India - India’s Supreme Court Rules on Transfer Pricing Appeals to High Courts

In a landmark decision, the Supreme Court of India in the case of SAP Labs[1] recently pronounced a significant judgement elaborating the circumstances in which an arm’s length price determined by the Income Tax Appellate Tribunal can be subject to further review. The core issue in the litigation pertained to the inclusion and exclusion of a few comparables and the selection of filters.

The genesis of this issue can be traced to the provisions of the tax law and numerous long-standing judicial positions that the Income Tax Appellate Tribunal is the last fact-finding authority. Any appeal to the superior appellate forum -- the Indian High Courts and Indian Supreme Court -- can be made only on questions of law.

Income tax liability is determined by an Assessing Officer, who issues an assessment order. However, transfer pricing matters are adjudicated by a Transfer Pricing Officer, whose order merges into the Assessing Officer’s order. A taxpayer aggrieved by various actions of Assessing Officers or Transfer Pricing Officers can appeal before the Commissioner of Income Tax (Appeals)/Dispute Resolution Panel (DRP). Further appeal can be presented before the Income Tax Appellate Tribunal. On substantial questions of law, further appeal can be filed before the High Court and even to the Supreme Court.

In the context of transfer pricing, many Indian High Courts have held that once the Income Tax Appellate Tribunal, the last fact-finding authority, determines an arm’s length price, no additional question of law arises therefrom and thus the issue reaches finality.

Synopsis of the Ruling

The case is part of a batch of appeals, mostly by the tax department and a few by taxpayers, arising out of decisions by various Indian High Courts[2]  dismissing the appeals challenging the findings of the immediately lower judicial body, namely the Income Tax Appellate Tribunal, on the grounds that issues relating to the inclusion and exclusion of comparables decided are

  • Questions of fact
  • Perversity is neither pleader nor argued or demonstrated by placing material to that effect

Taxpayer Arguments

The taxpayer argued that an appeal to the Indian High Courts from any order of the Income Tax Appellate Tribunal can be made only if the case involves a substantial question of law, which is lacking in the instant case. Instances where substantial question of law can arise in transfer pricing matters include  

  • Determining if a transaction falls within the definition of an “international transaction”; and
  • Determining If two enterprises are “associated enterprises” under India’s Transfer Pricing Regulations.

Questions of comparability of companies or the selection of filters are questions of fact, and unless perversity in findings of the Income Tax Appellate Tribunal is pleaded and demonstrated by placing material on the record, no substantial question of law can arise and there can be no interference by the superior appellate forums.

Finally, transfer pricing provisions are essentially a valuation exercise and previous decisions of the Indian Supreme Court[3] have held that valuation is a question of fact.

Tax Department Arguments

The principal argument by the tax department before the Indian Supreme Court was that the arm’s length price determined by the Income Tax Appellate Tribunal did not consider the guidelines stipulated under the Indian Transfer Pricing Regulations and any determination made without bearing in mind said regulations can always be said to be perverse and hence can be appealed.

Indian Supreme Court Ruling

The Indian Supreme Court held that the Indian High Courts can examine in each case whether while determining the arm’s length price, the guidelines laid down in the Indian Transfer Pricing Regulations are followed or not and whether the findings recorded by the Income Tax Appellate Tribunal are perverse or not. 

Life after the Indian Supreme Court Decision

The Delhi High Court in the case of Principal CIT Vs. P Ltd [2023] 146 576 (Delhi), held that “Exclusion or inclusion of one or other comparable would by itself does not constitute a question of law unless it is shown that there are important functional dissimilarities or vital material facts which go to route of profitability or other material circumstances are involved. Since Tribunal gave cogent reasons and disclosed functional reasons to elucidate dissimilarities between four entities and assesses, exclusion was to be upheld.”

In another case, the Indian Supreme Court in the case of DIT vs Travelport Inc. [2023] 149 470 held that a “question as to what proposition of profit is attributable to India is a question of fact and Tribunal had dealt with the profit attribution for Dependent Agent Permanent Establishment (DAPE). Therefore, the Tribunal order do not call for interference”.

Implications of Supreme Court Decision

The SAP Labs decision has several positive outcomes:

  • Clarification of Jurisdiction: The judgement provides clarity on the jurisdiction of the Indian High Courts to review transfer pricing cases. Taxpayers can approach the Indian High Courts on admissible transfer pricing disputes.
  • Protection of Taxpayer Rights: The blanket curb on appeals against orders of the Appellate Tribunal has been read down, upholding the rights of taxpayers to seek legal recourse.

Conversely, the decision also presents some downsides:

  • Surge in appeals: The ruling may lead to continued litigation.
  • Uncertainty in transfer pricing disputes: Transfer pricing disputes will continue to languish in the courts of law for longer period of time.

These negative repercussions may require taxpayers to allocate more resources, time and funds to protect themselves, which could be a major source of distraction to the harmonious conduct of business operations.

Takeaways for Taxpayers

While in Appeal, taxpayers should

  1. Document the factual background of the case and the relevant provisions of the Transfer Pricing Regulations.
  2. Draw attention to specific paragraphs in the Transfer Pricing Orders, orders passed by the Commissioner of Income Tax (Appeals)/Dispute Resolution Panel, and Income Tax Appellate Tribunal Orders that deviate from the regulations and judicial precedent.
  3. Correlate evidence submitted before the income tax authorities to establish any inconsistencies in the Appellate Tribunal's order.

By addressing these points, taxpayers can effectively present their case and demonstrate any deviation from the provisions of the law or any perversity in the findings of the Income Tax Appellate Tribunals in its order, if the taxpayer intends to follow the litigation route.

Given that pursuing a transfer pricing dispute in the courts can be time consuming and onerous, taxpayers can perhaps explore alternate dispute resolution mechanisms.

Alternate Dispute Resolution mechanism

         1. Safe Harbour Rules

Safe harbours are circumstances under which the tax authorities will accept the transfer pricing declared by the taxpayer. Depending on the nature of the transaction, these could be in the form of reporting a mark-up equal to or greater than the prescribed rate, say 17% or 18% for the provision of software development/outsourced services.       

         2. Advance Pricing Agreement (APA)

An APA is an agreement between the tax authorities and a taxpayer on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time. An APA can be unilateral, bilateral or multilateral. In the Indian context, an APA typically would cover five advance years. A rollback clause introduced in March 2015 covers a period of four preceding years, thus potentially providing assurance for a total of nine covered years. An APA provides certainty in tax positions in India and saves cost and time spent on compliances and litigation.

         3. Mutual Agreement Procedure (MAP)

The MAP is a mechanism available under tax treaties that allows Competent Authorities (CAs) from the affected countries to resolve double taxation disputes through negotiations. The MAP provides for higher scope for negotiations/compromises and the CAs generally involve the taxpayer during the fact-finding, information gathering and explanations stage, although the taxpayer is not allowed to participate in the negotiations between the CAs.

Munjal Almoula
Krishnan Parameshwaran
BDO in India


[1] SAP Labs India Pvt Ltd & Others [ TS-225-SC-2023-TP]

[2] Various High Court decisions, including the Karnataka High Court in the case of PCIT v. Softbrands India (P) Ltd [406 ITR 513].

[3] G.L. Sultania and Anr Vs. SEBI and Others (2007) [5 (SCC) 133].

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