Section 92A: is 26% shareholding enough for an associated enterprise?

A pharmaceutical research company in Gujarat sold technology to two overseas entities in the same group, took the view that they were not associated enterprises, and filed no report in Form No. 3CEB. The Assessing Officer disagreed, referred the matter to the Transfer Pricing Officer, and an upward adjustment of about Rs. 17.92 crores followed. The question that decided everything else was a narrow one: when one man holds shares carrying not less than 26 per cent of the voting power in both companies, does that by itself make them associated enterprises, or must the Revenue also show that he participates in the management, control or capital of each?

On 15 October 2026 the Ahmedabad Bench answered that it does by itself, and said that participation is then “necessarily presumed”. The answer matters well beyond this assessee, because the same shareholding pattern sits under a great many Indian promoter groups. It is also an answer the Karnataka High Court has twice declined to give, and that the Memorandum to the Finance Bill 2002 appears to contradict.

The order does a good deal more than that. It rejects the argument that Chapter X cannot charge what sections 4 and 5 do not reach. It sets aside an arm’s length price that the Transfer Pricing Officer fixed without selecting any prescribed method, and then, instead of deleting the addition as several Benches have done, sends it back. And it leaves one ground entirely unanswered.

Key points

• Where a common shareholder holds shares carrying not less than 26 per cent of the voting power in each enterprise, clause (b) of section 92A(2) is satisfied, and the Bench held that the participation test in section 92A(1) is then necessarily presumed (paras 11 and 12).
• The Bench rests that on the Finance Act, 2002 prefix “For the purposes of sub-section (1),”. The Memorandum to the Finance Bill 2002 gives that prefix the opposite purpose, as a restriction on sub-section (1).
• Two Karnataka High Court decisions hold the sub-sections are interlinked and both must be satisfied, and no High Court has held the other way, though the Revenue’s special leave petition against the later of the two is pending in the Supreme Court. This order cites no authority on section 92A at all.
• Chapter X computes an arm’s length price; it does not change the head or the nature of the income, which remained business income (para 17).
• In the Revenue’s own appeal for 2013-14 a separate transfer pricing addition on product development services was deleted and stayed deleted, the Commissioner (Appeals) having followed the group’s earlier order (para 45.1).
• An arm’s length price fixed without selecting a method under section 92C(1) cannot be sustained, but the matter was remanded rather than the addition deleted, because the assessee had filed no Form No. 3CEB (paras 22 and 23).
• The Bench reads Kodak India far more narrowly than the Tribunal decisions that have followed it, and rightly, though it describes the High Court as having upheld a view when the High Court decided nothing.
• The ground that the assessee was under a 100 per cent tax holiday, so no tax could be avoided, was never adjudicated.
• From 1 April 2026 the whole sub-section (1) against sub-section (2) architecture loses its footing, because section 162(1) of the Income-tax Act, 2025 drops the deeming language and states the voting power tests inside the definition itself.

What the Tribunal decided, and what it did not

The order is Sun Pharma Advance Research Co. Ltd. v. DCIT, decided by Bench ‘D’ of the Income Tax Appellate Tribunal at Ahmedabad, Dr. BRR Kumar, Vice President, and Sanjay Kumar, Judicial Member, on 15 October 2026, reported at [2026] 191 taxmann.com 491. Ten appeals were disposed of together, the assessee’s in ITA Nos. 366/AHD/2020 and 765 to 768/AHD/2025, the Revenue’s in ITA Nos. 931 to 933 and 2593 and 2594/AHD/2025, covering assessment years 2009-10, 2012-13 to 2015-16, 2017-18 and 2018-19. Mr. S. N. Soparkar, Senior Advocate, with Ms. Urvashi Sodhan, appeared for the assessee, and Mr. R. V. Aroon Prasaad, Commissioner of Income-tax (Departmental Representative), for the Revenue. The lead appeal on transfer pricing is ITA No. 366/AHD/2020 for assessment year 2009-10, and the decision there was applied to assessment years 2012-13 to 2015-16 on the parties’ agreement that the facts had not changed.

A reader working from the printed order should know that its paragraphs 28, 32, 35 and 38 refer to the lead appeal as ITA No. 366/AHD/2025. The result table at paragraph 51 gives it as 366/AHD/2020, which matches the cause title. The 2025 references are typographical.

Five transfer pricing questions were decided, and a sixth was raised and left alone. The Bench held that the overseas entities were associated enterprises; that the Assessing Officer was not required to pass a speaking order recording his satisfaction before referring the matter to the Transfer Pricing Officer; that Chapter X is a machinery provision which does not alter the charge; and that the arm’s length price could not stand because no prescribed method had been applied, so the matter went back for fresh determination. In the Revenue’s own appeal for assessment year 2013-14 it dismissed a transfer pricing ground on product development services, following the group’s earlier order. The ground that the assessee’s profits were in any event exempt was never reached.

The results are at paragraph 51. Of the ten appeals, seven were partly allowed for statistical purposes and one allowed for statistical purposes, which is what a remand looks like in the Tribunal’s order sheet, and two of the Revenue’s appeals, ITA Nos. 2593 and 2594/AHD/2025 for assessment years 2017-18 and 2018-19, were simply allowed on the expenditure issue. Nothing in the transfer pricing half was finally decided against the assessee on quantum. What was decided against it, and decided finally so far as this Tribunal is concerned, is that the counterparties were associated enterprises, that the reference was validly made, and that Chapter X applies.

This piece deals with the transfer pricing half of the order. The same order decides a set of expenditure questions, on capital expenditure for scientific research under section 35(1)(iv), on research and development expenditure under section 37, on when software is capital and when it is revenue, on a provision for leave encashment under section 43B(f), and on a handy cam treated as a freebie to doctors. Those are a separate subject and are not covered here. Nor is the consequential ground on interest under section 234B, which the Bench disposed of at paragraph 33 as requiring no adjudication.

The shareholding that made them associated enterprises

The assessee had income of Rs. 32.30 crores from the sale of technology and know-how and Rs. 2.82 crores of fees and service charges, and on those receipts it had incurred a loss, the major expenses being research and development material consumption, salaries and professional charges. That loss matters twice over: it is why the tax holiday ground had little to work with, since section 80-IB(8A) needs positive income from the undertaking, and it is the background against which the Revenue says the price was understated. Of the technology receipts, Rs. 4,60,36,100 came from Sun Pharma Global Inc., described in the order as SPG BVI, and Rs. 27,69,77,675 from Sun Pharma Global FZE, described as SPG FZE.

The structure the Assessing Officer recorded was this. SPG BVI was a wholly owned subsidiary of Sun Pharmaceutical Industries Ltd. SPG FZE was a wholly owned subsidiary of SPG BVI. Shri Dilip Sanghvi, whose name the order also spells Shanghvi in places, held, indirectly, about 46.81 per cent of the shares in the assessee and about 45.89 per cent in Sun Pharmaceutical Industries Ltd. Both figures are above the twenty-six per cent line in clause (b) of section 92A(2).

The assessee filed no report in Form No. 3CEB, on the footing that the two overseas entities were not associated enterprises. The Assessing Officer took the contrary view, obtained the Commissioner’s approval, and referred the transactions to the Transfer Pricing Officer. Before the Commissioner (Appeals), and again before the Tribunal, the shareholding itself was not in dispute. The Bench records at paragraph 12 that the authorised representative had confirmed the shareholding before the Commissioner (Appeals), and that the fact was not disputed by Mr. Soparkar before the Tribunal either. What was disputed was the legal consequence.

That matters, because it shapes what the order can be used for. This was not a case where the Revenue had to prove participation and failed. It was a case where the assessee accepted the shareholding and argued that the shareholding alone did not answer the statutory question.

One limb of the Revenue’s case was conceded here and will not always be. Clause (b) requires a person to hold shares carrying not less than twenty-six per cent of the voting power in each of the two enterprises. Shri Sanghvi held that in the assessee and in Sun Pharmaceutical Industries Ltd. He is not recorded as holding any shares in SPG BVI or SPG FZE at all. The Revenue reaches them through the word “indirectly”, running his holding in the listed parent down through a wholly owned subsidiary and then a wholly owned subsidiary of that. On a chain of wholly owned companies that is a strong reading. It is weaker where the chain is diluted, and an assessee facing clause (b) on a less complete chain should ask how far “indirectly” runs before conceding the arithmetic, because this order decides nothing about it.

Section 92A: two sub-sections, and the question between them

Section 92A of the Income-tax Act, 1961 is built in two parts, and the relationship between them is the whole controversy.

Sub-section (1) defines an associated enterprise, in relation to another enterprise, as an enterprise which participates, directly or indirectly or through one or more intermediaries, in the management or control or capital of the other enterprise, or in respect of which one or more persons who so participate in its management or control or capital are the same persons who so participate in the management or control or capital of the other enterprise. That is a test of participation, and it is expressed in broad, factual language.

Sub-section (2) opens with the words “For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,” and then sets out thirteen clauses, (a) to (m). Clause (a) covers one enterprise holding, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other. Clause (b), the one in play here, covers any person or enterprise holding, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of two enterprises. The remaining clauses run through loan thresholds, guarantees, board appointments, dependence on know-how, supply of raw materials, sale of manufactured goods, control by the same individual or his relative, control by a Hindu undivided family or by its member or his relative, a ten per cent interest in a firm, association of persons or body of individuals, and, in clause (m), any relationship of mutual interest as may be prescribed. No rule prescribing such a relationship could be traced for this note, so clause (m) appears in practice to be an empty limb.

