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

ITA 6973/MUM/2017

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5656 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Assessment Year: 2013-2014
• Appeal Filed On: 08-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Presumptive income; Double taxation relief; TDS
• Section: 92C; 143(3); 44BB; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA NO. 6972 & 6973/MUM/2017 : A.YS : 2010 - 11 & 2013 - 14 M/S. THE PROCTER & GAMBLE CO. USA C/O. P& G PLAZA, CARDINAL GRACIOUS ROAD, CHAKALA, ANDHERI (E), MUMBAI 400 099. (APPELLANT) PAN : AABCT6854H VS. DCIT(IT) - 3(3)(2), MUMBAI (RESPONDENT) ASSESSEE BY : SHRI DHANESH BAFNA & MS. HIRALI DESAI REVENUE BY : SHRI SAMUEL DARSE DATE OF HEARING : 31/08/2018 DATE OF PRONOUNCEMENT : 28 /11/2018 O R D E R PER G.S. PANNU , VICE PRESIDENT : THE CAPTIONED ARE TWO APPEALS BY THE SAME ASSESSEE PERTAINING TO ASSESSMENT YEARS 2010 - 11 AND 2013 - 14 AND SINCE THEY INVOLVE A COMMON ISSUE, THEY HAVE BEEN CL UBBED AND HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. 2 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 2. IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE FACTS AND CIRCUMSTANCES AS WELL AS THE DISPUTE INVOLVED IN BOTH THE APPEALS STAND ON IDENTICAL FOOTING, THEREFORE, APPEAL IN ITA NO. 6973 /MUM/2017 RELATING TO ASSESSMENT YEAR 2013 - 14 IS TAKEN - UP AS THE LEAD CASE. 3. THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 27.09.2017 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R.W.S. 144C( 13) & 92CA(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) GIVING EFFECT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL - 2, MUMBAI (DRP) DATED 24.08.2017. 4. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - GROUND NO 1: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL ('DRP') IS A VITIATED ORDER, AS THE DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER ('AO') TO THE APPELLANT'S INCOME; GROUND NO 2: 2. THE ID. AO/ DRP ERRED IN LAW AND IN FACTS IN CONFIRMING THE ADDITION OF RS.32,35,11,301/ - TO THE INCOME OF THE APPELLANT TOWARDS SERVICE TAX AND RESEARCH AND DEVELOPMENT CESS STATING THAT THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION OF THESE AMOUNTS FROM ITS RECEIPTS TOWARDS ROYALTY ON ACCOUNT. 3. FURTHER THE LD. AO/ DRP ERRED IN LAW AND IN FACTS IN MAKING THE FOLLOWING OBSERVATIONS: - 3 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 A) FROM THE RECEIPTS BY THE APPELLAN T, IT CANNOT CLAIM ANY DEDUCTION TOWARDS SERVICE TAX AND RESEARCH AND DEVELOPMENT CESS WHEN IT NEVER HAD ANY LIABILITY ON ITS PART. THEREFORE THE APPELLANT IS NOT ELIGIBLE FOR ANY DEDUCTION OF THESE AMOUNTS FROM ITS RECEIPTS. B) SERVICE TAX AND RESEARCH A ND DEVELOPMENT CESS, EVEN IF THE SAME IS PAID BY THE PAYEE, HAS TO BE TAKEN AS PART OF TAXABLE GROSS RECEIPTS IN THE HANDS OF THE APPELLANT AS IT IS GROSS ROYALTY, AS PER AGREEMENTS, WHICH IS TO BE TAXED NOT ROYALTY NET OF TAXES. C) THE CIRCULAR NO. 4/200 8 DATED