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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM]
Per Shri Mahavir Singh, JM: This appeal by revenue and cross objection by assessee are arising out of order of CIT(A)-VIII, Kolkata vide Appeal No. 395/CIT(A)-VIII/Kol/09-10 dated 13.10.2011. Assessment was framed by DCIT, Circle-8, Kolkata u/s. 147/143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2002-03 vide his order dated 29.12.2009.
At the outset, the Ld. Counsel for the assessee stated that he has raised jurisdictional issue with respect to assumption of jurisdiction u/s. 147 read with section 148 of the Act. Hence, the Cross Objection should be taken up first for hearing. 3. The only issue in this Cross Objection of assessee is against the order of CIT(A) confirming the action of AO in assumption of jurisdiction u/s. 147/148 of the Act despite the fact that original assessment was completed u/s. 143(3) of the Act and this reopening beyond four years without any charge that there is any failure of the assessee to disclose
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truly and fully all material fact during completion of original assessment. For this, assessee has raised following ground no.1 in his Cross Objection:
“1(a). That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the action of the AO in initiating the reassessment proceedings u/s. 147/148 without appreciating the fact that the same has been done in utter disregard of the express provisions of the Act on fresh application of mind on the same set of facts, more so when there was no failure on the part of the appellant to disclose truly and fully all the facts necessary for completion of the original assessment u/s. 143(3). 1(b). That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in not holding that the order u/s. 143 r.w.s. 147 dated 29.12.2009 passed by the AO is unjustified, erroneous and needs to be summarily cancelled.”
Briefly stated facts are that the assessee filed its return of income for AY 2002-03 on 13.10.2002. The return of income was assessed by the AO u/s. 143(3) of the Act on 21.03.2005. Subsequently, notice u/s. 148 of the Act was issued on 24.03.2009 by recording the following reasons: “Office of the DJy. Commissioner of Income Tax, Circle-8, Aayakar Bhawan. P-7 Chowringhee Square, Kolkata-69. No. Circle-8/Kol/148/2008-09/1432 Dated: 08/12/2009 To The Principal Officer, M/s.Sicpa India Ltd. 21, Camac Street, Kolkata-700 016 Sir, Sub: Proceeding u/s.l47 of Act for A.Yrs.2002-03 Kindly find below reason for which notice u/s.148 of Income Tax Act, 1961 was issued for the above mentioned assessment year: The assessee filed its return of income on 30.10.2002 declaring total income at Rs.11,35,96,450/-. Assessment was completed under section 143(3) of Act on 21.03.2005 assessing total income at Rs.14,85,56,420/-. In the instant case the assessee company entered into a collaboration agreement with foreign company for manufacture of security printing inks for Bank notes and for other securities and the right to sell such products under the terms of agreement. The foreign company also agreed to keep the Indian company upgraded with the latest and modern development in the field of manufacture of security printing inks for Bank notes and for other securities and to train the necessary personnel at its Switzerland factory or elsewhere and granted the assessee company exclusive, non-transferable rights to manufacture, the products in India and a non-exclusive right to sell in India. Under the terms of the agreement, the assessee company agreed to pay to the foreign company as consideration for the services rendered by it, a royalty on sales and a lump sum for the technical aid, payable in three equal instalments, the payment to be spread over a period of time,
3 ITA No.36/Kol/2012 & CO No.05/Kol/2012 Sicpa India Pvt. Ltd.., AY 2002-03 Accordingly, the assessee company paid royalty to the foreign company of Rs.l,80,71,146/- as shown in the Profit & Loss Account as revenue expenditure and the TDS on royalty was also deducted. However, in the light of Judicial decision held by the Hon'ble Supreme Court of India in the case of Southern Switch Gear Ltd. Vs. Commissioner of Income Tax and another (232 ITR 359(scrutiny) 1998), the right to manufacture certain goods exclusively in India should be taken to be on independent right secured by the assessee from the foreign company which was of an enduring nature, that consequently, the entire royalty could not be allowed as a revenue expenditure and 25% of royalty would have to be taken as being Capital in nature. Accordingly, 25 per cent of royalty paid by the assessee, amounting to Rs.45.17,787/- to the foreign company would have to be treated as capital expenditure and it is not an allowable revenue expenditure. Thus the assessee claimed excess expenditure by not disclosing facts fully and truly which were necessary for assessment. On the above facts of the case, I have reason to believe that the assessee failed to disclose all the facts fully and truly necessary for assessment and, hence, I have reason to believe that income chargeable to tax has escaped assessment. Notice under section 148 of the Income Tax act, 1961 is issued. You are required to file detailed reply on 11.12.2009 at 1.30 P.M.”
