Dr. S. Muralidhar, J.:— This writ petition seeks the following reliefs:

(a) A writ of certiorari or writ, order of direction in the nature of certiorari, or any other appropriate writ, order or direction under article 226/227 of the Constitution of India quashing Instruction No. 3 of 2003 dated May 20, 20031, issued under section 119 of the Income-tax Act, 1961 to the extent it requires compulsory reference to the Transfer Pricing Officer to determine the arm's length price where the aggregate value of international transactions exceeds Rs. 5 crores.

(b) A writ of certiorari or writ, order of direction in the nature of certiorari, or any other appropriate writ, order or direction under article 226/227 of the Constitution of India setting aside assessment order dated March 21, 2005, and directing the Assessing officer to exercise his powers ignoring Instruction No. 3 of 2003 dated May 20, 2003 (see [2003] 261 ITR (St.) 51).

Background facts

2. The petitioner Sony India P. Limited is a wholly owned subsidiary of Sony Corporation of Japan. It was incorporated on November 17, 1994, and commenced manufacturing activities in March 1995. The petitioner is engaged in assembling, manufacturing and distribution of electronic goods including colour television and audio products. During the previous year relevant to the assessment year 2002-03, besides the aforementioned activities it also imported from its associated enterprises high end products such as DVDs, handy cams, play stations and projectors etc. for sale in India. The Finance Act, 2001 substituted the earlier section 92 of the Income-tax Act, 1961 (“the Act”) with sections 92 to 92 F with effect from April 1, 2002. These provisions are found in Chapter X of the Act titled “Special provisions relating to avoidance of tax”. The sub-heading reads “Computation of income from international transactions having regard to arm's length price.” A fairly detailed scheme for computing the arm's length price (ALP) of international transactions is set out in these provisions. The Finance Act, 2002 inserted, with effect from June 1, 2002, section 92CA titled “Reference to Transfer Pricing Officer”. This provision enables the Assessing Officer (the AO), where he “considers it necessary or expedient so to do”, with the previous approval of the Commissioner, to refer to the Transfer Pricing Officer (the TPO) the computation of the ALP in relation to an international transaction entered into by an assessee in any previous year.

3. The petitioner filed its return for the assessment year 2002-03 with the Additional Commissioner of Income-tax on October 31, 2002, declaring an income of Rs. 8,71,08,860. This was subsequently revised to Rs. 8,67,46,730.

4. On May 20, 2003, the Central Board of Direct Taxes (the CBDT) issued the impugned Instruction No. 3 of 2003 (see [2003] 261 ITR (St.) 51) on the subject of “Computation of income from international transaction having regard to arm's length price—Reference to Transfer Pricing Officer under section 92CA of the Act.” This instruction provided, inter alia, that “wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the Transfer Pricing Officer.”

5. On December 8, 2003, the Assessing Officer referred to the Transfer Pricing Officer the determination of the ALP in respect of the international transactions entered into by the petitioner during the previous year 2001-2002 relevant to the assessment year 2002-2003. The Joint Commissioner of Income-tax, who was the Transfer Pricing Officer-II, issued notice to the petitioner and considered its detailed reply. The Transfer Pricing Officer also heard its authorized representatives. Thereafter on March 11, 2005, the Transfer Pricing Officer passed a detailed order determining the ALP of the international transactions of exports made by the petitioner to Sony Corporation of Japan. The Transfer Pricing Officer recommended that the Assessing Officer should on this basis enhance the total income of the petitioner by Rs. 42,41,40,934.

6. After receipt of the report of the Transfer Pricing Officer, the Assessing Officer sent a letter dated March 14, 2005, to the petitioner asking it to show cause why the aforesaid adjustment on account of ALP of the international transaction be not added to the income. After considering the petitioner's objections, the Assessing Officer passed and issued the assessment order dated March 21, 2005, assessing the income of the petitioner for the assessment year 2002-03 at Rs. 59,92,40,000 and the tax payable thereon was determined as Rs. 26,52,66,896. The petitioner has filed an appeal against the said assessment order dated March 21, 2005, before the Commissioner of Income-tax (the CIT) (Appeals) and the said appeal is stated to be pending.

