Flyjac Logistics Private Limited Vs DCIT (Bombay High Court)
Summary: The Bombay High Court considered a writ petition filed by Flyjac Logistics Private Limited challenging the order dated 20th March 2023 passed by the Transfer Pricing Officer under Section 92CA(3) of the Income Tax Act, 1961 for Assessment Year 2020-21. The principal challenge was that the mandatory Show Cause Notice contemplated under Section 92CA(3) read with Section 92C(3) had not been served before the Transfer Pricing Officer passed the impugned order, depriving the petitioner of an opportunity of being heard.
The petitioner’s case had been selected for scrutiny and the Assessing Officer referred it to the Transfer Pricing Officer under Section 92CA(1) for determination of the Arm’s Length Price of international transactions entered into with Associated Enterprises. The Transfer Pricing Officer issued notices under Section 92CA(2) seeking information, to which the petitioner responded. Thereafter, the Transfer Pricing Officer passed the impugned order under Section 92CA(3), proposing an adjustment of Rs. 20,16,01,089/- to the Arm’s Length Price of various international transactions. The order stated that a Show Cause Notice dated 28th February 2023 had been issued but that the petitioner had not responded.
Before the High Court, the petitioner submitted that the Show Cause Notice under Section 92C(3) was a statutory notice distinct from the earlier information notices issued under Section 92CA(2). According to the petitioner, the Show Cause Notice had neither been served nor uploaded on the Income-tax Portal, and its existence came to light only because it was referred to in the impugned Transfer Pricing Officer’s order. The petitioner also relied upon the respondents’ Affidavit-in-reply, which admitted that the Show Cause Notice had not been served by email because the email had bounced. The petitioner further pointed to a response from ‘efilingwebmanager’ stating that an unknown technical issue in the Department’s ITBA system had prevented the notice from appearing on the e-filing portal and had also prevented generation of the SMS.
The Revenue fairly admitted that the Show Cause Notice dated 28th February 2023 had not been served, although it submitted that earlier notices had been served and replies had been filed by the petitioner. The Court thereafter examined the statutory scheme. It noted that Section 92C provides the mechanism for computation of the Arm’s Length Price and that the proviso to Section 92C(3) expressly requires an opportunity of being heard by serving a notice calling upon the assessee to show cause why the Arm’s Length Price should not be determined on the basis of the material or information or documents in the possession of the Assessing Officer.
The Court further considered Section 92CA. It noted that Section 92CA(1) permits the Assessing Officer to refer computation of the Arm’s Length Price to the Transfer Pricing Officer, while Section 92CA(2) concerns notices requiring production of evidence. Section 92CA(3), however, requires the Transfer Pricing Officer to determine the Arm’s Length Price by an order in writing in accordance with Section 92C(3). On this statutory framework, the Court held that the Transfer Pricing Officer was required to follow the procedure prescribed under Section 92C(3), including the statutory requirement of issuing a Show Cause Notice before determining the Arm’s Length Price under Section 92CA(3).
The Court found that the statutory Show Cause Notice dated 28th February 2023 had admittedly never been served on the petitioner. The earlier notices under Section 92CA(2), which merely sought information, could not be treated as the Show Cause Notice contemplated by the proviso to Section 92C(3). Since the only statutory Show Cause Notice had not been served, the petitioner had no opportunity to reply to it. The Court consequently held that the impugned order dated 20th March 2023, having been passed without serving the mandatory Show Cause Notice, was bad in law and liable to be set aside.
The High Court therefore set aside the impugned order, remanded the matter to the file of the Transfer Pricing Officer at the stage of issuance of the Show Cause Notice dated 28th February 2023, and directed the petitioner to file its reply within two weeks from uploading of the order on the High Court website. The Transfer Pricing Officer was directed to pass an order under Section 92CA(3) as expeditiously as possible and preferably within 12 weeks from uploading of the order, after affording a personal hearing to the petitioner. The Rule was made absolute in those terms, the writ petition was disposed of accordingly, and there was no order as to costs.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Rule. Respondents waive service. With the consent of the parties, Rule made returnable forthwith and the Petition is heard finally.
