2023 (4) TMI 859 - SC - Income Tax

Supreme Court: Tribunal's Arm's Length Price rulings under Income Tax Act subject to judicial review

The Supreme Court held that the determination of Arm's Length Price (ALP) by the Tribunal is subject to judicial scrutiny under Section 260A of the Income ... Scrutiny by the High Court in an appeal u/s 260A for Determination of the arm’s length price made by the Tribunal - 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? - HELD THAT:- 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 u/s 260A - 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. 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. Therefore, the view taken by the Karnataka High Court in the case of Softbrands India (P) Ltd. [2018 (6) TMI 1327 - KARNATAKA HIGH COURT] 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. As observed 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 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. 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. Issues Involved:1. Determination of Arm's Length Price (ALP) by the Tribunal.2. Scope of judicial scrutiny under Section 260A of the Income Tax Act, 1961.Summary:Issue 1: Determination of Arm's Length Price (ALP) by the TribunalThe present batch of Civil Appeals arises from judgments of various High Courts, notably the Karnataka High Court, which dismissed appeals challenging the Income Tax Appellate Tribunal's (Tribunal) findings on 'Transfer Pricing' issues. The High Courts held that the Tribunal's decisions were questions of fact, and without demonstrated perversity, no substantial question of law arises under Section 260A of the Income Tax Act, 1961 (IT Act). The High Courts relied on the precedent set in PCIT v. Softbrands India (P) Ltd., which stated that the Tribunal is the final fact-finding authority on ALP determinations.Issue 2: Scope of judicial scrutiny under Section 260A of the Income Tax Act, 1961The Revenue argued that the Karnataka High Court's decision in Softbrands India (P) Ltd. erroneously held that the Tribunal's determination of ALP is not subject to judicial scrutiny under Section 260A. They contended that there is no absolute proposition of law precluding High Court interference in ALP determinations by the Tribunal. The Revenue emphasized that the High Court should examine whether the Tribunal followed the guidelines under Chapter X of the IT Act and Rules 10A to 10E of the Income Tax Rules. If the Tribunal's determination is de hors these guidelines, it may be considered perverse and subject to scrutiny by the High Court.The assessees countered that once the Tribunal determines the ALP considering relevant guidelines, it cannot be challenged as a substantial question of law under Section 260A. They argued that a substantial question of law arises only when there is room for difference of opinion, and the Tribunal's findings are based on no evidence, inadmissible evidence, or misreading of evidence. They cited precedents affirming that the Tribunal is the final fact-finding authority, and without demonstrated perversity, High Court interference is unwarranted.Judgment:The Supreme Court held that the determination of ALP by the Tribunal is not absolutely final and can be scrutinized by the High Court under Section 260A. The High Court can examine whether the Tribunal followed the guidelines under the IT Act and Rules while determining ALP and whether the findings are perverse. The view taken by the Karnataka High Court in Softbrands India (P) Ltd. that ALP determinations by the Tribunal are not subject to scrutiny under Section 260A was rejected.The Supreme Court set aside the impugned judgments and orders of the High Courts and remitted the matters back to the respective High Courts to decide afresh. The High Courts are to examine whether the Tribunal followed the guidelines under the Act and Rules and whether the Tribunal's findings are perverse. The exercise is to be completed within nine months. The Supreme Court clarified that it did not enter into the merits of the cases or express any opinion on the ALP determinations.All appeals were allowed, and no costs were awarded.