7. Consequent to the assessment order, a demand was raised asking the petitioner to pay the tax within seven days as against the usual period of 30 days. This led to the petitioner filing Writ Petition (C) No. 5301 of 2005. Pursuant to certain orders made by this court in the said petition, the petitioner paid Rs. 2 crores on March 30, 2005, and the said writ petition was disposed of on May 12, 2005. Thereafter, the petitioner filed the present writ petition challenging Instruction No. 3 of 2003, issued on May 21, 2003 (see [2003] 261 ITR (St.) 51) by the Central Board of Direct Taxes as well as the assessment order dated March 21, 2005, by which the Assessing Officer assessed the income of the petitioner for the assessment year 2002-03 on the basis of the ALP determined by the Transfer Pricing Officer by the order dated March 11, 2005. The petitioner also filed on January 19, 2006, an application CM No. 817 of 2006 seeking a stay of the recovery of Rs. 11,20,36,798 stated to be the outstanding tax as on that date.

Submissions of counsel

8. Mr. M.S Syali, learned senior counsel appearing for the petitioner submits as under:

(a) The classification of international transactions into two categories, i.e, those of the value exceeding Rs. 5 crores, in respect of which a reference has to be compulsorily made to the Transfer Pricing Officer by the Assessing Officer for determination of ALP, and those of a value less than that amount is not based on an intelligible differentia and has no nexus with the object sought to be achieved. The classification is suspect and violative of article 14 of the Constitution.

(b) Section 92C itself makes no such classification of the international transactions. Therefore, such classification cannot be introduced by an “instruction” issued by the Central Board of Direct Taxes in exercise of its powers under section 119 of the Act. Consequently, the impugned instruction is ultra vires the Act.

(c) The discretion of the Assessing Officer under section 92CA of the Act to make a reference to the Transfer Pricing Officer only where he considers it “necessary and expedient” has been taken away by the impugned instruction in so far as international transactions of a value of over Rs. 5 crores are concerned. The word “may” in section 92CA of the Act underscores the discretionary nature of the power. Further, the provision presupposes the formation of a judicial opinion by the Assessing Officer, on a case-by-case basis, before making a reference to the Transfer Pricing Officer. The judicial discretion of the Assessing Officer in this behalf has been fettered by the impugned instruction of the Central Board of Direct Taxes which is binding on all the subordinate officers including the Assessing Officer and the Commissioner of Income-tax. This also renders the impugned instruction illegal and ultra vires the Act. In support of this contention, Mr. Syali relied on the decisions in Yum! Restaurants India Pvt. Ltd… v. Commissioner Of Income-Tax Delhi…., [2005] 278 ITR 401 (Delhi). His submission in effect is that executive instructions cannot control the law and set at naught the statutory framework for the exercise of discretionary powers by quasi judicial authorities.

(d) The ultimate decision on the computation of the ALP is that of the Assessing Officer under section 92C. However, that is now sought to be supplanted by the decision of the Transfer Pricing Officer for transactions of the value over Rs. 5 crores. Moreover, the Transfer Pricing Officer is not bound to follow the steps outlined in section 92C(1), (2) and (3) which are otherwise mandatory for the Assessing Officer to follow. In the absence of any specific provision in the Act permitting this, a Central Board of Direct Taxes instruction cannot be permitted to bring about this change.

9. Mr. Sanjeev Sabharwal, learned counsel for the respondent, submits that a reference under section 92CA will be made by the Assessing Officer only where he “considers it necessary or expedient so to do”. There may be several instances in which the Assessing Officer may exercise his discretion and this could include transactions of the value in excess of Rs. 5 crores. He further submits that the view expressed by the Transfer Pricing Officer is not binding on the Assessing Officer. The assessee may able to persuade the Assessing Officer, even after the report of the Transfer Pricing Officer is received, that the ALP determined by the Transfer Pricing Officer should not be acted upon. He submits that the apprehension expressed by the petitioner that the Transfer Pricing Officer is not bound to follow the procedure outlined under section 92C(1) to (3) is misconceived in view of the latter part of section 92CA(3) which stipulates that the Assessing Officer shall “by an order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92c.” According to him the impugned circular only facilitates the work of both the Assessing Officer and the Transfer Pricing Officer and cannot be characterised as usurping their discretion or ultra vires the Act. He referred to the decision of the hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan, [2003] 263 ITR 706 and in particular the passage in page 727 where the scope of the power of the Central Board of Direct Taxes under section 119 has been explained.