APRIL 28, 2008 IS NOT RELEVANT IN THE CASE OF THE APPELLANT AS THIS CIRCULAR REFERS TO WHAT COMPRISES INCOME AS PER INCOME TAX ACT. D) THE RELIANCE PLACED BY THE APPELLANT ON BOARD CIRCULAR NO. 1/2014 DATED JANUARY 13, 2014 HAS BEEN DISREGARDED BY STATING THAT EVEN AS PER THIS CIRCULAR, THE TAX IS NOT TO BE DEDUCTED AT SERVICE TAX COMPONENT COMPRISED IN THE AMOUNT PAYABLE IF IT IS INDICATED SEPARATELY, WHICH MEANS THAT THE TAX IS NOT REQUIRED TO BE DEDUCTED ONLY WHERE THE COMPONENT OF SERVICE TAX I S IDENTIFIED SEPARATELY IN THE AGREEMENT ITSELF. HOWEVER, IN THE AGREEMENTS BETWEEN THE APPELLANT AND THE PAYEE INDIAN ENTITIES AMOUNT OF SERVICE TAX IS NOT IDENTIFIED SEPARATELY AS COMPONENT OF THE GROSS ROYALTY AS AGREEMENT COMPRISES SPECIFIED PERCENTAGE OF THE NET SALES OF THE PAYEES AND THERE IS ONLY A GENERAL REFERENCE THAT TAXES PAYABLE WOULD BE PAID BY THE PAYEE. HENCE SERVICE TAX AND RESEARCH AND DEVELOPMENT CESS IS AN INTEGRAL PART OF THE GROSS ROYALTY AND, THEREFORE, NO DEDUCTION COULD BE ALLOWED ON ACCOUNT OF THE SAME AND THE GROSS ROYALTY IS TO BE TAXED AT SPECIAL RATE OF 15% AS PER ARTICLE 12 OF THE DTAA. THE APPELLANT THEREFORE PRAYS THAT THE ADDITION MADE BY THE AO OF RS.32,35,11,301/ - UNDER SECTION 143(3) READ WITH SECTION 144C(13) & 92CA(3) OF THE INCOME TAX ACT, 1961 ('THE ACT') ON THE BASIS OF THE ORDER PASSED BY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) - 3 UNDER SECTION 263 OF THE ACT BE DELETED. 4 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 GROUND NO. 3: 4. THE APPELLANT CRAVES LEAVE TO ADD, OMIT OR ALTER GROUNDS OF APPEAL BEFORE OR DURING THE HEARING OF AFORESAID MATTER. GROUND NO. 4: 5. AN APPROPRIATE COST MAY BE AWARDED TO ASSESSEE. 5. A PERUSAL OF THE GROUNDS OF APPEAL REVEAL THE DISPUTE WHICH REQUIRES ADJUDICATION IS - WHETHER THE ELEMENT OF SERVICE TAX AND R ESEARCH & D EVELOPMENT C ESS WHICH IS COLLECTED, PAID AND BORNE BY THE SERVICE RECIPIENT (I.E. INDIAN ENTITY) CAN BE CONSIDERED AS INCOME IN THE HANDS OF THE SERVICE PROVIDER (I.E. THE ASSESSEE NON - RESIDENT ) . 6. BRIEFLY PUT, THE FACTS RELEVANT TO DECIDE THE CONTROVERSY CAN BE UNDERSTOOD AS FOLLOWS. THE APPELLANT BEFORE US IS A NON - RESIDENT COMPANY INCORPORATED IN U.S.A. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING, SELLING AND DISTRIBUTION, INTER - ALIA , OF PERSONAL CARE AND HYGIENE RELATED PRODU CTS. IT HAS ENTERED INTO TECHNICAL COLLABORATION AND TRADEMARK LICENCE AGREEMENT WITH TWO INDIAN CONCERNS, NAMELY, M/S. P ROCTER & G AMBLE HOME PRODUCTS PVT. LTD. (HEREINAFTER REFERRED TO AS PGHP) AND M/S. PROCTER & GAMBLE HYGIENE AND HEALTH C ARE LTD. (HE REINAFTER REFERRED TO AS PGHH C ). FOR THE PRESENT PURPOSE, IT WOULD SUFFICE TO NOTE THAT IN PURSUANCE OF THE AFORESAID AGREEMENTS, ASSESSEE - COMPANY IS ENTITLED TO RECEIVE FROM THE INDIAN CONCERNS A SPECIFIC PERCENTAGE OF NET SALES AS ROYALTY . NOTABLY, IN THE CONTEXT OF ASSESSMENT YEAR 2013 - 14, IN TERMS OF THE AGREEMENT DATED 25.04.2011 WITH PGHH C AND DATED 01.04.2010 WITH