SAP LABS INDIA PRIVATE LIMITEDversusINCOME TAX OFFICER, CIRCLE 6, BANGALORE

430                      [2023]REPORTS
               SUPREME COURT    4 S.C.R. 430               [2023] 4 S.C.R.


A                   SAP LABS INDIA PRIVATE LIMITED
                                        v.
             INCOME TAX OFFICER, CIRCLE 6, BANGALORE
                         (Civil Appeal No. 8463 of 2022)
B                               APRIL 19, 2023
                [M. R. SHAH AND M. M. SUNDRESH, JJ.]
             Income Tax Act, 1961 : ss. 92, 92A to 92CA, 92D, 92E, 92F
      and 260 A – Transfer pricing matters – Arm length price,
      determination of – Arm length price, determined by the tribunal –
C
      Thereafter, determination of the arm’s length price by the High Court,
      in exercise of powers u/s. 260A – Permissibility of - Held: There
      cannot be any absolute proposition of law that in all cases where
      the tribunal has determined the arm’s length price the same is final
      and cannot be the subject matter of scrutiny by the High Court in
D     an appeal u/s 260A – When the determination of the arm’s length
      price is challenged before the High Court, it is always open for the
      High Court to consider and examine whether the arm’s length price
      has been determined while taking into consideration the relevant
      guidelines under the Act and the Rules – It is always open for the
      High Court to examine in each case whether the determination of
E
      the arm’s length price and the findings recorded by tribunal while
      determining the arm’s length price are perverse or not – Thus, the
      impugned judgments and orders passed by the High Court that the
      determination of arm’s length price by the tribunal shall be final
      against which an appeal u/s. 260 A is not required to be entertained
F     is quashed and set aside.
            Allowing the appeals, the Court
            HELD: 1.1 While determining the arm’s length price, the
      tribunal has to follow the guidelines stipulated under Chapter X
      of the Income Tax Act, 1961, namely, Sections 92, 92A to 92CA,
G     92D, 92E and 92F of the Act and Rules 10A to 10E of the Rules.
      Any determination of the arm’s length price under Chapter X de
      hors the relevant provisions of the guidelines, can be considered
      as perverse and it may be considered as a substantial question of
      law as perversity itself can be said to be a substantial question of
H     law. Therefore, there cannot be any absolute proposition of law
                                       430
    SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                       431
           OFFICER, CIRCLE 6, BANGALORE

that in all cases where the tribunal has determined the arm’s          A
length price the same is final and cannot be the subject matter of
scrutiny by the High Court in an appeal under Section 260A of
the IT Act. When the determination of the arm’s length price is
challenged before the High Court, it is always open for the High
Court to consider and examine whether the arm’s length price
                                                                       B
has been determined while taking into consideration the relevant
guidelines under the Act and the Rules. Even the High Court
can also examine the question of comparability of two companies
or selection of filters and examine whether the same is done
judiciously and on the basis of the relevant material/evidence on
record. The High Court can also examine whether the                    C
comparable transactions have been taken into consideration
properly or not, i.e., to the extent non-comparable transactions
are considered as comparable transactions or not. [Para 7][442-
C-G]
       1.2. In each case, the High Court should examine whether        D
the guidelines laid down in the Act and the Rules are followed
while determining the arm’s length price. Therefore, the absolute
proposition of law laid down by the Karnataka High Court in the
case of Softbrands India (P) Ltd. that in the matter of transfer
pricing, determination of the arm’s length price by the tribunal
shall be final and cannot be subject matter of scrutiny and the        E
High Court is precluded from examining the correctness of the
determination of the arm’s length price by the tribunal in an appeal
under Section 260A of the IT Act on the ground that it cannot be
said to be raising a substantial question of law cannot be accepted.
Within the parameters of Section 260A of the IT Act in an appeal       F
challenging the determination of the arm’s length price, it is
always open for the High Court to examine in each case whether
while determining the arm’s length price, the guidelines laid down
under the Act and the Rules, are followed or not and whether the
determination of the arm’s length price and the findings recorded
by the tribunal while determining the arm’s length price are           G
perverse or not. [Para 8][442-H; 443-A-C]
     1.3. The impugned judgments and orders passed by the
High Court dismissing the Revenue’s appeals and even the
appeals preferred by the assessees are quashed and set aside
                                                                       H
432            SUPREME COURT REPORTS                        [2023] 4 S.C.R.


