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

(a)A writ of Certiorari or Writ, order of Direction in the nature of Certiorari, or any other appropriate writ, order or direction under Article 226/227 of the Constitution of India quashing Instruction No. 3 of 2003 dated 20.5.2003, issued u/s 119 of the Income Tax Act, 1961 to the extent it requires compulsory reference to Transfer Pricing Officer to determine arms length price where the aggregate value of international transactions exceeds Rs. 5 crores.

(b)A writ of certiorari or writ, order of direction in the nature of certiorari, or any other appropriate writ, order or direction under Article 226/227 of the Constitution of India setting aside assessment order dated 21.3.2005 and directing Assessing officer to exercise his powers ignoring the Instruction No. 3 of 2003 dated 20.5.2003.

Background Facts

2. The petitioner Sony India (P) Limited is a wholly owned subsidiary of Sony Corporation of Japan. It was incorporated on 17.11.1994 and commenced manufacturing activities in March 1995. The petitioner is engaged in assembling, manufacturing and distribution of electronic goods including colour television and audio products. During the previous year relevant to Assessment Year (AY) 2003-03, besides the aforementioned activities it also imported from its associated enterprises high end products such as DVDs, Handy Cams, Play Stations and Projectors etc. for sale in India.

3. The Finance Act, 2001 substituted the earlier Section 92 of the Income Tax Act 1961 (Act) with Sections 92 to 92F with effect from 1.4.2002. These provisions are found in Chapter X of the titled Special Provisions Relating to Avoidance of Tax. The sub-heading reads "Computation of Income from International Transactions having regard to arms length price." A fairly detailed scheme for computing the arms length price (ALP) of international transactions is set out in these provisions. The Finance Act, 2002 inserted, with effect from 1.6.2002, Section 92CA titled Reference to Transfer Pricing Officer. This provision enables the Assessing Officer (AO), where he "considers it necessary or expedient so to do", with the previous approval of the Commissioner, to refer to the Transfer Pricing Officer (TPO) the computation of the ALP in relation to an international transaction entered into by an assessed in any previous year.

4. The petitioner filed its return for AY 2002-03 with the Additional Commissioner of Income Tax on 31.10.2002 declaring an income of Rs. 8,71,08,860. This was subsequently revised to Rs. 8,67,46,730.

5. On 20.5.2003 the Central Board of Direct Taxes (CBDT) issued the impugned Instruction No. 3 of 2003 on the subject of "Computation of income from international transaction having regard to arms length price - Reference to Transfer Pricing Officer u/s 92CA of the." This instruction provided, inter alia, that "wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference u/s 92CA be made to the TPO."

6. On 8.12.2003, the AO referred to the TPO the determination of the ALP in respect of the international transactions entered into by the petitioner during the previous year 2001-2002 relevant to AY 2002-2003. The Joint Commissioner of Income Tax, who was the TPO-II, issued notice to the petitioner and considered its detailed reply. The TPO also heard its authorized representatives. Thereafter on 11.3.2005, the TPO passed a detailed order determining the ALP of the international transactions of exports made by the petitioner to Sony Corporation of Japan. The TPO recommended that the AO should on this basis enhance the total income of the petitioner by Rs. 42,41,40,934.

7. After receipt of the report of the TPO, the AO sent a letter dated 14.3.2005 to the petitioner asking it to show cause why the aforesaid adjustment on account of ALP of the international transaction be not added to the income. After considering the petitioners objections, the AO passed issued the assessment order dated 21.3.2005 assessing the income of the petitioner for AY 2002-2003 at Rs. 59,92,40,000 and the tax payable thereon was determined as Rs. 26,52,66,896. The petitioner has filed an appeal against the said assessment order dated 21.3.2005 before the Commissioner of Income Tax (CIT) (Appeals) and the said appeal is stated to be pending.

8. Consequent to the assessment order, a demand was raised asking the petitioner to pay the tax within seven days as against the usual period of 30 days. This led to the petitioner filing Writ Petition (C) No. 5301 of 2005. Pursuant to certain orders made by this Court in the said petition, the petitioner paid Rs. 2 crores on 30.3.2005 and the said writ petition was disposed of on 12.5.2005. Thereafter, the petitioner filed the present writ petition challenging the Instruction No. 3 of 2003 issued on 21.5.2003 by the CBDT as well as the assessment order dated 21.3.2005 by which the AO assessed the income of the petitioner for the AY 2002-2003 on the basis of the ALP determined by the TPO by the order dated 11.3.2005. The petitioner also filed on 19.1.2006 an application CM 817/2006 seeking a stay of the recovery of Rs. 11,20,36,798 stated to be the outstanding tax as on that date.

Submissions of Counsel

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

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

(b) Section 92C itself makes no such classification of the international transactions. Therefore, such classification cannot be introduced by an instruction issued by the CBDT in exercise of its powers u/s 119 of the. Consequently, the impugned instruction is ultra virus the.

