Information-Seeking Notice Cannot Be Treated As Show Cause Notice In Transfer Pricing Case: Bombay High Court
The Bombay High Court has ruled that notices issued by a Transfer Pricing Officer seeking information from a taxpayer cannot substitute the show cause notice required before determining the arm's length price.
A Division Bench of Justice B.P. Colabawalla and Justice Farhan P. Dubash observed, “Further 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 ruling came while hearing Flyjac Logistics Private Limited's challenge to an order passed by the Transfer Pricing Officer for Assessment Year 2020-21. An adjustment of ₹20,16,01,089 was made to international transactions.
Section 92C(3) sets out when the arm's length price may be determined using material or information available with the assessing authority. Its proviso requires the assessee to be given an opportunity to explain why the arm's length price should not be determined on that basis through a show cause notice.
The Transfer Pricing Officer issued a show cause notice to Flyjac on February 28, 2023. He later passed an order dated March 20, 2023, recording that Flyjac had not responded. The order cited the company's failure to provide adequate documentary evidence supporting its arm's length price.
Flyjac told the court that it had never received the February 28 notice. It learned about it only because the notice was referred to in the Transfer Pricing Officer's order.
The Department's affidavit acknowledged that the email carrying the show cause notice had bounced. It recorded that an unknown technical issue in the ITBA system had prevented the notice from appearing on Flyjac's e-filing portal. An SMS alert was not generated either.
The Revenue's counsel admitted that the February 28 show cause notice had not been served. The Revenue nevertheless relied on the earlier notices, pointing out that Flyjac had received them and filed replies.
The court rejected this argument. It held that a Section 92CA(2) notice seeks information or evidence, while the Section 92C(3) show cause notice gives the assessee an opportunity to respond to the material on which the arm's length price may be determined.
The Bench held that the Section 92C(3) procedure, including the show cause notice requirement, applies to the Transfer Pricing Officer before passing an order under Section 92CA(3).
Since the show cause notice was never served, Flyjac had no opportunity to reply. The court therefore held that the March 20 order was bad in law and liable to be set aside.
The court set aside the order and remanded the matter to the Transfer Pricing Officer at the stage of issuance of the February 28 show cause notice. Flyjac was directed to file its reply within two weeks from the uploading of the High Court order.
The Transfer Pricing Officer was directed to pass a fresh order under Section 92CA(3), preferably within 12 weeks, after giving Flyjac a personal hearing.
For Petitioner/Assessee: Advocate Madhur Agrawal, instructed by Advocate Atul K. Jasani.
For Respondents/Income Tax Department: Advocate Suresh Kumar, along with Advocate Smita Thakur.