A     and the matters are required to be remitted back to the concerned
      High Courts to decide and dispose of the respective appeals
      afresh in light of the observations made and examine in each and
      every case whether the guidelines laid down under the Act and
      the Rules, referred are followed while determining the arm’s
      length price by the tribunal or not and to that extent whether the
B
      findings recorded by the tribunal while determining the arm’s
      length price are perverse or not. [Para 9][443-D-E]

            PCIT v. Softbrands India (P) Ltd. (2018) 406 ITR 513
            (Karnataka) – disapproved.
C
            Vijay Kumar Talwar v. CIT (2011) 1 SCC 673 : [2010]
            14 SCR 499; Sir Chunilal V. Mehta and Sons Ltd. v.
            Century Spinning and Manufacturing Co. Ltd. AIR 1962
            SC 1314 : [1962] Suppl. SCR 549; G. L. Sutania and
            Anr v. SEBI and Ors. (2007) 5 SCC 133 : [2007] 6
D           SCR 1152 – referred to.

                             Case Law Reference

      [2010] 14 SCR 499                   referred to             Para 3.4
E     [1962] Suppl. SCR 549               referred to             Para 3.4

      [2007] 6 SCR 1152                   referred to             Para 3.11

            CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8463
      of 2022.
F
            From the Judgment and Order dated 09.07.2018 of the High Court
      of Karnataka at Bengaluru in ITA No. 10 of 2011.

            With
G
            Civil Appeal Nos. 8553, 8504, 8464, 8682, 9387, 8675, 9401, 9023,
      8465, 8466, 8607, 8608, 8554, 8622, 8609, 8702, 8621, 8620, 8610, 8611,
      8619, 8617, 8625, 8624, 8618, 8627, 8665, 8623, 8557, 8626, 8555, 8528,
      8704, 8666, 8661, 8663, 8628, 8664, 8559, 8667, 8560, 8668, 8584, 8587,

H
     SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                         433
            OFFICER, CIRCLE 6, BANGALORE

8586, 8669, 8672, 8591, 8671, 8670, 8556, 8558, 8561, 8583, 8585, 8590,   A
8592, 8674, 8679, 8594, 8680, 8686, 8703, 8600, 8676, 8677, 8683, 8684,
8689, 8690, 8685, 9412, 8678, 8691, 9413, 8692, 9414, 8695, 9415, 8687,
8696, 8603, 8605, 8699, 8700, 8701, 8697, 9404, 9411, 8602, 8693, 8705,
8688, 8698, 9405, 9406, 9409, 9407, 9408, 9025, 9030, 9034, 9036, 8604,
9410, 9021, 9022, 9024, 9026, 9027, 9028, 9029, 9416, 9031, 9032, 9033,
                                                                          B
9035, 9037, 9038, 9039, 9388, 9389, 9390, 9393, 9394, 9395, 9396, 9397,
9398, 9399, 9400 of 2022, 2939 of 2023, 9402-9403, 8606, 8512, 8513,
8511, 8646, 8549 of 2022, 2938 of 2023, 8461 and 8535 of 2022.