(c) The discretion of the AO u/s 92CA of the to make a reference to the TPO only where he considers it necessary and expedient has been taken away by the impugned instruction in so far as international transactions of a value of over Rs. 5 crores are concerned. The word may in Section 92CA of theunderscores the discretionary nature of the power. Further, the provision presupposes the formation of a judicial opinion by the AO, on a case-by-case basis, before making a reference to the TPO. The judicial discretion of the AO in this behalf has been fettered by the impugned instruction of the CBDT which is binding on all the subordinate officers including the AO and the CIT. This also renders the impugned instruction illegal and ultra virus the. In support of this contention, Mr. Syali relied on the decisions in Yum! Restaurants India Pvt. Ltd. Vs. Commissioner of Income Tax, . His submission in effect is that executive instructions cannot control the law and set at naught the statutory framework for the exercise of discretionary powers by quasi judicial authorities.

(d) The ultimate decision on the computation of the ALP is that of the AO u/s 92C. However, that is now sought to be supplanted by the decision of the TPO for transactions of the value over Rs. 5 crores. Moreover, the TPO is not bound to follow the steps outlined in Section 92C(1), (2) and (3) which are otherwise mandatory for the AO to follow. In the absence of any specific provision in the permitting this, a CBDT instruction cannot be permitted to bring about this change.

10. Mr. Sanjeev Sabharwal, learned Counsel for the respondent submits that a reference u/s 92CA will be made by the AO only where he "considers it necessary or expedient so to do". There may be several instances in which the AO may exercise his discretion and this could include transactions of the value in excess of Rs. 5 crores. He further submits that view expressed by the TPO is not binding on the AO. The assessed may able to persuade the AO, even after the report of the TPO is received, that the ALP determined by the TPO should not be acted upon. He submits that the apprehension expressed by the petitioner that the TPO is not bound to follow the procedure outlined u/s 92C(1) to (3) is misconceived in view of the latter part of Section 92CA(3) which stipulates that the AO shall "by an order in writing, determine the arms length price in relation to the international transaction in accordance with Sub-section (3) of the Section 92C." According to him the impugned circular only facilitates the work of both the AO and the TPO and cannot be characterised as usurping their discretion or ultra virus the. He referred to the decision of the Honble Supreme Court in Union of India and Another Vs. Azadi Bachao Andolan and Another, and in particular the passage in page 727 where the scope of the power of the CBDT u/s 119 has been explained.

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

The statutory provisions

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

13. u/s 92B(1) "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or appointment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or faculty provided or to be provided to any one or more of such enterprises." Section 92F(v) defines transaction to include "an arrangement, understanding or action in concert." Section 92C sets out the steps to be sequentially followed by the AO for determining the ALP. Section 92E mandates that every person who has entered into an international transaction during a previous year "shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed." The prescribed form in this regard is Form 2CEB.

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

15. The provisions of Section 92C(3) read as under:

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

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

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

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

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

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

Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessed to show cause, on a date and time to be specified in the notice, why the arms length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer."

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

16. Now we turn to Section 92CA which permits the AO to refer, with the prior approval of the CIT, the exercise of computing the ALP to the TPO where the AO "considers it necessary or expedient so to do". Section 92CA reads as under:

Reference to Transfer Pricing Officer

(1) Where any person, being the assessed, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arms length price in relation to the said international transaction u/s 92C to the Transfer Pricing Officer.

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

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

(4) On receipt of the order under Sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessed under Sub-section (4) of Section 92C having regard to the arms length price determined under Sub-section (3) by the Transfer Pricing Officer.

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

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

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

Interpretation of the statutory provisions

17. At the outset it must be noticed that the only condition that is spelt out for the reference to the TPO is the opinion of the AO that it is "necessary or expedient so to do". There is no gainsaying that power conferred on an authority, particular a discretionary power, cannot be exercised mechanically. What is necessary or expedient will depend on the facts and circumstances of every case and the satisfaction of the AO in this regard will have to be based on some objective criteria. On the other hand, the relatively insignificant value of the transaction may make it inexpedient for the matter to be referred to the TPO. It is not possible to anticipate the instances that may necessitate the invoking of the discretion vested in the AO in this regard. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately the courts. The words "necessary and expedient" occurring in other provisions of the and other statutes have been interpreted judicially to admit of a strict construction permitting the power to be used only in the manner and subject to the conditions stipulated in the provision. In the context of a similar phrase occurring in Section 245E of thepermitting the Settlement Commission to reopen proceedings where it thinks it "necessary or expedient", the Honble Supreme Court in Commissioner of Income Tax, Calcutta [Central] Vs. Paharpur Cooling Towers Pvt. Ltd., , observed (SCC page 161):

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

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

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

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

21. In Juggi Lal Kamlapat Bankers and Another Vs. Wealth Tax Officer, Special Circle C-Ward, Kanpur and Others, the provisions of Section 7 of the Wealth Tax Act, 1957, which reads as under, was under consideration:

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

(Explanation.-* * *)

(2) Notwithstanding anything contained in Sub-section (1),-

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

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

In explaining the purport of the words "having regard to" occurring in the above provision the Honble Supreme Court observed (SCC p.582):

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

22. In relation to Section 23A of the Income Tax Act 1922, where a similar expression occurred, the Supreme Court in Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., adopted the reasoning of the Privy Council in CIT v. Williamson Diamonds 35 ITR 290 to hold that the Income Tax Officers power is not circumscribed by the conditions preceding those words and that he can consider any other matter relevant to the question. In the latter case it was held (ITR p.297):

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

23. In view of the settled legal position, we are of the view that the expression "having regard to" in Section 92C(4) and 92CA(4) enables the AO to consider not only the report of the TPO but any other material that may be placed before him by the assessed to arrive at a different conclusion. This also strengthens the position that the report of the TPO is not binding on the AO.

