ITAT Mumbai Allows Mahindra’s Development and Scientific Research Expenses

Mahindra Two Wheelers Ltd. Vs DCIT (ITAT Mumbai)

Summary: The Income Tax Appellate Tribunal, Mumbai “J” Bench, comprising Shri Prashant Maharishi, Accountant Member, and Shri Sandeep Singh Karhail, Judicial Member, partly allowed the appeal of Mahindra Two Wheelers Ltd., formerly Mahindra Trucks and Buses Ltd., against DCIT for Assessment Year 2013-14. The appeal challenged the assessment order dated 30 November 2017 passed under Sections 143(3) read with 144C(13) of the Income-tax Act, 1961. The assessee, engaged in manufacturing and selling commercial vehicles, had returned a loss of ₹335.62 crore, while its assessed income was determined at ₹60.32 lakh. The appeal involved specified domestic transfer pricing, development expenditure, dealer incentives, scientific research deductions, industrial promotion subsidy and carry-forward of losses.

The principal dispute concerned a ₹2,19,64,47,328 transfer-pricing adjustment relating to purchases of finished commercial vehicles from an associated domestic entity, Mahindra Vehicle Manufacturers Limited. The adjustment had been made under Section 92CA by treating transactions covered by Section 92BA(i) as specified domestic transactions. During appellate proceedings, the assessee raised an additional legal ground that clause (i) of Section 92BA had been omitted by the Finance Act, 2017 without a saving provision and that the consequent transfer-pricing adjustment could not survive. The Tribunal admitted the ground because it raised a legal question requiring no further factual investigation.

The assessee relied particularly on PCIT Vs Texport Overseas Pvt. Ltd., which had considered the effect of omission of Section 92BA(i). The Revenue contended that the omission was prospective and relied on judgments concerning the effect of statutory repeal, including Fibre Boards Pvt. Ltd. and Shree Bhagwati Steel Rolling Mills. Following the Karnataka High Court ruling cited before it, the Tribunal held that the adjustment made by invoking omitted Section 92BA(i) was unsustainable and deleted the entire ₹219.64 crore transfer-pricing adjustment. However, it separately directed the Assessing Officer to examine the deductibility and reasonableness of the underlying related-party expenditure under Section 40A(2).

The Tribunal also considered a disallowance arising from ₹4,78,71,842 of development expenditure incurred for commercial vehicle manufacturing. The Assessing Officer had treated this expenditure as capital in nature and allowed depreciation at 25%, principally because the expenditure related to further development of vehicle assembly operations. The Tribunal observed that the assessee was already manufacturing commercial vehicles and had substantial vehicle sales during the relevant year. The expenditure was incurred for expansion and development within an existing business, rather than for commencing an entirely new undertaking or acquiring an identifiable asset of enduring benefit. It therefore directed allowance of the full expenditure as revenue expenditure and withdrawal of the depreciation already granted.

The next issue concerned dealer incentives of ₹23,18,59,282 disallowed under Section 40(a)(ia) for alleged failure to deduct TDS under Section 194H. The assessee maintained that it sold vehicles to dealers on a principal-to-principal basis and that dealer incentives did not constitute commission or brokerage. The Tribunal relied on the Bombay High Court’s decision in Mahindra and Mahindra Ltd., which had followed the position that such dealer arrangements were not agency transactions. The Tribunal also considered CIT Vs Intervet India Pvt. Ltd. and the dismissal of the Revenue’s special leave petition against the relevant Bombay High Court order. It accordingly deleted the disallowance, holding that tax was not required to be deducted under Section 194H on the incentives in the factual arrangement under examination.

