In the realm of transfer pricing, the interplay between law and facts is a critical determinant of the outcome of disputes. This analysis delves into significant judicial decisions, including SAP Labs India Private Limited vs. Income Tax Officer, Evalueserve.Com Pvt. Ltd. vs. The Principal Commissioner of Income Tax 3, and Principal Commissioner of Income Tax, Bangalore vs. Softbrands India (P.) Ltd.
The issue at hand revolves around the interpretation of “substantial question of law” versus “question of facts” in transfer pricing matters. The Supreme Court’s verdicts in these cases shed light on the fine line differentiating them.
On the perusal of the said rulings, the following observations has been made.
1. Evalueserve Judgement reiterates that unless there lies a substantial question of law, the Supreme Court cannot intervene on the decisions of the tribunal. It highlights that there has been specific peculiar facts which shows that it’s a question of fact and not law. This has been keenly pointed out through the extracts of the said ITAT order where it has stated that such comparable has been rejected by the Department due to lack of segmentalized analysis such as
i. BNR Udyog Ltd. where in the annual report it is seen that apart from medical transcription activities, it is also into medical billing and coding services. The functional profile of the medical transcription segment is almost akin to functions of Accentia Technologies Ltd. and again for the various activities of medical transcription, medical billing and coding services there is no separate segment. In the case of Evalueserve SEZ, the Tribunal after detail analysis has excluded the said comparable.
ii. Excel Infoways Ltd. where apart from ITeS-BPO segment, this company is also carrying business of infrastructure facility which almost constitutes 49% of the revenue. There are no segmental details for these two activities. The profit margin on such activity of development of infrastructure facility cannot be identified and therefore, it cannot be held that such a huge margin reported by the said company is on account of ITeS/BPO segment or development of infrastructure facility.
2. From the above, it can be inferentially portrayed that there had been no error in the implementation of the rules, regulations and guidelines prescribed by the legislation for determining the suitable comparable. There indeed existed a factual tussle where certain characteristics were to be spotlighted by the Revenue to establish that there was an error on the valuation made by the Assessee. Neither the Revenue nor the Assessee are challenging the guidelines or for that factor any method being used for arriving at such compatibles, rather have been stressed on the choice of such comparable.
3. Hence, Supreme Court was not wrong in its ratio to place its reasoning on the peculiarity of facts to show that there never existed a question of law.
However,
4. SAP Labs Judgement has categorically enumerated the possible challenges that can arise from the aspect of Transfer Pricing and the determination of Arm’s Length Price.
“It is further submitted that some instances where a substantial question of law can arise in Transfer Pricing matter is where the issue relates to whether at all a transaction falls within the definition of ‘international transaction’, or if two enterprises are ‘associated enterprises’ as per the definition under the IT Act. The question of comparability of two companies or selection of filters are usually question of fact, which primarily depend on the functions performed, assets employed and risks assumed by the tested party as well as comparable transactions. Unless perversity in the findings of the Tribunal is pleaded and demonstrated, by placing material on record, no substantial question of law can arise and, therefore, there can be no interference by the High Court.”
5. The Apex court has also opined that, “the High Court after noting the questions raised, findings rendered by the Tribunal and noting that perversity is neither pleaded/argued nor demonstrated by placing any material, dismissed the appeals, by relying on principles laid down in Softbrands India (P) Ltd. (supra). Therefore, no error can be attributed to the orders passed by the High Court dismissing the appeals, in such circumstances.” Thus, clarifies that the High Court has been bestowed with the powers to dwell into such appeal of determining the comparable if the material facts connecting to the mistake made by Revenue of not adhering to the guidelines is well established for the Court’s consideration. This has been further substantiated by the Court:
“In background facts or present batch of department’s appeals, acceptance of department’s contention about lack of application of mind by the High Court would cast an unjust burden on the High Court to undertake a suo moto exploration of facts not placed before it, make out a case for the department and decide the same without any assistance from the appellant before the High Court. Any such guidelines would upset settled law not only with reference to section 260A but also impact process under section 100 CPC.”
6. Further, the Apex Court has also mentioned in its judgement that the Bench has not been receipt to the Facts of all the SLPs that have been clubbed for the hearing along with SAP Labs. Meantime, the court has considered and sculptured the issue pertaining to the extent & finality of Tribunal’s power to determine the comparable for the purpose of Transfer Pricing. It has righly pointed out that
“Therefore, 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. 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. Therefore, 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 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. 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.”
7. Therefore, 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. If the further question as to when things can be under the purview of the Appellate Jurisdiction from ITAT, the answer would be when the Assessee or Revenue can contend on the non-adherence of the guidelines well supported by material records and facts, the parties may seek for appeal on the grounds of substantial question of law and the said contentions cannot be devoid of any merits as to it’s a challenge of factual matrix and not the law under use.
Remarks:
The SAP Labs Judgement has pointed out that mere unhappiness in the choice of comparable shall be substantial question of fact that the HC or the SC cannot entertain the appeals on. However, if such choiceof comparable has been supported by non-adherence of the guidelines and supported by material facts for the same, then it shall be substantial question of law over other. Hence, it can specifically be differentiated between Evalueserve, Softbrands & SAP Labs Judgement where the spotlighted aspects mentioned above show the transition of such reasoning of the Supreme Court in the same issue being considered. It is pertinent to note that Revenue has relied on the aspect the Assessee have not been noticing the need for segmentalized view of the comparable, for example a company may be dealing with software products but the comparable chosen is a company which deals with both software services & software products which is highly essential to be noted and differentiated on the revenues. Hence, this aspect shall lie in the ambit of substantial question of fact as the said reason is not out of the purview of the guidelines or any regulations.
Thus, it can be cleared that any determination of the arm’s length price under Chapter X de hors the relevant provisions of the guidelines, 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. Hence, appellate courts 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, while taking into consideration the relevant guidelines under the Act and the Rules are well adhered to.
Reference:
- Sap Labs India Private Limited v. Income Tax Officer, Circle 6, Bangalore, CIVIL APPEAL NO. 8463 OF 2022
- The Principal Commissioner of Income Tax 3 v. Evalueserve.Com Pvt. Ltd., ITA 127/2022, High Court of Delhi
- Principal Commissioner of Income Tax, Bangalore v. Softbrands India (P.) Ltd., I.T.A.No.536/2015, High Court of Karnataka
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