2025 (10) TMI 840 - AT - Income Tax

Deletion of TP adjustment upheld as section 92BA deemed omitted; penalty under section 271AA deleted

ITAT PUNE - AT upheld CIT(A)'s deletion of the TP adjustment and addition made by AO where TPO had applied internal CUP as MAM and AO rejected CPM, ... TP Adjustment - Selection of MAM - TPO in the instant case, rejecting the CPM method adopted by the assessee as the most appropriate method, applied internal CUP method as the most appropriate method and proposed an upward adjustment - CIT(A) deleted the addition made by the AO on the ground that clause (i) of section 92BA of the Act has been omitted by the Finance Act, 2017 w.e.f. 01.04.2017 - HELD THAT:- Since the provisions of section 92BA(i) of the Act have been omitted by the Finance Act, 2017 w.e.f. 01.04.2017 without any saving clause, therefore, the resultant effect is that it had never been passed and to be considered as a law never been existed. No infirmity in his order deleting the addition. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. Penalty levied u/s 271AA for non-maintenance of certain records for working out the ALP of the specified domestic transactions deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether clause (i) of section 92BA (definition of 'specified domestic transaction') can be applied retrospectively to assessment year 2013-14 where clause (i) was omitted by the Finance Act, 2017 w.e.f. 01.04.2017, in the absence of a saving clause. 2. Whether reference to the Transfer Pricing Officer under section 92CA and consequent ALP adjustment under Chapter X in respect of transactions covered by clause (i) of section 92BA is valid when clause (i) was omitted without a saving clause. 3. Whether the allowability of expenditures debited to profit & loss in respect of such domestic transactions should be examined under section 40A(2) where transfer pricing adjustments under section 92BA are held not sustainable. 4. Whether penalty under section 271AA for failure to maintain prescribed transfer-pricing records (section 92D and Rule 10D sub-clauses (g), (h), (j)) can survive where the substantive transfer-pricing adjustment is quashed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Retrospective applicability of omitted clause (i) of section 92BA Legal framework: Clause (i) of section 92BA defined 'specified domestic transaction' for the purpose of applying Chapter X; it was inserted (effective 01.04.2013) and subsequently omitted by the Finance Act, 2017 w.e.f. 01.04.2017. The General Clauses Act (and Supreme Court jurisprudence interpreting repeal/omission and saving provisions) governs effects of repeal/omission on pending proceedings. Precedent Treatment: The Tribunal and several Benches (and the Karnataka High Court in PCIT v. Texport Overseas) have held that where a provision is unconditionally omitted without a saving clause, the provision is to be treated as never having existed (relying on Kolhapur Canesugar Works Ltd. and related authority). Multiple coordinate benches have followed this view and quashed actions taken under the omitted provision. Interpretation and reasoning: The Court examined whether omission without any saving clause preserves actions/ proceedings initiated under the omitted clause. Applying the principle that repeal/omission without a saving clause obliterates the provision retrospectively for purposes of pending proceedings, the Court concluded that clause (i) of section 92BA does not survive for proceedings that were pending when omission took effect, and thus actions taken under that clause (including references to TPO and adjustments under Chapter X in respect of specified domestic transactions) are without legal basis. Ratio vs. Obiter: Ratio - omission of clause (i) of section 92BA without a saving clause renders the provision non-existent for pending proceedings, and actions founded solely on that provision are void ab initio. Obiter - ancillary observations about legislative intent where a replacement provision exists but no saving clause was inserted. Conclusions: The Court upheld deletion of the ALP adjustment made under section 92BA(i)/Chapter X for the assessment year in question on the ground that clause (i) was omitted without a saving clause and therefore could not form the basis of TPO/AO action; the impugned adjustment was quashed as void and without jurisdiction. Issue 2 - Validity of TPO/AO action under section 92CA/Chapter X in respect of transactions covered by omitted clause (i) Legal framework: Section 92CA empowers the TPO to determine ALP when the Assessing Officer refers transactions under Chapter X; section 92BA identified which domestic transactions fell within Chapter X prior to omission. Precedent Treatment: Coordinate decisions of various ITAT Benches and the Karnataka High Court treated references and adjustments made under Chapter X in respect of clause (i) transactions as invalid where clause (i) had been omitted without saving; these authorities were followed by the Court. Interpretation and reasoning: Because the only statutory basis for subjecting the specified domestic transactions to transfer pricing scrutiny (clause (i) of section 92BA) was omitted without saving, references to the TPO and consequent ALP determinations in respect of those transactions lacked jurisdiction. The Court regarded orders passed by the TPO/AO under section 92CA/Chapter X as void ab initio insofar as they rested exclusively on the omitted