Domestic TP Adjustments Section 92BA ITAT Mumbai 2026

What Happened?

The Income Tax Appellate Tribunal (ITAT) Mumbai has recently ruled that domestic transfer pricing (TP) adjustments cannot be sustained under the omitted Section 92BA(i) of the Income Tax Act 2025. This ruling clarifies an important limitation on the AO's powers during transfer pricing assessments. The tribunal simultaneously upheld the taxpayer's claim for mark-to-market loss relief and rejected the AO's Section 14A computation, providing significant relief on multiple fronts for the assessee.

Background & Legal Context

What is Section 92BA(i)?

Section 92BA of the Income Tax Act 2025 deals with the safe harbour provisions for transfer pricing. However, Section 92BA(i) specifically, when omitted or not applied by the taxpayer initially, creates a procedural and substantive limitation on the Assessing Officer's (AO) power to reopen or adjust domestic transfer pricing arrangements.

The Transfer Pricing Framework

Transfer pricing rules under Chapter X-A (Sections 92 to 92F) of the IT Act 2025 require related parties engaged in international or specified domestic transactions to maintain an arm's length price (ALP). The focus has traditionally been on international transactions. However, since the 2012 amendments, domestic transfer pricing also came under scrutiny for specified categories of related party transactions.

Key Provisions Involved:

• Section 92BA(i): Pertains to domestic transfer pricing cases and the safe harbour mechanism
• Section 14A: Deals with disallowance of expenditure relating to income not chargeable to tax
• Section 43(5): Related to computing loss on mark-to-market basis for securities
• Section 92 (IT Act 2025): General transfer pricing framework for related party transactions

Why Does This Matter?

The ITAT's ruling establishes that when Section 92BA(i) is omitted or not initially claimed by the taxpayer, the Assessing Officer cannot unilaterally impose domestic transfer pricing adjustments based on this section. This is a critical procedural safeguard that prevents the AO from exceeding statutory authority.

What Does This Mean for You?

For Companies with Domestic Related Party Transactions:

If your business engages in domestic transactions with related parties (such as interest-free loans, management fees, inter-company charges, or royalties), this ruling provides important protection. You cannot be assessed under Section 92BA(i) if:

• You did not originally claim the safe harbour benefit
• The AO is attempting to make a domestic TP adjustment without proper statutory authority
• Your transaction is purely domestic (not crossing international borders)

Mark-to-Market Loss Relief Confirmation:

The tribunal's affirmation of mark-to-market loss relief under Section 43(5) is particularly important for financial year AY 2025-26 and AY 2026-27. If you hold securities and have suffered mark-to-market losses, you can claim these losses without needing to prove actual realization. This is a significant relief especially in volatile market conditions.

Section 14A Computation Benefits:

The ITAT's stance on Section 14A computation suggests a reasonable approach to disallowance of expenses. This means:

• The AO cannot make arbitrary or excessive disallowances under Section 14A
• Reasonable apportionment methods will be accepted
• You have more room to defend your methodology during assessment

Practical Implications for AY 2025-26 & 2026-27:

If you are currently facing a transfer pricing audit or adjustment for domestic transactions, you can cite this ITAT ruling to challenge the AO's authority. The ruling effectively closes a potential loophole where AOs were attempting to make domestic TP adjustments beyond their statutory powers.

What Should You Do Now?

Step 1: Review Your Transfer Pricing Documentation

Examine all domestic related party transactions in your business. Identify which ones have been claimed under safe harbour provisions and which have not. For those not claimed, ensure you have proper documentation showing commercial rationale and pricing methodology.

Step 2: Assess Current Assessments and Appeals

If you have:

• A pending assessment with domestic TP adjustments under Section 92BA(i)
• An appeal before CIT(A) on similar grounds
• A completed assessment facing reopening under this section

File an appeal immediately citing this ITAT Mumbai ruling as judicial precedent.

Step 3: Reconcile Mark-to-Market Losses

If you have claimed mark-to-market losses in previous years and faced disallowance, this ruling supports revisiting those positions. Consider filing revised returns (if within the statutory period) or appeals to recover the tax benefit.

Step 4: Strengthen Section 14A Methodology

Maintain clear records of how you have apportioned expenses under Section 14A. Use reasonable and consistently applied methods. This ruling gives you judicial backing to defend against aggressive disallowances.

Step 5: Engage Transfer Pricing Experts

For assessment years AY 2025-26 and AY 2026-27, if the AO initiates transfer pricing scrutiny on domestic transactions, ensure you have robust TP documentation prepared by qualified experts. The burden is on you to prove arm's length nature, but this ruling ensures the AO cannot bypass statutory procedures.

Key Takeaways

• Procedural Protection: The ITAT has established that omitted Section 92BA(i) cannot form the basis of domestic transfer pricing adjustments by the AO, providing crucial procedural safeguard to taxpayers.
• Mark-to-Market Loss Relief Upheld: The tribunal's confirmation of mark-to-market loss relief under Section 43(5) provides certainty for financial institutions and investors holding securities, applicable for AY 2025-26 and 2026-27.
• Section 14A Adjustments Face Scrutiny: The AO's Section 14A computations must be reasonable and well-substantiated; arbitrary disallowances will not withstand appellate scrutiny based on this ruling.
• Implications for Ongoing Assessments: Taxpayers currently facing assessments or appeals involving domestic TP adjustments under Section 92BA(i) have strong judicial precedent to challenge the AO's authority.
• Documentation Remains Critical: While this ruling provides procedural protection, maintaining robust transfer pricing documentation and clear methodology for domestic related party transactions remains essential for successful defense during any tax scrutiny.

Bottom Line: This ITAT Mumbai ruling is a significant win for taxpayers engaged in domestic related party transactions. It reasserts the importance of statutory procedure and prevents overreach by tax authorities. However, it does not eliminate the need for proper transfer pricing documentation or reasonable expense allocation under Section 14A. Stay compliant and document-heavy to maximize the benefits of this ruling.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602