       Balbir Singh, ASG, K.K.Chythanya, Tarun Gulati, Ajay Bohra,
Arvind P. Datar, T. Suryanarayan, Percy Pardiwala, Ajay Vohra, Sr.        C
Advs., Samarvir Singh, Naman Tandon, Prasenjeet Mohapatra, Ms.
Monica Benjamin, Ms. Anu Sura, Rupesh Kumar, Rajat Nair, Shyam
Gopal, Zoheb Hussain, Prahlad Singh, Raj Bahadur Yadav, S. Sukumaran,
Anand Sukumar, Sharath S., Bhupesh Kumar Pathak, Mrs. Meera
Mathur, Ambhoj Kumar Sinha, Mrs. Anil Katiyar, Kishore Kunal, Parth,
Manish Rastogi, Ankita Prakash, Akanksha Vigyan, Senthil Jagadeesan,      D
Sajal Jain, Ms. Sonakshi Malhan, Ms. Remya Raj, Aakarshan Aditya,
Deepak Chopra, Rohan Khare, Priyam Bhatnagar, Harpreet Singh
Ajmani, Mrs. Vanita Bhargava, Ajay Bhargava, Shantanu Chaturvedi,
Prerna Singh, M/s. Khaitan & Co., Himanshu S. Sinha, Bhuwan Dhoopar,
Yash Varmani, Syed Jafar Alam, Sanand Ramakrishnan, Nageswar Rao,         E
Shreyash Shah, Yatharth Singh, Ms. Archana Sahadeva, Siddharth Raj
Choudhary, G. C Srivastava, Suvinay Dash, Kalrav Mehrotra,
Ms. Runamoni Bhuyan, H. Raghavendra Rao, Shankey Agrawal, Harsh
Shukla, Aditya Rathore, Ms. Shreya Wadhera, Ms. Meera Mathur, Kunal
Verma, Yugandhara Pawar Jha, Ms. Tanmayee Rajkmar, Ms. Manasa
Ananthan, Ashwin Nair, Ms. Mahima Goud, Sai Kiran, Ms. Lavanya            F
Dhawan, Ritik Gupta, Ms. Kavita Jha, Anant Mann, Neeraj Jain, Udit
Naresh, Aniket D. Agrawal, Rajeev Mishra, Vishal Kalra, S. S. Tomar,
Anil Kumar Gautam, Rohan Shah, Aurupdas Gupta, Rohan Thawani,
Ms. Pooja Dhar, Hardeep Singh Anand, Pratul Pratap Singh, Mantavya
Sharma, V. Balachandran, K.R. Vasudevan, Siddharth Naidu, M/s. KSN        G
& Co., Salil Kapoor, Ms. Ananya Kapoor, Sanat Kapoor, Sumit
Lalchandani, Dr. Shaswat Bajpai, Vibhu Jain, Praveen Swarup, Vivek
Sarin, Dibya Prashant Singh, Satish C. Kaushik, Ms. Avnika Mishra,
Aakarshan Aditya, Advs. for the appearing parties.

                                                                          H
434             SUPREME COURT REPORTS                           [2023] 4 S.C.R.


A           The Judgment of the Court was delivered by
            M. R. SHAH, J.
             1. The present batch of Civil Appeals, mostly by the Revenue and
      few of the assessees arises out of judgments and orders passed by the
      various High Courts, more particularly the High Court of Karnataka,
B     dismissing the appeals challenging the findings of the Income Tax
      Appellate Tribunal (for short, ‘Tribunal’) on ‘Transfer Pricing’ issues on
      the ground that the issues decided by the Tribunal are questions of fact
      and as perversity is neither pleaded nor argued nor demonstrated by
      placing material to that effect, no substantial question of law arises for
C     consideration under Section 260A of the Income Tax Act, 1961 (for
      short, ‘IT Act’). The High Court of Karnataka has dismissed the appeals
      preferred by the Revenue by relying upon its earlier judgment in the
      case of PCIT v. Softbrands India (P) Ltd., reported in (2018) 406
      ITR 513 (Karnataka).

