PR. COMMISSIONER OF INCOME TAX vs. M/S XCHANGING SOLUTIONS LTD

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ITA/411/2017HC KarnatakaKAHC01034077201724 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 granted to the Revenue to revive it as prayed for by its counsel. The Court did not decide the substantial questions of law on merits. The Court explicitly stated that the questions of law are kept open to be adjudicated in an appropriate proceeding. Therefore, no specific findings were made on the arm's length commission for corporate guarantees, the interest rate for foreign currency loans, or the working capital adjustments for software development services. The operative direction was to dispose of the appeal with liberty to revive, meaning the substantive issues raised by the Revenue were not addressed in this judgment.

What were the facts?

The Revenue, represented by 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 31.10.2016 passed by the Income Tax Appellate Tribunal (ITAT), 'A' Bench, Bengaluru. The appeal pertains to Assessment Year 2008-2009 and challenges the ITAT's decision in IT(TP)A No.1294/Bang/2012. The High Court admitted the appeal on 13.01.2020 to consider specific substantial questions of law concerning the determination of arm's length price for corporate guarantees, interest rates on foreign currency loans from associated enterprises, and working capital adjustments for software development services.

What were the issues?

The Tribunal had to decide the following substantial questions of law: 1. Whether the Tribunal erred in directing the Assessing Officer/TPO to adopt a commission of 0.5% for corporate guarantees instead of the prevailing market rate, which the revenue contended was around 3% of the credit availed. 2. Whether the Tribunal was correct in fixing the interest rate at 2% instead of a standard market rate or a rate/basis points fixed by regulatory bodies, particularly for foreign currency loans from Associated Enterprises, where the standard procedure is LIBOR + basis points prescribed by RBI. 3. Whether the Tribunal was right in directing the Assessing Authority/TPO to re-determine the Arm's Length Price for software development services by considering proper working capital adjustments, despite a South Zone conference decision against allowing such adjustments and concerns about the disclosure of segmental working capital. The assessee argued that the appeal should not be entertained due to the tax effect being less than Rs. 2 Crores, citing CBDT Circular No. 09/2024. The revenue requested liberty to revive the appeal if the matter fell within the exceptions of Circular No. 09/2024 and Circular No. 5/2024.

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:39748-DB ITA No. 411 of 2017

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. 411 OF 2017 BETWEEN:

1.

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

2.

THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(5) BANGALORE. …APPELLANTS (BY SRI. SANMATHI E.I., ADV.)

AND:

M/S. XCHANGING SOLUTIONS LTD., NO.13, 14 AND 15 SJR I PARK, EPIP INDL AREA, PHASE-I, WHITEFILED, BANGALORE-560066 PAN:AAEFCS9303L. …RESPONDENT (BY SRI.NAGESHWAR RAO D.D., ADV. (V/C))

THIS APPEAL IS UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31/10/2016 PASSED IN IT(TP)A NO.1294/BANG/2012, FOR THE ASSESSMENT YEAR 2008-2009, PRAYING TO (1) DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE COURT AS DEEMED FIT

Digitally signed by MARIGANGAIAH PREMAKUMARI Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:39748-DB ITA No. 411 of 2017

AND SET ASIDE THE APPELLATE ORDER DATED 31/10/2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT- ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A NO.1294/BANG/2012 FOR A.Y.2008-09 & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

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

ORAL JUDGMENT

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

Heard the learned counsel Sri.Sanmathi.E.I., for appellants/Revenue and learned counsel Sri.Nageshwar Rao.D.D., for respondent/assessee through video conference.

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 31.10.2016 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru (for short, ‘Appellate

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NC: 2024:KHC:39748-DB ITA No. 411 of 2017

Authority’) in IT(TP)A.No.1294/Bang/2012 for the assessment year 2008-09.

3.

This

Court,

admitted the appeal on 13.01.2020 to consider the following substantial question of law: “[i] Whether on the facts and circumstances of the case, the Tribunal is right in directing the assessing officer/TPO to adopt the arms length commission of corporate guarantee at 0.5% instead of prevailing market rate and without appreciating that corporate and financial institutions charge for such credit guarantees and prevailing market rate for guarantee commission is on average at 3% of the credit availed? [ii] Whether on the facts and in the circumstances of the case, the Tribunal is right in directing in fixing the interest rate at 2% instead of standard rate available in market or rate/basis points fixed by regulatory bodies and without appreciating that the interest by the Associates Enterprises to tax payers was in foreign currency and the standard procedure is LIBOR + BASIS POINTS prescribed by RBI/Regulatory authority for that period?

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NC: 2024:KHC:39748-DB ITA No. 411 of 2017

[iii] Whether on the facts and in the circumstances of the case, the Tribunal is right in directing the assessing authority/TPO to redo the determination of the Arms Length Price in respect of providing software development services by considering the proper working capital adjustment without appreciating that in the South Zone conference meet it was decided not to allow working capital adjustments and average working capital will not show the actual working capital employed during the year and future the segmental working capital is not disclosed in the annual reports?”

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:39748-DB ITA No. 411 of 2017

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

MPK CT:bms List No.: 2 Sl No.: 0

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