The Supreme Court examined whether determinations of arm’s length price made by the Income Tax Appellate Tribunal in transfer pricing matters attain finality and are immune from scrutiny by the High Court under Section 260A of the Income Tax Act, 1961, or whether such determinations can be examined where perversity or non-application of statutory guidelines is alleged.

The batch of appeals arose from judgments of various High Courts, particularly the High Court of Karnataka, which dismissed appeals filed under Section 260A on the ground that issues relating to selection of comparables, application of filters, and determination of arm’s length price are pure questions of fact. The High Courts relied heavily on the decision in PCIT v. Softbrands India Pvt. Ltd., holding that unless perversity is demonstrated, no substantial question of law arises.

The Revenue contended that the view taken in Softbrands India Pvt. Ltd. laid down an erroneous and overly broad proposition that determinations of arm’s length price by the Tribunal are final and cannot be scrutinised under Section 260A. It was argued that transfer pricing determinations must strictly comply with the framework laid down under Chapter X of the Act and Rules 10A to 10E of the Income Tax Rules, and any deviation therefrom gives rise to a substantial question of law.

The assessees contended that the Tribunal is the final fact-finding authority and that issues of comparability, selection of filters, and benchmarking analysis are factual in nature. It was submitted that interference by the High Court is permissible only where perversity is specifically pleaded and demonstrated, and that the High Courts were justified in dismissing the appeals where no such perversity was shown.

After examining the statutory framework governing transfer pricing, including Sections 92, 92A to 92F of the Act and Rules 10A to 10E, the Supreme Court held that there cannot be an absolute proposition that every determination of arm’s length price by the Tribunal is immune from scrutiny under Section 260A. The Court held that if the Tribunal determines the arm’s length price without adhering to the statutory guidelines, or if its findings are perverse, such determination can give rise to a substantial question of law.

The Court clarified that while the Tribunal is the final fact-finding authority, findings of fact can still be interfered with where they are based on no evidence, ignore relevant material, consider irrelevant material, misapply legal principles, or are otherwise perverse. In such cases, the High Court is empowered to examine whether the statutory framework governing transfer pricing has been correctly applied.

Accordingly, the Supreme Court disapproved the absolute proposition laid down in Softbrands India Pvt. Ltd. and held that High Courts are not precluded from examining transfer pricing determinations under Section 260A. The impugned judgments of the High Courts were set aside, and the matters were remanded to the respective High Courts for fresh consideration, with directions to examine in each case whether the guidelines under the Act and the Rules were followed and whether the findings of the Tribunal suffered from perversity.

The Supreme Court clarified that it had not expressed any opinion on the merits of the individual transfer pricing adjustments and left it open to the High Courts to decide the appeals afresh in accordance with law.

Source Link - https://api.sci.gov.in/supremecourt/2018/38332/38332_2018_4_1501_43620_Judgement_19-Apr-2023.pdf

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