Issue of comparability and determination of ALP can give rise to “substantial question of law” – Supreme Court of India

Facts of the Case:

• In the instant case, multiple Civil Appeals (majorly by the Income Tax Department and some from the taxpayer’s side) were filed before the Hon’ble Supreme Court which are arising from the judgements and orders passed by various High Courts, more particularly the High Court of Karnataka. The taxpayers, in the present case, were subject to Transfer Pricing (TP) adjustments made by the tax authorities. The TP adjustments(while calculating Arm Length Prices) were primarily made by selecting different sets of comparable data and applying different filters as compared to what was adopted by the taxpayers in their TP study report.
• The High Court of Karnataka dismissed the appeals of the Assessee and tax authorities on ground that the issues decided by the Tribunal are questions of fact and as perversity in the fact-finding process is neither pleaded nor argued nor demonstrated by placing material to that effect thereby no substantial question of law arises for consideration u/s 260A of the Income Tax Act, 1961 (“the Act”).
• As per section 260A of the Act, an appeal against an order of the Tribunal, is admitted by the High Court only if the case involves a ‘substantial question of law’ and thereafter, the High Court of Karnataka also placed reliance on their earlier judgement in case of PCIT v. Softbrands India (P) Ltd wherein it has been held that in transfer pricing matters, the determination of the arm’s length price by the Tribunal is final and cannot be subject matter of scrutiny under Section 260A of the Act.

Question before the Hon’ble Supreme Court:

• Whether in every case where the Tribunal determines the arm’s length price (ALP), the same shall attain finality and the High Court is precluded from considering the determination of the arm’s length price determined by the Tribunal, in exercise of powers under Section 260A of the Act?

Decision of Hon’ble Supreme Court:

• The Hon’ble Supreme Court has overturned decisions of all such High Courts and made the following observations on the admissibility of TP appeals by the High Courts:
• Determination of ALP must follow the guidelines stipulated under Chapter X of the Act (such as sections 92, 92A to 92CA, 92D, 92E and 92F of the Act and rules 10A to 10E of the Income-tax Rules, 1962). Any deviation from these guidelines can be considered as perverse and may be considered as a substantial question of law
• There cannot be any absolute proposition of law that in all cases where the Tribunal has determined ALP, the same is final and cannot be subject matter of scrutiny by the High Court under section 260A of the Act. It is always open for the High Court to examine whether or not the guidelines under Chapter X of the Act are followed, and whether or not the findings recorded by the Tribunal while determining ALP are perverse.
• The High Court can also examine whether the comparability of two companies or selection of filters has been done judiciously and whether non-comparable transactions have been wrongly considered as comparable transactions or not within the parameters of section 260A of the Act.
• The Hon’ble Supreme Court after making the above-mentioned observations finally remitted back the matter to the respective High Courts for disposing the appeals and decide the matter freshly considering the above-mentioned observations within a period of nine months from the receipt of this order. Further, the Hon’ble court has specifically observed that merits of the case of the respective taxpayers have been not considered while deciding this matter.

SW Point of View:

The Hon’ble Supreme Court has delivered this landmark judgement which will open up pandoras box for litigation in transfer pricing.  Matters settled by the tribunal can now be agitated before the High Court due to this judgement irrespective whether perversity exists in finding if the tribunal’s order or not. 

Virendra Vikram, Tax Associate, SW India