PROCTER AND GAMBLE COMPANY, USA, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION 3(3)(2), MUMBAI

ITA 4681/MUM/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5504 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2014-2015
• Appeal Filed On: 02-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANOJ KUMAR LD
• Assessee Lawyers: HIRALI DESAI LD
• Section: 143(3)

Judgement Text

ITA NO.468/MUM/2018 THE PROCTER & GAMBLE CO. USA ASSESSMENT YEAR :2014-15 1 IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE HONBLE SHRI SAKTIJIT DEY, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.4681/MUM/2018 ( / ASSESSMENT YEAR: 2014-15) THE PROCTER & GAMBLE CO. USA C/O P & G PLAZA CARDINAL GRACIOUS ROAD CHAKALA, ANDHERI (E) MUMBAI 400 099 / VS. DEPUTY COMMISSIONER OF INCOME TAX-INT. TAXATION-3(3)(2) MUMBAI 400 021 ./ ./PAN/GIR NO. AABCT-6854-H ( /APPELLANT ) : ( / RESPONDENT ) ASSESSEE BY : HIRALI DESAI, LD. AR REVENUE BY : MANOJ KUMAR, LD. SR. DR # $% / DATE OF HEARING : 17/01/2019 # $% / DATE OF PRONOUNCEMENT : 05/02/2019 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEAR [AY] 2014-15 CONTEST FINAL ASSESSMENT ORDER DATED 04/06/2018 PAS SED BY LD. DEPUTY COMMISSIONER OF INCOME TAX (IT)-3(3)(2) [AO] U/S 143(3) READ WITH SECTION 144C(13) PURSUANT TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL-2, MUMBAI [DRP] DATED 03/05/2018 QUA CONFIRMATION OF ADDITION ITA NO.468/MUM/2018 THE PROCTER & GAMBLE CO. USA ASSESSMENT YEAR :2014-15 2 OF RS.36.64 CRORES TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF SERVICE TAX & RESEARCH & DEVELOPMENT CESS PAYABLE ON THE ROYALTY INCOME EARNED BY THE ASSESSEE. 2. BRIEFLY STATED THE ASSESSEE BEING FOREIGN COMPANY INCORPORATED UNDER THE LAWS OF STATE OF OHIO, USA IS ENGAGED IN THE BUSINESS OF MANUFACTURING, SELLING, DISTRIBUTION ETC. OF PERSON AL CARE AND HYGIENE RELATED PRODUCTS. THE ASSESSMENT FOR IMPUGNED AY WAS FINALLY COMPLETED ON 04/06/2018 WHEREIN THE INCOME OF THE A SSESSEE HAS BEEN DETERMINED AT RS.341.57 CRORES AFTER CERTAIN DISALL OWANCES OF RS.36.64 CRORES AS AGAINST RETURNED INCOME OF RS.304.92 CROR ES E-FILED BY THE ASSESSEE ON 30/11/2014. THE ASSESSEE EARNED INCOME IN THE SHAPE OF ROYALTIES / FEES FOR TECHNICAL SERVICES FROM VARIOUS INDIAN ENTITIES, THE DETAILS OF WHICH HAVE ALREADY BEEN ENUMERATED IN TH E QUANTUM ASSESSMENT ORDER. THE SOLE DISALLOWANCE OF RS.36.64 CRORES IS THE SUBJECT MATTER OF PRESENT APPEAL BEFORE US. 3. DURING ASSESSMENT PROCEEDINGS, IT TRANSPIRED THA T THE ASSESSEE, AGAINST ITS RECEIPTS, CLAIMED DEDUCTION OF SERVICE TAX & R&D CESS FOR RS.26.72 