Domestic transfer pricing: Specified Domestic transaction to exclude payments made u/s 40A(2)(b); Inter-unit comparison of net profit in these GST times

[Vivek Jalan]

Various issues in Domestic transfer pricing have come up recently on which various judgements have been passed –

i. Specified Domestic transaction to exclude payments made u/s 40A(2)(b)

Section 92BA(i) of Income Tax Act was deleted w.e.f. 1.7.2017 and before deletion required that "specified domestic transaction" includes “any expenditure in respect of which payment has been made or is to be made to a person referred to Section 40A(2)(b)”.

The omission of a particular provision in a statue would not save the acts done earlier and therefore the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as if it had never been passed, and the statute must be considered as a law that never existed. The issue is no more res-integra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of KOLHAPUR CANESUGAR WORKS LTD. VERSUS UNION OF INDIA - 2000 (2) TMI 823 - SUPREME COURT where under Apex Court has examined the effect of repeal of a statute visa-vis deletion/addition of a provision in an enactment and its effect thereof.

Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.04.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Therefore, it was held accordingly in the case of GOLDBRICKS INFRASTRUCTURE PVT. LTD. VERSUS ASST. COMMISSIONER OF INCOME TAX-1 (1) , RAIPUR (C.G.) - 2024 (12) TMI 905 - ITAT RAIPUR

ii. Addition due to difference in profitability of different Units In the current age of GST where the trial balance is maintained state-wise, can the same be used by Income Tax Authorities for domestic transfer pricing purposes adding expenses of certain units which show a lower net profit? In such matters, it has been held in plethora of judgements that merely low profit by itself is not a valid criterion for not accepting profit shown in books of account. There may be various reasons for it like –

A. Higher depreciation due to newer technologies installed

B. Higher labour, fuel, power, etc expenses

For substantiating such an allegation, the AO has to –

A. Either point out any discrepancy in the books of account

B. Or reject the books of account u/s 145 of the I.T. Act

C. Or has to bring on record a specific instance of under reporting or over reporting of revenue

D. Or has to point out an instance of bogus or excessive claim of any expenses or under reporting of expenditure.

This was upheld in the cases of COMMISSIONER OF INCOME TAX-XII VERSUS SMT. POONAM RANI - 2010 (5) TMI 57 - DELHI HIGH COURT, MD. UMER VERSUS COMMISSIONER OF INCOME-TAX, BIHAR - 1974 (11) TMI 29 - PATNA HIGH COURT and now was again upheld in the case of A.C.I.T. Vs M/s PRAG INDUSTRIES (INDIA) PVT LTD [2024-VIL-1788-ITATLCK]