ITAT MUMBAI BENCH ‘L’
Johnson & Johnson
Versus
Assistant Director of Income-tax (International Taxation -3) (1)
IT Appeal No. 7865 (Mum.) of 2010
[ASSESSMENT YEAR 2004-05]
FEBRUARY 1, 2013
ORDER
B. Ramakotaiah, Accountant Member
This is an assessee appeal against the order of the DDIT (IT)-3(1) Mumbai under section 143(3) r.w.s. 147 r.w.s. 144C(13) of the I.T. Act. Since the draft order was approved by the DRP-I, Mumbai, assessee preferred the present appeal before us.
2. The grounds raised by assessee are as under:
“1. Based on the facts and circumstances of the case, the learned AO has erred in law and in fact, in reopening the assessment under section 147 of the Act. Your Appellant respectfully submits that the initiation of re-assessment proceedings is contrary to law and erroneous and ought to be set aside.
2. Based on the facts and circumstances of the case, the learned AO has erred in law and in fact in making arbitrary addition of royalty income of Rs. 4,49,084,243 to the total income of the Appellant by summing up the total amount of royalty as reflected by the certificates of Tax Deducted at Source (TDS) and not accepting the cash basis of accounting method adopted regularly by assessee since last 13 years.
3. Based on the facts and circumstances of the case, the learned AO has erred in not assessing the income of the Appellant on mercantile basis at Rs. 38,48,76,032 for A.Y 2004-05 as against Rs. 5,20,753,780 as per TDS certificates for various years.
4. Based on the facts and circumstances of the case, the learned AO has erred in not granting corresponding credit of TDS of Rs. 78,113,068 in respect of above determined income of Rs. 5,20,753,780.
5. Based on the facts and circumstances of the case, the learned AO has erred in law and in fact, in levying interest under section 234B of the Act, disregarding the fact that the Appellant is a non-resident assessee and its entire revenues/ receipts are subject to tax withholding in India under section 195 of the Act and the Appellant is not liable to pay advance tax in respect of such revenues. The Appellant respectfully submits that, as per the provisions of the Act, the interest under section 234B of the Act is not leviable in case of the Appellant and the AO be directed to delete the interest levied under section 234B of the Act at Rs. 52,542,856″.
3. The facts leading to the present appeal are as under. Assessee is a tax resident of USA deriving income mainly on Royalty claiming benefits under India-USA DTAA. Assessee filed its return of income for A.Y 2004-05 on 1.11.2004 declaring income of Rs. 7,16,69,537. The case of assessee was selected for scrutiny and the assessment order under section 143(3) of the I.T. Act dated 30.11.2006 was passed accepting the total income at Rs. 7,16,69,540 and rate of tax @15%. Afterwards the notice under section 148 of the Act, dated 25.03.2009 was issued. The assessment in the case of assessee was reopened after recording the reasons as under:
“The total income of a person for any previous year includes all income from whatever source derived which is received or which accrues or arises in such previous year unless specifically exempted from tax. The related receipt in respect of any tax deducted at source has to be taken into account in computing the total income of assessee.
Assessee is a tax resident of USA. Assessee provides various services like technological assistance, expert services related to advertising, promotions, marketing plans and strategy, distribution network, technological solutions for information management etc, to its associated enterprises. Johnson & Johnson Ltd and M.R. Enterprises Ltd and earned royalty J&J USA holds 75% of the total shares of J&J India. The assessment of A.Y 2004-05 was computed under scrutiny in November, 2006 for income of Rs. 716.69 lakhs. On verification, it was revealed that the total amount paid/credited to assessee account on account of royalty for the period upto March 04 (previous year relevant to A.Y 2004-05) amounted to Rs. 52,07,53,780, whereas assessee has offered only Rs. 7,16,69,537 for taxation. Thus royalty income of Rs. 44,90,84,243 was not offered for taxation in AY 2004-05. Further the tax rate applicable as per agreement is 20 per cent whereas tax was levied @ 15 per cent. The short levy of tax on assessed income escaped assessment works out to Rs. 2,60,37,689 (after adjustment of TDS @ 15%).
In view of the above, there is reason to believe that the income chargeable to tax has escaped assessment within the meaning of section 147, explanation 2(C) of the IT Act and it is fit case to re-open the assessment”.