CRORES & RS.9.92 CRORES RESPECTIVELY. HOWE VER, UPON PERUSAL OF TERMS OF RESPECTIVE AGREEMENTS, IT WAS NOTED THA T THERE WAS NO SUCH OBLIGATION ON ASSESSEE TO PAY SERVICE TAX / R & D CESS AND THEREFORE, THE DEDUCTION OF THE SAME COULD NOT BE ALLOWED TO THE A SSESSEE. THE ASSESSEE DEFENDED THE SAME BY SUBMITTING THAT SERVI CE TAX PAYMENT WAS THE LIABILITY OF THE INDIAN ENTITIES AND THE IN DIAN COMPANIES PAYING ROYALTIES TO FOREIGN COMPANY WERE REQUIRED TO DISCH ARGE SERVICE TAX LIABILITY ON REVERSE CHARGE MECHANISM AS PER SECTION 66A OF THE FINANCE ACT, 1994. THEREFORE, THE PAYMENT OF THE SA ME WAS NOT THE ITA NO.468/MUM/2018 THE PROCTER & GAMBLE CO. USA ASSESSMENT YEAR :2014-15 3 LIABILITY OF THE ASSESSEE. THE ATTENTION WAS DRAWN TO THE FACT THAT PENAL ACTION TO DEPOSIT THE SAME SHALL FALL UPON INDIAN E NTITIES ONLY. IT WAS FURTHER SUBMITTED THAT R&D CESS WAS PART OF SERVICE TAX LIABILITY ONLY AS CLARIFIED BY MINISTRY OF FINANCE NOTIFICATION NO. 14/2012-SERVIC E TAX DATED 17/03/2012 . THE LD. AO OPINED THAT SINCE THESE ITEMS WERE NOT STATUTORY LIABILITY OF THE ASSESSEE, THE DEDUCTION OF THE SAME COULD NOT BE ALLOWED. ACCORDINGLY, THE SAME WAS DENIED TO THE AS SESSEE. THE LD. DRP , FOLLOWING THE ORDER OF DRP FOR IMMEDIATELY PRECED ING AY 2013-14 CONFIRMED THE STAND OF LD. AO, AGAINST WHICH THE AS SESSEE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. AUTHORIZED REPRESENTATIVE FOR ASSESSEE [ AR], MS. HIRALI DESAI , AT THE OUTSET, SUBMITTED THAT THE ISSUE FOR AY 20 13-14 HAS BEEN ADJUDICATED BY THE TRIBUNAL IN ASSESSEES FAVOR VID E ITA NO. 6972- 73/MUM/2017 ORDER DATED 28/11/2018 FOR AY 2010-11 & 2013-14. THE COPY OF THE SAME HAS BEEN PLACED BEFORE US. THOUGH LD. DR SUPPORTED THE STAND OF LOWER AUTHORITIES, HOWEVER, THE AFORES AID FACT COULD NOT BE CONTROVERTED. 5. AFTER CAREFUL CONSIDERATION, WE FIND THAT THE ST AND OF LD. AO HAS BEEN CONFIRMED BY LD. DRP BY RELYING UPON THE DECIS ION OF DRP IN AY 2013-14. HOWEVER, UPON FURTHER APPEAL FOR AY 2013-1 4, THE SAID DECISION HAS BEEN REVERSED BY THE TRIBUNAL IN THE C ITED ORDER, THE RELEVANT PORTION OF WHICH COULD BE EXTRACTED IN THE FOLLOWING MANNER: - 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. AS WE HAD NOTED AT THE OUTSET, THE CRUX OF THE CONTROVERSY IS WHETHER THE ELEMENT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS IS INCLUDIBLE AS INCOME IN THE HANDS OF THE ASSESSEE-COMPANY. NOTABLY, ASSESSEE EARNS ROYALTY F ROM TWO INDIAN CONCERNS IN TERMS OF THE RESPECTIVE ROYALTY ARRANGEMENTS. IT IS ALSO FACTUALLY NOT IN DISPUTE THAT IN TERMS OF THE SAID ROYALTY ARRANGEMENT, SERVICE