As per case facts, the Revenue and some assessees challenged High Court judgments, especially from Karnataka, which dismissed appeals against the Income Tax Appellate Tribunal's Transfer Pricing findings. The High ...
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8463 OF 2022
(Arising from S.L.P.(Civil) No.28652/2018)
SAP LABS INDIA PRIVATE LIMITED ..APPELLANT
VERSUS
INCOME TAX OFFICER, CIRCLE 6,
BANGALORE ..RESPONDENT
WITH
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J U D G M E N T
M.R. SHAH, J.
1.The present batch of Civil 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 (for short, ‘Tribunal’) on ‘Transfer
Pricing’ issues on the ground that the issues decided by
the Tribunal are questions of fact and as perversity is
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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 (for short, ‘IT Act’). 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)
406 ITR 513 (Karnataka).
2.Shri Balbir Singh, learned Additional Solicitor
General of India, appearing on behalf of the Revenue has
vehemently submitted that the Karnataka High Court in
the case of Softbrands India (P) Ltd. (supra) 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.
2.1Shri Balbir Singh, learned ASG has submitted that
there cannot be any absolute proposition of law that
against the decision of the Tribunal determining the arm’s
length price, there shall not be any interference by the
High Court in an appeal under Section 260A of the IT Act.
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2.2Shri Balbir Singh, learned ASG has taken us to the
scheme of transfer pricing/arm’s length price to be
determined under Chapter X of the IT Act, more
particularly Sections 92, 92A to 92CA, 92D, 92E and 92F
and Rules 10A to 10E of the Income Tax Rules, 1962 (for
short, ‘IT Rules’). It is 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. It is
submitted that 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.
2.3It is 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.
2.4It is submitted that therefore the view taken by the
High Court of Karnataka in the case of Softbrands India
(P) Ltd. (supra) is required to be corrected by this Court.
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3.S/Shri Arvind P. Datar, Tarun Gulati, Percy
Pardiwala, learned Senior Advocates and other learned
counsel appearing on behalf of the respective assessees
have vehemently 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.
3.1It is submitted on behalf of the assessees that
Section 260A of the IT Act provides that an 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. Sub-section (6) thereof
provides that the High Court may determine any issue
which (a) has not been determined by the Appellate
Tribunal; or (b) has been wrongly determined by the
Appellate Tribunal, by reason of a decision on such
question of law as is referred to in sub-section(1).
3.2It is submitted that the said provision came up for
consideration in a catena of decisions. It is a settled
position that jurisdiction under section 260A of the IT Act
cannot be invoked unless there arises a substantial
question of law. This is precisely what is held by the High
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Court of Karnataka in the judgment in Softbrands India
(P) Ltd. (supra), by relying on a series of judgments of
this Court.
3.3It is submitted that a substantial question of law can
arise in a case only when a question of law is fairly
arguable, where there is room for difference of opinion on
it.
3.4It is submitted that 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.
In support of his submission, learned senior
counsel/counsel have relied upon the decisions of this
Court in the cases of Vijay Kumar Talwar v. CIT, (2011)
1 SCC 673 and Sir Chunilal V. Mehta and Sons Ltd. v.
CA 8463/2022 ETC. Page 15 of 29
Century Spinning and Manufacturing Co. Ltd.,
reported in AIR 1962 SC 1314.
3.5It 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. (supra), the same ought to
have been demonstrated.
3.6It is further submitted that some instances where a
substantial question of law can arise in Transfer Pricing
matter is where the issue relates to whether at all a
transaction falls within the definition of ‘international
transaction’, or if two enterprises are ‘associated
enterprises’ as per the definition under the IT Act. The
question of comparability of two companies or selection of
filters are usually question of fact, which primarily depend
on the functions performed, assets employed and risks
assumed by the tested party as well as comparable
transactions. Unless perversity in the findings of the
Tribunal is pleaded and demonstrated, by placing material
on record, no substantial question of law can arise and,
therefore, there can be no interference by the High Court.
To the extent there can be no dispute between the parties,
in view of the settled legal proposition dealing with
CA 8463/2022 ETC. Page 16 of 29
sections 260A of the Act and section 100 of the Code of
Civil Procedure, 1908.
3.7It is submitted that in all the appeals filed by the
Revenue before the High Court, the primary issues raised
pertained to inclusion and exclusion of a few comparables
and selection of filters, which are essentially questions of
fact and there is a consensus ad idem to this extent
between the parties. In none of the appeals has the
Revenue pleaded, argued, or placed any material to
demonstrate perversity in the order of the Tribunal.
Therefore, the High Court after noting the questions
raised, findings rendered by the Tribunal and noting that
perversity is neither pleaded/argued nor demonstrated by
placing any material, dismissed the appeals, by relying on
principles laid down in Softbrands India (P) Ltd. (supra).