2. This Petition has been filed by the Petitioner to challenge the order dated 20th March 2023 passed by the Transfer Pricing Officer (Respondent No. 1) under Section 92CA(3) of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2020-21. The main challenge in the petition is that the impugned order has been passed by Respondent No. 1 contrary to the principles of natural justice as the mandatory Show Cause Notice required to be issued under Section 92CA(3) read with Section 92C(3) of the Act was not served on the Petitioner before passing the impugned order, and therefore, the Petitioner was not given an opportunity of being heard.
3. The facts relevant to the present petition are that the Petitioner’s case for the relevant Assessment Year was selected for scrutiny assessment. During the course of the scrutiny assessment proceedings, the Assessing Officer (Respondent No. 2) referred the case of the Petitioner to Respondent No. 1 (Transfer Pricing Officer) under Section 92CA(1) of the Act for determination of the Arm’s Length Price of international transactions entered into by the Petitioner with its Associated Enterprises (“AEs”).
4. Accordingly, Respondent No. 1 issued notices under Section 92CA(2) of the Act from time to time asking for various information from the Petitioner. The Petitioner filed replies to the said notices. Respondent No.1, thereafter, passed the impugned order dated 20th March 2023 under Section 92CA(3) of the Act. In the said order, Respondent No. 1 proposed an adjustment of Rs. 20,16,01,089/- to the Arm’s Length Price of various international transactions entered into by the Petitioner. Respondent No. 1 held that a Show Cause Notice dated 28th February 2023 was issued by Respondent No. 1 to the Petitioner, however, the Petitioner did not respond to the said Show Cause Notice. However, considering that during the last 12 months various statutory notices were issued by Respondent No. 1, no further opportunity is required to be given to the Petitioner in case of non-compliance with the Show Cause Notice. Further, one of the reasons given in the impugned order for making the transfer pricing adjustment was that the Petitioner has failed to provide adequate documentary evidence to support its claim of the Arm’s Length Price for the international transactions entered into by it.
5. In this factual backdrop, Mr. Agrawal, learned counsel appearing on behalf of the Petitioner, submitted that the Show Cause Notice issued by Respondent No. 1 under Section 92C(3) of the Act is a statutory notice which is required to be issued to an Assessee before passing the order under Section 92CA(3) of the Act. He submitted that the Show Cause Notice was neither served on the Petitioner nor was the said Show Cause Notice uploaded in the Income-tax Portal of the Petitioner. The Petitioner came to know that a Show Cause Notice dated 28th February 2023 under Section 92C(3) of the Act was issued only because the same was referred to in the impugned order passed under Section 92CA(3) of the Act by the Transfer Pricing Officer (Respondent No.1). He submitted that the initial notices which were issued to the Petitioner in response to which the Petitioner filed its replies were all notices issued under Section 92CA(2) of the Act calling for information from the Petitioner, whereas the notice dated 28th February 2023 was a Show Cause Notice issued under Section 92C(3) of the Act. He submitted that the Show Cause Notice issued under Section 92C(3) of the Act cannot be compared to notices issued under Section 92CA(2) of the Act and merely because the notices under Section 92CA(2) have been served on the Petitioner, it cannot be said that principles of natural justice are complied with unless the notice issued under Section 92C(3) is also served on the Petitioner. He submitted that since the said statutory notice under Section 92C(3) of the Act was not served on the Petitioner, the Impugned Order has been passed clearly in breach of the principles of natural justice and, hence, liable to be quashed and set aside.
6. Mr. Agrawal further submitted that in the Affidavit-in-reply at paragraph 15, the Respondents have admitted that the said Show Cause Notice was not served on the email of the Petitioner as the said email had bounced. He further submitted that in paragraph 18 of the Affidavit-in-reply, there is a reference to the response received from ‘efilingwebmanager’ wherein it is noted that due to an unknown technical issue in the ITBA system of the Department, the said Show Cause Notice was not visible on the e-filing portal of the Petitioner. Further the SMS was also not generated because of the aforesaid unknown technical issue. Accordingly, there is no doubt that the Show Cause Notice was not served on the Petitioner before passing of the impugned order, was the submission.
