The Assessing Officer referred my case to the TPO in a one-paragraph letter without dealing with my objection that there was no international transaction at all. Can I attack the reference itself?
Yes. The Delhi High Court held that the Assessing Officer's satisfaction, even prima facie, that there IS an international transaction or specified domestic transaction is a sine qua non for a reference under s.92CA(1); where the assessee raises a threshold objection to jurisdiction, the officer must deal with it and must give a hearing before recording his satisfaction. The three references were set aside and the officer directed to decide afresh after hearing the assessee. The Court concurred with the Bombay High Court in Vodafone India Services and declined to follow the contrary Gujarat decision in Veer Gems, noting that CBDT Instruction No. 3 of 2016 has itself adopted the Bombay position.
Decided by the High Court (S. Muralidhar J and Najmi Waziri J) on 2016-07-25, reported as W.P.(C) 6422/2013 with CM No.14002/2013, W.P.(C) 4558/2014 and W.P.(C) 12072/2015 (Delhi High Court). It bears on section 92CA, section 92CA(1), section 92CA(2), section 92CA(2A), section 92CA(2B), section 92CA(2C), section 92CA(3), section 92CA(4), section 92C, section 92C(3), section 92E, section 92B, section 92BA, section 92A of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the earliest point at which the whole transfer pricing exercise can be stopped, and it is worth taking because the reference also buys the department twelve extra months on the assessment. Para 3.4 of Instruction No. 3 of 2016 identifies the three situations in which the officer must, as a jurisdictional requirement, record satisfaction and give a hearing before seeking the Principal Commissioner's approval: no Form 3CEB filed at all; a transaction not declared in the Form 3CEB filed; and a transaction declared but with a qualifying remark that it is not an international transaction or does not affect income. The Court rejected the argument that the Instruction was prospective, holding it clarifies the correct legal position and, being procedural and for the assessee's benefit, applies to a reference made as early as 31 March 2013. Two limits. First, the relief is a fresh decision by the officer, not an annulment — the Court gave fifteen days for the hearing and four weeks after it for a fresh order. Second, the Bombay High Court's caveat is that the hearing is required where the applicability of Chapter X is objected to, and not otherwise; where Form 3CEB is filed without qualification the applicability of Chapter X is usually an admitted position.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner, a widely held public limited company, imported raw material worth Rs 196.48 crores during the previous year 2009-10 from Indorama Petrochem Limited, a Thai company. It filed a nil return for AY 2010-11 after set-off of brought forward losses. The assessment had to be completed by 31 March 2013 under s.153, but if a reference were made to the TPO the limitation would be extended by nine months to October 2014. In February 2013 the Assessing Officer asked the petitioner to explain why Chapter X should not apply to the import transaction. By reply dated 26 February 2013 the petitioner said the Thai company was not an associated enterprise within s.92A, that the two companies were separate and managed by independent boards with no direct or indirect control over each other's business, and filed an independent legal opinion dated 19 February 2013. Nothing further was heard. By letter dated 31 March 2013 the Assessing Officer informed the petitioner that, because no report under s.92E had been filed, and with the prior approval of the CIT-IV, the case had been referred to the TPO. Similar references were made for the two following years, and a notice was later issued by the TPO under s.92CA(2) and s.92D(3). Three writ petitions followed.
The references made by the Assessing Officer to the TPO were set aside. Where the assessee raises a threshold objection that it has entered into no international transaction within s.92B, it is imperative for the Assessing Officer to deal with that objection, and if he nevertheless makes a reference he must record the reasons, even prima facie, why he considers it necessary and expedient to do so. The satisfaction that an international transaction or specified domestic transaction exists, even prima facie, is a sine qua non for the reference. An opportunity of being heard before recording that satisfaction is a procedural requirement implicit in s.92CA(1), as the Bombay High Court held in Vodafone India Services and as CBDT Instruction No. 3 of 2016 reaffirms (paras 14 to 23). The Assessing Officer was directed to decide afresh, after a hearing within fifteen days on one week's notice, and to issue a fresh order within four weeks of the hearing (paras 24 to 26).
