TaxTMI 
TaxTMI 
2013 (10) TMI 759
X X X X Extracts X X X X
X X X X Extracts X X X X
....lant by summing up the total amount of royalty as reflected by the certificates of Tax Deducted at Source (TDS) and not accepting the cash basis of accounting method adopted regularly by assessee since last 13 years. 3. Based on the facts and circumstances of the case, the learned AO has erred in not assessing the income of the Appellant on mercantile basis at Rs.38,48,76,032 for A.Y 2004-05 as against Rs.5,20,753,780 as per TDS certificates for various years. 4. Based on the facts and circumstances of the case, the learned AO has erred in not granting corresponding credit of TDS of Rs.78,113,068 in respect of above determined income of Rs.5,20,753,780. 5. Based on the facts and circumstances of the case, the learned AO has erred in law and in fact, in levying interest under section 234B of the Act, disregarding the fact that the Appellant is a non-resident assessee and its entire revenues/ receipts are subject to tax withholding in India under section 195 of the Act and the Appellant is not liable to pay advance tax in respect of such revenues. The Appellant respectfully submits that, as per the provisions of the Act, the interest under section 234B of the Act is not levi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s fit case to re-open the assessment". In the re-assessment proceedings rejecting assessee objections, draft order under section 144C (1) r.w.s. 147 r.w.s. 143(3) of the I.T. Act 1961 was passed on 24.11.2009. Assessee filed objections against the draft order before the Dispute Resolution Panel- 1,Mumbai (DRP) as per the provisions of section 144C (2) of the Act. The Dispute Resolution Panel-1, Mumbai vide its order dated 12.08.2010 has issued directions under section 144C (5) of the I.T. Act confirming the action of AO. Accordingly order under section 143(3) r.w.s. 147 r.w.s. 144C (13) of the I.T. Act, 1961 dt. 03.09.10 was passed, which is subject matter of present appeal. 4. Assessee's objections regarding reopening of assessment and bringing to tax higher amount before AO and DRP are as under:- a) No fresh material has come on record to establish that income of J&J USA has escaped assessment. The issue of royalty has been verified in detail during the scrutiny assessment proceedings for AY 2004-05 and all the relevant documents were submitted to AO during such proceedings. b) Assessee had fully and truly disclosed all material facts in return of income which has att....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted that the amount of royalty credited as per Form 3CEB, J&J India and NR Jet is Rs.38,48,76,032. The same argument is also not acceptable because on perusal of the TDS certificates filed by assessee along with the return of income for A.Y 2004-05, it is noticed that the total amount of royalty received by assessee is Rs.52,07,53,780". AO brought to tax the entire amount of Rs.52,07,53,780. DRP-I in their brief order, simply rejected the objections without considering the merits of the issues. 6. The learned Counsel in his arguments, referring to the documents placed on record, raised the issue of jurisdiction, legality of bringing to tax the entire royalty income, provisions of DTAA, mistake in AO's order in considering the entire amount as accrued ignoring assessee's contention of amount accrued during the year, not giving credit of tax deducted and levy of interest etc,. 7. The learned CIT (DR) however, countered the arguments and relied on the order of AO, principles relied upon by AO on legality of reopening and reason for taxing the income on accrued basis. He also submitted that an anomalous situation may arise when assessee may not offer income and the deductors m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Royalty was referred to TPO and TPO under section 92CA(3) dated 29.09.06 had not made any adjustment to the Arms Length Price. AO also left a note regarding the tax levied as per DTAA. 8.4 Interestingly, by the time assessment under section 143(3) was passed by AO for AY 2004-05, the CIT (A) has already decided similar issue in AY 2003-04. In that year assessee has shown royalty of Rs.24,66,34,994, whereas the TPO has fixed as royalty income at Rs.26,53,07,141. The difference is only because in the audit report in Form No.3CEB, the amount reported was Rs.26,53,07,141. Assessee was asked by AO to explain why the difference should not be treated as its income for that assessment year. In this regard, assessee contended before AO as follows: (a) J&J USA has received royalty income of Rs.24,66,34,994 from Johnson & Johnson Limited during the year relevant for the assessment year 2003-04. (b) The amount of Rs.26,53,07,141 as reported in the Accountants Audit Report is amount provided by Johnson & Johnson Limited in its books of account. (c) J&J USA has been filing the return on cash basis and not on accrual basis since more than last 10 years. Assessee also contended....