PR COMMISSIONER OF vs. M/S MICROCHIP TECHNOLOGY

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ITA/916/2017HC KarnatakaKAHC01050641201713 August 2018Bench: S.SUJATHA,VINEET KOTHARI10 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the issue regarding exclusion of expenses from turnover for Section 10A benefits is covered by the Supreme Court's decision in HCL Technologies Ltd. The Court also noted that appeals concerning the selection of comparables and filters do not raise substantial questions of law.

What were the facts?

The Revenue appealed against an ITAT order concerning the assessment year 2008-09. The appeal raised questions about excluding foreign currency and communication charges from export turnover and total turnover for Section 10A benefits, and the application of an RPT filter for comparable companies.

What were the issues?

Whether expenses should be excluded from both export and total turnover for Section 10A benefits, and whether the selection of comparable companies and RPT filters raise substantial questions of law.

Which sections of the Income-tax Act were involved?

Section 10A,Section 260-A

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(2)Show list

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1/10 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 13TH DAY OF AUGUST 2018

PRESENT

THE HON’BLE DR.JUSTICE VINEET KOTHARI

AND

THE HON’BLE MRS.JUSTICE S.SUJATHA

I.T.A. No.916/2017

BETWEEN : 1. PR. COMMISSIONER OF INCOME TAX-4 BMTC COMPLEX KORMANGALA, BANGALORE.

2.

ASSISTANT COMMISSIONER

OF INCOME TAX, CIRCLE-12[1]

BANGALORE.

...APPELLANTS

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

AND : M/s. MICROCHIP TECHNOLOGY [INDIA] PVT. LTD., No.149-B, EPIP, 1ST PHASE INDL. AREA, WHITEFIELD BANGALORE PAN: AABCM 9868J.

…RESPONDENT

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 03.05.2017 PASSED IN IT[TP]A No.1586/BANG/2012, FOR THE ASSESSMENT YEAR 2008-2009, VIDE ANNEXURE-A, PRAYING TO: [1] 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

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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SET ASIDE THE APPELLATE ORDER DATED 03.05.2017 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.1586/BANG/2012 FOR A.Y. 2008-09 VIDE ANNEXURE-A AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:

J U D G M E N T

Mr. E.I.Sanmathi, Adv. for Appellants – Revenue.

This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’, Bangalore, in IT[TP]A No.1586/Bang/2012 dated 03.05.2017, relating to the Assessment Year 2008-09.

2.

The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under: “1. Whether on the facts and circumstances of the case, the Tribunal is justified in directing the assessing officer to exclude the expenditure in foreign currency and

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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communication charges both from the export turnover and the total turnover when there is no provision in Section 10A which requires the said expenses to be reduced from the total turnover?

2.

Whether on the facts and circumstances of the case, the Tribunal is right in law in excluding certain by imposing RPT filter of 15% for selection of comparable without giving specific reason for rejection of RPT filter of 25% applied by the Transfer Pricing Officer?”

Regarding Substantial Question of Law No.1: 3. The issue is covered by the decision of the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).

4.

The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- “17. The similar nature of controversy, akin this case, arose before the Karnataka High Court

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover.

Any other interpretation would run counter to the legislative intent and would be impermissible.

18.

XXXXXX

19.

In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent,

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.

20.

Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well”.

5.

The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of Law No.2: “6. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The assessee’s turnover of international transactions is Rs.22.88

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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Crores. Therefore the first issue raised is regarding the applying of proper filter of turnover. Both the parties have agreed in principle that 10 times of the assessee’s turnover on both sides shall be applied as a filter for selecting he comparable companies. The second aspect which is to be considered in this appeal is regarding Related Party Transaction [RPT] filter. The TPO applied 25% RPT. We find that neither the TPO nor the assessee has found any difficulty in selection of comparable companies. The TPO has selected as many as 20 companies in the final set of comparables. Therefore this is a normal case of availability of comparables. Accordingly, in view of the consistent view taken by this Tribunal that in the normal circumstances, the RPT tolerance range shall not exceed 15%.

7.

Thus the comparability of the entire set of comparables has to be decided by applying the appropriate filter of turnover at 10 times of assessee’s turnover on both sides and further RPT filter of 15%. We are of the considered opinion that the entire TP issue requires fresh examination and consideration at the level of TPO/A.O. Accordingly, in the facts and circumstances of the case, we set aside the TP

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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issue including selection of comparables and functional comparability to the record of the TPO for consideration and adjudication. Needless to say the assessee be given a proper opportunity of hearing raising the objections on the functional comparability of the company.”

6.

However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. –v- M/s Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.

The relevant portion of the said judgment is quoted below for ready reference: “Conclusion: 55.

A substantial quantum of international trade and transactions depends

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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56.

We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.

57.

We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.

Date of Judgment 13-08-2018, ITA No.916/2017 Pr. Commissioner of Income Tax-4 & Another Vs. M/s. Microchip Technology [India] Pvt. Ltd.,

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58.

The appeals filed by the Revenue are therefore dismissed with no order as to costs.”

7.

Having heard the learned counsel appearing for the Appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The Appeal filed by the Appellants- Revenue is liable to be dismissed and it is dismissed accordingly. No costs.

Copy of this Order be sent to the Respondent- Assessee forthwith.

Sd/- JUDGE

Sd/- JUDGE

NC.

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