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SC rules that determining correctness of ALP is an admissible question of law before HC

Supreme Court (“SC”) in a bunch of matters led by SAP Labs India Pvt. Ltd. (Civil Appeal No. 8463 of 2022) has recently reversed the decision of Karnataka High Court (“HC”) in the case of SoftBrands India (P) Ltd.[1], disregarding the view of HC that once the Tribunal has determined Arm’s Length Price (“ALP”), the same is final and cannot be a subject matter of scrutiny by the HC in an appeal u/s 260A of the Income-tax Act, 1961 (“the Act”) as it is not a question of law but of fact.

The Apex Court further held that when challenged before the HC, it is always open for it to examine whether the ALP has been determined in accordance with the guidelines stipulated under Chapter X of the Act namely, Sections 92, 92A to 92CA, 92D, 92E and 92F and Rules 10A to 10E of the Income-tax Rules, 1961 (“the relevant guidelines”).

Facts and Department’s contentions:

∞ Kar HC in Softbank (supra) dismissed the Department’s appeal on the ground that whether comparables have been rightly picked up or not, filters for arriving at the correct list of comparables have been rightly applied or not, do not give rise to any substantial question of law

∞ The matter travelled to the Apex Court wherein the Department argued that if ALP determined by the Tribunal is not in line with the relevant guidelines, such determination can be said to be perverse and should be subjected to scrutiny by the HC.

∞ The Department contended that the view taken in Softbank is required to be corrected.

Assessees’ contentions:

The Assesses, inter alia, contended as under:

∞ S. 260A provides that an appeal shall lie to the HC only in a case involving a substantial question of law.

∞ The question of comparability of two companies or selection of filters are usually question of fact, which primarily depend on the FAR analysis. Benchmarking of controlled transactions with uncontrolled transactions is largely a statistical exercise using database of companies in public domain.

∞ Unless perversity in the findings of the Tribunal is pleaded and demonstrated by placing material on record, which is absent in the present case, no substantial question of law can arise and therefore, there cannot be an interference by the HC.

SC’s ruling:

The key observations of the SC are summarised below:

∞ Any determination of ALP not in accordance with the relevant 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.

∞ There cannot be any absolute proposition of law that in all cases where the Tribunal has determined ALP, the same is final and cannot be the subject matter of appeal before HC.

∞ It is always open for the HC to examine whether ALP has been determined while taking into consideration the relevant guidelines. Even HC can examine the question of comparability of two companies or selection of filters etc.

∞ The view taken by Kar HC in Softbank cannot be accepted.

Our Views:

• The Assessee should maintain extensive and robust TP documentation which clearly brings out the methods used, FAR Analysis, selection of tested parties etc. to enable them to better substantiate their case before HC.
• Comparables selection and documentation would be critical. For eg:- As of now and correctly so, subsequent exclusion of a comparable, suo-moto included by Assessee at the time of benchmarking, is permissible by the Tribunal. However, with one more level of litigation now, it may get very complicated to substantiate the same.
• This judgement of Apex Court could result in increased litigation and could overburden the HC thereby resulting in delayed outcomes. Whether it would lead to setting aside matters back to ITAT or AO in most cases, is to be seen.
• Assessee may now be more inclined to resort to alternate, non-litigious ways of determining ALP such as APA/MAP, however that too has its own pros and cons and MAP and APA too may be time consuming.

The above document is contributed by – Ronak Doshi, Partner and Ayushi Modani, Senior Manager 

[1] [2018] 406 ITR 513 (Kar HC)

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