2019 (1) TMI 1870 - AT - Income Tax

Tribunal Upholds CIT(A)'s Orders, Dismisses Revenue's Appeal

The Asst. Commissioner of Income-tax (LTU) 1, Mumbai Versus M/s. Johnson& Johnson Pvt. Limited (Formerly known as Johnson & Johnson Limited)

The Tribunal dismissed the Revenue's appeal and the assessee's Cross Objection, upholding the CIT(A)'s orders. The Tribunal relied on prior decisions in ... Adjustment made on account of income tax on brand usage royalty - HELD THAT:- We find that this issue is covered by the co-ordinate Bench decision of this Tribunal in assessee’s own case for assessment year 2005-2006 in [2018 (12) TMI 1515 - ITAT MUMBAI] 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 arms length price. Reliance by the assessee on the decision of the Tribunal in the case of Dresser Rand India Pvt. Ltd. [2012 (10) TMI 127 - ITAT MUMBAI] 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. Adjustment made on account of payment of royalty on traded finished goods made by the assessee to Johnson & Johnson, USA - HELD THAT:- As perused the orders of the lower authorities and the material evidence brought on record in the form of paper book. In assessee's appeal, we have already held that the agreements between J&J India and J&J USA for payment of royalty has to be considered in the light of the approval of the RBI. We do not find any substance in the findings of the TPO that there is no need for paying royalty for technical/marketing know-how. We also do not find any force in the findings of the TPO that this royalty is deemed to be included in Brand royalty. The Ld. CTT(A) has rightly considered the relevant clauses of the agreement between J&J India and J&J USA. We, therefore, do not find any reason to interfere with the findings of the Ld. CIT(A). Technical know-how royalty payment at 2% / 4% instead of 1% as done by the ld.TPO - HELD THAT:- As relying on own case [2014 (2) TMI 978 - ITAT MUMBAI] payment of royalty has to be considered in the light of the agreement between the assessee and J&J USA. Adjustment made on account of service tax paid by the assessee on know-how royalty - HELD THAT:- We find that this issue is covered by the co-ordinate Bench decision of this Tribunal in assessee’s own case for assessment year 2005-2006 in [2018 (12) TMI 1515 - ITAT MUMBAI] after considering the agreements entered into between the assessee and J&J US and also the decision in the case of Dresser Rand India P. Ltd. [2012 (10) TMI 127 - ITAT MUMBAI] that the taxes were liability of the assessee- company under the terms of agreements and accordingly disallowance made by AO were deleted. Further, we also observe that liability of payment of service tax is of recipient of services and since assessee is the receiver of services, it is the liability of the assessee company to bear service tax. Hence we hold that TPO was not justified to state that liability of bearing service tax was of assessee-company. In view of above, we hold that disallowances made by TPO on account of taxes, services tax is not justified and we direct to delete the same. Adjustment made on account of sales and promotion expenses - HELD THAT:- Rule 10B specifically provides the procedure to be followed fordetermining Arm's Length Price. We observe that the TPO while suggesting the disallowance of 200.82 Lakhs out of the expenses incurred by assessee on publicity and sales promotion has not followed any of the method and therefore the said adjustment/disallowance suggested by TPO is outside its jurisdiction. During the course of hearing, id. DR submitted that the matter could be restored to TPO to decide afresh after considering the guidelines laid down in the case of L.G. Electronics India (P.) Ltd. [2013 (6) TMI 217 - ITAT DELHI]. Since no specific submissions were made and considering the fact that the assessee justified the payment of technical know-how royalty at the rate of 4% of net sales which is lower than Arm's length rate of 4.84% and the said fact, we have also discussed herein above in para 33 of this order, that the payment of royalty by assessee to its parent company is at Arm's Length, we do not find any justification to make the said disallowance of ₹ 200.82 lakhs as suggested by TPO towards the shares to be contributed by AE of the asses see-company. Therefore, we delete the said disallowance made by AO by allowing ground of the appeal taken by assessee. Grand credit in respect of retained MODVAT credit relating to opening stock - HELD THAT:- CIT(A) allowed relief to the assessee by following the decision of Hon'ble High Court in Mahalaxmi Glass Works[2009 (4) TMI 182 - BOMBAY HIGH COURT] which was also followed by his predecessors in A.Y. 2003-04 & A.Y. 2004-05. Considering the consistent view on the issue which was followed by Id. CIT(A), therefore, we do not find any justification to interfere in his order. Addition on account of payment on fees paid for legal counseling u/s 40A(2)(b) - HELD THAT:- We find that the Ld. CIT(A) has deleted the addition holding that for the payments for legal counseling, it is futile to think of comparables because counsels may not charge standard fee but may charge according to the issue involved. The Ld. CIT(A) further observed that if the AU wanted to disallow on the ground of excessive payment, he ought to have established excessiveness of the payment. This has not been done. Considering the decision of the Tribunal in assessee's own case, in the light of the observations made by the Ld. CIT(A), we do not find any reason to interfere with the findings of the Ld. CIT(A) . Depreciation on testing equipment provided to laboratories and hospitals free of charge - HELD THAT:- Similar issue was raised in the case of assessee's sister concern, namely, NR Jet Enterprises Limited has held that depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides. The learned Departmental Representative did not contravene this position. Addition due to non-reconciliation of AIR data - HELD THAT:- As relying on SHRI S. GANESH [2016 (5) TMI 792 - BOMBAY HIGH COURT]assessee gave an explanation