The reasons recorded by the AO for issuance of notice u/s 148 of the Act are that the assessee entered into a collaboration agreement with foreign company for manufacture of security printing inks for Bank notes and for other securities and the right to sell such products under the terms of agreement. The foreign company also agreed to keep the Indian company upgraded with the latest and modern development in the field of manufacture of security printing inks for Bank notes and for other securities and to train the necessary personnel at its Switzerland factory or elsewhere and granted the assessee exclusive, non-transferable rights to manufacture the products in India and a non-exclusive right to sell in India. Under the terms of the agreement, the assessee company agreed to pay to the foreign company as consideration for the services rendered by it, a royalty on sales and a lump sum for the technical aid, payable in three equal instalments, the payment to be spread over a period of time. According to reasons recorded by the AO the assessee company paid royalty to foreign company of Rs.l,80,71,146/- as shown in the Profit & Loss Account as revenue expenditure and the TDS on royalty was also deducted. According to AO, in view of the decision of Hon’ble Supreme Court in the case of Southern Switch Gear Ltd. Supra, the right to manufacture certain goods exclusively in India should be taken to be on independent right secured by the assessee from the foreign company which was of an enduring
4 ITA No.36/Kol/2012 & CO No.05/Kol/2012 Sicpa India Pvt. Ltd.., AY 2002-03 nature, that consequently, the entire royalty could not be allowed as a revenue expenditure and 25% of royalty would have to be taken as being Capital in nature. Hence, According to him, 25 per cent of royalty paid by the assessee, amounting to Rs.45.17,787/- to the foreign company would have to be treated as capital expenditure and it is not an allowable revenue expenditure. Thus the assessee claimed excess expenditure by not disclosing facts fully and truly which were necessary for assessment. 6. We have heard rival submissions and gone through facts and circumstances of the case. We find that the fact relating to payment of royalty to foreign company amounting to Rs.l,80,71,146/- as shown in the Profit & Loss Account and claimed as revenue expenditure is declared by assessee in its accounts and computation of income with the return of income. Even otherwise, on merits, the issue is covered by the order of jurisdictional High court in the case of Agarwal Hardware Works Pvt. Ltd. Vs. CIT (1980) 121 ITR 510 (Cal), wherein it is held that the expenditure incurred for payment of royalty for patents on percentage basis of annual production where the ownership rights of patents are retained by the owners, the expenditure is revenue in nature. Similar view was taken by Hon’ble Calcutta High court in CIT Vs. B. N. Elias & Co. Pvt. Ltd. (1987) 168 ITR 190 (Cal), wherein the assessee entered into collaboration agreement with a foreign company to use technical know-how for manufacture of machines upto the termination of agreement. Hon’ble Calcutta High Court considering the facts and also the decision of Hon’ble Supreme Court in the case of Southern Switchgear Ltd., supra, held that once the know-how remained the property of the foreign company, and there is no outright transfer of know-how to assessee, hence, royalty paid by the assessee is to be regarded as revenue in nature. In such situation, whether the revenue on same set of facts can reopen the assessment by resorting to the provisions of section 148 r.w.s. 147 of the Act? Admittedly, in the present case, the relevant AY involved is 2002-03 and assessment was completed u/s. 143(3) of the Act. We find from reassessment order framed u/s. 143(3) r.w.s. 147 of the Act and consequent to that the order of CIT(A), there is no finding as such that there is any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the relevant assessment year. The CIT(A) has simply confirmed the action of AO for reopening of assessment by holding as under:
5 ITA No.36/Kol/2012 & CO No.05/Kol/2012 Sicpa India Pvt. Ltd.., AY 2002-03 “I have carefully considered the submission of the A/R of the appellant and examined both the original and reopened assessment orders, the reasons recorded by the AO and the materials available on records and my observation as under: (i) After careful examination of the original assessment it is noticed that the AO had not examined the matter and dealt with the issues under consideration, so there is no question of change of opinion. (ii) On perusal and examination of the reasons recorded by the AO it is observed that there is “prima facie” material and reasons to reopen the case. Hence, the reopening of the case by the AO is held valid and issues are being decided on merits.” 7. We find that this issue is squarely covered in favour of the assessee and against revenue by the judgment of Hon’ble Supreme Court in the case of CIT Vs. Kelvinator India Ltd. (2010) 310 ITR 561 (SC), wherein newly substituted provision of section 147 of the Act with effect from 01.04.1989 is interpreted by observing, that section 147 of the Act, as substituted w.e.f. 01.04.1989 does not postulates conferment of power upon the AO to initiate reassessment proceeding upon his mere change of opinion. Further, if ‘reason to believe’ of the AO is founded on an information which might have been received by the AO after the completion of assessment, it may be a sound foundation for exercising the power under section 147 r.w.s. 148 of the Act. It cannot be accepted that only because in the assessment order, detailed reasons have not been recorded, an analysis of the materials on the record by itself may be justifying the AO to initiate a proceeding u/s. 147 of the Act. When a regular order of assessment is passed in terms of section 143(3) of the Act, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without any thing further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong.
Similarly, Hon’ble Supreme Court in the case of CIT Vs. Foramer France (2003) 264 ITR 566 (SC) affirmed the judgment of Hon’ble Allahabad High Court in the case of Foramer Vs. CIT (2001) 247 ITR 436 (All), wherein Hon’ble Allahabad High Court held as under: “Having heard learned counsel for the parties, we are of the view that these petitions deserve to be allowed. It may be mentioned that a new section substituted section 147 of the
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Income-tax Act by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. The relevant part of the new section 147 is as follows: “147. If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may,subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re- compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.” This new section has made a radical departure from the original section 147 inasmuch as clauses (a) and (b) of the original section 147 have been deleted and a new proviso added to section 147. In Rakesh Aggarwal v. Asst. CIT [1997] 225 ITR 496, the Delhi High Court held that in view of the proviso to section 147 notice for reassess- ment under section 147/148 should only be issued in accordance with the new section 147, and where the original assessment had been made under section 143(3) then in view of the proviso to section 147, the notice under section 148 would be illegal if issued more than four years after the end of the relevant assessment year. The same view was taken by the Gujarat High Court in Shree Tharad Jain Yuvak Mandal v. ITO [2000] 242 ITR 612. In our opinion, we have to see the law prevailing on the date of issue of the notice under section 148, i.e., November 20, 1998. Admittedly, by that date, the new section 147 has come into force and, hence, in our opinion, it is the new section 147 which will apply to the facts of the present case. In the present case, there was admittedly no failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment. Hence, the proviso to the new section 147 squarely applies, and the impugned notices were barred by limitation mentioned in the proviso. Learned departmental counsel relied on section 153(3)(ii) of the Income- tax Act and submitted that there was no bar of limitation in view of the said provision. We do not agree. Section 153 relates to passing of an order of assessment and it does not relate to issuing of notice under section 147/ 148. Moreover, this is not a case where reassessment is sought to be made in consequence of or to give effect to any finding or direction contained in the order of the Tribunal in Boudier Christian’s case. As already stated above, Boudier Christian’s case related to the employees of the company, whereas the impugned notice has been issued to the company. Hence, it cannot be said that the proposed reassessment in consequence of the