D            2. Shri Balbir Singh, learned Additional Solicitor General of India,
      appearing on behalf of the Revenue has vehemently submitted that the
      Karnataka High Court in the case of Softbrands India (P) Ltd. (supra)
      has erroneously held that the Tribunal is the final fact finding authority
      on determining the arm’s length price and therefore once the Tribunal
      determines the arm’s length price the same cannot be subject to judicial
E     scrutiny/scrutiny in an appeal under Section 260A of the IT Act.
            2.1 Shri Balbir Singh, learned ASG has submitted that there cannot
      be any absolute proposition of law that against the decision of the Tribunal
      determining the arm’s length price, there shall not be any interference
      by the High Court in an appeal under Section 260A of the IT Act.
F
             2.2 Shri Balbir Singh, learned ASG has taken us to the scheme of
      transfer pricing/arm’s length price to be determined under Chapter X of
      the IT Act, more particularly Sections 92, 92A to 92CA, 92D, 92E and
      92F and Rules 10A to 10E of the Income Tax Rules, 1962 (for short, ‘IT
      Rules’). It is submitted that under the scheme of transfer pricing, the
G     arm’s length price is to be determined taking into consideration the
      guidelines stipulated under the aforesaid provisions of the IT Act and the
      Rules. It is submitted that therefore it is always open for the High Court
      to consider and/or examine, whether the guidelines stipulated under the
      Act and the Rules, while determining the arm’s length price have been
      followed by the Tribunal or not.
H
     SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                                 435
      OFFICER, CIRCLE 6, BANGALORE [M. R. SHAH, J.]

       2.3 It is submitted that if the arm’s length price is determined by        A
the Tribunal de hors the guidelines stipulated under the Act and the
Rules, more particularly Rules 10A to 10E of the Rules, the determination
can be said to be perverse which is always subject to the scrutiny by the
High Court in an appeal under Section 260A of the Act.
       2.4 It is submitted that therefore the view taken by the High Court        B
of Karnataka in the case of Softbrands India (P) Ltd. (supra) is required
to be corrected by this Court.
      3. S/Shri Arvind P. Datar, Tarun Gulati, Percy Pardiwala, learned
Senior Advocates and other learned counsel appearing on behalf of the
respective assessees have vehemently submitted that once the arm’s                C
length price is determined by the Tribunal taking into consideration the
relevant guidelines, thereafter challenge to the same cannot be said to
be a substantial question of law, to be considered in an appeal under
Section 260A of the IT Act.
       3.1 It is submitted on behalf of the assessees that Section 260A of        D
the IT Act provides that an appeal shall lie to the High Court from every
order of the Tribunal only if the High Court is satisfied that the case
involves a substantial question of law. Sub-section (6) thereof provides
that the High Court may determine any issue which (a) has not been
determined by the Appellate Tribunal; or (b) has been wrongly determined
by the Appellate Tribunal, by reason of a decision on such question of            E
law as is referred to in sub-section(1).
       3.2 It is submitted that the said provision came up for consideration
in a catena of decisions. It is a settled position that jurisdiction under
section 260A of the IT Act cannot be invoked unless there arises a
substantial question of law. This is precisely what is held by the High           F
Court of Karnataka in the judgment in Softbrands India (P) Ltd. (supra),
by relying on a series of judgments of this Court.
       3.3 It is submitted that a substantial question of law can arise in a
case only when a question of law is fairly arguable, where there is room
for difference of opinion on it.                                                  G
      3.4 It is submitted that a finding of fact may give rise to a substantial
question of law, inter alia, in the event the findings are based on (i) no
evidence; and/or (ii) while arriving at the said finding, relevant admissible
evidence has not been taken into consideration or inadmissible evidence
has been taken into consideration; or (iii) legal principles have not been        H
436             SUPREME COURT REPORTS                            [2023] 4 S.C.R.