Therefore, no error can be attributed to the orders passed
by the High Court dismissing the appeals, in such
circumstances.
3.8 It is next submitted that the submission of the
Revenue that in each case the High Court should
examine whether the guidelines laid down in the IT Act
and the Rules are followed to determine the arm’s length
price is not correct and moreover is too farfetched, as the
CA 8463/2022 ETC. Page 17 of 29
High Court can only decide substantial questions of law
raised and arising before it.
3.9It is further submitted that the Revenue’s submission
that the judgment in Softbrands India (P) Ltd. (supra)
indicates that there will be no interference even where
inconsistent views are taken by the Tribunal is
misconceived, because, it is quite possible that in view of
the particular set of facts in one case, one Bench
excludes a company and in another case includes the
same in view of different set of facts, or similarly applies a
filter in one and not in another. This is what is in fact held
in Softbrands India (P) Ltd. (supra) (please see para
45). In almost all cases it is the Revenue which uses the
same set of comparables for determining an arm’s length
price, thus, painting all assessees with the same brush.
These are questions of facts, which would require
determination on a case by case basis, and unless
perversity is demonstrated in the order of the Tribunal, no
interference is called for by the High Court.
3.10It is further submitted that Transfer Pricing analysis
involves benchmarking of controlled transactions with
uncontrolled transactions (terms specifically defined in the
IT Act and the Rules) is largely a statistical exercise using
database of companies in public domain as specifically
CA 8463/2022 ETC. Page 18 of 29
defined in the IT Act and the Rules, referred hereinabove.
In the specific facts of batch of cases wherein 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
assistance of tax payers representatives and department
officers by looking a publicly available information mostly
in the form of audited financials etc., of companies as
prescribed in the IT Act and the Rules. Contrasting the
appeals/ pleadings filed before High Court of Karnataka
by taxpayers and department available as part of batch of
appeals filed would enable appreciation of the case made
out before the High Court. This is essential to appreciate
the correctness of conclusions by the High Court in this
batch of appeals/petitions. Tax department is attempting
to seek intervention of this Court in present batch of
department’s cases without reference to/de hors any of
this relevant background facts. Over last two decades,
Tribunal and various High Courts have applied the
guidelines laid down in the IT Act and the Rules
contributing to evolution of a process. Intervention in the
department’s appeals in present batch of cases and/or
laying down any guidelines ignoring this background could
potentially disturb the well settled principles under section
CA 8463/2022 ETC. Page 19 of 29
260A (equivalent to section 100 CPC). In background
facts or present batch of department’s appeals,
acceptance of department’s contention about lack of
application of mind by the High Court would cast an unjust
burden on the High Court to undertake a suo moto
exploration of facts not placed before it, make out a case
for the department and decide the same without any
assistance from the appellant before the High Court. Any
such guidelines would upset settled law not only with
reference to section 260A but also impact process under
section 100 CPC. Unlike the assessees cases involved in
this batch of appeals, it was never the case of the
department that the High Court has not considered any of
its written/ oral pleadings before the High Court. It is
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.
3.11 It is submitted that Transfer Pricing provisions are
essentially a valuation exercise involving determination of
a statistical sample of comparables. Under Section
92C(2) of the IT Act, Arm’s Length Price is always in a
range. It is not a science but it is an art. This Court in
CA 8463/2022 ETC. Page 20 of 29
G.L. Sutania and Anr v SEBI and Ors. reported in 2007
(5) SCC 133 at paras 84 and 85, have unequivocally
stated that valuation is a question of fact.
3.12It is submitted that the case of the Revenue is that
the proposition in Softbrands India (P) Ltd. (supra) that
no question of law can arise out of the transfer pricing
matters involving selection of comparables or application
of filters, and the Tribunal is the final fact finding authority
and all the questions decided by the Tribunal are
questions of fact is too broadly stated, and as a result of
this proposition, it would appear that the High Court has
held that no appeal would lie to it under section 260A of
the IT Act.
3.13It is further submitted by the learned counsel
appearing on behalf of the respective assessees in the
appeals preferred by the Revenue that in all these cases,
the High Court has found that there is no perversity by the
Tribunal in determining the arm’s length price and
therefore no substantial question of law arises as no
perversity is pleaded and demonstrated. 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.
CA 8463/2022 ETC. Page 21 of 29
4.We have heard Shri Balbir Singh, learned ASG
appearing on behalf of the Revenue and learned senior
counsel/counsel appearing on behalf of the respective
assessees at length.
5.In the present batch of Civil Appeals preferred by
the Revenue, the respective High Courts, more
particularly the Karnataka High Court have/has dismissed
the appeals preferred by the Revenue in which the
Revenue challenged the determination of the arm’s length
price by the Tribunal, relying upon and/or considering the
decision of the Karnataka High Court in the case of
Softbrands India (P) Ltd. (supra). In the case of
Softbrands India (P) Ltd. (supra), the High Court has
taken the view that the determination of arm’s length price
by the Tribunal shall be final against which an appeal
under Section 260A of the IT Act is not required to be
entertained.