Regarding scientific research, the Assessing Officer had disallowed ₹13,13,40,403 claimed under Section 35(1)(i) and ₹70,88,075 claimed under Section 35(1)(iv), allowing depreciation instead. The expenditure related to automotive product development, including engineering design, testing, validation, product readiness and related technical activities. On examining the business and nature of the research, the Tribunal held that the activities involved extending applied technical knowledge in the existing automobile manufacturing business. It therefore allowed the ₹13.13 crore revenue scientific research expenditure under Section 35(1)(i) and the ₹70.88 lakh capital scientific research expenditure under Section 35(1)(iv), directing withdrawal of the corresponding depreciation benefits to avoid duplication.

The Tribunal further examined an industrial promotion subsidy of ₹18,81,19,155 received from the Government of Maharashtra under the Package Scheme of Incentives, 2007. The Assessing Officer had treated the subsidy as taxable revenue receipt because its payment mechanism was connected with sales tax. The Tribunal applied the purpose test recognised in CIT Vs Ponni Sugars and Chemicals Ltd.. It found that the scheme was designed to encourage industrial development and investment in less developed regions, and that disbursement through VAT/CST refunds did not alter its capital character. Following coordinate Bench decisions concerning the same scheme and the Mahindra group, it held the subsidy to be a capital receipt.

The Tribunal directed the Assessing Officer to determine the assessee’s eligible carry-forward losses and unabsorbed depreciation in accordance with law. The appeal was partly allowed. Importantly, although the Section 92BA(i) transfer-pricing adjustment was deleted, the assessment of underlying related-party expenditure under Section 40A(2) remained open. The ruling should also be read in the context of AY 2013-14 and the judicial authorities applicable to the particular issues, rather than as a blanket exemption from all transfer-pricing or related-party expenditure scrutiny.

Cases Discussed

1. PCIT Vs Texport Overseas Pvt. Ltd. — ITA No. 392/2018; 12/12/2019; Karnataka High Court. Principal precedent followed regarding the effect of omission of Section 92BA(i) on specified domestic transfer-pricing adjustments.

2. Texport Overseas Private Limited Vs DCIT — IT(TP)A No. 1722/Bang/2017; ITAT Bangalore. Relied upon concerning the omission of Section 92BA(i) and separate scrutiny under Section 40A(2).

3. SMR Automotive Systems India Ltd. Vs ACIT — ITA No. 6614/Del/2017; 30/06/2021; ITAT Delhi. Relied upon by the assessee on the statutory omission issue.

4. Amman India (P.) Ltd. Vs ACIT — (2022) 134 taxmann.com 10; ITAT. Cited by the assessee regarding the statutory omission.

5. Kolhapur Canesugar Works Ltd. Vs Union of India — AIR 2000 SC 811; Supreme Court. Discussed within the Karnataka High Court quotation concerning statutory omission and saving provisions.

6. General Finance Co. Vs ACIT — Supreme Court. Referred to in the quoted discussion on the effect of repeal or omission.

7. GE Thermometrics India Private Ltd. — Karnataka High Court. Referred to in the quoted reasoning on statutory omission.

8. Fibre Boards Private Limited — (2015) 62 taxmann.com 135 (SC); Supreme Court. Relied upon by the Revenue concerning repeal, omission and statutory savings.

9. Shree Bhagwati Steel Rolling Mills Vs Commissioner of Central Excise — 2015 (326) ELT 209; Supreme Court. Cited by the Revenue concerning the legal consequences of omission.

10. Firmenich Aromatics India Private Limited — (2020) 118 taxmann.com 3; ITAT; 15/07/2020. Relied upon by the Revenue; distinguished by the assessee.

11. Sobha City Vs ACIT — (2021) 127 taxmann.com 39; ITAT Bangalore. Relied upon concerning examination of related-party expenditure under Section 40A(2) notwithstanding omission of Section 92BA(i).

12. CIT Vs V.S. Dempo & Co. Pvt. Ltd. — (2011) 336 ITR 29 (Bombay); Bombay High Court. Discussed on Section 40A(2)(b), related-party status and the relevance of the factual circumstances.

13. Mahindra Navistar Automotives Ltd. Vs DCIT — (2016) 181 TTJ 271; ITAT Mumbai; 13/05/2016. Distinguished while examining whether development expenditure in an existing manufacturing business was revenue or capital in nature.

