M/s Glaxo Smithkline Consumer Healthcare Ltd., Nabha, Gurgaon V. Addl. CIT, Chandigarh

ITA 1238/CHANDI/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7415 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 20-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA; RITESH KUMAR
• Assessee Lawyers: NEERAJ KUMAR JAIN
• Keywords: Gift; Transfer pricing; Business expenditure; International transaction; Period of limitation; Retrospective amendment; Avoidance of tax; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 92C; 43B; 143(3); 92D; 92B; 92F; 92A; 92E; 10AA; 133A; 234B; 37(1); 10B; 131; 10; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO.1238/CHD/2010 (ASSESSMENT YEAR : 2006-07) M/S GLAXO SMITHKLINE CONSUMER VS. THE ADDL.C.I.T. HEALTHCARE LTD., NABHA. RANGE IV DLF PLAZA TOWER CHANDIGARH. DLF CITY PHASE-1, GURGAON. PAN: AACCS0144E (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI AJAY VOHRA & NEERAJ KUMAR JAIN RESPONDENT BY : S/SHRI RITESH KUMAR & AJAY SHARMA, DR DATE OF HEARING : 20.10.2011 DATE OF PRONOUNCEMENT : 25.01.2012 O R D E R PER SUSHMA CHOWLA, J.M, : THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER DATED 28.9.2010 PASSED UNDER SECT ION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 RELATING TO ASSESS MENT YEAR 2006-07. AS THE IMPUGNED ASSESSMENT ORDER IS PASSED AFTER AS SESSEES OBJECTIONS AGAINST THE PROPOSED ADDITIONS TO THE RETURNED INCO ME HAVING BEEN EXAMINED BY THE DISPUTE RESOLUTION PANEL, THIS IS A DIRECT APPEAL AGAINST THE ASSESSMENT ORDER. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL : 1.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C READ WITH SECTION 143(3) OF THE INCOME TAX ACT (THE ACT) AT AN INCOME OF RS.313,86,75,735 AS AGAINST TH E RETURNED INCOME OF RS.1,88,22,37,820. 2 2.0 THAT THE ASSESSING OFFICER/TRANSFER PRICING OFF ICER (AO/TPO) ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTE NT OF RS.1,19,45,81,713 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF REIMBURSEMENT OF ADVERTISEMENT, MARKETING AND BRAND PROMOTION EXPENSES (AMP EXPENSES). 21. THAT ON THE FACT AND CIRCUMSTANCES OF THE CASE BENCHMARKING OF THE INTERNATIONAL TRANSACTION OF REIMBURSEMENT OF ADVERTISEMENT AND PROMOTION (AMP) EXPENSES AS WELL AS ROYALTY EXPENSES BY THE TPO IN ABSENCE OF A REFERENCE BY THE AO IS UNLAWFUL AND BEYOND JURISDICTION. 2.2 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT AMP EXPENSES AMOUNTING TO RS.1,40,29,07,000, COMPRISING OF (I) ADVERTISEMENT AND SALE PROMOTION EXPENSES OF RS.12,316.81 LACS; (II) DEVELOPMENT AND SCIENTIFIC RESEARCH EXPENSES O F RS.97.41 LACS; (III) SERVICES CHARGES PAID TO SELLI NG AGENTS OF RS.11.49 LACS; (IV) MARKET RESEARCH EXPENSES OF RS.790.14 LACS; (V) SELLING AND DISTRIBUTION EXPENSES OF RS.372.17 LACS AND (VI) DISCOUNT ON SALES OF RS.441.05 LACS RESULTED IN PROMOTION OF BRAND OWNED BY THE ASSOCIATED ENTERPRISE, THEREBY CREATING MARKETING INTANGIBLES WHOSE ULTIMATE BENEFIT INURE TO THE ASSOCIATED ENTERPRISE. 2.3 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAS DEVELOPED MARKETING INTANGIBLE FOR THE ASSOCIATED ENTERPRISE IN INDIA B Y PERFORMING ALL FUNCTIONS AND BY BEARING ALL ECONOMIC COSTS AND RISKS. 2.4 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT ADVERTISEMENT AND MARKETING EXPENSES INCURRED BY THE APPELLANT DOES NOT RESULT IN BENEFIT NOR CREATED ANY INTANGIBLE FOR THE AE. 2.5 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE AMP EXPENSES, ETC., INCURRED BY THE APPELLANT CANNOT BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B OF THE INCOME TAX ACT SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 2.6 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE ASSOCIATED ENTERPRISE WAS NOT UNDER OBLIGATION TO REIMBURSE THE ALLEGED AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS TO THE DEALERS. 2.7 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION COULD AT BEST BE SAID TO BE UNILATERAL FLOW FROM ACTION OF THE APPELLANT AND 3 COULD NOT BE REGARDED AS TRANSACTION OR INTERNATIONAL TRANSACTION: AS PER SECTION 92B OF T HE INCOME TAX ACT SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 2.8 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE POWER OF THE TPO IS RESTRICTE D TO THE DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AND NOT TO MAKE DISALLOWANCE OF BUSINESS EXPENSES INCURRED BY THE APPELLANT. 