The Court read s.92CA as containing jurisdictional prerequisites. What is referred is the determination of the arm's length price OF an international or specified domestic transaction, so the existence of such a transaction must first be satisfied, even prima facie. Where Form 3CEB is filed there is usually no difficulty; where none is filed, the Court asked what the basis for the officer's satisfaction could otherwise be. CBDT Instruction No. 3 of 2003 already required the officer to satisfy himself that an international transaction with an associated enterprise had been entered into, and required all transactions to be explicitly mentioned in the letter of reference and the Commissioner's approval to be obtained. The very nature of that exercise means the officer must first put the assessee on notice of his proposal and seek information; if the assessee then objects to jurisdiction, the officer must deal with the objection on merits before concluding that the reference is necessary and expedient. On the hearing, the Court adopted the Bombay High Court's reasoning in Vodafone India Services, where the objection had been dealt with by nobody — the TPO said his mandate under s.92CA was only to compute the arm's length price, and the Assessing Officer said s.92CA(4) obliged him to conform to the TPO's determination — so that unless the objection is decided at the threshold it is never decided at all, and the entire arm's length exercise may turn out to be academic. The Court held the CBDT had accepted the Bombay position rather than the Gujarat view in Veer Gems, reproduced para 3.4 of Instruction No. 3 of 2016, and rejected the Revenue's argument that the Instruction was prospective: it clarifies the correct legal position, and being procedural and for the assessee's benefit it applies to the reference of 31 March 2013 and afterwards.
Therefore, the satisfaction to be arrived at by the AO regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO.
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Handle my notice → Ask a CA on WhatsAppYes. The Delhi High Court held that the Assessing Officer's satisfaction, even prima facie, that there IS an international transaction or specified domestic transaction is a sine qua non for a reference under s.92CA(1); where the assessee raises a threshold objection to jurisdiction, the officer must deal with it and must give a hearing before recording his satisfaction. The three references were set aside and the officer directed to decide afresh after hearing the assessee. The Court concurred with the Bombay High Court in Vodafone India Services and declined to follow the contrary Gujarat decision in Veer Gems, noting that CBDT Instruction No. 3 of 2016 has itself adopted the Bombay position. This was decided by the High Court (S. Muralidhar J and Najmi Waziri J) and bears on section 92CA, section 92CA(1), section 92CA(2), section 92CA(2A), section 92CA(2B), section 92CA(2C), section 92CA(3), section 92CA(4), section 92C, section 92C(3), section 92E, section 92B, section 92BA, section 92A of the Income Tax Act 1961. It is reported as W.P.(C) 6422/2013 with CM No.14002/2013, W.P.(C) 4558/2014 and W.P.(C) 12072/2015 (Delhi High Court). This is the earliest point at which the whole transfer pricing exercise can be stopped, and it is worth taking because the reference also buys the department twelve extra months on the assessment. Para 3.4 of Instruction No. 3 of 2016 identifies the three situations in which the officer must, as a jurisdictional requirement, record satisfaction and give a hearing before seeking the Principal Commissioner's approval: no Form 3CEB filed at all; a transaction not declared in the Form 3CEB filed; and a transaction declared but with a qualifying remark that it is not an international transaction or does not affect income. The Court rejected the argument that the Instruction was prospective, holding it clarifies the correct legal position and, being procedural and for the assessee's benefit, applies to a reference made as early as 31 March 2013. Two limits. First, the relief is a fresh decision by the officer, not an annulment — the Court gave fifteen days for the hearing and four weeks after it for a fresh order. Second, the Bombay High Court's caveat is that the hearing is required where the applicability of Chapter X is objected to, and not otherwise; where Form 3CEB is filed without qualification the applicability of Chapter X is usually an admitted position. If it applies to you, the first step is this: Raise the jurisdictional objection in writing, before the reference, saying in terms that no international transaction within s.92B exists or that no income arises or is affected — the hearing requirement is triggered by the objection.
