Income Tax Appellate Tribunal - Mumbai
Johnson & Johnson, Mumbai vs Assessee on 24 January, 2013
ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri Amit Shukla, Judicial Member and
ITA No.7865/Mum/2010
(Assessment year: 2004-05)
Johnson & Johnson, Vs. Asstt. Director of Income Tax
30 Forjett Street, (International Taxation-3) (1)
Mumbai 400036 Scindia House, N.M. Road,
PAN: AAACJ 1067 F Ballard Pier,
Mumbai 400038
(Appellant) (Respondent)
Assessee by: Shri M.P. Lohia
Department by: Shri Mahesh Kumar, DR
Date of Hearing: 24/01/2013
Date of Pronouncement: 01/02/2013
ORDER
Per B. Ramakotaiah, A.M.
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 `.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.Page 1 of 16
ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
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 `.38,48,76,032 for A.Y 2004-05 as against `.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 `.78,113,068 in respect of above determined income of `.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 `.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 `.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 `.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 & Page 2 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai 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 `.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 `.52,07,53,780, whereas assessee has offered only `.7,16,69,537 for taxation. Thus royalty income of `.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 `.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.Page 3 of 16
ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
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 Page 4 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai `.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 `.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 `.52,07,53,780".
AO brought to tax the entire amount of `.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,.
Page 5 of 16ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
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 `.7,16,69,534 and claiming TDS of `.1,07,50,431 (@15%) leaving a note in the computation of income as under:
"The TDS has been claimed for `.1,07,50,431 though the certificates filed are for `.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) S. Name of the person Period Amount (`.) TDS (`.) deducting the tax during No which it was issued 1 Johnson & Johnson Ltd (J&J India) 2002-03 90,33,657 13,55,049 2 J&J India 2002-03 5,19,04,792 77,85,719 3 J&J India 2002-03 1,36,23,484 20,43,522 4 J&J India 2002-03 5,99,76,651 89,96,497 5 NR Jet Enterprises Ltd 2002-03 8,48,972 1,27,346 6 J&J India 2003-04 30,99,83,389 4,64,97,509 7 J&J India 2003-04 7,53,82,835 1,13,07,426 52,07,53,780 7,81,13,068 Page 6 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai The above incomes were offered year wise as:
AY 2004-05 AY 2006-07 AY 2007-08
Amount TDS (`.) Amount (`.) TDS (`.) Amount TDS (`.)
(`.) (`.)
90,33,657 13,55,049 - - - -
5,19,04,792 77,85,719 - - - -
42,69,013 6,40,352 93,54,471 14,03,170 - -
56,13,100 8,41,965 5,43,63,551 81,54,532 - -
8,48,972 1,27,346 - - - -
- - 21,01,89,480 3,15,28,422 9,97,93,909 1,49,69,087
- - 4,96,91,373 74,53,706 2,56,91,462 38,53,720
7,16,69,534 1,07,50,431 32,35,98,875 4,85,39,830 12,54,85,371 1,88,22,807
8.2 The rate of tax @ 15% was claimed as under:
- Tax on royalty as per Article 12(2)(a)(ii) of DTAA between
India & USA
8.3 Assessee enclosed all the TDS certificates along with the
return. AO in the scrutiny assessment under section 143(3) dated 30.11.2006 has stated that the issue of Royalty was referred to TPO and TPO under section 92CA(3) dated 29.09.06 had not made any adjustment to the Arms Length Price. AO also left a note regarding the tax levied as per DTAA.
8.4 Interestingly, by the time assessment under section 143(3) was passed by AO for AY 2004-05, the CIT (A) has already decided similar issue in AY 2003-04. In that year assessee has shown royalty of `.24,66,34,994, whereas the TPO has fixed as royalty income at `.26,53,07,141. The difference is only because in the audit report in Form No.3CEB, the amount reported was `.26,53,07,141. Assessee was asked by AO to explain why the difference should not be treated as its income for that assessment year. In this regard, assessee contended before AO as follows:Page 7 of 16
ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
(a) J&J USA has received royalty income of `.24,66,34,994 from Johnson & Johnson Limited during the year relevant for the assessment year 2003-04.