10. During the course of the arguments, Mr. Syali very fairly submitted that if the court were to clarify that the Transfer Pricing Officer, upon a reference made by the Assessing Officer for determination of the ALP of an international transaction of a value exceeding Rs. 5 crores, is bound to follow the steps envisaged by section 92C(1) to (3), then he would not press the points noted at (a) to (c) of para. 9 (page 59) above. Mr. Sabharwal appearing for the Revenue maintained that the Transfer Pricing Officer is indeed bound to follow section 92C(1) to (3). Since the entire controversy revolves around this central issue, we propose to first answer this point before dealing with the other points made by the petitioner's counsel. In order to deal with this contention, we may first examine the relevant statutory provisions.

The statutory provisions

11. The concept of transfer pricing leading to tax avoidance has been acknowledged in the Act only recently. It is a concomitant of the operations of multinational corporations (MNCs) that set up base by incorporating a local subsidiary in a country where they seek to operate. It is often seen that the MNC transfers goods and services to its local subsidiary at a price not reflective of the market price (or arm's length price as it is referred to in the present context) and in turn the subsidiary is able to avoid, partly or wholly, payment of the local tax. Although the expression “transfer price” has not been defined in the Act, it is understood to mean “that price which is arrived at when two associated or related enterprises deal with each other” (Kanga, Palkhivala and Vyas, The Law and Practice of Income Tax, Ninth edition (2004) page 1532). It was acknowledged by the Finance Minister in the Budget Speech for the year 2001 that “the presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern.” The purpose of inserting these provisions is therefore to determine the arm's length price (ALP) of an international transaction involving an MNC and its local associate.

12. Under section 92B(1) “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.” Section 92F(v) defines “transaction” to include “an arrangement, understanding or action in concert.” Section 92C sets out the steps to be sequentially followed by the Assessing Officer for determining the ALP. Section 92E mandates that every person who has entered into an international transaction during a previous year “shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.” The prescribed form in this regard is Form No. 2CEB.

13. Section 92C is titled “Computation of arm's length price”. Sub-section (1) thereof states that the ALP will be determined by applying any of six methods specified in clauses (a) to (f) thereunder or “such other relevant factors” as the Central Board of Direct Taxes (the CBDT) may prescribe. sub-section (2) of section 92c states that the manner in which such method is to be applied will also be prescribed by the Central Board of Direct Taxes. This power of the Board to prescribe the manner and method is in addition to the general power to issue instructions to subordinate authorities under section 119 of the Act. Therefore, the statute envisages a role for the Central Board of Direct Taxes in relation to both the method to be applied and the manner of its application for the computation of the ALP.

14. The provisions of section 92C(3) read as under:

“Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that—

(a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or

(b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c) the information or data used in computation of the arm's length price is not reliable or correct; or

(d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92d,

the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:

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 so determined on the basis of material or information or document in the possession of the Assessing Officer.”

15. sub-section (3) of section 92c envisages the Assessing Officer having to form an opinion on the existence of the factors enumerated in clauses (a) to (d) as a pre-condition to proceeding to himself determine the ALP. In other words, the acceptance of the ALP declared by the assessee is the rule and its rejection is the exception posited on the presence of the factors enumerated in clauses (a) to (d). But the assessee is under the proviso to section 92C given an opportunity of being heard before the Assessing Officer proceeds to determine the ALP himself on the basis of available materials. It is only thereafter that under section 92C(4) that the Assessing Officer proceeds to compute the total income “having regard to the” ALP so determined by him. Thus, there are adequate safeguards built into section 92C to ensure that the determination of the ALP by the Assessing Officer is not a mechanical exercise.

16. Now we turn to section 92CA which permits the Assessing Officer to refer, with the prior approval of the Commissioner of Income-tax, the exercise of computing the ALP to the Transfer Pricing Officer where the Assessing Officer “considers it necessary or expedient so to do”. Section 92CA reads as under:

“Reference to Transfer Pricing Officer.—(1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer.

(2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction referred to in sub-section (1).

