Appellant: SAP LABS INDIA PRIVATE LIMITED
Respondent: INCOME TAX OFFICER, CIRCLE 6, (Bangalore)
Issue: The case deals with the determination of the arm’s length price by the Tribunal in transfer pricing matters and whether it can be subject to scrutiny by the High Court in an appeal under Section 260A of the IT Act if there exists a ‘substantial question of law”.
Judgement: As commonly known, the ITAT serves as the ultimate body for determining facts, i.e., it is the “final fact finding authority” and if there exists a ‘substantial question of law”, one may challenge the decision in the High Court.
The judgement passed by the Karnataka High Court (HC) in the case of Softbrands India (P.) Ltd[1] was reversed. The view taken in this case was that the determination of the arm’s length price by the Tribunal is final and cannot be subject to scrutiny under Section 260A of the IT Act may not be acceptable. The High Court also held that issues pertaining to selection of comparable data and criteria for comparability while undertaking an economic analysis in a TP study do not give rise to a “substantial question of law.”
The Supreme Court of India (SC) pronounced in this ruling in a bunch of appeals involving several taxpayers, with SAP Labs India Private Ltd. being the lead case. The Apex court held that the HC can scrutinize the determination of the arm’s length price by the Tribunal in an appeal under Section 260A of the IT Act.
The HC can examine whether the relevant guidelines under the Act and the Rules prescribed under Chapter X has been taken into consideration, whether the comparability of two companies or selection of filters has been done judiciously, and whether the comparable transactions have been considered properly, as it deems necessary on a case to case basis. Any determination of the arm’s length price under Chapter X other than the relevant provisions of the guidelines 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.
BCL India’s Comments: 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. The ruling is expected to provide better clarity for taxpayers and tax authorities on the admissibility of TP appeals by High Courts. However, it may result in the admission of a greater number of appeals, increasing the backlog of cases.
Any appeal to the High Court on transfer pricing issues, should include specific evidences, not following the guidelines laid down under the IT Act and the IT Rules for determination of the arm’s length price and whether the findings recorded by the Tribunal while determining the arm’s length price are perverse or not. Taxpayers should plan their strategies for TP in India, including considering alternative channels such as Mutual Agreement Procedure (MAP) and Advanced Pricing Agreements (APAs).
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[1] [2018] 94 taxmann.com 426 (Karnataka)/[2018] 406 ITR 513 (Karnataka)
