SC On ALP Determination, Selection Of Filters As Substantial Question Of Law
Hon'ble Supreme Court ('SC') vide order dated 19th April 2023 in batch of appeals led by SAP Labs India Pvt. Ltd. ('SAP Labs') has set aside the principle laid down by Hon'ble Karnataka High Court's judgment on issue of selection of comparables and whether it constitutes a 'substantial question of law'.
It is a settled proposition that in the absence of demonstrated perversity in the findings of the Income Tax Appellate Tribunal ('Tribunal'), the Court cannot interfere, and a finding of fact may give rise to a substantial question of law, only if it is perverse. Therefore, the Tribunal is considered as the final fact-finding authority and an appeal before the High Court ('HC') can be preferred under Section 260A of the Income Tax Act, 1961 ('the Act') only on substantial question of law.
In 2018, the Hon'ble Karnataka HC in the case of Softbrands India (P) Ltd. laid down an absolute proposition that no substantial question can arise under Section 260A of the Act against Tribunal order for determining an arm's length price ('ALP'). In other words, Tribunal is the final fact-finding authority on determining the ALP and therefore once the Tribunal determines the ALP the same cannot be subject to judicial scrutiny in an appeal before HC.
The Indian revenue authority filed an appeal against the above order before the Hon'ble SC. The apex court, while allowing revenue's appeal held that:
- It is always open for HC to examine each case whether while determining the ALP, the guidelines laid down under the Act and the Rules prescribed in that behalf are followed or not and whether the determination of the ALP and the findings recorded by the Tribunal while determining the ALP are perverse or not.
- There cannot be any absolute proposition of law that in all cases where the Tribunal has determined the ALP the same is final and cannot be the subject matter of scrutiny by the HC.
- HC can also examine the question of comparability of two companies or selection of filters & examine whether the same is done judiciously and on the basis of the relevant material/evidence on record.
The SC remitted all the matters back to respective High Courts to decide and dispose the matters afresh within a period of 9 months from the date of receipt of the present order.
In our opinion, we agreed with HC's Softbrands ruling on the limited issue of "comparability" being a question of fact and not of law. Further, there was always an option to go to the HC where there is perversity involved but not every time where the matter is mere fact-based ALP determination. Now with this landmark ruling on transfer pricing, even the matters that could have attained finality before the Tribunal maybe appealed before the HC dragging the court into a whirlpool of data analysis and fact finding.
It will be interesting to see how the HC decides and disposes of the appeals afresh in light of the observations laid down by the SC, whether it remits back the matter to the Tribunal leading to shuttling it back and forth or spends its own time to decide such appeals. In any case, the SC judgement may have a far-reaching ramification with HC redetermining the arm's length price in all the matters involved in the batch of matters led by SAP Labs before the apex court.
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