Transfer pricing law requires a Transfer Pricing Officer (TPO) to issue a show-cause notice before determining an arm's length price adjustment, giving the taxpayer a genuine opportunity to respond. Courts have generally dealt with breaches of this requirement where a notice was lost in transit, never issued, or deliberately bypassed. The Bombay High Court's recent ruling in Flyjac Logistics' case addresses a different failure mode: the notice was generated and logged by the department's own system, yet never reached the taxpayer because the system malfunctioned.
The TPO proposed a ₹20.16 crore adjustment to Flyjac's arm's length price and recorded that a show-cause notice had been issued and had gone unanswered. Flyjac stated that it never received any such notice and learned of its existence only because the TPO's order referred to it. In its affidavit, the Department attributed this to a technical failure rather than any deliberate lapse: the email carrying the notice had bounced, an unexplained glitch in the ITBA backend kept the notice from appearing on Flyjac's e-filing portal, and no SMS alert was triggered either.
The Bombay High Court held that the statutory show-cause requirement under Section 92C(3) is distinct from the information-seeking notices issued earlier under Section 92CA(2), and that the order could not stand without actual service on the taxpayer. A system log recording that a notice had been issued did not, in the court's view, satisfy that requirement.
The ruling can be read alongside other developments this year that touch on transparency and procedural rigour in tax administration, though these do not point to a single established trend. Chile's SII has published, in some detail, the risk criteria and audit yield behind its enforcement program. HMRC has tightened the link between its TP compliance guidance and its formal error-correction facility, creating a more structured route from self-identified error to resolution. India's Supreme Court, in the Samsung India matter, dismissed the Revenue's appeals because of unexplained delays of several hundred days in filing, without reaching the underlying transfer pricing questions. Taken together, these developments suggest that as tax administrations rely more on systems, logs and published criteria to manage scale, courts and taxpayers are likely to scrutinise those systems more closely rather than less.
CBDT has publicly stated its intention to expand automated risk-flagging through initiatives such as Project Insight and NUDGE, and the broader direction of travel is toward AI-assisted scrutiny. Tax-technology vendors, including infer360 (now allied with Nexdigm) and comparable platforms, market tools for machine-assisted TP monitoring and documentation. Flyjac illustrates a specific risk that arises as these systems take on a larger role: a system can generate a notice, log that it generated the notice, and still fail to deliver it, and such a failure may not surface until the taxpayer is already contesting the resulting order in court. As automated systems take on more of the notice-generation and routing function in TP enforcement, similar service failures are likely to recur as adoption increases.
For practitioners, the ruling raises a practical evidentiary question: whether a system log showing that a notice was issued will be treated as sufficient proof of service, or whether courts will continue to require affirmative proof of actual receipt, as the Bombay High Court did in this case. Until that question is settled through further litigation, TP compliance functions may find it prudent to maintain independent records of portal access, email delivery and SMS alerts, so that service failures originating in the department's own systems can be identified and raised at the earliest stage of any proceeding.
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