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impugned notice would be in consequence of or to give effect to any find- ings of the Tribunal in Boudier Christian’s case. A direction or finding as contemplated by section 153(3)(ii) must be a finding necessary for the disposal of a particular case, that is to say, in respect of the particular assessee and in relevance to a particular assess- ment year. To be a necessary finding it must be directly involved in the disposal of the case. To be a direction as contemplated by section 153(3)(ii) it must be an express direction necessary for the disposal of the case before the authority or court vide Rajinder Nath v. CIT [1979] 120 ITR 14 (SC) ; Gupta Traders v. CIT [1982] 135 ITR 504 (All) ; CIT v. Tarajan Tea Co. (P.) Ltd. [1999] 236 ITR 477 (SC) and CIT v. Goel Bros. [1982] 135 ITR 511 (All), etc. The case of an expatriate employee was to be decided on the basis of the provisions of article XIV of the treaty, whereas corporate income was to be decided on the basis of either article III or article XVI of the treaty or section 44BB of the Act. Hence, the observations of the Tribu- nal in Boudier Christian’s case was not a direction necessary for the dis- posal of the appeal relating to the petitioner. The exigibility of income of the petitioner from manning and management contracts was never an issue directly or indirectly involved in the case of Boudier Christian. Moreover, the Tribunal in the appeal relating to the assessment of the petitioner’s own case, vide Deputy CIT v. ONGC [1999] 70 ITD 468 (Delhi) has considered the decision of the Tribunal in Boudier Christian’s case. It is settled law that an appeal is a continuation of the original proceedings and hence when the Tribunal in the appeal relating to the petitioner has considered the decision of the Tribunal in Boudier Christian’s case, the impugned notice under section 147/148 would obviously be on the basis of a mere change of opinion by the income-tax authorities, which would not be valid as held by the Supreme Court in Indian and Eastern News- paper Society v. CIT [1979] 119 ITR 996 ; Gemini Leather Stores v. ITO [1975] 100 ITR 1 (SC) and Jindal Photo Films Ltd. v. Deputy CIT [1998] 234 ITR 170 (Delhi), etc. In the decision of the Tribunal in the assessee’s own case, Deputy CIT v. ONGC [1999] 70 ITD 468 (Delhi) it has been held that the income from the contract between the parties was business income and not fee for techni- cal services. Although we are of the opinion that the law existing on the date of the impugned notice under section 147/148 has to be seen, yet even in the alternative even if we assume that the law prior to the insertion of the new section 147 will apply even then it will make no difference since even under the original section 147 notice for reassessment could not be given on the mere change of opinion as held in numerous cases of the Supreme Court, some of which have been mentioned above. Since the Tribunal in the appeal relating to the assessee-company had considered the Tribunal’s earlier decision in Boudier Christian’s case, it will obviously amount to mere change of opinion, and hence the notice under section 147/148 would be illegal.”
From the above facts of the case and legal position as enunciated by Hon’ble Supreme Court in the above two case laws, we are of the considered view that the
8 ITA No.36/Kol/2012 & CO No.05/Kol/2012 Sicpa India Pvt. Ltd.., AY 2002-03 reopening u/s. 147 r.w.s. 148 of the Act is bad in law. Hence, reopening is quashed. Accordingly, the jurisdictional issue is decided in favour of the assessee and the CO of the assessee is allowed. Since we have quashed the reopening, we need not to adjudicate the issues raised assessee in its CO and by revenue on merits. Accordingly, the CO of assessee is allowed and appeal of revenue is dismissed. 10. In the result, the CO of assessee is allowed and appeal of revenue is dismissed. Order pronounced in the open court on 09.03.2016.
Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member
Dated : 9th March, 2016
Jd. Sr. P.S Copy of the order forwarded to: 1. Appellant – JCIT(OSD), Circle-8, Kolkata. 2. Respondent – M/s. Sicpa India Pvt. Ltd., C/o Newby Tea Overseas (P) Ltd., 9A, 2nd floor, 23A, N. S. Road, Kolkata-700 001. 3. CIT(A) , Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.