The question is what sub-section (2) does to sub-section (1). Three readings are possible, and keeping them apart is the only way to make sense of the case law.

The first is that sub-section (2) is necessary: participation under sub-section (1) alone will not do unless one of the thirteen clauses is also met. On that reading sub-section (2) narrows the section.

The second is that sub-section (2) is sufficient: once a clause is met the enterprises are associated, and no separate enquiry into participation is required. On that reading sub-section (2) is a gateway.

The third is that both must be satisfied together, which is the first proposition coupled with a denial of the second, and is what the assessee argued: a clause of sub-section (2) is necessary, and it is not by itself sufficient.

Most of the reported case law decides the first proposition. Very little decides the second. This order decides the second, and decides it for the Revenue.

What the Finance Act, 2002 actually did

The Bench’s reasoning at paragraph 11 turns on an amendment, so the amendment has to be stated correctly.

The Bench says that by virtue of the Finance Act, 2002 with effect from 1 April 2002, section 92A(2) was substituted with “For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year-” for “two enterprises shall be deemed to be associated enterprises if any time during the previous year-“. From that it reasons that the words “For the purposes of Sub-Section (1)” leave no ambiguity that if any of the clauses of sub-section (2) is satisfied the entities shall be deemed to be associated enterprises, that “shall” leaves no discretion, and that the deeming fiction is to be necessarily applied.

Checked against the Department’s own text, the second half of that quotation is not the provision as it stood. Section 92A was inserted by section 49 of the Finance Act, 2001 with effect from 1 April 2002, and sub-section (2) as enacted already read “Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,”. Section 40 of the Finance Act, 2002 substituted the sub-section, and the only change the substitution made was to prefix the words “For the purposes of sub-section (1),”. The comma and the words “at any time” were already there and were not touched. The pre-amendment reading the order sets out, “if any time during the previous year”, does not appear anywhere in the statutory history.

The effective date of 1 April 2002 is confirmed, although the section 40 page on the Department’s site carries no date of its own; the date comes from the Departmental footnote on an earlier year build of section 92A. No later amendment to section 92A has been traced.

The misquotation does not damage the Bench’s conclusion. If anything it sharpens it, because the prefix is the entire amendment, and the Bench’s reasoning rests on the prefix. But a practitioner citing paragraph 11 in another matter should quote the amendment as it was made, not as the order describes it, because the opposing side will check.

What the prefix was for is a different question, and here the record is awkward for the Bench. The Memorandum to the Finance Bill 2002, under the heading “Clarification regarding provisions of Transfer Pricing”, explains the amendment in these terms: it is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises, shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled.

The second limb of that sentence is the one on point here. It is the Memorandum’s own description of section 92A(1)(b), the common participation limb, which is exactly the limb a common shareholder engages.

Read plainly, that is a statement that participation under sub-section (1) is not enough without sub-section (2). It is the first proposition, not the second. The Memorandum does not say that satisfying a clause of sub-section (2) is enough without participation; it does not address that question at all. So it does not prove the assessee’s case either. What it does do is take away the premise that the prefix was inserted to make sub-section (2) a gateway. On the Memorandum’s own account the prefix was inserted to cut sub-section (1) down, not to enlarge sub-section (2).

Is a 26 per cent common shareholder enough? The case both ways

Put the Memorandum aside and look at what courts have done with the two sub-sections.

The case for reading them together. The Karnataka High Court decided the point in PCIT v. Page Industries Ltd., ITA No. 285 of 2017, on 8 January 2021, reported at (2021) 431 ITR 409. The Revenue argued in terms that sub-sections (1) and (2) have to be read independently and that clause (g) of sub-section (2) was satisfied. The Court held that the sub-sections are interlinked and have to be read together, and that the requirement of both has to be complied with. It affirmed the Bangalore Bench in Page Industries Ltd. v. DCIT, IT(TP)A No. 163/Bang/2015, decided 24 June 2016, where the Tribunal had reasoned at paragraphs 11 and 11.1 that the parameters in both sub-sections should be fulfilled, because otherwise sub-section (1) is rendered otiose. The same Court took the same view again in PCIT v. Obulapuram Mining Company, ITA No. 100012/2017, decided at Dharwad on 17 March 2023, reasoning at paragraphs 43 to 47. Two qualifications on that one. The Revenue’s special leave petition against it is pending in the Supreme Court, in SLP (C) Diary No. 5936 of 2024 with 15514 of 2024, listed during 2025. And a differently constituted Bench of the same High Court decided an appeal in the same name the Revenue’s way in 2020, reported at (2020) 428 ITR 322, so the name alone does not identify the decision. That 2020 decision is not on section 92A at all; it is on the Assessing Officer’s obligation to make a reference, following S.G. Asia Holdings. On the read-together side of the line, the Chennai Bench reached the same result in Orchid Pharma, ITA No. 771/CHNY/2016, decided 30 November 2016, where clause (i) was literally satisfied and the Bench still found no associated enterprise in the absence of control.

That line has a weakness which anyone relying on it should know. In Page Industries the substantial question of law as framed by the High Court is entirely about section 80JJA and never mentions section 92A, although paragraphs 5 to 9 of the judgment reason only on section 92A. The Revenue can be expected to argue that the section 92A discussion is not the ratio, and at least one digest reads the dismissal as resting on an unchallenged finding of fact.

What the Revenue actually argued here. What follows is critical of the result, and the Revenue’s case deserves to be put properly first. Mr. Aroon Prasaad for the Revenue put it in three steps at paragraph 8. The moment any of sub-clauses (a) to (m) of section 92A(2) is satisfied, the parties are deemed to be associated enterprises in terms of section 92A. It follows that the transactions between them are international transactions in terms of section 92B(1), the definition that fixes what Chapter X can reach. And it follows from that that any income arising has to be computed having regard to the arm’s length price under section 92.

The textual case behind that is stronger than the assessee’s answer allows. If sub-section (2) merely illustrates how participation may be shown, the thirteen clauses become evidence rather than law, and the carefully drawn thresholds, twenty-six per cent, fifty-one per cent, ninety per cent, do no work at all: an Assessing Officer could find participation on less and decline to find it on more. That is a mirror image of the otiose argument the assessee makes about sub-section (1), and it has to be answered. The ordinary canon on deeming provisions points the same way, since a fiction is carried to its logical conclusion within the field it occupies, and “shall be deemed” is not usually read as “may be treated as evidence of”. The Revenue can also read the Memorandum its own way, as directed only at stopping an Assessing Officer from finding an associated enterprise on participation alone, and as silent on the converse.

What the Tribunal authority on the other side actually says. The decision usually produced is Kaybee Pvt. Ltd., ITA Nos. 2166 and 2167/Mum/2015, decided 8 August 2018, where the Mumbai Bench held at paragraphs 13 and 14 that the clauses of section 92A(1) operate independently and that sub-section (2) is a deeming fiction which does not affect the test in sub-section (1). That has to be read precisely, because it is not the same proposition as this order’s. Kaybee was protecting sub-section (1) as a free standing test, so that an enterprise could be associated on participation alone; this order is doing the reverse, holding that a clause of sub-section (2) makes participation unnecessary to prove. The two share a premise, that the sub-sections operate independently of each other, and they run in opposite directions from it.

Anyone citing Kaybee at all should know what happened next, because it is unusual. In the same assessee’s own case for earlier years, ITA Nos. 2164 and 2165/Mum/2015 for assessment years 2006-07 and 2007-08, the Mumbai Bench decided on 28 February 2020 that it would not follow its own order of 8 August 2018. It set that order out at its paragraph 5, held at paragraph 9 that the line of decisions treating the sub-section (2) clauses as mere illustrations was per incuriam, said at paragraph 12 that it would prefer views approved by the higher courts to those of other benches, and held at paragraph 18 that section 92A(1) cannot be applied on a standalone basis and has to be read with section 92A(2). It deleted the adjustment at paragraph 19. So the Tribunal authority that the 2018 order represents has been departed from by the same Bench in the same assessee’s case, and the 2026 Ahmedabad order is now, so far as can be traced, on its own.

One case is commonly cited on this side and should not be. Diageo India, ITA No. 8602/Mum/2010, decided 5 September 2011, describes the clauses of sub-section (2) at paragraph 11 as only illustrations of de facto control under sub-section (1), which is not the same proposition, and it is among the decisions the 2020 Kaybee order treated as per incuriam. And “Alpha Nipon Innovatives” is not a section 92A authority at all; it is the assessee in a Gujarat writ about the reference to the Transfer Pricing Officer, which is a different question dealt with below.

Gujarat’s own position. The Ahmedabad Bench has been here before, in ACIT v. Veer Gems, ITA No. 1514/Ahd/2012, decided 3 January 2017, where it held at paragraph 8 that the sub-sections are required to be read together, and that was affirmed by the Gujarat High Court in PCIT v. Veer Gems on 20 June 2017, reported at (2018) 407 ITR 639; the tax appeal number could not be closed against any source read. The Revenue’s special leave petition against that affirmance was dismissed by the Supreme Court on 5 January 2018, and the Mumbai Bench in its 2020 Kaybee order treated the read-together view as having achieved finality on that footing.