(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92d and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all the relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92c and send a copy of his order to the Assessing Officer and to the assessee.

(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92c having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer.

(5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly.

(6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer.

(7) The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133.”

Interpretation of the statutory provisions

17. At the outset it must be noticed that the only condition that is spelt out for the reference to the Transfer Pricing Officer is the opinion of the Assessing Officer that it is “necessary or expedient so to do”. There is no gainsaying that power conferred on an authority, particularly a discretionary power, cannot be exercised mechanically. What is “necessary or expedient” will depend on the facts and circumstances of every case and the satisfaction of the Assessing Officer in this regard will have to be based on some objective criteria. On the other hand, the relatively insignificant value of the transaction may make it inexpedient for the matter to be referred to the Transfer Pricing Officer. It is not possible to anticipate the instances that may necessitate the invoking of the discretion vested in the Assessing Officer in this regard. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately the courts. The words “necessary and expedient” occurring in other provisions of the Act and other statutes have been interpreted judicially to admit of a strict construction permitting the power to be used only in the manner and subject to the conditions stipulated in the provision. In the context of a similar phrase occurring in section 245E of the Act permitting the Settlement Commission to reopen proceedings where it thinks it “necessary or expedient”, the hon'ble Supreme Court in CIT v. Paharpur Cooling Towers P. Ltd., [1996] 8 SCC 154; [1996] 219 ITR 618, 627, observed (SCC page 161):

“Section 245E …… which empowers the Commission to reopen any completed proceedings connected with the case before it but this power is circumscribed by the requirement expressly stated in the section that such reopening of completed proceedings should be necessary or expedient for the proper disposal of the case pending before it. There are two other limitations upon this power, viz., that this reopening of the completed proceedings can be done, even for the aforesaid limited purpose, only with the concurrence of the asses-see and secondly that this power cannot extend to a period beyond eight years from the end of the assessment year to which such proceeding relates. These two features make it abundantly clear that the section contemplates reopening of the completed proceedings not for the benefit of the assessee but in the interests of the Revenue. It contemplates a situation where the case before the Commission cannot be satisfactorily settled unless some previously concluded proceedings are reopened which would normally be to the prejudice of the assessee. It is precisely for this reason that the section says that it can be done only with the concurrence of the assessee and that too for a period within eight years. This section cannot be read as empowering the Commission to do indirectly what cannot be done directly… The power conferred by section 245E is thus a circumscribed and a conditional power. It can be exercised only in accordance with and subject to the conditions aforementioned and in no other manner.”

(emphasis supplied)

18. The exercise of the discretion by the Assessing Officer is required to be preceded by the formation of an opinion by the Assessing Officer of the necessity or expediency of making such a reference. However, what is not apparent is the nature of such opinion. Is this a prima facie opinion or a considered opinion after examining all available materials ? The answer to this will determine the stage at which the reference can be made to the Transfer Pricing Officer. This will have to be understood from the wording of the statute itself. A reading of section 92C and section 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. For instance, section 92CA(1) can be contrasted with section 55A of the Act where again the Assessing Officer is empowered to refer to the Valuation Officer the question of ascertaining the fair market value of a capital asset. The wording of section 55A is unambiguous that the Assessing Officer has to first form an opinion that the value declared is less than the fair market value before he can refer the question to the Valuation Officer. If he does not, then the reference is itself bad. Turning to section 92CA, the question is whether the reference to the Transfer Pricing Officer by the Assessing Officer has to be made by the Assessing Officer only after he is satisfied by going through the steps enlisted at section 92C(1) to (3) and concluding that the price declared by the assessee is not to be accepted or can he make such a reference at an anterior stage?

19. There is nothing in section 92CA itself that requires the Assessing Officer to first form a considered opinion in the manner indicated in section 92C(3) before he can make a reference to the Transfer Pricing Officer. In our view, it is not possible to read such a requirement into section 92CA(1). However, it will suffice if the Assessing Officer forms a prima facie opinion that it is necessary and expedient to make such a reference. One possible reason for the absence of such a requirement of formation of a prior considered opinion by the Assessing Officer is that the Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 92C(1) to (3) while determining the ALP under section 92CA(3). The latter part of section 92CA(3) unambiguously states that the Assessing Officer shall “by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of the section 92c.” It will be pointless to have a duplication of this exercise at two stages one after the other. On the other hand, the scheme is that after the Transfer Pricing Officer determines the ALP the matter revives before the ALP at section 92C(4) stage where, in terms of section 92CA(4) the Assessing Officer will compute the total income “having regard to” the ALP determined by the Transfer Pricing Officer.

