HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 25.09.2014 + W.P.(C) 13896/2009 and CM No. 15790/2009 ORACLE INDIA PVT LTD ... Petitioner versus DEPUTY COMMISSIONER OF INCOME TAX CIRCLE ... Respondent Advocates who appeared in this case: For Petitioner : Mr M.S. Syali, Senior Advocate with Mr Mayank Nagi, Mr Harkunal Singh, Mr Tarandeep Singh and Mr Tarun Singh For Respondents : Ms Prem Lata Bansal, Senior Advocate with Mr Naman Nayak. CORAM:- HON BLE MR JUSTICE BADAR DURREZ AHMED HON BLE MR JUSTICE SIDDHARTH MRIDUL JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1. notice dated 30.03.2009 under Section 148 of Income-tax Act, 1961 (hereinafter referred to as said Act ) and order dated 23.11.2009 rejecting objections filed by assessee are subject matter of challenge in this writ petition which pertains to assessment year 2002-03. W.P.(C) No. 13896/2009 Page 1 of 17 2. assessment under Section 143(3) was completed and assessment order was passed on 04.03.2005. notice under Section 148 of said Act which, as mentioned above, was issued on 30.03.2009 has been issued after four years from end of relevant assessment year (assessment year 2002-03). That being position, first proviso to Section 147 of said Act would be applicable. Section 147 and first proviso thereto as well as Explanation 1 after provisos read as under:- 147. If Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to 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 course of proceedings under this section, or recompute loss or depreciation allowance or any other allowance, as case may be, for assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as relevant assessment year) : Provided that where assessment under sub-section (3) of section 143 or this section has been made for relevant assessment year, no action shall be taken under this section after expiry of four years from end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on part of assessee to make return under section 139 or in response to notice issued under sub- section (1) of section 142 or section 148 or to disclose fully W.P.(C) No. 13896/2009 Page 2 of 17 and truly all material facts necessary for his assessment for that assessment year. xxxx xxxx xxxx xxxx Explanation 1. Production before Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by Assessing Officer will not necessarily amount to disclosure within meaning of foregoing proviso. xxxx xxxx xxxx xxxx 3. It is settled position in law that for reassessment proceedings beyond period of four years from end of relevant assessment year, it is essential condition that income chargeable to tax which has allegedly escaped assessment must be occasioned, inter alia, by reason of failure on part of assessee to disclose fully and truly all material facts necessary for assessment, for that assessment year. Mr Syali, learned senior counsel, appearing on behalf of petitioner / assessee submits that in present case, this pre-condition has not been met, inasmuch as, there has been no failure on part of petitioner / assessee to make full and true disclosure of material facts necessary for assessment. He further points out that even in reasons which have been supplied, it has not been indicated as to which material fact was not fully and truly disclosed by assessee. He placed reliance on W.P.(C) No. 13896/2009 Page 3 of 17 decision in Haryana Acrylic Manufacturing Company v. Commissioner of Income Tax & Anr : 308 ITR 38(Del) as well as on Microsoft Corporation (I) Pvt. Ltd v. Deputy Commissioner of Income Tax & Anr: 357 ITR 50 (Del) and Bombay Stock Exchange v. Deputy Director of Income Tax: 2014 TIOL 961 - High Court Bombay, W.P.(C) No. 2468/2011. Mr Syali also place reliance on recent decision of this court in case of M/s Swarovski India Pvt. Ltd v. Deputy Commissioner of Income Tax, W.P.(C) 1909/2013 decided on 08.08.2014. 4. Mrs Prem Lata Bansal, Senior Advocate, who appears on behalf of Revenue, contended that reasons to believe clearly indicate that there was failure on part of assessee to fully and truly disclose material facts necessary for assessment. She, therefore, submitted that this case was distinguishable from cases of Haryana Acrylic (supra) and other judgments cited by learned counsel for petitioner. She also contended that all ingredients necessary for invoking provisions of Section 147 and, particularly, proviso thereto have been satisfied and re-opening of assessment is valid in law. She placed reliance on three decisions of this court in case of CIT v. Usha International Ltd.: 348 W.P.