Case Law Details
PCIT Vs TT Steel Service India Pvt. Ltd. (Karnataka High Court)
The Karnataka High Court recently addressed a pivotal tax dispute involving question of jurisdiction in PCIT v. TT Steel Service India Pvt. Ltd. (ITA No. 665 of 2023), involving the validity of a reference made to the Transfer Pricing Officer (TPO) for examining a Specified Domestic Transaction(SDT) under Section 92BA(i) of the Income Tax Act, when such clause (i) stood omitted effective from April 1, 2017. The appeal, filed by the Income Tax Department, contested the ITAT’s ruling invalidating the reference and deleting the resulting addition for AY 2016-17. The court upheld ITAT’s decision, citing established precedents, and clarified that the omitted provision must be treated as non-existent from its inception, reaffirming the limited scope of transfer pricing adjustments under Chapter X of the Act.
In the present case, the income Tax department filed an appeal against the order of ITAT invalidating the reference made to the TPO for the determination of a Specified Domestic Transaction (SDT) mentioned u/s 92BA(i) of the Income Tax Act in respect to transactions for A.Y. 2016-17. The core issue arose from a reference made to the Transfer Pricing Officer (TPO) regarding specified domestic transactions under clause (i) of Section 92BA of the Income Tax Act. This clause was omitted effective from 01.04.2017. The ITAT ruled that the reference to the TPO was invalid due to the omission of the provision, leading to the addition made by the Assessing Officer being deleted. The tribunal holds that omission of section 92BA(1) of the Act w.e.f. 1/4/2017 would amount to the nonexistence of the section from the date of insertion.
The revenue contended that the reference was made to TPO in compliance with the provisions of Section 92CA and the amendment takes effect from 01.04.2017 shall apply on A.Y. 2017-18 and afterwards. The revenue contended that all transactions, including those with non-AEs, should be subject to adjustment based on the ALP as the assessee is providing service to both AE and Non-AE and the assessee has not made any bifurcation of profit in the book of account as the overall profit margin is recorded in books without any data as to what would be the profits earned for non-AE.
On the other hand, the assessee relied on the decisions of KOHLAPUR CANESUGAR WORKS LTD. v. UNION OF INDIA, AIR 2000 SC 811 and Commissioner of Income-tax Vs. Thyssen Krupp Industries India (P.) Ltd., [2016] 70 TAXMANN.COM 329 (Bombay) and submitted that the present appeal is covered in the favour of the assessee by these decisions.
The HC relied on the judgment of KOHLAPUR CANESUGAR WORKS LTD. v. UNION OF INDIA, AIR 2000 SC 811, and observed
“37. …………………..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.”
Regarding the issue of TP adjustment, relying on the decision of CIT v. Thyssen Krupp Industries India (P.) Ltd., [2016] 70 TAXMANN.COM 329 (Bombay) the bench observed
“We find that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from international Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.”
The High Court reaffirms the decision of the Tribunal and dismisses the appeal filed by Revenue on the ground that there is no substantial question of law arising in the present appeal as the same has been settled by courts in its decisions.
FULL TEXT OF KARNATAKA HIGH COURT JUDGMENT
The challenge in this appeal is to an order passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru dated 06.04.2023 in appeal proceedings No. IT[TP]A No.375/Bang/2021 which were for the assessment year 2016- 17.
2. The learned counsel for the appellants submits that the following substantial questions of law arise for consideration:
(i) “Whether the Tribunal was right in holding that the reference made to TPO for specified domestic transaction mentioned in clause (i) of Section 92BA of the Act is not valid as the said provision has been omitted and as such addition made in respect of same needs to be deleted without appreciating that reference made to Transfer Pricing Officer was in accordance with parameters of Section 92CA of the Act and the amendment takes effect from 1/4/2027 which applies to A.Y.2017-18 and subsequent years”?
(ii) “Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature in holding that omission of section 92BA(1) of the Act w.e.f 1/4/2017 would amount to nonexistence of the section from the date of insertion when it is settled position that the amendment under the Act would be applicable to the relevant assessment year in which effect is contemplated and recorded a finding contrary to scheme of the Act”?
(iii) “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in view of section 92BA (i) of the Act being omitted with effect from 1/4/2017 would amount to nonexistence of section contrary to settled position of law that the law during the relevant A.Y. has to be applied”?
(iv) “Whether the Tribunal was right in fact and in law in restricting Transfer Pricing Adjustment to International Transaction with Associated Enterprises only even when same is contrary to Section 92CA of the Act and when assesse is providing service to both AE and Non-AE’s where assesse has not made any bifurcation of profit in book of account as overall profit margin is recorded in books without any data as to what would be the profits earned for non-AE”?
3. The learned Senior Counsel appearing for the respondent would, at the outset, submit that no substantial questions of law arise for consideration, as the questions urged in the appeal are covered by the judgment of Co-ordinate Bench of this Court (with regard to questions 1 to 3) and also of the High Court of Bombay (with regard to question No.4).
