SC ruling sap labs

Softbrands SAP Labs Supreme Court (SC) Ruling – Key Takeaways:

Last week, in a landmark verdict in the case of SAP Labs, the SC overturned the HighCourt ( HC ) order in the case of Softbrands. The SC ruled that HC has to decide the appeals by examining whether determination of arm’s length price (ALP) by the Income Tax Appellate Tribunal (ITAT) is based on the Income Tax Act and Income Tax rules. Earlier in the case of Softbrands, the HC ruled that ITAT is the final fact-finding authority and unless the appellant states the perversity as well as demonstrates the perversity of the ITAT order, HC would not interfere in the findings of the ITAT.

While most of us are aware of the decision, in our alert, we have primarily focussed on the key takeaways and considerations of this landmark SC ruling viz.,:

1. For the cases remanded by the SC in the order, HC will have to adjudicate the cases within 9 months and the appellant will have to present before HC how the ITAT order did not adhere to Income Tax Act and rules in determining the arm’s length price.
2. Increase in cases before the HC based on the SC ruling. In the event of adverse order for the taxpayer, increase in cash outflow due to interest and penalties.
3. Impact on refunds and demand.
4. In existing cases, Two alternatives where appellant is aggrieved by the order of HC – in determination of ALP – Review petition and SLP before SC
5. Revisit the strategy/Framing of grounds before the ITAT.
6. Impact on contingent liability – evaluation and FIN 48 related disclosure.
7. Alternate dispute resolution currently available – APA, Safe harbor (SHR) , MAP,
8. Expectation from Government of India – enhancement of scope of SHR, hybrid programs, introduction of ICAP (International Compliance Assurance Programme) in India.

VSTN can support taxpayers in:

1. Understanding the impact on the ruling for the MNE Group.
2. Performing a health check to identify any gaps or red flags in the existing intragroup transactions and Group’s transfer pricing policy
3. Outline the strategy to overcome any issues that can arise from a Transfer pricing litigation perspective
4. Devise risk mitigation plans to reduce the possibility of litigation or transfer pricing adjustments, including use of dispute resolution mechanisms such as Safe Harbour Rules, Advance pricing agreement, as may applicable.

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