20. The two aspects require to be taken note of in this context. The Assessing Officer will necessarily have to give an opportunity to the assessee after receiving the report of the Transfer Pricing Officer and before he finalises the assessment computing the total income. Secondly, the provisions do not mandate that the Assessing Officer is bound to accept the ALP as determined by the Transfer Pricing Officer. And for good reason because the Assessing Officer has himself not made up his mind at the stage about the ALP. He has, in a sense, only “outsourced” this exercise to the Transfer Pricing Officer. He can always be persuaded by the assessee at that stage to reject the Transfer Pricing Officer's report and proceed to still determine the ALP himself. It must be recalled that it is the Assessing Officer who is the authority to finalise the assessment and that power cannot be usurped, as it were, by the Transfer Pricing Officer or any other authority contrary to the scheme of the Act. If on the other hand one were to interpret the provisions to require the Assessing Officer to first form a considered opinion on the ALP before referring the matter to the Transfer Pricing Officer, then the Assessing Officer will thereafter have no option but to accept the report of the Transfer Pricing Officer and to that extent the Assessing Officer's final say on the ALP while computing the total income gets diluted. By preserving the power of the Assessing Officer to determine the ALP even after the determination by the Transfer Pricing Officer, full effect can be given to the words “having regard to” occurring in both section 92C(4) and section 92CA(4).

21. In Juggilal Kamlapat Bankers v. WTO, [1984] 145 ITR 485 (SC); [1984] 1 SCC 571 the provisions of section 7 of the Wealth-tax Act, 1957, which reads as under, were under consideration (page 494 of ITR):

“7. Value of assets, how to be determined.—(1) Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date.

(Explanation…….)

(2) Notwithstanding anything contained in sub-section (1),—

(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as may be prescribed.

(3) Notwithstanding anything contained in sub-section (1), where the valuation of any asset is referred by the Wealth-tax Officer to the Valuation Officer under section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date, or, in the case of an asset being a house referred to in sub-section (4), the valuation date referred to in that sub-section.”

22. In explaining the purport of the words “having regard to” occurring in the above provision the hon'ble Supreme Court observed (page 496 of ITR):

“…. even when he proceeds under sub-section (2) he has to determine the net value of the business as a whole having regard to the balance-sheet of such business as on the valuation date; the phrase ‘having regard to the balance-sheet of such business’ as judicially interpreted means that the Wealth-tax Officer has to take into consideration or account the balance-sheet of such business for such valuation and not that such balance-sheet is conclusive or binding or decisive of the values of assets appearing therein.”

23. In relation to section 23A of the Indian Income-tax Act, 1922, where a similar expression occurred, the Supreme Court in CIT v. Gangadhar Banerjee and Co. P. Ltd., [1965] 57 ITR 176 adopted the reasoning of the Privy Council in CIT v. Williamson Diamonds Ltd., [1959] 35 ITR 290 to hold that the Income-tax Officer's power is not circumscribed by the conditions preceding those words and that he can consider any other matter relevant to the question. In the latter case it was held (page 297 of ITR)

“The form of words used no doubt lends itself to the suggestion that regard should be paid only to the two matters mentioned, but it appears to their Lordships that it is impossible to arrive at a conclusion as to reasonableness by considering the two matters mentioned isolated from other relevant factors. Moreover, the statute does not say ‘having regard only’ to losses previously incurred by the company and to the smallness of the profits made. No answer, which can be said to be in any measure adequate, can be given to the question of ‘unreasonableness’ by considering these two matters alone. Their Lordships are of the opinion that the statute by the words used, while making sure that ‘losses and smallness of profit’ are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered. Capital losses, if established, would be one of them.”

24. In view of the settled legal position, we are of the view that the expression “having regard to” in section 92C(4) and section 92CA(4) enables the Assessing Officer to consider not only the report of the Transfer Pricing Officer but any other material that may be placed before him by the asses-see to arrive at a different conclusion. This also strengthens the position that the report of the Transfer Pricing Officer is not binding on the Assessing Officer.

