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Sap Labs India Private Limited vs. Income Tax Officer - (Supreme Court) (19 Apr 2023)

High Courts are not precluded from considering the determination of the arm’s length price finalised by the Tribunal


Direct Taxation

The present batch of Civil Appeals arise out of judgments and orders passed by the various High Courts, dismissing 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 arises for consideration under Section 260A of the Income Tax Act, 1961 (‘IT Act’).

The short question which is posed for the consideration of this Court is, 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 IT Act?

While determining the arm’s length price, 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 arm’s 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 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.

When the determination of the arm’s length price is challenged before the High Court, it is always open for the High Court to consider and examine whether the arm’s 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 selection of filters and examine whether the same is done judiciously and on the basis of the relevant material/evidence on record. The High Court can also examine 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.

Thus, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm’s length price. The impugned judgments and orders passed by the respective High Courts are hereby quashed and set aside. The matters are remitted back to the respective High Courts to decide and dispose of the appeals afresh. Appeals allowed


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