(C) No. 13896/2009 Page 4 of 17 ITR 485 (del), M/s OPG Metals & Finsec Ltd. V. CIT, W.P.(C) No. 8283/2010 decided on 30.08.2013 and Meinhardt Singapore Pte Ltd. V. ADIT: (2013) 212 Taxman 637. 5. Before we examine rival submissions made by learned counsel for parties, it would be appropriate if we set out relevant facts. As pointed out above, assessment was completed by virtue of assessment order under Section 143(3) on 04.03.2005. notice under Section 148 was issued on 30.03.2009. By letter dated 16.04.2009, petitioner / assessee requested for reasons for believing that income had escaped assessment. reasons were subsequently supplied on 28.05.2009. reasons read as under:- Reasons for reopening case u/s 147 of I.Tax Act in case of M/s Oracle India Pvt. Ltd. in A.Y. 2002-03. In this case, return declaring income of Rs. 61,96,43,330/-was filed on 31.10.2002 and assessment order u/s 143(3) of (I. Tax Act was passed on 04.03.2005 assessing total income at Rs. 138,74,45, 540/-. Further, on verification of assessment record for A.Y. 2002-03, following mistake was pointed out:- "As per Form No. 3CEB (Attachment II) - assessee has acquired intangible asset / property such as know-how, patent, copyright, etc. by paying royalty of Rs. 70,60,25,973/- for duplication/ distribution of licensed software and W.P.(C) No. 13896/2009 Page 5 of 17 same was charged to profit and loss account as Revenue expenditure. Whereas as per amendment made by Finance Act, 1998, depreciation will be allowed u/s 32 in respect of intangible asset. Thus, assessee was entitled only to claim depreciation of Rs. 17,65,06,493/- @ 25% on these intangible assets. Thus, depreciation was excess allowed by Rs. 52,95,19,480/- approx. In view of facts narrated above, there is failure on part of assessee to disclose fully and truly all material facts necessary for his assessment and I have reason to believe that income of assessee to extent of Rs. 52,95,19,480/- approx. has escaped assessment for which action u/s 147 of I. Tax Act is to be initiated in year under consideration i.e. A.Y. 2002-03. Since assessment in this case was completed u/s 143(3) of I. Tax Act, and four years have also been elapsed from end of relevant assessment year, therefore, kind approval of Commissioner, Delhi-V, New Delhi is solicited as per provisions of Section 151(2) of I. Tax Act. to issue notice u/s 148 read with section 147 of I. Tax Act. Submitted please. (R.K. Sharma) DCIT, Circle -13(1), New Delhi Add. CIT, Range-13,New Delhi. In view of mistakes as indicated above, there is reason to believe that income has escaped assessment to extent of Rs. 52.95 crores. As such kind approval for issue of notice u/s 148 of Act may kindly be accorded. W.P.(C) No. 13896/2009 Page 6 of 17 6. In respect of above reasons, Mr Syali submitted that first of all, it was only alleged mistake on part of Assessing Officer and it cannot be construed as failure on part of assessee to fully and truly disclose all material facts. Furthermore, Mr Syali submitted that as per Form No. 3CEB, paragraph 9 was omnibus paragraph requiring information in following manner:- 9. Particulars in respect of transactions in intangible property. Has assessee entered into any international Transaction(s) in respect of purchase/sale/use of Intangible property such as know-how, patents, copyrights, licenses, etc ? If yes provide following details in respect of each associated enterprise and each category of intangible property: (a) Name and address of associated enterprise with whom international transaction has been entered into. (b) Description of intangible property and nature of transaction. (c) Amount paid/received or payable/receivable for purchase/sale/use of each category of intangible property. (i) As per books of account. (ii) As computed by assessee having regard to arm s length price. (d) Method used for determining arm s Length price [See Section 92C (1)] aforesaid Form No. 3CEB particulars that were filled in by petitioner / assessee were as under:- W.P.