2.9 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN APPLYING BRIGHT LINE TEST (BLT) FOR COMPUTING ADJUSTMENT ON ACCOUNT OF EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION EXPENSES WITHOUT APPRECIATING THAT IN ABSENCE OF SPECIFIC PROVISION UNDER THE TRANSFER PRICING REGULATIONS IN INDIA, ADJUSTMENT ON ACCOUNT OF THE ARMS LENGTH PRICE OF THE ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE. 2.10 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/T PO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN APPLYING DEVELOPER ASSISTER RULE AS CONTAINED IN US TRANSFER PRICING REGULATIONS, VIZ., REG.1482- 4, THE APPELLANT WOULD BE CHARACTERIZED AS DEVELOPE R OF THE MARKETING INTANGIBLES AND HENCE IT WOULD NOT BE REQUIRED TO SEEK REIMBURSEMENT COMPENSATION FOR SUCH EXPENDITURE FROM THE ASSOCIATED ENTERPRISE. 2.11 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN RELYING UPON THE DECISION OF THE CASE OF DHL INCORPORATED AND SUBSIDIARIES VS. COMMISSIONER OF INTERNAL REVENUE TAX COURT, TCD 1998-461, AFFD IN PART, REVD IN PART 285F.3D.1285. 89AFTR2D 2002- 1978 (CA-9,2002); AND GLAXO SMITH KLINE HOLDING (AMERICAS) INC. VS. COMMISSIONER, T.C. NO.5750-04 AND T.C. NO.6959-05, WHICH WERE RENDERED IN THE CONTEXT OF SPECIFIC PROVISION UNDER THE TRANSFER PRICING REGULATIONS OF UNITED STATES OF AMERICA. 2.12 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE EXPENSES INCURRED BY THE APPELLANT ON ADVERTISEMENT AND BRAND PROMOTION ARE REQUIRED TO BE BENCHMARKED, VIS--VIS, THE COMPARABLE COMPANIES INCURRING SIMILAR ADVERTISEMENT AND BRAND PROMOTION EXPENSES. 2.13 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT ADVERTISEMENT AND PROMOTION EXPENSES INCURRED BY THE APPELLANT OUGHT TO BE RESTRICTED TO 2.02% OF THE SALE AS AGAINST 13.60% INCURRED BY THE APPELLANT. 2.14 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS 4 COMPARABLE COMPANIES FOR BENCHMARKING ADVERTISEMENT AND PUBLICITY EXPENSES : * KWALITY DAIRY (INDIA) LTD. * MILKFOOD LTD. * MODERN DAIRIES LTD. * RAVALGON SUGAR FARM LTD. * MAHAAN FOODS LTD. * ANIK INDUSTRIES LTD. * HASTUN AGRO PRODUCTS LTD. 2.15 WITHOUT PREJUDICE THAT ASSESSING OFFICER/TPO E RRED ON FACTS AND IN LAW IN REJECTING THE FOLLOWING ALTERNATE SET OF COMPARABLE COMPANIES IN FMCG SEGMENT IDENTIFIED BY THE APPELLANT FOR BENCHMARKING OF ADVERTISEMENT AND BRAND PROMOTION EXPENSES : COMPANIES ADVERTISEME NT EXPENSES (% OF SALES) CADBURY INDIA LTD. 17.14% GILLETTE INDIA LTD. 17.10% HINDUSTAN UNILEVER LTD. 13.09% NESTLE INDIA LTD. 9.98%% PROCTER & GAMBLE HYGIENE & HEALTH CARE LTD. 13.89% AVERAGE 14.24% 2.16 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT ADVERTISEMENT AND PROMOTION EXPENSES OF 14.24% OF THE SALE WAS INCURRED BY THE AFORESAID COMPANIES WHICH WAS COMPARABLE/HIGHER THAN THAT OF THE APPELLANT. 2.17 WITHOUT PREJUDICE THAT THE AO/TPO ERRED ON FAC TS AND IN LAW IN CONSIDERING EXPENDITURE ON DEVELOPMENT AND SCIENTIFIC RESEARCH AMOUNTING TO RS.97.41 LACS AND SERVICES CHARGES PAID TO SELLING AGENT OF RS.11.49 LACS; DISCOUNT ON SALES OF RS.441.05 LACS AND MARKET RESEARCH EXPENSES AMOUNTING TO RS.790.14 LACS AS PART OF THE ADVERTISEMENT AND SALE PROMOTION EXPENSES. 2.18 WITHOUT PREJUDICE THAT THE AO/TPO ERRED ON FAC TS AND IN LAW THAT NO ADJUSTMENT IS REQUIRED TO BE MAD E IN RESPECT OF THE ADVERTISEMENT EXPENSES ATTRIBUTED TO THE PROMOTION OF BRANDS, VIZ., VIVA, MALTOVA AND BOOST, WHICH ARE OWNED BY THE APPELLANT. 2.19 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT THE ASSOCIATED ENTERPRISES/BRAND OWNER HAS NOT SOLD ANY GOODS IN INDIA AND ACCORDINGLY HAVE NOT AVAILED ANY BENEFIT OF AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS TO THE DEALERS. 5 3. THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE PAYMENT OF ROYALTY TO GLAXOSMITHKLINE ASIA PVT. LTD. IS A DOMESTIC TRANSACTION AND NOT AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF INDIAN TRANSFER PRICING REGULATIONS. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION FOR INCREMENTAL BALANCE AMOUNTING TO RS.25,23,710 LYING IN PLA UNDER SECTION 43B OF THE INCOME TAX ACT, 1961 (THE ACT) . 