Transfer Pricing Litigation | Insights from the Post SC Decision in SAP Labs

  • Blog|Transfer Pricing|
  • 6 Min Read
  • By Taxmann
  • |
  • Last Updated on 26 May, 2023

Transfer Pricing Litigation

Table of Contents

  1. Principal CIT v. Softbrands India Pvt. Ltd. ([2018] 94 426/406 ITR 513 (Kar. HC))
  2. SC Decision in SAP Labs India Pvt. Ltd. v. ITO [2023] 149 327 (SC)
  3. Two Subsequent SC Decisions
  4. Areas of Litigation and Possible Approach

1. Principal CIT v. Softbrands India Pvt. Ltd. ([2018] 94 426/406 ITR 513 (Kar. HC))

1.1 Key Findings of the High Court


  • The Karnataka HC was dealing with the Revenue appeal against the Tribunal decision of exclusion of certain comparables and applying RPT filter of 15%.


  • The existence of a substantial question of law is an indispensable requirement for maintaining an appeal before the High Court.
  • The entry into the HC under section 260A of the Act is locked with the words “Substantial questions of law“.
  • The key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings should be established on the basis of cogent material, which was available before the Authorities below including the tribunal.
  • It is not allowed to either of the parties e. the Assessee or the Revenue to invoke the jurisdiction under section 260A merely because the Tribunal comes to reverse or modify the findings given by the lower Authority.
  • From the scheme of assessment with regard to international transaction, it is clear that the process of determination of ALP has to be undertaken by the Expert Wing of the Income Tax Department which is manned by TPO and at the higher level by a Collegium of three Commissioners in the form of DRP, whose orders on questions of facts are appealable before the highest fact finding body, the Appellate Tribunal.
  • The pick of comparables, short-listing of them, applying of filters, are all fact finding exercise and therefore the final Orders passed by the Tribunal are binding on the lower Authorities of the Department as well as High Court and do not give rise to substantial question of law.
  • The Tribunal is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders.
  • Laying down of certain Guidelines about the Filters or Most Appropriate Method to be adopted for determination of ALP, does not fall within the parameters of the substantial question of law.
  • Even the in-consistent view taken by the Tribunal in different cases depending upon the relevant facts available before it cannot lead to the formation of a substantial question of law.
  • A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases.
  • If the question is of interpretation of provisions of DTAA, Treaty shopping, BEPS, etc, same can be raised as substantial questions of law before the High Court under section 260A.

1.2 Key Findings by the High Court on Section 260A

Some Precedents from the High Courts holding Similar View:

  • The Division Bench of Madras High Court in the case of CIT v. Same Deutz-Fahr India (P) Ltd. [2018] 253 Taxman 32/89 47 (Mad.) held that that right of appeal under Section 260-A of the Act is not automatic and it is limited right of appeal restricted only to cases which involve substantial questions of law and it is not open to the High Court to sit in appeal over the factual findings arrived at by the Tribunal.
  • The Division Bench of Delhi High Court in the case of Principal CIT. v. WSP Consultants India (P.) Ltd. in the judgment dated 03/11/2017, [2018] 253 Taxman 58/[2017] 87 266 (Delhi)] held that the reasons given by the Tribunal were justified and any inclusion or exclusion of comparables per se cannot be treated as a question of law unless it is demonstrated to the Court that the Tribunal or any other lower Authority took into account the irrelevant consideration or excluded the relevant entries in the ‘Arm’s Length Price’ determination.
  • The Division Bench of Bombay High Court in the case of CIT v. PTC Software (I)(P) Ltd. [2017] 395 ITR 176/[2016] 75 31 (Mad.) held that that if there is a functionality difference between the two comparables and the Tribunal was justified in excluding the same on the challenge being raised by the assessee and such findings of Tribunal are findings of fact which do not give rise to any substantial question of law.

