2025 (8) TMI 961 - AT - Income Tax

10% upward adjustment under s.92BA(i) invalid after 01.04.2017; additions under s.92CA(3)/s.143(3) held without jurisdiction, revenue challenge dismissed

Deputy Commissioner of Income Tax-1 (1) Versus C.G. Ispat Private Limited, Raipur

Deputy Commissioner of Income Tax-1 (1) Versus C.G. Ispat Private Limited, Raipur - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an upward transfer-pricing adjustment and resultant addition based on clause (i) of section 92BA (relating to specified domestic transactions) can be sustained where clause (i) was omitted by amendment (Finance Act, 2017) effective 01.04.2017 and there is no saving clause. 2. Whether the Commissioner (Appeals) was justified in admitting Transfer Pricing documentation as additional evidence under Rule 46A despite the Assessing Officer/TPO having completed proceedings ex parte on account of alleged non-cooperation by the taxpayer. 3. Whether the Transfer Pricing Officer's use of a flat 10% upward estimate (rather than determination under a recognised method) to compute arm's length price was legally sustainable, particularly where the taxpayer later furnished TP documentation on appeal. 4. Whether the decision of the appellate authority to quash the upward adjustment is perverse or contrary to law in view of record and precedent relied upon by Revenue. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of adjustment based on omitted clause (i) of sec. 92BA Legal framework: Section 92BA defines 'specified domestic transactions' (SDT); clause (i) (prior to omission) covered certain expenditures to associated persons. Finance Act, 2017 omitted clause (i) effective 01.04.2017. General principles of repeal/omission (common law and Section 6 of General Clauses Act) govern effect of omission where no saving clause exists. Precedent treatment: The Court relied on authoritative decisions (including Kolhapur Canesugar principle as applied by higher courts and coordinate benches) and on a binding line of subsequent decisions - notably a Karnataka High Court decision and following coordinate/tribunal orders - holding that omission without a saving clause renders the omitted provision to be treated as never having existed insofar as pending proceedings after the effective date are concerned. The Tribunal's Raipur bench decision on an identical issue was also followed. Interpretation and reasoning: Where the TPO's order and AO's assessment were passed after 01.04.2017 (dates in the case: TPO order 25.10.2017; AO order 28.12.2017), the provision relied upon for making the SDT determination (clause (i) of sec. 92BA) had already been omitted with no saving clause. Applying the cited authorities, the appellate tribunal held that any action or addition founded on that omitted clause is invalid and cannot be sustained. The Tribunal concluded that the omission rendered the impugned statutory basis otiose and therefore the TPO/AO could not lawfully make the upward adjustment based on that clause. Ratio vs. Obiter: Ratio - omission of clause (i) of sec. 92BA without a saving clause removes legal foundation for SDT-based adjustments made after effective date; hence additions under that clause made after omission are unsustainable. This is the dispositive holding of the Court and thus the ratio. Conclusion: The upward adjustment and consequent addition predicated on clause (i) of sec. 92BA are quashed; the deletion by the Commissioner (Appeals) is upheld on this ground. Cross-reference: See Issue 3 for discussion of alternative merits-based reasoning applied by the CIT(A) and why it was rendered academic by the primary ground above. Issue 2 - Admissibility of additional evidence under Rule 46A (admission of TP documentation on appeal) Legal framework: Rule 46A permits admission of additional evidence by the appellate authority in limited circumstances where a party was prevented by sufficient cause from producing evidence before the AO; remand report mechanism requires calling AO's comments. Precedent treatment: The appellate authority relied on multiple High Court and Tribunal authorities holding that additional evidence may be admitted where the assessee was prevented for sufficient cause (examples given in the record: cases permitting relief when non-compliance was due to counsel's default or other reasonable causes), and on decisions directing liberal admission where evidence is relevant to ascertaining real income and facts are already on record. Interpretation and reasoning: The CIT(A) examined the facts, including the remand report from AO and the taxpayer's explanation (counsel's failure to submit TP report during TPO proceedings and subsequent compliance at appellate stage). The CIT(A) accepted that the taxpayer was prevented by sufficient cause from producing TP documentation before the TPO and therefore admitted the TP documentation under Rule 46A. The Tribunal observed