Two cautions on Veer Gems all the same. The first is that the High Court judgment itself could not be read for this note, so what it says beyond the result is not asserted here; the Tribunal’s order below, which does hold at its paragraph 8 that the sub-sections are required to be read together, has been read. The second is that a dismissal of a special leave petition, particularly in limine, is not a declaration of law under Article 141, so the finality is practical rather than binding. The distinction between deciding that sub-section (2) is necessary and deciding that it is not sufficient has to be kept in view whichever way the decision is used.

What this means on the facts. It is best to be honest about how much the argument was worth here. Where one individual holds something close to half the equity of both the Indian company and the group’s listed parent, and the counterparties are wholly owned step-down subsidiaries of that parent, a finding of participation in management, control or capital would be very hard to resist even on the assessee’s own reading. The Chennai Bench in Hospira Healthcare, ITA No. 821/Mds/2016, decided 28 February 2017, applied the read-together approach at paragraph 29 and still upheld associated enterprise status. The legal point is real and is worth preserving for a case with thinner facts. On these facts it was probably always going to lose.

An order that cites no authority on the point

Paragraphs 11 and 12 of this order cite no case law on section 92A. Not Page Industries, not Veer Gems, not Orchid Pharma, not Kaybee, not Obulapuram, and no High Court decision either way. Nor is the Memorandum to the Finance Bill 2002 mentioned.

That opens an argument, and it also has limits.

The argument is that a decision reached without considering binding authority, or without considering a statutory provision or its Memorandum, is per incuriam, or at least is sub silentio on a point not argued, and so is of limited precedential value. That is a familiar submission and it is available here on the face of the order.

The limits are three. First, the Karnataka High Court is not binding on the Ahmedabad Bench; the Gujarat High Court is, and Gujarat’s own decision in Veer Gems does not decide the proposition this order decides. Second, the per incuriam doctrine is about binding authority overlooked, and is a good deal weaker where the overlooked decisions are from a different High Court and coordinate Benches. Third, and most practically, a Bench that is shown Page Industries and the Memorandum may still conclude that the facts establish participation anyway, which takes the assessee nowhere.

The useful way to use this order is therefore not to say it is wrong. It is to say that the question was not argued with the authorities in front of the Bench, so the point remains open, and to argue it properly in a case where the shareholding is the only thing the Revenue has.

Before the reference: must the Assessing Officer record his satisfaction?

The assessee’s second contention was procedural. The Assessing Officer, it was said, had passed no speaking order dealing with the objections to referring the matter to the Transfer Pricing Officer, and had recorded no satisfaction before making the reference. The contention as recorded at paragraph 7.4 was wider than that: the failure of natural justice was said to run both to the making of the reference and to the process of determining the arm’s length price, with no reasonable opportunity afforded at either stage. Only the first limb is dealt with in the order.

Two things in the record qualify that complaint before any law is reached. At paragraph 6.3 the Bench records that on receipt of the Transfer Pricing Officer’s report the Assessing Officer passed the assessment order after seeking the assessee’s objections. And at paragraph 14 the Commissioner (Appeals) is recorded as having held that the Assessing Officer, after hearing the objections of the appellant, satisfied himself that the transactions were with associated enterprises in terms of section 92A(2)(b). So this is not a case of an assessee who was never heard. The complaint is about sequence and form: no speaking order, and no satisfaction recorded before the reference rather than after the objections.

The Commissioner (Appeals) held that there is no statutory requirement of recording satisfaction, that satisfaction should be discernible from the facts of the case, and that it was discernible here from the letters written to the Commissioner and to the Transfer Pricing Officer and from the assessment order itself. Mr. Aroon Prasaad relied on those observations and submitted at paragraph 9 that more than adequate and fair opportunity had been made available by the Assessing Officer and the Transfer Pricing Officer during the proceedings. At paragraph 15 the Tribunal found no infirmity in that view, holding that the Assessing Officer’s having recorded the 46.81 per cent and 45.89 per cent shareholdings established that he had proper satisfaction that the two entities were associated enterprises and that the transactions were required to be referred.

Paragraphs 13 to 15 cite no case law and no Instruction. The subject has a good deal of both, and it needs setting out, because this is one of the more unsettled corners of transfer pricing practice in Gujarat.

What the section says. Section 92CA(1) requires that the Assessing Officer “considers it necessary or expedient so to do” and that he act with the previous approval of the Principal Commissioner or Commissioner. It does not in terms require a recorded satisfaction, a hearing, or a speaking order. Any such duty therefore has to be found either in the Board’s Instructions or by construction of the section itself.

Where it comes from. It comes from the Board’s Instructions, and their content has changed three times. The hearing is also read into section 92CA(1) on two High Court decisions set out below. Instruction No. 3 of 2003, dated 20 May 2003, required a prima facie satisfaction, set a monetary threshold, and required the Commissioner’s approval, but imposed no recorded-satisfaction duty, no pre-reference hearing and no speaking order by the Assessing Officer; the opportunity it contemplated came after the arm’s length price was proposed, and the speaking order it required was the Transfer Pricing Officer’s. Instruction No. 15 of 2015, dated 16 October 2015, superseded it, and its paragraph 3.2 required the Assessing Officer to record his satisfaction as a jurisdictional requirement and to give an opportunity of being heard, but still put no speaking-order duty on him. Instruction No. 3 of 2016, dated 10 March 2016, replaced that, and its paragraph 3.4 added the duty to consider the taxpayer’s objections and pass a speaking order. No later Instruction replacing 3/2016 has been traced. None of the three could be retrieved from the Department’s own website, so the text relied on here is taken from full reproductions, cross-read against the judgments that apply them, and the paragraph numbers given are those the judgments themselves use.

Two things about those Instructions are routinely missed. The first is that the recorded satisfaction and hearing requirements are not attached to every reference. They apply in three situations: where no report under section 92E has been filed, where the transaction was not disclosed, or where it was disclosed with qualifying remarks. The second is that the hearing requirement sits at paragraph 3.2 of Instruction 15/2015 and at paragraph 3.4 of Instruction 3/2016, and the two are frequently cited interchangeably and wrongly.

Which Instruction governed here, and whether it matters. The lead year is assessment year 2009-10. The reference would have been made under Instruction 3/2003, which imposed none of these duties. On that footing the Bench’s conclusion is defensible even though it reasons from first principles rather than from the Instruction. Two live questions remain for that period all the same. The first is whether Instruction 3/2016 can be applied to earlier references, and on that the authorities disagree: the Delhi High Court in Indorama Synthetics (India) Ltd. v. Addl. CIT, W.P.(C) 6422/2013 and connected matters, decided 25 July 2016, applied it at paragraphs 20 to 22, while the Delhi Bench in Nikon India, ITA No. 6314/Del/2015, decided 15 July 2016, held at paragraph 15 that it is prospective. The second is whether the hearing depends on an Instruction at all. On the decisions set out below the Bombay High Court read it into section 92CA(1) itself and the Delhi High Court treated it as implicit in the section, and on that footing it is owed irrespective of which Instruction was in force when the reference was made, so neither the prospectivity objection nor the three-situations limitation reaches it. The Bombay decision, which is the 2013 Vodafone India Services writ and not the 2014 share premium writ taken up later, was itself a case on assessment year 2009-10, the lead year here, so the reference there also predated both later Instructions. The Revenue’s answer is that neither decision requires a hearing for an assessee who has objected to nothing, which is why the qualification noted below matters.

The authorities both ways. For the assessee, the strongest is the Gujarat High Court in Hitachi Hi-Rel Power Electronics Pvt. Ltd. v. DCIT, R/Special Civil Application No. 23302 of 2019, decided 19 August 2021, reported at (2021) 282 Taxman 520. It held at paragraph 34 that it saw no good reason to take the view that no opportunity of hearing is required, and at paragraph 39 that the Assessing Officer had overlooked the jurisdictional requirement of a satisfaction in accordance with paragraph 3.4 of Instruction 3/2016, finding not a word about it in the order disposing of the objections. On those two paragraphs it quashed the reference at paragraph 40 and remitted the matter for a hearing and a reasoned order. Two details matter for anyone using it. The assessee there had filed its report in Form No. 3CEB, the Revenue’s case being that an external commercial borrowing had been left out of it, so the case is not authority about an assessee who filed nothing. And the Court did not declare its own earlier decision wrong: it discussed Veer Gems, meaning the 2011 writ taken up below and not the section 92A appeal discussed earlier, at paragraphs 28 and 30 to 34, acknowledged at paragraph 33 that a coordinate Bench binds it and that it would not have taken a minute to follow it, and then took the contrary view at paragraph 34 on the strength of Indorama, Vodafone India Services and the Board’s own Instructions. It did not refer the conflict to a larger Bench.

Alongside it stands Indorama, which treats the hearing as implicit in section 92CA(1). Earlier, and outside Gujarat, the Bombay High Court in Vodafone India Services Pvt. Ltd. v. UOI, W.P. No. 1877 of 2013, decided 29 November 2013, reported at (2014) 361 ITR 531, held at its paragraph 34 that the grant of a personal hearing before referring the matter has to be read into section 92CA(1), and at paragraph 37 that the hearing has to be given by the Assessing Officer before the reference is made. It declined to follow Veer Gems on that point. Two qualifications: the holding is expressed to apply where the assessee challenges the jurisdiction to tax under Chapter X, which is this assessee’s position but will not always be so; and the Court gave no relief against the reference itself, for the reason set out below. Alpha Nipon Innovatives Ltd. v. DCIT, Special Civil Application No. 7720 of 2016, decided 16 November 2016, is often added to this list and belongs there only with a qualification: it is a specified domestic transaction case, where no accountant’s report under section 92E had been filed on a transaction with a relative, it quashed the reference at its paragraphs 8 and 10 on the single ground that no speaking order had been passed, and it remitted the matter to the Assessing Officer to pass one within four weeks. It does not mention Veer Gems at all and decides nothing about the hearing question Veer Gems decided.

