THE PR. COMMISSIONER OF INCOME TAX vs. M/S ON SEMICONDUCTOR TECHNOLOGY INDIA PVT LTD

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ITA/165/2023HC KarnatakaKAHC01017340202327 September 2024Bench: S.G.PANDIT,C.M. POONACHA5 pages
AI SummaryWithdrawn

What did the High Court hold?

The High Court disposed of the appeal with liberty to the revenue to revive it as prayed for by its counsel. The court acknowledged the submissions regarding the tax effect and the applicability of CBDT Circulars No. 09/2024 and 05/2024. Consequently, the court did not adjudicate on the substantial questions of law framed at the time of admission. The court explicitly stated that the questions of law were kept open to be adjudicated in an appropriate proceeding. Therefore, no specific findings were made on the exclusion of comparables, the correlation between turnover and margin, or the working capital adjustments. The operative direction was to dispose of the appeal with liberty to revive, without deciding the merits of the case.

What were the facts?

The Revenue, comprising the Principal Commissioner of Income Tax and the Deputy Commissioner of Income Tax, has filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated July 21, 2022, passed by the Income Tax Appellate Tribunal, Bengaluru Bench. The appeal pertains to Assessment Year 2016-17 and challenges the Tribunal's decision in IT(TP)A No. 291/Bang/2021. The High Court admitted the appeal on December 12, 2023, to consider substantial questions of law. During the hearing, the assessee, M/s. On Semiconductor Technology India Pvt. Ltd., argued that the tax effect in the appeal is less than Rs. 2 Crores, making it ineligible for appeal by the revenue as per CBDT Circular No. 09/2024. The revenue sought liberty to revive the appeal if the matter fell within exceptions under Circulars 09/2024 and 05/2024.

What were the issues?

The Tribunal had to decide eight substantial questions of law. The primary questions revolved around the exclusion of comparables by the Tribunal based on turnover exceeding Rs. 200 Crores and the application of an upper turnover filter (Question 1). Another key issue was whether the Tribunal erred in not following its own prior decisions in M/s Societe Generale Global Solution Centre Pvt Ltd. and M/sj.Vmoksha Technologies Pvt. Ltd., which held that turnover is not a relevant criterion for comparability (Question 2). The Tribunal's finding on the existence of a correlation between turnover and operating margin of an entity was also questioned (Question 3). Furthermore, the appeal questioned the Tribunal's allowance of working capital adjustments, particularly whether it impacts profit margins (Question 4), whether average capital accurately reflects working capital employed (Question 5), whether disclosures in the annual report provided sufficient breakup of debtors and creditors for such adjustments (Question 6), and whether the cost of capital for different companies was considered (Question 7). Finally, the revenue questioned if the Tribunal's order was perverse in excluding comparables chosen by the Transfer Pricing Officer (Question 8). The assessee contended that the tax effect was below the threshold stipulated in CBDT Circular No. 09/2024, thus barring the appeal. The revenue sought liberty to revive the appeal based on exceptions in relevant circulars.

Which sections of the Income-tax Act were involved?

Section 260-A

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:40429-DB ITA No. 165 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.165 OF 2023 BETWEEN:

1.

THE PR. COMMISSIONER OF INCOME TAX 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.

2.

THE DEPUTY COMMISSION OF INCOME-TAX, CIRCLE-3(1)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560095. …APPELLANTS (BY SRI. DILIP M., ADVOCATE ALONG WITH RAVIRAJ Y.V., ADVOCATE)

AND:

M/S. ON SEMICONDUCTOR TECHNOLOGY INDIA PVT. LTD., NO.105, PRESTIGE SALEH AHMED INFANTRY ROAD, BENGALURU-560 001. PAN. AADCP 8949D. …RESPONDENT (SERVED)

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:40429-DB ITA No. 165 of 2023

THIS APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961, PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU, IN IT(TP)A NO. 291/BANG/2021 DATED 21.07.2022 FOR THE ASSESSMENT YEAR 2016-2017 (ANNEXURE-D) AND ETC.

THIS APPEAL IS COMING ON FOR FINAL 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

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

Heard the learned counsel Sri. Dilip.M., along with Sri. Raviraj.Y.V., learned counsel for the appellants/Revenue.

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 21.07.2022 passed by the Income Tax Appellate Tribunal, 'B' Bench, Bengaluru (for short, ‘Appellate Authority’) in IT(TP)A.No.291/Bang/2021 for the Assessment Year 2016-17.

3.

This Court, admitted the appeal on 12.12.2023 to consider the following substantial questions of law:

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NC: 2024:KHC:40429-DB ITA No. 165 of 2023

"1. Whether on the facts and in the circumstances on the case, the Tribunal is right in directing Transfer Pricing Officer to exclude comparable's namely, L&T Infotech Ltd., Nihilent Technologies Ltd., Persistent Systems Ltd., Thirdware Solutions Ltd., Infosys Ltd., Asprie Systems India Pvt. Ltd. & Cybage Software Pvt. Ltd. as comparables having turnover in excess of 200cr and in directing to apply appropriate upper turnover filter?

2.

Whether the Tribunal is right in fact and law in not following the decision of its own bench rendered in the case of M/s Societe Generale Global Solution Centre Pvt Ltd. in IT (TP) A No. 1188/BANG/2011 and M/sj.Vmoksha Technologies Pvt. Ltd. in IT(TP) A No.595/BANG/2013 dated 26.08.2016 for AY 2005-06 where the Tribunal has held that turnover is not a relevant criteria for deciding the comparability?

3.

Whether the Tribunal is right in law and fact in holding that there exists a co-relation between turnover and operating margin of an entity?

4.

Whether the Tribunal is right in fact and in law by allowing working capital adjustment, where it does not impact the profit margin of the company?

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NC: 2024:KHC:40429-DB ITA No. 165 of 2023

5.

Whether the Tribunal is right in law by directing to allow working capital adjustments without considering that the average capital may not show the actual working capital employed during the year?

6.

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

7.

Whether the Tribunal is right in fact and in law in providing working capital adjustment to the assessee without considering that cost of capital is different for different companies?

8.

Whether on the facts and in circumstances of the case, the Tribunal's order is perverse in law in excluding comparable's chosen by Transfer Pricing Officer which satisfied all required tests."

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

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NC: 2024:KHC:40429-DB ITA No. 165 of 2023

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.: 48

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