DCIT vs. Canon India Pvt. Ltd.: Reopening of Assessment and Dispute over Section 10A Exemption Claim for AY 2009-10

Case Overview

The case of DCIT, Circle-5(2), New Delhi vs. Canon India Pvt. Ltd., Gurgaon (ITA No. 6367/DEL/2019) pertains to the assessment year 2009-10. The case was filed by the DCIT on 29th July 2019, challenging the order passed by the CIT(A) -12, New Delhi. The final tribunal order was pronounced on 15th February 2023 by the Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘D’.

Background of the Case

Canon India Pvt. Ltd., a prominent entity in the Indian electronics and imaging industry, filed its income tax return for the assessment year 2009-10, declaring a loss of Rs. 19.32 crores. The initial assessment was completed under Section 143(3) r.w.s. 144C of the Income Tax Act, with the returned income being assessed at Rs. 42 crores. The core issue in this case emerged when the Assessing Officer (AO) received information from the Directorate of Income Tax (Intelligence & Criminal Investigation), Chandigarh, indicating that Canon India had received remittances from its associate enterprise in Japan, which were allegedly misclassified as export remittances instead of royalty income.

Why the Case Was Filed

The case was filed by the DCIT following the AO’s belief that Canon India had misrepresented its income to claim an exemption under Section 10A of the Income Tax Act. According to the AO, the remittance of 40,27,12,135 Japanese Yen (approximately Rs. 16.10 crores) from Canon Inc., Japan, was in the nature of ‘royalty,’ not eligible for the Section 10A exemption, which is only applicable to income derived from the export of articles, things, or computer software. The AO argued that by classifying the remittance as export income, Canon India had incorrectly claimed a tax exemption, leading to the reopening of the assessment under Section 147, with a notice issued under Section 148 of the Act.

Tribunal Proceedings

The appeal by the revenue and the cross-objection by Canon India were heard together by a bench comprising Sh. N.K. Billaiya, Accountant Member, and Sh. Anubhav Sharma, Judicial Member. The proceedings centered on two primary issues:

• The validity of the reopening of the assessment under Section 147/148 of the Income Tax Act.
• The correctness of the AO’s decision to treat the remittance as royalty income, thereby denying the Section 10A exemption.

Reopening of Assessment

Canon India contested the reopening of the assessment, arguing that it had fully and truly disclosed all relevant facts during the original assessment proceedings. The company emphasized that the exemption under Section 10A had been claimed consistently for the past nine assessment years, and the remittance in question was correctly classified as export income. Canon India further argued that the AO’s decision to reopen the assessment was based on a mere change of opinion, which is not a valid ground for reopening an assessment under Section 147.

The tribunal examined the details of the original assessment, noting that the AO had indeed raised specific queries regarding the exemptions and deductions claimed by Canon India, to which the company had provided detailed responses. The tribunal found that there was no new material or information that justified the reopening of the assessment. Citing the Supreme Court’s ruling in Kelvinator of India Ltd. (320 ITR 561), the tribunal concluded that the reopening was based on a change of opinion, making it legally untenable.

Classification of Remittance as Royalty Income

The second major issue was the AO’s decision to classify the remittance as ‘royalty’ income, which would disqualify it from the Section 10A exemption. The AO argued that the remittance represented payments for the use of Canon Inc.’s intellectual property, such as patents and trademarks, rather than income derived from the export of software services.

Canon India, on the other hand, maintained that the remittance was indeed related to the export of computer software and related services, developed and delivered through its Software Technology Park (STP) unit. The company provided evidence, including contracts and invoices, to support its claim that the income was correctly classified as export income eligible for the Section 10A exemption.

Tribunal’s Decision

After reviewing the evidence and hearing both parties, the tribunal delivered its verdict on 15th February 2023:

Reopening of Assessment

The tribunal sided with Canon India, ruling that the reopening of the assessment was invalid. The tribunal noted that the original assessment had thoroughly examined the claim for the Section 10A exemption, and there was no new evidence or material that justified the reopening. The tribunal quashed the assessment order dated 14th December 2016, framed under Section 143(3) r.w.s. 148/147 of the Income Tax Act.

Classification of Income

Given that the tribunal had quashed the assessment order on the grounds of invalid reopening, it did not delve into the merits of the classification of the remittance as royalty income. However, the tribunal’s observations during the proceedings indicated that the company had made a strong case for the remittance being classified as export income eligible for the Section 10A exemption.

Significance of the Case

This case is significant for several reasons:

• It reinforces the legal principle that reopening an assessment under Section 147 cannot be based on a mere change of opinion. There must be new and tangible evidence to justify the reopening.
• It highlights the importance of thorough documentation and transparency in claiming tax exemptions, particularly under Section 10A, which is subject to scrutiny by tax authorities.
• The case underscores the challenges multinational companies face in navigating complex tax regulations, especially concerning cross-border transactions and the classification of income.

The tribunal’s ruling provides clarity on the conditions under which an assessment can be reopened and serves as a precedent for similar cases in the future. It also emphasizes the need for tax authorities to carefully evaluate the basis for reopening assessments, ensuring that such actions are grounded in new and substantive information rather than retrospective reconsideration of previously examined issues.

Conclusion

The case of DCIT, Circle-5(2), New Delhi vs. Canon India Pvt. Ltd. (ITA No. 6367/DEL/2019) offers valuable insights into the complexities of tax assessments and the legal safeguards available to taxpayers against arbitrary reopening of assessments. The tribunal’s decision to quash the assessment order underscores the importance of adherence to legal standards and due process in tax proceedings.

As businesses continue to expand their operations globally, cases like this highlight the critical need for meticulous tax planning and compliance, particularly in jurisdictions with stringent tax regulations. The outcome of this case serves as a reminder to both taxpayers and tax authorities of the importance of fairness, transparency, and adherence to the rule of law in tax administration.

DCIT vs. Canon India Pvt. Ltd.: Reopening of Assessment and Dispute over Section 10A Exemption Claim for AY 2009-10