(C) No. 13896/2009 Page 7 of 17 9. Particulars in respect of transactions in intangible property. Has assessee entered into any international Yes Transaction(s) in respect of purchase/sale/use of Intangible property such as know-how, patents, copyrights, licenses, etc ? If yes provide following details in respect of each Refer associated enterprise and each category of intangible Attachment II property: and notes 3, 4 and 5 in Attachment IV. He submitted that question was whether assessee had entered into any international transactions in respect of purchase / sale / use of intangible property such as knowhow, patents, copyright licenses, etc. true and correct answer given by petitioner was yes inasmuch as petitioner had entered into international transaction with its parent company in USA with regard to use of knowhow for duplication of software. attachments referred to above also indicated that royalty was paid for duplication and distribution of licensed software and extent of royalty paid was ` 70,60,25,973/-. This is exact amount which is reflected in reasons referred to above. 7. According to Mr Syali, there is no non-disclosure of fact that royalty to extent of ` 70,60,25,973/- had been paid by petitioner / W.P.(C) No. 13896/2009 Page 8 of 17 assessee to its parent company in USA. petitioner had claimed entire amount as revenue expenditure in original assessment proceedings. He further submitted that this fact was very much under consideration of Assessing Officer himself who had issued questionnaire dated 31.08.2004. Point No. 8 of questionnaire specifically dealt with royalty in following manner:- 8. Furnish details of royalty paid during year and justify same. In response to this question, details were submitted by petitioner / assessee and entire aspect of royalty has been discussed in original assessment order dated 04.03.2005 in following manner:- Royalty Payment: During year assessee has claimed to have paid sum of Rs. 70,60,25,973/- on account of royalty to M/s Oracle Corporation USA for duplicating & sub-licensing of software to its customers. assessee vide questionnaire dated 31.08.2004 was asked to justify royalty payment. In response assessee vide reply dated 21.09.2004 submitted that company imports master copy of software from Oracle Corp, USA and in pursuance of software duplication and distribution license agreement executed with "Oracle Corp, USA on 28th May, 1993. Based on terms and conditions of agreement, assessee is required to remit royalty on basis of Indian Published Price of software replicated and distributed in India. assessee further stated that India Exchange Control laws prevailing at time of agreement entered into and those applicable in subject assessment year provide that Indian Software reproducers W.P.(C) No. 13896/2009 Page 9 of 17 such as assessee company are permitted to remit upto 30% of Indian published price to overseas copy right holders i.e. Oracle Corp, USA in this case. assessee also produced copy of approval issued Reserve Bank of India for payment of royalty read in conjunction with ADMA Circular No.6 dated March 10, 1993 permitting remittance of royalty. assessee has treated royalty expenditure as revenue in nature which has been incurred wholly and exclusively for purpose of company's business, same is allowable /s 37 of I.T.Act. reply filed by assessee was examined and it has been found that this issue is squarely covered and discussed elaborately in assesses own case for Asstt. Year 1999-2000. addition on similar issue also made in Asstt. Year 2000-01& 2001-2002. It may also be mentioned that CIT(A) in appeal has upheld addition on this account. In view of these facts, disallowance u/s 37(1) on account of payment of royalty beyond maximum limit of 30% of sublicence fees earned by assessee is computed @ 30% of Rs. 11,99,06,200/- i.e. (-35,97,18,600) + 70,60,25,973 = Rs. 34,63,07,373/-. Penalty proceedings u/s 271(1)(c) are being initiated separately for concealment of income and furnishing inaccurate particulars as discussed above. (ADDITION: Rs. 34,63,07,373/-) 8. These facts were pointed out by assessee in objections submitted on 28.08.2009, however, Assessing Officer rejected those objections by virtue of impugned order dated 23.11.2009. Assessing Officer, inter alia, held as under:- I have considered submission of assessee on facts and merits of case. I have also considered judicial decisions relied up on by assessee. objections raised by assessee are discussed as under- W.P.