14. Mahindra & Mahindra Ltd. — Income Tax Appeal No. 1148 of 2014; Bombay High Court; 06/02/2017. Relied upon regarding dealer incentives paid in principal-to-principal sales arrangements and non-applicability of Section 194H; SLP (Civil) No. 37462/2017 dismissed on 12/01/2018.

15. CIT Vs Intervet India Pvt. Ltd. — (2014) 364 ITR 238; Bombay High Court. Referred to regarding the character of dealer incentives and principal-to-principal transactions.

16. CIT Vs Ponni Sugars and Chemicals Ltd. — (2008) 306 ITR 392; Supreme Court. Applied for the purpose test in determining whether government incentives constitute capital or revenue receipts.

17. Reliance Industries Limited — Special Bench/Bombay High Court proceedings. Discussed by the parties concerning the treatment of industrial subsidies and the status of related appellate proceedings.

18. Mahindra Vehicle Manufacturers Limited — ITA No. 6919/Mum/2016; AY 2011-12; ITAT Mumbai. Followed regarding the capital character of subsidy under Maharashtra’s Package Scheme of Incentives, 2007.

19. Mahindra Vehicle Manufacturers Private Limited — ITA No. 2808/Mum/2018; AY 2013-14; 24/07/2019; ITAT Mumbai. Followed on the same Maharashtra subsidy scheme.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

01. This appeal is filed by Mahindra Two wheelers Limited [ earlier known as Mahindra Trucks and Buses Limited] for AY 2013-14 against the order passed under section 143(3) read with section 144C(13) of The Income-Tax Act, 1961 (the Act) passed by the Dy. Commissioner of Income-tax-2(2)(2), Mumbai (the Assessing Officer) dated 30th November, 2017.

02. During the pendency of appeal, there is a change in the name of the appellant from Mahindra trucks and buses Ltd to Mahindra two wheelers Ltd; assessee has filed revised form number 36 to this effect on 22/02/2021.

03. The assessee is a company engaged in the business of manufacture and sale of commercial vehicles, spare parts and its components. Assessee filed return of income on 26th November, 2013 at a loss of Rs. 335,61,83,066/-, which was picked up for scrutiny and consequently draft assessment order was passed by the learned Assessing Officer, wherein the adjustment proposed by the learned Jt. Commissioner of Income-tax, Transfer Pricing-3(2), Mumbai by order under section 92CA(3) of The Act dated 31st October, 2016, was incorporated. The draft order was objected before Dispute Resolution Panel-3, Mumbai (DRP), who passed direction on 27th September, 2017 and consequently the impugned assessment order was passed wherein the income of the assessee was determined at Rs. 60,32,061/-.

04. Assessee is aggrieved with that order has preferred the appeal before us raising the following grounds of appeal:-

Being aggrieved by the order passed by the Deputy Commissioner of Income tax Circle 2 (2) (2) Mumbai (DCIT, for short) the Appellant submits the following grounds of appeal for your sympathetic consideration

Expenditure debited to Profit and loss account Rs. 4,78,71,842/

On the facts and in the circumstances of the case and in law the Appellant contends that the learned DCIT erred in proposing and the DRP erred in confirming disallowance of the following sums treating the same as capital expenditure:

The learned DCIT/DRP ought to have upheld the Appellant’s contention that the expenses were incurred wholly and exclusively for the purpose of business of the Appellant and were revenue incurred wholly and exclusively for the purpose of business of the Appellant and were revenue in nature and therefore were allowable as deduction as claimed instead allowing only depreciation thereon at the rate of 25% resulting in net disallowance of Rs.3,59,03,881/-.

The claims of the Appellant be allowed without prejudice to the above and to similar contentions raised in this regard in earlier assessment years the learned DCIT be directed to allow depreciation at the rate of 25% in respect of the block of assets representing development expenditure similarly disallowed in preceding assessment years.