The decision most often produced by the Revenue is the Punjab and Haryana High Court in Shri Vishnu Eatables (India) Ltd. v. DCIT, Central Circle, Karnal, CWP No. 13613 of 2016, decided 3 October 2016, reported at (2016) 389 ITR 385, and it needs reading carefully because it cuts both ways. On the duty itself the Court is with the assessee: at paragraph 17 the Assessing Officer must decide the objections before referring, at paragraph 22 the assessee must be heard, at paragraph 26 paragraph 3.3(c) of the Instruction cannot be read in isolation from paragraph 3.4, at paragraph 27 the satisfaction must be recorded in writing with reasons, and at paragraph 29 the satisfaction note must be served. What the Revenue takes from it is the consequence: at paragraph 33 the Court held the defect to be at the highest a mere irregularity and not something that renders the proceedings void, at paragraph 34 reasoned that treating it as void would annul the entire assessment with nothing in the Act or the circular supporting that, and at paragraph 31 declined a writ as of right at the reference stage. So it is authority for the duty and against the drastic remedy, and it should be cited for one or the other rather than as though it were on one side.

The Madras High Court in Transsys Solutions, W.P. Nos. 5760 and 35246 of 2019, decided 15 October 2020, and PPN Power, W.A. No. 855 of 2020, decided 28 September 2020, are on the Revenue’s side on consequence, and the special leave petitions against Transsys were dismissed on 16 July 2021. The Calcutta High Court decision in Price Waterhouse, W.P. No. 733 of 2014 heard with Lovelock and Lewes, W.P. No. 735 of 2014, decided 8 December 2016, is often put in the same list and does not belong there: it holds that the Assessing Officer need not reach a definite finding and that a prima facie view suffices, it does not discuss recorded satisfaction or a speaking order at all, and the order was stayed by the Appeal Court by an interim order of 29 March 2017.

What actually happens when the reference is defective. This is the part that decides whether the point is worth taking, and the answer depends on where the point is taken.

In the writ jurisdiction it has produced a quashing of the reference, and in most cases a remittal, but in no case the end of the assessment. Indorama, Alpha Nipon and Hitachi each quashed the reference and sent the matter back, Alpha Nipon and Hitachi in terms giving the Assessing Officer a fresh opportunity to do it properly. Vodafone India Services Pvt. Ltd. v. UOI, W.P. No. 1877 of 2013, decided 29 November 2013, found an illegality at paragraph 46 and then declined to remand at paragraph 47, sending the assessee to the Dispute Resolution Panel instead. Outside the writ jurisdiction but to the same effect, the Supreme Court in PCIT v. S.G. Asia Holding (I) Pvt. Ltd., Civil Appeal No. 6144 of 2019, decided 13 August 2019, described the Instructions as mandatory and restored the matter to the Assessing Officer.

Before the Tribunal it has produced more. In Rittal India Pvt. Ltd., IT(TP)A No. 2868/Bang/2018 for assessment year 2014-15, decided by the Bangalore Bench on 28 June 2022, the reference was held invalid for breach of paragraph 3.3(b) of Instruction 3/2016, and at paragraph 12 the Bench held that the addition made consequent to such an illegal order is liable to be deleted, and allowed the appeal without a remand. In Ingram Micro (India) Exports Pte. Ltd., ITA No. 1746/Mum/2016 with Cross Objection No. 70/Mum/2017, decided by the Mumbai Bench on 15 September 2026, a general reference was held not to be a valid reference, the Transfer Pricing Officer’s findings were held unsustainable, and the assessment proceedings were held to have no legs to stand on.

So the honest summary is that the forum decides the remedy. In the writ jurisdiction the point has produced a quashing of the reference, and either a remittal for the exercise to be done properly or, in Vodafone, a direction to the Dispute Resolution Panel instead; in neither form has it ended the assessment. Before the Tribunal it has twice produced more than that, and an assessee taking the point in appeal should be citing Rittal India and Ingram Micro rather than the writ line.

Where Gujarat actually stands. Two coordinate Benches of the Gujarat High Court have taken positions that do not sit together on the hearing question. Veer Gems v. ACIT, Special Civil Application No. 12648 of 2011, decided 19 October 2011, reported at (2013) 351 ITR 35, held at paragraph 13 that no hearing is required. Hitachi in 2021 took the contrary view at its paragraph 34, having considered Veer Gems and acknowledged it as binding coordinate Bench authority. It did not overrule it, could not have done, and did not refer the conflict to a larger Bench, so the conflict is unresolved. Alpha Nipon is sometimes counted as a third; on a reading of the judgment it is not, because it is a specified domestic transaction case about a speaking order which never reaches the hearing question. Veer Gems has also not fared well outside Gujarat: the Bombay High Court declined to follow it on the hearing point in Vodafone India Services in 2013, and it is on Vodafone, Indorama and the Board’s Instructions that Hitachi rests at its paragraph 34. For a Gujarat practitioner the real position is that the point is open in this High Court on two judgments, and which one is put first matters.

One further observation on this order. The satisfaction the Bench found was satisfaction that the entities were associated enterprises. That is a different object from the satisfaction that paragraph 3.4 of Instruction 3/2016, and paragraph 39 of Hitachi applying it, require, which is directed at whether a reference is necessary or expedient in the circumstances. The order does not address that distinction, and a later Bench may.

The Revenue’s answer to that is not trivial. Where no report under section 92E has been filed, which is this case, the Instructions direct that a reference be made, and the Supreme Court in S.G. Asia Holdings treated them as mandatory in that sense. If the Assessing Officer has little choice but to refer, there is correspondingly little discretion for a recorded satisfaction to exercise, and the requirement starts to look like a formality rather than a jurisdictional condition. The assessee’s reply is that a condition does not stop being jurisdictional because it is easy to satisfy. Neither answer has been tested in this context.

One more thing the rule set out above requires of this very order. The Instruction that governs depends on when the reference was made, not on the assessment year, and this order covers seven years. The reference for assessment year 2009-10 fell under Instruction 3/2003. For assessment years 2012-13 to 2015-16 the order does not record when the references were made, and those dates decide which of the Instructions governed: a reference made up to 15 October 2015 fell under Instruction 3/2003, which imposed none of these duties, one made between 16 October 2015 and 9 March 2016 under Instruction 15/2015, which required a recorded satisfaction and a hearing, and one made from 10 March 2016 under Instruction 3/2016, which added a speaking order, the later two applying where no section 92E report was filed, which was the position throughout. The hearing point does not depend on those dates at all, because on the decisions set out above it has a footing in section 92CA(1) itself. For the later of those years the reference is likely to have been made after those duties came in. Those years were decided by applying the lead year mutatis mutandis on the parties’ agreement that the facts had not changed. Whether that agreement forecloses a year-specific challenge founded on a different Instruction is a question the order does not reach, and it is the kind of point that is lost by concession rather than by decision.

Chapter X computes, it does not charge

The third contention was more ambitious. Chapter X, it was said, cannot bring to charge notional income which is not chargeable under any head. The transfer pricing provisions are a mechanism to compute an arm’s length price; they are not charging provisions. Once the charge under sections 4 and 5 fails, the machinery of section 92 cannot be used to tax notional income.

At paragraph 17 the Bench called the plea entirely misconceived. Chapter X provides for computation of the arm’s length price in respect of transactions entered into by associated enterprises. It does not change the head of income under which the income falls. It is only a machinery provision to compute the value of the transaction. The fact that Chapter X has been applied to a particular transaction does not entail that the transaction changes the head of income or the nature of income. Here the transactions fell under income from business or profession, and remained there after transfer pricing.

That is orthodox, and the assessee’s argument was always going to need a better fact pattern. The decision the argument comes from is a different Vodafone India Services from the reference case discussed above: Vodafone India Services Pvt. Ltd. v. UOI, Writ Petition No. 871 of 2014, decided 10 October 2014, reported at 368 ITR 1, where the Bombay High Court held that Chapter X cannot apply where there is no income arising at all, in that case on a share premium received on a capital account issue. The distinction matters and has to be stated precisely, because it is the line between a good argument and a hopeless one. Vodafone is about whether income arises. Where income plainly arises and the only question is its quantum, as on a sale of technology for a price, Chapter X computes that quantum and sections 4 and 5 charge it. The Ahmedabad Special Bench in Doshi Accounting Services, decided 24 October 2019, distinguished Vodafone on exactly that basis at its paragraph 12.1.

So the argument survives, but only in its own territory: a receipt that is capital in nature, or a transaction from which no income arises at all. It does not survive as a general proposition that a transfer pricing adjustment needs an independent charge.

An arm’s length price fixed without a prescribed method

The fourth contention is the one the assessee won, and it is the one with the widest practical application.