25. This interpretation does not prejudice the assessee because in effect the assessee gets two opportunities to demonstrate that the price declared by it requires acceptance. The first is before the Transfer Pricing Officer in terms of section 92CA(3) and the second before the Assessing Officer under section 92C(4) after the receipt of the report of the Transfer Pricing Officer. Any possible prejudice is negatived by the principles of natural justice that are written into the provisions in large measure. Moreover, a specialized determination of the ALP by an experienced quasi-judicial authority exercising the function of the Transfer Pricing Officer can only minimize the possibility of the Assessing Officer acting arbitrarily. At the same time the Transfer Pricing Officer is not the final authority on the issue.

26. The salient points emerging from the above discussion may be recapitulated thus:

(a) The discretion of the Assessing Officer to refer the matter of computation of ALP to the Transfer Pricing Officer is not unfettered. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately the courts.

(b) The words “necessary and expedient” occurring in other provisions of the Act and other statutes have been interpreted judicially to admit of a strict construction permitting the power to be used only in the manner and subject to the conditions stipulated in the provision.

(c) The words “necessary and expedient” posit the formation of an opinion by the Assessing Officer of the need to make such a reference. However, a reading of section 92C and section 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. A prima facie opinion would suffice at the stage of making the reference.

(d) The Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 92C(1) to (3) while determining the ALP under section 92CA(3).

(e) The Assessing Officer is not bound to accept the ALP as determined by the Transfer Pricing Officer. He can always be persuaded by the assessee at that stage to reject the Transfer Pricing Officer's report and proceed to still determine the ALP himself. This is how the expression “having regard to” occurring in both sections 92C(4) and 92CA(4) can be given full effect.

(f) This interpretation does not prejudice the assessee because in effect the assessee gets two opportunities to demonstrate that the ALP declared by it requires acceptance. The first is before the Transfer Pricing Officer in terms of section 92CA(3) and the second before the Assessing Officer under section 92C(4).

27. The contention of learned senior counsel for the petitioner as noted in para. 9(d) (page 60) above stands answered accordingly. Although, no further issue would survive in view of the submission of counsel for the petitioner as noted in para. 11 (page 61) above, we nevertheless proceed to answer the other issues as well since the matter was argued at some length.

The impugned instruction

28. The first three contentions of the petitioner at para. 9(a) to (c) relate to the validity of the impugned instruction dated May 20, 2003 (see [2003] 261 ITR (St.) 51) of the Central Board of Direct Taxes. The salient features of the impugned instruction are reproduced verbatim for easy reference:

(a) “In order to make a reference to the Transfer Pricing Officer (the TPO), the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources from which the factual information regarding international transaction can be gathered is Form No. 2CEB filed with the return which is in the nature of an accountant's report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents maintained and the method followed. Thus the primary details regarding such international transactions would normally be available in the accountant's report.

(b) The Assessing Officer can arrive at a prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage.

(c) In the initial years of implementation of these provisions and pending development of adequate database, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the Transfer Pricing Officer.

(d) If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the Transfer Pricing Officer. Before making reference to the Transfer Pricing Officer, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act.

(e) The threshold limit of Rs. 5 crores will be reviewed depending upon the workload of the Transfer Pricing Officers.

(f) The role of the Transfer Pricing Officer begins after a reference is received from the Assessing Officer. In terms of section 92CA this role is limited to the determination of arm's length price in relation to the international transaction referred to him by the Assessing Officer.

(g) The transfer price has to be determined by the Transfer Pricing Officer in terms of section 92C. The price has to be determined by any one of the methods stipulated in sub-section (1) of section 92c and by applying the most appropriate method referred to in sub-section (2) thereof.

(h) The Transfer Pricing Officer, after taking into account all the relevant facts and data available to him, shall determine arm's length price and pass a speaking order after obtaining the approval of the DIT (TP). The order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods.

