PR. COMMISSIONER OF INCOME TAX vs. M/S SOFTWARE PARADIGMS INFOTECH PVT LTD

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ITA/324/2022HC KarnatakaKAHC01030090202225 September 2024Bench: S.G.PANDIT,C.M. POONACHA8 pages
AI SummaryWithdrawn

What did the High Court hold?

The High Court disposed of the appeal based on submissions regarding the tax effect and CBDT circulars. The assessee's counsel submitted that the tax effect in the appeal was 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. The Revenue's counsel requested liberty to revive the appeal if the matter fell within the exceptions of Circular No. 09/2024 and Circular No. 5/2024 dated 15.03.2024. In light of these submissions, the Court disposed of the appeal with liberty granted to the Revenue as prayed. The Court explicitly stated that the questions of law were kept open to be adjudicated in an appropriate proceeding. Therefore, no decision was made on the merits of the substantial questions of law raised by the Revenue regarding the comparability of companies in the transfer pricing analysis.

What were the facts?

The Revenue, represented by the Principal Commissioner of Income Tax and the Assistant Commissioner, filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated 27.12.2021 passed by the Income Tax Appellate Tribunal (ITAT), Bengaluru Bench. The appeal pertains to the assessment year 2013-14 and concerns the respondent assessee, M/s. Software Paradigms Infotech Pvt Ltd. The ITAT's order was in relation to IT(TP)A No. 2828/Bang/2017. The Revenue sought to set aside the ITAT's appellate order.

What were the issues?

The Tribunal had to decide several substantial questions of law raised by the Revenue concerning the selection and exclusion of comparable companies for transfer pricing analysis under the Transactional Net Margin Method (TNMM) for the assessment year 2013-14. The questions were: 1. Whether the Tribunal erred in excluding certain companies (Larsen and Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., CG-VAK Software & Exports Ltd., and Tech Mahindra Ltd.) as comparables in the SWD segment, despite their high turnover (over Rs. 200 Crores), without demonstrating how these exclusions align with Rule 10B(2) of the Income Tax Rules, 1962. 2. Whether the Tribunal was correct in excluding M/s. Microland Ltd and M/s. Tech Mahindra Ltd as comparables in the ITeS segment, also based on high turnover, without justification under Rule 10B(2). 3. Whether the Tribunal correctly upheld M/s Akshay Technologies Limited as functionally comparable without providing reasons or a FAR analysis. 4. Whether the Tribunal erred in excluding M/s Infosys BPO Limited as functionally dissimilar, citing high turnover and brand value, without acknowledging that brand value and high turnover do not necessarily increase profit margins. 5. Whether the Tribunal was right in excluding M/s Capegemini Business Services (India) Private Limited due to RPT filter and functional dissimilarity, despite a low RPT revenue to sales ratio and similar functions. 6. Whether the Tribunal erred in excluding M/s Hartron Communication Limited as functionally dissimilar with extraordinary profits, when it was engaged in similar BPO services and extraordinary profits without a peculiar event should not be a reason for exclusion. 7. Whether the Tribunal wrongly relied on co-ordinate bench decisions in M/s ISG Novasoft Technologies Limited without appreciating factual dissimilarities. 8. Whether the Tribunal erred by seeking exact comparability instead of similar comparables under TNMM, contrary to law and international jurisprudence. 9. Whether the Tribunal's objection to the selection of comparables was legally sustainable, given the search for exact comparability under TNMM. 10. Whether the Tribunal ignored the exhaustive parameters of Rule 10B, making its bypass legally impermissible. 11. Whether the Tribunal's order was perverse for not considering its own bench decisions that turnover is not a relevant criterion for comparability. The Revenue argued that the Tribunal's exclusions and inclusions were not justified under Rule 10B(2) and that the Tribunal sought exact comparability, which is not required. The Assessee argued that the tax effect was less than Rs. 2 Crores, and therefore, the appeal should not be entertained in light of CBDT Circular No. 09/2024.

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:39909-DB ITA No. 324 of 2022

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25TH 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.324 OF 2022

BETWEEN:

1.

PR. COMMISSIONER OF INCOME TAX BMTC COMPLEX, KORMANGALA BANGALORE.

2.

THE ASSISTANT COMMISSIONER OF CIRCLE1(1), MYSURU.

…APPELLANTS

(BY SRI. SANMATHI E.I., ADVOCATE)

AND:

M/S. SOFTWARE PARADIGMS INFOTECH PVT LTD NO.316-318 SPI CITY HEBBAL INDUSTRIAL AREA MYSURU-570016,

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:39909-DB ITA No. 324 of 2022

PAN-AALCS7583C …RESPONDENT

(BY SRI. K.R.VASUDEVAN, ADV., A/W ANKUR.P.D., ADV.)

THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27/12/2021 PASSED IN IT(TP)A NO.2828/BANG/2017, FOR THE ASSESSMENT YEAR 2013-2014 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 27/12/2021 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, A BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEES CASE, IN APPEAL PROCEEDINGS IN IT(TP)A NO. 2828/BANG/2017 FOR A.Y.2013-2014 (ANNEXURE-A) AND ETC.

THIS APPEAL, COMING ON FOR ORDERS, 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:39909-DB ITA No. 324 of 2022

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

Heard the learned counsel Sri. E.I.Sanmathi for appellants/Revenue and Sri. K.R.Vasudevan, learned counsel along with Sri. Ankur.P.D., 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 27.12.2021 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru (for short, ‘Appellate Authority’) in IT[TP]A.No.2828/Bang/2017 for the assessment year 2013-14, raising the following substantial questions of law: (a) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in law in excluding M/s. Larsen and Toubro Infotech Ltd., M/s. Mindtree Ltd., M/s. Persistent Systems Ltd., M/s. CG- VAK Software & Exports Ltd. and M/s. Tech Mahindra Ltd. as comparables in SWD segment, having high turnover of more than Rs. 200 Crores without

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NC: 2024:KHC:39909-DB ITA No. 324 of 2022

showing as to how these factors fall within the scope of factors specified in Rule 10B(2) of the Income Tax Rules, 1962"?

(b) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding M/s. Microland Ltd and M/s. Tech Mahindra Ltd as comparables in ITeS segment, having high turnover of more than Rs. 200 Crores without showing as to how these factors fall within the scope of factors specified in Rule 10B(2) of the Income Tax Rules, 1962"?

(c) "Whether on the facts and in the circumstances of the case, the Tribunal is correct in upholding the company M/s Akshay Technologies Limited as functionally comparable to the assessee without giving any reasons and without undertaking a FAR analysis of the company"?

(d) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that M/s Infosys BPO Limited cannot be taken as a comparable on the grounds of being functionally dissimilar, having high turnover and huge brand value, without acknowledging that there is no direct relationship between brand value and the margin earned by the company Brand name may generate

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NC: 2024:KHC:39909-DB ITA No. 324 of 2022

higher revenue of the company, but it does not necessarily mean that it would increase the profit margin, without appreciating the fact that the higher turnover does not necessarily mean that it would increase the profit margin"?

(e) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that M/s Capegemini Business Services (India) Private Limited cannot be taken as a comparable as the company has failed RPT filter and functionally dissimilar without appreciating the fact that as per page 147 of the Annual Report of the Company for the AY 2013-14, RPT revenue to sales ratio for this comparable works out to 0.26% (i.e. Rs. 1.32 Crores / Rs. 516.22 Crores) and as seen from the Annual Report of the Company, Capegemini renders the services broadly in the nature of IT enabled back office support services which include Finance and Accounts and Operational control assessment ? These functions of the Company are similar to the taxpayer. Under TNMM analysis, the requirement for benchmarking analysis is for similar functionally comparable not exact functionally comparable"?

(f) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that M/s Hartron Communication Limited cannot be taken

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NC: 2024:KHC:39909-DB ITA No. 324 of 2022

as a comparable on the grounds of being functionally dissimilar and having extraordinary profits, whereas as per Page No 28 of the Annual Report of the Company, it can be seen that the company is engaged in BPO services which is similar functions to the taxpayer without appreciating the facts that extraordinary profits without any peculiar event during the year cannot be reason to exclude the same"?

(g) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in relying on the decisions of co-ordinate benches in the case of M/s ISG Novasoft Technologies Limited without appreciating the dissimilarities between the facts in the case of the taxpayer and that of those relied upon"?

(h) "Whether on the facts and in the circumstances of the case, the Tribunal is correct in fact and in law in seeking exact comparability while searching for comparable companies of the assesses under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies?

(i) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law and in fact in

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NC: 2024:KHC:39909-DB ITA No. 324 of 2022

seeking exact comparability under TNMM and whether the objection to the selection of comparables is legally sustainable?

(j) "Whether on the facts and in the circumstances of the case, the Tribunal is right in law ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication"?

(k) "Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in nature in not considering the decisions of its own bench in various cases where the Tribunal has held that turnover is not a relevant criterion for deciding the comparability of a company?"

3.

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:39909-DB ITA No. 324 of 2022

4.

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.

5.

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.: 2 Sl No.: 8

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