Income Tax Appellate Tribunal - Kolkata
Dci India Ltd., Kolkata vs Dcit,Cir-10(1) Kolkata, Kolkata on 5 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
Kolkata Bench, KOLKATA
(Bench- "C")
BEFORE SHRI N. V. VASUDEVAN JUDICIAL MEMBER AND
SHRI M. BALAGANESH, ACCOUNTANT MEMBER,
I.T. A.No. 126 /Kol/2017
Assessment Years: 2010-11
DIC India Ltd. DCIT, CIR-10(1), Kolkata
-Vs-
[PAN :AABBCC0703C]
(Appellant) (Respondent)
For the Appellant Sri D. S. Damle, FCA
For the Respondent Sri G. Mallikarjuna, CIT, DR.
Date of Hearing 22.03.2017
Date of Pronouncement 05.04.2017
ORDER
Per M. BALAGANESH, AM
This is an appeal preferred by the assessee against the order passed by the Pr. Commissioner of Income Tax, Kolkata - 4 (hereinafter referred to as the "ld. CIT") u/s 263 of the Income Tax Act. 1961 (hereinafter referred to as the "Act") relating to Assessment Year 2010-11.
2. The only issue to be decided in this appeal is as to whether the ld. CIT was justified in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case.
3. The brief facts of this issue is that the assessee filed the return of income for the Asst Year 2010-11 declaring total income of Rs 26,57,00,956/- on 22.9.2010. Later this return was revised on 14.4.2011 declaring total income of Rs.
2 I.T.A.No. 126 /Kol/2017Assessment Years: 2010-11 M/s. DIC India Ltd.
26,62,38,618/-. The assessment was completed u/s 143(3) read with section 144C of the Act on 30.4.2014 determining total income at Rs 32,31,67,610/- pursuant to the letter dated 7.4.2014 filed by the assessee stating that they are not preferring to file objections before the Hon‟ble Dispute Resolution Panel (DRP) against the proposed additions / disallowances and that they would. only prefer regular appeal before the Ld. CITA. In the said assessment, a sum of Rs 4,87,70,886/- was added as per the order of the ld. TPO suggesting an upward adjustment to Arm‟s Length Price (ALP) which admittedly included an addition towards adjustment to ALP for payment of Royalty in the sum of Rs 82,88,935/-. During the pendency of appeal before the ld. CITA, the ld. Administrative Commissioner of Income Tax (CIT) sought to revise the assessment framed by the ld. AO on 30.4.2014 by holding the same as erroneous and prejudicial to the interests of the revenue in terms of section 263 of the Act.
4. The ld. CIT issued a show cause notice u/s 263 of the Act to the assessee on the ground that the Royalty Payment of Rs 6,42,47,978/- to its Associated Enterprise (AE) (DIC Asia Pacific PTE Ltd of Singapore and DIC Corporation of Japan) as revenue expenditure for using technical knowhow and upgrading manufacturing technology and right to use the trade names and brand names and reported in Form 3CEB as required u/s 92E of the Act. He observed that as per detail submitted in Form 3CEB, Column No. 9 and agreement dated 1.7.2008 between DIC India Ltd and DIC Asia Pacific India Ltd of Singapore (Holding Company having 71.27% shares) and DIC Corporation of Japan (Ultimate Holding Company) established that the payment of royalty was in composite manner and the charges of all (i) Technical Know-how (ii) Licences (iii) Trademarks (iv) Brand name, was paid to acquire the business/ commercial rights of intellectual property in the form of intangible assets for the period of seven years. He stated that assessee has 3 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
acquired the aforesaid intangible rights on technical knowhow for upgrading manufacturing technology.
4.1. The ld. CIT further observed on scrutiny of copy of the agreement relating to „Royalty payment‟ dated 1.7.2008 , that there was no embargo on the assessee to continue to manufacture the product in question even after expiry of the agreement. It was also observed that the assessee has been upgrading their existing plant and machineries to make their finished products more viable for the market from time to time. For example he noticed that assessee has annexed various accessories in the name of instrumentation where no additional depreciation is allowed, being the additional accessories of existing plant & machineries. This kind of modification of P&M is the effect of technical know- how for upgrading the manufacturing technology. The said royalty payment involves also setting up of P&M due to regular change in set up of machineries. In this way the technical knowhow for upgrading the manufacturing technology is helping the assessee to enter into the new dimension of the business from time to time. It is fact that these aspects were not brought on record in earlier occasions and the Royalty payment has been allowed as revenue expenditure. Hence the doctrine of res-judicata can‟t be applied here in the case of assessee and should. not be treated as settled for ever. The ld. CIT placed reliance on the decision of Hon‟ble Supreme Court in the case of Alembi Chemical Works Co. Ltd vs CIT reported in (1989) 177 ITR 377 (SC) held. that the royalty payment made by the assessee needs to be construed as capital in nature. Therefore, he issued show cause notice as to why the same should. not be treated as capital expenditure and depreciation at 25% be granted to the assessee by treating the same as intangible asset of enduring nature and since this was not done by the ld. AO in his order, it makes the order of ld. AO erroneous in so far as it is prejudicial to the interest of the revenue.
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5. The assessee submitted that During the year under consideration the assessee paid royalty of Rs.6,33,74,362/- and Rs.8,73,616/- to DIC Asia Pacific Pte Ltd.
Singapore & DIC Corporation, Japan respectively. The assessee stated that the payments were made in the course and for the purposes of carrying on ordinary business of manufacture and sale of printing inks. It stated that it did not purchase and/or acquire any technology or knowhow pursuant to the royalty payments. No intangible asset was purchase by the company nor was these payments expected to give benefit of any enduring nature. The royalties were payable on a monthly/quarterly basis aligned to the sales effected and were in the nature of periodical payments. The quantum of royalty payment was commensurate with sales achieved in given quarters meaning thereby that the royalty paid was directly correlated with the assessee‟s regular trade i.e. the sales and therefore the benefit derived from the same could not be said to be of enduring nature. It is also not a case one-time lump sum payment made by assessee for transfer of technology or knowhow which may raise a question as to the nature of expense.
In terms of the agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. the assessee was allowed the use of technology & trademarks in the manufacture & sale of printing inks only in the Indian Territory. In consideration the assessee was required to pay royalty @ 2% of the net sale printing inks subject to certain conditions. For the relevant AY 2010-11, pursuant to the aforesaid agreement 5 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
dated 01.07.2008, the assessee had paid royalty of Rs.6,33,74,362/- to DIC Asia Pacific Pvt Ltd.
Similarly the assessee had also entered into a technical collaboration agreement dated 01.04.2007 with DIC Corporation, Japan; in terms of which the assessee was permitted to use the technology for manufacture & sale of poly-resins only in Indian territory. In consideration for use of technology, the assessee was required to pay royalty @ 3 of the net sales of poly-resins to DIC Corporation, Japan.
