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