In the re-assessment proceedings rejecting assessee objections, draft order under section 144C (1) r.w.s. 147 r.w.s. 143(3) of the I.T. Act 1961 was passed on 24.11.2009. Assessee filed objections against the draft order before the Dispute Resolution Panel-1,Mumbai (DRP) as per the provisions of section 144C(2) of the Act. The Dispute Resolution Panel-1, Mumbai vide its order dated 12.08.2010 has issued directions under section 144C(5) of the I.T. Act confirming the action of AO. Accordingly order under section 143(3) r.w.s. 147 r.w.s. 144C(13) of the I.T. Act, 1961 dt. 03.09.10 was passed, which is subject matter of present appeal.
4. Assessee’s objections regarding reopening of assessment and bringing to tax higher amount before AO and DRP are as under:
“(a) No fresh material has come on record to establish that income of J&J USA has escaped assessment. The issue of royalty has been verified in detail during the scrutiny assessment proceedings for AY 2004-05 and all the relevant documents were submitted to AO during such proceedings.
(b) Assessee had fully and truly disclosed all material facts in return of income which has attained finality by virtue of order passed under section 143(3) of the Act. Thus, the entire re-assessment proceedings have been initiated merely because of a change in opinion in respect of the tax position which was initially accepted by AO and not because of income escaping assessment due to failure or omission on part of J&J to truly disclose the material facts necessary for assessment. Assessee placed reliance on various judicial pronouncements in support of its contentions.
(c) J&J USA has been consistently following the cash basis of accounting for more than 13 years and the same has been accepted consequent to the order by the CIT(A) for assessment year 2003-04.
(d) J&J India and NR Jet being companies incorporated under Companies Act, 1956 follow mercantile system of accounting. Amount accrued to J&J India in its books for the previous year ended 31st March 2004 has been actually paid to J&J USA during the previous year ended on 31st March, 2006 and 31st March, 2007.
(e) In any case, amount of royalty mentioned in the notice does not match with amount of royalty accrued to J&J India and NR Jet.
(f) Since the provision of India-USA DTAA are more beneficial to J&J USA i.e. royalty taxable @15% vis-à-vis @ 20% under the Income Tax Act, the royalty received has been offered to tax @ 15%.
(g) Without prejudice to above, the amount of royalty credited as per Form 3CEB, J&J India and NR Jet is Rs. 38,48,76,032 only and not the amount considered by AO.”
5. AO discussed the provisions of section 147, various legal principles in reopening within 4 years and rejected the objections. On facts, surprisingly AO did not accept assessee’s objections by stating as under:
“(g) Assessee’s representative has failed to file the documentary evidences to prove that J&J India and NR Jet being companies incorporated under Companies Act, 1956 follow mercantile system of accounting and amount accrued in by J&J India in its books for the previous year ended 31st March, 2004 has been actually paid to J&J during the previous year ended on 31st March, 2006 and 31st March, 2007. Assessee’s representative has also not filed any documentary evidences to prove various other contentions made in the submissions. In the absence of the documentary evidences, assessee’s representative’s various contentions are not acceptable.
(h) Assessee’s representative has submitted that the amount of royalty credited as per Form 3CEB, J&J India and NR Jet is Rs. 38,48,76,032. The same argument is also not acceptable because on perusal of the TDS certificates filed by assessee along with the return of income for A.Y 2004-05, it is noticed that the total amount of royalty received by assessee is Rs. 52,07,53,780″.
AO brought to tax the entire amount of Rs. 52,07,53,780. DRP-I in their brief order, simply rejected the objections without considering the merits of the issues.
6. The learned Counsel in his arguments, referring to the documents placed on record, raised the issue of jurisdiction, legality of bringing to tax the entire royalty income, provisions of DTAA, mistake in AO’s order in considering the entire amount as accrued ignoring assessee’s contention of amount accrued during the year, not giving credit of tax deducted and levy of interest etc..
7. The learned CIT (DR) however, countered the arguments and relied on the order of AO, principles relied upon by AO on legality of reopening and reason for taxing the income on accrued basis. He also submitted that an anomalous situation may arise when assessee may not offer income and the deductors may not deduct tax as amount is not taxable and provision of Act may become in-operable.
8. We have considered the rival contentions and examined the paper book placed on record. Before examining the legal issue of reopening, we examined the facts which determine whether action of AO is sustainable. Assessee filed return of income offering Rs. 7,16,69,534 and claiming TDS of Rs. 1,07,50,431 (@15%) leaving a note in the computation of income as under:
“The TDS has been claimed for Rs. 1,07,50,431 though the certificates filed are for Rs. 7,81,13,068 which pertain to income that are yet to be received and the same shall be claimed on the receipt of the royalty”.
8.1 Assessee enclosed the statement of TDS and details of income offered year wise as under:
(Big table was split for presentation)