(i) After receipt of the arm's length price so determined by the Transfer Pricing Officer, it is imperative that a formal opportunity is given to the taxpayer before making adjustments to the total income. The opportunity with regard to the determination of arm's length price has already been given by the Transfer Pricing Officer and, therefore, opportunity by the Assessing Officer, for final determination of income under sub-section (4) of section 92c read with subsection (4) of section 92ca is to be given by the Assessing Officer.”

29. At the outset, we may observe that these instructions are based on a correct interpretation of the relevant provisions of the Act as explained hereinabove. They can indeed guide the Assessing Officer while taking up the exercise of computing the ALP in terms of section 92C.

Validity of the impugned instruction

30. The first ground of attack is that the impugned instruction is vitiated for bringing about a classification that is violative of article 14. There is no doubt that the instruction “picks out” transactions of a value in excess of Rs. 5 crores for a particular treatment: the automatic reference to the Transfer Pricing Officer for determination of their ALP. In that sense it recognises two classes of international transactions within the meaning of section 92C. To the extent that administrative instructions have been judicially recognised as capable of supplementing statutory provisions and capable of filling gaps in the legislation without violating the scheme of the statute (see Sunt Ram Sharma v. State of Rajasthan, AIR 1967 SC 1910), such instructions would be vulnerable to being tested for prohibitory classification on the touchstone of article 14. But not all classification is forbidden by the statute or the Constitution. It is only where such classification is not based on an objective intelligible criteria and which bears no nexus to the object sought to be achieved that it will invite constitutional invalidation on the anvil of article 14. The twin test of classification propounded first by Das J. in State of West Bengal v. Anwar Alt Sarkar, AIR 1952 SC 75 and later stated authoritatively in Ram Krishna Dalmia v. Mr. Justice S.R Tendolkar*, AIR 1958 SC 538 continues to be the lode star guiding judicial exegesis to the present day.

31. Applying the above test, the impugned instruction cannot be held to violate article 14. The classification brought about by the impugned instruction is based on a straightforward recognizable basis giving no room for confusion. Transactions of a high value require a careful examination to determine if the declared price is in fact an acceptable ALP. It may not be expedient for the Assessing Officer to efficiently deal with the assessment involving such an exercise. In that sense it achieves the expeditious disposal of the assessment by the Assessing Officer if the exercise is referred for a specialised determination by the Transfer Pricing Officer. The classification certainly bears a nexus to this objective. We are of the considered view that the challenge to the impugned instruction on the ground of “suspect classification” must fail.

32. The impugned instruction also is not ultra vires the Act only because the classification of international transactions it brings about is not contained in the Act itself. In our view, the classification is not inconsistent with or contrary to the objective sought to be achieved by the provisions of Chapter X of the Act. The impugned instruction serves to supplement the statutory provisions to achieve the objective and not override them.

33. The impugned instruction does not seek to by-pass the statute and this is abundantly clear from the extracted portions which time and again make a reference to the provisions of the Act and in particular to sections 92C and 92CA. In sub-para. (1) of the instruction under the heading “Reference to Transfer Pricing Officer (TPO)”, it is stated as under (see [2003] 261 ITR (St.) 52):

“(i) Reference to Transfer Pricing Officer (TPO)

The power to determine arm's length price in an international transaction is contained in sub-section (3) of section 92c. however, section 92ca provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of the arm's length price in relation to an international transaction to the Transfer Pricing Officer. sub-section (3) of section 92ca provides that the Transfer Pricing Officer after taking in account the material available with him shall, by an order in writing, determine the arm's length price in accordance with sub-section (3) of section 92C. Subsection (4) of section 92CA provides that on receipt of the order of the Transfer Pricing Officer, the Assessing Officer shall proceed to compute the total income of the assessee having regard to the arm's length price determined by the Transfer Pricing Officer. Thus, whereas the determination of the arm's length price, wherever reference is made to him, is required to be done by the Transfer Pricing Officer under sub-section (3) of section 92ca read with sub-section (3) of section 92c, the computation of total income having regard to the arm's length price so determined by the Transfer Pricing Officer is required to be done by the Assessing Officer under sub-section (4) of section 92c read with sub-section (4) of section 92CA.”

