Court holds that non-service of mandatory Show Cause Notice under Sections 92CA(3) and 92C(3) of the Income Tax Act violates natural justice; order set aside and matter remanded for fresh proceedings.
In a significant ruling impacting transfer pricing disputes, the Bombay High Court (Division Bench) on 25th August 2026 quashed the order passed by the Transfer Pricing Officer (TPO) under Section 92CA(3) of the Income Tax Act, 1961 in the case of Flyjac Logistics Private Limited for the Assessment Year 2020-21. The Court held that the TPO's failure to serve the statutorily mandated Show Cause Notice under Section 92C(3) before determining the Arm's Length Price constituted a breach of the principles of natural justice, rendering the order invalid.
The petitioner, Flyjac Logistics Private Limited, had challenged the TPO's order dated 20th March 2023, which proposed an adjustment exceeding Rs. 20 crores to the Arm's Length Price of various international transactions with associated enterprises. The petitioner contended that while notices under Section 92CA(2) requiring information were duly served and replied to, the crucial Show Cause Notice under Section 92C(3) - which must be served before finalizing the price determination - was never served or uploaded on the petitioner's Income Tax Portal. This prevented the petitioner from making submissions against the proposed adjustment.
The Revenue admitted that the Show Cause Notice dated 28th February 2023 was not served due to technical glitches and email delivery failure, and acknowledged the petitioner's non-receipt of the notice. The Court emphasized that notices under Section 92CA(2) for seeking information cannot substitute the Show Cause Notice mandated under Section 92C(3), which specifically affords the assessee an opportunity to be heard on the proposed determination.
The Court analyzed the relevant statutory provisions - Sections 92C(3) and 92CA(3) - and held that the TPO is bound by the procedural safeguards prescribed under Section 92C(3), including issuance of the Show Cause Notice before passing any order determining the Arm's Length Price. The failure to do so violates principles of natural justice and vitiates the order.
Consequently, the Court set aside the impugned order and remanded the matter to the TPO at the stage of issuance of the Show Cause Notice. It directed the petitioner to file a response within two weeks of the order's upload and mandated that the TPO pass a fresh order within 12 weeks after providing a personal hearing.
This judgment reiterates the importance of strict compliance with procedural safeguards in transfer pricing assessments, ensuring assessees' rights to fair hearing are protected. It clarifies that the Show Cause Notice under Section 92C(3) is a mandatory statutory requirement and non-service thereof results in the invalidation of the transfer pricing order.
Bottom Line:
Income Tax - Transfer Pricing Officer is required to issue a mandatory statutory Show Cause Notice as per Section 92CA(3) read with Section 92C(3) of the Income Tax Act, 1961, before passing an order determining the Arm's Length Price of international or specified domestic transactions. Failure to serve such notice violates principles of natural justice, rendering the order bad in law.
Statutory provision(s):
Income Tax Act, 1961 - Sections 92C(3), 92CA(2), 92CA(3)
