PRINCIPAL COMMISSIONER OF INCOME TAX-4 vs. M/S MICROFOCUS SOFTWARE INDIA PVT LTD

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ITA/529/2019HC KarnatakaKAHC01027146201926 September 2024Bench: S.G.PANDIT,C.M. POONACHA6 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 kept the substantial questions of law open to be adjudicated in an appropriate proceeding. The decision was based on the submissions regarding the tax effect and the CBDT circulars. The Court did not decide the merits of the substantial questions of law concerning the comparability analysis under TNMM, the imposition of conditions by the Tribunal, or the nature of ALP determination. The operative direction was to dispose of the appeal with liberty to revive, leaving the questions of law undecided.

What were the facts?

The appeal was filed by the Revenue (Principal Commissioner of Income Tax-4 and Dy. Commissioner of Income Tax) against an order dated March 31, 2016, passed by the Income Tax Appellate Tribunal (ITAT), 'A' Bench, Bengaluru. The ITAT's order was in relation to appeal proceedings IT(TP)A No. 1287/Bang/2011 for the Assessment Year 2007-2008. The assessee is M/s Microfocus Software India Pvt. Ltd. The High Court of Karnataka admitted the appeal on February 11, 2020, to consider substantial questions of law. During the hearing, the assessee's counsel pointed out that the tax effect in the appeal was less than Rs. 2 Crores, citing CBDT Circular No. 09/2024 dated September 17, 2024, and argued that the appeal should not be entertained. The Revenue's counsel requested liberty to revive the appeal if the matter fell within exceptions under the mentioned circulars.

What were the issues?

The High Court was to decide the following substantial questions of law: 1. Whether the Tribunal was correct in seeking exact comparability while searching for comparable companies under the Transactional Net Margin Method (TNMM), when the law and international jurisprudence require seeking similar comparable companies? 2. Whether the Tribunal, while seeking exact comparability, imposed conditions beyond the law, when the law requires acknowledging only those differences that materially affect the margin? 3. Whether the Tribunal was correct in not acknowledging that the determination of Arm's Length Price (ALP) through comparability analysis is an art and not an exact science, as no two companies are exactly the same? The assessee contended that the appeal should not be entertained due to the tax effect being less than Rs. 2 Crores, relying on CBDT Circular No. 09/2024. The revenue contended that it should be granted liberty to revive the appeal if the matter falls 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:40502-DB ITA No. 529 of 2019

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. 529 OF 2019 BETWEEN:

1.

PRINCIPAL COMMISSIONER OF INCOME TAX-4, BMTC COMPLEX, KORAMANGALA, BENGALURU.

2.

THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BMTC COMPLEX, KORAMANGALA, BENGALURU …APPELLANTS (BY SRI. SANMATHI E I., ADVOCATE) AND:

M/S MICROFOCUS SOFTWARE INDIA PVT. LTD., (PREVIOUSLY KNOWN AS NOVELL SOFTWARE DEVELOPMENT (INDIA) P. LTD.,) BAGMANE TECH PARK, D .BLOCK 65/2, C.V. RAMAN NAGAR, BYRASANDRA POST, BANGALORE-560 093 PAN - AAACN6992K …RESPONDENT (BY SRI. SURYANARAYANA T., SR. COUNSEL A/W SMT. TANMAYEE RAJKUMAR, ADVOCATE)

Digitally signed by BHARATHI S Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:40502-DB ITA No. 529 of 2019

THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31/03/2016 PASSED IN IT(TP)A NO.1287/BANG/2011, FOR THE ASSESSMENT YEAR 2007-2008 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 A) SET ASIDE THE APPELLATE ORDER DATED 31.03.2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. IT(TP)A NO.1287/BANG/2011 (ANNEXURE-A) FOR THE ASSESSMENT YEAR 2007-2008 AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE 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:40502-DB ITA No. 529 of 2019

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

Heard the learned counsel Sri.Sanmathi.E.I., for appellants/Revenue and Sri. Suryanarayana.T., learned Senior Counsel along with 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 31.3.2016 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru (for short, ‘Appellate Authority’) in IT(TP)A.No.1287/Bang/2011 for the assessment year 2007-2008.

3.

This

Court,

admitted the appeal on 11.02.2020 to consider the following substantial questions of law:

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NC: 2024:KHC:40502-DB ITA No. 529 of 2019

1.

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

2.

Whether on the facts and circumstances of the case and in law, while seeking the exact comparability as mentioned above, the Tribunal was right in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin?

3.

Whether on the facts and circumstances of the case and in law, the Tribunal was right in not acknowledging that determination of

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NC: 2024:KHC:40502-DB ITA No. 529 of 2019

ALP by carrying out comparability analysis of the comparable companies is an art and not exact science as no two companies are exactly same?

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.

6.

In view of the aforesaid submissions, the appeal is disposed of with liberty as prayed for by the learned

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NC: 2024:KHC:40502-DB ITA No. 529 of 2019

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.: 12

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