2. Disallowance under section 40a(ia) in respect of dealer incentives of ₹23,18,59,282/- rejecting Appellant’s contention that tax was not deductible on dealer incentive under section 194H of the Act.

In any event, the learned DCIT/Dispute Resolution Panel ought to have appreciated that unless the Appellant is held to be an assessee in default under section 201 of the Act, it cannot be held that the Appellant had failed to deduct tax at source in accordance with the provisions of the Act so as to merit disallowance under section 40a(ia) of the Act.

In any event the learned DCIT/Dispute Resolution Panel ought not to have made disallowance under section 40a(ia) in those cases where the payees had filed their returns of income and paid tax due there under for the relevant assessment year, there being thus no subsisting tax liability of the payee which would entitle the Appellant to claim deduction under the proviso to the section at any subsequent point of time.

Further in our appeals against this disallowance for Assessment Year 2007-08 & 2008-09, the Honorable commissioner of Income (Appeals), has allowed our claim of dealer incentive and deleted the disallowance made by D.C.I.T. (Appellate order No. CIT(A)-5.DIT2(2)/IT-96/2010-11 for Assessment Year 2007-08 and Appellate order No. CIT(A)-5/JCIT(OSD) 2(2)/IT-252/2011-12 for Assessment Year 2008-9)

The addition made by the learned DCIT/Dispute Resolution Panel being contrary to the provisiosn of law be deleted.

3. Disallowance under section 35(1)(i) and 35(1)(iv) of ₹13,84,28,478/-

On the facts and in the circumstances of the case and in law the learned DCIT erred in disallowing expenditure of ₹13,13,40,403/- claimed under section 35(1)(i) and ₹70,88,075/- claimed under section 35(1)(iv) rejecting the contention of the Appellant that the said expenditure was indeed incurred on scientific research and instead allowing only depreciation thereon at the rate of 25% resulting in net disallowance of ₹10,38,21,359/-.

The disallowance, based on an incorrect appreciation of facts be deleted.

Without prejudice to the above and to similar contentions raised in this regard in earlier assessment years the learned DCIT be directed to allow depreciation at the rate of 25% in respect of the block of assets representing expenditure on scientific research similarly disallowed in preceding assessment years.

4. Disallowance of claim that Industrial Promotional Subsidy Incentive of Rs. 18,81,19,155/- was a capital receipt.

On the facts and in the circumstances of the case and in law the learned DCIT erred in proposing and the DRP erred in not accepting the contention of Appellant that Industrial Promotion Subsidy of Rs. 18,81,19,155/- received from Government of Maharashtra pursuant to the Package Scheme of Incentives was not taxable on the ground that it was a capital receipt.

The learned DCIT be directed to exclude the said sum from the income of the Appellant.

Without prejudice to the above the said amount be adjusted against the cost of relevant block of fixed assets and the WDV thereof recomputed.

5. Disallowance under Section 92CA(3) of Adjustment in Arms Length Price of Rs.2,19,64,47,328/-

The learned Assessing Officer (‘AO’) / Transfer Pricing Officer (‘TPO’)/ Dispute Resolution Panel (‘DRP’) has erred in passing the aforesaid assessment order dated November 30, 2017 which was received by the assessee on November 30, 2017) without appreciating the facts of the case both in essence and substance.

The learned AO / TPO / DRP has misapprehended the entire pricing arrangement of the specified domestic transaction (‘SDT’) of payment made by the appellant to Mahindra Vehicle Manufacturers Limited (‘MVML’ / ‘related party’) for purchase of finished goods.

The learned AO / TPO I DRP failed to appreciate that the payment made by the appellant for the purchase of finished goods approximately constitutes of 70 % – 75% towards material and conversion cost incurred by the related party on a back-to-back basis to the appellant.

The learned AO / TPO / DRP did not take cognizance of additional evidence filed by the appellant vide submission dated August 23, 2017.