The assessee submitted that it did not purchase the ownership rights in the technology form DIC Asia Pacific Pte Ltd. or DIC Corporation, Japan but it was granted only a non-transferable license to unitize the technological knowhow.
Under the license agreement, the assessee was not given the right to sub-license, sell, transfer or allocate the technology to third parties. The assessee never owned the technology and could not have registered the same in its own name. As stated in the foregoing the assessee was granted only a non-transferable license which is returnable to the licensor at the end of the license period. The royalty paid is directly commensurate with the products sold by the company.
5.1. The assessee replied that in the impugned notice it is alleged that the assessee had acquired the licensed information in form of business/commercial rights and therefore it constituted intangible asset of the assessee. it is submitted that the aforesaid observation is totally incorrect and in contradiction to the material facts 6 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
of the case and the extant terms of the License Agreements. On perusal of the terms & conditions of the license Agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. it would be noted that the license was a non-transferable non-
exclusive license granted to the assessee for limited use within the territory of India and that too for licensed period. It referred to the Clause 2.1 of the agreement wherein it is provided that the licensor has granted DIC India Limited a non-exclusive license to use the licensed information within the territory including improvements throughout the tenure of the agreement of 7 years. Clause10.2 of the agreement also provides that on termination of the Agreement, the assessee shall cease to use the License Information and shall deliver the Licensed Information, if any, in tangible form back to DIC Asia Pacific Pte Ltd. along with any copies thereof. The aforesaid terms of the Agreement therefore make it evidently clear that the licensed information was not acquired or purchased by the assessee outrightly. Instead the case is exactly opposite. The License Agreement provided only for the use of technical knowhow & information by the assessee which at all material times during the period of license & even thereafter is to be owned by DIC Asia Pacific Pte Ltd. The royalty paid by the assessee is only a "license fee" for use of technical knowhow and not the price for acquisition of a "capital assets". The royalty paid, without an iota of doubt was therefore revenue in character and hence fully deductible from the profits of the business. On appreciation of these material facts therefore the AO rightly allowed the deduction 7 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
of these material facts therefore the AO rightly allowed the deduction for royalty paid as revenue expenditure. The assessee also stated that it may also be relevant to invite attention to Clause 2.2 of the agreement which states that DIC India Limited is granted a non-exclusive right to sell the products in any countries except the countries where parent company has its plant, its subsidiaries or other joint venture arrangements for manufacture of the product, where parent company is engaged in the ordinary sale activity of the products, and where parent company licenses the exclusive sale right to third party. However, in the event parent company agrees in writing on prior written request of DIC India Limited, it may export the products to such countries as expected above. Clause 2.3 of the agreement further states that that DIC India Limited is not granted a right to sub-
license to any third parties and shall not make the licensed information available to any third parties. Similar terms & conditions as set out in the License Agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. was present in the Technical Collaboration Agreement dated 01.04.2007 with DIC, Corporation Japan. The agreements with DIC Asia Pacific Pte Ltd. & DIC, Corporation Japan are therefore pure license agreements which granted mere right of use of the licensed technical information. The assessee had neither purchase any technology or knowhow nor did it derive any enduring benefit from the royalty paid to the licensors. The royalty paid is therefore revenue in nature and hence rightly 8 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
allowed by the Assessing Officer as deductible expenditure under Section 137 of the Income-Tax Act,1961.
5.2. The assessee objected that in the impugned notice it has been further alleged that the technology was licensed to the assessee for setting up factory. It is submitted that the foregoing assertion is completely untrue and is not borne out from the facts available on record. From the terms & conditions mentioned in the License Agreement s it shall be observed that the assessee was required to pay royalty for use of technical information, knowhow and trade mark for certain period. The licensed information was not meant for setting up factory but contained technical knowhow & designs to assist the assessee in carrying on its existing business of manufacture of printing inks and poly-resin.
It is stated in the impugned notice that by using the licensed information the assessee was able to set up its plant & machinery to manufacture printing inks or poly-resins and therefore derived an enduring benefit. The assessee submits that this particular observation in factually incorrect & it also not relevant to decide the nature of royalty payment. Technical knowhow & information licensed to the assessee merely assisted the assessee to manufacture printing inks & poly-resins.
In the circumstances it was understandable that the licensed information contained technical knowhow concerning operations of plant & machineries to manufacture of the licensed products. The fact that by using the technical knowhow the assessee was able to use its plant & machinery more efficiently or profitably 9 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
cannot make the annual royalty payments as a percentage of sales to be capital in nature.
Attention in this regard is made to the decision of the Apex Court in the case of Commissioner of Income Tax Vs IAEC Pump Limited, reported in 232 ITR 316.
The facts and circumstances in that case were identical as those involved in the assessee‟s case. In that case the technical knowhow was licensed to the assessee for a period of 10 years non-transferable basis. The assessee in that case was also not entitled to disclose the documents & information to any third party. The AO treated the payment towards technical knowhow as capital expense. On appeal the Apex Court held that the amount paid to the parent company is only a "license fee" and not the price for acquisition of a "capital asset". It was concluded that the entire payment constituted revenue expenditure and addition made by the AO was deleted.
5.2.1. The assessee also placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Bata India Limited in GA No. 3482 of 2013 dated 12.11.2014 . In the said case, the assessment framed u/s 143(3) the AO observed that the assessee made royalty payments pursuant to the license agreement with foreign companies for use of technology and trademark in the course of manufacture of footwear. The assessee paid royalty as a percentage of the footwear manufactured & sold in the territory of India. The license granted by the foreign company was non-transferable & exclusive to the assessee and 10 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
returnable at the end of the tenure of the agreement. The assessee claimed the royalty payments for use of technology & trademark as revenue expenditure. The AO, however held that he royalty payment resulted in certain enduring benefit to the assessee and treated 25% of the royalty expenses as capital expenditure. On first appeal the Commissioner of Income-tax (Appeals)-1, Kolkata confirmed the addition. However on further appeal, the Tribunal considering the aforesaid facts of the case held that the royalty payment was entirely revenue in nature. The Tribunal noted that the license was for "use" of technology and no "transfer" took place. The Tribunal also observed that the license was only non-transferable and on expiry of license agreement the assessee was required to return the technology and trademarks. Referring to the decision of the Calcutta High Court in the case of CIT Vs Hindustan Motors Ltd (192 ITR 619), the ITAT allowed the assessee‟s appeal and deleted the disallowance of 25% out of royalty payments. The Department preferred appeal u/s 260A before the authorities had observed that the assessee did not derive any enduring benefit and the agreement was for no-
transferable license to manufacture licensed products in India. In the circumstance the appeal of the Revenue on this issue was dismissed. The CIT, Kolkata-1 has not preferred further appeal before the Supreme Court and therefore the issue has attained finality.
