing the coordinate bench's decision in M/s. Voora Property Developers Pvt. Ltd. vs DCIT, which followed the Karnataka High Court's ruling. The counsel emphasized that the omission of clause (i) of section 92BA means that the provision never existed and thus the AO's reference to the TPO and consequent adjustments under that clause were invalid.

On the other hand, the Departmental Representative (DR) contended that the CIT(A) should have decided the matter on merits rather than relying on retrospective application of the amendment. The DR argued that the amendment was effective only from 01.04.2017 and should not apply to AY 2014-15. Further, the DR submitted that the omission of clause (i) should be treated as a repeal, not an obliteration, and that proceedings initiated under the provision should continue to be valid.

The Tribunal considered extensive judicial precedents addressing the effect of omission versus repeal of statutory provisions, especially in the context of section 6 and 6A of the General Clauses Act, 1897. The key precedents include:

• The Karnataka High Court's decision in PCIT-7 vs Texport Overseas (P.) Ltd., which held that omission of clause (i) of section 92BA means it never existed, invalidating references made under it.
• The coordinate bench ITAT decisions in M/s. Voora Property Developers Pvt. Ltd. and M/s. DVC Emta Coal Mines Ltd., which followed the above principle and held that transfer pricing adjustments under the omitted clause are unsustainable.
• The Supreme Court's ruling in General Finance Co. vs ACIT, which clarified that section 6 of the General Clauses Act applies only to repeal and not omission, and that omission leads to the provision being treated as never having existed.
• The Supreme Court's decision in Kolhapur Canesugar Works Ltd. vs Union of India, which distinguishes between repeal and omission and the effect on pending proceedings.
• The constitutional bench decisions in M/s. Shree Bhagwati Steel Rolling Mills vs CIT Excise and M/s. Fibre Boards, which interpret repeal and omission as synonymous but emphasize that omission results in the provision ceasing to exist from inception.

Applying these precedents, the Tribunal noted that clause (i) of section 92BA was omitted effective 01.04.2017 without any saving clause preserving proceedings initiated under it. Therefore, the omission must be construed as if the clause never existed, rendering references to the TPO and consequent transfer pricing adjustments invalid, even for AY 2014-15. The Tribunal observed that the AO should have adjudicated the claim of expenditure under normal provisions of the Act, such as section 40A(2)(b), rather than under the omitted clause.

The Tribunal further discussed the DR's contention that omission should be treated as repeal and that proceedings should continue under section 6 of the General Clauses Act. However, it rejected this argument, relying on the Supreme Court's authoritative pronouncements that omission and repeal are distinct, and section 6 does not apply to omission. The Tribunal emphasized that no saving provision was introduced to preserve the validity of proceedings initiated under the omitted clause.

Consequently, the Tribunal upheld the CIT(A)'s order deleting the transfer pricing adjustment of Rs. 4,04,49,600/- made under section 92BA(i) and section 92CA. It clarified that this deletion does not affect the AO's power to examine the payments under other provisions such as section 40A(2)(b).

Regarding the second issue of retrospective application of the amendment, the Tribunal held that the omission of clause (i) of section 92BA with effect from 01.04.2017 must be deemed to apply retrospectively for all pending proceedings under that clause, as the provision is treated as never having existed. This view aligns with the judicial interpretation that omission results in the provision being void ab initio. The Tribunal noted that no provision was made to preserve the effect of actions taken under the omitted clause, and hence the retrospective application was justified.

In conclusion, the Tribunal dismissed the Revenue's appeal and allowed the appeal of the assessee in respect of deletion of transfer pricing adjustments related to specified domestic transactions under section 92BA(i). The Tribunal directed the AO to re-adjudicate the claims of expenditure under the normal provisions of the Act, affording the assessee an opportunity to be heard.

Significant holdings include the following verbatim excerpts of crucial legal reasoning:

"Clause (i) of section 92BA having been omitted by Finance Act, 2017 with effect from 01.04.2017 from statute, resultant effect is that it had never been passed and, hence, decision taken by AO under effect of section 92BA and reference made to Transfer Pricing Officer under section 92CA was invalid and bad in law."

"Once a particular provision of section is omitted from the statute, it shall be deemed to be omitted from its inception unless and until there is some saving clause or provision to make it clear that action taken or proceeding initiated under that provision or section would continue and would not be left on account of omission."

"The principle underlying section 6 of the General Clauses Act as saving the right to initiate proceedings for liabilities incurred during the currency of the Act will not apply to omission of a provision in an Act but only to repeal, omission being different from repeal."

"The cognizance taken by the AO under section 92BA(i) and reference made to TPO under section 92CA is invalid and bad in law. Therefore, the consequential order passed by the TPO and DRP is also not sustainable in the eyes of law."

Core principles established include:

• The omission of a statutory provision is to be construed as if the provision never existed, invalidating any proceedings initiated under it unless a saving clause preserves such proceedings.
• Section 6 of the General Clauses Act applies to repeal but not to omission; omission results in obliteration from inception.
• Transfer pricing adjustments under the omitted clause (i) of section 92BA cannot be sustained, and the AO must consider claims under other applicable provisions.
• Retrospective application of omission is justified where the provision is treated as never having existed.

Final determinations:

• The transfer pricing adjustments made under section 92BA(i) and section 92CA in respect of specified domestic transactions are invalid and must be deleted.
• The AO's reference to the TPO under the omitted clause is invalid and bad in law.
• The AO is directed to re-adjudicate the claims of expenditure under the normal provisions of the Act, such as section 40A(2)(b), after affording the assessee an opportunity to be heard.
• The retrospective application of the omission of clause (i) of section 92BA to AY 2014-15 is appropriate and justified.

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