that, because the primary legal ground of omission of sec. 92BA(i) disposed of the matter, the Revenue's complaint about non-compliance with Rule 46A became academic; nonetheless the CIT(A)'s admission of evidence was supported on the facts and by precedent cited. Ratio vs. Obiter: Partly ratio where admission was necessary to decide merits in earlier proceedings; partly obiter in this appeal because the Tribunal's ultimate decision turned on statutory omission and rendered the Rule 46A dispute academic. The Tribunal expressly treated the Rule 46A challenge as academic given disposal on the omission ground. Conclusion: Admission of TP documentation by CIT(A) was factually and legally sustainable in the circumstances; in any event, the appellate determination on the statutory omission made the Rule 46A dispute moot for present purposes. Issue 3 - Legality of TPO's method (10% estimate vs prescribed ALP methods) and merits of ALP determination Legal framework: Transfer-pricing determinations must be made by one of the prescribed methods (e.g., CUP, resale price, cost plus, profit split, TNMM, or other prescribed method); TPOs must base adjustments on such methods and supporting material. Precedent treatment: CIT(A) criticised TPO for resorting to a flat 10% estimate without demonstrating application of a prescribed method or providing material to justify the estimate; the appellate authority accepted the taxpayer's subsequently produced TP documentation indicating adoption of TNMM/other appropriate methods and transactions being at arm's length. Interpretation and reasoning: The CIT(A) found the TPO's 10% estimate unjustified on merits because no material was brought on record showing basis for the estimate; after admitting TP documentation, the CIT(A) concluded that appropriate methods were applied and transactions were at ALP. The Tribunal observed that this merits analysis was overtaken by the statutory omission ground but nevertheless recorded that the TPO's ex parte estimate lacked acceptable foundation. Ratio vs. Obiter: Obiter in the Tribunal's ultimate disposition (because the statutory omission ground was decisive). However, the CIT(A)'s finding on absence of material to justify a flat estimate is a reasoned merits observation relevant to other cases where omission may not apply. Conclusion: On merits, TPO's 10% estimate was inadequately supported; CIT(A) correctly questioned that approach and, after admitting TP documentation, found transactions at ALP - but the Tribunal's upholding of deletion proceeds primarily from the statutory omission principle, rendering merits analysis ancillary. Issue 4 - Allegation of perversity and correctness of appellate decision Legal framework: Appellate orders must address relevant facts and be reasoned; however, where a dispositive legal point (statutory omission) exists and is supported by binding precedent, reversal of assessment additions based on the omitted provision is proper. Precedent treatment: The Tribunal followed binding and persuasive precedents (Karnataka High Court and subsequent tribunal/bench decisions) holding that omission of clause (i) without saving clause invalidates actions founded on it after the effective date. Interpretation and reasoning: The Tribunal found no perversity in the CIT(A)'s outcome because the deletion was grounded on accepted legal principle; objections based on Rule 46A non-compliance and alleged after-thought explanations were rendered academic by the statutory omission finding. Revenue's contention that CIT(A) misread evidence was therefore rejected insofar as the dispositive legal point controlled. Ratio vs. Obiter: Ratio - appellate cancellation of additions based on an omitted statutory provision is correct and not perverse where prior authorities construe omission to abrogate the provision's application to proceedings after the effective date. Conclusion: The Revenue's challenge that the CIT(A)'s order was perverse is rejected; the Tribunal dismissed the revenue appeal and upheld deletion of the upward TP adjustment. Final Disposition (as to issues): 1. Deletion of the upward transfer-pricing adjustment founded on omitted clause (i) of sec. 92BA is sustained - that clause having been omitted effective 01.04.2017 without a saving clause, actions taken under it after that date are unsustainable (operative ratio). 2. Admission of additional TP documentation under Rule 46A by the Commissioner (Appeals) was factually and legally supportable; however, this issue is academic in the present disposal because the statutory omission ground is dispositive. 3. The TPO's flat 10% upward estimate lacked demonstrable application of prescribed ALP methods and supporting material; CIT(A)'s merits critique is justified though rendered secondary by the primary statutory holding. 4. The appellate order quashing the addition is not perverse and is affirmed; revenue appeal is dismissed.