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5.3. In view of the decisions of Hon‟ble Supreme Court and Hon‟ble Jurisdictional High Court supra, it was submitted that the royalty of Rs 6,42,47,978/- paid by the assessee was revenue in nature and hence it was rightly allowed deduction in respect of such payment from the profits of the business by the ld. AO.
5.4. The assessee further submitted that the royalty was paid to its foreign associated enterprises. The royalty payments made to these companies were reported in transfer pricing report furnished in Form 3CEB &, this was submitted along with the return of income. The Transfer Pricing Audit Report containing information about royalty paid to foreign associate enterprises was referred for transfer pricing scrutiny u/s 92CA(1) of the Act by the AO for the A.Y. 2010-11.
In the course of transfer pricing scrutiny, the assessee was specifically required by TPO to furnish details of royalty payments along with relevant agreements with Associated Enterprises vide his letter dated 01.03.2012. In response the assessee vide letter date 23.03.2012 furnished the details of payment of royalty and copies of relevant agreements with the associated enterprises. The TPO in his show cause notice date 15.01.2014 asked the assessee to justify the arm‟s length value of the deduction claimed in respect of royalty payment of Rs.6,42,47,978/- to associated enterprises from the profits of the business. In response; detailed submissions dated 22.01.2014 were filed by the assessee. After examination of the facts, agreements with DIC Corporation & DIC Asia Pacific Pte Ltd, the TPO proposed a transfer pricing adjustment of Rs.82,88,935/- on account of royalty payments in 12 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
the Transfer Pricing Order passed u/s 92CA(3) dated 29.01.2014. Meaning thereby, the Transfer Pricing Officer did not find the deduction of royalty of Rs.6,42,47,978/- claimed by way of revenue expenditure to be at arm‟s length and royalty to the extent of Rs.82,88.935/- was proposed to be disallowed by the Transfer Pricing Officer. Upon receipt of the transfer pricing order, the AO again requisitioned the details of payment of royalty. Copies of the agreements which were furnished before the TPO were again furnished before the AO as well & detailed submissions were furnished about its allowability. After making due enquiries and perusing the terms & conditions of the agreement the AO in his impugned assessment order dated 30.04.2014 made the addition of Rs.82,88,935/-
on account of royalty as proposed by the Transfer Pricing Officer.
In the facts and circumstances set out above, it shall therefore be appreciated that due enquiry was carried out by the TPO as well as AO and on obtaining assessee‟s explanation on this specific issue, the TPO proposed an upward adjustment of Rs.82,88,935/- on account of royalty which was added back by the AO while passing the final assessment order dated 30.04.2014. In the circumstances invocation of revisionary powers on such issue is not permissible.
6. The ld. CIT ignored the submissions of the assessee and passed an order u/s 263 of the Act on 26.12.2016 by setting aside the order of the ld. AO terming it to be erroneous and prejudicial to the interest of the revenue, with a direction to 13 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
examine and verify the above issue after giving sufficient opportunity of being heard to the assessee. Aggrieved, the assessee is in appeal before us on the following grounds:-
1) For that on the facts and in the circumstances of the case, the PCIT was unjustified in law and on facts in holding that the assessment order u/s 143(3) dated 30.04.2014 was erroneous in so far as prejudicial to the interest of the revenue even though on the facts and circumstances of the case the assessment order was neither erroneous nor prejudicial to the interest of the revenue.
2) For that on the facts and in the circumstances of the case, in spite of the fact that the company's representative had appeared before the PCIT in compliance to the show cause notice and made the written representation countering the reasons set out in show cause notice, the PCIT was grossly unjustified in passing the impugned order by ignoring the explanations put forth.
3) For that on the facts and in the circumstances of the case, the PCIT was grossly unjustified in considering the assessment order as erroneous on the ground that royalty paid by the appellant constituted "capital expenditure"
and therefore only the depreciation was permissible in respect of royalty payment.
4) For that on the facts and in the circumstances of the case, the finding recorded by the CIT that royalty was paid for indefinite use of the technical knowhow for manufacture of products was contrary to the provisions of the agreement available on record and therefore the finding of the CIT that 14 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
royalty was capital expenditure liable for disallowance was contrary to the jurisdictional facts...
5) For that on the facts and in the circumstances of the case, since the entire premise on which the CIT proceeded to hold the order of assessment to be erroneous was factually incorrect, order of the CIT revising the assessment in exercise of power u/s 263 be held to be bad in law and be therefore set aside.
6) For that on the facts and in the circumstances of the case, the order of the CIT passed u/s 263 be cancelled and the order of the AO u/s 144C/ 143(3) allowing the deduction for royalty paid as revenue expenditure be restored.
7) For that the appellant craves leave to submit additional grounds and or amend or alter the grounds already taken either at the time of hearing of the appeal or before.
7. The ld. AR apart from reiterating the submissions made before the ld. CIT supra argued that none of the written submissions of the assessee were considered by the ld. CIT while passing the revision order u/s 263 of the Act. This is quite evident from the fact of one line dismissal by the ld. CIT in his order as below:-
The submission of the assessee is perused but not found to be satisfactorily. He argued that the ld. CIT had merely reproduced the show cause notice issued to the assessee and had framed as his order without giving any credence to the written submissions made by the assessee. He argued that hence on this count itself, the order of section 263 of the Act deserves to be quashed. In any case, he argued that the ld. CIT had not brought out on record as to how the order passed by the ld. AO is erroneous for invoking revisionary jurisdiction u/s 263 of the Act. He argued that the ld. CIT had placed reliance on the decision of the Hon‟ble 15 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
Supreme Court in the case of Alembi Chemical Works Co. Ltd vs CIT reported in 177 ITR 377 (SC) . Actually even according to the version of the ld. CIT in his order, the said judgement indicated infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to form any general rule even in the generality of cases, sufficiently accurate and reasonable comprehensive, to draw any clear line of demarcative, whether a particular outlay is capital or revenue. And therefore, once for all test as well as the test of „enduring benefit‟ may not be conclusive may also be applied to conclude the issue of royalty payment as an capital expenditure instead of revenue which was allowed to the assessee for past several years. He argued that the said judgement itself specified that as to whether a particular outlay is capital or revenue in nature had to be judged from the facts of each case and there cannot be any conclusive proof for the same. Having said so, without bringing any material on record , the ld. CIT had simply categorized the royalty payment as capital expenditure , without appreciating as to how the royalty payment had assisted in acquisition of knowhow and without appreciating the terms and conditions of technical collaboration agreement entered into by the assessee. He argued that in the past , similar expenditure was allowed as revenue expenditure by the ld. AO u/s 143(3) of the Act and hence it could be concluded that the ld.
