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TMI Blog2013 (10) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) – Decided in favor of Assessee. 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 unnecessary implications – Therefore, credit of TDS allowed – Decided in favor of Assessee. - ITA No.7865/Mum/2010 - - - Dated:- 1-2-2013 - Shri B. Ramakotaiah And Shri Amit Shukla,JJ. For the Appellant : Shri M. P. Lohia For the Respondent : Shri Mahesh Kumar, DR 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, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax @15%. Afterwards the notice under section 148 of the Act, dated 25.03.2009 was issued. The assessment in the case of assessee was reopened after recording the reasons as under: "The total income of a person for any previous year includes all income from whatever source derived which is received or which accrues or arises in such previous year unless specifically exempted from tax. The related receipt in respect of any tax deducted at source has to be taken into account in computing the total income of assessee. Assessee is a tax resident of USA. Assessee provides various services like technological assistance, expert services related to advertising, promotions, marketing plans and strategy, distribution network, technological solutions for information management etc, to its associated enterprises. Johnson Johnson Ltd and M.R. Enterprises Ltd and earned royalty J J USA holds 75% of the total shares of J J India. The assessment of A.Y 2004-05 was computed under scrutiny in November, 2006 for income of Rs.716.69 lakhs. On verification, it was revealed that the total amount paid/credited to assessee account on account of royalty for the period upto March 04 (previous year rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted 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- -vis @ 20% under the Income Tax Act, the royalty received has been offered to tax @ 15%. g) Without prejudice to above, the amount of royalty credited as per Form 3CEB, J J India and NR Jet is Rs.38,48,76,032 only and not the amount considered by AO. 5. AO discussed the provisions of section 147, various legal principles in reopening within 4 years and rejected the objections. On facts, surprisingly AO did not accept assessee's objections by stating as under: "(g) Assessee's representative has failed to file the documentary evidences to prove that J J India and N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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. No. Name of the person deducting the tax Period during which it was issued Amount (Rs.) TDS (Rs.) during 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 The above incomes were offered year wise as: AY 2004-05 AY 2006-07 AY 2007-08 Amount (Rs.) TDS (Rs.) Amount (Rs.) TDS (Rs.) Amount (Rs.) TDS (Rs.) 90, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s fixed the royalty income of Rs.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 Rs.2,65,307,141 instead of Rs.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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs.1,07,50,431 though the certificates filed are for Rs.7,81,13,068 which pertain to income that are yet to be received and the same shall be claimed on the receipt of the roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 3 and fees for included services as defined in this Article (other than services described in sub-paragraph) (b) of this paragraph) 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee'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 assessment, AO made inquiries particularly with reference to the claim of TDS of part amount when certificates were filed to an extent of Rs.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 initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue 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. Failur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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