The Transfer Pricing Officer had examined an agreement of 28 October 2007 for the sale of technology for certain drugs. The assessee’s case was that the products were unique intangibles, that there was no comparable data, so that the methods prescribed under Rule 10B could not be applied, and that the price had been fixed by an independent valuer. The Transfer Pricing Officer found the valuation of the Abbreviated New Drug Applications was not uniform, that in some cases drugs with higher global sales had been valued at lower rates and the reverse, that there was no correlation between the nature of the application and the price fixed, that generic drugs command much lower prices than patented ones, that competitors had been estimated without any basis, that the cost of drugs was only an estimate rather than the actual cost from the company, and that the estimation did not factor in total sales at the time of valuation. He then held that the assessee had sold the products at US$ 48.045 million as against US$ 100.726 million for both the United States and European markets, and proposed an upward adjustment which the order gives as Rs. 17,91,66,000 at its paragraph 6.2 and as Rs. 17,91,61,000 in the caption and in the grounds. The difference is not explained and appears to be typographical. Nor does the order explain how a differential of about US$ 52.7 million produced a rupee figure of that size, which is not what the difference converts to on any rate for the year, and that is a point to take up on the remand.

Mr. Soparkar’s point was that in doing so the Transfer Pricing Officer had not selected any of the methods stipulated in section 92C(1)(a) to (e), and could not take shelter under clause (f), “such other method as may be prescribed by the Board”, because the method he had adopted had never been prescribed by the Board.

That submission was good for the year in question and should not be carried across to a current one without checking. For assessment year 2009-10 the Board had prescribed no other method, so clause (f) was an empty box. Rule 10AB, notified on 23 May 2012 and in force from 1 April 2012, now prescribes the other method for the purposes of clause (f), as any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, between non-associated enterprises, under similar circumstances. From assessment year 2012-13 the answer to a Transfer Pricing Officer who has used no named method is therefore not simply that clause (f) is empty. It is that what he did was not Rule 10AB either, which is a question of fact about what he actually did.

At paragraph 22 the Bench accepted the premise. Section 92 mandates that any income arising from an international transaction has to be computed having regard to the arm’s length price, and on the admitted position neither had the assessee determined the value having regard to the arm’s length price, nor could the price arrived at by the Transfer Pricing Officer be sustained, having faulted on the selection of the most appropriate method in terms of section 92C.

That holding is worth having in terms. Where the Transfer Pricing Officer reaches a figure by reasoning rather than by a prescribed method, the figure cannot stand, however sound the criticisms of the assessee’s valuation may be. Whether they were sound was never decided: the Bench refused the merits as academic at paragraph 24. They were simply not a method.

The assessee’s answer to those criticisms, which the order records in the grounds and which the remand leaves live, should be set alongside them. The price came from an independent Government approved valuer, on whose report the technology was transferred (ground 3.2). The Transfer Pricing Officer, it was said, did not produce a valuation of his own but cherry picked parts of the assessee’s report and altered its workings (ground 3.3). A separate valuation obtained by the purchaser was produced under Rule 46A to show the transaction was at arm’s length (ground 3.4), and the Commissioner (Appeals) is said to have refused to admit it as additional evidence in the remand proceedings without giving reasons (ground 2.5). And the Transfer Pricing Officer, not being a valuer, did not refer the technology to the Departmental Valuation Officer (ground 2.4). None of those grounds was adjudicated. They go back with the matter.

What Kodak India actually held

The assessee relied on CIT-10, Mumbai v. Kodak India (P.) Ltd., a decision of the Bombay High Court reported at [2017] 79 taxmann.com 362, and on the Mumbai Bench’s decision in Wartsila India Ltd. following it. The Bench reproduced two paragraphs of Kodak and then read it narrowly. Its reading is right in substance, and this part of the order is the most useful thing in it, although it overstates what the High Court itself did.

In the passage reproduced at paragraph 20, the High Court recorded that the arm’s length price had been arrived at by the Transfer Pricing Officer without adopting any of the methods prescribed under section 92C, that the method adopted was not one of the prescribed methods and was not even any method prescribed by the Board, that at the relevant time section 92C did not provide for the other method in section 92C(1)(f), and that the Tribunal had held the Revenue’s method alien to the prescribed methods. It then recorded, and this is the sentence that matters, that in those circumstances the Tribunal declined to restore the issue to the Assessing Officer for redetermining the arm’s length price by adopting one of the methods listed in section 92C, and that this finding of the Tribunal had also not been challenged by the Revenue.

The next paragraph of the High Court’s judgment explains what followed. Because the Revenue had accepted the Tribunal’s findings on facts and its refusal to restore the issue, the questions as formulated would become academic even if answered in the Revenue’s favour, so the Court saw no reason to entertain the appeal. It then said, in terms, that it made clear that the issues of law raised in the appeal were left open for consideration in an appropriate case.

At paragraph 21 the Ahmedabad Bench drew the conclusion that follows. The question before the High Court was not whether, in the absence of the Transfer Pricing Officer adopting any prescribed method, the addition has necessarily to be deleted. On the Bench’s reading the High Court had upheld the view that the Transfer Pricing Officer must adopt one of the section 92C(1) methods, and the Bench recorded its respectful agreement with that. But the High Court did not hold that non-compliance with section 92C(1) would necessarily result in deletion of the addition. The relief was granted because the Revenue chose not to contest the refusal of remand, so the question urged had become academic, and the Court refrained from answering it and left the question of law open.

That reading is right in its narrow part and overstated in its wider one. The High Court recorded the Tribunal’s finding that a prescribed method must be used; it did not uphold it, because it decided nothing. Both questions of law the Revenue actually framed in Kodak were about section 92B(2) and deemed international transactions. Deletion against remand was never before the Court. Anyone citing Kodak for the proposition that a missing method compels deletion is citing it for something it does not say, and the Court’s own closing reservation is the ready answer.

Two cautions on sources. No official copy of the Kodak judgment could be reached: it is not on Indian Kanoon, the Bombay High Court site requires the internal file name, and the text used here comes from two independent full-text reproductions which agree sentence for sentence and which match the Tribunal’s own verbatim reproduction in this order. The judgment’s own assessment year is internally inconsistent, its opening paragraph and the passage reproduced here giving different years, so neither is asserted here.

Delete, or send it back? Why this order remanded

Having held the arm’s length price unsustainable, the Bench had a choice, and the choice is where practitioners will disagree with it.

There is now High Court authority, decided after Kodak, that declines to disturb a deletion. In Pr. CIT v. Capgemini India Pvt. Ltd., ITA No. 1087 of 2024, decided by the Bombay High Court on 20 November 2025, Sonak and Advait M. Sethna JJ., reported at [2025] 181 taxmann.com 7, the Tribunal had found that the Transfer Pricing Officer failed to follow any of the methods prescribed by the Act. The Court recorded at its paragraph 4 that the failure to follow any method prescribed by the law does not entitle the Transfer Pricing Officer to rectify the mistake in the second innings, at paragraph 5 that the finding was not even controverted by the Revenue and that the Tribunal cannot be faulted for following Kodak, and at paragraph 6 that the Revenue had basically conceded that the prescribed methods were not followed and had requested another opportunity, which was refused. It held at paragraph 8 that no substantial question of law arose. ITAT Mumbai has since followed it, in UCB India, ITA No. 905/Mum/2021, decided 31 August 2026.

How much weight that carries needs stating honestly, because it is an order refusing admission rather than a judgment on a question of law. The operative reason for refusing the Revenue’s remand plea was that the argument had not been raised before the Tribunal and was not in the appeal memorandum, and at paragraph 9 the Court expressly left the general determination open. It is therefore good authority that on facts of this kind a deletion rather than a remand raises no substantial question of law. It is not a ratio that forecloses a remand in every case. One further caution on citing it: the companion appeal, ITA No. 60 of 2024, is a separate section 14A matter disposed of on low tax effect and decides nothing on this point.

There is also a line of Tribunal decisions that deletes. Wartsila India Ltd. v. ACIT, ITA No. 5002/Mum/2013, decided by the Mumbai Bench on 4 October 2018 for assessment year 2008-09, held that because the method adopted by the Transfer Pricing Officer was not a prescribed one, the addition should be deleted. The Mumbai Bench went the same way in CLSA India, ITA No. 1182/Mum/2017 for assessment year 2012-13, decided 16 January 2019, on an adjustment of Rs. 143,67,42,784: the holding is at paragraphs 25 to 27, where the determination was held bad in law and deletion directed, paragraph 8 being counsel’s submission and paragraph 24 only framing the question. The same assessee obtained the same result again in ITA No. 902/Mum/2016, decided 3 February 2020, at paragraph 9, on about Rs. 127.38 crores. Safilo India, ITA Nos. 588 and 4940/Mum/2015, decided 12 January 2018, at paragraph 5.3, is to similar effect, though the Revenue’s appeals against it were disposed of on 16 October 2019 under Circular 17 of 2019 for low tax effect rather than on the merits. That line reads Kodak as approving the refusal to remand, which as shown above is more than the judgment supports. A caution on the citation: this order cites Wartsila as [2019] 102 taxmann.com 564, and that reference could not be closed; the order traced on the cause title, subject matter and bench is the one of 4 October 2018.

At paragraph 23 the Bench gave its reason for going the other way, and the reason is specific to this assessee. It is a matter of record that the assessee had not filed the report in Form No. 3CEB in respect of the transactions with the two overseas entities, claiming that they were not associated enterprises. Section 92CA(2), as well as section 92E, mandates the assessee to furnish its computation of arm’s length price before the Transfer Pricing Officer or the Assessing Officer. The assessee had failed to discharge that obligation.

