The Bombay High Court has set aside a transfer pricing order proposing an adjustment of ₹20.16 crore after finding that the statutory show-cause notice required under Section 92C(3) of the Income Tax Act, 1961, was never served on the assessee.
A Division Bench of Justice B.P. Colabawalla and Justice Farhan P. Dubash held that notices merely seeking information under Section 92CA(2) cannot substitute for the mandatory show-cause notice that must precede the determination of the arm’s length price and remanded the matter to the Transfer Pricing Officer at the stage of issuing the show-cause notice and directed that a fresh order be passed after considering the assessee’s response and granting it a personal hearing.
The company’s case had been selected for scrutiny assessment. During the proceedings, the Assessing Officer referred the matter to the Transfer Pricing Officer for determining the arm’s length price of international transactions entered into by the company with its associated enterprises.
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The Transfer Pricing Officer issued several notices under Section 92CA(2), seeking information and evidence concerning the company’s computation of the arm’s length price. The company submitted replies to those notices.
Subsequently, the officer passed the disputed order proposing an adjustment of ₹20,16,01,089 to the arm’s length price of various international transactions.
The order stated that a show-cause notice dated February 28, 2023, had been issued to the company but that no response was received. It further recorded that several statutory notices had already been issued during the preceding 12 months and, therefore, no further opportunity was required to be granted in the event of non-compliance with the show-cause notice.
One of the reasons cited for the proposed adjustment was the company’s alleged failure to provide sufficient documentary evidence in support of the arm’s length price claimed for its international transactions.
The company argued that the show-cause notice issued under Section 92C(3) was a mandatory statutory notice that had to be served before an order could be passed under Section 92CA(3).
According to the company, the notice dated February 28, 2023, was neither delivered through email nor made available on its Income Tax e-filing portal. It claimed that it learnt about the existence of the notice only when it was referred to in the final transfer pricing order.
The company distinguished the earlier notices issued under Section 92CA(2) from the notice contemplated under Section 92C(3). It contended that the earlier communications merely called for information and supporting evidence, whereas the Section 92C(3) notice required the assessee to explain why the arm’s length price should not be determined on the basis of material available with the tax authority.
Therefore, service of information-gathering notices could not be treated as compliance with the statutory obligation to serve a specific show-cause notice before making a transfer pricing determination.
The company also relied on the Income Tax Department’s affidavit filed before the High Court. It pointed out that the Department had admitted that the email carrying the show-cause notice had bounced.
The affidavit also referred to a response from the “efilingwebmanager”, which stated that an unknown technical issue in the Department’s Income Tax Business Application system resulted in the notice not being visible on the company’s e-filing portal. An SMS alert was also not generated due to the same technical issue.
Counsel appearing for the Revenue fairly admitted before the Court that the show-cause notice dated February 28, 2023, had not been served, although earlier information notices had been delivered and answered.
Examining the statutory framework, the High Court noted that Section 92C prescribes the mechanism for computing the arm’s length price of international and specified domestic transactions.
The proviso to Section 92C(3) requires the Assessing Officer to give the assessee an opportunity of being heard by serving a notice calling upon it to explain why the arm’s length price should not be determined on the basis of material, information or documents in the officer’s possession.
The Court also considered Section 92CA, which empowers the Assessing Officer to refer the computation of the arm’s length price to a Transfer Pricing Officer.
While Section 92CA(2) enables the Transfer Pricing Officer to require the assessee to produce supporting evidence, Section 92CA(3) requires the officer to determine the arm’s length price in accordance with Section 92C(3).
The Bench held that a Transfer Pricing Officer determining the arm’s length price must follow the procedure prescribed under Section 92C(3). Consequently, the statutory requirement contained in the proviso to that provision—including service of a show-cause notice—applies equally before an order is passed under Section 92CA(3).
“The notice issued by the Transfer Pricing Officer under Section 92CA(2) of the Act seeking information from an assessee cannot be said to be a show-cause notice issued as per the proviso to Section 92C(3) of the Act,” the Court observed.
The Bench found that the February 28, 2023 notice was the only communication asking the company to explain why the arm’s length price should not be determined on the basis of the material available with the Transfer Pricing Officer.
Since that notice was admittedly never served, the company had no opportunity to submit its explanation before the ₹20.16 crore adjustment was proposed.
The Court therefore held that the transfer pricing order passed without serving the mandatory notice was bad in law and liable to be set aside.
The High Court set aside the March 20, 2023 order and remanded the matter to the Transfer Pricing Officer from the stage of issuance of the show-cause notice dated February 28, 2023.
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