Furthermore, learned AO / TPO / DRP erroneously rejected the appellant’s claim of no mark-up being levied by the related party on third party vendor costs contending that the appellant has not provided any evidence to prove that no mark-up has been charged.

The learned AO / TPO / DRP has erred in not appreciating the fact that the appellant in his additional evidence provided the entire backward trail of evidences to prove that no mark-up has been charged; commencing from consideration paid by appellant to its related party until the third party vendor cost details (including third party invoices) incurred by the related party for manufacturing of Heavy Commercial Vehicles (‘HCVs’); factored in the transfer price.

Further, the learned AO / TPO / DRP has erred in not limiting the transfer pricing adjustment to cost elements beyond the material cost, which are purely third party vendor costs charged on a back-to-back basis by MVML to the appellant.

The learned AO / TPO / DRP erred in disregarding the entire additional evidence of the appellant and misapprehended the fact that profit before tax of INR 430.53 crores as generated by related party, was after debiting entire costs sustained by it, inclusive of expenses that were being claimed by the appellant on which no mark-up is paid.

Incidentally, the learned AO / TPO / DRP failed to acknowledge the fact that the related party is also engaged in another business segment of manufacturing Light Commercial Vehicles (‘LCV) which constitutes 90% of its total revenue and the business segment which pertains to the SDT transaction for purchase of finished goods constitutes – HCV segment which only constitutes 10% percent of total revenue. Accordingly, the premise of rejecting the additional evidence taken by learned AO /TPO / DRP is erroneous.

The learned AO / TPO / DRP has grossly erred in disregarding the economic adjustments i.e. capacity utilization adjustment being performed and applied by the appellant to operating margins earned by it under the HCV manufacturing segment on account of its underutilized manufacturing capacity for the year under consideration vis-â-vis the operating margins earned by the comparable companies.

The learned AO / TPO / DRP has misconstrued the facts and erroneously believed the appellant of claiming capacity adjustment for under-utilized capacity sustained by the AE.

The learned AO / TPO / DRP has failed to appreciate and find merit in the fact that lack or deficiency of requisite information and data cannot be a lucid justification for disregarding the capacity utilization adjustment.

The learned AO / TPO / DRP erred in not acknowledging the fact that the losses incurred by the assessee were genuine due to business, commercial and economic reasons and accordingly there was a need to perform capacity utilization adjustment to establish comparability.

The learned AO/ TPO / DRP failed to appreciate failed to appreciate verdict of its very own jurisdictional tribunal in case of FIAT India Private Limited ITA No. 1848/Mum/2009

The learned AO / TPO/ DRP erred in rejecting Ural India Limited and Force Motor Limited as a comparable company to the appellant’s HCV segment on the ground that volume of turnover and functionality were incomparable, respectively.

The learned AO / TPO /DRP made an arbitrary and subjective application of lower turnover filter for rejection of Ural India Limited as a comparable company and did not apply such filter for companies with higher turnover to establish comparative analysis.

The learned AO / TPO/ DRP failed to acknowledge that annual report of Force Motors Limited substantiated the fact of it being engaged in business of manufacturing HCVs.

The learned AO / TPO / DRP failed to acknowledge the fact that the appellant had no intentions to erode the taxable base, since in the instant case neither the appellant nor MVML avails tax holiday benefits. Furthermore, with regard to transaction under appeal herein, there were no other tax arbitrage opportunities arising as the appellant was a loss making entity contrary to MVML, a profit making entity.

The learned AO/TPO / DRP failed to appreciate the appellant’s reliance on principle laid down by the Supreme Court ruling in case of Glaxo Smithkline Asia (P) Ltd (2010/236 CTR (SC) 113).

The learned AO / DRP failed to appreciate that the amendment in Section 92BA of the Income Tax Act, 1961, vide Finance Act 2017 (with effect from 1 April 2017, whereby clause (i) of Section 92BA is omitted, is deemed to be omitted from inception and on account of its omission, the impugned transaction would not fall within the definition of specified domestic transactions.