PGHP, ASSESSEE IS ENTITLED TO EARN A FLAT ROYALTY @ 5 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 4.5% OF NET SALES IN INDIA. PERTINENTLY, BOTH THE AGREEMENTS PRESCRIBE THAT THE INDIAN CONCERNS, I.E. PGHHC & PGHP WOULD BEAR ALL TAXES, DUTIES, ETC., INCLUDING SERVICE TAX AND OTHER LEVIES. IN OTHER WORDS, AS PER THE UNDERSTANDING BETWEEN THE ASSESSEE - C OMPANY AND THE TWO INDIAN CONCERNS, SERVICE TAX AND RESEARCH & DEVELOPMENT CESS LEVIABLE ON THE ROYALTY PAYMENTS WAS TO BE BORNE AND PAID BY THE INDIAN CONCERNS TO THE GOVERNMENT. 7. IN THIS BACKGROUND, THE ROYALTY CALCULATED AS PER THE TWO AGREEMENTS FOR ASSESSMENT YEAR 2013 - 14 CAME TO ` 261.74 CRORES AND THE SERVICE TAX AND RESEARCH & DEVELOPMENT CESS LEVIABLE ON THE SAME AMOUNTED TO ` 32.35 CRORES. FURTHERMORE, THE SERVICE TAX AND RE SEARCH & DEVELOPMENT CESS OF ` 32.35 CRORES WAS BORNE BY THE TWO INDIAN CONCERNS, WHICH WAS DULY DEPOSITED BY THEM WITH THE EXCHEQUER . NOW, WHILE FILING THE RETURN OF INCOME, ASSESSEE SHOWED ITS ROYALTY INCOME AT ` 294.47 CRORES FOR ASSESSMENT YEAR 2013 - 14, WHICH WAS INCLUSIVE OF THE ELEMENT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS . CORRESPONDINGLY, ASSESSEE CLAIMED DEDUCTION OF THE COMPONENT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS OF ` 32.35 CRORES. THUS, IN THE ULTIMATE ANALYSIS, ROYALTY INCOME OFFERED TO TAX WAS ` 261.74 CRORES, WHICH WAS THE AMOUNT CALCULATED IN TERMS OF THE TWO ROYALTY AGREEMENTS. ON THE AFORESAID FACTS THERE IS NO DISPUTE. THE ASSESSING OFFICER EXAMINED THE TWO AG REEMENTS AND NOTED THAT THERE WAS NO OBLIGATION ON THE PART OF THE ASSESSEE TO PAY SERVICE TAX AND RESEARCH & DEVELOPMENT CESS . AS PER THE ASSESSING OFFICER, SINCE IT WAS THE RESPONSIBILITY OF THE ASSESSEE TO PAY SERVICE TAX AS WELL AS RESEARCH & DEVELOPM ENT CESS TO THE GOVERNMENT, HE HELD THAT THE ASSESSEE CANNOT 6 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 CLAIM ANY DEDUCTION TOWARDS SUCH LIABILITY. THEREFORE, THE DEDUCTION OF ` 32.35 CRORES CLAIMED BY THE ASSESSEE WAS DISALLOWED WHILE SUBJECTING THE ROY ALTY INCOME TO TAX ON THE AMOUNT SHOWN IN THE RETURN OF INCOME (WHICH WAS INCLUSIVE OF ` 32.35 CRORES ON ACCOUNT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS ) . 8. T HE AFORESAID POSITION WAS TAKEN BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(1) & 92C A(3) OF THE ACT DATED 30.12.2016 , WHICH WAS OBJECTED TO BY THE ASSESSEE BEFORE THE DRP. ASSESSEE POINTED OUT THAT THE TWO INDIAN CONCERNS WERE RESPONSIBLE FOR PAYING SERVICE TAX AND RESEARCH & DEVELOPMENT CESS IN TERMS OF T HE SERVICE TAX ACT AND THE RESEARCH & DEVELOPMENT CESS ACT RESPECTIVELY AND FURTHER THAT THE ROYALTY AGREEMENTS ALSO PRESCRIBED THAT THE LIABILITY ON ACCOUNT OF RESEARCH & DEVELOPMENT CESS AND SERVICE TAX WAS TO BE BORNE BY THE INDIAN CONCERNS. THEREFORE, THE ELEMENT OF SER VICE TAX AND RESEARCH & DEVELOPMENT CESS COULD NOT BE INCLUDIBLE AS A PART OF ROYALTY TAXABLE IN THE HANDS OF THE ASSESSEE - COMPANY. IN THE ALTERNATE, THE ASSESSEE ALSO ASSERTED THAT SERVICE TAX COLLECTED BY THE ASSESSEE DOES NOT HAVE ANY ELEMENT OF INCO ME AS IT IS PASSED ON TO THE GOVERNMENT AUTHORITIES. ON THIS ASPECT, IT RELIED UPON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ADDL. CIT VS HALLIBURTON OFFSHORE SERVICES INC., [TS - 5593 - ITAT - 2016(DELHI) - O] , WHEREIN IN THE CONTEXT OF SEC . 