(b) The amount of `.26,53,07,141 as reported in the Accountants Audit Report is amount provided by Johnson & Johnson Limited in its books of account.
(c) J&J USA has been filing the return on cash basis and not on accrual basis since more than last 10 years.
Assessee also contended before AO that `.26,53,07,141 cannot be considered as income of assessee, since assessee has received only royalty income of `.24,66,34,994 and also assessee was following cash accounting system. AO has not accepted assessee's contention stating that the TPO has fixed the royalty income of `.26,53,07,141.
On appeal, the learned CIT (A) recorded the contentions and decided as under:
"3.4 The appellant also contended that in any case, the auditors who had issued the Form No.3CEB of the appellant, have issued a revised certificate to the appellant explicitly stating that the amount of royalty received by the appellant from J&J India during the previous year ended 31/03/2003 has been inadvertently shown as of `.2,65,307,141 instead of `.2,46,634,994 in the Form No.3CEB of the appellant. The appellant also furnished a copy of revised Form No.3CEB which was submitted along with the rectification application to AO. 3.5 Without prejudice to the above, the appellant stated that the taxes on the royalty payable to the appellant, credited in the books of account of the paying entities, namely J&J India and NR Jet, is actually paid into the Government Treasury by the paying entities upfront. Hence, while the royalty income may be offered to tax by the appellant following the cash basis of accounting, the taxes payable thereon have been already been paid in advance. It is also contended that accordingly, even in terms of this addition made by AO to the total income of the appellant, there should be no tax liability payable by the appellant. In addition to the above, the appellant furnished the following details:Page 8 of 16
ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
i) Documents evidencing receipt of royalty by the appellant.
ii) Copy of return of income of the appellant for the assessment year 2001-02, 2002-03 & 2003-04.
3.6 The appellant also furnished the reconciliation of royalty received by the Appellant vis-à-vis royalty accrued in the books of J&J India and it is reproduced below:
In the books of appellant In the books of J&J Details of royalty India Details of royalty receipts provision A.Y Royalty Amount in `. Royalty Amount in `.
Period Period 2001- Oct. 99 to 4,66,59,254 Apr.00 to 4,83,07,352 02 Sept.00 Mar.01 2002- Oct.00 to 3,16,42,481 Apr.01 to 13,29,18,968 03 Jun 01 Mar.02 2003- July 01 24,66,34,994 Apr.02 to 2,65,307,140 04 to Sep.02 Mar.03
Details of payment of royalty provided in the books of J&J India (Amount `.) Royalty amount provided in the books of J&J India During p.y.e. 31/03/2003 26,53,07,140 Less: Royalty paid to Appellant on 29 Jan.2003 12,23,40,114 1,42,967,026 Less: Royalty paid to Appellant on 16 Mar.2004 7,08,20,564 7,21,46,462 Less: Balance royalty paid to Appellant on 16 Sep.05 7,21,46,462 NIL
4. I have considered the facts of the case very carefully. It is a fact that the Appellant is following 'Cash System of Accounting' consistently, 'Cash System of Accounting' is also recognized method of accounting under section 145 of the I.T. Act, 1961. This fact is seen from returns of income filed for the AY 2001-02, 2002-03 & 2003-04. It is also seen from the reconciliation filed by the Appellant, the balance amount of royalty was paid on 16/09/2005. It is also submitted that the tax was also deducted as and when royalty income was credited in the books of account of J&J Limited. From these facts, it very clear that the income of royalty has not escaped assessment. M/s J&J credited the royalty in one accounting year whereas the Appellant offered this income in the later year as and when it is received, since the appellant is following 'Cash Systems of Accounting'.
Page 9 of 16ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai 4.1 In view of this, I find merits in the appellant's contention and the appeal is allowed. AO is directed to delete the entire addition".
The orders of the CIT (A) dated 30.10.2006 has become final as the Revenue has accepted the same and has not preferred any appeal.
8.5 Therefore, what crystallizes from the above is that:
a) Assessee is following cash system of accounting
b) The TDS was deducted at the same rate upon crediting to the account of assessee by the deductors.
c) The Royalty income was being offered and TDS to that extent only was claimed.
d) There is no escapement of income of income, as and when received was being offered by assessee in that year.
e) Assessee's consistent practice is according to the provisions of law and accepted upto assessment year 2003-04, even before reopening of the assessment in this year.
