2022 (5) TMI 1541 - AT - Income Tax

TP Adjustment - Specified Domestic Transactions SDT undertaken by the assessee qualifying for ALP principle envisaged under the Act - assessee alleged that Section 92BA(1) has been omitted by the Finance Act, 2017 and, therefore, the impugned order should lapse and become invalid in law. HELD THAT - The undisputed fact is that as per sub-clause (1) of section 92BA of the Act, the assessee has undertaken the transaction which has exceeded the prescribed limit. It is also not in dispute that vide Finance Act, 2017 w.e.f. 01.04.2017 the said sub-clause (1) of section 92BA has been omitted. We find that the AO has made a reference u/s 92CA of the Act having observed that the assessee has entered into specific domestic transaction as the case is covered u/s 92BA of the Act. Respectfully following the decision of the co-ordinate bench 2017 (12) TMI 1719 - ITAT BANGALORE which has been upheld by the Hon'ble High Court of Karnataka 2019 (12) TMI 1312 - KARNATAKA HIGH COURT we have no hesitation in holding that the cognizance taken by the Assessing Officer u/s 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. Applicability of provisions of section 40A(2) of the Act on the impugned transactions cannot be ruled out - As in the interest of justice and fair play, we restore this issue to the file of the Assessing Officer. The AO is directed to examine the impugned transaction in light of provisions of section 40A(2) of the Act after affording reasonable and sufficient opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C of the Income-tax Act, 1961.
2. Applicability of Section 92BA(1) of the Income-tax Act after its omission by the Finance Act, 2017.
3. Determination of the arm’s length price for Specified Domestic Transactions (SDTs) and international transactions.
4. Reference to the Transfer Pricing Officer (TPO) and the validity of the TPO's adjustments.
5. Application of Section 40A(2) of the Income-tax Act on the impugned transactions.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The appeal by the assessee is against the order dated 24.08.2018 framed under Section 143(3) read with Section 144C of the Income-tax Act, 1961, for the Assessment Year 2014-15. The primary grievance is that the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) erred in holding that the Specified Domestic Transactions (SDTs) undertaken by the assessee do not satisfy the arm’s length principle envisaged under the Act.

2. Applicability of Section 92BA(1) Post-Omission:
The assessee contended that Section 92BA(1) of the Act, which was omitted by the Finance Act, 2017, should render the impugned order invalid. The Tribunal noted that the AO made a reference under Section 92CA of the Act, observing that the assessee had entered into specific domestic transactions covered under Section 92BA. However, the Tribunal found that the omission of Section 92BA(1) by the Finance Act, 2017, means that it should be considered as if it never existed on the statute. This position was supported by the judgment of the Apex Court in Kolhapur Canesugar Works Ltd., which held that the omission of a provision without a saving clause results in the provision being considered as never having existed.

3. Determination of Arm’s Length Price:
The international transactions undertaken by the assessee with its Associated Enterprises (AEs) were detailed, including the purchase of raw materials, sale of goods, intra-group services rendered and received, engineering design services, and reimbursement of expenses. The AO referred the matter to the TPO for the determination of the arm’s length price due to the transactions exceeding the monetary limit specified in the Act. The TPO proposed adjustments on account of purchase of raw material and business support services, which were objected to by the assessee but upheld by the DRP.

4. Reference to TPO and Validity of Adjustments:
The Tribunal found that the reference made by the AO to the TPO under Section 92CA was invalid due to the omission of Section 92BA(1). Consequently, the order passed by the TPO and the DRP was also deemed unsustainable in the eyes of the law. This decision was based on the precedent set by the coordinate bench in IT(TP)A No. 1722/2017 and upheld by the Hon’ble Karnataka High Court in ITA No. 392/2018 and ITA No. 170/2019.

5. Application of Section 40A(2):
Despite the invalidity of the reference to the TPO, the Tribunal acknowledged that the applicability of Section 40A(2) on the impugned transactions could not be ruled out. Therefore, the matter was restored to the AO to examine the transactions in light of Section 40A(2) after providing the assessee with a reasonable opportunity to be heard.

Conclusion:
The Tribunal allowed the appeal of the assessee for statistical purposes, holding that the cognizance taken by the AO under Section 92CA was invalid and the consequential orders by the TPO and DRP were unsustainable. The AO was directed to re-examine the transactions under Section 40A(2) of the Act. The order was pronounced in the open court on 25.05.2022.