ASST CIT (LTU) -1, MUMBAI vs. JOHNSON & JOHNSON LTD, MUMBAI

On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition on account of tax and R & D cess paid on know-how royalty on traded finished goods and manufactured products.

The Ld. D.R. reasonably appeared to be in agreement with the contentions of the Ld. A.R.

We find that the identical issue has been decided by the co-ordinate bench of the Tribunal in for A.Y. 2002-03 order dated 28.08.2013 wherein it has been held that production loss depends on number of factors and in absence of any comparable to show that loss shown by the assessee is excessive and thus the appeal was decided in favour of the assessee. The said case was decided by the coordinate bench following the order in assessee’s own case for A.Y. 1991-92 in ITA No.1146/M/1997. In the present case, we find that no evidence of purchases and sales outside the books of accounts were brought before the authorities below.

The issue raised in ground No.2 is against the direction of Ld. CIT(A) to AO to grant credit in respect of retained modvat credit relating to the opening stocks. After perusal of the record and hearing both the parties, we find that the issue is squarely covered by the order of the co-ordinate bench of the Tribunal wherein the same was restored to the file of AO with the direction to decide the issue afresh in the light of direction of the Tribunal in ITA No.2680/M/2003. The relevant operative extracts are reproduced below: “7. We have carefully perused the orders of the lower authorities and we have also the benefit of the order of the Tribunal in assessee's own case in ITA No. 2680/M/03. We find that the Tribunal has considered this issue at para-95 of its order and at para-96 has held as under:

The Hon’ble Bombay High Court has not entertained the appeal raising a substantial question of law filed by the Revenue against the decision of the co-ordinate bench of the Tribunal on this issue. We, therefore, following the decision of the Tribunal, restore this issue back to the file of the AO to decide the same as directed hereinabove.

We have heard the rival submissions of both the parties and perused the material on record. During the course of hearing both the parties agreed that the issue involved is squarely covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in for A.Y. 2002-03 order dated 28.08.2013 wherein it has been held that the assessee is entitled to the depreciation on testing 7 & 1777/M/2017 CO No.242/M/2017 M/s. Johnson & Johnson Ltd. equipments provided to the laboratories and hospitals free of charge. The relevant extract is reproduced as under: “82. Ground No. 12 relates to depreciation on testing equipments amounting to Rs. 34,50,441/-. This issue has been considered by the AO at para-14 on page-17 of his order and the Ld. CIT(A) has considered the same at para-20 on page-25 of his order.

A similar issue came up for hearing before the Tribunal in assessee's own case for A.Y. 2000-01 and 2001-02 in ITA Nos. 2774 & 9106/M/04 wherein the Tribunal has decided this issue in favour of the assessee following the decision of the Tribunal in the case of NR Jet Enterprises Ltd. in ITA No. 4474/M/04. Facts and circumstances being identical, respectfully following the decision of the Tribunal in assessee's own case ground No. 12 is dismissed.”

Therefore, we, respectfully following the decision of the co-ordinate bench of the Tribunal, dismiss the ground raised by the Revenue. Moreover, the substantial question of law raised by the Revenue on this issue stands dismissed by the Hon’ble Jurisdictional High Court.

The issue raised in ground No.5 is against the deletion of adjustment made on account of tax on brand usage royalty by Ld. CIT(A) as made by the AO under Article 13 of the agreement for payment of royalty which was paid net of taxes after obtaining the approval from the RBI. The Ld. A.R. submitted before the Bench that issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in favour of the assessee in for A.Y. 2002-03 order dated 28.08.2013 which was fairly conceded by the Ld. D.R.

After hearing both the parties and perusing the decision of the co-ordinate bench of the Tribunal, we find that that the issue is covered in favour of the assessee by the decision of 8 & 1777/M/2017 CO No.242/M/2017 M/s. Johnson & Johnson Ltd. the co-ordinate Bench. The relevant extract is reproduced as under: “34. We have heard the rival submissions, perused the orders of the lower authorities and also the copy of agreement submitted alongwith application to RBI as exhibited at pages 1143 to 1145 of the Paper book. We find that the application made by the assessee to RBI for brand usage agreement specifically mentions that the royalty to be remitted is net of taxes. Further, the approval was received from the RBI to remit the royalty on brand usage by the assessee @ 1% net of taxes. Considering the brand usage agreement vis-à-vis the approval granted by RBI, it can be safely inferred that taxes were liability of J&J India under the terms of agreement. The assessee has entered into a commercial arrangement with J&J US and it has been so arranged that the payment of taxes have to be borne by the assessee being a commercial arrangement, the same should not be questioned while calculating arm's length price. Reliance by the assessee on the decision of the Tribunal in the case of Dresser Rand India Pvt. Ltd. in ITA No. 3509/M/08 is well founded. Considering the entire facts in totality in the light of the brand usage agreement and the approval of the RBI, the findings of the Ld. CIT(A) is set aside. The AO is directed to delete the addition of Rs. 60,00,000/-. Ground No. 13 is allowed.”