8.6 It is also noticed that AO vide his letter dated 15.11.06 has asked assessee the following clarification:
"Question No.7. Please substantiate the following note given under the computation of income?. "The TDS has been claimed for `.1,07,50,431 though the certificates filed are for `.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".
In the above context state the name of the parties from whom the balance royalty is receivable and further state whether the said royalty is received as on date, if so in which A.Y the above credit for TDS was claimed"?. Assessee answered the above vide letter dated 28.11.2006 as under:
"c) As regards TDS certificates and the income claimed, please find enclosed the copy of the statement giving the details of the same marked as Annexure 5.Page 10 of 16
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d) Please note that the company offers the income in India on receipt basis for the Royalty Income.
(The annexure 5 is same as per the table extracted above but in different format.) It was explained that part of the amount credited and TDS paid pertain to financial year 2002-03 ie. assessment year 2003-04 and the amounts pertaining to the year 2003-04( AY 2004-05) was only `.38,48,76,032. Assessee was offering the amounts on receipt basis. This was also reconciled before the CIT (A) in assessment year 2003-04 when the appeal was preferred as can be seen from the submissions extracted above.
8.7 All these facts indicate that assessee has furnished all the details, AO enquired and accepted. There is no escapement of income also as assessee offered in later years and claimed TDS only to the extent of income offered. As rightly pointed out by the CIT (A) in assessment year 2003-04, the remittance of TDS is coming to the government first at the time of credit itself by the deductors, whereas assessee is taking credit at a later point of time when corresponding income was offered.
8.8 Assessee contends that it is offering income on receipt basis consistently over the last so many years, based on the DTAA between India & USA. Article 12 covering Royalties and Fees for included services is as under:
"ARTICLE 12 - Royalties and fees for included services - . 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State"
2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:
a) in the case of royalties referred to in sub-paragraph
(a) of paragraph 3 and fees for included services as defined in this Article (other than services described in sub-paragraph) (b) of this paragraph) Page 11 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai
i) during the first five taxable years for which this convention has effect,
a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Govt. of that Contracting State, a political sub-divisions or public sector company; and
b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases and
ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services and
b) In the case of royalties referred to in sub-paragraph
(b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services".
The definition of Royalties, vide Article 12(3) means as under:
"3. The term "royalties" as used in this Article means:
a) Payments of any kind received as a consideration for the use of or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with ratio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and
b) Payments of any kind received as consideration for the use of or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8(Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8".
8.9 As can be seen from the above, the words used in Article 12(1) was "paid to a resident of other contracting state". The term royalties also means "payment of any kind received". Since the word used in the DTAA is 'paid' or 'received', assessee's contention that Page 12 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai amounts cannot be taxed on accrual basis is correct. This interpretation is also supported by the decision of the Hon'ble Bombay High Court in the case of DIT (IT) vs. M/s Siemens Aktiengesellschaft ITA no 124 of 2010 dt.22.10.12 wherein the Hon'ble Bombay High Court on a question as follows:
Question:
"Q. i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the Royalty and fees for technical services should be taxed on receipt basis without appreciating the fact that the Hon'ble Supreme Court has held in the case of Standard Drum Motors Private Limited vs. CIT 201 ITR 391 that the credit entry to the account of assessee non-resident in the books of the Indian company amounted to receipt by the non-resident?.
Held:
"2. As regards first question is concerned, the Income Tax Appellate Tribunal referring to Para 1 to 3 under Article IIX-A of the Double Taxation Avoidance Treaty with the Federal Germany Republic as per Notification dated 26th August, 1985 held that the assessment of royalty or any fees for technical services should be made in the year in which the amounts are received and not otherwise. Counsel for the Revenue relied upon the Special Bench decision of the Tribunal in assessee's own case, which in our opinion, has no relevance to the facts of the present case, as it relates to the period prior to the issuance of Notification dated 26th August, 1985. In this view of the matter the decision of the Income Tax Appellate Tribunal in holding that the royalty and fees for technical services should be taxed on receipt basis cannot be faulted".