T AX AND RESEARCH & DEVELOPMENT CESS LEVIABLE ON THE ROYALTY CONSIDERAT ION PAYABLE TO THE ASSESSEE IS ITA NO.468/MUM/2018 THE PROCTER & GAMBLE CO. USA ASSESSMENT YEAR :2014-15 4 TO BE BORNE BY THE TWO INDIAN CONCERNS. AT THIS STA GE, WE MAY BRIEFLY REFER TO THE PROVISIONS OF THE SERVICE TAX ACT, NAMELY, CHAPTER V OF THE FINANCE ACT, 1994, WHICH HAS BEEN REFERRED TO BY THE APPELLANT BEFORE US. GENERALLY, UNDER THE SCHEME OF SERVICE TAX, THE LIABILITY TO COLLECT AND PAY SE RVICE TAX IS PLACED ON THE SERVICE PROVIDER. HOWEVER, SEC. 66A OF THE FINANCE ACT, 199 4 CARVES OUT A DIFFERENT SCHEME, INTER-ALIA, IN RELATION TO CHARGING OF SERV ICE TAX ON SERVICES RECEIVED FROM OUTSIDE INDIA. IT IS PRESCRIBED THAT WHERE TAXABLE SERVICES ARE PROVIDED BY A NON- RESIDENT TO A PERSON HAVING A PLACE OF BUSINESS IN INDIA, IT IS THE SERVICE RECIPIENT WHO SHALL BE LIABLE TO PAY SERVICE TAX AND ALL OTHE R PROVISIONS OF THE SERVICE TAX ACT SHALL APPLY AS IF IT WERE THE SERVICE PROVIDER. THI S IS COMMONLY UNDERSTOOD AS A REVERSE CHARGE MECHANISM UNDER THE REGIME OF SERV ICE TAX WHEREBY, IN CASE OF RENDERING OF SERVICES BY NON-RESIDENT SERVICE PROVI DERS, IT IS THE SERVICE RECEIVER WHICH IS MADE LIABLE TO PAY THE SERVICE TAX ON THE CONSIDERATION PAYABLE TO THE NON- RESIDENT AND ALSO IT IS MANDATED THAT IT IS THE SER VICE RECIPIENT/RECEIVER WHO SHALL COMPLY WITH OTHER PROVISIONS OF THE SERVICE TAX ACT . THIS STATUTORY MECHANISM IS ATTRACTED IN THE PRESENT CASE INASMUCH AS THE ASSES SEE IS A NON-RESIDENT ENTITY WHICH IS RENDERING SERVICES TO THE TWO INDIAN CONCE RNS. THEREFORE, THE LIABILITY TO PAY THE SERVICE TAX TO THE INDIAN GOVERNMENT IS ON THE SERVICE RECEIVER/RECIPIENT, WHICH IN THE PRESENT CASE HAPPENS TO BE PGHHC & PGHP, I.E . THE TWO INDIAN CONCERNS. 13. SIMILARLY, EVEN SEC. 3(2) OF THE RESEARCH & DEV ELOPMENT CESS ACT, 1986 PRESCRIBES THAT THE LIABILITY TO PAY THE RESEARCH & DEVELOPMENT CESS IS ON THE CONCERN WHICH IMPORTS TECHNOLOGY INTO INDIA. THEREF ORE, IN THE CONTEXT OF RESEARCH & DEVELOPMENT CESS TOO, THE TWO INDIAN CONCERNS, NA MELY, PGHHC & PGHP ARE LIABLE TO PAY THE RESEARCH & DEVELOPMENT CESS ON RO YALTY PAYMENTS MADE TO THE ASSESSEE-COMPANY. 14. IF THE AFORESAID STATUTORY PROVISIONS ARE READ ALONGWITH THE TWO ROYALTY AGREEMENTS WITH THE INDIAN CONCERNS, IT IS CLEAR TH AT THE LIABILITY TO PAY SERVICE TAX AND RESEARCH & DEVELOPMENT CESS WAS ON THE INDIAN C ONCERNS, I.E. PGHHC & PGHP. IT IS ALSO FACTUALLY NOT DISPUTED THAT THE AF ORESAID LIABILITY WAS INDEED BORNE BY THE TWO INDIAN CONCERNS IN TERMS OF THE ROYALTY AGREEMENTS. IN FACT, THE WHOLE BASIS FOR THE ASSESSING OFFICER TO DISALLOW THE DED UCTION IS THE FACT THAT THE ASSESSEE-COMPANY IS NOT RESPONSIBLE FOR THE PAYMENT OF SERVICE TAX AS WELL AS RESEARCH & DEVELOPMENT CESS IN QUESTION, AND THAT S UCH LIABILITY RESTS ON THE TWO INDIAN CONCERNS. 