CIT vs Johnson & Johnson Ltd.

This Appeal under Section 260A of the Income Tax Act, 1961 (the Act), challenges the order dated 5th February, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order dated 5th February, 2014 is in respect of Assessment Year 200607.

The Revenue urges the following questions of law for our consideration:

"(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in its decision on the issue of inclusion of Modvat in opening stock as rendered for A.Y. 199900 & 200102 in the light of section 145A and is consistent with its decisions deleting modvat from the valuation of closing stock rendered for preceding assessment years A/y 19971998 and A/Y 1998-1999?

(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was right in deleting the addition on account of payment to persons referred to under section 40A(2)(b) though the assessee has not discharged its onus to prove the reasonableness?

(c) Whether on the facts and in the circumstance of the case and in law, the Tribunal was right in reducing the disallowance of 50% of professional sponsorship expenses to 2% after agreeing to the observations of the DRP and without assigning any reasons?

(d) Whether on the facts and in the circumstance of the case and in law, the Tribunal was right in holding that depreciation is allowable on the testing equipments not used by the assessee for its business which is contrary to the provision under section 32 of the Income Tax Act?

(e) Whether on the facts and in the circumstance of the case and in law, the Tribunal was right in reducing the disallowance of 75% of expenses on free sample distribution to 2% without assigning any reason and after observing that A. O. could not verify the genuineness of claim?

(f) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition on account of tax on brand usage royalty without appreciating the fact that approval taken from RBI cannot be taken to be augmenting the terms of agreement with the principals?

(g) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition on account of service tax paid by the assessee on brand usage royalty?

(h) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition on account of royalty payment on traded finished goods?

(i) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in allowing the royalty payment @2% instead of 1% as done by the TPO?

(j) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition on account of tax and R & D cess paid on knowhow royalty on traded finished goods and manufactured products?

(k) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition on account of service tax paid by the assessee on knowhow royalty?

(l) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in deleting the addition of Rs.200.82 lacs on account of publicity and sales promotion expenses?

(m) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in not restoring the matter to the TPO to decide the issue afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India Ltd.,?

Re Questions (a), (b), (d) & (i) :-

(i) It is an agreed position between the parties that the aforesaid questions as urged herein, stand concluded against the Revenue and in favour of the Respondent-Assessee by the order dated 7th March, 2017 of this Court in Revenue's appeal being Income Tax Appeal No. 1030 of 2014 (CIT v. Johnson & Johnson Ltd.). These very questions were raised as question Nos.(A), (D), (F) and (H) in the above Income Tax Appeal No.1030 of 2014 (supra).

(ii) For the reasons indicated in our order dated 7th March, 2017, in Income Tax Appeal No.1030 of 2014 (supra), questions as proposed herein above, do not give rise to any substantial questions of law. Thus, not entertained.

Re Question (l) :-

(i) The impugned order of the Tribunal allowed the Respondent-Assessee's appeal before it by deleting the addition of Rs.200.82 lakhs being the transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the Respondent-Assessee'' parent M/s. Johnson & Johnson, USA. This on the ground that the Transfer Pricing Officer (TPO) has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined the Arms Length Price (ALP) by following any of the methods prescribed under-Section 92C(1) of the Act read with Rule 10B of the Income Tax Rules, 1962.

(ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA.

(iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act.

(iv) In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained.

Re Questions (n):-

(i) The impugned order of the Tribunal negatived the Revenue's alternative contention that the issue of determination of the ALP be restored to the TPO to consider the matter afresh. This on the basis of guidelines laid down by the Special Bench of the Tribunal in the case of LG Electronics v. ACIT 14 ITD 51 (Del.) (S.B). The impugned order records the fact that no specific submissions were made as to how the guidelines prescribed in LG Electronics (supra) would be applicable to the Respondent-Assessee's case.

Even before us, no submissions have been made as to the reasons why the decision of the Special Bench in LG Electronics (supra) should be applied in the present facts. Therefore, we are unable to understand the grievance of the Revenue on the above issue.

(ii) Thus, the question as framed does not give rise to any substantial question of law. Thus, not entertained.

Appeal admitted on substantial questions at (c), (e), (f), (g), (h) and (k).

Registry is directed to communicate copy of this order to the Tribunal. This would enable the Tribunal to keep papers and proceedings relating to the present appeal available, to be produced when sought for by the Court.

To be heard along with Income Tax Appeal No.1030 of 2014.