AO had taken one of the possible views in the matter and accordingly the wisdom of the ld. AO in this regard cannot be questioned by the ld. CIT u/s 263 of the Act. He placed reliance on several decisions of Hon‟ble Supreme Court, High Courts and Tribunal in support of his various contentions.
8. In response to this, the ld. DR argued that the proceedings before the ld. TPO and he making an adjustment to ALP on the royalty transactions has got no relevance at all as the scope of enquiry before the ld. TPO was totally different from that of the ld. AO. He argued that the assessee never replied before the ld.
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TPO or ld. AO justifying the royalty payment as eligible as revenue expenditure. Hence no enquiry in this regard was made by the ld. AO. The ld. AO in the instant case had simply adopted the adjustment to ALP suggested by the ld. TPO and he did not make any independent enquiry with regard to royalty payment. With regard to the allowability of this expenditure in earlier years, he contended that no examination was carried out earlier by the revenue and hence pursuant to elaborate examination carried out this year, if the stand taken earlier had to be changed, then the same should. not be taken as violation of principle of consistency. He argued that since no view at all was taken by the ld. AO, there is no question of he taking one of the possible view. Hence the case laws relied on in this regard stands defeated. On merits, he stated that the Hon‟ble Supreme Court in I.A.E.C. Pumps Ltd case simply relied on its previous decision in CIBA of India Ltd case reported in 69 ITR 692 (SC). He argued that the royalty is paid by the assessee for right to sell the finished goods manufactured using the technical knowhow, whereas the technical collaboration agreement fees is for right to use the technical knowhow which is in the form of „fee for technical services‟ (FTS). The decision in CIBA India Ltd supra dealt only with FTS and not royalty. Hence the reliance on the said decision is misplaced. He in turn placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT vs Southern Switchgear Ltd reported in (1984) 148 ITR 273 (Mad) in support of his contention.
9. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find Coates of India Limited was the erstwhile name of DIC India Limited (assessee herein) . We find from the technical collaboration agreement entered into between assessee and DIC Corporation, Japan on 5.12.2000 that assessee is engaged in the business of manufacturing of printing inks and allied products in India in its various factories located at Calcutta, Delhi, Mumbai, Chennai, Noida and Ahmedabad. The 17 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
assessee was desirous of upgrading its overall technology and introduction of new technology for manufacturing printing inks and allied products of all types viz., manufacturing of flushed pigments, sheetfed offset inks, gravure inks, web offset inks, news inks, screen printing inks, varnishes of all types including flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as future products relating printing inks and allied products on a continuous basis in its plants located at Calcutta, Mumbai, Noida, Ahmedabad , New Delhi , Madras or any other future place as may be determined by assessee from time to time. It is further stated that the DIC Japan would. make available to assessee the technical knowhow as aforesaid and the right to use the trade names and brand names. In this regard, the following clauses in the said agreement would. be relevant:-
1.3. "Products" will also include the right of COATES to use the Trade Names, Brand Names relevant to the Products, whether the same be registered or otherwise (hereinafter referred to as "Trademarks"), provided, however, it shall be the responsibility of COATES to ensure compliance with local laws relating to use of such names and marks.
1.4. Licensed Information means such technical information in possession of, and at free disposal of , DIC, on the Effective Date of the Agreement in relation to the Products towards manufacturing, formulation and application and shall also include formulation, production process, quality control, sourcing of input materials, material safety data sheet, safety, health and environment protection measures.
2. LICENSE 2.1. DIC hereby grants COATES a non-exclusive license to use Licensed Information for the manufacture of Products in Territory.
2.2. COATES is granted a non-exclusive right to sell Products in any countries except the countries where DIC has its plant, its subsidiaries or other joint venture arrangements for the manufacture of Products, where 18 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
DIC is engaged in the ordinary sales activity of Products, and where DIC licenses the exclusive sales right to a third party. However, in the event DIC agrees in writing on the prior written request of COATES, COATES may export Products to such countries as expected above.
2.3. COATES in not granted a right to sublicense to any third parties and shall not make Licensed Information available to any third parties.
4. Compensation 4.1. COATES shall pay DIC a royalty of 2% (two) on total net sales for all Products manufactured and sold. by COATES in India and abroad.
4.2. DIC may from time to time help COATES by purchasing the said products directly or through its group/ associate companies at such prices as may be mutually agreed upon but not less than the actual cost plus reasonable profit margin. Provided however COATES shall be under no obligations to accept such orders from DIC or its associates and DIC shall not be entitled to any royalty on such transactions.
.......................................
7. SECRECY 7.1. COATES agree to keep the Licensed Information provided hereunder by DIC as secret and confidential and agrees not to disclose it to any third party provided that the information of the following nature shall be excluded from these secrecy obligations:
(a) Information that is in public domain.
(b) Information that COATES has in its possession at the Effective date which is not subject to an Agreement of Confidentiality.
(c ) Information which COATES has received rightfully from other sources before or after at the Effective Date.
7.2. The obligation under this article shall survive any termination of this Agreement for ten (10) years.
9. Period of Agreement 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES.
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9.2. One (1) year prior to the expiration of this Agreement, the parties shall meet and shall decide jointly either to renew this Agreement for the further period fo five (5) years at the expiration of this Agreement or whether it shall not be renewed after the normal date of expiration.
10. Termination 10.1. Either party may terminate this Agreement forthwith:
(1) if the other party is in breach of any of the provisions of this Agreement and fails or is unable to remedy the same within 30 days after receiving notice in writing thereof from the other party.
(2) if the other party becomes insolvent, bankrupt or is placed liquidation.
10.2. If under the provisions of this Agreement COATES ceases to be entitled to use the Licensed Information COATES shall deliver up to DIC all such Licensed Information in tangible form which may then be in its possession and will keep no copies thereof.