clause. Ratio vs. Obiter: Ratio - TPO/AO actions under Chapter X are invalid where they relate solely to transactions falling under a clause that has been omitted without a saving clause; such actions are void for want of statutory foundation. Conclusions: The Court sustained the CIT(A)'s deletion of transfer pricing additions founded on TPO/AO action under section 92BA(i)/92CA, finding those actions unlawful and quashing the additions. Issue 3 - Examination of allowability under section 40A(2) after quashing transfer-pricing adjustment Legal framework: Section 40A(2) governs allowability of certain payments to related persons; it remained on the statute-book and provides a separate head to scrutinise reasonableness/allowability of expenditures irrespective of Chapter X. Precedent Treatment: Coordinate benches have directed that where Chapter X action is found unsustainable due to omission of section 92BA(i), the Assessing Officer should nevertheless examine allowability under section 40A(2); this approach has been endorsed in several Tribunal orders cited to the Court. Interpretation and reasoning: The Court acknowledged that even if transfer-pricing adjustments under section 92BA(i) are quashed, the revenue retains the statutory route under section 40A(2) to test allowability of expenditures. The Court therefore required the Assessing Officer to verify allowability under section 40A(2) in the light of facts and records submitted (including Tax Audit certifications and AE financials). In the present case factual verification showed Tax Audit certification that payments to related parties were at par or less than fair market value and that no tax arbitrage existed; the Tribunal accepted these records and concluded no disallowance under section 40A(2) was warranted. Ratio vs. Obiter: Ratio - remitting or directing examination under section 40A(2) is appropriate where Chapter X action is invalid; the Court's direction to examine allowability is a binding procedural outcome in the case. Obiter - general observations on legislative intent behind omission and interplay between Chapter X and section 40A(2). Conclusions: The Court required AO verification under section 40A(2) but, on the actual evidence furnished (tax auditor certification, AE returns, income-tax brackets), held the expenditures allowable and dismissed any further adjustment under section 40A(2) in this instance. Issue 4 - Viability of penalty under section 271AA for non-maintenance of transfer-pricing records where substantive adjustment is quashed Legal framework: Section 271AA penalises failure to maintain information/ documents required under section 92D read with Rule 10D (including Rule 10D(g), (h), (j)) relating to transfer pricing records and workings; penalty quantum linked to value of specified domestic transactions. Precedent Treatment: Petitioners and tribunals have approached penalty relief where the foundational transfer-pricing adjustments were quashed. The CIT(A) in the instant matter deleted penalty on the ground that the underlying ALP adjustment was deleted; the Tribunal examined that approach in light of the record. Interpretation and reasoning: The Court observed that the Assessing Officer levied penalty based on alleged failure to maintain ROIs required by section 92D/Rule 10D in connection with specified domestic transactions. However, since the transfer-pricing addition that gave rise to the penalty was quashed (for lack of statutory basis), the penalty could not survive. The Court further noted that the assessee had produced the TP report, tax audit and AE records to the TPO and that the TPO had rejected the TP study on methodology grounds rather than non-furnishing of records; on facts the Tribunal found no infirmity in deleting the penalty. Ratio vs. Obiter: Ratio - where the substantive transfer-pricing adjustment is quashed as void, a penalty under section 271AA predicated on those specific transactions does not survive and may be deleted; factual sufficiency of records may also negate penalty. Obiter - discussion of procedural sufficiency of record-production to TPO. Conclusions: The Court upheld deletion of penalty under section 271AA because the foundational specified domestic transaction adjustment was quashed and proper records/returns had been placed on record; accordingly, penalty order was set aside. Cross-References and Consolidated Outcome 1. Issues 1 and 2 are interlinked: omission of clause (i) of section 92BA without a saving clause (Issue 1) renders TPO/AO action under Chapter X in respect of specified domestic transactions void (Issue 2) - this was the decisive ratio upheld. 2. Issue 3 flows from Issues 1-2: quashing of Chapter X adjustment does not foreclose examination under section 40A(2); the Court directed AO to examine allowability under section 40A(2) and, on the evidence submitted, found no disallowance necessary. 3. Issue 4 is consequential: deletion of the substantive adjustment led to deletion of the penalty under section 271AA; factual production of audit reports and AE records supported the deletion. Final conclusions: The Tribunal upheld deletion of the transfer-pricing adjustment made under the omitted clause (i) of section 92BA as void ab initio; directed (and where evidence warranted, concluded) that allowability under section 40A(2) be examined and found no disallowance on facts; and confirmed deletion of penalty under section 271AA consequent upon quashing of the substantive adjustment.