One qualification on that reasoning, for anyone meeting it on the other side. Section 92CA(2) does not in terms impose a freestanding duty on the assessee to furnish a computation of the arm’s length price. What it provides is that where a reference has been made, the Transfer Pricing Officer shall serve a notice requiring the assessee to produce evidence in support of the computation made by it. The reporting obligation that does stand on its own feet is section 92E, with section 92D for the documentation. The point the Bench is making survives on section 92E alone, but the pairing with section 92CA(2) is looser than the sentence suggests.

Read with paragraph 22, the logic is that neither side had done what the statute required. The assessee had not computed a price having regard to the arm’s length price and had filed no report; the Transfer Pricing Officer had not used a method. Deleting the addition would leave the income from an international transaction uncomputed, which section 92 does not permit. So the matter goes back for both sides to do it properly.

The counter-argument is available and should be stated. The burden of determining the arm’s length price in the assessment is on the Transfer Pricing Officer, and a remand gives the Revenue a second opportunity to make a case it failed to make within the time the statute allowed. That is the thinking behind Wartsila and CLSA. The answer the Bench would give is that the assessee cannot rely on a failure of method when it denied the obligation to compute at all. Where an assessee has filed its Form No. 3CEB and documented its method, and the Transfer Pricing Officer has simply gone outside the prescribed methods, that answer is not available, and the deletion line is a good deal stronger. That distinction, rather than any general rule, is what this order really decides.

Because of the remand, the Bench recorded at paragraph 24 that the challenge to the addition on merits had become academic and was not adjudicated. The merits are therefore open before the Assessing Officer and the Transfer Pricing Officer on the fresh round, and so are the valuation grounds set out above.

Four things about that fresh round need working out before it starts, because the order does not address them.

The first is what the Transfer Pricing Officer can lawfully do for assessment year 2009-10. The reason the first determination failed was that no prescribed method was used, and for that year clause (f) was an empty box, Rule 10AB being three years away. So the fresh determination has to be made under one of clauses (a) to (e), on a unique intangible for which the assessee’s case throughout has been that no comparable data exists. If that case is right, the remand may not be capable of producing a sustainable price at all, which is an argument to make on the remand rather than against it.

The second is limitation. A set-aside revives the assessment, and the time available is governed by section 153 together with the sixty-day rule in section 92CA(3A). How much time remains, and whether a fresh reference under section 92CA(1) is needed or the existing one revives, are questions to settle at the outset rather than after a fresh order is passed.

The third is section 144C. A variation proposed on the second round attracts the draft order and Dispute Resolution Panel route for an eligible assessee, and section 144C(8) bars the Panel from setting aside any variation, so the assessee who wants a set-aside is better placed before the Commissioner (Appeals) than before the Panel.

The fourth is whether the figure can go up. A remand for de novo determination in terms of Chapter X is not in terms confined to the Rs. 17.92 crores originally proposed, and an assessee should know before it starts that the exercise is not one-way.

The tax holiday ground nobody answered

Ground 3.5 before the Tribunal said that the appellant was under a 100 per cent tax holiday, that all the profits were exempt, and that there could therefore be no motive or objective to circumvent or avoid any taxes in India. The ground as printed refers to section “801B(BA)”, which is a typographical rendering of section 80-IB(8A), the deduction for a company approved for scientific and industrial research and development. That the reference is to section 80-IB(8A) is confirmed from within the order itself: the Assessing Officer’s own reasoning, reproduced at his paragraph 4.3.16, records that the assessee had reserved its right to claim the deduction under section 80-IB(8A), and denies it on the ground that the assessee had no positive income out of the industrial undertaking.

The Bench did not deal with the ground. It repays working through, because the argument is raised often in pharmaceutical, research and special economic zone files, and because it generally fails for a reason that is easy to miss.

The short answer on these facts. Before any of the law is reached, ground 3.5 had a practical difficulty. A hundred per cent deduction of profits is worth nothing where there are no profits, and in the year in question the assessee was in loss. So the ground could not show on its own terms that an adjustment would shift no tax. What an upward adjustment does to a loss-making assessee is reduce the loss, and section 92(3) bars only the opposite case, where the effect of the section would be to reduce the income chargeable to tax or increase the loss computed on the basis of the books. The argument that an adjustment which only shrinks a carried forward loss achieves nothing has to be made on the utility of the exercise, not on sub-section (3).

Why the no-motive argument fails as law. The answer is the proviso to section 92C(4). It provides that no deduction under section 10A, section 10AA, section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under that sub-section. The proviso is a denial provision, and it presupposes that the adjustment can be made. If Chapter X could not be applied to an assessee enjoying a holiday, there would be nothing for the proviso to deny. Section 80-IB(8A) is in Chapter VI-A, so the proviso reaches it squarely: the deduction on the returned profits survives, and the deduction on the enhancement does not.

The case law follows the proviso. The Bangalore Special Bench in Aztec Software and Technology Services Ltd., decided 12 July 2007, reported at 107 ITD 141, held at paragraphs 16, 17 and 20 to 22 that there is no need to demonstrate avoidance and that entitlement to section 10A relief is irrelevant. The Karnataka High Court in CIT v. Philips Software Centre Pvt. Ltd., reported at (2018) 257 Taxman 449, is recorded as having held that the Tribunal’s contrary observation was merely an obiter, with no binding character, and made in ignorance of the proviso; the appeal number, date and paragraph could not be closed against any source read. Closer to home, the Ahmedabad Special Bench in Doshi Accounting Services Pvt. Ltd., ITA No. 1352/Ahd/2011 and connected appeals, decided 24 October 2019, rejected the argument, and the Ahmedabad Bench had already done so in Atul Limited, ITA No. 3118/Ahd/2010, decided 29 October 2012, at paragraph 5.24, on a section 80-IA claim. There is no Supreme Court decision either way. On Philips Software a word of caution is owed: the judgment could not be read in full for this note, and its ratio is reported as resting on the appeal not being maintainable, so the observation about the proviso should be checked before it is put to a Bench. And Tweezerman (India) is sometimes produced on the assessee’s side: the outcome is against the assessee, the Madras High Court having set aside the Tribunal and restored the addition, reported at (2021) 437 ITR 80, but the judgment does not decide the no-motive point either way.

The argument that does survive. It is narrower and it is textual, and it has to be put precisely. Sub-section (4) of section 92C opens with the words “Where an arm’s length price is determined by the Assessing Officer under sub-section (3)”, and it is that sub-section which the proviso qualifies. So the proviso has work to do only where the Assessing Officer has himself determined the price under sub-section (3). Where the price is not so determined, the argument runs, neither sub-section (4) nor its proviso is engaged. The Bangalore Bench in Dell International Services India Pvt. Ltd., IT(TP)A No. 879/Bang/2018, decided 24 June 2020, took that approach at paragraphs 35 and 36, framing it by reference to section 92CA(4) rather than section 92C(3), and the Pune Bench reached a similar result in Approva Systems Pvt. Ltd., ITA No. 1051/PUN/2015 for assessment year 2011-12, decided 12 March 2018, at paragraphs 22 to 25. Two cautions. The extension of the reasoning to prices arrived at under an advance pricing agreement, under safe harbour or through the mutual agreement procedure is an argument available on the logic, not something Approva itself decides, and the Revenue’s appeal against Approva has not been disposed of. That is the argument to run, and it is a different argument from the one in ground 3.5.

The penalty exposure that runs alongside all of this. Not filing the report is not free. Section 271BA provides a penalty for failure to furnish the report under section 92E, and section 271AA for failure to keep and maintain the documentation required by section 92D or to report a transaction. Section 273B takes both out of the penalty provisions where the assessee proves reasonable cause. The argument for reasonable cause here is that the associated enterprise question was genuinely arguable, which on the state of the authorities described above it was. The Revenue’s answer is that the twenty-six per cent thresholds in section 92A(2) are objective and ascertainable from the share register, so a mistake about them is not a reasonable one. Which answer prevails depends less on the law than on how arguable the position really was on the particular shareholding, and an assessee who denies the relationship should be preparing that record at the time, not afterwards.

And the separate point the Assessing Officer took. He denied section 80-IB(8A) for want of positive income from the undertaking. On that he was right. The requirement of positive income comes from section 80-IB(1), which operates where the gross total income includes profits derived from the eligible business, and the Supreme Court settled it in Synco Industries Ltd. v. AO, reported at 299 ITR 444, at paragraphs 7 to 13, reasoning from sections 80A(2) and 80B(5) and holding at paragraph 12 that section 80-I(6) goes only to quantum. So even if the transfer pricing adjustment had been sustained, the enhancement would have been denied the deduction by the proviso, and the underlying claim would have faced the positive income requirement in any event.

Two further points on section 80-IB(8A) that matter to anyone making the claim. The approval has to be granted by the prescribed authority, the Secretary of the Department of Scientific and Industrial Research under Rule 18D, and the window for approval closed on 31 March 2007, so the provision now only governs undertakings approved before that date. And section 80-IB(13) imports sub-section (5) and sub-sections (7) to (12) of section 80-IA, and so carries in section 80-IA(10), under which an arrangement producing more than ordinary profits can be adjusted. On that the Revenue carries the burden of proving the arrangement, as the Pune Bench held in Honeywell Automation India Ltd., reported at (2022) 95 ITR (Trib) 51.