A     applied in appreciating the evidence; or (iv) when the evidence has been
      misread. The High Courts as well as this Court have consistently held
      that the Tribunal being a final fact finding authority, in the absence of
      demonstrated perversity in its finding, interference therewith by the High
      Court is not warranted. In support of his submission, learned senior
      counsel/counsel have relied upon the decisions of this Court in the cases
B
      of Vijay Kumar Talwar v. CIT, (2011) 1 SCC 673 and Sir Chunilal
      V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing
      Co. Ltd., reported in AIR 1962 SC 1314.
             3.5 It is further submitted that perversity, if any, not only should be
      specifically alleged in the appeal before the High Court but also, as held
C     by the High Court in the case of Softbrands India (P) Ltd. (supra), the
      same ought to have been demonstrated.
             3.6 It is further submitted that some instances where a substantial
      question of law can arise in Transfer Pricing matter is where the issue
      relates to whether at all a transaction falls within the definition of
D     ‘international transaction’, or if two enterprises are ‘associated
      enterprises’ as per the definition under the IT Act. The question of
      comparability of two companies or selection of filters are usually question
      of fact, which primarily depend on the functions performed, assets
      employed and risks assumed by the tested party as well as comparable
E     transactions. Unless perversity in the findings of the Tribunal is pleaded
      and demonstrated, by placing material on record, no substantial question
      of law can arise and, therefore, there can be no interference by the High
      Court. To the extent there can be no dispute between the parties, in
      view of the settled legal proposition dealing with sections 260A of the
      Act and section 100 of the Code of Civil Procedure, 1908.
F
             3.7 It is submitted that in all the appeals filed by the Revenue
      before the High Court, the primary issues raised pertained to inclusion
      and exclusion of a few comparables and selection of filters, which are
      essentially questions of fact and there is a consensus ad idem to this
      extent between the parties. In none of the appeals has the Revenue
G     pleaded, argued, or placed any material to demonstrate perversity in the
      order of the Tribunal. Therefore, the High Court after noting the questions
      raised, findings rendered by the Tribunal and noting that perversity is
      neither pleaded/argued nor demonstrated by placing any material,
      dismissed the appeals, by relying on principles laid down in Softbrands
H     India (P) Ltd. (supra). Therefore, no error can be attributed to the
     SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                               437
      OFFICER, CIRCLE 6, BANGALORE [M. R. SHAH, J.]

orders passed by the High Court dismissing the appeals, in such                 A
circumstances.
      3.8 It is next submitted that the submission of the Revenue that in
each case the High Court should examine whether the guidelines laid
down in the IT Act and the Rules are followed to determine the arm’s
length price is not correct and moreover is too farfetched, as the High         B
Court can only decide substantial questions of law raised and arising
before it.
       3.9 It is further submitted that the Revenue’s submission that the
judgment in Softbrands India (P) Ltd. (supra) indicates that there will
be no interference even where inconsistent views are taken by the               C
Tribunal is misconceived, because, it is quite possible that in view of the
particular set of facts in one case, one Bench excludes a company and
in another case includes the same in view of different set of facts, or
similarly applies a filter in one and not in another. This is what is in fact
held in Softbrands India (P) Ltd. (supra) (please see para 45). In
almost all cases it is the Revenue which uses the same set of comparables       D
for determining an arm’s length price, thus, painting all assessees with
the same brush. These are questions of facts, which would require
determination on a case by case basis, and unless perversity is
demonstrated in the order of the Tribunal, no interference is called for
by the High Court.                                                              E
        3.10 It is further submitted that Transfer Pricing analysis involves
benchmarking of controlled transactions with uncontrolled transactions
(terms specifically defined in the IT Act and the Rules) is largely a
statistical exercise using database of companies in public domain as
specifically defined in the IT Act and the Rules, referred hereinabove.         F
In the specific facts of batch of cases wherein department has
approached this Court, the exercise of application of detailed guidelines
set out in the IT Act and the Rules was indeed carried out and ironed out
by Tribunal with assistance of tax payers representatives and department
officers by looking a publicly available information mostly in the form of
audited financials etc., of companies as prescribed in the IT Act and the       G
Rules. Contrasting the appeals/ pleadings filed before High Court of
Karnataka by taxpayers and department available as part of batch of
appeals filed would enable appreciation of the case made out before the
High Court. This is essential to appreciate the correctness of conclusions
by the High Court in this batch of appeals/petitions. Tax department is         H
438             SUPREME COURT REPORTS                            [2023] 4 S.C.R.


