Transfer-pricing determinations are reviewable under Section 260A for statutory non-compliance or perversity.

The connected appeals arose from transfer-pricing assessments concerning international transactions between the respective assessees and their associated enterprises.

The assessees furnished transfer-pricing studies, following which the Assessing Officers referred the matters to the Transfer Pricing Officers (TPOs) for determination of the arm’s length price (ALP).

The TPOs applied various filters, selected comparable companies and proposed adjustments, which were incorporated into draft or final assessment orders.

The Karnataka High Court had earlier decided the appeals between 2018 and 2021. Those decisions were challenged before the Supreme Court, which, in SAP Labs India (P.) Ltd. v. ITO, [2023] 454 ITR 121 (SC), set aside the High Court’s judgments and remitted the matters for fresh consideration.

The Supreme Court directed the High Court to examine whether the provisions of Chapter X of the Income-tax Act and Rules 10A–10E had been followed and whether the ITAT’s findings were perverse.

1. Whether the High Court could examine, in an appeal under Section 260A, the ITAT’s determination of ALP, selection or exclusion of comparables and application of filters, where violation of the Act, the Rules or perversity was alleged?

2. Whether the selection or exclusion of comparable companies was consistent with Sections 92C and 92CA and Rule 10B, including the use of turnover and RPT filters?

3. Whether foreign-exchange gains or losses could be treated as operating revenue or operating expenditure for ALP computation?

4. Upon whom did the burden lie to substantiate the inclusion or exclusion of comparables and the determination of ALP?

5. Whether new comparables could be introduced or existing comparables excluded at the appellate stage on the basis of subsequently available data?

6. Whether the ±5% variation under Section 92C(2) constituted a standard deduction, and whether Section 92C(2A) applied retrospectively from Assessment Year 2002–03?

7. Whether working-capital adjustment was legally permissible and whether the ITAT’s findings on such adjustment warranted interference?

8. Whether the ITAT could follow its earlier decisions concerning the functional comparability of companies?

9. In the individual appeals, whether the ITAT’s findings regarding particular comparables, foreign-exchange items, RPT filters, abnormal profits or losses, Satyam Computers, and the 6% margin filter were contrary to law or perverse?

The Court applied Sections 92, 92C, 92CA, 92D, 92E and 92F of the Income-tax Act, 1961, and Rules 10A–10E of the Income-tax Rules.

Section 92C requires ALP to be determined by the most appropriate prescribed method, while Rule 10B requires comparability to be assessed by reference to the characteristics of the transaction, functions performed, assets employed, risks assumed, contractual terms and market conditions; material differences must be eliminated through reasonably accurate adjustments.

The taxpayer bears the initial burden of determining and documenting the ALP, but the TPO may reject it only when one or more conditions in Section 92C(3) are satisfied; once the TPO substitutes comparables, the TPO must justify that selection.

Relying on SAP Labs India (P.) Ltd. v. ITO, [2023] 454 ITR 121 (SC), the Court held that perversity or non-compliance with Chapter X may constitute a substantial question of law under Section 260A.

The Court also relied on Marubeni India (P.) Ltd. v. DIT, [2013] 354 ITR 638 (Delhi), for the retrospective operation of Section 92C(2A), and Smt. Jyothi Kumari v. ACIT, [2012] 20 taxmann.com 236 (Karnataka), for the proposition that a cross-objection is not maintainable in an appeal under Section 260A.

The Court held that ALP determination is ordinarily a fact-intensive and data-driven exercise, but it remains reviewable under Section 260A where the Tribunal fails to apply Chapter X, Rule 10B or relevant evidence, or where its findings are demonstrably perverse.

It upheld the Tribunal’s use of a ₹200-crore upper turnover filter, observing that size, brand value, economies of scale, bargaining power and ownership of intangibles can materially affect comparability.

A 15% RPT filter was held ordinarily appropriate; a higher filter of 20% or 25% could be used only upon a specific finding that sufficient comparables satisfying the lower threshold were unavailable.

Foreign-exchange gains or losses could be treated as operating items only if the assessee established a direct nexus with the relevant international transaction.

Mere attribution to business operations was insufficient where the gain or loss arose solely from currency fluctuation unrelated to the transaction itself.

The Court further held that later-available data could support inclusion or exclusion of comparables at the appellate stage, provided the proposed comparables satisfied the statutory requirements; the Tribunal could decide the matter itself or remand it to the TPO.

The ±5% benefit was held to be a tolerance range and not a standard deduction.

The arithmetic mean had first to be compared with the actual transaction price, and adjustment was required where the variation exceeded the prescribed limit.

Section 92C(2A), inserted by the Finance Act, 2012, operated retrospectively from 1 April 2002.

Working-capital adjustment was recognised as a comparability adjustment under Rule 10B(3), but its grant depended on reliable data and the facts of each case.

Applying these principles, the Court generally declined to interfere with the ITAT’s exclusion of functionally dissimilar or economically incomparable companies because the Revenue had not pleaded or demonstrated perversity.

However, the exclusion of Hinduja TMT Ltd. and Aftek Infosys Ltd. in the SAP Labs appeals was set aside for reconsideration because it had been influenced by the wrongly applied pre-amendment ±5% benefit.

The issue of foreign-exchange gains or losses in several appeals was remitted to the TPO to determine whether a direct nexus with the international transactions existed.

The 15% RPT filter and ₹200-crore turnover filter were upheld.

The treatment of foreign-exchange gains or losses was remitted to the TPO for verification of a direct nexus with the relevant international transactions.

The exclusion of Hinduja TMT Ltd. and Aftek Infosys Ltd. was set aside and remitted to the Tribunal for fresh consideration in light of the retrospective application of Section 92C(2A).

The Tribunal’s use of the ±5% variation as a standard deduction was set aside, and the matter was remitted for fresh determination.

The Court declined to exclude Satyam Computers Ltd. merely on the basis of unsubstantiated allegations concerning its accounts.

The cross-objection in ITA Crob. No. 1/2018 was dismissed as not maintainable under Section 260A.

The connected appeals were disposed of accordingly, with pending applications also disposed of.