[Opinion] HC to Address ‘Substantial Question of Law’ on Comparable Selection & ALP Determination

CA Mithilesh Reddy & CA Praneeth Narahari – [2023] 149 taxmann.com 392 (Article)

The transfer pricing world is abuzz with the news of the Supreme Court of India’s decision in the case of SAP Labs India (P.) Ltd. v. ITO. This judgment is significant because the Supreme Court overturned the ratio decidendi law laid down by the Karnataka High Court in case of Pr. CIT v. Softbrands India (P.) Ltd, which held that the determination of the arm’s length price by the Income-tax Appellate Tribunal shall be final and the High Court is precluded from examining the same as there is no “substantial question of law” arising unless there is a perversity established in the Tribunal rulings with regard to transfer pricing disputes.

A. Brief Background

Earlier, various High Courts, including the Karnataka High Court, have held that the determination of the arm’s length price by the Income-tax Appellate Tribunal in transfer pricing disputes is final and cannot be subject to judicial scrutiny in an appeal before High Court under section 260A of the Income-tax Act unless there is any perversity established in the Tribunal rulings. This means that the Tribunal, being the final fact-finding authority, is the final appellate authority for transfer pricing disputes.
However, in the recent case of SAP Labs India (P.) Ltd. (supra), the Supreme Court of India has overturned the ratio decidendi law laid down by the Karnataka High Court in the Softbrands India (P.) Ltd. case, (supra) thereby leading to significant implications for the transfer pricing community.

B. Question before the Apex Court

The key question before the Supreme Court was whether in every case where the Income Tax Appellate Tribunal determines the arm’s length price, 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 Income-tax Act.

C. Arguments of the Revenue

The Department Representative argued that the determination of the arm’s length price by the Income Tax Appellate Tribunal must adhere to the transfer pricing guidelines stipulated under the Income-tax Act and the Rules, failing which such determination is said to be perverse and always subject to the scrutiny by the High Court through Section 260A of the Income-tax Act.

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