THE PR COMMISSIONER OF INCOME TAX vs. M/S TOYOTO BOSHOKU AUTOMOTIVE INDIA PVT LTD

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ITA/241/2023HC KarnatakaKAHC01019882202326 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 submissions regarding the tax effect. The learned counsel for the assessee submitted 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 September 17, 2024, which binds the Revenue. The learned counsel for 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 March 15, 2024. The Court granted this liberty. 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.

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 September 26, 2022, passed by the Income Tax Appellate Tribunal, Bengaluru. The appeal pertains to the assessment year 2017-18 and concerns the determination of the Arms Length Price (ALP) for royalty transactions between the assessee, M/s. Toyota Boshoku Automotive India Pvt Ltd, and its Associated Enterprise (AE). The High Court admitted the appeal to consider substantial questions of law regarding the appropriateness of the methods used for ALP determination.

What were the issues?

1. Whether the Tribunal's order is perverse in directing the Assessing Officer/Transfer Pricing Officer (TPO) to apply the Most Appropriate Method (MAM) for determining ALP as against the Transactional Net Margin Method (TNMM) adopted by the TPO for royalty transactions, when the transactions met the conditions of Rule 10B(1)(d) and OECD guidelines? - Assessee's contention: Not recorded. - Revenue's contention: The Tribunal's order is perverse for directing MAM over TNMM, especially when the conditions of Rule 10B(1)(d) and OECD guidelines were met. 2. Whether the Tribunal is right in directing the TPO to apply the Profit Split Method (PSM) as MAM against TNMM, ignoring that TNMM, which uses net profit margins of the entity, cannot demonstrate the arms-length nature of a standalone transaction like royalty payment? - Assessee's contention: Not recorded. - Revenue's contention: TNMM is inappropriate for royalty transactions as it reflects entity-level margins, not standalone transaction ALP. 3. Whether the Tribunal's order is perverse for failing to consider that the residual profit split method provides a routine return for routine services and accommodates compensation for non-routine services and investments, making it the most appropriate method for evaluating international royalty transactions? - Assessee's contention: Not recorded. - Revenue's contention: The Tribunal failed to consider the suitability of the residual profit split method for royalty transactions.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 10B(1)(d)

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:40544-DB ITA No. 241 of 2023

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 26TH 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.241 OF 2023

BETWEEN:

1.

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

2.

THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-7(1)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU – 560 095.

…APPELLANTS

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

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:40544-DB ITA No. 241 of 2023

AND:

M/S. TOYOTO BOSHOKU AUTOMOTIVE INDIA PVT LTD 41, BHIMENAHALLI, M N HALLI POST, BIDADI, RAMANAGARAM - 562 109. PAN. AAECT 1871F.

…RESPONDENT

(BY SRI. BALRAM R RAO, ADVOCATE)

THIS 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 ABOVE 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:40544-DB ITA No. 241 of 2023

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 and Sri. Balram.R.Rao, learned counsel for the 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 26.09.2022 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (for short ‘Appellate Authority’) in IT(TP)A.No.722/Bang/2022 for the assessment year 2017-18.

3.

This

Court,

admitted the appeal on 12.09.2023 to consider the following substantial questions of law: 1. Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in nature in directing the Assessing

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NC: 2024:KHC:40544-DB ITA No. 241 of 2023

Officer/Transfer Pricing Officer to apply most appropriate method for determination of Arms Length Price as MAM method as against TNMM method adopted by Transfer Pricing Officer to benchmark royalty transactions when the transactions between the taxpayer and its AE fulfilled all the conditions specified in Rule 10B(1)(d) of the Act and OECD guidelines?

2.

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to apply most appropriate method for determination of Arms Length Price as PSM method as against TNMM method adopted by Transfer Pricing Officer ignoring that profit margins under TNMM method, which is net profit margin of the entity, cannot demonstrate the arms length nature of an independent, stand- alone transaction like royalty payment?

3.

Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as

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NC: 2024:KHC:40544-DB ITA No. 241 of 2023

perverse in nature as Tribunal has failed to consider that the residual profit split method provides a routine return for routine services and also accommodates a compensation for non- routine services and investment in non-routine assets and hence, it is the most appropriate method to evaluate the international transactions of royalty?

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

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NC: 2024:KHC:40544-DB ITA No. 241 of 2023

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.: 3 Sl No.: 14

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