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING CONSUMER PRODUCT RESEARCH EXPENSES OF RS.6,23,17,381 UNDER SECTION 37(1) OF THE ACT ALLEGING THE SAME TO BE CAPITAL IN NATURE. 5.1 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER F AILED TO APPRECIATE THAT THE MARKET RESEARCH EXPENSES OF RS.7,90,13,961 WHICH COMPRISED OF THE IMPUGNED EXPENSES AMOUNTING TO RS.6,23,17,381 WERE ALREADY DISALLOWED BY THE ASSESSING OFFICER WHILE CALCULATING ARMS LENGTH PRICE, RESULTING IN A DOUBL E DISALLOWANCE. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 3. THE PRESENT APPEAL WAS FIXED FOR HEARING ON VARI OUS DATES STARTING FROM 14.2.2011 AND THE MATTER WAS ADJOURNED FROM DA TE TO DATE. ON SEVERAL DATES OF HEARING THE MATTER WAS ADJOURNED A T THE REQUEST OF THE LEARNED D.R. FOR THE REVENUE. THE APPEAL WAS FIXED FOR HEARING ON 3.10.2011, ON WHICH DATE AN APPLICATION WAS MOVED B Y SHRI AJAY KUMAR SHARMA, ADDL.CIT, CHANDIGARH, THAT BECAUSE OF HIS A TTENDANCE IN SOME PROSECUTION PROCEEDINGS AS WITNESS OF THE DEPARTMEN T, HE WAS UNABLE TO ATTEND THE PROCEEDINGS BEFORE THE BENCH. THE MATTE R WAS ADJOURNED TO 12.10.2011. ON THE APPOINTED DATE OF HEARING I.E. 12.10.2011 ANOTHER APPLICATION WAS MOVED BY SHRI AJAY KUMAR SHARMA, AD DL. CIT ON THE PLEA THAT THE CASE WAS BEING REPRESENTED BY SHRI RI TESH PARMAR, ADDL.CIT, WHO WAS BUSY IN DISPOSAL OF TIME BARRING CASES. THE SAID REQUEST OF THE LEARNED D.R. FOR THE REVENUE WAS REJ ECTED IN VIEW OF THE FACT THAT ON THE EARLIER DATE, THE CONTENTION OF TH E LEARNED D.R. FOR THE 6 REVENUE THAT HE WAS HELD-UP DUE TO HIS PERSONAL APP EARANCE BEFORE ANOTHER COURT, WAS ACCEPTED. WHEREAS ON THE DATE OF HEARING, THE PLEA WAS IN RESPECT OF NON-ATTENDANCE BY SHRI RITESH PAR MAR. THE MATTER WAS TAKEN UP FOR HEARING ON 12.10.2011 AND WAS PARTLY H EARD ON THE SAID DATE, WHEREIN THE LEARNED A.R. FOR THE ASSESSEE PUT FORWARD THE CONTENTIONS AND RELIED ON THE WRITTEN SUBMISSIONS. IT WAS FURTHER ADJOURNED TO 20.10.2011, ON WHICH DATE SHRI RITESH PARMAR APPEARED ALONGWITH SHRI AJAY KUMAR SHARMA FOR THE REVENUE AN D THE HEARING OF THE CASE WAS CONCLUDED. 4. WE PROCEED TO DISPOSE OFF THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE. 5. GROUND NO.1 RAISED BY THE ASSESSEE BEING GENERAL IS DISMISSED AS SUCH. 6. THE ISSUE IN GROUND NO.2 I.E. GROUND NOS.2.0 TO 2.19 IS AGAINST THE ADDITION MADE ON ACCOUNT OF ALLEGED DIFFERENCE IN A RMS LENGTH PRICE OF REIMBURSEMENT OF ADVERTISEMENT,, MARKETING AND BRAN D PROMOTION EXPENSES (AMP EXPENSES) AND DIFFERENT FACETS OF THE SAID ADDITION. 7. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.188,2 2,37,820/-. THE ASSESSING OFFICER VIDE LETTER DATED 3.10.2008 REFER RED THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING TH E FINANCIAL YEAR 2005- 06 AS REPORTED IN AUDIT REPORT FURNISHED IN FORM NO .3CEB, UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, TO THE TRANS FER PRICING OFFICER (TPO) AS ENLISTED UNDER PARA 2.1 OF THE ORDER OF TP O. THE ASSESSING OFFICER VIDE LETTER DATED 3.10.2008 HAD REFERRED TH E INTERNATIONAL TRANSACTIONS IN RESPECT OF EXPORT OF MALTED FOOD, B ISCUITS, EXPORT OF PACKING MATERIAL, PROVISION OF I.T. SERVICES, REIMB URSEMENT OF EXPENSES 7 (RECEIPTS) AND REIMBURSEMENT OF EXPENSES (PAYMENTS) AS ENLISTED UNDER PARA 2.1 OF THE ORDER OF TPO. THEREAFTER ANOTHER R EFERENCE WAS MADE BY THE ADDL. CIT VIDE LETTER DATED 11.9.2009 IN RESPE CT OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92CA(1) OF THE ACT, TO T HE TPO, AS ENLISTED UNDER PARA 2.2 OF THE ORDER OF TPO. 8. THE TPO WAS OF THE VIEW THAT THE ASSESSEE COMPAN Y IS INCORPORATED UNDER THE LAWS OF INDIA AND IS 40% OWNED BY HORLICK S LTD., U.K., WHICH IS PART OF GSK GROUP. THE TPO VIDE PARA 5 THUS HEL D THAT IT IS AN ASSOCIATED ENTERPRISE WITHIN THE MEANING OF SECTION 92A (2)(A) OF THE INCOME TAX ACT. THE TPO VIDE PARA 6 OF HIS ORDER A CKNOWLEDGED THE ASSESSEE TO HAVE ADOPTED TRANSACTION NET MARGIN MET HOD (TNMM) FOR TRANSFER PRICING ANALYSIS WITH OPERATING PROFIT/TOT AL COST RATIO AS PROFIT LEVEL INDICATOR. SIMILAR METHOD WAS USED BY THE AS SESSEE IN THE PRECEDING YEARS. THE TPO THEREAFTER ANALYZED THE T RANSFER PRICING APPROACH OF THE ASSESSEE AND SHOW CAUSED THE ASSESS EE TO EXPLAIN WHY THE DATA OF THE RELEVANT