4. On questions No. 1 to 3, he states the same are primarily relatable to Section 92(BA)(i) which provision has been omitted by the Finance Act,2017 with effect from 01.04.2017. The Senior Counsel states though the assessment year is prior to the omission of the said provision with effect from 01.04.2017, but in view of the judgment of the Co- ordinate Bench wherein the Co-ordinate Bench has followed the judgment of the Apex Court in Kohlapur Canesugar Works Ltd., Union of India reported in AIR 2000 SC 811 and also in view of the judgment of the Co-ordinate Bench of this Court in M/s. GE Thermometrics India private limited Vs the Commissioner of Income tax and another ITA Nos. 876/2008 and 877/2008, the same need to be rejected. Learned Senior Counsel also submits that insofar as question No.4 is concerned, the same is also covered against the Revenue in terms of the judgment of Bombay High Court in the case of Commissioner of Income-tax Vs. Thyssen Krupp Industries India (P.) Ltd., reported in [2016] 70 TAXMANN.COM 329 (Bombay), more specifically, paragraphs Nos.2(a) and 3(d) and (e) thereof. The above submissions made by the learned Senior Counsel for the respondent on the basis of the judgments could not be disputed by the counsel for the appellants.
5. Having noted the submissions made by the learned counsel for the parties, insofar as issues No. 1 to 3 are concerned, we find that, the Co-ordinate Bench of this Court in the case of Commissioner of Income Tax-7 and another Vs. M/s. Texport overseas Pvt. Ltd. in ITA No.392/2018 along with ITA No.170/2019 decided on 12.12.2019 has in paragraphs No.3 onwards, has stated as under:
“3. It is the contention of learned Advocates appearing for revenue that tribunal was not justified in arriving at a conclusion that Clause (i) of Section 92BA of the Act, which had been omitted w.e.f. 01.04.2017 would be applicable retrospectively by presuming the retrospectivity, particularly when the statue itself explicitly stated it to be prospective in nature. As such they have sought for formulating substantial questions of law and have sought for answering the same in favour of revenue and against the assessee.
4. Sri.E.I.Sanmathi, learned counsel appearing for revenue/appellant in ITA No.170/2019 would contend that even the disallowance made by the AO under Section 14A r/w Section 8(2)(iii) of Income Tax Rules for a sum of Rs.14,88,870/- by holding that there was no exempted income and as such disallowance could not have been made even though said provision was rightly invoked by AO, and as such setting aside the disallowance is erroneous. Hence, he prays for substantial question of law as formulated in the appeal memorandum (ITA 170/2019) be formulated, adjudicated and answered in favour of assessee.
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 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 KOHLAPUR CANESUGAR WORKS LTD. v. UNION OF INDIA reported in AIR 2000 SC 811 whereunder 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. 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 o 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, Coordinate 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. vs. 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-TOP 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 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.
8. Insofar as question 2 is concerned, we find from the order of the Tribunal that issue relating to the deletion of disallowance made by the Assessing Officer has been remitted back to the Assessing Officer which finding is based on factual aspects which would not call for interference by us, that too, by formulating substantial question of law. The Assessing Officer has to undertake the exercise of factual determination. As such, without expressing any opinion on merits with regard to question No.2 formulated by the revenue in the respective appeals, we proceed to pass the following:
ORDER
i) Both the appeals i.e., ITA No.392/2018 and ITA No.170/2019 are dismissed.
ii) Order dated 22.12.2017 passed by the Income Tax Appellate Tribunal, Bangalore in IT(TP)A No.1722/Bang/2017 is”
6. Insofar as issue No.4 is concerned, the substantial question of law framed by the Bombay High Court is identical to the question No.4 in this appeal. The question is reproduced as under:
(a) Whether on the facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs)?
7. The findings of the Bombay High Court on the aforesaid question can be seen in paragraph 3(d) and (e) of the judgment as under:
xxx xxx xxx xxx xxx xxx
(d) The grievance of the Revenue before us is that the adjustment is not to be restricted only in respect of transactions entered into with the All the transactions of the respondent-Assessee would have necessarily be varied/adjusted by the margin arrived at by the TPO to arrive at the ALP.
(e) We find that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from international Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.
8. At this stage, we may state here that the judgment of the Co-ordinate Bench in Commissioner of Income Tax-7 and another Vs. M/s, Texport Overseas Private Limited was taken in appeal to the Hon’ble Supreme Court, but the tax effect being less than prescribed limit, the appeal was withdrawn. Since the issue with regard question Nos. 1 to 3 is covered by the judgment of Co-ordinate Bench of this Court, for parity of reasons, we hold, the questions are not sustainable. Insofar as, question No.4 is concerned, though the learned Senior Counsel for the respondent has also relied upon another judgment of Bombay High Court in the case of Commissioner of Income Tax-8, Mumbai Vs Phoenix Mecvano (India)(P.) Ltd. [2019] 108 taxmann.com 124 (Bombay) wherein according to him, the appeal was filed against the order of the Tribunal, wherein Tribunal has relied upon the judgment of the Bombay High Court in the case of Commissioner of Income-tax Vs Thyssen Krupp Industries India (P.) Ltd., (supra) which judgment (in the case of Commissioner of Income Tax-8, Mumbai Vs Phoenix Mecvano (India)(P.) Ltd. (supra)) was taken in appeal before the Hon’ble Supreme Court the same was dismissed in SLP No.2234/2018 dated 05.02.2018.
9. In view of the fact that the issue relatable to question No.4 is covered by the judgment of the High Court of Bombay in Commissioner of Income-tax Vs Thyssen Krupp Industries India (P.) Ltd., and also Commissioner of Income Tax-8, Mumbai Vs Phoenix Mecvano (India)(P.) Ltd., which have attained finality till the Hon’ble Supreme Court, we find no merit insofar as question No.4 is concerned. Accordingly, the appeal being without merit is dismissed. The questions of law are answered in favour of Assessee and against the Revenue.
No Costs.
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