(emphasis supplied)

34. The above passage makes it clear that the Transfer Pricing Officer has to determine the ALP “in accordance with sub-section (3) of section 92c.” Further in sub-para. 2 it reiterates that “the transfer price has to be determined by the Transfer Pricing Officer in terms of section 92C.” Thereafter it stipulates that “price has to be determined by any one of the methods stipulated in sub-section (1) of section 92c and by applying the most appropriate method referred to in “sub-section (2) thereof.” It further refers to section 92CA(3) which states that the Transfer Pricing Officer shall “by an order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92c and copy of his order should be made available to the Assessing Officer.”

35. Since the extracted portions of the impugned instruction are based on a correct understanding of the legal position, the question of the Central Board of Direct Taxes's binding instruction being contrary to the statute does not arise. The instructions are consistent with section 119 of the Act and therefore not contrary to any of the decisions cited including Azadi Bachao Andolan, [2003] 263 ITR 706 (SC), Yum Restaurants India P. Ltd., [2005] 278 ITR 401 (Delhi) and M.P Tewari v. Y.P Chawla, ITO, [1991] 187 ITR 506 (Delhi) as modified by the hon'ble Supreme Court in (Y.P Chawla v. M.P Tiwari, [1992] 195 ITR 607).

36. The other ground on which the instruction is challenged is that it completely takes away the discretion of the Assessing Officer in relation to an international transaction of the value exceeding Rs. 5 crores. A reading of the impugned instruction indicates that it acts as a guideline to the Assessing Officer in the exercise of the discretion conferred under section 92CA(1). This instruction is in fact helpful in ensuring that the discretion of the Assessing Officer will not be abused. It correctly interprets the law as requiring only a formation of a prima facie opinion by the Assessing Officer at the stage of the reference. Therefore, the question of the Central Board of Direct Taxes supplanting the judicial discretion of the Assessing Officer does not arise. It is perfectly possible that, independent of the circular, the Assessing Officer might still “consider it necessary or expedient” to refer an international transaction of such value to the Transfer Pricing Officer for determination of the ALP. At the same time it is not as if the transactions of the value of less than Rs. 5 crores cannot be referred to the Transfer Pricing Officer by the Assessing Officer. Ultimately, any exercise of discretion by the Assessing Officer is bound to be judicially reviewed by the statutory appellate authorities as well as by the courts. Therefore, it is not as if there is no check on the exercise of discretion by the Assessing Officer.

37. Two more factors may be mentioned. It is not as if the impugned instruction is intended to apply for all times to come. It is stated to be an experiment aimed at enhancing the efficiency of the Assessing Officer and is for a limited period. We may add that perforce the Central Board of Direct Taxes is expected to periodically review the impact of the instruction on the functioning of the Assessing Officers in the context of determination of the ALP of international transactions. If at any time it is found that the instruction of the Central Board of Direct Taxes is not achieving the object of facilitating such expediency, then it will require to be reviewed. This is an in-built safeguard that is a sine qua non for the continuance of the instruction beyond the period for which it is initially envisaged to operate. Secondly, it is expected that in due course there will be available to Assessing Officers a database of decisions handed down by the Transfer Pricing Officers who are expected to be officers more experienced than the Assessing Officers. This database will doubtless be a useful guide to the Assessing Officers in their determination of the ALP. Once this object is achieved, it may not be necessary to continue with the instruction. However, this is ultimately for the Central Board of Direct Taxes to decide taking into account all relevant factors that will impinge on the decision to continue the impugned instruction.

38. For these reasons, we hold that the impugned Instruction No. 3 dated May 20, 2003 (see [2003] 261 ITR (St.) 51) issued by the Central Board of Direct Taxes is consistent with the statutory objective underlying section 92CA(1) and acts as a guidance to the Assessing Officer in the exercise of discretion in referring a international transaction to the Transfer Pricing Officer for determination of its ALP. It is neither arbitrary nor unreasonable, and is not ultra vires the Act. We are not inclined to entertain the second prayer in the writ petition for quashing of the assessment order dated March 21, 2005 since the petitioner has already filed an appeal against the said order before the Commissioner of Income-tax (Appeals). It will be open to the petitioner to assail the assessment order on any additional grounds that may arise as a result of the present judgment explaining the scope of the functions of the Assessing Officer and the Transfer Pricing Officer under the relevant statutory provisions.

39. The writ petition and the applications stand dismissed with no order as to costs.