9.1. We find from pages 27 to 29 of the Paper Book, a copy of the approval, from Government of India, Ministry of Commerce & Industry , Department of Industrial Policy & Promotion Secretariat for Industrial Assistance vide approval No. 8(2001)/719(2000)/PAB-IL , New Delhi dated 3.1.2001 , of technical collaboration agreement dated 5.12.2000 . Later the technical collaboration agreement was renewed with effect from 1.7.2008 with DIC Asia Pacific Pte Ltd, Singapore with the same terms and conditions. Similarly there was yet another License Agreement entered on 1.4.2007 between the assessee and DIC Japan on same terms and conditions as in earlier agreement except with change in percentage of royalty agreed upon, which is not in dispute before us. Hence royalty was paid by the assessee to DIC Asia Pacific Pte Ltd, Singapore and to DIC Corporation, Japan. We also find from the Fixed Assets Schedule as on 31.3.2010 (relevant to year under appeal) that there has been a minor addition of Rs 6.58 crores to Plant & Machinery which is hardly 5.23% of Gross Block of Fixed Assets as on 31.3.2010. Hence it could. be safely concluded that no new activity by setting up of a new business venture was carried out by the assessee 20 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
during the year under appeal for which the licensed information was used by the assessee. We find that the ld. CIT had one hand alleged that the assessee had acquired the business / commercial rights in Intellectual Property Rights (IPR) , but in the very same context , he had also stated that the business / commercial rights have been obtained for a period of seven years only. Admittedly the licensed information has been obtained for a period of seven years by the assessee and hence there cannot be any question of acquisition of such licensed information by the assessee. We have gone through the agreement entered into between the assessee and DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan and we find that nowhere it was mentioned that the assessee had acquired the business/ commercial rights of IPR so as to fall within the ambit of an asset having enduring nature in the capital field.. On the contrary it is very clearly stated in both the agreements that DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan has granted license to use technology, knowhow and other license information for a specified period and hence it cannot be said that the assessee had acquired any business / commercial rights thereon. We find that the ld. CIT had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P&M and also changed the setting up of P&M to make its finished products viable for the market. This assumption is factually incorrect and does not emanate out of the jurisdictional facts on record. The ld. CIT had not brought any material evidence on record to justify this incorrect assumption thereby leading to incorrect conclusion. We find that the assessee had all along been in the business of manufacture of printing inks and it had not ventured into any new business as could. be evident from its financial statements. We find that the knowhow was provided for upgrading the existing business. This payment of royalty has been allowed as a revenue expenditure in the past by the ld. AO u/s 143(3) of the Act. The ld. CIT merely made a bald 21 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
statement by stating that the assessee by using the licensed information had entered into new dimensions of business from time to time and hence the payment of royalty could. not be equated with the nature of royalty paid in earlier years, which statement is absolutely without any basis and without any material on record. The assessee had submitted before the ld. CIT that the royalty was paid in respect of licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan for manufacture of resins and printing inks and the licensed information pertains to these specific items i.e resins and printing inks alone and cannot be used to venture into new business. The nature of royalty, mode and manner of payment thereon had remained the same since financial year 2007-08 / 2008-09 as the case may be, in which these agreements were entered into by the assessee. In this regard, we would. like to place reliance on the decision of the Hon'ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held. that :
As we are aware of the fact that, strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would. not be at all appropriate to allow the position to be changed in a subsequent year.
9.2. Based on the aforesaid findings, it could. be safely concluded that the ld. AO had arrived at one possible conclusion in the given set of facts and circumstances and had taken one possible view. The ld. CIT is only trying to substitute his own view on the same set of facts and circumstances by invoking his revisionary powers u/s 263 of the Act which in our considered opinion is not permissible in law.22 I.T.A.No. 126 /Kol/2017
Assessment Years: 2010-11 M/s. DIC India Ltd.
9.3. We find that similar issue was addressed by the co-ordinate bench of this tribunal in the case of DCIT vs Bata India Ltd in ITA Nos. 1826 to 1828/Kol/2012 dated 23.5.2013. In this case also, it had secrecy & confidentiality clause and termination clause similar to what is present in the technical collaboration agreement entered into by the assessee herein. The Tribunal after examining the relevant clauses of the agreement held. as below:-
16. The ld. AR drew our attention to the royalty agreement which was at pages 8 to 28 of the paper book. He drew our attention to para 2.5 of the agreement which specifically says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with the words "Secret and Confidential-property of Wolverine World Wide, Inc.". He further drew our attention to Article 6.1 wherein it has been agreed that the technical know-how imparted to licensee is and shall remain the exclusive and valuable secret property of licensor. He drew our attention to para 6.5 wherein it has been specifically mentioned that on termination of the agreement the technical know-how papers, instruments, documents etc. both original and all copies and translations thereof and all shop or working notes shall be returned to the licensor. He further drew our attention to Article 11.6 when specified the effects of the termination to show that in the event of termination or expiry of the agreement the licensed products were not to be manufactured nor was its trade marks to be used and all to be returned to the licensor. It was the submission that in view of the decision of the Hon'ble Calcutta High Court in the case of CIT vs Hindusthan Motors Ltd. 192 ITR 619 it clearly ITA Nos1826-1828/Kol/2012 & C.O.Nos.10&11/Kol/2013 5 DCIT, Circle-2, Kolkata vs M/s. Bata India Ltd.. A.Yrs.2005-06 & 2006-07 shows that this royalty payment was a revenue expenditure as no capital assets came into being in the hands of the assessee.
17. In reply the ld. DR vehemently supported the orders of the AO as well as the ld. CIT(A).
18. We have heard the rival submissions. A perusal of the agreement in respect of the technical know-how and the manufacturing process clearly shows that the assesse has derived no enduring benefit nor has assessee obtained any capital asset on the basis of the payment of the royalty as per the agreement. The technical know-how trade marks denies drawings, notes etc. in respect of the agreement for which the assessee has paid the royalty belongs to the licensor being M/s. Wolverine World Wide, INC. Thus as the assessee has derived no enduring benefit the same cannot be treated as a capital expenditure but is clearly 23 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
in the name of revenue expenditure and allowable. In the circumstances the AO is directed to allow the royalty paid by the assessee as revenue expenditure as claimed.
9.3.1. We find that this order was further agitated by the revenue by preferring an appeal before the Hon‟ble Calcutta High Court which was disposed off in GA No. 3482 of 2013 dated 18.8.2014 in favour of the assessee. The relevant operative portion of the said order is as below:-
So far as question nos. (iv) and (v) are concerned we find from the order of the CIT(A) the assessee did not derive any enduring benefit for payment of lumpsum royalty as the agreement was for non-transferable license to manufacture licensed products in India.
Out of several questions raised by the revenue before the Hon‟ble Calcutta High Court, only question no. (iv) was admitted by the Court and all other questions were either disposed of on merits or on the ground that they do not involve any substantial question of law.
9.4. We find that the assessee had filed chartered accountant‟s certificate in Form 3CEB for its international transactions which included payment of subject mentioned Royalty to its AE which was certified to be at Arm‟s Length by the Chartered Accountant. The assessee benchmarked its royalty transactions by following CUP method and by comparing the royalty percentage made by the comparable companies and arrived at the arithmetic mean of 8.55% on sales.
Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm‟s Length. The Transfer Pricing Documentation in this regard was also filed during the hearing wherein at pages 44 to 54 of the TP Study Report, the details of benchmarking of royalty and justification of ALP for the 24 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
same is reflected. The case was referred to the ld. Transfer Pricing Officer u.s 92CA of the Act after obtaining the prior approval of the ld. CIT. The ld. TPO found that the CUP method is not the suitable method for benchmarking the Royalty Payment and other international transactions and adopted Transaction Net Margin Method (TNMM) and made an upward adjustment of Rs 4,87,70,886/- on various international transactions of the assessee including the payment of royalty. Based on this ld. TPO order examining the aspect of ALP of royalty payment, the ld. AR argued that the issue of royalty payment had been duly examined by the subordinate authorities and the ld. AO had also made an addition of Rs 82,88,935/- attributed towards royalty which is included in the total TP addition of Rs 4,87,70,886/- and accordingly the same cannot be construed as „lack of enquiry‟ warranting revision u/s 263 of the Act. In this regard, we hold. that the scope of enquiry as envisaged in the statute by the ld. TPO and by the ld. AO are totally different. The scope of the ld. TPO is restricted only to determination of ALP, whereas, the ld. AO is entitled to get into the propriety of transaction and ascertain whether the same is required to be incurred for the purpose of business or not. Hence the argument advanced by the ld. AR that the verification of royalty payments had been made in depth by the ld. TPO and hence it cannot be said that there was no enquiry by the subordinate authority does not hold. water. We find that the ld. AO had simply adopted the upward adjustment to ALP contemplated by the ld. TPO in his order which admittedly included an adjustment towards royalty in the sum of Rs 82,88,935/-. That does not automatically mean that the entire issue of payment of royalty on propriety basis had been duly examined by the subordinate authorities precluding the ld. CIT from exercising his revisionary jurisdiction on the same. We are also not in agreement with the argument advanced by the ld. AR that the ld. AO had made a reference to ld. TPO on the international transactions carried out by the assessee and hence the ld. AO had applied his mind that the royalty payment was in the revenue field and addition 25 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
had been made thereon by the ld. TPO and ld. AO. Hence it amounts to application of mind by the ld. AO. We find that the international transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA of the Act. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee.
9.5. We also find that the issue of allowability of royalty as revenue expenditure was considered by the Hon'ble Calcutta High Court in the case of Timken India Ltd vs CIT reported in (2014) 51 taxmann.com 184 (Calcutta) dated 30.7.2014 which considered the decisions relied upon by the ld. AR [i.e CIT vs I.A.E.C. (Pumps) Ltd - 232 ITR 316 (SC) and ld. DR (i.e Alembic Chemical Works Co. Ltd vs CIT - 177 ITR 377 (SC) ]. The Hon‟ble Calcutta High Court held. as under:-
5. Mr. Majumdar, learned advocate appearing in support of the appeal, submitted that the facts and circumstances of the present case are identical with those in the case ofAlembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC). The assessee company, he contended, was already in existence and the assessee was also engaged in the business of ball bearings. The assessee entered into an agreement with the foreign company for the purpose of acquiring a new technology. In an identical situation in the aforesaid case of Alembic Chemical Works Co. Ltd. (supra), the Apex Court held. that "it appears to us that the answer to the questions referred should. be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should., therefore, be held. to be a revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd."
6. Mr. Majumdar also relied upon a judgment in the case of CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR 316 (SC), wherein Their Lordships of the Supreme Court agreed with the views of the High Court holding that "we are of the opinion that the above features clearly establish that what was obtained by the assessee is 26 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
only a licence and what was paid by the assessee to Aturia is only a licence fee and not the price for acquisition of any capital asset."
7. Mr. Majumdar submitted that considering the fact that the payment made by the assessee is on account of a license fee and considering that the Supreme Court was considering an identical question in the case of I.A.E.C. (Pumps) Ltd. (supra) the question should. be answered in favour of the assessee.
8. Ms. Gutgutia, learned advocate appearing for the revenue, drew our attention to a judgment of the apex Court in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT[1997] 224 ITR 342/91 Taxman 1 (SC). She submitted that the moot question for consideration has been indicated in the aforesaid judgment as follows:
"Whether the expenditure or payment thus made makes an accretion to the capital asset and after the court comes to the conclusion that it does so, then it has to be held. to be a capital expenditure."
9. She contended that the vexed question has been made simpler by the apex Court in the aforesaid case. If the payment made by the assessee makes an accretion to the capital asset the expenditure is capital in nature. She contended that the assessee may have already had an existing plant and machinery. It may also be true that the assessee was pursuing the same line of business, but it cannot be denied that by paying the sum of USD 200,000 the assessee acquired a new technology. There was as such accretion to the capital of the assessee in the sense that the company became better equipped to do its business with the help of technology. Therefore, the expenditure has to be treated as a capital expenditure. On the top of that, from the agreement entered into between the assessee and the non-resident it would. appear that the benefit of such payment is of an enduring nature which is to continue to benefit the assessee for a period of six years. It was, as such, a plain case of a capital expenditure on which the assessee was entitled to claim depreciation. The assessee has already been allowed depreciation at the rate of 25%. Accordingly, more than just treatment was given to the assessee and this court should. refrain from interfering with the order under challenge.
10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms. Gutgutia are no doubt meritorious and certainly represent one way of looking at the things. Sight cannot however be lost of the fact that the payment made by the assessee is on account of license fee. By making such payment, the assessee has got a permission to use the technology. The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped, no benefit from such payment is likely to accrue to the assessee. The license is not transferable. Therefore, it cannot be said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case, the assessee continues to do business and continues to exploit the technology for the agreed period of time, the assessee will be entitled to take the benefit thereof. But in case it does not do so, the payment made is 27 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex Court in the case of IAEC (Pumps) Ltd. (supra). The point as a matter of fact is covered by the aforesaid judgment. Nothing really is left for us to do in the matter.
11. We are, therefore, of the opinion that the question has to be answered in the affirmative and in favour of the assessee.
12. The appeal is, thus, allowed.
The aforesaid decision of Hon‟ble Calcutta High Court is squarely applicable to the facts of the instant case on merits. We find that the decision of the Hon'ble Madras High Court in the case of CIT vs Southern Switchgear Ltd reported in (1984) 148 ITR 273 (Mad) does not come to the rescue of the revenue as in that case, it was categorically found that in addition to the acquisition of technical knowledge, the assessee company got an exclusive right to manufacture and sell its articles without any objection from anyone including the foreign company and this is clearly an advantage of enduring nature. It was further observed in that case that it is well established that even without acquisition of an asset, a right of a permanent advantage could. be acquired and the cost of acquisition of such a right could. be taken to be capital expenditure. In the instant case, the assessee shall not be entitled to use the Licensed Information and it had to deliver up to its AE all such Licensed Information in tangible form which may then be in its possession and will keep no copies thereof. Moreover, assessee in the instant case was given by its AE only a non-exclusive and non-transferable license to use Licensed Information for manufacture of products. Assessee was not granted any right to sublicense to any third parties or make available any licensed information to any third parties and is also directed to maintain the secrecy and confidentiality of the licensed information by not disclosing to any third party and such secrecy & confidentiality clause shall be binding even after termination of the agreement for ten years. Hence it is a restrictive usage privilege given to the assessee in the 28 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
instant case and hence the facts before the Hon‟ble Madras High Court are squarely distinguishable.
