The landscape of Transfer Pricing litigation delves around matters that are more or less factual, viz. selection of most appropriate method, choice of comparable companies, aggregation of international transactions, etc. Among the various issues cited, one of the most common litigative issues is the selection of comparable companies. It is pertinent to note that the selection of comparable companies is a dynamic and statistical process (conducting a search, including the application of quantitative and qualitative filters) that requires judgment, and the same cannot be bracketed as a formula that would yield the same results every time it is run or processed as the qualitative aspect is more subjective in nature.

Though the matter of choice of comparable companies, application of filters, etc., have often been heard and argued at the different Tribunals across the country, various Hon'ble High Courts placing reliance on the Karnataka High Court's ruling of Softbrands India Pvt. Ltd.1 (Softbrands India) adjudicated the matter, stating that it does not give rise to 'substantial question of law' unless found ex-facie perverse.

Brief facts about Softbrands India case:

In the case of Softbrands India, the assessee was engaged in providing software services to its associated enterprise. During the scrutiny proceedings, it faced adjustments on comparability issues, partly upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. Aggrieved the Revenue and the assessee filed an appeal with the Income Tax Appellate Authority (Tribunal). The Tribunal ruled in favor of the assessee on the application of the Related Party Transaction (RPT) filter and altered the list of comparable companies.

Observations of the Hon'ble Karnataka High Court:

Aggrieved by Tribunal's order, the Revenue filed an appeal with the Hon'ble High Court against the premise of the application of a 15% RPT filter and rejection of comparable companies as a â€Ssubstantial question of lawâ€. The High Court observed the following:

  • The underlying issue pertained to the selection of comparable companies' basis the functional profile of the assessee, and the said exercise has been duly carried out by the Tribunal, which is the final fact-finding authority.
  • The question of fact-finding shall arise in a case where there is no evidence and/or relevant evidence has not been considered, inadmissible evidence has been considered or legal principles have not been applied in appreciating the evidence or in a case where the evidence has been misinterpreted.
  • The Tribunal had analyzed the comparable companies and provided cogent reasons before accepting or rejecting any.
  • The appeals before the High Court should pass the test of 'substantial question of law' as per Section 260A (pari materia with Section 100 r.w.s.103 of Civil Procedure Code).
  • Neither party is allowed to invoke the jurisdictional High Court on the premise that Tribunal has reversed and/or modified the findings of the lower authorities.
  • The appellant has not appealed against the perversity of the Tribunal's order, and neither was any perversity found apparent on record in the Tribunal's order.

On the basis of the observations of the Hon'ble High Court, the appeal was adjudicated.
Reliance was placed on Softbrands India ruling by the Hon'ble Karnataka High Court in the case of SAP Labs India Private Limited 2(SAP India).

Supreme Court Ruling:

120 plus Special Leave Petitions (SLPs) were filed with the Apex Court to contest the blanket application of the Softbrands India/SAP Labs ruling. On 19 April 2023, the Hon'ble Apex Court quashed and set aside the High Court's rulings in the case of Softbrands India/SAP India and observed that the High Court could also examine the question of comparability of two companies or selection of filters and examine whether the same is done judiciously, and based on the relevant material/evidence on record. The Apex Court, in this regard, observed that Chapter X of the Income-Tax Act, 1961 (Act) needs to be adhered to along with the Rules prescribed under Income-Tax Rules, 1962 (Rules) while determining the Arm's Length Price (ALP). Thus, any deviation therefrom would lead to substantial question of law before the Hon'ble High Court as per Section 260A of the Act. Furthermore, the Apex Court holds that any deviation in the determination of ALP contrary to the statutory guidelines shall be tantamount as perverse and thus would warrant the Hon'ble High Court to investigate the matter as a question of substantial law.

Briefly, the Hon'ble Apex Court held that:

  • Determination of ALP, choice of comparable companies and filters shall be construed as a substantial question of law before the High Court under Section 260A of the Act provided substantial evidence/relevant material is provided to the High Court.
  • Determination of ALP contrary to the prescribed statutory guidelines can be referred to as perverse and thereby warrant intervention by the Hon'ble High Court, giving rise to substantial question of law.
  • The Apex Court observed that it has not entered the merits of the cases and has not expressed any opinion on the determination of ALP either in favor of the respective assessee or the Revenue.

The Apex Court has remitted the cases back to the High Courts to decide the matter afresh, prescribing a timeline of nine months within which the Hon'ble High Court must determine whether the prescribed statutory guidelines have been adhered to or not.

Our Comments

India has always had the highest volume of Transfer Pricing litigation globally, with comparability analysis forming a significant part. With the High Court's view that Tribunals are the final-fact finding authority on comparability, there was some respite to the taxpayers that once the comparability matter was concluded at the Tribunal level, the prolonged litigation was over. With the Hon'ble Apex Court ruling opening the comparability issues to be determined by the High Courts making it a substantial question of law, there would be a tsunami of cases that would now be pending at High Court levels for determination of arm's length principle. It would be worthwhile to see how the Hon'ble High Court shall evaluate the appropriateness of the comparables selected by the taxpayer or the revenue authorities and how this would impact the ALP of the taxpayer's international transactions. Taxpayers should consider Mutual Agreement Procedure (MAP) (for past litigated years), Advance Pricing Agreements (APA) (rollback and future years), or Safe Harbor to achieve certainty.


1. Pr. CIT & Asst. CIT vs Softbrands India Private Limited held by Karnataka High Court, I.T.A.No.536/2015 C/W I.T.A.No.537/2015

2. Pr. CIT & Addl. CIT vs SAP Labs India Private Limited held by Karnataka High Court, , ITA No.225/2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.