FINANCIAL YEAR ONLY SHOULD NOT BE USED, AS AGAINST THREE YEARS DATA ADOPTED BY THE ASSESSEE. THE QUESTIONNAIRE ISSUED BY THE TPO AND THE EXPLANATION OF THE ASSESS EE ARE INCORPORATED UNDER PARAS 7.1 TO 7.4 AT PAGES 5 TO 7 OF THE ORDER OF TPO. THEREAFTER VIDE PARA 7.5 THE TPO NOTED THAT THE ASSESSEE HAD S ALES TURNOVER OF RS.103,131.33 LACS AND HAD DEBITED THE FOLLOWING EX PENSES : S.NO. NAME OF EXPENSES AMOUNT (RS.LACS) 1. ADVERTISEMENT EXPENSES 8640.06 2. SELLING & DISTRIBUTION 372.17 3. MARKET RESEARCH 790.14 4. SALES PROMOTION 3676.75 5. SERVICE CHARGES PAID TO SELLING AGENT 11.49 6. DISCOUNT - SALES 441.05 7. DEVELOPMENT & SCIENTIFIC RESEARCH 97.41 8. ROYALTY 4115.79 9. TOTAL 18144.86 8 9. THE SUBMISSIONS OF THE ASSESSEE IN RESPECT OF VA RIOUS EXPENSES IS REPRODUCED UNDER PARA 7.6 AT PAGES 8 TO 11 OF THE O RDER OF TPO. THE CONTENTION OF THE ASSESSEE, AS PER THE TPO, WAS MIS PLACED, BECAUSE OF THE SHAREHOLDING PATTERN OF TWO COMPANIES AND IT WA S OBSERVED THAT GSK ASIA PVT. LTD. IS SUBSIDIARY OF S.B. PORT LOUIS LTD ., MAURITIUS, AN ASSOCIATED ENTERPRISE. SIMILARLY GLAXO GROUP LTD., U.K. (AN ASSOCIATED ENTERPRISE) HAS 35.99% SHARE HOLDING IN GSK PHARMACEUTICALS LTD. THUS THE PROVISIONS OF SECTIO N 92A(2)(B) OF THE I.T. ACT ARE ATTRACTED . THE OBSERVATION OF THE TPO THEREAFTER WAS THAT THUS THE PAYMENT OF ROYALTY BY THE ASSESSEE IS AN I NTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS A.E. AND I DO NOT FIND ANY MERIT IN THE SUBMISSION OF THE ASSESSEE ON THIS ISSUE. HE FURTHER OBSERVED AS UNDER : 7.9 SINCE ROYALTY PAYMENT IS A DEEMED INTERNATIONA L TRANSACTION AND THE ASSESSEE HAS NOT BENCHMARKED THIS TRANSACTION TO PROVE IF TRANSACTION IS AT ARM S LENGTH PRICE, I HAVE EXAMINED ARMS LENGTH OF THE ROYALTY. IN THIS CONTEXT, IS IMPORTANT TO NOTE THA T ON ONE HAND, THE ASSESSEE IS MAKING ROYALTY PAYMENT TO ITS AE FOR THE USE OF HORLICKS TRADEMARK AND FROM ITS AUDITED FINANCIALS, IT IS SEEN THAT IT HAS INCU RRED EXPENDITURE OF RS.18144.86 LAKHS ON ADVERTISEMENT, MARKETING AND PROMOTION. THUS IN THE YEAR THE ASSESSEE HAS CREATED MARKETING INTANGIBLES BY INCURRING EXPENDITURE OF RS.18144.86 LAKHS ON ADVERTISEMENT, MARKETING AND PROMOTION OF THE AE BRAND AND PRODUCTS, HOWEVER, THE AE HAS NOT COMPENSATED THE ASSESSEE FOR THIS COST PERTAINING T O THE BRAND PROMOTION OF THE AE IN INDIA. IN ORDER T O EXAMINE THE ARMS LENGTH PRICE IT IS NECESSARY TO COMPARE TOTAL EXPENDITURE INCURRED BY THE ASSESSEE ON BEHALF OF THE AE IN INDIA AND AMOUNT PAID BY THE ASSESSEE TO INDIA AS CONTRIBUTION FOR ADVERTISEMENT EXPENDITURE BY THE AE. ACCORDINGLY, I HAVE EXAMINED ALL THE ADVERTISEMENT MARKETING AND SALE PROMOTION EXPENDITURE (IN SHORT AMP EXPENDITURE) INCURRED BY THE ASSESSEE IN INDIA. 10. THE ASSESSEE WAS THUS SHOW CAUSED AS TO WHY IT SHOULD NOT BE INFERRED THAT IT HAD INCURRED BOTH ROUTINE AND NON- ROUTINE ADVERTISEMENT AND MARKETING EXPENSES ON BRAND PROMOTION AND DEVEL OPMENT OF 9 MARKETING INTANGIBLES FOR THE ASSOCIATED ENTERPRISE S (IN SHORT AE). THE QUESTIONNAIRE ISSUED BY THE TPO IS REPRODUCED AT P AGE 13 AND PART AT PAGE 14 OF THE ORDER OF TPO. THE SUBMISSION OF THE ASSESSEE IN REPLY IS REPRODUCED UNDER PARA 17.10 AT PAGES 14 TO 26 OF TH E ORDER OF TPO. THE MAIN PLEA OF THE ASSESSEE WAS THAT THE EXPENSES ON ADVERTISEMENT AND BRAND PROMOTION ARE NOT INCURRED AT THE INSTANCE OR DIRECTION OF THE AE NOR THE AE IS TO BENEFIT FROM SUCH EXPENDITURE INCU RRED BY THE ASSESSEE IN INDIA. FURTHER, IT WILL BE APPRECIATED THAT IN ABSENCE OF ANY TRANSACTION WHICH RESULTS IN TRANSFER OF THE BENEFI T OF ADVERTISEMENT AND BRAND PROMOTION EXPENSES WHICH OTHERWISE BELONG TO AND IS EXPLOITED BY THE ASSESSEE COMPANY TO THE ASSOCIATED ENTERPRISE, THE QUESTION OF TRANSFER OF THE INTANGIBLES OR PAYMENT BY THE AE TO THE ASSESSEE COMPANY FOR TRANSFER OF SUCH INTANGIBLES DOES NOT ARISE. FURTHER CONTENTION BY THE ASSESSEE WAS THAT FROM THE CONJOINT READING OF PROVISIONS OF CLAUSE (V) OF SECTION 92F AND SUB-SECTION (I) OF SECTION 9 2B OF THE ACT IT COULD BE INFERRED THAT TRANSFER PRICING REGULATION WOULD BE APPLICABLE TO ANY TRANSACTION, BEING AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, INTER ALIA, IN THE NATURE OF PURCHASE, SAL E OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR ANY OTHER TRANSACTION HAV ING BEARING ON PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRIS ES. THEREFORE, IN ORDER TO BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTIO N, IT WOULD HAVE TO BE DEMONSTRATED THAT THE SAME ARISES PURSUANT TO AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. THE MAIN PLEA OF THE ASSESSEE WAS THAT IT HAD INCURRED EXPENDITURE FOR BRAND PROMOTIO N IN INDIA TO CATER TO LOCAL REQUIREMENTS AND THE SAID EXPENDITURE WAS NOT AT THE INSTANCE OF AE. IF ANY BENEFIT DID ARISE TO THE AE BUT WITHOUT ANY ARRANGEMENT OR UNDERSTANDING COULD NOT BE TERMED AS INTERNATIONAL TRANSACTION. THE NEXT PLANK OF ARGUMENT BEFORE THE TPO BY THE ASSESSEE WA S THAT REBATES/INCENTIVES WERE PAID TO OTHER INDIAN PARTIE S AND THE SECOND 10 REQUIREMENT IN THE APPLICATION OF TRANSFER PRICING REGULATION I.E. EXISTENCE OF INTERNATIONAL TRANSACTION AND TRANSACT ION OF PAYMENT BETWEEN ASSOCIATED ENTERPRISES, ONE OF WHOM IS NON- RESIDENT, WAS NOT FULFILLED AND THUS PROVISIONS OF SECTION 92B(1) OF THE ACT COULD NOT BE INVOKED. 11. THE ALTERNATE PLEA OF THE ASSESSEE VIDE PARA 7. 11 OF THE ORDER OF TPO WAS THAT VARIOUS EXPENSES INCURRED WERE FOR THE PROMOTION OF NOT ONLY HORLICKS BUT OTHER BRANDS I.E. VIVA, MALTOVA A ND BOOST. THE BREAK- UP OF THE EXPENDITURE IN TABULATED FORM IS INCORPOR ATED UNDER PARA 7.13 AT PAGE 27 OF THE ORDER OF TPO. THE TPO THEREAFTER HAS HELD THAT IN VIEW OF THE TERMS AND CONDITIONS OF THE AGREEMENT B ETWEEN THE ASSESSEE AND AUTHORIZED AE, THE PAYMENT OF ROYALTY BY THE AS SESSEE WAS HELD TO BE DEEMED INTERNATIONAL TRANSACTION AS PER SECTION 92B (2) OF THE INCOME TAX ACT. THE TAX AUDITORS HAD REPORTED EXPENDITURE OF RS.4115.79 LACS BY THE ASSESSEE ON PAYMENT OF ROYALTY TO ITS AE, WH ICH WAS AN INTERNATIONAL TRANSACTION, AS PER THE TPO. HOWEVER , THE ASSESSEE HAD NOT DETERMINED THE ARMS LENGTH PRICE OF THE SAID TRANS ACTION, AS OBSERVED BY THE TPO. HE WAS OF THE VIEW THAT ON ONE HAND, THE ASSESSEE WAS MAKING ROYALTY PAYMENT TO ITS AE FOR THE USE OF TRADEMARK AND ON THE OTHER HAND, IT HAD INCURRED EXPENDITURE OF RS.140.29 CROR ES ON AMP (EXCLUDING ROYALTY). THE TPO THUS OBSERVED THAT DURING THE YE AR THE ASSESSEE HAD CREATED MARKETING INTANGIBLES BY INCURRING EXPENDIT URE OF RS.140.29 CRORES ON AMP OF AE BRAND AND PRODUCTS, HOWEVER, TH E AE HAD NOT COMPENSATED THE ASSESSEE FOR THIS COST PERTAINING T O THE BRAND PROMOTION OF THE AE IN INDIA. THE TPO WAS OF THE VIEW THAT IN ORDER TO EXAMINE THE ARMS LENGTH PRICE IT IS NECESSARY TO COMPARE T OTAL EXPENDITURE INCURRED BY THE ASSESSEE ON BEHALF OF THE AE IN IND IA AND AMOUNT PAID BY THE ASSESSEE TO INDIA AS CONTRIBUTION FOR ADVERTISE MENT EXPENDITURE BY 11 THE AE. ACCORDINGLY, I HAVE EXAMINED ALL THE ADVER TISEMENT MARKETING AND SALE PROMOTION EXPENDITURE (IN SHORT AMP EXPEND ITURE) INCURRED BY THE ASSESSEE IN INDIA. IN LIGHT OF THESE FACTS, IT IS INCORRECT TO SAY THAT AMP EXPENDITURE IS NOT AN INTERNATIONAL TRANSACTION . THE TPO VIDE PARA 8.2.2 FURTHER OBSERVED AS UNDER : 8.2.2 THE ASSESSEE HAS CLAIMED THAT THE TPO HAS NO JURISDICTION OVER THE EXAMINATION OF THIS ISSUE AS HE HAS NO POWERS TO MAKE DISALLOWANCES NOT REFERRED TO HIM. IT HAS BEEN CONTENDED IN THE AUDIT REPORT FOR THE ASSESSEE THAT AMP EXPENDITURE IS THIRD PARTY EXPENDITURE ACCORDINGLY, THE SAME CAN NOT BE HELD AS INTERNATIONAL TRANSACTION. IT IS PERTINENT TO MENTION HERE THAT IN THIS CASE AMP EXPENDITURE HAS BEEN EXAMINED IN ORDER TO DETERMINE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF REIMBURSEMENTS OF ADVERTISEMENT EXPENDITURE OF 140.29 CRORES AS DISCUSSED IN PARAGRAPH ABOVE. ACCORDINGLY, ON THE INTERNATIONAL TRANSACTION AND REFERENCE BY THE AO, NO OBJECTION CAN BE RAISED ON THE ISSUE. 