The Revenue’s own transfer pricing ground, and the group’s earlier order

The assessee’s appeals are not the only transfer pricing in this order. In ITA No. 933/AHD/2025 for assessment year 2013-14 the Revenue appealed against the deletion of an addition of Rs. 4,28,000 proposed by the Transfer Pricing Officer on account of product development services rendered to an associated enterprise. Its grounds complained that the Commissioner (Appeals) had not appreciated the Transfer Pricing Officer’s approach of determining the arm’s length price by adopting the transactional net margin method instead of the cost plus method, taking external companies engaged in the manufacture of formulations, and that by accepting the assessee’s own arm’s length price the Commissioner (Appeals) had violated the ratio in SAP Labs India Pvt. Ltd. v. ITO.

At paragraph 45.1 the Bench dismissed the ground. The Commissioner (Appeals) had allowed it by relying on this Tribunal’s own decision in Sun Pharmaceutical Industries Ltd. v. Asstt. CIT / Dy. CIT, dated 24 August 2022, where on a similar set of facts the Tribunal had allowed the assessee’s ground. Paragraph 45.1 cites that order by ITA No. 1463/AHD/2018 alone; it was one of four connected appeals, IT Appeal Nos. 1462, 1463, 1519 and 1520 (Ahd) of 2018. In that view the Revenue’s ground was dismissed.

A disclosure is owed here. The order of 24 August 2022 has been located, but every freely available copy breaks off before the part of it that deals with the product development services ground, and the Tribunal’s reasoning on the method question in that earlier order could not be read in full. What is set out above is what the present order itself records about it. The holding in the earlier order should be checked against the Tribunal’s own record or a subscription report before it is relied on in a submission.

Two observations can safely be made. The first is that SAP Labs does not carry the Revenue’s ground as far as the ground assumes. The Supreme Court, in Civil Appeal No. 8463 of 2022 and connected appeals, decided on 19 April 2023, held at its paragraph 7 that there cannot be any absolute proposition of law, that it is always open to a High Court to examine whether the determination has been made in accordance with the Act and the Rules, that the High Court can examine the question of comparability and the selection of filters, and that a determination made de hors the relevant provisions is perverse and perversity is itself a substantial question of law. That displaces the earlier practice of declining appeals on comparability as a matter of course. It does not say that any particular method must be applied, and it says nothing about cost plus against the transactional net margin method.

The second is that the method question itself is not settled. Section 92C(1) requires the most appropriate method, Rule 10C(2) lists the factors, and the Indian rules contain no hierarchy, so the choice is fact specific. The Ahmedabad Bench has dealt with the same contest in Sabic Research and Technologies Pvt. Ltd., ITA No. 1065/Ahd/2012 and connected appeals, decided 1 May 2017, where the assessee had adopted the cost plus method, the Transfer Pricing Officer applied the transactional net margin method, the assessee conceded that method at paragraph 9.7, and the contest then turned on comparability. Anyone defending a contract research or product development margin should expect the argument to be fought on comparables rather than on the name of the method.

Gujarat: what the record shows

For a practice in Ahmedabad, four things in this order are worth filing.

The first is that on section 92A the Ahmedabad Bench has now spoken twice and not consistently. In Veer Gems in January 2017 it held that the sub-sections are required to be read together. In this order it holds that satisfying a clause of sub-section (2) makes participation under sub-section (1) a necessary presumption. The two can be reconciled, because Veer Gems was deciding whether sub-section (2) is necessary and this order is deciding whether it is sufficient, but a Bench will have to be taken through that distinction carefully, and the Gujarat High Court’s affirmance in Veer Gems does not settle the question this order decides.

The second is the procedural point. Gujarat has two High Court decisions on whether the Assessing Officer must hear the assessee before a reference under section 92CA, and they do not agree. Hitachi Hi-Rel considered the earlier Veer Gems, accepted that it was binding coordinate Bench authority, and took the contrary view anyway without referring the conflict upward. Until a larger Bench resolves it the point is unresolved in this Court in a way it is not elsewhere, where Bombay and Delhi are with the assessee on the hearing and Veer Gems has not been followed, and Hitachi Hi-Rel, being the more recent and the more fully reasoned, is the natural starting point for an assessee.

The third is that the Ahmedabad Special Bench in Doshi Accounting Services has closed off the no-motive argument locally. An assessee under a holiday who wants to resist an adjustment should not be running the motive point in this Tribunal; the argument has to be the narrower one on the proviso to section 92C(4).

The fourth is practical rather than legal. This is a group matter spanning ten appeals and seven assessment years, decided by one order, with the lead year’s reasoning applied mutatis mutandis to the later years on the parties’ agreement that the facts had not changed. That agreement is efficient and it is also a commitment. Where the facts of a later year are in truth different, the time to say so is before the concession is recorded, not after the order.

The Income-tax Act, 2025: the architecture disappears

For any year beginning on or after 1 April 2026 the controversy this order decides ceases to exist, because the provision it turns on has been rebuilt.

Section 162 of the Income-tax Act, 2025 carries the heading “Meaning of associated enterprise” and is the counterpart of section 92A. The change that matters is not that sub-section (2) has gone, because section 162 does have a sub-section (2). It is that the deeming has gone.

Section 162(1) defines an associated enterprise in a single definition of twelve clauses, (a) to (l). The twenty-six per cent voting power tests sit inside clause (a), as sub-items, and the words “at any time during the tax year” appear only in those two limbs. The thresholds are unchanged, though now expressed in numerals. What has disappeared is the language of deeming: section 162(1) nowhere says that two enterprises “shall be deemed to be” associated enterprises. The voting power tests are no longer a separate deeming provision operating “for the purposes of” a participation test; they are stated as manners of participating, within the definition itself. Section 162(2) is a different thing altogether. It extends the meaning of associated enterprise for a specified domestic transaction, in three clauses, and clause (c) of it was substituted by the Finance Act, 2026 with effect from 1 April 2026.

The consequence for this controversy is that it has nothing left to attach to. The argument is about the relationship between a participation test and a deeming provision expressed to operate for its purposes. Section 162(1) has no such two-part structure. An enterprise either falls within one of the twelve clauses or it does not, and bare participation outside those clauses no longer stands on its own footing either. Whatever the right answer is under the 1961 Act, the arguments on both sides of this order will matter only for assessment years up to 2026-27, the year now under assessment, and for matters already pending.

The rest of the transfer pricing chapter carries across with its numbering changed. Section 92 becomes section 161, section 92B becomes section 163, section 92C becomes section 165, section 92CA becomes section 166, and section 92E becomes section 172. Within section 165 the proviso to section 92C(4) becomes sub-section (7), and section 92C(4) itself becomes sub-section (6). The “necessary or expedient” language and the previous approval requirement of section 92CA(1) carry over verbatim into section 166(1), so the procedural controversy described above does survive the new Act. The block option regime, under which no reference may be made for a year covered by a valid option and a reference made in spite of that takes effect as if none had been made, is sometimes described as new in the 2025 Act. It is not. The first and second provisos to section 92CA(1) of the 1961 Act, which work with section 92CA(3B), do the same thing, and were inserted by the Finance Act, 2025 with effect from 1 April 2026, so the two Acts come into step on this from the same date.

One amendment note, which has a consequence worth drawing out. The Finance Act, 2026, Act No. 4 of 2026, which Taxmann dates to 30 March 2026, substituted section 162(2)(c) and omitted the words “under section 144 or” from section 165(7), both with effect from 1 April 2026. Section 144 of the 2025 Act is the special economic zone deduction. Its omission from section 165(7) means that from 1 April 2026 the denial of a deduction on the amount of a transfer pricing enhancement no longer reaches that deduction, which is a real change of position for a unit in a special economic zone and the opposite of what the proviso to section 92C(4) does under the 1961 Act.

Open questions, argued both ways

1. Is satisfying a clause of section 92A(2) enough, without any finding of participation? For the Revenue: the words “For the purposes of sub-section (1)” make sub-section (2) the route into sub-section (1), “shall be deemed” admits of no discretion, and a deeming fiction is to be given full effect; this order so holds, and the Mumbai Bench in Kaybee in 2018 also refused to require both sub-sections, though by the different route of treating section 92A(1) as the operative test. For the assessee: the Memorandum to the Finance Bill 2002 gives the prefix the opposite purpose; the Karnataka High Court in Page Industries and Obulapuram holds the sub-sections interlinked; the Gujarat affirmance in Veer Gems survived a special leave petition; and the Mumbai Bench itself departed from its 2018 reasoning in the same assessee’s case in 2020. No Supreme Court decision on the merits. Open, but the weight of reported authority now sits against this order.

2. Does the Memorandum settle it? For the assessee: it is the clearest available statement of what the 2002 prefix was for, and it points away from sufficiency. For the Revenue: the Memorandum addresses only whether participation alone suffices, says nothing about whether a sub-section (2) clause alone suffices, and in any event cannot cut down the enacted words. Open, and narrower than it first appears.

3. Is this order per incuriam on section 92A? For the assessee: it decides a contested question of construction without reference to two High Court decisions, to coordinate Bench authority, or to the Memorandum. For the Revenue: the Karnataka decisions do not bind this Bench; Gujarat’s own Veer Gems decides a different proposition; and the result would have been the same on these facts. Open, and worth less than it looks on strong facts.

