PR COMMISSIONER OF INCOME TAX-2 vs. M/S EMC SOFTWARE AND SERVICES INDIA PVT LTD

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ITA/226/2022HC KarnatakaKAHC01015320202224 September 2024Bench: S.G.PANDIT,C.M. POONACHA6 pages
AI SummaryWithdrawn

What did the High Court hold?

The High Court disposed of the appeal based on the submissions made by both parties. The assessee contended that the tax effect was below the threshold stipulated in CBDT Circular No. 09/2024, making the appeal not maintainable. The Revenue sought liberty to revive the appeal if the case fell under exceptions to the circulars. The Court granted the liberty as prayed for by the Revenue. Consequently, the appeal was disposed of without a decision on the merits of the substantial questions of law. The Court explicitly kept the questions of law open to be adjudicated in an appropriate proceeding. No specific findings were made on the ITAT's exclusion of comparables, the nature of comparability analysis, or the application of Rule 10B. The operative direction was to dispose of the appeal with liberty to revive.

What were the facts?

The Revenue, represented by the Principal Commissioner of Income Tax-2 and the Dy Commissioner of Income Tax, filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated 24.11.2020 passed by the Income Tax Appellate Tribunal (ITAT), Bengaluru Bench. The appeal pertains to Assessment Year 2011-12 and challenges the ITAT's decision in ITA No. 554/Pune/2016. The High Court of Karnataka admitted the appeal to consider substantial questions of law concerning the ITAT's exclusion of comparable companies in transfer pricing analysis under the TNMM method.

What were the issues?

The High Court was asked to decide the following substantial questions of law: 1. Whether the ITAT was correct in excluding comparables (Acropetal Technologies, Persistent Systems Ltd., and Infosys Ltd.) despite them satisfying the TPO's qualitative and quantitative filters. 2. Whether the ITAT erred in demanding exact comparability for companies under the TNMM method, contrary to legal and international jurisprudence requiring only comparable companies. 3. Whether the ITAT was right in disregarding the principle that differences between compared enterprises under TNMM may not materially affect price, cost, or profits. 4. Whether the ITAT was correct in imposing decisions from its co-ordinate benches without performing a FAR analysis of the taxpayer in relation to those cases. 5. Whether the ITAT was right in holding that M/s Accropetal Technologies Ltd. failed the service revenue filter when its software segment's service revenue constituted 100% of segmental sales. 6. Whether the ITAT was correct in not acknowledging that determining ALP through comparability analysis is an art, not an exact science. 7. Whether the ITAT was right in demanding comparability standards that could defeat the purpose of ALP determination under the Income Tax Act. 8. Whether the ITAT's order was perverse in excluding Persistent Systems Ltd., Acropetal Technologies Ltd., E-Infochips Ltd., and Infosys Ltd. by ignoring the TPO's findings and materials and the parameters of Rule 10B of the IT Rules. Assessee's Contention: The assessee argued that the tax effect in the appeal is less than Rs. 2 Crores, and therefore, the appeal should not be entertained by the Revenue in view of CBDT Circular No. 09/2024 dated 17.09.2024, which binds the Revenue. Revenue's Contention: The Revenue sought liberty to revive the appeal if the matter falls within the exceptions under Circular No. 09/2024 and Circular No. 5/2024 dated 15.03.2024.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 10B

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24TH 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. 226 OF 2022 BETWEEN:

1.

PR. COMMISSIONER OF INCOME TAX-2 KORAMANGALA, BANGALORE.

2.

THE DY COMMISSIONER OF INCOME TAX CIRCLE 1(2), KORAMANGALA, BMTC COMPLEX, BANGALORE …APPELLANTS (BY SRI SANMATHI E I,ADVOCATE) AND:

1.

M/S EMC SOFTWARE AND SERVICES INDIA PVT LTD NO.1430, SHURAKAWAR PETH, OFF NO.5, J K CHAMBERS, BAJI ROAD, PUNE 411002, PAN AABCT01998. …RESPONDENT (BY SMT TANMAYEE RAJKUMAR, ADVOCATE)

THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 24/11/2020 PASSED IN ITA NO.554/PUNE/2016, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING THIS HON’BLE COURT TO: (A) DECIDE THE FOREGOING QUESTION OF LAW AND / OR

Digitally signed by MARIGANGAIAH PREMAKUMARI Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT 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

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

Heard the learned counsel Sri.Sanmathi.E.I., for appellants/Revenue and learned counsel Smt.Tanmayee Rajkumar 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 24.11.2020 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (for short, ‘Appellate Authority’) in ITA.No.554/Pune/2016 for the assessment year 2011-12.

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

3.

This

Court,

admitted the appeal on 27.03.2023 to consider the following substantial question of law: “(1) Whether on the facts and circumstances of the case and in law, the ITAT was right in excluding comparables namely Acropetal Technologies, Persistent Systems Ltd. and Infosys Ltd. holding that it cannot be taken as comparables, even when it satisfies all the qualitative and quantitative filters applied by the TPO?.

(ii) Whether on the facts and circumstances of the case and in law, the ITAT was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking comparable companies?

(iii) Whether on the facts and circumstances of the case and in law, the ITAT was right in disregarding the position of law that there could be difference between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises?.

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

(iv) Whether on the facts and circumstances of the case and in law, the ITAT was right in imposing the decisions of its co-ordinate benches rendered in other cases to the facts of the taxpayer without doing any FAR analysis of the taxpayer with those other cases?

(v) Whether on the facts and circumstances of the case and in law, the ITAT was right in holding that M/s Accropetal Technologies Ltd. fails service revenue filter when the TPO has considered only software segment of the company and wherein service revenue is 100% of segmental sales and thereby the company qualifies the said revenue filter?

(vi) Whether on the facts and circumstances of the case and in law, the ITAT was right in not acknowledging that determination of ALP by carrying out comparability analysis of the companies is an art and not exact science as no two companies are exactly same?

vii) Whether on the facts and circumstances of the case and in law, the ITAT was right in demanding comparability standards that may itself defeat the

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

purpose of law relating to determination of ALP under the income tax Act?

viii) Whether the order passed by Tribunal is perverse in nature as Tribunal has excluded Persistent Systems Ltd, Acropetal Technologies Ltd, E-Infochips Ltd, Infosys Ltd by ignoring the findings and materials brought on record by Transfer Pricing officer and parameters of Rule 10B of I.T. Rules?”

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.

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.

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NC: 2024:KHC:39762-DB ITA No. 226 of 2022

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

MPK List No.: 2 Sl No.: 0

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