12. IN THE ALTERNATIVE THE TPO OBSERVED THAT FROM T HE FINDINGS OF FACTS, THE ASSESSEE HAD INCURRED HUGE AMP EXPENDITURE TO P ROMOTE TRADEMARK OWNED BY ITS AE AND DEVELOP MARKETING INTANGIBLES F OR THE PRODUCT OF AE. THE AE HAVING RECEIVED BENEFIT IN FORM OF ENHA NCED BRAND VALUE IN INDIA AND ACCORDINGLY, AMP EXPENDITURE OF RS.140.29 CRORES WAS HELD TO BE INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTION 92B(1) OF THE ACT. AS PER PARA 8.2.3 OF THE ORDER OF TPO, THE AS SESSEE WAS FOUND TO HAVE INCURRED SAID AMP EXPENDITURE FOR THE BENEFIT OF ITS AE AND IT WAS FURTHER HELD THAT THE SAME WAS INCURRED IN CONNECTI ON WITH A BENEFIT AND SERVICE PROVIDED TO THE AE UNDER MUTUAL AGREEMENT, WHICH WAS NOT IN WRITING, BUT SUCH ARRANGEMENTS WERE PROVED FROM THE CONDUCT OF THE ASSESSEE AND HENCE, AMP EXPENDITURE WAS HELD TO BE AN INTERNATIONAL TRANSACTION UNDER SECTION 92B(1) READ WITH CLAUSE ( V) OF SECTION 92F. THE CLAIM OF THE ASSESSEE THAT AMP EXPENDITURE OF R S.140.29 CRORES WAS 12 NOT AN INTERNATIONAL TRANSACTION, WAS REJECTED BY T HE TPO. THE TPO THEREAFTER OBSERVED THAT MULTIPLE YEARS DATA WAS NO T TO BE USED TO BENCH MARK THE INTERNATIONAL TRANSACTIONS AND ONLY DATA O F FINANCIAL YEAR WAS TO BE USED FOR THE SAID BENCH MARKING OF INTERNATIONA L TRANSACTION AS PER PARA 8.3 ONWARDS. FURTHER THE TPO VIDE PARA 8.5.2 OBSERVED THAT AMP EXPENDITURE VIS--VIS SALES OF THE YEAR, ACCOUNTED FOR 13.60% OF INCOME AS COMPARED TO AMP EXPENDITURE TO INCOME RATIO OF 0 .22% TO 3.20%, IN THE CASE OF COMPARABLES, SELECTED BY THE ASSESSEE. THE TPO THUS OBSERVED THAT FACTUALLY THIS BY ITSELF HAS ESTABLISHED THAT THE A SSESSEE HAD INCURRED HUGE NON-ROUTINE EXPENDITURE TO DEVELO P MARKETING TANGIBLE FOR THE AE. THE TPO VIDE PARA 8.5.3 FURTHER HELD AS UNDER : 8.5.3 FROM THE AUDITED FINANCIALS OF THE ASSESSEE, IT IS SEEN THAT IT HAS INCURRED EXPENDITURE OF RS.1,40,29,07,000 ON ADVERTISEMENT, MARKETING AND PROMOTION OF THE GLAXO & HORLICKS BRAND AND TO DEVELOP MARKET FOR THE PRODUCT OF THE AES IN INDIA. SINCE AMP EXPENDITURE HAS RESULTED IN INCREASED IN THE VALUE OF GLAXO & HORLICKS BRAND IN INDIA AND HELPED PENETRATION OF GLAXO & HORLICKS PRODUCTS IN INDIA. IT IS HELD THAT BENEFIT OF AMP EXPENDITURE WAS ENJOYED BY THE AE WHO IS LEGAL OWNER OF THE BRAND. HOWEVER, IT IS NOTED THAT THE ASSESSEE HAS NOT BEEN COMPENSATED FOR INCURRING COST AND ASSUMING RISK OF PROMOTING BRAND OF THE AE IN INDIA AND DEVELOPING MARKETING INTANGIBLE FOR THE AE. SINCE, THE ASSESSEE IS MANUFACTURER-CUM-DISTRIBUTOR OF PRODUCTS IN INDIA, IT IS REQUIRED TO INCUR CERTAIN ROUTINE AMP EXPENDITURE AS LIMITED RISK DISTRIBUTOR BUT IT IS NOTED THAT THE ASSESSEE HAS INCURRED CERTAIN NON-ROUTINE EXPENDITURE FOR THE AE. 13. THE CONTENTION OF THE ASSESSEE THAT THE ADVERTI SEMENTS IN PRINT MEDIA, PRESS OR OTHERWISE WAS IN RELATION TO PRODUC TS AIMED TO BENEFIT ONLY THE PRODUCTS SOLD BY THE ASSESSEE IN INDIA AND ANY BENEFIT ACCRUING TO AES BEING INCIDENTAL, WAS REJECTED BY THE TPO, A S THE THRUST OF AMP EXPENDITURE WAS TO POPULARIZE THE BRAND NAME OF TH E AE AND THE SAME 13 WAS TO PROMOTE BUSINESS ACTIVITIES OF THE PARENT CO MPANY AND TO ENHANCE BRAND VALUE, FOR WHICH NO COMPENSATION WAS PAID TO THE ASSESSEE IN RETURN. THE TPO OBSERVED THAT THE THRUST OF AMP EX PENDITURE WAS TO PROMOTE THE BRAND OF AE AND TO DEVELOP MARKET AND C USTOMER LOYALTY FOR THE AES BRAND. THE CLAIM OF THE ASSESSEE THAT IT H AD INCURRED AMP EXPENDITURE ALSO ON BRANDS OWNED BY IT, WAS REJECTE D BY THE TPO. UNDER PARA 8.6.11 OF THE ORDER THE TPO HAS ENLISTED THE FUNCTIONS PERFORMED BY THE ASSESSEE, WHICH IN TURN HAS RESULT ED IN DEVELOPMENT OF MARKETING INTANGIBLE BY THE ASSESSEE FOR ITS AE. THE TPO THUS WAS OF THE VIEW THAT BECAUSE OF THE INTANGIBLE DEVELOPED B Y THE ASSESSEE BY WAY OF ENHANCED SALE OR PRODUCTION IN INDIA, IN TURN LE D TO THE INCREASED PROFITABILITY OF THE PARENT AE. THE TPO WAS OF THE VIEW THAT THE ABOVE SAID REQUIRED RECOMPUTATION AT ARMS LENGTH PRICE, AS THE ASSESSEE HAD NOT BEEN COMPENSATED FOR THE SAID SERVICES. THEREA FTER THE TPO UNDER PARA 9 HAD DISCUSSED THE SELECTION OF COMPARABLES F OR BENCHMARKING OF ROUTINE AMP EXPENDITURE AND APPLIED BRIGHT LINE MET HOD TO DETERMINE ARMS LENGTH PRICE. THE TEN COMPARABLE COMPANIES S ELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING REPORT, WERE SELEC TED AS BENCH MARK. THE TPO WAS OF THE VIEW THAT THOUGH AMP EXPENDITURE OF THE ASSESSEE ACCOUNTED FOR 13.60% OF ITS INCOME AS COMPARED TO A VERAGE AMP EXPENDITURE TO INCOME RATIO OF 2.02% FOR THE COMPAR ABLES IN VIEW OF THE COMPARABLE UNCONTROLLED PRICE METHOD, BY ITSELF EST ABLISHED THAT THE ASSESSEE HAD INCURRED HUGE NON-ROUTINE EXPENDITURE TO DEVELOP MARKETING INTANGIBLE FOR THE AE AND THE SAME WAS IN EXCESS. T HE TPO THUS DETERMINED THE ARMS LENGTH PRICE OF REIMBURSEMENT RECEIVED BY THE ASSESSEE FOR THE BRAND PROMOTION AND MARKETING INTA NGIBLE OF AE IN INDIA @ 2% OF AMP EXPENDITURE AND HELD THAT THE ADJ USTMENT OF RS.1,19,45,81,713/- WAS TO BE MADE TO THE INCOME OF THE ASSESSEE BEING DIFFERENCE BETWEEN ARMS LENGTH PRICE OF SUBSIDY AN D THE SUBSIDY 14 RECEIVED BY THE ASSESSEE FROM ITS AE. THE INCOME O F THE ASSESSEE WAS THUS ENHANCED BY THE SAID FIGURE AND THE ASSESSEE W AS HELD NOT TO BE ENTITLED FOR DEDUCTION UNDER SECTION 10A, 10AA, 10B OR UNDER CHAPTER VIA IN RESPECT OF THE AMOUNT OF INCOME WHICH HAS BE EN ENHANCED. 