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4 Apr.02 to Mar.03 2,65,307,140 Details of payment of royalty provided in the books of J&J India (Amount Rs.) Royalty amount provided in the books of J&J India During p.y.e. 31/03/2003 26,53,07,140 Less: Royalty paid to Appellant on 29 Jan.2003 12,23,40,114 1,42,967,026 Less: Royalty paid to Appellant on 16 Mar.2004 7,08,20,564 7,21,46,462 Less: Balance royalty paid to Appellant on 16 Sep.05 7,21,46,462 NIL 4. I have considered the facts of the case very carefully. It is a fact that the Appellant is following 'Cash System of Accounting' consistently, 'Cash System of Accounting' is also recognized method of accounting under section 145 of the I.T. Act, 1961. This fact is seen from returns of income filed for the AY 2001-02, 2002-03 & 2003-04. It is also seen from the reconciliation filed by the Appellant, the balance amount of royalty was paid on 16/09/2005. It is also submitted that the tax was also deducted as and when royalty income was credited in the books of account of J&J Limited. From these facts, it very clear that the income of royalty has not escaped assessment. M/s J&J credited the royalty in one accounting year whereas the Appellant offered this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was preferred as can be seen from the submissions extracted above. 8.7. All these facts indicate that assessee has furnished all the details, AO enquired and accepted. There is no escapement of income also as assessee offered in later years and claimed TDS only to the extent of income offered. As rightly pointed out by the CIT (A) in assessment year 2003-04, the remittance of TDS is coming to the government first at the time of credit itself by the deductors, whereas assessee is taking credit at a later point of time when corresponding income was offered. 8.8. Assessee contends that it is offering income on receipt basis consistently over the last so many years, based on the DTAA between India & USA. Article 12 covering Royalties and Fees for included services is as under: "ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State" 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the benefic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng state". The term royalties also means "payment of any kind received". Since the word used in the DTAA is 'paid' or 'received', assessee's contention that amounts cannot be taxed on accrual basis is correct. This interpretation is also supported by the decision of the Hon'ble Bombay High Court in the case of DIT (IT) vs. M/s Siemens Aktiengesellschaft ITA no 124 of 2010 dt.22.10.12 wherein the Hon'ble Bombay High Court on a question as follows: Question: "Q. i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the Royalty and fees for technical services should be taxed on receipt basis without appreciating the fact that the Hon'ble Supreme Court has held in the case of Standard Drum Motors Private Limited vs. CIT 201 ITR 391 that the credit entry to the account of assessee non-resident in the books of the Indian company amounted to receipt by the non-resident?. Held: "2. As regards first question is concerned, the Income Tax Appellate Tribunal referring to Para 1 to 3 under Article IIX-A of the Double Taxation Avoidance Treaty with the Federal Germany Republic as per Notification dated 26th August, 1985 held that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t also devoid of any facts. One cannot decide the issue on legal principles alone without examining the facts on record. Leave alone the issue of jurisdiction, even the contention that an amount of Rs.38,48,76,032 only has accrued during the year was also not accepted when the facts stare on its face. We were surprised to note that while accepting that royalty income should be taxed on accrual basis, the DRP failed to examine the correct amount which was accrued during the year, as part of the amount offered during the year on receipt basis pertain to assessment year 2003-04. 8.12. It is also surprising that while bringing to tax the entire amount, neither AO nor the DRP found it convenient to grant the TDS of the entire amount deducted. As already stated earlier assessee has enclosed all the certificates wherein the TDS of Rs.7,81,13,068 was deducted and paid to the government on the total royalty claimed by the said persons of Rs.52,07,53,780. Had AO gave credit to the entire amount of TDS deducted @ 15%, there would not be any occasion to raise the demand or levy of interest under section 234B, the issue of which was also not according to the provisions of the law. Therefore,....