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

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

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

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

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

(d)The TPO is expected to perform the same exercise as envisaged u/s 92C(1) to (3) while determining the ALP u/s 92CA(3).

(e)The AO is not bound to accept the ALP as determined by the TPO. He can always be persuaded by the assessed at that stage to reject the TPOs Report and proceed to still determine the ALP himself. This is how the expression "having regard to" occurring in both Sections 92C(4) and 92CA(4) can be given full effect.

(f)This interpretation does not prejudice the assessed because in effect the assessed gets two opportunities to demonstrate that the ALP declared by it requires acceptance. The first is before the TPO in terms of Section 92CA(3) and the second before the AO u/s 92C(4).

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

The impugned Instruction

27. The first three contentions of the petitioner at para 9 (a) to (c) relate to the validity of the impugned instruction dated 20.5.2003 of the CBDT. The salient features of the impugned instruction are reproduced verbatim for easy reference:

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

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

(c) "In the initial years of implementation of these provisions and pending development of adequate data base, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. The CBDT, Therefore, have decided with wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference u/s 92CA be made to the TPO."

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

(e) "The threshold limit of Rs. 5 crores will be reviewed depending upon the workload of the TPOs.

(f) "The role of the TPO begins after a reference is received from the Assessing Officer. In terms of Section 92CA this role is limited to the determination of arms length price in relation to the international transaction referred to him by the Assessing Officer.

(g) "The transfer price has to be determined by the TPO in terms of Section 92C. The price has to be determined by any one of the methods stipulated in Sub-section (1) of Section 92C and by applying the most appropriate method referred to in Section (2) thereof.

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

(i) After receipt of the arms length price so determined by the TPO, "it is imperative that a formal opportunity is given to the taxpayer before making adjustments to the total income. The opportunity with regard to the determination of arms length price has already been given by the TPO and, Therefore, opportunity by the Assessing Officer, for final determination of income under Sub-section (4) of Section 92C read with Sub-section (4) of Section 92C is to be given by the Assessing Officer.

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

Validity of the impugned Instruction

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

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

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

32. The impugned instruction does not seek to bye-pass the statute and this is abundantly clear from the extracted portions which time and again make a reference to the provisions of the and in particular to Sections 92C and 92CA. In sub-para (1) of the instruction under the heading "Reference to Transfer Pricing Officer (TPO)", it is stated as under:

(1) Reference to Transfer Pricing Officer (TPO):

The power to determine arms length price in an international transaction is contained in Sub-section (3) of Section 92C. However, Section 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arms length price in relation to an international transaction to the TPO. Sub-section (3) of Section 92CA provides that the TPO after taking in account the material available with him shall, by an order in writing, determine the arms length price in accordance with Sub-section (3) of Section 92C. Sub-section (4) of Section 92CA provides that on receipt of the order of the TPO, the Assessing Officer shall proceed to compute the total income of the assessed having regard to the arms length price determined by the TPO. Thus, whereas the determination of the arms length price, where reference is made to him, is required to be done by the TPO under Sub-section (3) of Section 92CA read with Sub-section of Section 92C, the computation of total income having regard to the arms length price so determined by the TPO is required to be done by the Assessing Officer under Sub-section (4) of Section 92C read with Section (4) of Section 92CA.

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

34. Since the extracted portions of the impugned instruction is based on a correct understanding of the legal position, the question of the CBDTs binding instruction being contrary to the statute does not arise. The instructions are consistent with Section 119 of theand Therefore not contrary to any of the decisions cited including Azadi Bachao Andolan (supra), Yum Restaurants India Pvt. Ltd. (supra) and Y.P. Chawla and others Vs. M.P. Tiwari and another,

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

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

37. For these reasons, we hold that the impugned Instruction No. 3 dated 20.5.2003 issued by the CBDT is consistent with the statutory objective underlying Section 92CA(1) and acts as a guidance to the AO in the exercise of discretion in referring an international transaction to the TPO for determination of its ALP. It is neither arbitrary nor unreasonable, and is not ultra virus the.

38. We are not inclined to entertain the second prayer in the writ petition for quashing of the assessment order dated 21.3.2005 since the petitioner has already filed an appeal against the said order before the CIT (Appeals). It will be open to the petitioner to assail the assessment order on any additional grounds that may arise as a result of the present judgment explaining the scope of the functions of the AO and the TPO under the relevant statutory provisions.

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