Supreme Court: High Courts are not Precluded from Considering ITAT’s Determination of Arm’s Length Price under Section 260A of Income Tax Act, 1961

Supreme Court: High Courts are not Precluded from Considering ITAT’s Determination of Arm’s Length Price under Section 260A of Income Tax Act, 1961

The Supreme Court in a significant ruling has held that High Courts are not precluded from considering the determination of the arm’s length price determined by the Income Tax Appellate Tribunal (ITAT), in exercise of its powers under Section 260A of the Income Tax Act, 1961 (in short IT Act).

In the present case batch of Civil Appeals were preferred by the Revenue, the respective High Courts, more particularly the Karnataka High Court had 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 PCIT vs. Softbrands India (P) Ltd (2018).

In the case of Softbrands India (P) Ltd. (supra), the High Court viewed 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.

The question which was posed for the consideration before the division judges bench comprising of Justices M.R. Shah and M.M. Sundresh was, 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?

At the outset, the Apex Court stated that 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.

In this regard, the Court discerned, “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.”

The bench was of the considered view that 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.

“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-comparable transactions are considered as comparable transactions or not,” the bench observed.

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, stated the Court.

Thus, the Apex Court held that 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.

Accordingly, the impugned judgments and orders passed by the High Court dismissing the Revenue’s appeals and even the appeals preferred by the assessees were quashed and set aside by the Apex Court.

The Court further directed the matters to be remitted back to the concerned High Courts to decide and dispose of the respective appeals afresh.