DCIT Vs M/s DSM Sinochem Pharmaceuticals Pvt. Ltd. (ITAT Chandigarh)
In this case since there was no reason at all for reopening the case on the issue of treatment of royalty expenses ,since the same had already been decided in favour of the assessee by the ITAT, before the recording of reasons for reopening the present case. In fact, the ITAT had decided the issue in the very same assessment year, which assessment order had formed the basis for reopening the case i.e A.Y 2009-10. The AO could not have any reasons to believe that income had escaped assessment when the very basis of its belief, being the assessment order of a subsequent year, had been reversed by the ITAT before the recording of reasons by the AO.
FULL TEXT OF THE ITAT JUDGMENT
The present appeal filed by the Revenue and the Cross Objection of the assessee are directed against the order of CIT(A)-1 Chandigarh 31/07/2017.
2. Briefly stated the assessee had for the impugned year filed return declaring Nil income, which was assessed under section 143(3) of the Act making various additions therein. Thereafter the AO reopened the assessment under section 147 and made addition of Rs. 3,11,32,500/- to the income of the assessee by treating the royalty paid by the assessee amounting to Rs. 4.67 crores as capital expenses, as against revenue claimed by the assessee. The said order was challenged before the Ld. CIT(A) both on the legal ground of the validity of the assessment framed under section 147 of the Act as well as on the merits of the case. The Ld. CIT(A) upheld the validity of the order passed but at the same time decided the issue in favour of the assessee on merits following the decision of the ITAT Chandigarh in the case of the assessee for AY 2009-10 and 2010-11.
3. Aggrieved by the same the Revenue has come in appeal before us challenging the deletion of the addition made on merits while the assessee has filed a Cross Objection challenging the action of the CIT(A) in upholding the validity of the order passed under section 147 of the Act. The grounds raised by the Revenue are as under:
1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the appeal of the assessee without appreciating the facts of the case.
2. Whether the Ld. CIT(A) is right in deleting the addition on account of royalty expenses by relying of the decision of Hon ble ITAT in the case of the assessee for A.Y. 2009-10 & A.Y. 2010-11 in which it was held that expenditure made on account of royalty is a license fee, when the agreement clearly stipulates that it is a royalty payment for an intangible
3. Whether the Ld. CIT(A) is right in law in holding that expenditure made on account of royalty is a Revenue expenditure by relying on the decision of Hon’ble ITAT in the case of the assessee for A.Y. 2009-10 & A.Y. 2010-11 which further relied on the decision of the Hon ble Supreme Court in the case of CIT vs. I.A.E.C (Pumps) Ltd., when the facts of the present case are
4. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer may be restored.
5. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or is disposed off.
4. The ground raised by the assessee in its CO are as under:
1. That on the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) ( Ld. CIT(A) J has erred in upholding the erroneous action of the Ld. Assessing Officer ( ‘Ld. AO’ ) in initiating and completing the reassessment proceedings under section 147/148 of the Act.
1.1 That the Ld. CIT(A) failed to appreciate that the said reassessment proceedings were barred by limitation in view of the proviso to section 147 of the Act on account of the reason that there was no failure on the respondent#s part to disclose fully and truly all material facts necessaiy for assessment.
1.2 That the Ld. CIT(A) failed to appreciate that there is no escapement of income for the year under consideration as no tangible material has come into existence after completion of original assessment and there was mere change of opinion on the part of Ld. AO.
5. Since the assessee has raised a legal ground before us challenging the validity of the order passed under section 147, we shall first be dealing with the Cross Objection filed by the assessee.