15. NOW, THE MOOT QUESTION IS WHETHER IN THE AFORES AID LEGAL AND FACTUAL BACKGROUND, CAN IT BE SAID THAT THE ELEMENT OF SERV ICE TAX AND RESEARCH & DEVELOPMENT CESS WAS INCOME IN THE HANDS OF THE ASS ESSEE-COMPANY? PERTINENTLY, THE BASIS FOR THE REVENUE TO TAX THE AFORESAID AMOU NTS AS INCOME, IS THE MANNER IN WHICH ASSESSEE HAS MADE THE PRESENTATION IN THE RET URN OF INCOME. THIS, IN OUR VIEW, IS AN AVOIDABLE APPROACH BECAUSE WHAT IS REQU IRED TO BE ESTABLISHED IS THE RELEVANT LEGAL POSITION AND NOT MERELY THE MANNER I N WHICH THE AMOUNTS HAVE BEEN SHOWN IN THE RETURN OF INCOME. IN FACT, EVEN IF ONE IS TO GO BY THE MANNER IN WHICH THE AMOUNTS HAVE BEEN SHOWN IN THE RETURN OF INCOME , SUBSTANTIVELY SPEAKING, WHAT THE ASSESSEE HAS OFFERED FOR TAX ULTIMATELY IN THE RETURN OF INCOME IS THE ROYALTY CALCULATED IN TERMS OF THE TWO AGREEMENTS WITHOUT I NCLUDING THE AMOUNT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS, WHICH WAS THE LIABILITY OF THE INDIAN CONCERNS, BOTH AS PER THE STATUTORY FRAMEWORK AS WE LL AS THE CONTRACTUAL FRAMEWORK OF THE ROYALTY AGREEMENTS. ITA NO.468/MUM/2018 THE PROCTER & GAMBLE CO. USA ASSESSMENT YEAR :2014-15 5 16. THEREFORE, IN OUR CONSIDERED OPINION, IT IS IN THE FITNESS OF THINGS THAT THE TAXABILITY OF THE ROYALTY INCOME IN THE HANDS OF TH E ASSESSEE-COMPANY IS LIMITED TO THE AMOUNT CALCULATED IN TERMS OF THE ROYALTY AGREE MENTS, WHICH FOR ASSESSMENT YEAR 2013-14 AMOUNTS TO RS.261.74 CRORE. THUS, ON T HIS ASPECT, ASSESSEE SUCCEEDS. 17. IN THE RESULT, APPEAL OF ASSESSEE FOR ASSESSMEN T YEAR 2013-14 IS ALLOWED, AS ABOVE. NOTHING COULD BE BROUGHT ON RECORD BY THE REVENUE T O SUBMIT ANY DIFFERENCE IN MATERIAL FACTS DURING IMPUGNED AY VIS --VIS AY 2013-14. HENCE, FACTS BEING PARI-MATERIA THE SAME, RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL IN AS SESSEES OWN CASE, WE DELETE THE IMPUGNED DISALLOWANCE. 6. RESULTANTLY, THE APPEAL STANDS ALLOWED IN TERMS OF OUR ABOVE ORDER. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH FEBRUARY, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 05.02.2019 SR.PS, JAISY VARGHESE / COPY OF THE ORDER FORWARDED TO : 1. !' / THE APPELLANT 2. #$!' / THE RESPONDENT 3. %% ( ) / THE CIT(A) 4. %% / CIT CONCERNED 5. & '# ( , % ( , / DR, ITAT, MUMBAI 6. ' *+, / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.