Since the issue in hand is identical to one as decided by the co-ordinate bench of the Tribunal, we, therefore, respectfully following the same dismiss the ground raised by the Revenue.

The issue raised in ground No.6 is against the deletion of adjustment by the Ld. CIT(A) as made by the AO towards payment of royalty on traded finished goods made by the assessee to J & J US.

We have heard the rival submissions of both the parties and perused the decisions cited by the Ld. A.R. After perusal of the said order, we find that the issue is covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in for A.Y. 2002-03 order dated

We, therefore, following the decision of the Tribunal, dismiss the ground raised by the Revenue as the issue stands settled in the earlier year as discussed hereinabove.

The issue raised in ground No.7 is against the order of Ld. CIT(A) allowing the technical knowhow royalty payment @ 2%/4% instead of 1% as done by the TPO. The Ld. A.R. pointed out that the issue is covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in for A.Y. 2002-03 order dated 28.08.13 which was fairly conceded by the Ld. D.R.

We have perused the said decision which is in favour of the assessee. The operative part is extracted below: “52. The Ld. CIT(A) has considered this issue at page-12 para-6 of his order. It was strongly contended before the Ld. CIT(A) that the TPO has not provided any sound basis for restricting this royalty. After considering the facts and submissions of the assessee, the Ld. CIT(A) was convinced that the restriction by the TPO to 1% is without any basis and allowed the appeal.

Since the issue in hand is identical to one as decided by the co-ordinate bench of the Tribunal, we, therefore, respectfully following the same dismiss the ground raised by the Revenue.

The issue raised in ground No.8 is against the deletion of addition on account of tax and R & D cess paid on know-how royalty on traded finished goods and manufactured products. The Ld. A.R. pointed that the issue is covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in for A.Y. 2002-03 order dated 28.08.13 which was fairly conceded by the Ld. D.R.

We have perused the said decision which is in favour of the assessee. The operative part is extracted below:

The TPO has disallowed the withholding tax and R&D Cess and technical know- how royalty. The Ld. CIT(A) has confirmed the decision of the TPO holding that withholding tax and R&D Cess can only be allowed only to the extent they are payable on allowable royalty. As we have already held elsewhere that royalty payments has been approved by RBI and therefore deserves to be allowed. Accordingly as the payments have been made in the light of the agreement with J&J US and as per the approval/guidelines of the RBI, we do not find any reason to disallow the tax and R&D Cess paid on technical royalty. We accordingly direct the AO to delete the addition made on this account. Ground No. 16 is accordingly allowed.”

Resultantly, the appeal of the Revenue is dismissed.

The issue raised in ground Nos.1, 2, 3, 4, 8, 9 & 10 are identical to one as decided by us in in ground Nos.1, 2, 3, 4, 5, 6 & 7 which were dismissed. Therefore, our finding in ITA No.1776/M/2017 would, mutatis mutandis, apply to the above grounds in ITA No.1777/M/2017 as well. Accordingly, these grounds raised by the Revenue are dismissed.

The issue raised in ground No.5 is against the decision of the Ld. CIT(A) holding that addition of Rs.5,69,60,372/- being remission of sales tax (deferral sales tax liability) under package scheme of incentives of Government of Maharashtra is not chargeable to tax as ‘Business income’ of the assessee company u/s 41(1) of the Act. The Ld. A.R. submitted that the issue is covered in favour of the assessee by the decision of the Hon’ble jurisdictional Bombay High Court in the case of CIT vs. Sulzer India Ltd. [2014] 369 ITR 717 (Bom) and the decision of the Apex Court in the case of CIT vs. Balkrishna Industries Ltd. (2017) 88 taxmann.com 273 (SC) which was fairly conceded by the Ld. D.R.