The petitioner, a widely held public limited company, imported raw material worth Rs 196.48 crores during the previous year 2009-10 from Indorama Petrochem Limited, a Thai company. It filed a nil return for AY 2010-11 after set-off of brought forward losses. The assessment had to be completed by 31 March 2013 under s.153, but if a reference were made to the TPO the limitation would be extended by nine months to October 2014. In February 2013 the Assessing Officer asked the petitioner to explain why Chapter X should not apply to the import transaction. By reply dated 26 February 2013 the petitioner said the Thai company was not an associated enterprise within s.92A, that the two companies were separate and managed by independent boards with no direct or indirect control over each other's business, and filed an independent legal opinion dated 19 February 2013. Nothing further was heard. By letter dated 31 March 2013 the Assessing Officer informed the petitioner that, because no report under s.92E had been filed, and with the prior approval of the CIT-IV, the case had been referred to the TPO. Similar references were made for the two following years, and a notice was later issued by the TPO under s.92CA(2) and s.92D(3). Three writ petitions followed. The matter was decided on 2016-07-25 by the High Court (S. Muralidhar J and Najmi Waziri J). On those facts the High Court held as follows. The references made by the Assessing Officer to the TPO were set aside. Where the assessee raises a threshold objection that it has entered into no international transaction within s.92B, it is imperative for the Assessing Officer to deal with that objection, and if he nevertheless makes a reference he must record the reasons, even prima facie, why he considers it necessary and expedient to do so. The satisfaction that an international transaction or specified domestic transaction exists, even prima facie, is a sine qua non for the reference. An opportunity of being heard before recording that satisfaction is a procedural requirement implicit in s.92CA(1), as the Bombay High Court held in Vodafone India Services and as CBDT Instruction No. 3 of 2016 reaffirms (paras 14 to 23). The Assessing Officer was directed to decide afresh, after a hearing within fifteen days on one week's notice, and to issue a fresh order within four weeks of the hearing (paras 24 to 26).
The Court read s.92CA as containing jurisdictional prerequisites. What is referred is the determination of the arm's length price OF an international or specified domestic transaction, so the existence of such a transaction must first be satisfied, even prima facie. Where Form 3CEB is filed there is usually no difficulty; where none is filed, the Court asked what the basis for the officer's satisfaction could otherwise be. CBDT Instruction No. 3 of 2003 already required the officer to satisfy himself that an international transaction with an associated enterprise had been entered into, and required all transactions to be explicitly mentioned in the letter of reference and the Commissioner's approval to be obtained. The very nature of that exercise means the officer must first put the assessee on notice of his proposal and seek information; if the assessee then objects to jurisdiction, the officer must deal with the objection on merits before concluding that the reference is necessary and expedient. On the hearing, the Court adopted the Bombay High Court's reasoning in Vodafone India Services, where the objection had been dealt with by nobody — the TPO said his mandate under s.92CA was only to compute the arm's length price, and the Assessing Officer said s.92CA(4) obliged him to conform to the TPO's determination — so that unless the objection is decided at the threshold it is never decided at all, and the entire arm's length exercise may turn out to be academic. The Court held the CBDT had accepted the Bombay position rather than the Gujarat view in Veer Gems, reproduced para 3.4 of Instruction No. 3 of 2016, and rejected the Revenue's argument that the Instruction was prospective: it clarifies the correct legal position, and being procedural and for the assessee's benefit it applies to the reference of 31 March 2013 and afterwards. In the words reproduced by the source cited on this page: "Therefore, the satisfaction to be arrived at by the AO regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO." The decision followed or applied Vodafone India Services (P) Limited v. Union of India (2014) 361 ITR 531 (Bom) — concurred with and applied; Veer Gems v. Assistant Commissioner of Income Tax (2013) 351 ITR 35 (Guj) — not followed; CBDT Instruction No. 3 of 2016 dated 10 March 2016, para 3.4 (replacing Instruction No. 15 of 2015 dated 16 October 2015) — relied on; CBDT Instruction No. 3 of 2003 dated 20 May 2003 — relied on.