(C) No. 13896/2009 Page 10 of 17 (a) objection raised that reopening of assessment proceedings is merely on basis of change of opinion and AO had enquired into matter and was conscious about fact that royalty payment were revenue in nature, is not correct. issue addressed by AO was that whether quantum of expenditure of royalty claimed by assessee was fully allowable under Section 37 of IT Act, same was claimed in excess. AO had not addressed issue of royalty being capital expenditure as per provisions of section 32 of IT Act and only depreciation is allowable to assessee. (b) submission of assessee is not tenable. In form 3CEB, column 9 reads as "particulars in respect of transactions in intangible property" which does not mean that transaction required in this column are, not regarding to acquisition of intangible assets. (c) submission of assessee that assessee had disclosed all material facts and at time of recording reason for reopening assessment there was no fresh material with assessing officer which was not made available by assessee during course of original assessment proceedings is not correct. Since royalty payment, as per provisions of section 32 of IT Act is intangible asset and same of capital in nature. assessee has not disclosed this fact neither in return of income nor at time of assessment proceedings. Hence, contention that all material facts were fully and truly disclosed is not correct. xxxx xxxx xxxx xxxx Finally Assessing Officer rejected objections and directed assessee to comply with notice under Section 143(2) and 141(1) of W.P.(C) No. 13896/2009 Page 11 of 17 said Act issued for reassessment. It is at this stage that present writ petition was filed and this court at interim stage stayed further proceedings. 9. position in law has been clearly spelt out in Haryana Acrylic Manufacturing Company (supra) as under:- 29. In reasons supplied to petitioner, there is no whisper, what to speak of any allegation, that petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been escapement of income chargeable to tax. Merely having reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond four year period indicated above. escapement of income from assessment must also be occasioned by failure on part of assessee to disclose material facts, fully and truly. This is necessary condition for overcoming bar set up by proviso to section 147. If this condition is not satisfied, bar would operate and no action under section 147 could be taken. We have already mentioned above that reasons supplied to petitioner does not contain any such allegation. Consequently, one of conditions precedent for removing bar against taking action after said four year period remains unfulfilled. In our recent decision in Wel Intertrade Private Ltd. [2009] 308 ITR 22 (Delhi) we had agreed with view taken by Punjab and Haryana High Court in case of Duli Chand Singhania [2004] 269 ITR 192 that, in absence of allegation in reasons recorded that escapement of income had occurred by reason of failure on part of assessee to disclose fully and truly all material facts necessary for his assessment, any action taken by Assessing Officer under section 147 beyond four year period would be wholly without jurisdiction. Reiterating our W.P.(C) No. 13896/2009 Page 12 of 17 view-point, we hold that notice dated March 29, 2004, under section 148 based on recorded reasons as supplied to petitioner as well as consequent order dated March 2, 2005, are without jurisdiction as no action under section 147 could be taken beyond four year period in circumstances narrated above. (underlining added) In Microsoft Corporation (I) Pvt. Ltd (supra) also this court observed as under:- From above, it is evident that merely having reason to believe that income had escaped assessment is not sufficient for reopening assessment beyond four year period referred to above. It is essential that escapement of income from assessment must be occasioned by failure on part of assessee to, inter alia, disclose material facts, fully and truly. If this condition is not satisfied, there would be bar to taking any action under Section 147 of said Act. (underlining added) Both these decisions were taken note of in M/s Swarovski India Pvt. Ltd (supra) wherein it was observed as under:- 12. It is clear that escapement of income by itself is not sufficient for reopening assessment in case covered by first proviso to Section 147 of said Act unless and until there is failure on part of assessee to disclose fully and truly all material facts necessary for assessment. In present case, it has not been specifically indicated as to which material fact or facts was/were not disclosed by petitioner in course of its original assessment under Section 143(3) of said Act. (underlining added) W.P.