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Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUDHANSHU SRIVASTAVA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Principal Commissioner of Income Tax, Gurugram dated 20.03.2018 pertaining to assessment year 2011-12.
The sum and substance of the grievance of the assessee is that the PCIT grossly erred in assuming jurisdiction u/s 263 of the Income- tax Act, 1961 [hereinafter referred to as 'the Act' for short.
The representatives of both the sides were heard at length. The case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.
Briefly stated, the facts of the case are that assessment was completed u/s 143(3) of the Act vide order dated 04.01.2016. The ld. PCIT called for assessment records and examined the same. On perusal of the records, the ld. PCIT noticed that the assessee has debited a sum of Rs. 28.69 crores against royalty expenses, which was allowed by the AO as claimed. The ld. PCIT was of the opinion that 25% of the royalty was to be treated as capital expenditure and the expenditure to that extent was to be disallowed. The ld. PCIT further found that on identical set of facts in the subsequent A.Y, i.e. 2012-13, the AO had made an addition of Rs. 70.83 crores. The ld. PCIT further found that in its sister concern’s case, i.e. Honda SIEL, disallowance was made on account of technical know-how, as well as running royalty and the matter travelled upto the Hon'ble Allahabad High Court and Hon'ble High Court answered the question in favour of the Revenue and against the assessee. The decision of the Hon'ble Allahabad High Court was challenged before the Hon'ble Apex Court and the Hon'ble Supreme Court dismissed the appeals.
With this background, the ld. PCIT was of the firm belief that the issue of royalty has been decided by the Hon'ble Allahabad High Court in favour of the Revenue which has been confirmed by the Hon'ble Supreme Court, therefore, royalty payment allowed by the AO during the year under consideration has made the assessment order erroneous as well as prejudicial to the interest of the Revenue and after giving show cause notice to the assessee and after considering its reply, the ld. PCIT directed the AO to pass fresh assessment order after considering the issue in light of the decision in sister concern’s case.
Aggrieved by this, the assessee is before us. The ld. AR vehemently contended that the ld. PCIT wrongly assumed jurisdiction u/s 263 of the Act on wrong assumption of facts and without understanding the facts of the case of sister concern, Honda SIEL.
7. It is the say of the ld. AR that in the case of Honda SIEL, the Hon'ble High Court came to the conclusion that royalty was for enduring benefit for business. It was not only for running business but for bringing business into existence and then for running and sustaining it. The ld. AR vehemently stated that in that case, a new unit was brought into existence. The ld. AR pointed out that in that case, the Tribunal has decided the issue on wrong facts which has been corrected by the Hon'ble High Court and confirmed by the Hon'ble Supreme Court. The ld. Counsel concluded by stating that the ld. PCIT has considered wrong facts in assuming jurisdiction u/s 263 of the Act and, therefore, order so framed deserves to be set aside.
Per contra, the ld. DR strongly supported the findings of the PCIT.
We have given thoughtful consideration to the orders of the authorities below. It is a settled position of law that powers u/s 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the decision of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 taxmann.com 272 (Bombay). This view is further supported by the decision of the Hon'ble Gujarat High Court in the case of Shri Prakash Bhagchand Khatri in Tax Appeal No. 177 with Tax Appeal No.178 of 2016, wherein the Hon'ble Gujarat High Court was seized with the following substantial question of law:-
"Whether the Tribunal is right in law and on facts in upholding the order passed by the CIT under section 263 of the Act on merits and still storing the issue of allowability of deduction under section 54 of the Act to the file of Assessing Officer even though the working of allowability of deduction under section 54F is available in the order under section 263 which is not disputed by the assessee before ITAT."
6 10. And the Hon'ble High Court, after considering the facts, held as under:-
"6. It can thus be seen that though final order of assessment was silent on this aspect, the Assessing Officer had carried out inquiries about the nature of sale of land and about the validity of the assessee's claim of deduction under section 54F of the Act. Learned counsel for the Revenue however submitted that these inquiries were confined to the claim of deduction under section 54F of the Act in the context of fulfilling conditions contained therein and may possibly have no relevance to the question whether the sale of land gave rise to a long term capital gain. Looking to the tenor of queries by the Assessing Office and details . A.Y. 2009-10 supplied by the assessee, we are unable to accept such a condition. In that view of the matter, the observation of the Tribunal that the Assessing Officer having made inquiries and when two views are possible, revisional powers could not be exercised, called for no interference. Since with respect to computation and assertions of other aspects of deduction under section 54Fofthe Act, the Tribunal has remanded the proceedings, nothing stated in this order would affect either side in considerations of such claim.
No question of law arises. Tax Appeals are dismissed."
7 11. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd., 243 ITR 83, has laid down the following ratio:
"A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous ".
In the light of the aforestated judicial discussion, let us now consider the facts of the case in hand. There is no dispute that the assessee is paying royalty since the year 2000. The A.Y under consideration is A.Y 2011-12 which means that since the last 10 years Revenue has been accepting the payment of royalty as legitimate revenue expenditure. No new facts have come into existence nor the law has changed. Therefore, the ratio laid down by the Hon'ble Supreme Court in the case of Radhaswami Satsang 193 ITR 321 squarely applies. Further, the PCIT’s decision is solely based upon the decision in the case of sister concern Honda SIEL.
We have carefully perused the judgment of the Hon'ble Supreme Court in that case. The Hon'ble Supreme Court has categorically held as under:
“When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lumpsum royalty, though in five instalments, was paid therefor.”
14. And in the same breath the Hon'ble Supreme Court elsewhere has observed as under:
“Coming to the judgment of the Delhi High Court in the case of this very assessee, it would be noticed that in that case, technical know-how was obtained for improvising scooter segment, which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for the first time to manufacture cars. The Delhi High Court specifically noted this fact in para 14 of the judgment. While analysing the agreement in that case which was for providing technical know-how in relation to the product i.e. two wheelers and three wheelers and the purpose was to introduce ‘new models’ of the said product developed by the Japanese Company, the High Court noted that the agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results. As a consequence, we find no merit in these appeals which are dismissed with cost”.
It can be seen from the aforesaid extracts from the judgment of the Hon'ble Supreme Court that in case of sister concern, the issue went in favour of the Revenue because the assessee was not in existence at all and it came into existence as a result of joint venture of HMCL, Japan and HSCIL, India. The very purpose of agreement was to set up a joint venture company to establish a unit for manufacture of automobiles and as a result of this, Honda SIEL was incorporated.
The facts of the case in hand and as mentioned elsewhere, do not support the findings of the Hon'ble Supreme Court in the case of sister concern. As mentioned elsewhere the assessee is in existence since the year 2000 and has been paying royalty since past 11 years. Considering the facts of the case in hand, vis a vis the decisions considered by the ld. PCIT for assuming jurisdiction u/s 263 of the Act, we are of the considered opinion that the PCIT has erred in assuming jurisdiction in as much as he has considered the facts of the case of the sister concern without appreciating the facts of the case in hand in true perspective. We are of the considered opinion that the assessment order framed u/s 143(3) of the Act is neither erroneous nor prejudicial to the interest of the Revenue. We, therefore, set aside the order of the ld. PCIT and restore that of the AO.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 26.06.2018.