6. The sole argument of the Ld.Counsel for the assessee before us was that the reassessment proceedings were initiated in violation of the conditions prescribed in the proviso to section 147 of the Act ,which was attracted in the present case. Drawing our attention to the proviso which states as under:
“147. If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure8O on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:”
Ld. Counsel for the assessee stated that where assessment had been earlier framed u/s 143(3) of the Act, reopening beyond four years from the end of the assessment year could be resorted to only in the situations prescribed therein which included the failure to file the return of income or the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
7. Ld. Counsel for the assessee thereafter drew our attention to the facts of the present case stating that the notice for initiation of reassessment proceeding for the impugned AY i.e. AY 2008-09 was issued on 30/03/2015 i.e. after a lapse of four years from the end of the relevant assessment year. Ld. Counsel for the assessee further pointed out that assessment had originally been made under section 143(3) of the Act. Ld. Counsel for the assessee thus stated that the reopening could be resorted to only in the situations prescribed in the proviso to section 147. Ld.Counsel for the assessee stated that the since the failure to file return could not be ascribed to the assessee, since it had filed its return of income which had been duly scrutinized u/s 143(3) of the Act, the reopening could have been validly initiated only if the assessee had failed to disclose fully and truly all material facts necessary for assessment. Ld. Counsel for the assessee thereafter drew our attention to the reasons recorded by the AO placed at PB page no. 272 which is reproduced hereunder:
The reason for re-assessment u/s 148 of the Act are as under:
“During the course of assessment proceedings for A.Y. 2009-10, it was noticed that the M/s DSM Sin ochem Pharmaceuticals India Pvt. Ltd. claimed expenditure of 46.73 million as Revenue Expenditure on account of payment of Royalty under the head operating and other expenses. As per Agreement/license furnished by the assessee, the royalty is to be paid in installments. During the F.Y. 2007-08 relevant to A.Y. 2008-09, the assessee company has paid Royalty of Rs. 41.51 million and claimed it as a Revenue Expenditure. Since, such expenditure made under the head “royalty shall give enduring benefits to the assessee company in the ensuing years, therefore, the claim of the assessee of expenditure with reference to Royalty amounting to Rs. 41.51 Million appear to be unjustified. The stance of the derailment on this issue in A.Y. 2009-10 & A Y. 20 10-1 1 has also been confirmed by the DRP.
Therefore, I have reasons to believe that the income to the tune of Rs. 4, 15, 10,000/- for the A. Y. 2008-09 has escaped assessment within the meaning of Section 147 of the Income Tax Act, 1961. Therefore, the proceedings in the case of the assessee for A. Y. 2008-09 are being initiated u/s 147 of the Income Tax Act.”
8. Ld. Counsel for the assessee pointed out therefrom that the reopening had been resorted to on account of the claim of the assessee of royalty expenses as revenue in nature, which the AO noted in the reasons, as having been held to be capital in nature in the assessment framed for the subsequent years. It was on account of this fact that the AO allegedly formed the belief that income to the tune of royalty expenses claimed amounting to Rs. 4.15 crores had escaped assessment within the meaning of section 147 of the Act. Ld. Counsel for the assessee thereafter pointed out that the issue of royalty had been discussed during assessment proceedings wherein all primary and material facts relating to royalty had been submitted. In this regard, Ld. Counsel for the assessee pointed out that the transfer pricing officer had discussed the issue of royalty in his order dt. 28/10/2011 placed in the PB at page 113-141. It was contended that through various submissions made during assessment proceeding all information relevant to the payment of royalty had been furnished (P.B 1-112) and also the copy of the Royalty License Agreement(P.B-303-31 9) .Therefore Ld. Counsel for the assessee contended that all material facts with respect to the purported issue of royalty had been filed and had been truly and fully disclosed during assessment proceedings and therefore by virtue of the first proviso to section 147 the AO could not have reopened the assessment. Ld. Counsel for the assessee further pointed out from the reasons that there is not a whisper in the said reason of any failure on the part of the assessee to disclose fully and truly any material fact vis a vis the issue of royalty expenses. It was therefore contended that the present proceedings were invalid and liable to be quashed for this reason. Reliance was placed on the decision of the Hon’ble jurisdictional High Court in the case of State Bank Of Patiala Vs. Commissioner of Income Tax (2015) 375 ITR 109(P&H).
9. Ld. Counsel for the assessee further contended that when the reopening was initiated vide issue of notice dt.30-03-1 5, on account of the treatment of Royalty expenses as revenue in nature, on the basis and for the reason that the same had been held to be capital in nature in the succeeding year i.e. A.Y 2009-10 & 2010-11 by the DRP, the ITAT had already decided the issue in favour of the assessee in one of the years ,i.e. A.Y 2009-10, vide its order in ITA. No. 155/Chd/2014,dt.16-03- 15.Ld.Counsel contended that the AO therefore could not have any reason to believe that income had escaped assessment on account of allowing the claim of royalty expenses as revenue . Ld.Counsel for the assessee further pointed out that the said fact stood admitted by the AO also in his assessment order, and despite the same the AO proceeded with the assessment proceedings. Ld.Counsel for the assessee drew our attention to para 2 of the assessment order in this regard which read as under:
“2. Later, while framing the assessment u/s 143(3) for the subsequent year A.Y. 2009-10, the then Assessing Officer noticed that the assessee company claimed expenditure of 46.73 million as Revenue Expenditure on account of payment of Royalty under the head operating and other expenses. As per Agreement/license furnished by the assessee, the Royalty is to be paid in instalments. The 1st installment of Rs.4 1.51 million was paid by the assessee during the F.Y. 2007-08 relevant to A.Y. 2008-09. The Assessing Officer made an addition on this ground in A.Y. 2009 1-0. The assessee’s claim of Revenue expenditure on this account was rejected by the DRP during these years. However, the assessee succeeded on this ground in ITAT, Chandigarh, for A.Y. 2009-10 in ITA NO. 155/Chd/2014 dated 16.3.20 15. The department is in process of filing appeal on this issue in the Hon’ble High Court of Punjab & Haryana. Since, the expenditure made under the head Royalty’ shall give enduring benefits to the assessee company in the ensuing years, therefore, the claim of the assessee of expenditure with reference to Royalty amounting to Rs.4 1.51 Million has to be re examined in the A.Y. 2008-09 as well. Therefore, proceedings were initiated u/s 147 of the Act and notice was issue to the assessee u/s 148 of the Act on 30.3.20 15 after obtaining due approval from the competent authority.”
