India's high court modifies the scope of litigation for matters involving transfer pricing

The Supreme Court recently held that transfer pricing comparability difficulties can result in a "substantial question of law."

High courts can now decide whether transfer pricing issues including comparables and filters are worthy of action, the Indian Supreme Court has concluded.

On April 19, the Indian Supreme Court (SC) rendered its decision in the case of Sap Labs India v. ITO, overturning a Karnataka High Court decision and broadening the high courts' appellate jurisdiction in TP cases.

According to the SC, there would be a significant "question of law" when determining the arm's-length principle, which would include selecting comparable businesses and using filters.

The high courts in each state are only permitted to examine an appeal from lower courts if it raises a substantial question of law, according to Shruti KP, partner at IndusLaw in Mumbai.

"The lower courts are the ultimate fact-finding authority. This is also applicable in tax matters, where Income Tax Appellate Tribunals in various locations across the country are the final fact-finding and adjudication authority in relation to matters involving factual aspects.

KP continued, "The high courts will only adjudicate on questions of law in relation to tax matters."

This new procedure for TP litigation has raised some questions, though.

"This may potentially lead to an increase in tax litigation in transfer pricing matters, including settled matters," said Aditi Mehra, a transfer pricing specialist for Coinmen Consultants in Delhi.

"For instance, in some rulings of the Tax Tribunal, the Indian tax authorities may not have preferred an appeal to the high court. However, they may re-examine old cases to identify where an appeal could be preferred to the high courts," Mehra added.

She said, "Having said this, similar appeals may also be available to taxpayers. Achieving finality in TP matters will be further away since factual aspects may be examined even by high courts"

As a result, she said, it's possible that the number of TP cases pending in India's already overburdened courts may increase.

The SC decision says nothing about why the change was made. According to sources, the SC could not have been sufficiently convinced that selecting comparables and filters is typically more of a factual exercise than a legal one.

By fLEXI tEAM