We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the Ld. A.R. The undisputed facts are that the assessee availed the benefit of sales tax deferral scheme offered by the State of Maharashtra for its Aurangabad plant. Under the said scheme the company has deferred the sales tax liability to the tune of Rs.13,14,79,300/- for the period ending from September 1999 to March 31.09.2008. Thereafter, the said deferred sales tax liability has been converted into interest free loan payable to Ckom vide agreement dated 10.05.1994 between the Government of Maharashtra through the implementing agency Ckom and the assessee. Under the said scheme the assessee repaid the sales tax loan prior to the due dates by making payments at the discounted rate i.e. at net present value. Under the said scheme the net present value of the sales tax liability as repaid till financial year 2003-04 was Rs.7,72,28,628/- against the outstanding of Rs.13,41,89,000/-. Thus the difference of liability as on 31.03.03 Rs.5,69,60,373/- was written back during the year as not being payable anymore. The said amount was not offered to tax by the assessee as the same is a capital receipt. The AO did not find the reply of the assessee satisfactory and added the same to the income of the assessee. The first appellate authority also allowed the appeal of the assessee. The Ld. CIT(A) allowed the appeal of the assessee by holding that the remission of sales tax liability is not chargeable to tax as business income of the assessee under section 41(1) of the Act. We have perused the decision

The issue raised in ground No.6 is against the decision of Ld. CIT(A) holding that refund of Rs.37,98,20,369/- made to NPPA is an amount which is hit by the explanation 1 of section 37 of the Act and allowed as deduction. The Ld. A.R. submitted that the issue is covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in assessee’s own case in for A.Y. 1999-

We have heard the rival submissions of both the parties and perused the material on record. We find that the identical issue was decided by the co-ordinate bench of the Tribunal in assessee’s own case in (supra). The operative portion which is reproduced as under: “135. We have considered the rival contentions, perused the orders of the authorities below and the material available on record. The assessee, which is also engaged in the manufacturing of drugs, was selling scheduled drugs. The NPPA which is a Government authority is responsible for implementation of the provisions of drug price and control and/or is competent to fix the price of scheduled drugs by taking into consideration certain cost parameter. The assessee was charging `25 per strip of Raricap tablet. Later on, the NPPA, vide order dated 7th August 19996, fixing the revised price of Raricap tablet at `16.24. Immediately thereafter, the assessee on 19th August 1996, filed a detail reply that price of `25, was approved under DPCO, 1987 and, therefore, requested the Government to furnish the cost data so that the revised application can be filed. Subsequently, on 30th March 1997, the assessee discontinued to manufacture Raricap tablet. On 24th September 1998, a notice was issued from NPPA determining the total over charged amount of `5.32 crores from the period of August 1996 to August 1998. Against the said notice, the assessee filed Writ Petition before the Delhi High Court. The Delhi High Court, vide its judgment dated 23rd November 1998, passed an interim order and directed the assessee to deposit `1.50 crores with NPPA till the disposal of the Petition. On 10th December 1998, payment of `1.50 crores was paid to NPPA based on such interim order of the High Court. From the records, it is seen that the assessee has been regularly filing replies to the NPPA for giving justification for reducing the price and the working of the cost. However, without reverting to the assessee's reply on 1st November 2002, a revised order was passed by the NPPA whereby it determined the total overcharged amount of `1,56,06,224, for the period from 20th August 1998 to 31st March 1997 and further interest of ` 50,38,024. On 1st July 2008, the Delhi High Court disposed off the Writ Petition quashing the earlier order of the NPPA and directed to pass order afresh for fixing the price. On 18th December 2009, NPPA again passed an order on similar lines confirming the demand of `1,56,06,224 and asked the assessee to pay the balance demand by May 2009, as the assessee had already deposited `1.50 crores. In the assessment year 1999-2000, what the assessee has claimed is a sum of `1.50 crores only which has been deposited to the NPPA in view of the interim order passed by the High Court in its Profit & Loss account. After going through various notifications and relevant provisions of The Essential Commodities Act, 1955, we find that there are separate provisions for penalty and interest and the sum of `1.50 crores, which has been paid is the refund of excess price paid by the assessee to NPPA. Hence,

The facts of the present case being materially same to the one as decided by the co-ordinate bench of the Tribunal as referred to hereinabove, we, therefore, maintaining the consistency with the earlier year, dismiss the ground raised by the Revenue.

The issue raised in ground No.7 is against the decision of CIT following the order of ITAT in assessee’s own case wherein it is held that brand usage royalty was payable without a formal deed and based on commercial expediency, despite the assessee failing to provide sufficient evidence to prove its liability during the period.

After hearing both the parties and perusing the material on record, we find that J & JUS India has paid brand usage royalty to J & JUS @ 1% of net sales based on agreement dated 14.03.2002. After hearing both the parties and perusing the records as placed before us carefully , we find that the payment of brand usage royalty at 1% has not been disputed by the TPO and was not subject matter before the Ld. CIT(A) and accordingly the ground raised by the Department

Appeal of the Revenue is dismissed.

In the result, both the appeals of the Revenue as well as cross objection of the assessee are dismissed.