4. Must the Assessing Officer record satisfaction before a section 92CA reference, and what follows if he does not? For the assessee: Hitachi Hi-Rel treats it as a jurisdictional requirement and quashed the reference; the Bombay High Court in Vodafone India Services read the hearing into section 92CA(1) and declined to follow Veer Gems on it, though only where Chapter X jurisdiction is challenged; Indorama is to the same effect on the hearing, and Alpha Nipon quashed a reference for want of a speaking order, though on a specified domestic transaction and without reaching the hearing question. For the Revenue: section 92CA(1) imposes no such duty in terms; the Instructions confine it to three situations, and neither Vodafone nor Indorama requires a hearing for an assessee who has objected to nothing; and Vishnu Eatables holds the defect at highest an irregularity rather than something that renders the assessment void. Against that, Rittal India deleted the addition outright and Ingram Micro held the assessment proceedings unsustainable, so the remedy is not confined to a remand. Open on both limbs. On the duty, Gujarat has two coordinate Benches that disagree and the conflict has not been referred upward. On the consequence, the writ line gives a fresh reference or, in Vodafone, a direction to the Dispute Resolution Panel, and the Tribunal line has twice given more, and no High Court has reconciled them.

5. Does Instruction 3/2016 apply to references made before 10 March 2016? For the assessee: Indorama applied it to an earlier reference, and in any event read the hearing into section 92CA(1) itself, as the Bombay High Court had done in Vodafone India Services, which needs no Instruction. For the Revenue: Nikon India holds Instruction 3/2016 prospective, and neither High Court requires a hearing for an assessee who has objected to nothing. Unresolved, and it decides the speaking order for every reference made before 10 March 2016, though not the hearing, which has a source independent of the Instructions.

6. Where no prescribed method has been used, is the addition deleted or the matter remanded? For the assessee: Wartsila, CLSA India and Safilo India delete, and the Bombay High Court in Capgemini India declined to disturb a deletion and refused the Revenue a second innings; the Revenue had its opportunity and failed to use a method; a remand extends the Revenue’s time. For the Revenue: Kodak decided nothing on the point and left it open; section 92 requires the income to be computed, so deletion leaves a statutory obligation unperformed; and an assessee who filed no Form No. 3CEB cannot complain. Open, and the Form No. 3CEB point looks like the real dividing line.

7. Can an assessee under a tax holiday resist an adjustment because no tax is avoided? For the assessee: there is no base erosion and no motive. For the Revenue: the proviso to section 92C(4) presupposes the adjustment and denies only the deduction on the enhancement; Aztec Software and Doshi Accounting reject the argument, and so does Philips Software in the Karnataka High Court, though that judgment could not be read in full and its reported ratio is on maintainability. Effectively closed against the assessee on the motive formulation; open only on the narrower question below.

8. Does the proviso to section 92C(4) apply where the price was not determined by the Assessing Officer under section 92C(3)? For the assessee: sub-section (4) opens with those very words and the proviso does no more than qualify that sub-section, and Dell International and Approva Systems read it that way, which on the logic extends to a price arrived at under an advance pricing agreement, under safe harbour or through the mutual agreement procedure. For the Revenue: the purpose is to deny a holiday on an enhancement however it arises. Open, and the better argument for a holiday assessee.

9. For contract research and product development, is cost plus or the transactional net margin method the most appropriate? For the assessee: a cost plus mark-up matches a service provider bearing limited risk. For the Revenue: where reliable gross margin comparables are absent, the net margin method is more robust. No hierarchy in the Indian rules and no High Court ruling choosing between them. Open, and fought on comparables in practice.

On a live file

• Check the shareholding first, and check it both ways. Clause (b) of section 92A(2) is satisfied by one person holding shares carrying not less than 26 per cent of the voting power in each of two enterprises, however remote the two enterprises are from each other commercially.
• If the only thing the Revenue has is the shareholding, take the section 92A(1) point, and take it with Page Industries, Obulapuram, Orchid Pharma and the Memorandum in front of the Bench. If there is also real participation in management or control, the point will not carry the appeal and the time is better spent on the adjustment.
• Decide early whether to file Form No. 3CEB under protest. This order shows the cost of not filing: it is the reason the matter was remanded rather than the addition deleted. A protective report with the associated enterprise relationship denied in the covering note preserves both arguments.
• Ask whether a report under section 92E was filed and whether the transaction was disclosed. That decides whether the Instructions’ satisfaction and hearing requirements apply at all, since they are confined to three situations. For the hearing there is a second footing the three situations do not touch, because two High Courts read it into section 92CA(1) itself, though the Bombay holding is expressed to apply where Chapter X jurisdiction is challenged.
• Identify which Instruction governed on the date the reference was made, not the assessment year it relates to. Instruction 3/2003 for a reference made up to 15 October 2015, Instruction 15/2015 from 16 October 2015 to 9 March 2016, and Instruction 3/2016 from 10 March 2016. The duties are different under each.
• If the satisfaction point is taken, take it at the right time and in the right forum. The writ petitions that succeeded were filed against the reference and produced a fresh reference or, in Vodafone, a direction to the Dispute Resolution Panel, not an end to the assessment. Raised in appeal, the Tribunal has gone further, in Rittal India and Ingram Micro.
• Read the Transfer Pricing Officer’s order for the method before arguing comparables. If no method in section 92C(1)(a) to (e) was selected, the price is unsustainable whatever the comparables show. For years up to 2011-12 clause (f) is an empty box. For 2012-13 onwards the question is whether what was done was Rule 10AB, which is a question of fact.
• If the method point is taken, be ready for the remand argument. The deletion cases are strongest where the assessee has filed its Form No. 3CEB, documented its own method, and the Transfer Pricing Officer has simply gone outside the statute.
• For a holiday assessee, do not run the no-motive argument before the Ahmedabad Tribunal. Run the proviso to section 92C(4) on its own terms, and check whether sub-section (4) is engaged at all, which on the better reading of its opening words it is only where the Assessing Officer has himself determined the price under sub-section (3).
• Check whether the year falls under the 1961 Act or the 2025 Act. The 1961 Act governs up to assessment year 2026-27. From the tax year beginning 1 April 2026 the section 92A(1) against 92A(2) argument has nothing to attach to.

The 1961 and 2025 provisions side by side

Income-tax Act, 1961	Income-tax Act, 2025	Note
s.92, computation having regard to arm’s length price	s.161	Heading now adds the specified domestic transaction
s.92A, meaning of associated enterprise	s.162	No deeming language; s.162(1) is one definition of twelve clauses, s.162(2) extends it for specified domestic transactions
s.92A(2)(b), shares carrying not less than 26 per cent of the voting power in each of two enterprises	within s.162(1)(a)	Threshold unchanged, now in numerals, and stated as a manner of participating
s.92B, meaning of international transaction	s.163
s.92C, computation of arm’s length price	s.165
s.92C(4)	s.165(6)
Proviso to s.92C(4), no holiday on the enhancement	s.165(7)	A sub-section, not a proviso; “under section 144 or” omitted w.e.f. 1 April 2026
s.92CA(1), reference to the Transfer Pricing Officer	s.166(1)	“Necessary or expedient” and previous approval carried over verbatim
s.92CA(2)	s.166(4)
s.92CA(3)	s.166(6)
s.92CA(4)	s.166(11)
s.92E, report from an accountant	s.172
s.80-IB(8A)	s.141	Operates by reference to s.80-IB as if the 1961 Act had not been repealed

Where this piece could not close a source

Seven things in this article rest on less than a primary source, and the firm’s practice is to say so rather than to let the citation imply more than it is worth.

No official copy of CIT-10, Mumbai v. Kodak India (P.) Ltd. could be obtained. The text relied on comes from the Tribunal’s own verbatim reproduction in this order, cross-checked against two independent full-text reproductions which agree with it and with each other. The judgment’s assessment year is internally inconsistent between its opening paragraph and the passage reproduced here, and neither year is asserted above.

The CBDT Instructions discussed above could not be retrieved from the Department’s own website, whose search returns no results for them and whose Instructions index is closed to automated access. Their contents have been taken from full reproductions and cross-read against the judgments that apply them. The paragraph numbers given are those the judgments themselves use.

The Tribunal’s earlier order of 24 August 2022 in the group’s own case could not be read as far as the ground that matters, and what is said about it above is confined to what the present order records.

The order cites Wartsila India as [2019] 102 taxmann.com 564. That reference could not be closed, and the decision relied on above is the Mumbai Bench order of 4 October 2018, identified from the cause title, the subject matter and the bench.

The Gujarat High Court judgment in PCIT v. Veer Gems and the Karnataka High Court judgment in CIT v. Philips Software Centre could not be read in full either. In each case what is stated above is confined to the result and to what other decisions record about them, and neither is relied on here for anything further. The tax appeal number in the first, and the appeal number, date and paragraph in the second, could not be closed against any source read.

The date on which the Finance Act, 2026 received assent is not on the Department’s site. The 30 March 2026 given above is Taxmann’s date; the Act number and both amendments it made are closed against the Department’s own text.

This note states the law as at 29 October 2026 and is general commentary on the Income-tax Act, 1961 and the Income-tax Act, 2025. It is not advice on any matter. The transfer pricing position in any particular case turns on the shareholding, the documentation, the method and the year, and should be taken on the file.

This note is general commentary on the law as at 29 October 2026 and is not advice on any matter. The position in a particular case depends on its own facts.