Summary
In a batch of appeals, mostly by the Revenue, High Courts had dismissed appeals under Section 260A of the Income Tax Act against the Tribunal's determination of arm's length price in transfer pricing matters, following PCIT v. Softbrands India, on the footing that the Tribunal is the final fact-finding authority and no substantial question of law arises unless perversity is pleaded and demonstrated. The Supreme Court held that there is no absolute proposition that the Tribunal's determination is final: the High Court may always examine whether the guidelines in Chapter X of the Act and Rules 10A to 10E were followed, whether comparables and filters were selected judiciously, and whether the findings are perverse, perversity itself being a substantial question of law. All the judgments were set aside and the appeals remitted.
Issues
- Whether the determination of arm's length price by the Income Tax Appellate Tribunal in transfer pricing matters attains finality so that the High Court is precluded from examining it in an appeal under Section 260A of the Income Tax Act, 1961.
Provisions considered
- Section 260A, Income Tax Act, 1961An appeal lies to the High Court on a substantial question of law; a determination of arm's length price made de hors the statutory guidelines is perverse, and perversity is itself a substantial question of law open to scrutiny. (¶¶ 5, 7, 8)
- Chapter X, Sections 92, 92A to 92CA, 92D, 92E and 92F, particularly Section 92C, Income Tax Act, 1961Prescribe the methods and factors for determining arm's length price, including the most appropriate method and the arithmetical mean where more than one price results; the Tribunal must follow these guidelines and the High Court may examine whether it did. (¶¶ 6, 7)
- Rules 10A to 10E, particularly Rule 10B(1)(e) (transactional net margin method), Income Tax Rules, 1962Prescribe the manner of determining arm's length price under Section 92C; any determination ignoring them may be treated as perverse. (¶¶ 6, 7)
Held
- The view in Softbrands India that in transfer pricing matters the Tribunal's determination of arm's length price is final and cannot be scrutinised under Section 260A cannot be accepted; there is no absolute proposition of law to that effect, and when the determination is challenged the High Court may examine whether the arm's length price was determined in accordance with the guidelines under Chapter X of the Act and Rules 10A to 10E, whether the comparability of companies and selection of filters were decided judiciously on relevant material, and whether non-comparable transactions were treated as comparable. (¶¶ 7, 8)
- In each case the High Court should examine, within the parameters of Section 260A, whether the statutory guidelines were followed in determining the arm's length price and whether the Tribunal's findings are perverse; the Court expressed no view on the merits of any assessee's case. (¶¶ 8, 9, 10)
Result
All appeals allowed; the judgments of the respective High Courts dismissing the Revenue's and the assessees' appeals quashed and set aside; matters remitted to the respective High Courts to decide the appeals afresh, examining in each case whether the guidelines under the Act and Rules were followed in determining the arm's length price and whether the Tribunal's findings are perverse, preferably within nine months. No costs.