As per section 260A of the Income Tax Act, an appeal shall lie to the High Court from order passed by ITAT, if the High Court is satisfied that the case involves a substantial question of law.  In the context of Transfer Pricing, an issue arises that what circumstances substantial question of law arises.  This issue has been dealt in following cases:

Principal CIT vs. Softbrands India P. Ltd.; 406 ITR 513 (Kar HC) – The Revenue filed appeal before the HC raising grounds on selection of comparables and application of filters.  The HC held that the pick of comparables, short-listing of them, applying of filters, etc., are all fact finding exercises and therefore the final orders passed by the Tribunal are binding on the lower authorities of the Department as well as the High Court.  The HC observed that existence of a substantial question of law is a sine qua non for maintaining an appeal before the High Court.  The High Court observed that it may determine any issue which (a) has not been determined by the Tribunal or (b) has been wrongly determined by the Tribunal, only if the High Court comes to the conclusion that by reason of the decision on substantial question of law rendered by it, such a determination of an issue of fact also would be necessary and incidental to the answer given by it to the substantial question of law arising and formulated by it.

The HC concluded that “from the perusal of the Tribunal’s order, it was apparent that individual cases of such comparables had been considered, analysed and discussed by the Tribunal and while some comparables were found to be appropriate and really comparable to the facts of the assessee, some were not. The Tribunal had given cogent reasons and detailed findings upon discussing each case of comparable corporate properly. Whether or not the comparables had been rightly picked up or filters for arriving at the correct list of comparables had been rightly applied, did not give rise to any substantial question of law.”  Accordingly, the appeal of Revenue was dismissed.

Sap Labs India Private Limited Vs. ITO – [2023] 149 327 (SC) – The Supreme Court reverses/sets aside Karnataka HC judgment in Softbrands on issue of what constitutes a ‘substantial question of law’.

The SC has held that 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.”; 

The SC held that HC can examine the issues of comparability as also selection of filters, especially whether the same has been done ‘judiciously’ and based on evidence/material on record. The SC observes that “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”. SC has further held that “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 SC has remitted the cases back to the concerned High Courts to decide and dispose of the respective appeals afresh in light of the observations made and to examine in each and every case whether the ITAT has followed the guidelines laid down under the Act and the Rules while determining the ALP. The SC has clarified that it has not expressed any opinion on the ALP determination in specific cases and calls for completion of this exercise, preferably within 9 months from the date of receipt of the present order by the respective High Courts.

MCCAIN FOODS INDIA PVT LTD TS-885-HC-2017(DEL)-TP – The HC held that with respect to selection of method, there is no substantial question of law.

PCIT v EVALUESERVE.COM PVT LTD TS-859-HC-2017(DEL)-TP – The HC held that selection of Mold-Tek for ITES segment is pure question of fact.

MAKEMY TRIP INDIA PVT LTD TS-871-HC-2017(DEL)-TP  –  The HC held that appropriateness of method is not question of law.

ST MICROELECTRONICS PRIVATE LTD TS-850-HC-2017(DEL)-TP – The ITAT had rejected comparables following decision in the case of Hewlett Packard Global Soft.  The ITAT extracted 26 pages of HP decision containing analysis of 16 comparables. The HC held that ITAT had followed decision in the case of Hewlett Packard Global Soft post detailed analysis and no substantial question of law arises.  The High Court observed that “The Revenue or for that matter any party may be correct in contending, that a blind application of precedent, merely because in a previous ruling the Tribunal accepted or did not accept the comparables, cannot per se be a ground for excluding it or including it later. At the same time, while testing the application of that Rule, the Court has to be careful to discern whether, in fact, the subsequent ruling, which relies on the previous ruling, carries out such a factual analysis. In this case, the ITAT clearly did communicate and carry out such a functional and factual analysis.”

NETWORK PROGRAMS INDIA LTD TS-883-HC-2017(DEL)-TP – The HC held that allocation of expense does not give rise to substantial question of law.

WSP CONSULTANTS INDIA PVT LTD TS-861-HC-2017(DEL)-TP –  The HC held that inclusion or exclusion of comparables cannot be treated as a question of law unless it is demonstrated that the lower authorities have taken into account irrelevant consideration or excluded relevant consideration in ALP determination.

Sojitz India Pvt Ltd [TS-704-HC-2017(DEL)-TP] – The ITAT dealt with inclusion and exclusion of comparables.  The HC noted that ITAT order gave detailed reasons in support of its conclusion.  The HC held that exclusion/inclusion of comparables is by and large an exercise of analysis of facts.  The HC further noted that the memorandum of appeal filed by Revenue and a question of law raised for its consideration did not mention a specific plea that the ITAT order was perverse. The HC observed that “the ground of perversity is not to be casually urged. It has to be supported by a proper pleading which again has to be on the basis of a detailed study of the impugned order of the ITAT pointing out to the High Court in what manner the ITAT’s conclusions can be said to be perverse. This condition is not met in the present case”.  SOJITZ INDIA PVT LTD [TS-728-SC-2018-TP] – SC Dismisses Revenue’s SLP.

ESPN SOFTWARE INDIA LTD TS-873-HC-2017(DEL)-TP – The HC held that aggregation of businesses is pure question of fact.

Same Deutz Fahrenheit India Pvt ltd TS-973-HC-2017(MAD)-TP, 89 47 –  Held that selection of comparable is a factual issue and not question of law.  The HC held that Government company can be taken as comparable and turnover not relevant factor in determining comparability.

Becton Dickinson [TS-45-HC-2018(DEL)-TP]  – The HC held that “exclusion or inclusion of one or the other comparable would by itself not constitute a question of law unless it is shown that there are important functional dissimilarities or that vital material facts which go to the route of profitability or other material circumstances are involved”.  Also refer Becton Dickinson India Pvt Ltd TS-105-HC-2018(Del)-TP.

E.I.DUPONT INDIA TS-138-HC-2018(DEL)-TP – The HC held that no discussion on foreign AE has tested party by CIT(A) and Tribunal.  Therefore no question of law arises.

International Metro Civil Contractors TS-175-HC-2018(BOM)-TP – HO expenses of JV partners allocated to the extent of 8.5% of turnover.  Assessee produced CA certificate and basis of allocation.  The HC held that no question of law arises.

TIBCO Software (India) Pvt Ltd [TS-1077-HC-2018(BOM)-TP] – The HC held that comparable selection is not necessarily a question of law.

Honeywell Turbo (I) Pvt Ltd [TS-80-HC-2019(BOM)-TP] – The HC observed that ITAT had rendered a finding of fact, which was not shown to be perverse in any manner by the Revenue and hence, did not give rise to any substantial question of law.  The ITAT had excluded ICRA Online Ltd under the business support services segment on grounds of high profit margins and fluctuating margins. Further, ITAT included ACE Softwares Exports Ltd under the engineering segment on ground that it is engaged in similar activities as assessee.

PYRAMID CONSULTING PVT LTD vs ACIT TS-419-HC-2019(DEL)-TP  – HC held that exclusion of comparable is not substantial question of law. However, the HC observed that in the present case, since ITAT  has overlooked the Assessee’s objection about the HCCA being functionally different and the same is not discussed by ITAT in its order, the same is remanded back to TPO to check the functionality of HCCA.

Gulbrandsen Chemicals Pvt Ltd [TS-466-HC-2020(GUJ)-TP]; 119 52 – The HC Dismissed Revenue’s appeal absent question of law much less any substantial question of law on finding that ITAT had considered the voluminous documentary evidence on record for the purpose of selection of MAM.  The HC observes that the order of ITAT could not be termed as perverse or contrary to the evidence on record.

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