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India's High Court rules on principles for admissibility of transfer pricing appeals by High Courts

Executive summary

This Tax Alert summarizes the decision of the Honorable Karnataka High Court (HC) pronounced on 25 June 2018 in the case of Softbrands India Private Limited1 (Taxpayer). The ruling sets forth some significant principles relating to admissibility of appeals by HCs which involve transfer pricing (TP) issues. Under the Indian income tax law (ITL), an appeal against an order of an Income tax Appellate Tribunal (Tribunal), which is the second-level appellate forum in the hierarchy of appellate authorities, can be made to the jurisdictional HC. However, an HC can only admit an appeal if it is satisfied that the case involves a ”substantial question of law.” In the instant case, the issue before the HC was whether comparability issues in TP as decided by the Tribunal, give rise to any substantial question of law for the HC to admit and thereafter adjudicate an appeal.

The HC ruled that the Tribunal is the final fact finding authority and the jurisdiction to consider the factual nature of issues is with the Tribunal. As long as there is a no unreasonableness in the order of the Tribunal in the findings of the fact, the same does not qualify to be a ”substantial question of law.” The HC held that it cannot be expected to undertake the ”fact finding exercise” and lightly consider appeals against the findings of a Tribunal without putting it to a strict scrutiny of the existence of the substantial question of law. The HC also held that the ”substantial question of law” generally arises regarding issues such as interpretation of tax treaties, interplay between provisions of the ITL and tax treaties, issues involving Base Erosion and Profit Shifting (BEPS) principles, among others. On the other hand, issues pertaining to the selection of comparable data and criteria for comparability while undertaking an economic analysis in a TP study do not give rise to ”any substantial question of law.”

This Alert summarizes the decision.

Detailed discussion


The Taxpayer is an Indian affiliate of a multinational group which is engaged in the provision of software development services to its associated enterprises. The Taxpayer was subject to a TP adjustment based on a TP audit conducted by the Tax Authority. The TP adjustment was made largely by adopting a different set of comparable data as well as by adopting different criteria for selection of comparable data by the Tax Authority as compared to what was used by the Taxpayer in its TP documentation. The Taxpayer obtained partial relief at the first-appellate level before the Commissioner of Income-tax (Appeals), an administrative appellate authority under the hierarchy of appellate authorities. An appeal against the order of the first appellate authority was filed before the Tribunal, the second level appellate authority, by the Taxpayer as well as by the Tax Authority. The Tribunal ruled in favor of the Taxpayer by upholding the Taxpayer’s selection of comparable data and rejecting the approach adopted by the Tax Authority. The Tax Authority thereafter filed an appeal before the jurisdictional HC against the order of the Tribunal. The key questions raised before the HC was: (a) whether the Tribunal was right in law in rejecting a few comparables; and (b) whether the Tribunal was right in determining the threshold for comparability filters for selection of such comparables.

However, before addressing the questions, the HC sought to address the threshold issue of whether the questions in appeal come up to the level of definition/meaning of ”substantial questions of law” for the HC to accept the appeal.

Ruling of the HC

Grounds for admissibility of appeal before the HC

Under section 260A of the ITL, as well as under the Code of Civil Procedures, 1908, an appeal can be made to the HC from every order passed by a subordinate court, if the HC is satisfied that the case involves a ”substantial question of law.” Therefore, the HC held that unless the findings of the Tribunal are unreasonable and unsustainable and exhibit a total lack of reasoning by the Tribunal to the relevant facts of the case and evidence before the Tribunal, there can be no substantial question of law. The HC has power to not only formulate the substantial questions of law but also to frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it.

What is a substantial question of law?

The HC, while referring to leading case laws on the topic, quoted with approval certain observations which indicate factors for determining whether an appeal involves a substantial question of law. A question of law having a material bearing on the decision of the case will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principles emerging from binding precedent and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation where the legal position is clear, either on account of express provisions of law or binding precedent, but the court below has decided the matter, either ignoring or acting contrary to such legal principle.

Could TP matters be considered as those giving rise to a substantial question of law?

The HC observed that the entire exercise of making TP adjustments on the basis of the comparability analysis is a matter of estimation by the taxpayer as well as the Tax Authority. Further, the Tribunal, being the final fact finding authority, adjudicates on the TP issues based on relevant material/facts produced. The HC also noted that the Tribunal is expected to act fairly, reasonably and rationally to avoid unsupportable decisions.

In the instant case, the HC noted that the dispute was with respect to pairing and matching of comparable companies as identified by the Taxpayer vis-à-vis the Tax Authority for determination of the arm’s-length price (ALP). Also, the arguments before the HC pertained to appropriate application of filters to be used for comparability analysis. The HC observed that the order of the Tribunal was not unreasonable either in analyzing the application of filters or in adoption of the most appropriate method for determining the ALP. Accordingly, based on the principles emanating from the judicial precedents referred to, the HC held that the same does not qualify to be a ”substantial question of law.” Further, considering that the Tribunal is the final fact finding body, the HC considered it appropriate not to entertain an appeal in the absence of involvement of a ”substantial question of law.” Accordingly, the HC opined that it cannot be expected to undertake the ”fact finding exercise” which would drag the whirlpool of domestic litigations; thereby defeating the very purpose and purport of section 260A (relating to HC appeal) of the ITL.

Moreover, the HC held that the ”substantial question of law” could generally be with respect to interpretation of provisions of tax treaties, interpretation of provisions of the ITL or the overriding effect of the tax treaties over the ITL or the questions pertaining to treaty shopping, interpretation of BEPS guidance/recommendations, etc. Accordingly, in such cases the HC could embark upon the exercise of framing and answering such substantial questions of law. On the other hand, the appeals as in the given case, which are primarily to decide as to whether the comparables have been correctly chosen or not and whether quantitative filters have been appropriately applied or not, do not give rise to any ”substantial question of law.” The HC also observed that a Court cannot be expected to undertake an exercise of comparability which is essentially a fact finding exercise because the Court has neither sufficient information nor technical expertise to undertake any such fact finding.


One of the key TP challenges faced by taxpayers in India relates to the time consuming nature of the appeal process because of the number of tiers of appellate authorities and the inventory of cases at each level. HCs in the past have generally shown a fair degree of flexibility in admitting appeals involving TP matters, including those involving comparability issues, even though the provisions of the ITL permitted appeals to an HC only on matters involving a substantial question of law. This approach of the HCs may generally be attributed to the nascent stage of the TP law and the evolving nature of TP issues. However, this resulted in a proliferation of appeals involving TP matters and created a significant back log of cases at the HC level.

The HC’s ruling in this case could result in Courts applying more scrutiny to appeals involving TP matters to ensure that they involve a substantial question of law or the questions are appropriately re-framed to address only substantial questions of law. This is likely to impact appeals by either the taxpayer or the Tax Authority of an order of a Tribunal and could therefore reduce the time involved for reaching finality on a TP controversy under the domestic tax law appeal process where the issues in dispute largely involve factual matters.

The ruling sets forth important principles for taxpayers to consider while deciding their strategies for TP controversy management in India. Taxpayers who are subject to a TP adjustment should consider strengthening their defense strategy on factual matters before the Tribunal as well as evaluating alternative options for dispute resolution such as use of MAP and APAs.


1. TS-475-HC-2018(KAR)-TP.

EYG no. 010114-18Gbl

Download this Tax Alert as a PDF file.

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