Therefore, 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 Act?
CA 8463/2022 ETC. Page 22 of 29
6.While determining the aforesaid issue, the relevant
provisions for determining the arm’s length price under the
IT Act are required to be referred to.
Section 92-C which is relevant, for the purpose of
determining ALP inter alia, reads as follows:
“92C. (1) The arm's length price in relation to an
international transaction [or specified domestic
transaction] shall be determined by any of the following
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 plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the
Board.
(2) The most appropriate method referred to in sub-
section (1) shall be applied, for determination of arm's
length price, in the manner as may be prescribed:
Provided that 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:
** ** **
(3) Where during the course of any proceeding for the
assessment of income, the Assessing Officer is, on the
CA 8463/2022 ETC. Page 23 of 29
basis of material or information or document in his
possession, of the opinion that-
(a) the price charged or paid in an international
transaction [or specified domestic transaction] has not
been determined in accordance with sub-sections (1)
and (2); or
(b) any information and document relating to an
international transaction [or specified domestic
transaction] have not been kept and maintained by the
assessee in accordance with the provisions contained
in sub-section (1) of section 92D and the rules made in
this behalf; or
(c) the information or data used in computation of the
arm's length price is not reliable or correct; or
(d) the assessee has failed to furnish, within the
specified time, any information or document which he
was required to furnish by a notice issued under sub-
section (3) of section 92D, the Assessing Officer may
proceed to determine the arm's length price in relation
to the said international transaction [or specified
domestic transaction] in accordance with sub-sections
(1) and (2), on the basis of such material or information
or document available with him:
Provided that an opportunity shall be given by the
Assessing Officer by serving a notice calling upon the
assessee to show cause, on a date and time to be
specified in the notice, why the arm's length price
should not be so determined on the basis of material or
information or document in the possession of the
Assessing Officer.”
20. Section 92C(1) thus visualizes determination of the
“arms-length price” (ALP) by any of five enumerated
methods, “being the most appropriate method”, having
CA 8463/2022 ETC. Page 24 of 29
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
arithmetical mean of such prices.”
21. Rule 10B of the Rules prescribes the determination of
arm's length price under Section 92C. The first step in all
methods is 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 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. Rule 10B(1)(e) (i) is as under:
“10B. (1) Determination of arm's length price under
section 92C:— . .
************* *********
(e) transactional net margin method, by which,—
(i) the net profit margin realised by the enterprise from an
international transaction entered into with an associated
enterprise is computed in relation to costs incurred or
sales effected or assets employed or to be employed by
the enterprise or having regard to any other relevant
base.”
7.Therefore, while determining the arm’s length price,
the Tribunal has to follow the guidelines stipulated under
CA 8463/2022 ETC. Page 25 of 29
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, referred to hereinabove, 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-
CA 8463/2022 ETC. Page 26 of 29
comparable transactions are considered as comparable
transactions or not. 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 subject matter of scrutiny under
Section 260A of the IT Act cannot be accepted.
8.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, we are of the opinion that 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, 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. 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
CA 8463/2022 ETC. Page 27 of 29
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.
9.In view of the above, the impugned judgments and
orders passed by the High Court dismissing the
Revenue’s appeals and even the appeals preferred by the
assessees are required to be quashed and set aside and
the matters are required to be remitted back to the
concerned High Courts to decide and dispose of the
respective appeals afresh in light of the observations
made hereinabove and examine in each and every case
whether the guidelines laid down under the Act and the
Rules, referred to hereinabove, are followed while
determining the arm’s length price by the Tribunal or not
and to that extent whether the findings recorded by the
Tribunal while determining the arm’s length price are
perverse or not.
10.In view of the above and for the reasons stated
above, all these appeals are allowed. The impugned
judgments and orders passed by the respective High
Courts are hereby quashed and set aside. The matters
CA 8463/2022 ETC. Page 28 of 29
are remitted back 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. The aforesaid
exercise be completed, preferable within a period of nine
months from the date of receipt of the present order by
the respective High Courts. It is specifically observed that
we have not entered into the merits of the cases at all and
we have not expressed anything on the determination of
the arm’s length price in case of respective assessees,
either in favour of the assessees or in favour of the
Revenue. It is ultimately for the concerned High Court to
take a fresh decision, as observed hereinabove.
11.All these appeals stand allowed in terms of the
above. No costs.
……………………………..J.
[M.R. SHAH]
NEW DELHI; ……………………………..J.
APRIL 19, 2023. [M.M. SUNDRESH]
CA 8463/2022 ETC. Page 29 of 29
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