Texport Overseas Private Limited (the Appellant) vs. Deputy Commissioner of Income-tax (the Respondent)
Income-Tax Appellate Tribunal, Bangalore [IT(TP)A No. 1722/Bang. 2017, AY 2013-14]
Whether the omission of reference of section 40A(2)(b) from section 92BA by virtue of the amendment of Finance Act, 2017 w.e.f. 01.04.2017 shall be deemed not to be on the statute since its introduction w.e.f. 01.04.2012?
- The Income-tax Act, 1961 (the Act) was amended prospectively by the Finance Act, 2012, to provide for a mechanism to determine the fair market value in cases of domestic transactions of related parties in India. A new section 92BA was inserted which defined ‘Specified Domestic Transaction (SDT)’.
- ‘Specified Domestic Transaction’ covered, amongst others, the payments made to related parties stated under section 40A(2)(b) of the Act. Section 40A(2) provides for disallowance of expenditure, in respect of which payment is made by the taxpayer to its related party, where such expenditure is, in the opinion of the Assessing Officer (AO) excessive or unreasonable having regard to the fair market value of the goods, services or facilities, etc. After the amendment made by Finance Act, 2012, the expenditure referred to under section 40A(2)(b) was to be computed based on arm’s length price.
- However, sub-clause (1) of section 92BA, which referred to the payments made to related parties covered under section 40A(2)(b), was omitted by the Finance Act, 2017 w.e.f. 01.04.2017.
Contentions of the appellant
- In light of this amendment, the appellant raised additional grounds before the ITAT, regarding the applicability of section 92BA with respect to transactions covered under section 40A(2)(b), on the principle that such grounds go to the root of the matter and need to be disposed off at the threshold. The AO referred the case to the Transfer Pricing Officer (TPO) considering that the appellant has entered into specified domestic transaction. However, the appellant contended that considering the omission of clause (i) of section 92BA, such clause shall be deemed not to be on the statute since the beginning.
- The appellant supported its contentions by placing reliance on the decision of the Constitution Bench of the Hon’ble Supreme Court (SC) in the case of Kolhapur Canesugar Works Ltd. vs. Union of India (Civil Appeal No. 2132 of 1994). It is to be borne in mind that Article 367 of the Constitution of India states that, the General Clauses Act, 1897 (GCA) applies to the interpretation of any legislation of the Dominion of India.
- The SC explained the same as under:
“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 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.”
- The SC in the above case dealt with the effect of repealing a rule in the Central Excise Rules, 1944. Further, the SC distinguished between the repeal of a ‘statute’, the repeal of a ‘rule’ and also the play of section 6 of the GCA.
- The SC held that section 6 of the GCA only applies to ‘repeals’ and not to ‘omissions’, and applies when the repeal is of a Central Act and not as a Rule. It was further clarified by the SC that in such a case the court may look at the provisions in the rule which has been introduced after omission of the previous rule, to determine whether a pending proceeding will continue or lapse.
- The appellant also relied on the decision of the SC in the case of General Finance Co. vs. ACIT (257 ITR 338). Additionally, reliance was also placed upon the decision of the Karnataka High Court (HC) in the case of CIT Vs. GE Thermometrics India Pvt. Ltd. (ITA No. 876/2008), which dealt with the omission of sub-section (9) of Section 10B of the Act. The HC in this case held that, once the section is omitted from the statute book, the result would be that, ‘it had never been passed’ and be considered as a law that never exists. Therefore, the HC also held that, when the assessment orders were passed, the AO was not justified in taking note of a provision which was not in the statute book and denying benefit to the assessee.
- Thus, drawing an analogy from these judicial pronouncements, the appellant contended that clause (i) of section 92BA of the Act, shall be deemed to be not on the statute since the beginning.
Key observations and decision of the Tribunal:
- The ITAT observed that based on the judgements referred above, it is understood that once a particular provision is omitted from the statute, it shall be deemed to be omitted from the inception.
The only exception is that unless there is some saving section or provision, to make it clear that the action taken or proceeding initiated under that section or provision would continue and would not be left on account of omission. If there is a provision that pending proceedings shall continue and be disposed of under the old rule as if the rule has not been deleted or omitted then such a proceeding will continue.
- Once the clause is omitted by subsequent amendment, it would be deemed that it never existed on the statute. While omitting the clause (i) of section 92BA, nothing was specified whether the proceeding initiated or action taken on this would continue; there existed no saving clause or provision introduced by way of an amendment.
- The ITAT held that the proceeding initiated or action taken under such clause would not survive at all. Hence, in this legal position, actions of the AO under section 92BA(i) and reference made to TPO under section 92CA are invalid and bad in law, and consequentially order passed by the TPO and DRP are also not sustainable in law.
- The ITAT restored the matter back to the file of AO for adjudicating the issue of claim of expenditures in accordance with law after affording opportunity of being heard to the appellant.
The decision of the Bangalore ITAT reiterates the basic principle in the interpretation of statutes which has been expounded by the Supreme Court, that there is a distinction between ‘repeal’ of a statute and ‘omission’ of a statute. In law, each would have a different effect, and further the savings provided under section 6 of the General Clauses Act, 1897, may or may not be applicable.
The jurisprudence regarding the same has been unequivocally stated by the Supreme Court in its decision at para 9 in the case of General Finance Co. (supra):
“……principle underlying section 6 as saving the right to initiate proceedings for liabilities incurred during the currency of the Act will not apply to omission of a provision in an Act but only to repeal, omission being different from repeal….”