that the break-up as desired cannot be given and with regard to all payments. It is pointed out that at times, assessee receives fees directly from the clients or from the instructing Advocates or Chartered Accountants if such professionals have collected the amounts from the clients.Under these circumstances, the break-up as desired cannot be placed on record. An explanation which has been given by the assessee and accepted in the past has been now accepted by the Tribunal once again. Since it is accepted for the Assessment Year 2006-07, in the peculiar facts, in relation to the present assessee, we are of the view that this Appeal does not deserve to be entertained. It does not give rise to any substantial question of law, Issues Involved:1. Deletion of adjustment on account of income tax on brand usage royalty.2. Deletion of adjustment on account of payment of royalty on traded finished goods.3. Allowance of technical know-how royalty payment at 2% / 4% instead of 1%.4. Deletion of adjustment on account of service tax paid on know-how royalty.5. Deletion of adjustment on account of tax, R&D cess on know-how royalty and traded finished goods.6. Deletion of adjustment on account of service tax paid on brand usage royalty.7. Deletion of adjustment on account of sales and promotion expenses.8. Direction to grant credit in respect of retained MODVAT credit relating to opening stock.9. Deletion of addition made on account of payment to M/s. Crawford Bailey & Co u/s 40A(2)(b).10. Allowance of depreciation on testing equipment provided to laboratories and hospitals free of charge.11. Deletion of addition due to non-reconciliation of AIR data.Detailed Analysis:1. Deletion of adjustment on account of income tax on brand usage royalty:The Tribunal found that the issue was covered by a prior decision in the assessee's own case for the assessment year 2005-2006. It was held that the taxes were the liability of J&J India under the terms of the agreement and should not be questioned while calculating the arm's length price. The Tribunal confirmed the order of the CIT(A) and dismissed the Revenue's ground.2. Deletion of adjustment on account of payment of royalty on traded finished goods:The Tribunal noted that this issue was also covered by the decision in the assessee's own case for the assessment year 2005-2006. It was held that the agreements for payment of royalty were in light of the approval of the RBI, and there was no need to question the payment of royalty for technical/marketing know-how. The Tribunal confirmed the order of the CIT(A) and dismissed the Revenue's ground.3. Allowance of technical know-how royalty payment at 2% / 4% instead of 1%:This issue was found to be covered by the Tribunal's decision in the assessee's own case for the assessment year 2005-2006. The Tribunal upheld the CIT(A)'s findings that the payment of royalty should be considered in light of the agreement between the assessee and J&J USA. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.4. Deletion of adjustment on account of service tax paid on know-how royalty:The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2005-2006, which held that the liability for payment of service tax was on the recipient of services, i.e., the assessee. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.5. Deletion of adjustment on account of tax, R&D cess on know-how royalty and traded finished goods:The Tribunal found that this issue was covered by the decision in the assessee's own case for the assessment year 2005-2006. It was held that royalty payments approved by RBI should be allowed, and the tax and R&D cess paid on technical royalty should not be disallowed. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.6. Deletion of adjustment on account of service tax paid on brand usage royalty:The Tribunal applied the decision discussed in ground No. 4 to this issue as well, confirming the CIT(A)'s order and dismissing the Revenue's ground.7. Deletion of adjustment on account of sales and promotion expenses:The Tribunal referred to its decision in the assessee's own case for the assessment year 2005-2006, which held that the TPO cannot suggest disallowance based on assumptions without following the prescribed methods for determining arm's length price. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.8. Direction to grant credit in respect of retained MODVAT credit relating to opening stock:The Tribunal noted that this issue was covered by its decision in the assessee's own case for the assessment year 2005-2006. It was held that the production loss depends on various factors, and no evidence of purchase/sales outside the books was brought on record. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.9. Deletion of addition made on account of payment to M/s. Crawford Bailey & Co u/s 40A(2)(b):The Tribunal found that this issue was covered by its decision in the assessee's own case for the assessment year 2005-2006. It was held that the AO must establish the excessiveness of the payment to make any disallowance under section 40A(2)(b). The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.10. Allowance of depreciation on testing equipment provided to laboratories and hospitals free of charge:The Tribunal referred to its decision in the assessee's sister concern's case, which allowed depreciation on testing equipment provided free of charge as it was for making a profit from the sale of slides. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.11. Deletion of addition due to non-reconciliation of AIR data:The Tribunal found that the issue was covered by the jurisdictional High Court's decision, which held that no addition could be made merely based on AIR information alone. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's ground.Conclusion:The Tribunal dismissed the appeal filed by the Revenue and the Cross Objection filed by the assessee, following the decisions in the assessee's own case and the jurisdictional High Court's rulings. The Tribunal upheld the CIT(A)'s orders on all grounds raised by the Revenue.