Supreme Court in a transfer pricing matter reversed its earlier judgment in the matter of Softbands India and held that the determination of Arm’s length price by the tribunal is not conclusive and Higher courts can re-assess the point.

SAP LABS INDIA PRIVATE LIMITED (APPELLANT) Vs. INCOME TAX OFFICER, CIRCLE 6, BANGALORE (RESPONDENT)

(CIVIL APPEAL NO. 8463 OF 2022 arising from S.L.P. No.28652/2018)

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(2JB, M.R. SHAH and M.M. SUNDRESH JJ., delivered by M.R. SHAH, J.]

Facts: Present batch of Appeals mostly by the Revenue and few of the assessees arises out of judgments and orders passed by the various High Courts, more particularly the High Court of Karnataka, 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 no substantial question of law arises for consideration under Section 260A of the Income Tax Act,1961.The High Court of Karnataka has dismissed the appeals preferred by the Revenue by relying upon its earlier judgment in the case of PCIT v. Softbrands India (P) Ltd., reported in (2018)

Issue: 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?

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Arguments on behalf of counsel for appellant: Shri Balbir Singh, learned ASG of India

It is submitted that Karnataka High Court in the case of Softbrands India (P) Ltd. has erroneously held that the Tribunal is the final fact-finding authority on determining the arm’s length price and therefore once the Tribunal determines the arm’s length price the same cannot be subject to judicial scrutiny/scrutiny in an appeal under Section 260A of the IT Act. It is further submitted that under the scheme of transfer pricing, the arm’s length price is to be determined taking into consideration the guidelines stipulated under the aforesaid provisions of the IT Act and the Rules, and therefore it is always open for the High Court to consider and/or examine, whether the guidelines stipulated under the Act and the Rules, while determining the arm’s length price have been followed by the Tribunal or not. It is further submitted that if the arm’s length price is determined by the Tribunal de hors the guidelines stipulated under the Act and the Rules, more particularly Rules 10A to 10E of the Rules, the determination can be said to be perverse which is always subject to the scrutiny by the High Court in an appeal under Section 260A of the Act, and therefore the view taken by the High Court of Karnataka in the case of Softbrands India (P) Ltd. is required to be corrected by this Court.

Arguments on behalf of counsel for respondent: S/Shri Arvind P. Datar, Tarun Gulati, Percy Pardiwala

It is submitted that once the arm’s length price is determined by the Tribunal taking into consideration the relevant guidelines, thereafter challenge to the same cannot be said to be a substantial question of law, to be considered in an appeal under Section 260A of the IT Act. It is further submitted that appeal shall lie to the High Court from every order of the Tribunal only if the High Court is satisfied that the case involves a substantial question of law which can arise in a case only where there is room for difference of opinion on it as per Softbrands India (P) Ltd. Case. It is further submitted that perversity, if any, not only should be specifically alleged in the appeal before the High Court but also, as held by the High Court in the case of Softbrands India (P) Ltd., the same ought to have been demonstrated. It is further submitted that considered view may be taken after taking into account pleadings before the High Court, pleadings in the appeals before this Court in Assessees and department appeals and not based on sweeping generalization. It is submitted that therefore the impugned judgments and orders passed by the High Court dismissing the appeals preferred by the Revenue are not required to be interfered with by this Court.

Held: The court while allowing the present appeals, quashed and set aside the impugned judgments and orders passed by the High Court, and over ruled the law laid in Softbrands India case while holding that, “opinion that the absolute proposition of law laid down by the Karnataka High Court in the case of Softbrands India (P) ltd. that in the matter of transfer pricing, determination of the arm’s length price by the Tribunal shall be final and cannot be subject matter of scrutiny and the High Court is precluded from examining the correctness of the determination of the arm’s length price by the Tribunal in an appeal under Section 260A of the IT Act on the ground that it cannot be said to be raising a substantial question of law cannot be accepted….….within the parameters of Section 260A of the IT Act in an appeal challenging the determination of the arm’s length price, 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, referred to hereinabove, 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 court thereby remitted back the matters to the respective High Courts to decide and dispose of the appeals afresh in light of the observations made hereinabove and to examine whether in each case while determining the arm’s length price the guidelines laid down under the Act and the Rules, referred to hereinabove, are followed or not and whether the findings recorded by the Tribunal while determining the arm’s length price are perverse or not.

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