14. THE ASSESSEE FILED ITS OBJECTIONS DATED 27.1.20 10 IN FORM NO.35A BEFORE THE DISPUTE RESOLUTION PANEL. DIRECTIONS UN DER SECTION 144C OF THE ACT WERE ISSUED BY THE DISPUTE RESOLUTION PANEL , NEW DELHI VIDE ITS ORDER DATED 9.9.2010. THE EXPLANATION OF THE ASSES SEE BEFORE THE DISPUTE RESOLUTION PANEL WAS THAT THE TPO HAD ERRED IN OBSE RVING THAT THE ASSESSEE HAD DEVELOPED MARKETING INTANGIBLE FOR AE IN INDIA BY DEVELOPING OF FUNCTIONS AND BY INCURRING OF ECONOMI CAL COST AND RISK. THE DISPUTE RESOLUTION PANEL HELD THAT ONLY SUCH CO MPARABLES WHICH WERE ENGAGED IN THE DISTRIBUTIONS BUSINESS AND WERE INCURRING ROUTINE AMP EXPENDITURE WERE TO BE SELECTED. THE SAID CONC EPT WAS OBSERVED BY THE DISPUTE RESOLUTION PANEL TO BE VERY SCIENTIFIC AND ACCEPTABLE IN MANY DEVELOPED COUNTRIES INCLUDING USA. THE CONTEN TION OF THE ASSESSEE THAT THE CONCEPT OF BRIGHT LINE TEST SHOUL D NOT BE APPLIED TO ITS CASE, WAS FOUND TO BE NOT TENABLE BY THE DISPUTE RE SOLUTION PANEL, OBSERVING THAT TPO HAD SIMPLY APPLIED A WELL DEVISE D, SCIENTIFIC, ALREADY IN USE AND A SOUND TAXATION CONCEPT. THE PANEL FUR THER OBSERVED THAT WHILE WORKING OUT THE EXCESS PAYMENT TO ITS ASSOCIA TED ENTERPRISE, THE TPO HAD ALREADY GIVEN SET OFF OF RS.20.83 CRORES, W HICH IN FACT ARE THE EXPENDITURE RELATING TO AMP. FURTHER OBSERVATION O F THE PANEL WAS THAT THE TOTAL AMOUNT PAID BY THE ASSESSEE TO ITS AE COM PRISED OF DIFFERENT HEADS AND AS THE TPO HAD HELD THAT EXPENSES OF RS.2 0.83 CRORES ARE AT ARMS LENGTH AND REQUIRED TO BE INCURRED FOR AMP EX PENSES, NO FURTHER ADJUSTMENT IS WARRANTED. THE ORDER OF THE TPO WAS THUS UPHELD. 15 15. THE ASSESSING OFFICER DURING THE ASSESSMENT PR OCEEDINGS CONFRONTED THE REPORT OF TPO TO THE ASSESSEE. THE OBJECTIONS RAISED BY ASSESSEE ARE INCORPORATED AT PAGES 21 TO 24 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER VIDE PARA 7 OBSERVED THAT A REFER ENCE WAS MADE TO THE TPO UNDER SECTION 92CA OF THE ACT FOR COMPUTATION O F ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF OVER RS. 5 CRORES AS PER FORM NO.3CEB FILED BY THE ASSESSEE. IN VIEW OF THE ORDE R OF THE TPO THE DIFFERENCE IN THE AMOUNT OF ARMS LENGTH SUBSIDY AN D THE VALUE OF INTERNATIONAL TRANSACTION UNDERTAKEN BEING MORE THA N 5%, ADJUSTMENT OF RS.1,19,45,81,713/- WAS MADE TO THE INCOME OF THE A SSESSEE, AFTER CONSIDERING THE REPLY OF THE ASSESSEE ON THE ISSUE. 16. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT AND HAS RAISED VARIOUS GROUNDS OF APPEAL. THE LEARNED A.R. FOR TH E ASSESSEE POINTED OUT THAT THOUGH MULTIPLE GROUNDS OF APPEAL HAVE BEEN RA ISED BUT THE BROAD PROPOSITIONS TO BE CONSIDERED REGARDING GROUND NO. 2 TO 2.19 ARE AS UNDER: 1. WHETHER INTERNATIONAL TRANSACTION? 2. WHETHER INTERFERENCE BY TPO PERMISSIBLE WITHOUT REFERENCE FROM THE AO? 3. ALLOWABILITY AS REVENUE EXPENSES IF INDIRECT BENEFI T TO THIRD PARTY/AE? 4. WHETHER CAPITAL EXPENDITURE/RESULTS IN CREATION OF AN INTANGIBLE ASSET? 5. IF YES, WHETHER SUCH INTANGIBLES ARE CREATED ON BEHALF OF/TRANSFERRED TO AE? 6. APPLICABILITY OF US REGULATIONS AND OECD GUIDELINES/NO DEEMING PROVISION AS IN US REGULATIONS. 7. ON FACTS, EXPENDITURE NORMAL/NOT EXTRAORDINARY AND IN LINE WITH THE INDUSTRY SPEND. 8. COMPARABLES CONSIDERED BY THE TPO NOT RELEVANT FOR AMP EXPENSES. 9. IN ANY CASE, AMP EXPENSES DEMONSTRATED TO BE AT ARMS LENGTH APPLY ENTITY WIDE BASIS. 16 10. ADJUSTMENT, EVEN OTHERWISE, NOT SUSTAINABLE, NOT BEING BASED ON ANY OF THE METHODS PRESCRIBED IN TRANSFER PRICING REGULATIONS. 11. WITHOUT PREJUDICE, NO ADJUSTMENT FOR AMP EXPENSES FOR VIVA MALTOVA AND BOOST. 