In a significant ruling, the Supreme Court on April 19, 2023, set aside an earlier Karnataka High Court ruling which held that in all cases where the Income Tax Appellate Tribunal (ITAT) has determined the arm’s length price (ALP), the determination of the ITAT is final and cannot be the subject matter of scrutiny by the High Court.

The apex court held that any ALP determined outside the purview of relevant transfer pricing (TP) provisions can be considered as ‘perverse’ and may be considered as a substantial question of law.

The Supreme Court ruling shall have far-reaching implications for taxpayers in India, including on a large number of cases covered by High Court rulings, that had relied on the Karnataka HC ruling.

The SC ruling has restored TP issues to the same pedestal as other tax issues, where both, the Indian Revenue Authorities (IRA) as well as taxpayers, can approach a HC after a decision by the ITAT.

As is the trend with many tax disputes, this is likely to increase the time-frame to resolve TP disputes and result in more litigation, as typically the taxpayer or IRA is likely to file appeals against unfavourable ITAT orders before the HC.

On appeal, there is also likelihood of HCs remanding such matters to the ITAT for adjudication, instead of passing a speaking order on merits.

To give a background, in August 2018, in what is widely viewed as a landmark case, the Karnataka HC had put forth significant principles relating to admissibility of appeals concerning TP issues by the HC.

The HC had held that ITAT is the final fact-finding authority and, therefore, questions such as appropriateness of qualitative and quantitative filters for identifying comparables and acceptance/rejection of comparables should not be reviewed by the HC.

Following this ruling, the Karnataka HC as well as some other HCs dismissed a plethora of TP appeals on the grounds that substantial question of law did not arise in those cases.

Substantial question of law

In contrast to other taxation areas, where there is comparatively more clarity, TP disputes may typically be clouded by ambiguity on whether an issue is a “question of fact” or a “substantial question of law”, as only the latter merits admission of appeal before the HC under existing law.

Intra-group trade within different cross-border arms of multinational companies (MNCs) has increased exponentially over the past decades globally as well as in India.

Like almost all its trading partners, India too has introduced measures to assess that pricing of all intra group transactions mirrors the pricing that may be adopted by independent companies in similar circumstances.

Tax disputes arising out of these regulations have reached Indian courts and several significant decisions have been pronounced to clarify and amplify requirements from MNCs for their Indian operations.

Many TP disputes are centred around specific facts of that particular trade or transaction and not necessarily as a matter of legal interpretation.

It has been a matter of controversy and debate on whether certain types of TP disputes involve matter of fact or are about a substantial question of law. The apex court ruling provides much-awaited clarity on this matter.

Going forward, it may be useful for taxpayers to proactively strategise at the time of entering into an international transaction or latest, when they receive an adverse TP order, on whether they should focus on the domestic litigation route or also evaluate alternative dispute resolution mechanisms such as Mutual Agreement Procedure and Advance Pricing Agreement.

The writer is Partner with Deloitte Touche Tohmatsu India LLP. Views are personal

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