Thus, there is no dispute with reference to taxation of the royalties on receipt basis as far as recipient is concerned who is a resident of the other contracting state, like assessee as per the DTAA.
8.10. In view of the legal principles and facts as stated above, we do not see any reason to re-open the assessment under section 147 as per the satisfaction recorded by AO. First of all, the entire information was furnished and was available with AO at the time of Page 13 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai assessment, AO made inquiries particularly with reference to the claim of TDS of part amount when certificates were filed to an extent of `.7.81 crores and also the fact that assessee's taxation on receipt basis was accepted and the order of the CIT (A) in assessment year 2003-04 was already on record by the time the re- assessment proceedings were initiated. In view of this AO's opinion in reopening the assessment can only be considered as change of opinion from that of his predecessor who inquired and accepted assessee's return under section 143(3), which is also correct according to the law and on facts. Therefore, the principles laid down by the Hon'ble Supreme Court in the case of CIT vs. Kelvinator India Ltd, 320 ITR 561(SC) that mere change of opinion cannot be a reason to reopen the assessment, as AO has no power to review the earlier order, apply to the facts of the case. In view of this, we uphold assessee's contention with reference to jurisdiction of section 147 and hold that the issuance of notice under section 147 is bad in law. The re-assessment proceedings are contrary to the law and facts of the case.
8.11 The DRP-1 should have examined these aspects when they were entrusted with the statutory function to resolve the objections raised by assessee. The order of the DRP is not only brief but also devoid of any facts. One cannot decide the issue on legal principles alone without examining the facts on record. Leave alone the issue of jurisdiction, even the contention that an amount of `.38,48,76,032 only has accrued during the year was also not accepted when the facts stare on its face. We were surprised to note that while accepting that royalty income should be taxed on accrual basis, the DRP failed to examine the correct amount which was accrued during the year, as part of the amount offered during the year on receipt basis pertain to assessment year 2003-04.
8.12. It is also surprising that while bringing to tax the entire amount, neither AO nor the DRP found it convenient to grant the Page 14 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai TDS of the entire amount deducted. As already stated earlier assessee has enclosed all the certificates wherein the TDS of `.7,81,13,068 was deducted and paid to the government on the total royalty claimed by the said persons of `.52,07,53,780. Had AO gave credit to the entire amount of TDS deducted @ 15%, there would not be any occasion to raise the demand or levy of interest under section 234B, the issue of which was also not according to the provisions of the law. Therefore, we are of the opinion that the DRP failed in its statutory duty in resolving the dispute/objections raised by assessee and affirmed the order of AO without any application of mind.
8.13. The learned DR raised an interesting issue in the course of arguments that if the system of cash accounting was allowed, it would result in anomalous situation wherein the payers will claim on accrual basis and the payees would offer on cash basis and a situation may arise where since the amount was not taxable in that year, there is no need to deduct the tax and accordingly the payee may not be covered under the provisions of TDS. This argument is not only far fetching but also not according to the provisions of law. As far as payer is concerned, being an Indian Company and maintaining accounts on mercantile system of accounting can claim the royalty on accrual basis, the provisions of Income Tax allows such payment to non -resident only in the event of deduction of tax. Therefore, anomalous situation so visualized by the learned DR may not arise at all. On the facts of the case, the payee's credited the amount to assessee, deducted the tax as per the provisions of the Act, remitted to the Govt. of India and issued certificates. What assessee has claimed was only offering the income which it received and also taking credit only to the extent of income offered as per the provisions of Section 199 of the I.T. Act. Failure on the part of AO in not giving credit to the entire TDS made when he brought the entire amount to tax on accrual basis gave rise to the demand afresh with Page 15 of 16 ITA No.7865 of 2010 Johnson & Johnson Ltd Mumbai unnecessary implications. Looking at in any way, we cannot uphold the orders of AO and the DRP.
8.14 Therefore, we hold that the initiation of proceedings under section 147 is bad in law and consequently the orders passed are to be annulled. We direct accordingly. Assessee's grounds are allowed.
9. In the result, appeal filed by assessee is allowed.
Order pronounced in the open court on 1st February, 2013 Sd/- Sd/-
(Amit Shukla) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 1st February, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, " L " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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