PR COMMISSIONER OF INCOME TAX vs. M/S RAKON INDIA PVT LTD

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ITA/456/2022HC KarnatakaKAHC01043218202225 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 noted the assessee's submission regarding the tax effect and the Revenue's request for liberty to revive. Consequently, the substantial questions of law were kept open to be adjudicated in an appropriate proceeding. No specific findings were made on the merits of the transfer pricing issues, the comparability analysis, the treatment of foreign currency fluctuations, or the exclusion of depreciation. The operative direction was to dispose of the appeal with the stated liberty, leaving the questions of law undecided on the merits.

What were the facts?

The Revenue, comprising the PR. Commissioner of Income Tax and the Dy. Commissioner of Income Tax, filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated 01.11.2021 passed by the Income Tax Appellate Tribunal, 'A' Bench, Bengaluru. The appeal pertains to Assessment Year 2009-10 and challenges the Tribunal's decision in ITA No. 1964/Bang/2017 concerning M/s. Rakon India Pvt. Ltd. The Revenue raised several substantial questions of law regarding transfer pricing adjustments, comparability analysis, treatment of foreign currency fluctuations, and the exclusion of depreciation in margin calculations. The assessee's counsel raised a preliminary objection regarding the tax effect of the appeal being below Rs. 2 Crores, citing CBDT Circular No. 09/2024.

What were the issues?

The Tribunal was to decide the following substantial questions of law: 1. Whether the Tribunal erred in requiring exact comparability for comparable companies under the TNMM method, instead of similar comparables as per international jurisprudence, concerning Section 92C of the Income Tax Act. 2. Whether the Tribunal's rejection of M/s Valiant Communication Ltd and M/s Chemtrols Industries Ltd. as comparables, due to an insistence on strict comparability under TNMM, defeats the purpose of determining the Arm's Length Price (ALP) under the Income Tax Act. 3. Whether the Tribunal was justified in treating foreign currency fluctuations as operating in nature, contrary to Income Tax Rule 10 TA, concerning Section 92C. 4. Whether the Tribunal was justified in comparing the assessee's margins with comparables after excluding depreciation, ignoring that depreciation is an integral part of manufacturing operations, concerning Section 92C. 5. Whether the Tribunal's order directing the Transfer Pricing Officer to exclude or include comparables chosen by the officer, in accordance with Section 92 and its rules, was perverse. Assessee's Contention: The appeal should not be entertained due to the tax effect being less than Rs. 2 Crores, citing CBDT Circular No. 09/2024. Revenue's Contention: Sought liberty to revive the appeal if the matter falls within exceptions under Circular No. 09/2024 and Circular No. 5/2024.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 92C,Section 92,Section 10 TA

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:40057-DB ITA No. 456 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.456 OF 2022

BETWEEN:

1.

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

2.

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

M/S. RAKON INDIA PVT. LTD., NO.12, KHB INDUSTRIAL AREA, YELAHANKA NEW TOWN, BANGALORE-560 106. …RESPONDENT (BY SMT. TANMAYEE RAJKUMAR, ADVOCATE)

THIS ITA / INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 01/11/2021 PASSED IN ITA NO.1964/BANG/2017 FOR THE ASSESSMENT YEAR 2009-2010 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HONBLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:40057-DB ITA No. 456 of 2022

ORDER DATED 01/11/2021 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN ITA NO. 1964/BANG/2017 FOR ASSESSMENT YEAR 2009-2010 (ANNEXURE-A) AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THIS APPEAL, COMING ON FOR FURTHER 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 Smt. Tanmayee Rajkumar, 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 01.11.2021 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru (for short ‘Appellate Authority’) in ITA.No.1964/Bang/2017 for the assessment year 2009-10, raising the following substantial questions of law:

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NC: 2024:KHC:40057-DB ITA No. 456 of 2022

I. "Whether on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of the law and international jurisprudence require seeking similar comparable companies?"

II. "Whether the order of the tribunal in rejecting comparables M/s Valiant Communication Ltd and M/s Chemtrols Industries Ltd. by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under income Tax Act?"

III. "Whether on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in treating the foreign currency fluctuations as operating in nature, ignoring the fact that the foreign currency fluctuations are non operating in nature as per Income Tax Rule 10 TA?"

IV. "Whether on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in comparing the margins of the assessee and the comparable after excluding depreciation to arrive at correct comparability. Ignoring the fact that depreciation is an integral part of business operation in manufacturing industry?"

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NC: 2024:KHC:40057-DB ITA No. 456 of 2022

V. "Whether on the facts and in the circumstances of the case, can the order passed by Tribunal be said as perverse in nature since Tribunal has directed the Transfer Pricing Officer to exclude or include certain comparable's which are chosen by the said officer in accordance with parameters set out in section 92 and Rules framed thereunder"?

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.

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.

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NC: 2024:KHC:40057-DB ITA No. 456 of 2022

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

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