(2023) 454 ITR 121 (SC)
Determination of arm's length price; reference to the Transfer Pricing Officer
High Courts can and must examine whether the arm's length price was determined in accordance with the statute and the Rules. Transfer pricing appeals are not immune from scrutiny merely because they involve comparables.
Can a High Court examine the determination of the arm's length price in appeal, or is the selection of comparables always a question of fact beyond its jurisdiction?
A very large batch of appeals reached the Supreme Court in which High Courts — following the Karnataka High Court's decision in Softbrands India — had declined to entertain Revenue and taxpayer appeals against Tribunal orders on transfer pricing. The consistent reasoning below was that the selection and rejection of comparable companies, the application of filters such as turnover and related-party transaction thresholds, and the making of economic adjustments were all matters of fact, so no substantial question of law arose and the appeals were not maintainable. The effect was that Tribunal determinations of arm's length price had become effectively final, whatever their reasoning.
The lead matters came from the Karnataka High Court, with connected appeals from several other High Courts which had adopted the same approach. The Supreme Court heard them together to settle the maintainability question across the country.
For the assessee
In many of the matters the taxpayers themselves supported appellate scrutiny, since the reasoning below cut both ways: Tribunal orders adverse to taxpayers were equally insulated from review. The statutory methods and the Rules are binding, and whether they have been followed is a question of law.
For the Revenue
Chapter X prescribes methods, and the Rules prescribe how comparability is to be judged. A determination made without following the prescribed method, or by ignoring relevant material, or on a perverse view of the evidence, raises a substantial question of law which the High Court is bound to consider under Section 260A.
The Court disapproved the blanket approach that had developed. It held that in each case the High Court must examine whether the Tribunal, while determining the arm's length price, followed the guidelines laid down under the Act and the Rules — namely Chapter X and Rules 10A to 10E. Where the determination has been made without adhering to the prescribed methods, or by disregarding relevant considerations, or on the basis of irrelevant material, or where the exercise is otherwise perverse, a substantial question of law arises and the appeal is maintainable. The Court was careful to state that it was not opening every comparability dispute to fresh argument: findings reached after a proper application of the statutory method remain findings of fact. What it rejected was the proposition that transfer pricing determinations are, as a class, beyond the appellate jurisdiction of the High Court. It accordingly remitted the large batch of appeals to the respective High Courts for consideration on the merits in the light of these observations.
The single most consequential recent transfer pricing decision. It reopened High Court scrutiny of Tribunal orders on arm's length pricing, which now sits in Sections 165 and 166 of the IT Act 2025. In practice it means the statutory method and the Rules must be visibly applied in the order itself, with reasons, because appellate review is now available where they are not. It cuts both ways — taxpayers and the Revenue alike can pursue appeals that would previously have been dismissed at the threshold.