A     attempting to seek intervention of this Court in present batch of
      department’s cases without reference to/de hors any of this relevant
      background facts. Over last two decades, Tribunal and various High
      Courts have applied the guidelines laid down in the IT Act and the Rules
      contributing to evolution of a process. Intervention in the department’s
      appeals in present batch of cases and/or laying down any guidelines
B
      ignoring this background could potentially disturb the well settled principles
      under section 260A (equivalent to section 100 CPC). In background
      facts or present batch of department’s appeals, acceptance of
      department’s contention about lack of application of mind by the High
      Court would cast an unjust burden on the High Court to undertake a suo
C     moto exploration of facts not placed before it, make out a case for the
      department and decide the same without any assistance from the appellant
      before the High Court. Any such guidelines would upset settled law not
      only with reference to section 260A but also impact process under section
      100 CPC. Unlike the assessees cases involved in this batch of appeals,
      it was never the case of the department that the High Court has not
D
      considered any of its written/ oral pleadings before the High Court. It is
      submitted that considered view may be taken after taking into account
      pleadings before the High Court, pleadings in the appeals before this
      Court in Assessees and department appeals and not based on sweeping
      generalization.
E            3.11 It is submitted that Transfer Pricing provisions are essentially
      a valuation exercise involving determination of a statistical sample of
      comparables. Under Section 92C(2) of the IT Act, Arm’s Length Price
      is always in a range. It is not a science but it is an art. This Court in G.L.
      Sutania and Anr v SEBI and Ors. reported in 2007 (5) SCC 133 at
F     paras 84 and 85, have unequivocally stated that valuation is a question of
      fact.
             3.12 It is submitted that the case of the Revenue is that the
      proposition in Softbrands India (P) Ltd. (supra) that no question of
      law can arise out of the transfer pricing matters involving selection of
G     comparables or application of filters, and the Tribunal is the final fact
      finding authority and all the questions decided by the Tribunal are
      questions of fact is too broadly stated, and as a result of this proposition,
      it would appear that the High Court has held that no appeal would lie to
      it under section 260A of the IT Act.

H
     SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                              439
      OFFICER, CIRCLE 6, BANGALORE [M. R. SHAH, J.]

       3.13 It is further submitted by the learned counsel appearing on        A
behalf of the respective assessees in the appeals preferred by the
Revenue that in all these cases, the High Court has found that there is
no perversity by the Tribunal in determining the arm’s length price and
therefore no substantial question of law arises as no perversity is pleaded
and demonstrated. It is submitted that therefore the impugned judgments
                                                                               B
and orders passed by the High Court dismissing the appeals preferred
by the Revenue are not required to be interfered with by this Court.
      4. We have heard Shri Balbir Singh, learned ASG appearing on
behalf of the Revenue and learned senior counsel/counsel appearing on
behalf of the respective assessees at length.
                                                                               C
        5. In the present batch of Civil Appeals preferred by the Revenue,
the respective High Courts, more particularly the Karnataka High Court
have/has dismissed the appeals preferred by the Revenue in which the
Revenue challenged the determination of the arm’s length price by the
Tribunal, relying upon and/or considering the decision of the Karnataka
High Court in the case of Softbrands India (P) Ltd. (supra). In the            D
case of Softbrands India (P) Ltd. (supra), the High Court has taken
the view that the determination of arm’s length price by the Tribunal
shall be final against which an appeal under Section 260A of the IT Act
is not required to be entertained.
       Therefore, the short question which is posed for the consideration      E
of this Court is, whether in every case where the Tribunal determines
the arm’s length price, the same shall attain finality and the High Court is
precluded from considering the determination of the arm’s length price
determined by the Tribunal, in exercise of powers under Section 260A
of the Act?                                                                    F
       6. While determining the aforesaid issue, the relevant provisions
for determining the arm’s length price under the IT Act are required to
be referred to.
      Section 92-C which is relevant, for the purpose of determining
      ALP inter alia, reads as follows:                                        G
          “92C. (1) The arm’s length price in relation to an
          international transaction [or specified domestic
          transaction] shall be determined by any of the following
          methods, being the most appropriate method, having regard
          to the nature of transaction or class of transaction or class        H
440     SUPREME COURT REPORTS                       [2023] 4 S.C.R.