10. Ld. DR, on the other hand ,supported the order of the CIT(A) and stated that merely because the assessee had disclosed the transaction at the time of original assessment proceedings it does not protect the assessee from reassessment under section 147 and further that the department was in the process of contesting the order of the ITAT and therefore the said agreeable order of the ITAT did not make the present proceedings invalid. Our attention was drawn to the findings of the AO while dealing with the objections raised by the assessee to the reopening of assessment which the Ld.CIT (A) had reiterated to dismiss the legal ground raised by the assessee before him as under:
“5.2 Objection No. 2 & 3: While the reason to believe by the Assessing Officer primarily focus on the issue at hand whereby certain expenditure made on account of payment of Royalty to M/s DSM BV which was treated as revenue expenditure in your books of account, non disclosure by the assessee has not been explicitly brought out in the reasons recorded. Nevertheless, perusal of the record shows that the assessee failed to disclose the nature of expense so claimed and it was only during assessment proceedings for A.Y. 2009-10 that the issue came to light. Mere submission of final accounts wherein several heads of expenses have been shown does not amount to full disclosure within the meaning of section
147. The assessee should have ideally declared before the AO that the expenditure claimed as Royalty which by its nature gives enduring benefit to the assessee has been differently treated.
5.3 Objection No. 5: The assessee’s contention that relook at the existing material is impermissible has no basis in law and therefore, requires no comments. Further, the argument that the assessee had submitted the ITAT order for A.Y. 2009-10 wherein Royalty payment has been allowed as revenue expenditure also does not has any weight because as a matter of procedure, orders of the Hon’ble ITAT are given effect to only once they are formally received in the office of Commissioner of Income Tax. Moreover, the department is in process of contesting the order of the ITAT before the High Court.”
11. Ld. DR further relied upon the following case laws in support of its contention:
1) Honda Siel Power Products Ltd. Vs. Dy.CIT [2012] 20 Taxmann. com5 (SC) [2012] 206 Taxman 33 (SC) (MAG.) [2012] 340 ITR 64 (SC) [2012] 247 CTR 316 (SC)
2) Honda Siel Power Products Ltd. Vs. Dy.CIT [2012] 10 Taxmann. com2 (Delhi)[ (2011]1907 Taxman 415 (Delhi) [2012] 340 ITR 53 (Delhi) [2012] 247 CTR 322 (Delhi)
3) New Delhi Television Ltd.. Vs. [2017] 84 Taxmann. com 136 (Delhi)
4) CIT Vs. P.V.S. Beedies (P) Ltd. [1999] 103 Taxman 294 (SC) [1999] 237 ITR 13 (SC) [1999] 155 CTR 538 (SC)
5) CIT Vs. Kiranbhai Jamnadas Sheth (HUF). [2013] 39 Taxmann. com116 (Gujarat) [2014] 221 Taxman 19 (Gujarat) (MAG.
6) Dishman Pharmaceuticals & Chemicals Ltd. Vs. CIT [2012] 346 ITR 228 (Guj)
12. We have heard the contentions of the both the parties,gone through the orders of the authorities below and also the documents referred to before us. We find merit in the contentions of Ld. Counsel for the assessee. Undisputedly notice u/s 148 of the Act was issued after the expiry of 4 years from the end of the assessment year and, we agree with the Ld.Counsel for the assessee, that the same did not satisfy the requirement provided u/s 147 regarding the failure of the assessee to disclose fully and truly all material facts.
13. Admittedly, it was the assessees claim of royalty expenses as revenue, as against capital held by the AO in subsequent year i.e A.Y 2009-10 & 2010-11, which lead the AO in the impugned year to form belief of escapement of income. We find that the said issue of royalty expenses had been examined in detail during assessment proceedings by the TPO, before whom all copies of agreement and other information relating to the said expenses had been filed by way of submissions made to the ACIT(TP) through the following letters:
