2022 (2) TMI 1337 - AT - Income Tax

TP Adjustment - reference to the TPO in respect of specified domestic transactions - transfer pricing provisions Applicability to transactions entered by the assessee with the related parties covered u/s 40A(2)(b) - HELD THAT - We hold that the reference to the TPO in respect of specified domestic transactions mentioned in clause (i) of sec.92BA is not valid as the said provision has been omitted. Accordingly we direct the AO to delete the addition relating to specified domestic transactions made u/s 92CA of the Act. We however notice that the co-ordinate bench in the case of Textport Overseas 2017 (1 2) TMI 1719 - ITAT BANGALORE has restored the matter to the file of the A.O. with the direction to examine the claim of expenditure in accordance with the provisions of section 40A(2) - Following the same we restore this issue to the file of the AO with the direction to examine the claim of expenditure mentioned above in terms of the provisions of section 40A(2) of the Act - reference to the TPO in respect of specified domestic transactions mentioned in clause (i) of sec.92BA is not valid as the said provision has been omitted. Accordingly we direct the AO to delete the addition relating to specified domestic transactions made u/s 92CA. As pointed out by D.R the co-ordinate bench in the case of Texport overseas P Ltd has restored the matter to the file of the A.O. with the direction to examine the claim of expenditure in accordance with the provisions of section 40A(2) - we restore this issue to the file of the AO with the direction to examine the claim of expenditure mentioned above in terms of the provisions of section 40A(2) of the Act. In view of the above conclusion we refrain from adjudicating other issues raised by the assessee in the grounds of appeal with regard to correctness of determination of ALP of the SDT. Addition u/s 68 - assessee has failed to prove the genuineness identity and creditworthiness of the creditors - failure of the assessee to furnish copy of stock register - HELD THAT - This cannot be a proper reason for rejecting the claim of the assessee when the confirmation letter purchase register along with sample invoices were furnished by the assessee. Assessee also submitted that payments have been made to all the 3 parties and that evidence would demonstrate that the trade creditors were genuine. Taking into account these circumstances we are of the view that it would be just and appropriate to set aside the issue with regard to the addition to the AO for consideration afresh in the light of the evidence already filed by the assessee and also in the light of the further evidence that the assessee may file with regard to repayment of the trade credits. AO is directed to consider the claim of the assessee in accordance with law after affording assessee opportunity of being heard. Appeal by the assessee is treated as partly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of TP addition under Section 92BA(i) post its omission by Finance Act 2017.
2. Applicability of Section 68 to trade creditors.

Issue-wise Detailed Analysis:

1. Validity of TP Addition under Section 92BA(i) Post its Omission by Finance Act 2017:

The primary issue raised by the assessee was the applicability of Section 92BA(i) of the Income-tax Act, 1961, which was omitted by the Finance Act 2017. The assessee argued that the omission of Section 92BA(i) should be considered retrospective, thus invalidating any TP additions made under this provision. The Tribunal noted that various courts, including the Karnataka High Court, have held that the omission of Section 92BA(i) is retrospective. The Tribunal cited the case of Texport Overseas Pvt Ltd v DCIT, where the Karnataka High Court confirmed that the omission of Section 92BA(i) meant it should be treated as if it never existed. Consequently, the Tribunal held that any reference to the TPO in respect of specified domestic transactions under Section 92BA(i) was invalid. The AO was directed to delete the TP adjustments made under Section 92CA of the Act. However, the Tribunal restored the matter to the AO to examine the claim of expenditure under Section 40A(2) of the Act, following the same approach as in the Texport Overseas case.

2. Applicability of Section 68 to Trade Creditors:

The second issue pertained to the addition of Rs. 52,87,093/- under Section 68 of the Act, related to outstanding balances of trade creditors. The AO had initially made an addition of Rs. 3,97,93,505/- under Section 68, citing the assessee's failure to prove the genuineness, identity, and creditworthiness of the creditors. However, during remand proceedings, the AO accepted the genuineness of transactions except for three creditors. The assessee provided additional evidence, including ledger extracts, confirmation letters, and bank statements, to substantiate the genuineness of these transactions. Despite this, the AO made the addition without referencing the evidence provided. The Tribunal found that the AO's reason for rejecting the claim, which was the failure to furnish a stock register, was not valid. The Tribunal directed the AO to reconsider the addition of Rs. 52,87,093/- in light of the evidence already submitted and any further evidence the assessee might provide regarding the repayment of trade credits. The AO was instructed to reassess the claim in accordance with the law, ensuring the assessee was given an opportunity to be heard.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal concluded that the TP adjustments under Section 92BA(i) were invalid due to the retrospective omission of the provision. The matter was remanded to the AO for reassessment under Section 40A(2). Additionally, the issue of trade creditor additions under Section 68 was also remanded to the AO for fresh consideration based on the evidence provided by the assessee.