A        of associated persons or functions performed by such
         persons or such other relevant factors as the Board may
         prescribe, namely : -
            (a) comparable uncontrolled price method;
            (b) resale price method;
B
            (c) cost plus method;
            (d) profit split method;
            (e) transactional net margin method;
            (f) such other method as may be prescribed by the Board.
C
      (2) The most appropriate method referred to in sub-section
      (1) shall be applied, for determination of arm’s length price,
      in the manner as may be prescribed:
      Provided that where more than one price is determined by the
D     most appropriate method, the arm’s length price shall be taken
      to be the arithmetical mean of such prices:
                             ** ** **
      (3) Where during the course of any proceeding for the
      assessment of income, the Assessing Officer is, on the basis
E     of material or information or document in his possession, of
      the opinion that-
         (a) the price charged or paid in an international
         transaction [or specified domestic transaction] has not
         been determined in accordance with sub-sections (1) and
F        (2); or
         (b) any information and document relating to an
         international transaction [or specified domestic
         transaction] have not been kept and maintained by the
         assessee in accordance with the provisions contained in
G        sub-section (1) of section 92D and the rules made in this
         behalf; or
         (c) the information or data used in computation of the arm’s
         length price is not reliable or correct; or

H
SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                        441
 OFFICER, CIRCLE 6, BANGALORE [M. R. SHAH, J.]

    (d) the assessee has failed to furnish, within the specified    A
    time, any information or document which he was required
    to furnish by a notice issued under sub-section (3) of
    section 92D, the Assessing Officer may proceed to
    determine the arm’s length price in relation to the said
    international transaction [or specified domestic
                                                                    B
    transaction] in accordance with sub-sections (1) and (2),
    on the basis of such material or information or document
    available with him:
    Provided that an opportunity shall be given by the Assessing
    Officer by serving a notice calling upon the assessee to
    show cause, on a date and time to be specified in the notice,   C
    why the arm’s length price should not be so determined on
    the basis of material or information or document in the
    possession of the Assessing Officer.”
 20. Section 92C(1) thus visualizes determination of the “arms-
 length price” (ALP) by any of five enumerated methods, “being      D
 the most appropriate method ”, having regard to the “nature of
 transaction or class of transaction or class of associated
 persons or functions performed by such persons or such other
 relevant factors as the board may prescribe, namely (a)
 comparable uncontrolled price method, (b) resale price             E
 method, (c) cost + method, (d) profit split method, (e)
 transactional net margin method, (f) any such other method
 as may be prescribed by the board. Where more than one price
 is determined by the most appropriate method, the arm’s length
 price shall be taken to be arithmetical mean of such prices.”
                                                                    F
 21. Rule 10B of the Rules prescribes the determination of arm’s
 length price under Section 92C. The first step in all methods is
 evaluation of differences between the international transaction
 undertaken with the “unrelated enterprise performing the
 comparable functions” in similar circumstances. Rule 10B of
 the Income-tax Rules inter alia, provides for various methods      G
 for determination of the arm’s length price. Rule 10B(1)(e)
 prescribes the “transactional net margin method” (TNMM) with
 which the present case is concerned. Rule 10B(1)(e) (i) is as
 under:
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442            SUPREME COURT REPORTS                           [2023] 4 S.C.R.


A               “10B. (1) Determination of arm’s length price under section
                92C:— . .
                               ************* *********
                (e) transactional net margin method, by which,—
B               (i) the net profit margin realised by the enterprise from an
                international transaction entered into with an associated
                enterprise is computed in relation to costs incurred or sales
                effected or assets employed or to be employed by the
                enterprise or having regard to any other relevant base.”

