Invalid Reference to Transfer Pricing Officer (TPO) under Section 92CA: A Critical Analysis of CBDT Instruction No. 3/2016
Introduction
In recent years, courts have repeatedly emphasized that a reference to the Transfer Pricing Officer (TPO) under section 92CA of the Income-tax Act, 1961 cannot be made mechanically. CBDT Instruction No. 3/2016 dated 10 March 2016 prescribes mandatory jurisdictional pre-conditions that must be fulfilled before any such reference is made.
Failure to adhere to these conditions renders the reference void ab initio, as consistently held by judicial authorities. This article examines the legal infirmities that arise when a reference to the TPO is made in violation of CBDT Instruction No. 3/2016 and the principles of natural justice.
1. CBDT Instruction No. 3/2016 – Binding and Jurisdictional in Nature
CBDT Instruction No. 3/2016 has been issued under section 119 of the Act. It is settled law that instructions issued under section 119 are statutorily binding on the Assessing Officer and are not mere administrative guidelines.
The Hon’ble Supreme Court in UCO Bank v. CIT (1999) 237 ITR 889 (SC) categorically held that circulars and instructions issued by the CBDT are binding on departmental authorities, and any action taken in violation thereof is legally unsustainable.
The Instruction prescribes jurisdictional conditions for making a reference under section 92CA. Any reference made dehors the Instruction is therefore without authority of law.
2. Exhaustive Circumstances Permitting Reference to the TPO
Paras 3.2 and 3.3 of CBDT Instruction No. 3/2016 exhaustively enumerate the situations in which a reference to the TPO may be made, namely:
- Selection of the case based on Transfer Pricing risk parameters; or
- Limited circumstances such as:
- Non-filing or non-disclosure of Form 3CEB
- TP adjustment of ₹10 crore or more in earlier years which is upheld or pending
- Search or survey cases with specific transfer pricing findings
Unless a case falls squarely within these defined categories, the Assessing Officer lacks jurisdiction to make a reference under section 92CA.
Further, denial of access to CASS reasons or failure to disclose the basis of reference violates the principles of natural justice and deprives the assessee of the right to raise jurisdictional objections at the threshold.
3. Mandatory Satisfaction under Para 3.4 – Not an Empty Formality
Para 3.4 of CBDT Instruction No. 3/2016 mandates that the Assessing Officer must record a reasoned satisfaction that income has arisen or is likely to be affected by determination of Arm’s Length Price, before seeking approval from the PCIT/CIT.
This requirement has been judicially recognized as mandatory and jurisdictional. In Shri Vishnu Eatables (India) Ltd. v. Dy. CIT (2016) 74 taxmann.com 89 (P&H), the Punjab & Haryana High Court held that recording satisfaction is a statutory pre-condition and not a procedural formality.
Absence of such satisfaction, or non-disclosure thereof, vitiates the jurisdiction of the Assessing Officer to make a valid reference.
4. Violation of Principles of Natural Justice – No Opportunity of Hearing
CBDT Instruction No. 3/2016 expressly mandates that where applicability of Chapter X is in dispute, the assessee must be granted a prior opportunity of being heard before making a reference to the TPO.
This principle has been upheld in:
- Indorama Synthetics (India) Ltd. v. Addl. CIT (2016) 71 taxmann.com 349 (Delhi)
- Alpha Nipon Innovatives Ltd. v. Dy. CIT (2016) 76 taxmann.com 166 (Gujarat)
In both cases, references made without granting an opportunity of hearing were quashed as being violative of CBDT Instruction No. 3/2016 and the principles of natural justice.
A reference made without such opportunity is therefore illegal and unsustainable.
5. Absence of a Speaking Order – A Fatal Procedural Defect
Where an assessee raises objections to a proposed reference, the Instruction mandates that the Assessing Officer must:
- Consider such objections; and
- Pass a reasoned speaking order before making a reference
Failure to pass a speaking order has been held to be a serious procedural illegality in Indorama Synthetics (India) Ltd. and Alpha Nipon Innovatives Ltd.
A non-speaking, mechanical reference reflects non-application of mind and vitiates the entire transfer pricing proceedings.
6. Vodafone India Services (P) Ltd. – Jurisdiction Must Be Decided by the AO
In Vodafone India Services (P) Ltd. v. Union of India, the Hon’ble Bombay High Court held that:
- The TPO has no jurisdiction to determine whether a transaction is an international transaction or whether Chapter X applies.
- These jurisdictional issues must be examined and decided by the Assessing Officer at the pre-reference stage.
- Where objections are raised, the AO must grant an opportunity of hearing and decide the objections before making a reference.
The Court read the principles of natural justice into section 92CA(1), even though the provision does not expressly provide for a hearing.
This ratio has been expressly incorporated in Para 3.4 of CBDT Instruction No. 3/2016, making compliance mandatory.
7. Cumulative Effect – Reference Is Void Ab Initio
On a cumulative reading of:
- CBDT Instruction No. 3/2016
- Section 119 of the Act
- Judicial precedents including UCO Bank, Vodafone India Services, Indorama Synthetics, and Alpha Nipon Innovatives
it becomes clear that:
- Jurisdictional conditions under Paras 3.2 and 3.3 are not met
- Mandatory satisfaction under Para 3.4 is absent
- Opportunity of being heard is denied
- No speaking order has been passed
Each lapse independently vitiates the reference. Collectively, they render the reference void, illegal, and non est in law.
Conclusion
CBDT Instruction No. 3/2016 is not a procedural guideline but a jurisdictional mandate. Any reference to the TPO made in breach of its provisions is liable to be withdrawn or quashed.
Assessing Officers must exercise their powers under section 92CA with due regard to statutory instructions, judicial discipline, and principles of natural justice. Mechanical references not only defeat legislative intent but also expose proceedings to inevitable judicial invalidation.
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