2. SC Decision in SAP Labs India Pvt. Ltd. v. ITO [2023] 149 327 (SC)

2.1 Key Findings of SC

The Supreme Court reversed the decision of Karnataka High Court and held as follows:

  • The short question before SC was, whether in every case where the 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 Act?
  • Any determination of the arm’s length price, which do not follow the Transfer Pricing provisions and 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.
  • 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 IT Act.
  • Under Section 260A, it is always open for the High Court to examine in each case whether while determining the arm’s length price, the guidelines laid down under the Act and the Rules are followed or not and 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 Supreme Court reversed the decision of Karnataka High Court and held as follows:

  • 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.
  • SC quashed HC Orders and matters remitted back to HC. HC to dispose the cases within 9 months from receipt of the copy of SC Order.
  • SC did not enter into merits of the cases.
  • Post SC decision, the person filing appeal before the High Court will have to demonstrate that the Tribunal’s decision is not in accordance with the provisions of the Act or Rules, to get the appeal admitted. | Research | Transfer Pricing

3. Two Subsequent SC Decisions

  • Principal CIT v. (P.) Ltd. [2023] 147 466 (SC): SLP dismissed against order of High Court.
  • Principal CIT v. (P.) Ltd [2023] 146 579 (Delhi): The High Court held that Tribunal gave cogent reasons and disclosed functional reasons to elucidate dissimilarities between four entities and assessee and therefore exclusion of four comparables by Tribunal for determining ALP of assessee was upheld.
  • The Tribunal had dealt with exclusion of Eclerx Services, TCS E-services Ltd, BNR Udyog and Excel Infoway Ltd.
  • DIT v. Travelport Inc. [2023] 149 470 (SC): SC held that Question as to what proportion of Profit is attributable to India is a question of fact. The ITAT had dealt with profit attribution for DAPE.

4. Areas of Litigation and Possible Approach

Some areas of litigation in the context of TP:

  • Whether TP application as per provisions of section 92
  • Whether AE relationship triggered
  • Whether a transaction is international transaction
  • Selection of MAM
  • Selection of Tested Party
  • Selection of Filters
  • Selection of Comparables
  • Selection of PLI and computation thereof
  • Adjustments and computation thereof
  • Selection of MAM – For selection of MAM, the guidelines are given in Rule 10C. However, those guidelines are general in nature and there will be cases, where one will have to fall back on judicial decisions and OECD guidelines to demonstrate the perversity or otherwise.
  • Selection of Tested Party – No specific guidance under Act or Rules.
  • Selection of PLI and computation thereof – No specific guidance under Act or Rules.
  • Adjustments and computation thereof – For adjustments, Rule 10B(1) read with Rule 10B(3) are relevant. First step is to demonstrate that what is the difference between the comparables and tested party. Second step is to demonstrate that difference has impact on price/margin. Once these two conditions are satisfied, adjustment has to be provided or comparable will have to be rejected. Quantification of adjustment, will mostly be factual exercise, unless perversity is demonstrated in the tribunal order.
  • Selection of Filters & Comparables
  • To argue whether a particular filter should be applied or not, genesis of such filter will have to be traced back to the Rules. Some examples are below:
Filter Analysis
Related party transaction filter (companies having high RPT are excluded) ALP to be determined based on based on uncontrolled transactions as per section 92F(ii)
75% operating revenue filter (Revenue from similar functions or products) As per Rule 10B(2)(a) specific characteristics of property transferred or services provided should be compared
Export revenue filter (companies having low export revenue are excluded) As per Rule 10B(2)(d) conditions prevailing in the market including geographical location should be considered for comparability
Salary cost filter (companies having low salary cost are excluded) As per Rule 10B(2)(b), for determining comparability functions performed, assets employed and risks assumed should be analysed.
Turnover filter (companies having low or high turnover are excluded) As per Rule 10B(2)(b), for determining comparability functions performed, assets employed and risks assumed should be analysed. As per Rule 10B(3), an uncontrolled transaction can be compared if there are no transaction level differences or enterprise level differences or reasonably accurate adjustment can be made for such differences.
  • For example, whether RPT filter should be applied, can be traced to the provisions of section 92F. However, what should be the ratio of RPT filter is very subjective.
  • For export filter, one can say that Rule 10B(2) provides that geographic market to be relevant criteria.
  • Similarly for turnover filter, enterprise wide difference can be considered as basis.

Areas of focus to support the case:

  • Appeal Memo should specifically allege perversity, wherever required.
  • Tribunal Order – reasoning given in the tribunal order and how the order is in accordance with Act/Rules or otherwise.
  • Filing Written Note before Tribunal capturing the facts, relevant provisions and court decisions.
  • Orders of CIT(A)/DRP – Reasoning in Orders given by CIT(A)/DRP and submissions made before them should highlight the relevant provisions, wherever required.
  • TP Study Report

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Leave a Reply

Your email address will not be published. Required fields are marked *

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied