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Loses Transfer Pricing Challenge as Delhi Rules Omission Only Prospective
The ) has ruled that the omission of from the transfer pricing regime under applies only , turning down ' attempt to retrospectively nullify a Rs.5.12 crore adjustment.
A bench of Judicial Member Satbeer Singh Godara and Accountant Member Manish Agarwal rejected the company's argument that the deletion of by the , should wipe out all earlier proceedings under the rule.
Background: The Transfer Pricing Adjustment
, which manufactures audio-video electronic products in India, had entered into SDTs with related parties covered under during . The Transfer Pricing Officer (TPO) applied the and arrived at a of 4.70 per cent, compared to the assessee's declared margin of 1.65 per cent, leading to the upward adjustment of Rs.5,12,70,379.
The upheld the TPO's order, prompting Dixon to appeal before the .
The Core Legal Question: Does Omission Equal Retrospective Repeal?
The assessee's primary legal ground was that the omission of — which had brought SDTs under transfer pricing scrutiny — meant the provision had "never existed" and that all pending proceedings must stop. Reliance was placed on the 's decision in and the 's judgment in , which held that an obliterates the law as if it never passed.
The Revenue countered that the Explanatory Memorandum to the , expressly stated that the amendment would take effect from and apply only from onwards. The 's Circular No. 2/2018 reiterated this . The Revenue argued that the legislature's clear intent to limit the change to future years should not be overridden.
's Analysis: Strict Interpretation Prevails
The sided with the Revenue, holding that the case was distinguishable from Kolhapur Canesugar Works because the legislature had made the omission "explicitly clear" as prospective.
"We are of the considered view that contrary to the facts therein, the legislature has made it explicitly clear that its omission carries prospective effect only. That being the case, we find merit in the Revenue's arguments that the aforesaid
could not be held as applicable with
for any preceding assessment year before that i.e. upto
,"
the Tribunal observed.
It further noted that the decision of a High Court — even one as persuasive as that of the in Texport Overseas — is not for another High Court or for tribunals outside its . The accordingly upheld the transfer pricing proceedings as legally valid.
Relief on Comparables and Other Grounds
While the legal challenge failed, the granted substantive relief to on the merits of the comparables used by the TPO.
- and were directed to be included as comparables, rejecting the TPO's grounds of declining net worth and lack of segmental data. The Tribunal noted that accumulated losses alone cannot justify outright rejection under , following the 's decision in .
- and were directed to be excluded, as they were engaged in diverse business segments (plastic containers and moulded plastic products) not comparable to Dixon's electronics manufacturing.
Disallowance and Preliminary Expenditure
On the second substantive issue, the rejected the assessee's challenge to the invocation of read with Rule 8D but remanded the quantification. The Tribunal observed that the lower authorities had not clarified whether only dividend-yielding investments were considered, and directed a fresh computation.
On the third issue, the Tribunal deleted the disallowance of Rs.34.61 lakh towards preliminary expenditure incurred for exploring a joint LED-light manufacturing venture with the . Relying on , the held that such expenditure — incurred in the exploration of a new business that later failed — is and allowable.
Key Observations
The Tribunal's most significant observation on the retrospectivity question:
"the legislature has made it explicitly clear that its omission carries prospective effect only. That being the case, we find merit in the Revenue's arguments that the aforesaid could not be held as applicable with ."
Final Decision
The appeal was partly allowed . The transfer pricing adjustment of Rs.5.12 crore was upheld in principle, but the TPO was directed to rework the comparables and the quantum of disallowance. The preliminary expenditure disallowance was deleted. The order was pronounced in open court on .
