THE PRINCIPAL COMMISSIONER OF INCOME TAX -2 V. M/S MICROCHIP TEHNOLOGIES INDIA PVT LTD

ITA/585/2022

AI Insights

The case involves an appeal by the Principal Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s. Microchip Technologies India Pvt. Ltd. concerning an order passed by the Income Tax Appellate Tribunal, Bengaluru. The appeal was filed under Section 260-A of the Income Tax Act, 1961, challenging the Tribunal's decision on various grounds related to transfer pricing and the exclusion of certain comparables. The Tribunal had directed the Transfer Pricing Officer to exclude certain comparables based on functional dissimilarity, which the appellants contested. Additionally, the appeal raised issues regarding the deduction for ESOP/RSUS costs and the application of the TNMM method for comparability.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 699868 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 24-09-2024
• Assessment Year: misc
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: TANMAYEE RAJKUMAR
• Assessee Lawyers: SANMATHI I
• Keywords: Comparable Analysis; Tax Deduction; TNMM; Transfer pricing; ESOP/RSUS
• Section: 10B; 260-A

Judgement Text

" - 1 - NC: 2024:KHC:39712-DB ITA No. 585 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. 585 OF 2022 BETWEEN: 1. THE PRINCIPAL COMMISSIONER OF INCOME TAX -2 BMTC COMPLEX KORAMANGALA BANGALORE. 2. THE DEPUTY COMMISSIONER INCOME TAX, CIRCLE -4(1)(2) BMTC COMPLEX KORAMANGALA BANGALORE. …APPELLANTS (BY SRI. SANMATHI E. I., ADV.) AND: M/S. MICROCHIP TECHNOLOGIES INDIA PVT. LTD., NO.149-B, EPIP I PHASE INDUSTRIAL AREA, WHITEFIELD BANGALORE- 569 066 PAN NO. AABCM 9868J. …RESPONDENT (BY SMT. TANMAYEE RAJKUMAR, ADV.) Digitally signed by MARIGANGAIAH PREMAKUMARI Location: HIGH COURT OF KARNATAKA - 2 - NC: 2024:KHC:39712-DB ITA No. 585 of 2022 THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 14.06.2021 PASSED IN ITA NO.323/BANG/2019 ASSESSMENT YEAR 2010- 2011, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/ OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 14.06.2021 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, A BENCH, BANGALORE, IN APPEAL PROCEEDINGS IN ITA NO.323/BANG/2019 (ANNEXURE-A) FOR A.Y. 2010-2011 AS SOUGHT FOR IN THIS APPEAL AND TO 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 Smt.Tanmayee Rajkumar for 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 14.06.2021 passed by the Income Tax Appellate Tribunal, - 3 - NC: 2024:KHC:39712-DB ITA No. 585 of 2022 ‘A’ Bench, Bengaluru (for short, ‘Appellate Authority’) in ITA.No.323/Bang/2019 for the assessment year 2010-11, raising the following substantial questions of law: “1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law to directing Transfer Pricing Officer to exclude comparable's by ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and, if so, whether it is legally permissible to bypass the same partially or by implication? 2. Whether under the facts and circumstances of the case, the Tribunal's order can be said as perverse in nature since Tribunal has directed Transfer Pricing Officer to exclude M/s.Infosys Ltd, Sasken Communication Technologies Ltd, Tata elxsi Ltd, Kals Information Systems Ltd, Asian Business Exhibition and Conferences Ltd, HCCA Business Services Pvt Ltd, Killick Agencies and Marketing Ltd, Hindusthan Housing Company Ltd on ground of functional dissimilarity without considering findings of Transfer Pricing Officer in TPO order whereby the said authority has categorically held that functions of said comparable companies are similar to that of - 4 - NC: 2024:KHC:39712-DB ITA No. 585 of 2022 assessee in respect of nature of filed they are involved? 3. Whether on the acts and in the circumstances of the case, the Tribunal is right in law in taking different stands on adjustments to comparables margins to make them comparable to tested party, just so that assessee benefits both ways and revenue looses both ways since it goes against the principle of equality and natural justice? 4. Whether on the facts and in circumstances of the case, the Tribunal is right in law in allowing deduction for a sum of Rs.1,99,91,400/- representing cost of ESOP/RSUS debited to the company by its parent company while not appreciating the fact that the capital expenditure of the parent company was being cloaked in the garb of revenue expenditure of its Indian Company? 5. Whether on the facts and in the circumstances of the case, the Tribunal is justified in not upholding the fact that passing on liability of parent company to its Indian Company was a mechanism to enable Indian Company to avail tax deduction under the Act? - 5 - NC: 2024:KHC:39712-DB ITA No. 585 of 2022 6. Whether on the facts and circumstances of the case and in law, the Tribunal was justified in seeking exact comparability under TNMM and whether the objection to the selection of comparable is legally sustainable? 7. Whether on the facts and circumstances of the case and in law, the Tribunal was justified in ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication? 8. Whether on the facts and circumstances of the case and in law, the Tribunal was justified in holding that M/s. Infosys Ltd. cannot be taken as a comparable as the company is a giant company in the area of software and it assumed all risks leading to higher profits, without 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? 9. Whether on the facts and circumstances of the case and in law, the Tribunal was justified in holding that M/S. Sasken Communication Technology Limited cannot be taken as comparable - 6 - NC: 2024:KHC:39712-DB ITA No. 585 of 2022 as the company owns IPR and has branded products without 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 from the annual report of the company, it can be seen that the company ha not shown any revenue in the financials from investments made on patents?” 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. - 7 - NC: 2024:KHC:39712-DB ITA No. 585 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 MPK CT:bms List No.: 2 Sl No.: 8 "