THE PR COMMISSIONER OF INCOME TAX CIT (A) vs. M/S APTEAN INDIA PVT LTD
What did the High Court hold?
The High Court disposed of the appeal as not maintainable due to the tax effect being less than Rs. 2 Crores, as per CBDT Circular No. 09/2024. Liberty was granted to the revenue to revive the appeal if exceptions under the circulars apply.
What were the facts?
The Revenue appealed against an ITAT order concerning transfer pricing adjustments for the assessment year 2013-14. The appeal raised several substantial questions of law regarding the exclusion and inclusion of comparable companies and the allowability of deductions.
What were the issues?
The core issues revolved around the correctness of the ITAT's decision on selecting comparable companies for transfer pricing analysis and the allowability of certain deductions. The maintainability of the appeal itself was also a key consideration.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
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. 288 OF 2022 BETWEEN:
THE PR. COMMISSIONER OF INCOME TAX, CIT (A), 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU-560095.
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1(1)(1) 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU-560095. …APPELLANTS (BY SRI. RAVIRAJ Y.V., ADV. A/W SRI DILIP M., ADV.)
AND:
M/S. APTEAN INDIA PVT. LTD., (FORMERLY APTEAN SOFTWARE INDIA PVT. LTD.,) LEVEL-5 (8TH FLOOR), GOLDEN HEIGHTS NO.1/2, 59TH C CROSS, 4TH M BLOCK RAJAJINAGAR, BENGALURU-560010 PAN-AACCP7154M. …RESPONDENT
THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 09/11/2021 PASSED IN IT(TP)A NO.2638/BANG/2017, FOR THE ASSESSMENT YEAR 2013- 2014, PRAYING TO I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE; II. ALLOW THE APPEAL AND SET ASIDE THE
Digitally signed by B LAVANYA Location: HIGH COURT OF KARNATAKA
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A NO.2638/BANG/2017 DATED 09/11/2021 FOR ASSESSMENT YEAR 2013-2014 ANNEXURE-D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU AND ETC.
THIS APPEAL, COMING ON FOR ADMISSION, 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.Raviraj Y.V. along with Sri.Dilip M, learned counsel for appellants/Revenue. 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 09.11.2021 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (for short, ‘Appellate Authority’) in IT(TP)A.No.2638/Bang/2017 for the assessment year 2013-14.
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
This
Court,
admitted the appeal on 22.08.2022 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 law in directing the Transfer Pricing Officer to exclude comparables namely, exclude, Persistent Systems Ltd, Sasken Communication Technologies Ltd, C.G.Vak Software & Exports Ltd on account of functional dissimilarity even when the said comparable satisfies qualitative and quantitative filters and as per Rule 10B of I.T.Rules and ignoring its earlier decision in case of M/s.Societe Generale Global Solution Centre Pvt Ltd and M/s.Vmoksha Technologies Pvt Ltd whereby it is held that turnover is not a relevant criteria for deciding the comparability?
Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in nature in directing Transfer Pricing Officer to include FCS Software Solutions on ground of on account of functional dissimilarity even when the said comparable satisfies qualitative and quantitative filters and as per Rule 10B of I.T. Rules?
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in law in directing the Transfer Pricing Officer to exclude comparables namely, exclude, Larsen & Tourbo, Mind Tree Ltd, Persistent Systems Ltd, R.S.Software India Ltd, Tech Mahindra Ltd as comparables on account of turnover filter even when the said comparable satisfies qualitative and quantitative filters and as per Rule 10B of I.T.Rules and ignoring its earlier decision in case of M/s.Societe Generale Global Solution Centre Pvt Ltd and M/s.Vmoksha Technologies Pvt Ltd whereby it is held that turnover is not a relevant criteria for deciding the comparability?
Whether on the facts and in the circumstances of the case and in law, the Tribunal in allowing deduction under section 37(1) of the Act by relying on clarificatory amendment brought vide finance Act, 2022 by inserting Explanation 3 to Section 40(a)(ii) making it explicitly clear that the term 'tax' shall include and shall be deemed to have always included any surcharge?
Whether the Hon'ble Tribunal is correct in holding that M/s. Persistent Systems ltd cannot be considered as a comparable as the company is engaged in software product development and
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
product design and segmental details are not available, whereas as per page 183 of the annual report of the company for AY 2014-15, it can be seen that the entire income is from software development services?
Whether on the facts and circumstances of the case, whether the Tribunal was correct in comparable's chosen by Transfer Pricing Officer cannot be taken as a comparable as the company is engaged in product development and earns revenue from sale of licenses and subscription and segmental details are not available, whereas as per the annual report of the companies finalized by said officer, it can be seen that the entire income is from software development service?
Whether the Tribunal was right in fact and in law holding that M/s. Larsen Toubro Infotech Ltd. cannot be taken as comparable as the company is engaged in diversified activities and no segmental details are available and the company has significant intangibles, significant brand value whereas as seen from the fixed assets schedule of the company, it can be seen that the company does not own any IPR. If at all, business rights are to be considered as IPR, they are very miniscule and insignificant. The internal software is still a work in
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
progress and should only pull down the company's profit?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not acknowledging that there is no direct relationship between brand value and the margin earned by the company. Brand name may generate higher revenue of the company but it does not necessarily mean that it would increase the profit margin and as seen from 'Note AB- segmental information' available on S-1258, it is seen that the company has disclosed segment based on the client's business?
Whether the Tribunal is right in law in not acknowledging that the segment classification has been done on vertical line of business and therefore, they do not constitute a separate and distinct business segment per-se, therefore discontinuing of one of such vertical line of business during the year will not have any material impact on the company's functional comparability and profit margin during the year?
Whether on the facts and in the facts and circumstances of the case, the Tribunal is right in law in holding directing Transfer Pricing Officer to include M/s. FCS Software Solutions on ground of
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
functional dissimilarity without appreciating the facts that the company is not functionally comparable to the taxpayer as can be seen from the annual report of the company, it is into the ITES industry and has done transaction processing work which is not functionally similar to the taxpayer?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in directing to allow negative working capital adjustment without appreciating the facts of the case where making a working capital adjustment based on such broad approximations estimations and assumptions may not lead to reliable results and failed to demonstrate the impact of difference in working capital?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not acknowledging that to allow working capital adjustment without an upper limit would result into abnormal adjustment and would make the profit earned within the permitted range even if no operating profit is earned?”
It is noticed that the tax effect in this appeal is less than Rs.2 Crores and therefore, the appeal would not
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NC: 2024:KHC:39757-DB ITA No. 288 of 2022
be maintainable 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.
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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