44BB OF THE ACT, IT WAS HELD THAT SERVICE TAX COLLECTED BY AN ASSESSEE CANNOT FORM PART OF GROSS RECEIPTS FOR COMPUTING THE PRESUMPTIVE INCOME UNDER SECTION 44BB OF THE ACT. IN THIS CONTEXT, REFERENCE WAS ALSO MADE TO THE DECISION OF THE HON'BLE DELHI H IGH COURT IN THE CASE OF DIRECTOR OF INCOME - TAX - I VS MITCHELL DRILLING 7 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 INTERNATIONAL PRIVATE LIMITED, 62 TAXMANN.COM 24 (DELHI) . THE ASSESSEE ALSO REFERRED TO CBDT CIRCULAR NO. 4/2008 DATED 28.04.2008 WHERE IN IT HAS BEEN CLARIFIED THAT SERVICE TAX PAID BY THE TENANT DOES NOT PARTAKE NATURE OF INCOME OF THE LANDLORD SINCE THE LANDLORD ONLY ACTS AS COLLECTING AGENT FOR GOVERNMENT FOR COLLECTION OF SERVICE TAX . CIRCULAR NO. 1/2014 DATED 13.01.2014 ISSUED BY THE CBDT WAS ALSO REFERRED TO SAY THAT THE SERVICE TAX IS NOT TO BE INCLUDED IN THE FEE FOR PROFESSIONAL SERVICES OR TECHNICAL SERVICES AND THAT NO TDS WAS REQUIRED TO BE DEDUCTED ON THE SERVICE TAX COMPONENT UNDER SECTION 194J OF THE ACT. AN ANALOGY WAS DRAWN FROM THE AFORESAID TWO CBDT CIRCULARS TO SAY THAT THE COMPONENT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS COULD NOT BE INCLUDED AS INCOME IN THE HANDS OF THE ASSESSEE AS PART OF ROYALTY . 9. THE AFORESAID SUBMISSIONS PUT FORTH BY THE ASSESSEE WERE REJECTED BY THE DRP. THE DRP CONCLUDED THAT R OYALTY IS TAXABLE ON GROSS BASIS IN TERMS OF ARTICLE 12 OF THE INDIA - USA DTAA AND ACCORDINGLY, THE ACTION OF ASSESSING OFFICER IN NOT ALLOWING DEDUCTION ON ACCOUNT OF ELEMENT OF SERVICE TAX IN ORDER TO COMPUTE ROYALTY INCOME ASSESSABLE IN INDIA WAS UPHELD. AS A CONSEQUENCE, THE ASSESSING OFFICER FINALISED THE ASSESSMENT DISALLOWING ASSESSEES CLAIM FOR DEDUCTION OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS AMOUNTING TO ` 32.35 CRORES WHILE DETERMINING THE INCOME OF THE ASSESSEE TAXABLE IN INDIA BY WAY OF ROYALTY . AGAINST SUCH AN ACTION OF THE ASSESSING OFFICER, ASSESSEE IS IN APPEAL BEFORE US. 10. BEFORE US, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS REITERATED THE STAND OF THE ASSESSEE TAKEN BEFORE THE LOWER AUTHORITIES. THE SAY OF THE 8 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 ASSESSEE IS THAT IT HAS NEVER RECEIVED NOR HAS A RIGHT TO RECEIVE OR COLLECT THE AMOUNT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS LEVIABLE ON THE ROYALTY CONSIDERATION EARNED AND RECEIVED BY IT AND, THEREFORE, THE SAME CANNOT BE HELD TO BE AN INCOME IN THE HANDS OF THE ASSESSEE SO AS TO BE TAXABLE IN INDIA. ON THIS POINT, IT IS SOUGHT TO BE POINTED OUT THAT WHAT WAS LIABLE TO BE EARNED AND RECEIVED BY THE ASSESSEE IN INDIA IN TERMS OF THE TWO AGREEMENTS WAS ROYALTY CALCULATED ON