9.6. We find that the ld. CIT considered the order of the ld. AO to be erroneous at the show cause notice stage by stating the royalty payment should be construed as capital expenditure and hence should. be disallowed, he later on in the order passed u/s 263 of the Act changed the track and considered the order to be erroneous for „lack of enquiry‟ on the part of the ld. AO. This finding of the ld. CIT recorded on altogether new footing without giving opportunity of being heard to the assessee, itself rendered the revision order u/s 263 of the Act as invalid and bad in law.
9.7. We find that the Hon‟ble Madras High Court supra had held. that 25% of the said expenditure would. have to be treated as capital in nature and balance 75% had to be treated as revenue in nature. Hence this was the third view that was possible in the impugned matter. We hold. that this itself makes the issue debatable and hence the same cannot be the subject matter of revision u/s 263 of the Act. We find that the Hon'ble Calcutta High Court in the case of CIT vs J L Morrison (India) Ltd reported in (2014) 366 ITR 593 (Cal) at page 619 had held. as under:-
61. The point as regards the disallowance of 25 percent of the royalty paid by the assessee is evidently based on omission on the part of the Commissioner of Income-Tax to notice that the assessee was not entitled to use the technical know-how after the expiry of the contract as discussed above. The point as regards the excess sum of Rs 1,56,59,363 having been allowed to be debited on account of raw material consumed is obviously based on a misunderstanding of the nature and purpose of notes on accounts required under the Companies Act.
62. We are, as such of the opinion that the Tribunal was justified in holding that the Assessing Officer took a possible view. The first question is thus answered in the affirmative and in favour of the assessee.29 I.T.A.No. 126 /Kol/2017
Assessment Years: 2010-11 M/s. DIC India Ltd.
9.7. We find that the ld. AO had called for the copy of the technical collaboration agreement entered into on 1.4.2007 and 1.7.2008 with DIC Corporation Japan and DIC Asia Pacific Pte Ltd, Singapore in the assessment proceedings and had applied his mind on the same. On verification of the said agreement and on finding that the same was just a continuation of the renewal of old agreements wherein royalty was allowed as revenue expenditure, formed an opinion on the subject mentioned issue , that the same should. be construed as revenue expenditure in the year under appeal. Since the ld. AO was not contemplating to take a divergent view on the issue of royalty payment, he did not bother to discuss about the same in the assessment order. That does not automatically give room for the ld. CIT to treat the order of the ld. AO as erroneous thereby invoking revisionary jurisdiction u/s 263 of the Act. It is pertinent to note that the ld. CIT had mentioned about the existence of the royalty agreement in the show cause notice issued by him itself and had also scrutinized the said agreement before issuing the show cause notice. This goes to prove that the assessee had already filed the said agreements during the assessment proceedings on request from the ld. AO. The ld. CIT was trying to substitute his own view against the view taken by the ld. AO on the basis of the very same agreement when there being no change in the facts and circumstances of the case as compared to that of the earlier years. In this regard, we would. like to place reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs Nirav Modi reported in (2016) 71 taxmann.com 272 (Bombay) dated 16.6.2016 wherein it was held. as below:-
7. Firstly, the Revenue contends that the exercise of powers under Section 263 of the Act is justified as in this case, as no inquiry in respect of the gifts received during the subject years was done by the Assessing Officer for the Assessment orders for Assessment Years 2007-08 and 2008-09. This according to the Revenue is evident from the Assessment Orders dated 31st December, 2009 and 30th December, 2010 which does not even make a mention of the gifts received much less discuss and/or deal with the same. This issue is no longer res integra as this 30 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
Court in Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407 (Bom.) has held. that if during Assessment proceedings queries were raised and the assessee responded to the same, then even if an Assessment order does not mention the same, it does not mean that the Assessing Officer has not applied his mind to the issues. It would. be well-nigh impossible for an Assessing Officer to complete all assessments assigned to him under Section 143(3) of the Act if he is required to deal with all issues which arose during the Assessment Proceedings. Thus, the Assessment Order primarily deal with only those issues in respect of which the Assessee has not been able to satisfy him and give reasons for his conclusion. This would. enable the Assessee to challenge the same, if aggrieved. In fact the Gujarat High Court in CIT v. Nirma Chemical Works Ltd. [2009] 309 ITR 67/182 Taxman 183 has observed that if an assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would. be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment Years, the Assessing Officer issued a query memos to the assessee, calling upon him to justify the genuineness of the gifts. The Respondent-Assessee responded to the same by giving evidence of the communications received from his father and his sister i.e. the donors of the gifts along with the statement of their Bank accounts. On perusal, the Assessing Officer was satisfied about the identities of the donors, the source from where these funds have come and also the creditworthiness/capacity of the donor. Once the Assessing Officer was satisfied with regard to the same, there was no further requirement on the part of the Assessing Officer to disclose his satisfaction in the Assessment Order passed thereon. Thus, this objection on the part of the Revenue, cannot be accepted.
8. It is next submitted that the donor had not been examined by the Assessing Officer. It is not in every case that every evidence produced has to be tested by cross examination of the person giving the evidence. It is only in cases where the evidence produced gives rise to suspicion about its veracity that further scrutiny is called for. If there is nothing on record to indicate that the evidence produced is not reliable and the Assessing Officer was satisfied with the same, then it is not open to the CIT to exercise his powers of Revision without the CIT recording how and why the order is erroneous due to not examining the donors. Thus, this objection to the impugned order by the Revenue is also not sustainable.
9. It was next submitted that no enquiry was done by the Assessing Officer to find out whether the donor Mr Deepak Modi (father) had received money from M/s. Chang Jiang as claimed. Nor any inquiry was done to find out whether the sister had in fact earned amounts on account of Foreign Exchange Transactions as claimed by her. We find that this enquiry of a source of source is not the requirement of law. Once the Assessing Officer is satisfied with the explanation offered on inquiry, it is not open to the CIT in exercise of his revisional powers direct that further enquiry has to be done. At the very highest, the case of the Revenue is that this is a case of inadequate inquiry and not of "no enquiry." It is well settled that the jurisdiction under Section 263 of the Act can be exercised by 31 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
the CIT only when it is a case of lack of enquiry and not one of inadequate enquiry. This view has been taken by this Court in the matter of CIT v. Shreepati Holdings & Finance (P.) Ltd. [ITA 1879 of 2013 dated 5th October, 2013], by the Delhi High Court in CIT v. Vikas Polymers [2012] 341 ITR 537/194 Taxman 57 and in D.G. Housing Projects (supra). In fact the Delhi High Court in D.G. Housing Projects (supra) while so holding placed reliance upon the decision of this Court in Gabriel (India) Ltd. (supra). It is very important to note that the CIT in his order under Section 263 of the Act has recorded the fact that there has been no adequate inquiry. Thus, this is not a case of no inquiry, warranting order under Section 263 of the Act. Thus, this objection on the part of the Revenue, is also not sustainable.
10. The Revenue placed reliance upon the decision of the Delhi High Court in D.G. Housing Projects Ltd., (supra) that as the Assessing Officer had not enquired into the source of the source of the gifts received by the Assessee, the Assessment Order is erroneous. The aforesaid decision holds that the power of Revision under Section 263 of the Act would. normally be exercised in case of no enquiry and not in cases of inadequate enquiry. However, even in case of inadequate enquiry by the Assessing Officer, the order of the Assessing Officer could. be erroneous in two classes of situation. The first class would. be where orders passed by the Assessing Officer are ex facie erroneous i.e. a decision rendered ignoring a binding decision in favour of the Revenue or where enquiry is per se mandated on the basis of the record available before the Assessing Officer and that is not done. In the second class of cases, where the order is not ex facie erroneous, then the CIT must himself conduct an enquiry and determine it to be so. The Court held. that it is not permissible to the CIT while exercising power under Section 263 of the Act to remit the issue to the Assessing Officer to re-examine the same and find out whether earlier order of Assessment is erroneous. It is the CIT who must hold. that the order is erroneous, duly supported by reasons. In the present facts, the CIT in exercise of its powers under Section 263 of the Act has merely restored the Assessment to the Assessing Officer to decide whether the gifts were genuine and, if not, then the Assessment could. be completed on application of Section 68 of the Act. In this case, the order passed by the Assessing Officer is not per se erroneous and further the CIT has not given any reasons to conclude that the order is erroneous. In fact, he directs the Assessing Officer to find out whether the order is erroneous by making further enquiry. This the decision of the Delhi High Court in D.G. Housing Projects Ltd. (supra), clearly negates. In the above view, the decision of Delhi High Court in D.G. Housing Projects Ltd. (supra) would. not assist the Revenue in the present facts.
11. Further, reliance is placed upon by the Revenue upon the decision of the Apex Court in Amitabh Bachchan (supra) to impugn the order of the Tribunal. In the facts of the Supreme Court decision, the Respondent-Assessee had filed a revised return, claiming additional expenses. During the Assessment Proceedings, the Assessing Officer called upon the Assessee to furnish the details with regard to 32 I.T.A.No. 126 /Kol/2017 Assessment Years: 2010-11 M/s. DIC India Ltd.
the expenses claimed to be incurred. The Assessee therein pointed out that the payments for expenses had come out of cash balance available with him. When the Assessing Officer commenced enquiry in respect of the claim of expenditure out of cash balance available, seeking to invoke Section 69(C) of the Act and treat the expenditure claimed as unexplained expenditure, the Assessee therein withdrew his revised return of income. Once this was done, the Assessing Officer accepted the same and did not make any further enquiry. The CIT in exercise of its powers under Section 263 of the Act noticed that the Assessee had after having pressed his claim for expenditure in cash, withdrew the claim by withdrawing the revised return of income. This was done only after the enquiry had commenced. This withdrawal of revised income and consequent claim for cash expenditure was contrary to the stand of the Assessee himself. This change on the part of the Assessee on commencement of enquiry, made further enquiry into his claim for cash expenditure necessary. In the above facts, the CIT while exercising his powers under Section 263 of the Act found that the facts on record per se mandated an enquiry to be made into the claim of the Assessee and not doing the same resulted in the order being erroneous. Thus, the Bachchan's case was a case where once the claim was withdrawn, then enquiry which was to be conducted, was aborted by the Assessing Officer. Therefore, a case of non-enquiry. It may have been different, if the Assessing Officer had enquired into the cash expenditure and its source as claimed, to come to his own conclusion and even accepted the stand of the Assessee. In such a case, even if the CIT would. have taken a view that the satisfaction of the Assessing Officer is not correct, he would. not have been able to exercise his powers of Revision under Section 263 of the Act.
12. In the present facts, the Assessing Officer was satisfied, consequent to making an enquiry and examining the evidence produced by the Assessing Officer, establishing the identity and creditworthiness of the donor as also the genuineness of the gift. The CIT in his order of Revision, does not indicate any doubts in respect of the genuineness of the evidence produced by the Assessee. The satisfaction of the Assessing Officer on the basis of the documents produced is not shown to be erroneous in the absence of making a further enquiry. It is made clear that our above observations should. not be inferred to mean that it is open to the Assessing Officer to enquire into the source of source for the purpose of the present facts. This is a case where a view has been taken by the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not correct, it would. not permit him to exercise power under Section 263 of the Act. In fact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no doubt that where the view taken by the Assessing Officer is a possible view, interference under Section 263 of the Act, is not permissible.
13 In view of the above, the questions as framed stands concluded by the decision of this Court in Gabriel (India) Ltd. (supra). Thus no substantial questions of law arises for our consideration.
33 I.T.A.No. 126 /Kol/2017Assessment Years: 2010-11 M/s. DIC India Ltd.
14. Accordingly, Appeals dismissed. No order as to costs.
We hold that the principles laid down by the Hon‟ble Bombay High Court in the aforesaid case would. be squarely applicable to the facts of the instant case.
10. In view of our aforesaid findings and respectfully following the various judicial precedents relied upon hereinabove; we hold that the ld. CIT erred in invoking revisionary jurisdiction u/s 263 of the Act in the instant case. Hence the order passed by the ld. CIT u/s 263 of the Act is hereby quashed and grounds raised by the assessee are allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 05.04.2017
Sd/- Sd/-
[N. V. Vasudevan] [M. Balaganesh]
Judicial Member Accountant Member
Dated : 05.04.2017
{SC SPS}
Copy of the order forwarded to:
1.Appellant/AssesseeDIC India Ltd. Transport Depot Road, Kolkata - 700 088.
2.Respondent -DCIT, Cir-10(1), Kolkata
3.CIT(A)- Kolkata.
4.CIT - , Kolkata.
5.CIT(DR), Kolkata Benches, Kolkata.
True copy By Order Asstt.Registrar, ITAT, Kolkata Benches