THE PR. COMMISSIONER OF INCOME TAX vs. M/S. TOKAI RIKA MINDA INDIA PVT. LTD.,

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ITA/139/2023HC KarnatakaKAHC01015985202327 September 2024Bench: S.G.PANDIT,C.M. POONACHA6 pages
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What did the High Court hold?

The High Court disposed of the appeal with liberty granted to the revenue to revive it, as prayed for by its counsel. The Court noted the assessee's submission regarding the tax effect being below the threshold stipulated in CBDT Circular No. 09/2024. The revenue requested liberty to revive the appeal in case the matter fell within the exceptions mentioned in Circular No. 09/2024 and Circular No. 05/2024. The Court acceded to this request. Consequently, the substantial questions of law were kept open to be adjudicated in an appropriate proceeding. No decision was made on the merits of the substantial questions of law raised by the revenue. The operative direction was to dispose of the appeal with liberty to revive.

What were the facts?

The Revenue, comprising the Principal Commissioner of Income Tax and the Deputy Commissioner of Income Tax, filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated June 29, 2022, passed by the Income Tax Appellate Tribunal (ITAT), Bengaluru. The appeal pertains to Assessment Year 2013-14 and challenges the ITAT's decision to allow working capital adjustments and other adjustments. The ITAT's order was passed in IT(TP)A No. 1513/Bang/2017. The High Court admitted the appeal on August 29, 2023, to consider substantial questions of law. The assessee is M/s. Tokai Rika Minda India Pvt. Ltd.

What were the issues?

The Tribunal had to decide six substantial questions of law. The Revenue contended that allowing working capital adjustment without an upper limit would lead to abnormal adjustments, potentially masking a lack of operating profit. They also argued that the Transfer Pricing Officer's (TPO) approach of limiting working capital adjustment to the average cost of capital of comparable companies should have been upheld. Furthermore, the Revenue questioned the Tribunal's direction to allow working capital adjustments without considering that average working capital might not reflect the actual capital employed during the year and that annual report disclosures might lack necessary breakup details for debtors, creditors, and varying costs of capital. Another issue raised was whether the TPO's comparison of net profit margins at the entity level with the taxpayer's, and subsequent adjustments, should be considered an adjustment to the international transaction, making the Tribunal's direction to consider only Associated Enterprises transactions illogical. Finally, the Revenue challenged the Tribunal's remittal of the custom duty adjustment issue, arguing that the relied-upon earlier order involved dissimilar taxpayer activities and functions, with the present case involving routine operations versus an extraordinary event in the relied-upon case. The assessee argued that the tax effect in the appeal was less than Rs. 2 Crores, making it non-maintainable under CBDT Circular No. 09/2024 dated September 17, 2024, which binds the revenue. The revenue sought liberty to revive the appeal if exceptions under Circulars 09/2024 and 05/2024 applied.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 10B(e)

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 27TH DAY OF SEPTEMBER, 2024 PRESENT THE HON'BLE MR JUSTICE S.G.PANDIT AND THE HON'BLE MR JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 139 OF 2023

BETWEEN:

1.

THE PR. COMMISSIONER OF INCOME TAX 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BENGALURU-560095.

2.

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-7(1)(1) 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560095.

…APPELLANTS

(BY SRI. M.DILIP, ADVOCATE A/W SRI. RAVIRAJ.Y.V., ADV.)

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

AND:

M/S. TOKAI RIKA MINDA INDIA PVT. LTD., PLOT NO.365 SOMPURA, KIADB INDUSTRIAL AREA, DOBBA SET, NELAMANGALA TALUK, BENGALURU RURAL DIST-562111. PAN: AADCT 0271C

…RESPONDENT

(BY SRI. K.R.VASUDEVAN, ADVOCATE)

THE ITA/INCOME TAX APPEAL IS FILED UNDER SEC.260- A OF THE INCOME TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A NO.1513/BANG/2017 DATED 29/06/2022 FOR ASSESSMENT YEAR 2013-2014 ANNEXURE -D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-7(1) (1), BENGALURU AND ETC.

THIS APPEAL, COMING ON FOR HEARING, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: CORAM: HON'BLE MR JUSTICE S.G.PANDIT and HON'BLE MR JUSTICE C.M. POONACHA

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

ORAL JUDGMENT (PER: HON'BLE MR JUSTICE S.G.PANDIT)

Heard the learned counsel Sri. Dilip.M., along with Raviraj.Y.V., learned counsel for the appellants/Revenue and learned counsel Sri. K.R.Vasudevan along with Sri. Ankur.P.D., learned counsel for respondent/assessee.

2.

The Revenue is in appeal under Section 260-A of the Income Tax Act, 1961 (for short, ‘the Act’) questioning the correctness and legality of order dated 29.06.2022 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (for short, ‘Appellate Authority’) in IT(TP)A.No.1513/Bang/2017 for the assessment year 2013-14.

3.

This

Court,

admitted the appeal on 29.08.2023 to consider the following substantial questions of law: 1. Whether on the facts and circumstances of the case and in law, the Tribunal is right in law in not considering that to allow working capital adjustment

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

without an upper limit would result into abnormal adjustment and would make the profit earned within the permitted range even if no operating profit is earned?

2.

Whether on the facts and circumstances of the case and in law, the Tribunal is right in law in not upholding the approach of the Transfer Pricing Officer in limiting the working capital adjustment to the average cost of capital of the comparable companies?

3.

Whether the Tribunal’s order can be said as perverse in nature in directing to allow working capital adjustments without considering that the average working capital may not show the actual working capital employed during the year?

4.

Whether the Tribunal is right in law in providing working capital adjustment to assessee without considering that the disclosures in the Annual Report does not contain a breakup of trade and non trade Debtors and creditors and cost of capital different for different companies?

5.

Whether the Transfer Pricing Officer compared the net profit margin of unrelated entities at entity level with that of the taxpayer as per Rule 10B(e) and

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

made adjustment to the net profit margin of the entity, the said adjustment would in fact be an adjustment to the net profit margin of international transaction and in such a scenario, the Tribunal’s direction to consider only Associated Enterprises Transaction for the adjustment is not logical and thus perverse in nature?

6.

Whether the Tribunal’s order can be said as perverse in nature in remitting the issue pertaining to custom duty adjustment by relying on its earlier order wherein, the taxpayer company’s activities and functions were not similar to that of assesse and cannot be considered to facts of present case as taxpayer in present case in a normal routine manner operates and in case of the relied upon company, it is an extraordinary event which is on-operating in the case?

4.

Learned counsel for the assessee submits that the tax effect in this appeal is less than Rs.2 Crores and therefore, the appeal should not be entertained at the instance of the revenue in view of the Circular No.09/2024 dated 17.09.2024 issued by the Central Board of Direct

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NC: 2024:KHC:40428-DB ITA No. 139 of 2023

Taxes. It is also submitted that the aforesaid Circular binds the revenue.

5.

On the other hand, learned counsel for the revenue submits that he be granted liberty to revive the appeal in case the matter falls within the exceptions under the aforesaid Circular dated 17.09.2024 and Circular No.5/2024 dated 15.03.2024.

6.

In view of the aforesaid submissions, the appeal is disposed of with liberty as prayed for by the learned counsel for the revenue. However, the question of law is kept open to be adjudicated in an appropriate proceeding.

Sd/- (S.G.PANDIT) JUDGE

Sd/- (C.M. POONACHA) JUDGE

SMJ List No.: 4 Sl No.: 47

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