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Supreme Court of India rules on the admissibility of transfer pricing appeals by High Courts
This Tax Alert summarizes the decision of the Supreme Court of India (SC) on the admissibility of transfer pricing (TP) appeals by High Courts (HC). The SC pronounced its ruling on 19 April 2023 in a batch of appeals involving several taxpayers, with SAP Labs India Private Ltd.[1] being the lead case.
Under the Indian Income-tax law (ITL), an appeal against an order of an Income-tax Appellate Tribunal (Tribunal), which is the second-level appellate forum in the hierarchy of appellate authorities, can be made to the jurisdictional HC. However, an HC can only admit an appeal if it is satisfied that the case involves a ”substantial question of law.” In the case of Softbrands India Private Ltd.[2] , the Karnataka HC ruled that the Tribunal is the final fact-finding authority and the jurisdiction to consider the factual nature of issues is with the Tribunal. As long as there is no unreasonableness in the order of the Tribunal in the findings of the fact, the same does not qualify to be a ”substantial question of law.” The HC also held that issues pertaining to selection of comparable data and criteria for comparability while undertaking an economic analysis in a TP study do not give rise to a “substantial question of law.”
The SC has reversed the order of the HC and ruled that there cannot be an absolute proposition of law and that in all cases where the Tribunal has determined the arm’s length price (ALP) the same is final and cannot be the subject matter of scrutiny by the HC in an appeal. According to the SC, in an appeal involving TP issues it is always open for a HC to examine in each case whether the provisions of the ITL dealing with TP have been followed or not and whether there is any perversity in the findings recorded by the Tribunal while determining the ALP.
While the ruling is expected to provide better clarity to taxpayers as well as tax authorities on the admissibility of TP appeals by HCs, it is also likely to result in proliferation of appeals and add to the backlog of cases. Taxpayers would accordingly need to consider their strategies for TP controversy management in India, including use of alternative channels such as Mutual Agreement Procedure (MAP) and Advanced Pricing Agreements (APAs).