C            7. Therefore, while determining the arm’s length price, the Tribunal
      has to follow the guidelines stipulated under Chapter X of the IT Act,
      namely, Sections 92, 92A to 92CA, 92D, 92E and 92F of the Act and
      Rules 10A to 10E of the Rules. Any determination of the arm’s length
      price under Chapter X de hors the relevant provisions of the guidelines,
      referred to hereinabove, can be considered as perverse and it may be
D     considered as a substantial question of law as perversity itself can be
      said to be a substantial question of law. Therefore, there cannot be any
      absolute proposition of law that in all cases where the Tribunal has
      determined the arm’s length price the same is final and cannot be the
      subject matter of scrutiny by the High Court in an appeal under Section
E     260A of the IT Act. When the determination of the arm’s length price is
      challenged before the High Court, it is always open for the High Court
      to consider and examine whether the arm’s length price has been
      determined while taking into consideration the relevant guidelines under
      the Act and the Rules. Even the High Court can also examine the question
      of comparability of two companies or selection of filters and examine
F     whether the same is done judiciously and on the basis of the relevant
      material/evidence on record. The High Court can also examine whether
      the comparable transactions have been taken into consideration properly
      or not, i.e., to the extent non-comparable transactions are considered as
      comparable transactions or not. Therefore, the view taken by the
G     Karnataka High Court in the case of Softbrands India (P) Ltd. that in
      the transfer pricing matters, the determination of the arm’s length price
      by the Tribunal is final and cannot be subject matter of scrutiny under
      Section 260A of the IT Act cannot be accepted.
            8. Thus, in each case, the High Court should examine whether
      the guidelines laid down in the Act and the Rules are followed while
H
     SAP LABS INDIA PRIVATE LIMITED v. INCOME TAX                             443
      OFFICER, CIRCLE 6, BANGALORE [M. R. SHAH, J.]

determining the arm’s length price. Therefore, we are of the opinion that     A
the absolute proposition of law laid down by the Karnataka High Court
in the case of Softbrands India (P) ltd. (supra) that in the matter of
transfer pricing, determination of the arm’s length price by the Tribunal
shall be final and cannot be subject matter of scrutiny and the High
Court is precluded from examining the correctness of the determination
                                                                              B
of the arm’s length price by the Tribunal in an appeal under Section
260A of the IT Act on the ground that it cannot be said to be raising a
substantial question of law cannot be accepted. As observed hereinabove,
within the parameters of Section 260A of the IT Act in an appeal
challenging the determination of the arm’s length price, it is always open
for the High Court to examine in each case whether while determining          C
the arm’s length price, the guidelines laid down under the Act and the
Rules, referred to hereinabove, are followed or not and whether the
determination of the arm’s length price and the findings recorded by the
Tribunal while determining the arm’s length price are perverse or not.
       9. In view of the above, the impugned judgments and orders passed      D
by the High Court dismissing the Revenue’s appeals and even the appeals
preferred by the assessees are required to be quashed and set aside and
the matters are required to be remitted back to the concerned High
Courts to decide and dispose of the respective appeals afresh in light of
the observations made hereinabove and examine in each and every case
whether the guidelines laid down under the Act and the Rules, referred        E
to hereinabove, are followed while determining the arm’s length price by
the Tribunal or not and to that extent whether the findings recorded by
the Tribunal while determining the arm’s length price are perverse or
not.
       10. In view of the above and for the reasons stated above, all         F
these appeals are allowed. The impugned judgments and orders passed
by the respective High Courts are hereby quashed and set aside. The
matters are remitted back to the respective High Courts to decide and
dispose of the appeals afresh in light of the observations made hereinabove
and to examine whether in each case while determining the arm’s length        G
price the guidelines laid down under the Act and the Rules, referred to
hereinabove, are followed or not and whether the findings recorded by
the Tribunal while determining the arm’s length price are perverse or
not. The aforesaid exercise be completed, preferable within a period of
nine months from the date of receipt of the present order by the respective
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444              SUPREME COURT REPORTS                          [2023] 4 S.C.R.


A     High Courts. It is specifically observed that we have not entered into the
      merits of the cases at all and we have not expressed anything on the
      determination of the arm’s length price in case of respective assessees,
      either in favour of the assessees or in favour of the Revenue. It is
      ultimately for the concerned High Court to take a fresh decision, as
      observed hereinabove.
B
               11. All these appeals stand allowed in terms of the above. No
      costs.

      Nidhi Jain                                                  Appeals allowed.
      (Assisted by : Abhishek Pratap Singh and Tamana, LCRAs)
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