Introduction
The Transfer Pricing provisions in the Income Tax Act of 1961 had been expanded to assure that transactions between parties which have a relationship are conducted at fair market value. One of the changes made was the addition of section 92BA which defined a number of domestic related party transactions as "Specified Domestic Transactions" or "SDT's". This resulted in the increased application of the Transfer Pricing provisions on a much larger number of taxpayers than had prior to that time been subject to the provisions.
Taking into consideration these difficulties, the government struck down Section 92BA (except clause (i)) via the Finance Act, 2017. A few litigations and pending assessments had been brought before the ITAT of India for each of these years prior to the repeal of certain sections of the ICA. An example of this is the case of Shri Sureshkumar Harjivanbhai Chandarana regarding his assessment year 2016–17 (“AY 2016–17”) which was addressed by the ITAT since these facts and circumstances had previously been considered by the ITAT.
The ITAT determined that no two entities were involved in transactions that required the identification of transfer pricing rules as between domestic entities and related parties. The ITAT also indicated that, since certain statutory provisions had been repealed, there was an opportunity for taxpayers to receive clarity in the future by allowing taxpayers to use any of their transactions as the basis of pricing established through domestic transactions.
Case Background and Details
The parties involved were the ITAT Rajkot Bench, case number ITA No. 415/RJT/2023 for AY 2016–17, where Shri Sureshkumar Harjivanbhai Chandarana was the taxpayer and had conducted business and made several related party transactions. The domestic transactions in the case were falling under the specified domestic transactions as defined under Section 92BA of the Act, as it was applicable during the relevant assessment year.
As per the relevant law, the assessee had made a disclosure of the transaction in Form 3CEB. During the course of assessment, the Assessing Officer referred a case to the Transfer Pricing Officer (TPO) under Section 92CA for determining the arm’s length price of the above-mentioned transactions.
Transfer Pricing Framework Applicable to the Case
All income must assess all income earned in foreign transactions and all identified local transactions under the Income Tax Act using an arm's length price, as outlined by Section 92 of the Income Tax Act. Section 92 includes various methods of calculating the arm's length price. Certain methods exist to determine arm's length pricing (e.g., CUP and TNMM), which are known as "most appropriate methods".
Previously, Section 92BA allowed all domestic transactions to be subject to arm's length pricing since they relate to individuals or companies. Additionally, Section 92BA applied to profit-linked deductions as part of determining transfer pricing compliance when calculating tax owed. Taxpayers must keep the necessary records relating to the transactions, and use the Form 3CEB in respect to the invoice. Failure to maintain documentation may result in administrative penalties.
Omission of Section 92BA and Its Legal Significance
A crucial aspect of this case revolves around the Finance Act, 2017, which omitted Section 92BA (except clause (i)) with effect from 1 April 2017. The omission was introduced to reduce unnecessary compliance burden and litigation, as domestic transfer pricing provisions were found to be disproportionately onerous.
Importantly, the Finance Act, 2017 did not contain any saving clause preserving pending proceedings or assessments relating to specified domestic transactions. This omission raised a fundamental legal question: whether transfer pricing adjustments could survive for assessment years prior to the omission when proceedings were still ongoing.
Proceedings Before the TPO and AO
In the present case, the TPO examined the specified domestic transactions reported by the assessee and applied the Comparable Uncontrolled Price (CUP) Method to benchmark them. Based on his analysis, the TPO concluded that the transactions were not at arm’s length and proposed an upward transfer pricing adjustment.
The Assessing Officer, relying on the TPO’s order, incorporated the adjustment in the assessment order, thereby increasing the taxable income of the assessee. Aggrieved by this adjustment, the assessee preferred an appeal, ultimately reaching the ITAT Rajkot Bench.
Issues for Determination by the Tribunal
The Tribunal was primarily called upon to examine the following issues:
- Whether transfer pricing provisions under Section 92 could be applied to specified domestic transactions after the omission of Section 92BA.
- Whether the TPO had valid jurisdiction to determine ALP for SDTs for Assessment Year 2016-17.
- Whether the transfer pricing adjustment made by the AO was legally sustainable in view of the legislative intent behind the Finance Act, 2017.
Contentions of the Assessee and Arguments of the Revenue
The assessees argued that once Section 92BA was omitted by the Finance Act, 2017, the provision ceased to exist in the statute book. In the absence of a saving clause, all pending proceedings based on the omitted provision automatically lapsed. The assessee emphasized that an omitted provision is to be treated as if it never existed, unless expressly saved by the legislature.
It was further contended that the reference made to the TPO itself was invalid, as the jurisdiction to benchmark specified domestic transactions no longer survived. The assessee also relied on judicial precedents wherein courts and tribunals have consistently held that omission of a statutory provision without a saving clause renders all pending proceedings under that provision invalid.
The Revenue contended that Assessment Year 2016-17 preceded the omission of Section 92BA and that the law applicable during the relevant year should govern the assessment. According to the Revenue, since transfer pricing provisions were in force during the relevant assessment year, the TPO’s action and the resultant adjustment were valid.
Considerations Taken into Account by the ITAT Rajkot Bench
The ITAT observed earlier laws concerning the applicability of 92BA and rulings over the last few months concerning 92BA. The ITAT also considered that section 92BA had been repealed through the 2017 Finance Acts of passage of the 2017 Finance Act did not provide a "savings provision" to allow either to proceed with ongoing, or when completed, to continue with those they proceeded under. Therefore, the ITAT also held further established that when a statutory provision is repealed, it's as if the original statutory provision never existed.
The Tribunal further held that the intention of the legislature was clear: specified domestic transactions, other than those covered under clause (i), were to be removed entirely from the transfer pricing regime. Allowing transfer pricing adjustments to survive despite such omission would defeat the legislative intent.
Decision of the Tribunal
Based on the above reasoning, the ITAT Rajkot Bench held that:
- The TPO lacked jurisdiction to determine ALP for specified domestic transactions after the omission of Section 92BA.
- The transfer pricing adjustment made by the Assessing Officer was unsustainable in law.
- The entire transfer pricing adjustment relating to specified domestic transactions for Assessment Year 2016-17 was liable to be deleted.
Accordingly, the appeal of the assessee was allowed.
Conclusion
The ITAT Rajkot’s historic decision in the matter of Shri Sureshkumar Harjivanbhai Chandarana is one of the most important judicial precedents in the area of specified domestic transactions. By quashing the transfer pricing adjustment for Assessment Year 2016-17, the Tribunal once again held that the deletion of a statutory provision without a saving clause renders all pending cases on the basis of such a provision as null and void.
This judicial precedent is in sync with the legislative intent, provides certainty in taxation, and provides long-overdue relief to taxpayers embroiled in the transfer pricing web of domestic disputes. For transfer pricing professionals, this judicial precedent is an important and highly persuasive judicial authority in the never-ending saga of Indian transfer pricing jurisprudence.