THE NET SALES , WHIC H HAS BEEN DULY OFFERED FOR TAX . THE LEARNED REPRESENTATIVE EMPHASISED THAT IT WAS A SYMBOLIC EXERCISE BY WAY OF WHICH ASSESSEE REPORTED IN ITS RETURN OF INCOME THE AMOUNT OF ROYALTY INCOME INCLUSIVE OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS OF ` 32.3 5 CRORES AND THE SAME HAS TO BE READ AND UNDERSTOOD ALONGWITH THE CONTRA CLAIM WHEREBY THE DEDUCTION OF THE LIKE AMOUNT WAS ALSO MADE , T HUS, ULTIMATELY OFFERING TO TAX THE ROYALTY INCOME OF ` 261.74 CRORES (I.E. ROYALTY CALCULATED AS PER THE AGREEMENTS). I N THE ALTERNATE, IT IS ASSERTED BY THE LEARNED REPRESENTATIVE THAT EVEN IF IT IS ASSUMED THAT ASSESSEE HAD A RIGHT TO COLLECT/RECEIVE THE AMOUNT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS , THE SAME CANNOT PARTAKE THE CHARACTER OF INCOME AND THUS, COULD NOT BE INCLUDIBLE IN THE TAXABLE AMOUNT OF ROYALTY ON THE BASIS OF PARITY OF REASONING WHICH IS APPROVED BY THE CBDT IN ITS CIRCULAR DATED 13.01.2014 (SUPRA). 11. ON THE OTHER HAND, THE LD. CIT - DR APPEARING FOR THE REVENUE HAS PRIMARILY RELIED UPON THE O RDERS OF THE AUTHORITIES BELOW IN DEFENDING THE CASE OF THE REVENUE. THE REASONING TAKEN BY THE ASSESSING OFFICER AS WELL AS BY THE DRP HAS BEEN NOTED BY US IN THE EARLIER PARAS AND THE SAME HAS BEEN 9 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 RELIED UPON BY THE LD. CIT - DR BEFORE US AND, THEREFORE, THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. AS WE HAD NOTED AT THE OUTSET, THE CRUX OF THE CONTROVERSY IS WHETHER THE ELEMENT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS IS INCLUDIBL E AS INCOME IN THE HANDS OF THE ASSESSEE - COMPANY. NOTABLY, ASSESSEE EARNS ROYALTY FROM TWO INDIAN CONCERNS IN TERMS OF THE RESPECTIVE ROYALTY ARRANGEMENT S . IT IS ALSO FACTUALLY NOT IN DISPUTE THAT IN TERMS OF THE SAID ROYALTY ARRANGEMENT, SERVICE TAX AND RESEARCH & DEVELOPMENT CESS LEVIABLE ON THE ROYALTY CONSIDERATION PAYABLE TO THE ASSESSEE IS TO BE BORNE BY THE TWO INDIAN CONCERNS. AT THIS STAGE, WE MAY BRIEFLY REFER TO THE PROVISIONS OF THE SERVICE TAX ACT, NAMELY, CHAPTER V OF THE F INANCE 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 SERVICE TAX IS PLACED ON THE SERVICE PROVIDER. HOWEVER, SEC. 66A OF THE FINANCE ACT, 1994 CARVES OUT A DIFFERENT SCHEME, INTER - ALIA , IN RELATION TO CHARGING OF SERVICE 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 SHAL L BE LIABLE TO PAY SERVICE TAX AND ALL OTHER PROVISIONS OF THE SERVICE TAX ACT SHALL APPLY AS IF IT WERE THE SERVICE PROVIDER. THIS IS COMMONLY UNDERSTOOD AS A REVERSE CHARGE MECHANISM UNDER THE REGIME OF SERVICE TAX WHEREBY , IN CASE OF RENDERING OF SERVICES BY NON - RESIDENT SERVICE PROVIDERS, 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 SERVICE RECIPIENT/RECEIVER WH O SHALL COMPLY WITH OTHER PROVISIONS OF THE 10 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 SERVICE TAX ACT. THIS STATUTORY MECHANISM IS ATTRACTED IN THE PRESENT CASE INASMUCH AS THE ASSESSEE IS A NON - RESIDENT ENTITY WHICH IS RENDERING