The appellant places reliance on the Bangalore Tribunal verdict in case of Texport Overseas Private Limited v. DCIT [IT (TP) A No.1722/Bang/2017] wherein it ruled – “IT would be deemed that clause (i) of section 92BA of the Income Tax Act, 1961 was never on the statute as it has been omitted w.e.f. April 01,2017 vide Finance Act, 2017 and nothing was specified whether the proceedings initiated or action taken on this continue.

6. Carry forward Losses-

The learned DCIT erred in not passing a speaking order quantifying carry forward of unabsorbed losses and unabsorbed depreciation for the current as well as the earlier years.

Each one of the above grounds of appeal is without prejudice to the other.

Your appellant reserves the right to add to, alter or amend any of the above grounds of appeal, if felt necessary.

05. During the course of hearing, on 14 August 2019, assessee filed an application for admission of the additional ground invoking the provisions of Rule 11 of The Income Tax [Appellate Tribunal] Rules 1963.

06. The additional ground raised is as Under:-

“7. On the facts and circumstances of the case and in law, no transfer pricing adjustment made in pursuance of Section 92BA (i) of The Income Tax Act, 1961 (Act) can be sustained as the same has been omitted without the saving clause.”

07. It was stated that the failure to raise the additional ground at the time of filing of the original appeal was not deliberate but arising out of the legal position which has come to the notice of the appellant subsequent to filing of the appeal. It was further stated that the facts are not required to be further investigated and are on record. It was stated that this ground goes to the root of the matter, is purely a legal ground, and therefore should be admitted. The application relied upon several judicial precedents.

08. Learned authorised representative reiterated the same argument as stated in the application and submitted that the additional ground deserves to be admitted.

09. The learned CIT DR vehemently opposed the additional ground and submitted that it should not be admitted at this stage.

010. We have carefully considered the rival contentions and find that the assessee has raised the additional ground of appeal, which goes to the root of the matter, is legal ground, does not require any further facts to be investigated, and therefore deserves to be admitted. The claim of the assessee is further supported by several judicial precedents. Therefore, we admit the additional ground.

011. On the merits of additional ground, The learned authorised representative submitted that additional ground raised is covering the adjustment made u/s 92CA (3) of the Act in in arm’s-length price of ₹ 2,196,447,328/– of specified domestic transactions. She submitted that there is no provision which provides for determination of Arm’s length price [ ALP] of the specified Domestic Transaction covered u/s 40 A (2) now as clause 92BA (i) is omitted By The Finance Act 2017 without any savings clause , total addition deserves to be deleted on this ground only. Therefore, she submitted that without going into the merits of the addition issue is squarely covered in favour of the assessee by the several judicial precedents. She submitted that decision of SMR Automotive Systems India Ltd versus Asst Commissioner of income tax in ITA number 6614/Del/2017 dated 30 June 2021 covers all those decisions. She referred to paragraph number 15 of the decisions wherein the issue first arose before the Bangalore bench in ITA (TP) number 1722/2017. She referred to paragraph number 16 further where the decision of the coordinate bench was confirmed by the honourable Karnataka High Court in ITA number 392/2018. She further referred to the decision of the coordinate bench in Amman India (private) Ltd versus ACIT (2022) 134 taxmann.com 10. The crux of the argument was that by The Finance Act 2012 with effect from 1/4/2013 the provisions of Section 92, 92C, 92D and 92E were made applicable to certain specified domestic transactions by introduction of Section 92BA of the act. One of the specified domestic transaction as per Section 92BA (i) was with respect to any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of Section 40A. This clause i.e. 92BA (i) was omitted by The Finance Act, 2017 with effect from 1/4/2017. Honourable Karnataka High Court in case of principal Commissioner of income tax versus Texport overseas (P) Ltd [2020] 114 taxmann.com 568 (Karnataka) has held as Under:-

