Under India’s Income Tax Act, an appeal against an order of an Income Tax Appellate Tribunal can be made to the High Court if it is satisfied that the case involves a “substantial question of law”. In the 2018 case of Softbrands India Private Ltd., the Karnataka High Court held that issues relating to the selection of comparable data and criteria for comparability in benchmarking for transfer pricing purposes do not raise a “substantial question of law”. In the 2023 case of SAP Labs India Private Ltd., the Supreme Court reversed this decision. According to the Supreme Court, it is always open to a High Court in an appeal involving transfer pricing issues to examine on a case-by-case basis whether the transfer pricing rules have been complied with or not and whether there is any perversity in the findings made by the Tribunal in determining the arm’s length price of controlled transactions. This means that the determination of arm’s length price by the Income Tax Appellate Tribunal is not final and may be subject to judicial review by the High Court in an appeal under Section 260A of the Income Tax Act. Click here for translation ...

The principal activity of Shell Services Asia Sdn Bhd in Malaysia is to provide services to related companies within the Shell Group. For FY 2011 – 2016 the company was part of a contractual arrangement for the sharing of services and resources within the Shell Group as provided in a Cost Contribution Arrangement. The tax authorities conducted a transfer pricing audit, and based on the findings, issued a tax assessment, where the Cost Contribution Arrangement had instead been characterised as an intra-group services arrangement. As a result the taxable income was adjusted upwards by imposing a markup on the total costs of the services provided for fiscal years 2012, 2014, 2015 and 2016. Consequently, the company had to pay the additional taxes in the amount of: RM 3,474,978.44; RM 2,559,754.38; RM 7,096,984.69; RM 2,537,458.50; RM 15,669,176.01. The company did not agree with the proposal and an appeal for leave was filed with the High Court related to statutory powers/legal jurisdiction of the authorities. Courts decision The appeal was dismissed. The judgement by the High Court only relates to proceedings and no views is expressed regarding the tax assessment. Excerpt “this judgement concerns solely DGIR’s decision on s 140A ITA which do not fall within the 3 Catagories. There may be decisions of DGIR under the ITA which fall within any one or more of the 3 Catagories and in such cases, leave of court should therefore be granted pursuant to O 53 r 3(1) RC for a judicial review of those decisions.” ...

In this case, an Indian High Court ruled that only substantial questions of law can be raised before the High Court. Issues relating to the selection of comparable data and criteria for comparability do not raise a “substantial question of law”. Excerpts “55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.” Click here for other translation ...