W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 03.08.2020 CORAM HONOURABLE DR. JUSTICE ANITA SUMANTH W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 International Flavours Fragrances India Pvt Ltd Rep by its Director P.Ramprasad 1-5 Seven Wells Street St.Thomas Street, Chennai-600 016. .. Petitioner Vs. 1 Joint Commissioner LTU Chennai Wanarpathy Block 121 Mahatma Gandhi Road Chennai 2 Assistant Commissioner of Income Tax LTU Chennai Wanarpathy Block 121 Mahatma Gandhi Road Chennai 3 Deputy Commissioner of Income Tax LTU-2 Chennai 1775 Jawaharlal Nehru Inner Ring Road Anna Nagar West Extension Chennai - 600 101. .. Respondents Prayer: Writ Petition filed under Article 226 of Constitution of India praying to Writ of Certiorari to call for records in Notice No.ITBA/ AST/ S/ 148/ 2018-19/ 1015475668(1) dated 28.03.2019 on file of 1st Respondent and consequential Order No.ITBA/ AST/ F/ 17/ 2019-20/ 1017568340(1) dated 26.8.2019 on file of 2nd Respondent herein and to quash same. http://www.judis.nic.in 1 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 For Petitioner : Mr.Srinath Sridevan For Respondent : Mrs.Hema Muralikrishnan Senior Standing Counsel ORDER petitioner challenges order dated 26.08.2019 rejecting objections to assumption of jurisdiction to re-assess income of petitioner under provisions of Income Tax Act, 1961 (in short Act ) for assessment year (A.Y.) 2013-14. 2. Heard Mr.Srinath Sridevan, learned counsel for petitioner and Mrs.Hema Muralikrishnan, learned Senior Standing Counsel for respondent. 3. sequence of relevant dates and events is as follows: i) For A.Y.2013-14, petitioner filed return of income on 28.11.2013. return was accompanied by necessary annexures, such as Tax Audit Report in Form 3CB and 3CD, Form No.10CCB and Transfer Pricing Report in Form 3CEB. ii) Transfer Pricing Report specifically detailed royalty paid by petitioner to International Flavours and Fragrances, USA, associated enterprise. complete details in regard to entity to which payment had been effected, class of transaction (manufacture), amount paid as http://www.judis.nic.in 2 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 per books of accounts and fact that same was at arms length and methodology used for arriving at Arms Length Price (ALP) being comparable uncontrolled price method (CUP), were set out. iii) return was picked up for scrutiny and notice under Section 143(2) dated 03.09.2014 was issued by third respondent. iv) On 19.09.2014, petitioner responded enclosing all annexures to return of income. v) Since assessment involved transactions inter se petitioner and its related parties and associated enterprises, matter was referred to Transfer Pricing Officer (TPO) for determination of ALP. vi) TPO issued notice under Section 92CA(3) dated 30.03.2016 followed by questionnaire under Section 142(1) dated 15.04.2016. vii) One of queries raised inter alia related to details of international transactions entered into by petitioner with foreign entities, nature of income received and expenses along with copies of relevant agreements and details of tax deducted at source (TDS). viii) Vide reply dated 29.04.2016, complete details as sought for were provided. reply of petitioner at point 4.7 provides copy of Intellectual Property Licence Agreement between itself and US entity providing for payment of royalty and under reply dated 20.05.2016 further details regarding payments made to Associated Enterprises were supplied. http://www.judis.nic.in 3 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 ix) On 24.06.2016, details of royalty paid and impact of transaction on profit and loss account was set out. x) Thereafter, TPO, vide notice dated 05.10.2016 posted assessment for completion and sought for various particulars needed for same. xi) At point 7 of aforesaid questionnaire, details of royalty and management serve charges debited to profit and loss account and details of tax deducted on same were sought. xii) TPO also specifically sought explanation as to why royalty payment not be treated as capital expenditure and disallowed and in this connection also sought copy of agreement copy. xiii) petitioner replied on 14.10.2018 wherein at point 12, it states as follows: 12. Royalty and Management Fee: Refer Annexure 4. copy of agreement for royalty payment is enclosed in Annexure 8. It is submitted that royalty is payable annually based on percentage of sale of products vide Emulsions, Cap-lock granules, Spray-dry, Flavour products for use of technology provided by IFF Inc for manufacture of said products. It is running royalty and not capital in nature and hence is allowable under section 37 of Act. xiv) order of TPO came to be passed on 31.10.2016 wherein royalty paid was also taken into account in computation of ALP and downward adjustment was recommenced in finalization of assessment. http://www.judis.nic.in 4 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 xv) Upon receipt of order of TPO, order of draft assessment dated 30.12.2016 was served on petitioner. Upon consideration of submissions made by petitioner vide letter dated 24.01.2017, order of final assessment came to be passed on 13.12.2017. 4. It is clear on perusal of narration above, that issue relating to payment of royalty, specifically whether such payment should be considered as capital expenditure or revenue expenditure had been considered by Officer and duly taken into account in framing Transfer Pricing Order as well as order of assessment. 5. order of assessment dated 13.02.2017 specifically notes adjustment recommended by TPO wherein reference had been made to payment of royalty as well. proceedings for re-assessment challenged in this Writ Petition should be seen in context of narration above. 6. After completion of assessment on 13.02.2017, petitioner received notice under Section 148 on 28.03.2019, five years from end of assessment year in question. assumption of jurisdiction by Assessing Officer came to be questioned by petitioner in line with procedure set out by Supreme Court in GKN Driveshafts (India) Ltd. V. Income Tax Officer (259 ITR 19) after it filed return of income and sought reasons on basis of which re-assessment had been initiated. 