(C) No. 13896/2009 Page 13 of 17 Similarly, in Bombay High Court decision it has been held that merely making bald assertion that assessee had not made full and true disclosure of material facts was not sufficient. It must be specifically indicated as to what material fact or facts was/were not disclosed by petitioner in course of its original assessment under Section 143(3) of said Act. 10. decisions referred to by Mrs Bansal do not in any way detract from this legal position. In Usha International Ltd. (supra) itself, Full Bench of this court (per majority) clearly noted that there was distinction between disclosure / declaration of material facts made by assessee and effect thereof and principle of change of opinion. This is stated so in paragraph 24 of said decision which also indicate that failure to make full and true disclosure of material facts is pre- condition which should be satisfied if re-opening is after four years of end of relevant assessment year. court also took note of Explanation 1 to Section 147 which stipulates that mere production of books of accounts and other documents, from which Assessing Officer could have with due diligence inferred facts did not amount to full and true disclosure. But, here, we find that it has not been pointed by W.P.(C) No. 13896/2009 Page 14 of 17 revenue as to what fact was not disclosed by assessee. assessee had clearly stated during its original assessment proceedings that it had paid amount of ` 70,60,25,973/- to its parent company in USA by way of royalty for use of knowhow for duplication of software and also for distribution of software for which it had license. petitioner had also clearly disclosed that it had license from its parent company and that parent company continued to own all rights in respect thereof and there was no acquisition of those rights other than right to use intangible assets in knowhow. It was also case of petitioner / assessee that entire payment by way of royalty was in nature of revenue expenditure and this aspect had been examined and accepted by Assessing Officer in original assessment. Therefore, we find it difficult to agree with Mrs Bansal that issue as to whether this payment was or was not in nature of revenue expenditure had not been considered by Assessing Officer during course of original assessment. In any case, we are not examining this case from stand point of change of opinion but from stand point of whether assessee had made full and true disclosure of material facts. There is no material which has been pointed out on behalf of revenue which W.P.(C) No. 13896/2009 Page 15 of 17 subsequently came to knowledge of revenue which was not already there in original assessment proceedings. No new fact has emerged as result of further or deeper examination of existing documents or any other fresh material. Insofar as assessee is concerned, it had disclosed all material facts and, therefore, there is no question of move to re-open assessment being valid. other decisions relied upon by Mrs Bansal turn on their own facts and do not alter settled position in law which has been indicated above. 11. fact of matter is that petitioner, during original assessment proceedings, had clearly indicated nature of royalty payments. Assessing Officer had specifically asked in his questionnaire as to nature of royalty payments and assessee was asked to justify same. Upon further information provided by assessee, Assessing Officer considered aspect of royalty payment and also noted fact that petitioner had claimed same as revenue expenditure. In fact, Assessing Officer disallowed ` 34,63,07,373/- out of entire claim of ` 70,60,25,973/- and made addition on account thereof. W.P.(C) No. 13896/2009 Page 16 of 17 12. Consequent upon above discussion, we are of view that very condition that assessee must not have made full and true disclosure of material facts is not satisfied and therefore, re- opening cannot be permitted. impugned notice dated 30.03.2009 and all proceedings pursuant thereto including impugned order dated 23.11.2009 are set aside. We are making it clear that we have arrived at above conclusion upon examining case from stand point of validity of assumption of jurisdiction under Section 147/148 and have not examined merits of matter as to whether royalty payments were of revenue or capital nature. 13. writ petition is allowed as above. pending application also stands disposed of. BADAR DURREZ AHMED, J SIDDHARTH MRIDUL, J SEPTEMBER 25, 2014 SU W.P.(C) No. 13896/2009 Page 17 of 17 Oracle India Pvt. Ltd. v. Deputy Commissioner of Income-tax Circle