7. Per contra, Mr. Suresh Kumar, learned counsel appearing on behalf of the Revenue, fairly admitted that the Show Cause Notice dated 28th February 2023 was not served on the Petitioner though he submitted that earlier notices were served on the Petitioner and the Petitioner had filed replies to the said notices.
8. We have heard both parties at length and also perused the documents, proceedings and affidavits filed by the parties in the present petition.
9. Section 92C of the Act provides the mechanism for computation of the Arm’s Length Price. Sub-section (1) provides that the Arm’s Length Price in relation to an international transaction or a specified domestic transaction shall be determined by following one of the specified methods, which, having regard to the various relevant factors, is the most appropriate method. Sub-section (2) provides that the most appropriate method shall be applied for determining the Arm’s Length Price. As per sub-section (3), the Assessing Officer may proceed to determine the Arm’s Length Price of the international transaction or a specified domestic transaction in accordance with sub-sections (1) and (2) under certain specified circumstances. The proviso to sub-section (3) stipulates that an opportunity of being heard is required to be given to an Assessee, in the form of a Show Cause Notice, based on information / material in possession of the Assessing Officer before passing an order under sub-section (3). The said proviso reads as under :-
“Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be determined on the basis of material or information or document in the possession of the Assessing Officer.”
10. Sub-section (1) of Section 92CA of the Act provides that the Assessing Officer may refer the matter of computation of the Arm’s Length Price in relation to an international transaction or a specified domestic transaction to the Transfer Pricing Officer, when he considers it necessary or expedient to do so. Sub-section (2) of Section 92CA provides that the Transfer Pricing Officer shall serve a notice on an Assessee requiring him to produce evidence which the Assessee may rely in support of the computation made by him of the Arm’s Length Price. Sub-section (3) of Section 92CA(3) of the Act provides that the Transfer Pricing Officer shall, by an order in writing, determine the Arm’s Length Price in relation to an international transaction or a specified domestic transaction in accordance with the provision of Section 92C(3) of the Act and send a copy of his order to the Assessing Officer and to the Assessee.
11. Having considered the above provisions, we are of the view that the Transfer Pricing Officer in determining the Arm’s Length Price of an international transaction or a specified domestic transaction, is required to follow the procedure as prescribed in Section 92C(3) of the Act. Therefore, the proviso to Section 92C(3) of the Act, which embodies a statutory requirement of issuing a Show Cause Notice before determining the Arm’s Length Price of an international transaction or a specified domestic transaction, will also be applicable to the Transfer Pricing Officer before he passes an order under Section 92CA(3) of the Act.
12. We find that in the present case admittedly, the said statutory Show Cause Notice dated 28th February 2023 was never served on the Petitioner as has been accepted in the Affidavit-in-reply filed by Respondent No.1 (Transfer Pricing Officer). Therefore, the Petitioner had no occasion to file a reply to said Show Cause Notice. 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. On the facts of the present case, only the notice dated 28th February, 2023 was a Show Cause Notice issued under Section 92C(3) of the Act, asking the Petitioner as to why the Arm’s Length Price should not be determined based on material or information or documents in possession of Respondent No. 1. As the said Show Cause Notice is statutorily required to be issued in terms of Section 92CA(3) read with Section 92C(3) of the Act, the impugned order dated 20th March, 2023, which has been passed without serving the said Show Cause Notice on the Petitioner, is therefore, bad in law and liable be set aside. We accordingly pass the following order :-
(a) The impugned order dated 20th March 2023 is set aside.
(b) The matter is remanded back to the file of the Transfer Pricing Officer at the stage of issuance of the Show Cause Notice dated 28th February 2023.
(c) The Petitioner will file a reply to the said Show Cause Notice within two weeks from the uploading of this order on the High Court Website.
(d) The Transfer Pricing Officer will pass an order under Section 92CA(3) of the Act as expeditiously as possible and preferably within a period of 12 weeks from the date of the uploading of this order after affording a personal hearing to the Petitioner.
13. Rule is made absolute in the aforesaid terms, and the Writ Petition is also disposed of in terms thereof. However, in the facts and circumstances of the present case, there shall be no order as to costs.
14. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