“5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular it is clearly noticeable that Clause (i) of section 92BA of the Act came to be omitted w.e.f. 01.04.2019 by Finance Act, 2014. As to whether omission would save the acts is an issue which is no more res intigra in the light of authoritative pronouncement of Hon’ble Apex Court in the matter of Kolhapur Canesugar Works Ltd. v. Union of India AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute vis-a-vis deletion/addition of a provision in an enactment and its effect thereof. The import of section 6 of General Clauses Act has also been examined and it came to be held:

“37. The position is well known that at common law, 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. To this rule, an exception is engrafted by the provisions of section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in section 6 or in special Acts may modify the position. Thus, the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision.”

6. In fact, Co-ordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of section 10B. In the matter of General Finance Co. v. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of section 92BI and reference made to the order of Transfer Pricing Officer-TPO under section 92CA could be invalid and bad in law.

7. It is for this precise reason; tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon’ble Supreme Court in Kolhapur Canesugar Works Ltd. referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra.”

012. The learned authorised representative also made a detailed submission on this issue drawing our attention to rational to introduction of the transfer pricing provision and its applicability to domestic transfer pricing provisions. It was also stated that domestic transfer pricing regulations are procedural in nature and they ought to be applied only for non-revenue neutral situations. It also emphasized that clause (i) of Section 92BA was omitted without a saving clause. Therefore, the adjustment made by the learned transfer officer on account of the arm’s-length price of domestic transaction u/s 92BA (i) of the act do not survive.

013. The learned CIT DR also placed a detailed written submission dated 9 February 2022 on the issue wherein also she discussed the background of the insertion and subsequent omission of Section 92BA (i) of the Act. It was stated that omission has been made by The Finance Act 2017 which clearly shows that the amended provisions were applicable only from assessment year 2017 – 18 onwards and therefore all specified domestic transactions benchmarked at arm’s-length up to that assessment year are valid. It was further submitted that coordinate bench in its own decision in Firemenich Aromatics India private limited (2020) 118 Taxmann.com 3 dated 15/7/2020 relying on the decision of the honourable Supreme Court in case of Fibre Boards Private Limited 62 taxmann.com 135 (SC) and Shri Bhagwati steel rolling mills versus Commissioner of Central Excise 2015 (326 ELT 209 observed that Section 6A of the general clauses act states that when any act or regulation is made after commencement of the act, such amendment would not affect the ongoing investigation or legal proceedings. She submitted that coordinate bench ruled that the word ‘repeal’ includes ‘ommission’ and there is no merit in the objection raised by the taxpayer. She heavily relied on paragraph number 13 – 21 of that decision and submitted that the additional ground raised by the assessee may be dismissed.

014. Alternatively, she submitted that, if the decision of the honourable Karnataka High Court is followed, even then the provisions of Section 40A (2) of the act still exist on the statute book and therefore, transactions which are covered by the above provisions should be examined according to the rules of provisions of Section 40A (2) of the act. For this proposition she relied on the decision of M/s Sobha City (2021) 127 taxman.com 39 (Bangalore). Therefore, the issue needs to be remitted back to the file of the learned assessing officer to examine these transactions in accordance with provisions of Section 40A (2) of the act.

015. In response to that, the learned authorised representative submitted that decisions relied upon by the learned departmental representative are distinguishable. It was stated that in the decision of the coordinate bench in case of Fireminch ITAT was dealing with Department’s ‘substantive right’ being the right of appeal against the order of the learned dispute resolution panel, which was omitted. Further, she referred to several judgments of the coordinate benches wherein the judgment of the honourable Supreme Court in case of Fibreboard (supra) and Shri Bhagwati Rolling Mills (supra) were distinguished.