7. reasons dated 30.07.2019 supplied by Officer are as follows: http://www.judis.nic.in 5 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 Subject:- Reasons for Re-opening of Assessment furnishing of Reg. It is seen from M.R. for AY 2013-14 that assessee company (Licencee) has paid amount of Rs.1,35,14,620/- to M/s.International Flavours & Fragrances INC, New York (IFFFUSA) towards royalty and claimed it as revenue expenditure. It is seen from Intellectual Property Licence Agreement entered into between assessee company and IFF USA that licensor (i.e.IFF USA) is owner of certain intellectual property relating to development, manufacture, marketing promotion and distribution and/or sale of products and both parties have agreed that licensor desires to grant licencee (i.e. assessee company) to utilize such intellectual property in connection with development, manufacture, marketing promotion and distribution and/or sale of products and licensee desires to pay royalty in exchange. As per agreement, intellectual Property shall mean and include all technical information, date, know-how processes, procedures, consumer insights, methods, flow charts, drawings, formulae, specifications, designs, process technology, patents, patent applications and patent disclosures etc. In this connection, it is observed that as per agreement entered into with IFF USA, assessee is having right to manufacture and sell products in India using licensed technology provided. Thus, right has been conferred on assessee for manufacturing and selling products and royalty payment was towards technical information provided by licensor in respect of manufacturing methods of products and right was granted to assessee company to manufacture and sell products. Thus, asset in form of commercial right has been acquired by Assessee which gives assessee enduring benefit and also exclusive advantage to assessee s business. Thus, royalty payments should be treated as capital expenditure and after allowing eligible depreciation (@ 25% on Rs.1,35,14,620) Rs.33,78,655 balance amount claimed as revenue expenditure to tune of Rs.1,01,35,965 needs to be disallowed. Excess deduction claimed: Rs.1,01,35,965 8. Proceedings for re-assessment initiated beyond four years from end of relevant assessment year have to satisfy added condition set out in proviso to Section 147 of Act. Normally, time limit for initiation of re- assessment is four years from end of subject assessment year with extended period of two years provided to Department conditional upon Department establishing that alleged escapement of income was attributable http://www.judis.nic.in 6 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 to failure of assessee to file return or to make full and true disclosure of its income for relevant period. 9. In present case, petitioner has filed return of income in time and thus only condition to be satisfied would be whether alleged escapement of income is on account of failure of petitioner to make full and true disclosure of its income at first instance. 10. reasons for re-assessment are premised upon classification of royalty paid by assessee being 'capital' in nature, as against claim of it being 'revenue' in nature, by assesssee/petitioner. All details relating to payment of royalty have been supplied by assessee commencing from disclosures in annexures to its return of income Queries and responses specific to aforesaid issue were exchanged between petitioner on one hand and TPO and Assessing Officer on other. Supporting evidences for petitioners claim that royalty was running royalty and thus revenue in nature was also filed. This issue has engaged attention of respondents since TPO has specifically raised query with regard to classification of royalty as capital vis-a-vis revenue and sought explanation in this regard. 11. relevant details being on record and having engaged attention of officers of Department, this is not case where alleged http://www.judis.nic.in 7 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 escapement can be attributed to any failure on part of assessee/petitioner. 12. perusal of reasons extracted elsewhere in this order only referred to issue of classification of royalty on merits and nowhere it is stated that there has been any failure by petitioner in making disclosure in this regard. To be fair to Assessing Officer, he does not even make such allegation in reasons for re-assessment and rightly so, since material available would show full disclosure by petitioner at all stages of assessment. 13. Thus I am of view that impugned order dated 26.08.2019 rejecting objections to assumption of jurisdiction is liable to be quashed and I do so. 14. For sake of completion, I may refer to judgment of Hon ble Supreme Court in case of Parashuram Pottery Works Co. Ltd. V. Income Tax Officer, Circle I, Ward , Rajkot, Gujarat (106 ITR 1), wherein Supreme Court, taking cue from decision of Privy Council in Compania General de Tabacos v. Collector of Internal Revenue, (275 U.S. 87 (1927)) has categorically stated that hallmark of civilized society is one that allows stale issues to rest without feeling need to rake same up repeatedly. relevant portion of judgment reads as follows: http://www.judis.nic.in 8 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 At same time, we have to bear in mind that policy of law is that there must be point of finality in all legal proceedings, that state issues should not be reactivated beyond particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. So far as income-tax assessment orders are concerned, they cannot be reopened on scope of income escaping assessment under section 147 of Act of 1961 after expiry of four years from end of assess- ment year unless there be omission or failure on part of assessee to disclose fully and truly all material facts necessary for assessment. As already mentioned, 'this cannot be said in present case. appeal is conse- quently allowed; judgment of High Court is set aside and impugned notices are quashed 15. This writ petition is allowed. No costs. Connected Miscellaneous Petitions are closed. 03.08.2020 Index:Yes Speaking order sl http://www.judis.nic.in 9 W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 Dr.ANITA SUMANTH, J. sl To 1 Joint Commissioner LTU Chennai Wanarpathy Block 121 Mahatma Gandhi Road Chennai 2 Assistant Commissioner of Income Tax LTU Chennai Wanarpathy Block 121 Mahatma Gandhi Road Chennai 3 Deputy Commissioner of Income Tax LTU-2 Chennai 1775 Jawaharlal Nehru Inner Ring Road Anna Nagar West Extension Chennai - 600 101. W.P. No.27359 of 2019 and WMP. Nos.26800/2019 & 7107/2020 03.08.2020 http://www.judis.nic.in 10 International Flavours Fragrances India Pvt. Ltd. v. Joint Commissioner LTU, Chennai / Assistant Commissioner of Income-tax LTU, Chennai / Deputy Commissioner of Income-tax LTU-2, Chennai