Summary: Section 92BA(i) of the Income Tax Act, 1961 introduced the concept of Specified Domestic Transactions (SDTs) to ensure related-party transactions in India were conducted at arm’s length to prevent tax evasion. However, the Finance Act of 2017 omitted clause (i), effectively exempting SDTs from transfer pricing scrutiny. In PCIT vs. TT Steel Service India Pvt. Ltd. (2024), the Karnataka High Court upheld the Tribunal’s ruling that adjustments made by the Transfer Pricing Officer (TPO) for SDTs were invalid, as the omission of section 92BA(i) retroactively nullified its existence. Citing precedents like Kolhapur Canesugar Works Ltd. v. Union of India, the Court reaffirmed that the omission of a provision without a saving clause renders it as if it never existed. The decision clarified that transfer pricing adjustments could only apply to international transactions under Chapter X of the Act and not to domestic transactions under section 40A(2)(b).
Introduction:
Prior to its amendment, Section 92BA(i) of the Income Tax Act, 1961 established the idea of “Specified Domestic Transactions” (SDTs) under the purview of transfer pricing laws. In order to prevent tax evasion through inflated or deflated transfer prices, the clause sought to guarantee that transactions between related parties within India were carried out at arm’s length, i.e., at a fair price.
Transactions for which payment was made or is to be paid to designated individuals under section 40A(2)(b) were included in SDTs under this provision. However, clause (i) of section 92BA was omitted in the Finance Act of 2017, these transactions were essentially exempt from transfer pricing scrutiny. Notwithstanding this omission, disagreements surfaced concerning the legality of transfer price modifications implemented following this clause before its repeal. In light of the legislative intent behind its repeal and court decisions regarding the retroactive application of such omissions, this case brief investigates the claim that transfer price adjustments under section 92BA(i), as they existed before the amendment, are invalid.
Background:
This Income Tax Appeal was filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITAT), Bangalore dated 06.04.2023 for the Assessment Year 2016-17 wherein the Tribunal invalidated the transfer made to the Transfer Pricing Officer (TPO) under clause (i) of section 92BA of the Act and consequently held that the transfer pricing adjustment in respect of the specified domestic transaction is liable to be deleted. The Karnataka High Court upheld the decisions of the Tribunal and dismissed the appeal.
Facts of the Case:
- The Assessee is a company TT Steel Service India Private Limited, incorporated on June 20, 2014 in the state of Karnataka. The assessee was formed as a result of demerger of the holding company Toyota Tsusho India Pvt. Ltd. into two resultant companies, i.e. TT Steel Service India Private Limited (assessee) and TT Bharat Integrated Logistic Pvt. Ltd.
- For the assessment year 2016-2017, the return of income was filed on 30.11.2016 declaring total loss of Rs. 28,87,61,042/- The assessment was selected for scrutiny u/ s 143 (2) of the Act.
- During the course of assessment proceedings, it was noticed that the international transactions entered by the assessee with its Associated Enterprises (AEs), hence, the matter was referred to the Transfer Pricing Officer (TPO)to determine the Arm’s Length Price (ALP) of the said transaction.
- The TPO computed adjustments on the international transactions and Specified Domestic Transactions (SDTs). The assessee contended that the adjustment should be restricted to the amount of international transactions only due to the non-applicability of section 92BA (i) which was omitted by the Finance Act, 2017.
Issues before the HC:
- Whether the Tribunal is correct in invalidating the reference made to TPO for Specified Domestic Transactions and restricting the Transfer Pricing Adjustments to International Transactions only?
- Whether the Tribunal was right in law in holding that in view of section 92BA (i) being omitted w.e.f. 01.04.2017 would amount to non-existence of section?
Respondent’s Argument:
The Ld. Counsel appearing for the Respondent, at the outset, submitted that no substantial question of law arose for consideration, which is a ground for appeal u/s 260-A as the question urge in the appeal are covered by the judgment of Co-ordinate Bench of this Court in Principal Commissioner of Income Tax & Ors. V. M/S. Texport Overseas Pvt. Ltd. and the pronouncement of the Apex Court in Kohlapur Canesugar Works Ltd. v. Union of India, according to which, clause (i) of section 92BA having been omitted by the Finance Act, 2017 from the statute, the resultant effect is that it had never been passed and to be considered as a law, never been existed.
The adjustments made by the Ld. TPO with respect to transactions executed by the Assessee with its AEs located in India are covered under clause (i) of section 92BA of the Act as it stood before the amendment, hence this is invalid.
Reasoning of the High Court:
The High Court accepted the contention of the assessee with regards to the first issue stating that it has already been taken into consideration by the Co-ordinate Bench of this Court in Principal Commissioner of Income Tax & Ors. V. M/S. Texport Overseas Pvt. Ltd. and held that the questions involved in this issue is not sustainable.
For the second issue, the High Court relied upon the decision of the Bombay HC in Commissioner of Income Tax v. Thyssen Krupp Industries India Pvt. Ltd. where a similar question of law was answered against the Revenue. In this case, the Bombay HC held that in terms of Chapter X of the Act, re-determination of consideration is to be done only with regard to income arising from international transactions on determination of ALP. The mandated adjustment is only in respect of International Transactions and not transactions entered into by assessee with unrelated independent third parties. The adjustment by the Revenue is beyond the scope and ambit of Chapter X of the Act. A similar decision in the case of Commissioner of Income Tax, Mumbai v. Phoenix Mecvano (India) Pvt. Ltd. has attained finality till the Supreme Court. Thus, this issue was also decided in the favour of the assessee.
ANALYSIS AND CONCLUSION:
The questions of law in this case were answered in favour of the assessee, wherein the Co-ordinate Bench of the Karnataka HC relied heavily upon the case of Kohlapur Canesugar Works Ltd. v. Union of India. In this case, the Supreme Court stated that the normal effect of deleting a provision is to obliterate it from the statute as if it had never been passed, unless a saving clause is provided for the same. By the virtue of this ruling, section 92BA clause (i) is to be considered a law that has never been existed.
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