The Bangalore bench of the Income Tax Appellate Tribunal (Tribunal), on 22 December 2017 ruled in favour of Texport Overseas Private Limited (Taxpayer) and held that since clause (i) of Section 92BA of the Income Tax Act, 1961 (IT Act) was omitted by the Finance Act 2017, it is deemed that the clause was never part of the IT Act. The Tribunal restored the case to the tax officer for him to conduct assessment under the regular provisions of the Act.
As per Section 92 of the IT Act, any ‘specified domestic transaction’ should be at an arm’s length price. A ‘specified domestic transaction’ is defined under Section 92BA of the IT Act, Clause (i) of which covered “any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A”, thus attracting domestic transfer pricing provisions. Section 40A(2)(b) of the IT Act inter alia includes payment made by a company to any director of the company.
The Taxpayer, an Indian company, made certain payments in the nature of remuneration to its directors. The transaction qualified as a ’specified domestic transaction’ under Section 92BA of the IT Act, and the tax officer referred the case to the Transfer Pricing Officer (TPO) for computation of arm’s length price. The Taxpayer objected to the computation of arm’s length price by the TPO before the Dispute Resolution Panel (DRP). The DRP issued certain directions, pursuant to which the tax officer passed an assessment order. The Taxpayer thereafter approached the Tribunal against the said assessment order.
While the matter was pending before the Tribunal, the Finance Act of 2017 was passed, which omitted clause (i) of Section 92BA, with effect from 1 April 2017. The Taxpayer contested for the admission of an additional ground contending that, since the Finance Act, 2017 omitted Section92BA(i), the impugned transaction would not fall under the definition of a ‘specified domestic transaction’ and would accordingly be outside the purview of transfer pricing provisions. The Taxpayer contended that pursuant to the amendment, Section 92BA(i) should be deemed to not be on the statute since the beginning.
In support of its contention, the Taxpayer placed reliance on two decisions of the Supreme Court (SC) in the case of Kolhapur Canesugar Works Limited (AIR 2000 SC 811) and General Finance Co (257 ITR 338 (SC)). The SC in these cases had dealt with Section 6 of the General Clauses Act 1897 (GC Act). Section 6 of the GC Act deals with effects of a repeal and inter alia lays down that, where any enactment (or part thereof) is repealed by a Central Act, the repeal does not affect any rights or liabilities acquired, accrued or incurred under the repealed enactment and neither does it affect any investigation, legal proceeding or remedy in respect of any such rights, liabilities or penalties. It further provides that any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty may be imposed as if the repealing Act had not been passed.
The SC in the aforementioned cases, upheld the following broad principles:
- Section 6 of the GC Act (which has an inbuilt savings clause) applies to repeals and not omissions and an omission is different from a repeal.
- The Court has to look at the provisions in the rule which has been introduced after the omission of the previous rule to determine whether a pending proceeding under the latter will continue or lapse. If there is a provision in the new rule, 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.
Thus, pending proceedings would not be affected by the omission of a provision, if the case was covered under Section 6 of the GC Act, or, there is a para materia provision or a savings provision in the new statute or repealing statute.
Further, the Taxpayer relied on the decision of the Karnataka High Court (HC) in the case of GE Thermometrics India Private Limited (ITA No. 876/2008), which, in dealing with the omission of Section 10(9) of the IT Act had held that once a section is omitted from the statute book, the result is that it had never been passed and is considered as a law that never existed.
Decision of the Tribunal
The Tribunal allowed the application of the Taxpayer for admission of additional grounds and held in favour of the Taxpayer.
The Tribunal observed that, in the instant case, clause (i) of Section 92BA had been omitted by the Finance Act, 2017, with effect from 1 April 2017 and that nothing was specified as to whether proceedings which had been initiated or any action taken under the clause would continue. Basis the decisions of the SC and the jurisdictional HC in the above cases, the Tribunal held that once a particular provision is omitted from the statute, it shall be deemed to be omitted from its inception unless there is some saving clause or provision to make it clear that any action taken or proceeding initiated under that provision or section would continue.
The Tribunal thus held that the cognizance taken by the tax officer under clause (i) of Section 92BA and the reference made to the TPO under Section 92CA was invalid and bad in law. The orders of the TPO and DRP were also held to be unsustainable. The Tribunal held that the tax officer ought to have framed the assessment in normal course and after setting aside the order of the tax officer and DRP, restored the matter back to the tax officer to re-adjudicate the issue.
The decision of the Tribunal may have rather far reaching implications. While on one hand it may put to rest pending litigations on the application of domestic transfer pricing provisions, it continues to keep in force a rather strange interpretation of the law. Bound by the decisions of the jurisdictional HC and the SC (relied on by the Taxpayer), the Tribunal seems to have delivered its judgment without examining the finer nuances and various legal intricacies that the present case throws up. It was not evaluated whether the omission of a clause ‘with effect from’ a particular date serves the purpose of saving pending proceedings initiated before the omission of the clause and how an ‘omission’ can be distinguished from ‘repeal’. It remains to be seen whether the tax authorities approach the higher forums with an appeal against the Tribunal’s decision, and how the issue is dealt with thereafter.