Transfer Pricing | High Courts Not Precluded From Scrutinising ITAT’s Determination Of Arm’s Length Price : Supreme Court

The Supreme Court has ruled that the High Court is not precluded from considering the determination of the arm’s length price determined by the Income Tax Appellate Tribunal (ITAT), in exercise of its powers under Section 260A of the Income Tax Act, 1961.

Dismissing the proposition that in every case where the Tribunal determines the arm’s length price, the same shall attain finality, the bench of Justices M.R. Shah and M.M. Sundresh remarked that there cannot be any absolute proposition of law that in all cases where the Tribunal has determined the arm’s length price, the same is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A.

The bench reckoned that while determining the arm’s length price, the Tribunal has to follow the guidelines stipulated under Chapter X of the Income Tax Act and the relevant Rules contained in the Income Tax Rules, 1962. Further, any determination of the arm’s length price under Chapter X of the Act de hors the relevant guidelines stipulated under the Act and the Rules, can be considered as perverse, which may be considered as a substantial question of law.

Thus, the top court concluded that, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm’s length price.

The Supreme Court was dealing with a batch of appeals filed mostly by the revenue department, against the judgement and order of various High Courts, more particularly the Karnataka High Court, where the appeals filed by the department challenging the findings of the ITAT on ‘Transfer Pricing’ issues, including the determination of the arm’s length price, were dismissed.

The High Courts had dismissed the appeals on the ground that the issues decided by the Tribunal are questions of fact and, in the absence of demonstrated perversity in its finding, interference is not warranted under Section 260A of the Act, as no substantial question of law can be said to have arisen for consideration. The Karnataka High Court, while dismissing the appeal, had relied on its earlier decision in PCIT vs Softbrands India (P) Ltd., (2018) 406 ITR 513 (Karnataka), where it was ruled that determination of arm’s length price by the Tribunal shall be final against which an appeal under Section 260A of the Act cannot be entertained.

The Revenue Department contended before the Supreme Court that the Karnataka High Court in Softbrands India (P) Ltd. has erroneously held that the Tribunal is the final fact-finding authority on determining the arm’s length price and therefore, once the Tribunal determines the arm’s length price the same cannot be subject to scrutiny in an appeal under Section 260A of the Act.

The department added that the arm’s length price is to be determined by taking into consideration the guidelines stipulated under the provisions of the Income Tax Act and the Income Tax Rules. Therefore, it is always open for the High Court to consider and/or examine, whether the said guidelines have been followed by the Tribunal while determining the arm’s length price or not.

Referring to the relevant provisions of the Income Tax Act and the Income Tax Rules, the Supreme Court concluded that while determining the arm’s length price, the Tribunal has to follow the guidelines stipulated under Chapter X of the Income Tax Act, namely, Sections 92, 92A to 92CA, 92D, 92E and 92F, and Rules 10A to 10E of the Income Tax Rules.

“Any determination of the arm’s length price under Chapter X de hors the relevant provisions of the guidelines, referred to hereinabove, can be considered as perverse and it may be considered as a substantial question of law as perversity itself can be said to be a substantial question of law,” the court said.

Thus, the Apex Court ruled that there cannot be any absolute proposition of law that in all cases where the Tribunal has determined the arm’s length price the same is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A of the Act. The bench ruled that, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm’s length price.

The court thus held that in an appeal challenging the determination of the arm’s length price, it is always open for the High Court to examine in each case, within the parameters of Section 260A of the Act, whether while determining the arm’s length price the guidelines laid down under the Act and the Rules are followed or not. The High Court can determine whether the determination of the arm’s length price and the findings recorded by the Tribunal while determining the arm’s length price, are perverse or not, the court ruled.

The court added: “Even the High Court can also examine the question of comparability of two companies or selection of filters and examine whether the same is done judiciously and on the basis of the relevant material/evidence on record. The High Court can also examine whether the comparable transactions have been taken into consideration properly or not, i.e., to the extent non- comparable transactions are considered as comparable transactions or not.”

“Therefore, we are of the opinion that the absolute proposition of law laid down by the Karnataka High Court in the case of Softbrands India (P) ltd. (supra) that in the matter of transfer pricing, determination of the arm’s length price by the Tribunal shall be final and cannot be subject matter of scrutiny and the High Court is precluded from examining the correctness of the determination of the arm’s length price by the Tribunal in an appeal under Section 260A of the IT Act on the ground that it cannot be said to be raising a substantial question of law cannot be accepted,” said the court.

The court thus allowed the appeals, setting aside the judgment and order of the respective High Courts, and remitted the matter back to the High Courts to decide the appeals afresh in light of the observations made by the court. The top court also directed the High Courts to examine whether in each case while determining the arm’s length price, the guidelines laid down under the Act and the Rules were followed or not and whether the findings recorded by the Tribunal while determining the arm’s length price are perverse or not.

Case Title: SAP Labs India Private Limited vs Income Tax Officer, Circle 6, Bangalore

Citation : 2023 LiveLaw (SC) 328

Counsel for the Assessee: Arvind P. Datar, Tarun Gulati, Percy Pardiwala, Senior Advocates

Counsel for the Revenue Department: Balbir Singh, Additional Solicitor General of India.

Income Tax Act, 1961- Section 260A: The Supreme Court has ruled that the High Court is not precluded from considering the determination of the arm’s length price determined by the Income Tax Appellate Tribunal (ITAT), in exercise of its powers under Section 260A.The bench of Justices M.R. Shah and M.M. Sundresh remarked that there cannot be any absolute proposition of law that in all cases where the Tribunal has determined the arm’s length price the same is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A.

Income Tax Act, 1961- Chapter X: The court held that any determination of the arm’s length price under Chapter X of the Act de hors the relevant guidelines stipulated under the Act and the Rules, can be considered as perverse, which may be considered as a substantial question of law. Thus, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm’s length price.