SERVICES TO THE TWO INDIAN CONCERNS. THEREFORE, THE LIABILITY TO P AY 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 & DEVELOPMENT CESS ACT, 1986 PRESCRIBES THA T THE LIABILITY TO PAY THE RESEARCH & DEVELOPMENT CESS IS ON THE CONCERN WHICH IMPORTS TECHNOLOGY INTO INDIA. THEREFORE, IN THE CONTEXT OF RESEARCH & DEVELOPMENT CESS TOO, THE TWO INDIAN CONCERNS, NAMELY, PGHHC & PGHP ARE LIABLE TO PAY THE RESEARCH & DEVE LOPMENT CESS ON ROYALTY 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 THAT THE LIABILITY TO PAY SERVICE TAX AND RESEARCH & DEVELOPMENT C ESS WAS ON THE INDIAN CONCERNS, I.E. PGHHC & PGHP. IT IS ALSO FACTUALLY NOT DISPUTED THAT THE AFORESAID 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 DISALL OW THE DEDUCTION 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 SUCH LIABILITY RESTS ON THE TWO INDIAN CONCERNS . 15. NOW , THE MOOT QUESTION IS WHETHER IN THE AFORESAID LEGAL AND FACTUAL BACKGROUND , CAN IT BE SAID THAT THE ELEMENT OF SERVICE TAX AND RESEARCH & 11 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 DEVELOPMENT CESS WAS INCOME IN THE HANDS OF THE ASSESSEE - COMPANY? PERTINENTLY, THE BASIS FOR THE REVENUE TO TAX THE AFORESAID AMOUNTS AS INCOME , IS THE MANNER IN WHICH ASSESSEE HAS MADE THE PRESENTATION IN THE RETURN OF INCOME. THIS, IN OUR VIEW, IS AN AVOIDABLE APPROACH BECAUSE WHAT IS REQUIRED TO BE ESTABLISHED IS THE RELEVANT LEGAL POSITION AND NOT MERELY THE MANNER IN WHICH THE AMOUNTS HAVE BE EN 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 CAL CULATED IN TERMS OF THE TWO AGREEMENTS WITHOUT INCLUDING THE AMOUNT OF SERVICE TAX AND RESEARCH & DEVELOPMENT CESS , WHICH WAS THE LIABILITY OF THE INDIAN CONCERNS, BOTH AS PER THE STATUTORY FRAMEWORK AS WELL AS THE CONTRACTUAL FRAMEWORK OF THE ROYALTY AGRE EMENTS. 16. THEREFORE, IN OUR CONSIDERED OPINION, IT IS IN THE FITNESS OF THINGS THAT THE TAXABILITY OF THE ROYALTY INCOME IN THE HANDS OF THE ASSESSEE - COMPANY IS LIMITED TO THE AMOUNT CALCULATED IN TERMS OF THE ROYALTY AGREEMENTS, WHICH FOR ASSESSMENT YE AR 2013 - 14 AMOUNTS TO ` 261.74 CRORE. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 17. IN THE RESULT, APPEAL OF ASSESSEE FOR ASSESSMENT YEAR 2013 - 14 IS ALLOWED, AS ABOVE. 18. INSOFAR AS THE APPEAL FOR ASSESSMENT YEAR 2010 - 11 IS CONCERNED, THE ISSUES ARE SIMILAR TO THOSE CONSIDERED BY US IN THE EARLIER PARAS IN RELATION TO ASSESSMENT YEAR 2013 - 14 AND, THEREFORE, OUR DECISION IN ASSESSMENT YEAR 2013 - 14 WILL APPLY MUTATIS MUTANDIS TO THE APPEAL FOR ASSESSMENT YEAR 12 M/S. THE PROCTER & GAMBLE CO. USA ITA NOS.6972 & 6973/MUM/2017 2010 - 11 ALSO. ACCORDINGLY, THE APPEAL FOR ASSESSMENT YEAR 2010 - 11 IS ALLOWED, AS ABOVE. 19. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 2 8 T H NOVEMBER, 2018. SD/ - SD/ - ( RAM LAL NEGI ) JUDICIAL MEMBER ( G.S. PANNU ) VICE PRESIDENT MUMBAI, DATE : 2 8 T H NOVEMBER , 2018 *SSL* COPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, L BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI