The article analyses the power of the High Court to determine the ‘arms-length price’ under provisions of section 260A of the Income Tax Act, 1961 by considering it as a 'substantial question of law', in view of the recent judgement of the Supreme Court of India in the matter of SAP Labs India Private Limited vs Income Tax Officer, Circle 6, Bangalore
Background of the matter
The High Court of Karnataka in the case of PCIT v. Softbrands India (P) Limited (2018) had held that the determination of the Arm's length price of an international transaction is a ‘question of fact’ and not a ‘substantial question of law’ and hence the High Court cannot interfere in the same. It was also observed by the High Court in the said matter that once the ITAT determines the arm’s length price the same cannot be subject to judicial scrutiny or scrutiny in an appeal under section 260A of the Income Tax Act. A batch of appeals was filed before the Supreme Court of India, questioning the said decision, wherein it was argued that, the conclusion arrived at by the High Court with respect to the absoluteness of the decisions taken by the ITAT is erroneous. Transfer Pricing analysis involves benchmarking of controlled transactions with uncontrolled transactions (terms specifically defined in the IT Act and the Rules) and is largely a statistical exercise using the database of companies in the public domain as specifically defined in the IT Act and the Rules, referred hereinabove. In the specific facts of the batch of cases wherein the department has approached this Court, the exercise of application of detailed guidelines set out in the IT Act and the Rules was indeed carried out and ironed out by Tribunal with the assistance of taxpayer's representatives and department officers by looking publicly available information mostly in the form of audited financials etc., of companies as prescribed in the IT Act and the Rules. The ITAT is painting all assessee with the same brush and hence the determination without due weightage to the facts of each case is perverse and hence to be adjudged as a ‘substantial question of law’, which is appealable.
The questions raised in the appeal.
Section 92, 92A to 92CA, 92D, 92E and 92F and Rules 10A to 10E of the Income Tax Rules 1962 (‘IT Rules’) deals with the scheme of transfer pricing /arm’s length price. As the determination of the applicability of the transfer pricing and the arrival of arm’s length price is as per the guidelines stipulated by the Act, the High Courts are having the jurisdiction to review the decisions taken by the ITAT.
Section 92C(1) thus visualizes the determination of the “arms-length price” (ALP) by any of five enumerated methods, “being the most appropriate method”, having regard to the “nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the board may prescribe, namely (a) comparable uncontrolled price method, (b) resale price method, (c) cost + method, (d) profit split method, (e) transactional net margin method, (f) any such other method as may be prescribed by the board. Where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices.”
Rule 10B of the Rules prescribes the determination of arm's length price under Section 92C. The first step in all methods is the evaluation of differences between the international transaction undertaken with the “unrelated enterprise performing the comparable functions” in similar circumstances. Rule 10B of the Income-tax Rules inter alia, provides for various methods for the determination of the arm's length price. Rule 10B(1)(e) prescribes the “transactional net margin method” (TNMM) with which the present case is concerned.
It was pleaded before the Supreme Court that the determination of the arm’s length price as per the guidelines stipulated under the Act and the Rules, the determination can be considered perverse, which enables the High Court to interfere in the said determination.
The Supreme Court had in the appeals filed before it, considered whether the determination of the arms-length price by ITAT is a ‘substantial question of law’ or ‘a question of fact’. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on (i) no evidence; and/or (ii) while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration, or (iii) legal principles have not been applied in appreciating the evidence; or (iv) when the evidence has been misread. The High Courts as well as this Court have consistently held that the Tribunal being a final fact-finding authority, in the absence of demonstrated perversity in its finding, interference therewith by the High Court is not warranted.
Decision of the Supreme Court
In order to raise a matter as one with ‘substantial question of law’, the perversity of the Tribunal has to be argued, pleaded and demonstrated. In the absence of perversity, the objections raised can only be considered as a ‘question of fact’.
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 dehors the relevant provisions of the guidelines, , can be considered 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.
Whether the comparable transactions have been taken into consideration properly or not, i.e., to the extent noncomparable transactions are considered comparable transactions or not can be determined by the High Court. 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 arm’s length price by the Tribunal is final and cannot be a subject matter of scrutiny under Section 260A of the IT Act cannot be accepted.
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. Therefore, the absolute proposition of law laid down by the Karnataka High Court in the case of Softbrands India (P) ltd. (supra) that in the matter of transfer pricing, the determination of the arm’s length price by the Tribunal shall be final and cannot be the 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.
As observed hereinabove, 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.
Bijoy P Pulipra LL.M, FCS