The Supreme Court has held that there cannot be any absolute proposition of law that in cases where the Tribunal has determined the arm’s length price it cannot be the subject matter of scrutiny by the High Court.

The Court added 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 Income Tax Act and the Rules.

The bench of Justice MR Shah and Justice MM Sundresh 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 Court set aside the view taken by various High Courts more particularly the Karnataka High Court holding 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.

ASG Balbir Singh appeared for the appellant-revenue whereas Senior Advocate Arvind P. Datar appeared for assesses.

The Court noted 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.

The Court 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 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 Court said.

The Court further added that “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.”

Thus the Court quashed and set aside the impugned judgments and orders passed by the respective High Courts and remitted the matter back to the respective High Courts to dispose of the appeals afresh while examining 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.

Cause Title- Sap Labs India Private Limited v. Income Tax Officer, Circle 6, Bangalore with connected matters

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Justice MR ShahJustice MM Sundresh

Ashish Shaji