016. To the alternative argument of the learned CIT DR that these transactions in any case needs to be examined in view of provisions of Section 40A (2) of the act, the learned authorised representative vehemently objected to. She submitted that there are many decisions of the tribunal over and above what have been cited above by her, wherein, no such directions to examine transactions in accordance with provisions of Section 40A (2) is given while deleting the adjustment on account of arm’s-length price of specified domestic transactions. For this proposition she relied upon the decision of the honourable Bombay High Court in CIT versus V S Dempo and Co private limited (2011) 196 taxman 193 and submitted that when assessee as well as the recipient of income are in the same tax bracket and pay same rate of tax, it is not a case of tax evasion and there would not be any significant difference in aggregate tax and therefore it should not be remanded to the AO for examination of allowability of these expenses u/s 40A (2) of the act.

017. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case there is an adjustment made to the income of the assessee by determining arm’s-length price of specified domestic provisions by invoking the provisions of Section 92BA (i) of the act. The impugned assessment year before us is assessment year 2013 – 14. The above provision i.e. 92BA (i) of the act was inserted by The Finance Act, 2012 with effect from 1/4/2013 and is omitted by The Finance Act, 2017 with effect from 1/4/2017. The issue whether the adjustment can be made to the total income of the assessee by invoking the provisions of Chapter X of The Income Tax Act to the transactions covered by provisions of Section 92BA (i) for assessment year 2013 – 14 till it was omitted. This issue has been dealt with by the honourable Karnataka High Court in case of Texport overseas (supra) in favour of the assessee holding that as the provisions of Section 92BA (i) has been omitted from the Income Tax Act without any saving clause therefore the natural corollary would be that it did not exist at all in the statute book. Accordingly, we allow the additional ground of appeal and hold that the impugned transfer pricing adjustment of ₹ 2,196,447,328/– made by the learned assessing officer is not sustainable.

018. However we are also conscious that the provisions of Section 40A (2) of the act still exists in the statute book. The decision of the Texport overseas Ltd of the coordinate bench, which was partly challenged by the revenue before the honourable High Court, also held so. In that case, the coordinate bench held that the adjustment on account of examination of the arm’s-length price of the specified domestic transactions is not valid because of deletion of the provisions of Section 92BA (i) of the act with effect from 1/4/2017 without any saving clause, but it held that provisions of Section 40A (2) of the act governs the allowability of those expenditure and therefore coordinate bench set-aside the matter back to the file of the learned assessing officer. The decision of the coordinate bench setting aside the issue back to the file of the learned assessing officer for examination of allowability in accordance with the provisions of Section 40A (2) of the act has not been challenged by either of the parties before the honourable High Court. Further, the decision of the coordinate bench in case of Sobha City (supra) also held so. In view of this we set-aside ground number 5 of the appeal of the assessee back to the file of the learned assessing officer to examine allowability of expenditure in terms of provisions of Section 40A (2) of the act.

019. We do not agree with the argument of the learned authorised representative that it amounts to giving a second chance to the revenue and therefore no remand is warranted for verification of provisions of Section 40A (2) of the act. Very heavy reliance was placed on the decision of the honourable Bombay High Court in CIT versus V S Dempo and Co (private) Ltd 336 ITR 29 (Bombay). We find that in that particular decision the honourable Bombay High Court has given a categorical answer that the provisions of Section 40A (2) was not attracted in that particular cases because the subsidiary company was not at all related person of the assessee within the meaning of the provisions of Section 40A (2) (b) of the act. No such facts exist in the case. Contrary to that, in the present case the assessee, itself has stated in its T P study report as well as Report of Accountant in 3CEB stated that these transactions are covered by the provisions of Section 40 (A) (2) of the act. Even otherwise, it is not the fact that revenue is given a second chance. In the present case earlier the impression of the revenue prior to the decision of the coordinate bench and of the honourable Karnataka High Court, was that specified domestic transaction i.e. transactions that are covered by the provisions of Section 40 A (2) are required to be tested in accordance with the provisions of chapter X of the act. However when the judicial precedents show that no such provision exist in the law, the natural corollary would be to examine the allowability of these expenses u/s 40A (2) of the act.

020. In view of this ground number 5 of the appeal of the assessee is partly allowed.