2022 (5) TMI 971 - AT - Income Tax

TP Adjustment - determination of Arms Length Price of specified domestic transactions - expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of Section 40A - HELD THAT -. According to the provisions of Section 92BA, the specified domestic transaction, in case of an assessee, covers the transaction of any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of Section 40A of the Act. To such transactions, the provisions of Section 92, 92C, 92D and 92B were made applicable. However with effect from 1/4/2017 The Finance Act, 2017 omitted Section 92BA (i) of the act. In view of the above omission, the controversy arose that whether transfer-pricing provisions are applicable to transactions covered under that clause or not. The honourable Karnataka High Court in case of PCIT vs. Texport Overseas (P.) Ltd. 2019 (12) TMI 1312 - KARNATAKA HIGH COURT held that when clause (i) 92BA is omitted with effect from 1st April, 2017, the resultant effect is that it had never been passed and to be considered as law never existed. Therefore, the Hon'ble Karnataka High Court held that the decision taken by the Assessing Officer under the effect of section 92BA (i) and reference made to Transfer Pricing Officer under section 92CA was invalid and bad in law. In view of this, the addition made by the learned Assessing Officer by applying the provision of section 92CA to the transaction covered under section 92BA (i) of the Act deserves to be deleted. Therefore respectfully following decision of Hon'ble Karnataka High Court, we direct the learned Assessing Officer to delete the same.But we cannot lose sight of the fact that coordinate bench in that particular case specifically directed the learned assessing officer to examine the transactions with respect to provision of section 40A (2) of the Act. We hastened to add that only the arm's-length price of such specified domestic transactions could not be determined by applying the above provisions as contained in Chapter X of The Income Tax Act. Still the provisions of Section 40A (2) are on the statute book, which governs the deductibility of such expenses. Therefore, we set aside the issue to the file of the learned Assessing Officer to examine the transactions covered under 40A (2)(b) of the Act and decide issue afresh. Accordingly, grounds no. 2 to 7 of these appeals are allowed for statistical purposes. The learned Assessing Officer is directed to grant the opportunity of hearing to the assessee and decide the same in accordance with law. Disallowance under section 14A r.w.r. 8D - HELD THAT - As we find that tax exempt income claimed by the assessee is only Rs. 1,12,635/- and therefore, disallowance under that section cannot exceed the exempt income. Accordingly, we direct the Assessing Officer to restrict the disallowance to the extent of Rs. 1,12,635/-. Accordingly, ground no. 8 is partly allowed. Disallowance of 50% of the property tax - AO found that assessee has occupied 50% of the property for its own use - HELD THAT - Before the learned DRP, the assessee submitted that it has already disallowed Rs. 786000/- in the return of income and the learned DRP directed that disallowance should be restricted to the disallowance of Rs. 8,46,653/-. We do not find any infirmity in such direction given by the DRP. In view of this ground no. 9 of the appeal is dismissed.

Issues Involved:

1. Determination of total income by the Assessing Officer.
2. Reference to the Transfer Pricing Officer under section 92CA(1).
3. Adjustment of specified domestic transactions.
4. Retrospective nature of the deletion of clause (i) of section 92BA.
5. Tax evasion in specified domestic transactions.
6. Adjustment of civil work expenditure subcontracted to AEs.
7. Adjustment of purchase of equipment from AE.
8. Disallowance under section 14A.
9. Disallowance of property taxes while computing income from house property.

Issue-wise Detailed Analysis:

1. Determination of Total Income by the Assessing Officer:
The Assessing Officer determined the total income of the appellant at Rs. (1,55,49,10,430)/- as against the returned income of Rs. (185,4573,238)/-. The appellant strongly objected to this addition.

2. Reference to the Transfer Pricing Officer under Section 92CA(1):
The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1), which the appellant claimed was "bad in law" and thus void ab initio.

3. Adjustment of Specified Domestic Transactions:
The TPO, as confirmed by the Dispute Resolution Panel (DRP), made an adjustment of Rs. 23,42,64,637/- in respect of certain specified domestic transactions, which the appellant contested.

4. Retrospective Nature of the Deletion of Clause (i) of Section 92BA:
The appellant argued that the deletion of clause (i) of section 92BA by the Finance Act, 2017 should be considered retrospective, rendering the entire transfer pricing adjustment invalid. The Tribunal referred to the Karnataka High Court's decision in PCIT vs. Texport Overseas (P.) Ltd., which held that the omission of section 92BA(i) is retrospective and thus any action taken under it is invalid.

5. Tax Evasion in Specified Domestic Transactions:
The appellant contended that there was no tax evasion since both the AEs and the appellant company were loss-making entities, making the transactions tax neutral. The Tribunal did not provide specific relief on this ground but focused on the retrospective application of the deletion of section 92BA(i).

6. Adjustment of Civil Work Expenditure Subcontracted to AEs:
The TPO made an adjustment of Rs. 20,64,57,852/- by recomputing the arm's length price for civil work expenditure subcontracted to IVRCL Ltd. and Palladium Infrastructure and Project Ltd. The TPO rejected the Comparable Uncontrolled Price (CUP) method applied by the appellant and used the Transactional Net Margin Method (TNMM) instead. The Tribunal directed the Assessing Officer to re-examine these transactions under section 40A(2)(b).

7. Adjustment of Purchase of Equipment from AE:
The TPO made an adjustment of Rs. 2,78,06,785/- for the purchase of equipment from Hindustan Dorr Oliver Technologies Ltd., claiming the AE had overcharged the appellant. The Tribunal directed the Assessing Officer to re-examine this transaction under section 40A(2)(b).

8. Disallowance under Section 14A:
The Assessing Officer disallowed Rs. 6,53,54,313/- under section 14A, which included Rs. 5,84,880/- for interest expenditure. The Tribunal directed the disallowance to be restricted to the exempt income of Rs. 1,12,635/-.

9. Disallowance of Property Taxes while Computing Income from House Property:
The Assessing Officer disallowed Rs. 8,46,635/- out of the municipal tax, claiming 50% of the property was occupied by the appellant for its own use. The Tribunal upheld the DRP's direction to restrict the disallowance to Rs. 8,46,653/-.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine the transactions under section 40A(2)(b) and to restrict the disallowance under section 14A to the exempt income. The appeal was partly allowed, with some grounds dismissed and others requiring re-examination.

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