It was decided by the High Court on 2016-07-25 and is reported as W.P.(C) 6422/2013 with CM No.14002/2013, W.P.(C) 4558/2014 and W.P.(C) 12072/2015 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 92CA, section 92CA(1), section 92CA(2), section 92CA(2A), section 92CA(2B), section 92CA(2C), section 92CA(3), section 92CA(4), section 92C, section 92C(3), section 92E, section 92B, section 92BA, section 92A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The references made by the Assessing Officer to the TPO were set aside. Where the assessee raises a threshold objection that it has entered into no international transaction within s.92B, it is imperative for the Assessing Officer to deal with that objection, and if he nevertheless makes a reference he must record the reasons, even prima facie, why he considers it necessary and expedient to do so. The satisfaction that an international transaction or specified domestic transaction exists, even prima facie, is a sine qua non for the reference. An opportunity of being heard before recording that satisfaction is a procedural requirement implicit in s.92CA(1), as the Bombay High Court held in Vodafone India Services and as CBDT Instruction No. 3 of 2016 reaffirms (paras 14 to 23). The Assessing Officer was directed to decide afresh, after a hearing within fifteen days on one week's notice, and to issue a fresh order within four weeks of the hearing (paras 24 to 26). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 92CA, section 92CA(1), section 92CA(2), section 92CA(2A), section 92CA(2B), section 92CA(2C), section 92CA(3), section 92CA(4), section 92C, section 92C(3), section 92E, section 92B, section 92BA, section 92A of the Income Tax Act 1961, and was decided by S. Muralidhar J and Najmi Waziri J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask under the Right to Information Act or by inspection for the officer's recorded satisfaction and the Principal Commissioner's approval, and check whether the letter of reference explicitly mentions each transaction referred. Test the reference against para 3.4 of Instruction No. 3 of 2016 and identify which of its three situations your case falls in. Where the objection has been ignored, note that neither the TPO nor the Assessing Officer will deal with it later — the TPO says his mandate is only to compute, and the officer says s.92CA(4) binds him; that circularity is the reason the hearing must come first. Do not assume annulment: the practical outcome is a remit for a fresh reasoned decision, so preserve the merits and, if the limitation clock matters, work out what the set-aside does to the s.153 timetable.
High Courts differ on this point. The conflict is between High Courts and is recorded in the judgment itself: the Gujarat High Court in Veer Gems v. ACIT (2013) 351 ITR 35 held there was no such hearing requirement; the Bombay High Court in Vodafone India Services (2014) 361 ITR 531 disagreed; and this Court concurred with Bombay. The practical significance of the conflict is much reduced because para 3.4 of CBDT Instruction No. 3 of 2016 now directs officers to record satisfaction and give a hearing in the three listed situations, which binds the department. I did NOT check whether the Gujarat High Court has revisited Veer Gems, whether any special leave petition was filed against this judgment, or how it has been treated since; that check remains to be done. It was applied by the Mumbai Bench of the Tribunal in Ambico Exports and Imports Pvt. Ltd. v. DCIT, IT(TP)A No.6822/Mum/2017, order dated 30 March 2021, which set aside a reference made without any show cause notice, though it held the point academic on the facts. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two internal inconsistencies in the report. Paragraph 2 sets out the facts for AY 2010-11 and the reference of 31 March 2013, and paragraph 7 describes the three writ petitions as relating to that reference and to references for AYs 2011-12 and 2012-13; but paragraph 23 sets aside the references 'for the AYs 2011-12, 2012-13 and 2013-14'. Paragraph 11 also refers to AY 2009-10. I have stated the disposal as the judgment records it at paragraph 23 and flagged the conflict rather than resolving it. Paragraph 7 gives the second petition number as W.P.(C) No. 4588 of 2014 while the cause title lists W.P.(C) 4558/2014. Paragraph 21 refers back to 'the above situations in para 3.2' where the three situations are set out in the extract from para 3.4 of the Instruction reproduced at paragraph 20. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The references made by the Assessing Officer to the TPO were set aside. Where the assessee raises a threshold objection that it has entered into no international transaction within s.92B, it is imperative for the Assessing Officer to deal with that objection, and if he nevertheless makes a reference he must record the reasons, even prima facie, why he considers it necessary and expedient to do so. The satisfaction that an international transaction or specified domestic transaction exists, even prima facie, is a sine qua non for the reference. An opportunity of being heard before recording that satisfaction is a procedural requirement implicit in s.92CA(1), as the Bombay High Court held in Vodafone India Services and as CBDT Instruction No. 3 of 2016 reaffirms (paras 14 to 23). The Assessing Officer was directed to decide afresh, after a hearing within fifteen days on one week's notice, and to issue a fresh order within four weeks of the hearing (paras 24 to 26).
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Our Indian affiliate is paid at arm's length. Can more profit still be attributed to a PE?
The TPO benchmarked my small captive unit against Infosys and Wipro. Can turnover be ignored?
Clause (i) of s.92BA was omitted in 2017. Is the TPO adjustment for an earlier year still good?
The TPO's order was one day late. Does that kill the transfer pricing addition?