Supreme Court expands scope for taxman to appeal against ITAT on transfer pricing issue [Read Judgment]

NEW DELHI: In a significant decision, the Supreme Court has on Wednesday declared that there cannot be any absolute proposition of law that a decision of tax tribunal is final and cannot be scrutinised by any High Court while deciding an appeal related to transfer pricing issue.

The ruling is seen as having a huge ramification on transfer pricing litigation, since it expands the scope for the taxman to appeal to High Court  against factual findings of the tax tribunal on arm's length price.

The top court said that the tax tribunal has to follow the guidelines and rules stipulated in the Income Tax Act for determining the arms length price.

A bench of Justices M R Shah and M M Sundresh set aside the Karnataka High Court ruling that gave a contrary view in the case of Softbrands India in this regard.

The court held it is always open for the High Court to examine in each case whether the guidelines laid down under the Act and the Rules are followed or not and whether the determination of the arms length price and the findings recorded by the tribunal while determining the arms length price are perverse or not.

The court said the tribunal has to follow the guidelines stipulated under Chapter X of the IT Act, namely, Sections 92, 92A to 92CA, 92D, 92E and 92F of the Act and Rules 10A to 10E of the Rules.

"Any determination of the arms length price under Chapter X de hors 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. Therefore, there cannot be any absolute proposition of law that in all cases where the Tribunal has determined the arms length price the same is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A," it said.

The court said when the determination of the arms length price is challenged before the High Court, it is always open for the High Court to consider and examine whether the arms length price has been determined while taking into consideration the relevant guidelines under the Act and the Rules.

"Even the High Court can also examine the question of comparability of two companies or 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, the view taken by the Karnataka High Court in the case of Softbrands India  (P) Ltd. that in the transfer pricing matters, the determination of the arms length price by the Tribunal is final and cannot be subject matter of scrutiny under Section 260A of the IT Act cannot be accepted," the bench said.

The Court's judgement came on batch of civil appeals, mostly by the Revenue and few of the assessees against the judgements and orders passed by the various High Courts, more particularly the High Court of Karnataka.

In all these cases, the High Courts had dismissed the appeals challenging the findings of the Income Tax Appellate Tribunal on Transfer Pricing issues on the ground that the issues decided by the Tribunal are questions of fact and as perversity is neither pleaded nor argued nor demonstrated by placing material to that effect, no substantial question of law arose for consideration under Section 260A of the Income Tax Act, 1961.
 

[Read Judgment]