17. ELABORATE SUBMISSIONS WERE MADE BY THE LEARNED A.R. FOR THE ASSESSEE IN RESPECT OF EACH OF THE AFORESAID PROPOS ITIONS INCLUDING RELEVANT CASE LAWS, WHICH SHALL BE REFERRED TO IN P ARAS HEREINBELOW. THE LEARNED A.R. FOR THE ASSESSEE HAS FILED WRITTEN SUB MISSIONS IN RESPECT OF SEVERAL PROPOSITIONS ADVANCED BY HIM AND COMPLETE R ELIANCE WAS PLACED BY THE LEARNED A.R. FOR THE ASSESSEE ON THE SAID WR ITTEN SUBMISSIONS. 18. THE LEARNED D.R. FOR THE REVENUE HAS FILED COMM ENTS OF TPO IN RESPECT OF VARIOUS GROUNDS OF APPEAL RAISED BY THE ASSESSEE AND HAS IN TURN RELIED UPON ON THE ORDER OF THE TPO. THE WRIT TEN SUBMISSIONS OF THE LEARNED A.R. FOR THE ASSESSEE AND COMMENTS OF TPO W HILE ARGUING THE PRESENT APPEAL SHALL BE REFERRED TO BY US AT THE AP PROPRIATE JUNCTURE. 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NOS. 2.0 TO 2.19 IS IN RES PECT OF ADJUSTMENT MADE ON ACCOUNT OF ARMS LENGTH PRICE IN VIEW OF TH E PROVISIONS OF CHAPTER-X OF THE INCOME TAX ACT. 20. THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AN D SELLING OF MALTED FOOD PRODUCTS AND DRINKS UNDER THE BRAND NAMES OF H ORLICKS, BOOST, MALTOVA AND VIVA. THE ASSESSEE CLAIMED THAT DURING THE YEAR UNDER CONSIDERATION IT HAD EXPORTED MALTED MILK FOOD TO I TS GROUP COMPANIES, WHICH IN TURN WAS MANUFACTURED BY THIRD PARTY VENDO RS IN INDIA. IN ADDITION, THE ASSESSEE CLAIMED TO HAVE CARRIED ON C ERTAIN ADMINISTRATIVE SUPPORT SERVICES SUCH AS MARKETING/SALES INPUTS I.T . SUPPORT AND TRAINING, ACCOUNTING, ETC. TO ITS GROUP COMPANIES. THE MANUF ACTURING UNITS OF THE ASSESSEE ARE LOCATED IN NABHA AND RAJAHMUNDRY. THE ASSESSEE HAD ALSO 17 SET UP MANUFACTURING FACILITY FOR MALTED FOOD AT SO NEPAT IN HARYANA. THE SAID PLANT IS ESTABLISHED WITH A CAPACITY TO MA NUFACTURE 26000 TPA OF MALTED FOOD AND IS THE LARGEST SPRAY DRYING PLANT I N ASIA MEETING EUROPEAN GMP AND SAFETY STANDARDS. THE FACILITIES PROVIDED BY THE ASSESSEE HAVE BEEN ACCREDITED WITH THE PRESTIGIOUS ISO CERTIFICATION. THE ASSESSEE HAD IN THE AUDIT REPORT FURNISHED IN F ORM NO.3CEB DECLARED THE DETAILS OF ITS INTERNATIONAL TRANSACTI ONS WITH THE ASSOCIATED ENTERPRISE IN RESPECT OF ITS EXPORT OF MALTED PRODU CTS AND OTHER ALLIED SERVICES. 21. THE ASSESSING OFFICER DURING THE COURSE OF ASSE SSMENT PROCEEDINGS HAD MADE A REFERENCE UNDER SECTION 92CA(1) OF THE A CT. THE ADDL. CIT, RANGE IV, CHANDIGARH IN HER LETTER NO. ADDL.CIT/R -IV/2007-08/232, DATED 03.10.2008 HAD REFERRED THE FOLLOWING INTERN ATIONAL TRANSACTION U/S 92CA(1) OF THE IT ACT:- AMOUNT IN RS. S.NO. TRANSACTION ASSOCIATED ENTERPRISE AS PER BOOKS ARMS LENGTH PRICE (AS DETERMINED BY THE ASSESSEE) METHOD ADOPTED S.B. LTD., SRI LANKA 15,65,29,175 15,65,29,175 SB, MAURITIUS 33,44,687 33,44,687 GSK SDN BHD, MALAYSIA 1,87,29,390 1,87,29,390 EXPORT OF MALTED FOOD/ BISCUITS GSK, HONG KONG 19,63,158 19,63,158 1 EXPORT OF PACKING MATERIAL S.B. LTD., SRI LANKA 6,97,430 6,97,430 TNMM GSK UNLIMITED UK PLC, UK 23,67,455 23,67,455 TNMM SB CORPORATE CENTRE, USA 64,01,551 64,01,551 GSK SERVICES UNLIMITED, UK 18,02,701 18,02,701 SMITHKLINE BEECHAM, USA 10,56,132 10,56,132 SB PHARMA SERVICES, USA 15,82,384 15,82,384 2. PROVISION OF I.T. SERVICES TIANJIN SKF,CHINA 2,53,281 2,53,281 18 SB RESEARCH LTD., PHILIPPINES 2,14,181 2,14,181 GSK CHINA INVESTMENT CO. LTD., CHINA 99,965 99,965 3. REIMBURSEMENT OF EXPENSES (RECEIPTS) GSK FINANCIAL SERVICES, UK 32,66,181 32,66,181 GSK CH LP, USA 14,22,227 14,22,227 GSK SDN BHD. MALASIA 8,50,000 8,50,000 GSK, NEGERIA 2,02,415 2,02,415 GSK AUSTRALIA 5,65,728 5,65,728 STERLING DURG MALAYA SDN BHD. MALASIA 18,43,191 18,43,191 SB LTD., SRI LANKA 47,50,970 47,50,970 GSK PTE LTD., SINGAPORE 4,27,460 4,27,460 GSK CH.KOREA 18,048 18,048 GSK LTD., HONG KONG 1,04,80,046 1,04,80,046 GSK K.K. JAPAN 15,000 15,000 GSK EXPORT LTD., UK 9,37,574 9,37,574 -- 4. REIMBURSEMENT OF EXPENSES (PAYMENT) GSK SERVICES UNLIMITED, UK 20,41,532 20,41,532 -- SB CROP. CB, USA 1,80,090 1,80,090 22. SUBSEQUENTLY VIDE LETTER NO. ADDL.CIT/R-IV/CHD/ 2009-10/1182 DATED 11.09.2009, THE ADDL. CIT, RANGE IV, CHANDIGA RH HAD REFERRED THE FOLLOWING INTERNATIONAL TRANSACTIONS UNDER SECTIO N 92CA(1) OF THE IT ACT. NAME OF ASSOCIATED ENTERPRISES : M/S GSK ASIA PVT. LTD. S. NO. DESCRIPTION OF THE TRANSACTION AMOUNT (IN RUPEES) 1 NET CONSIGNMENT SALES 12,062.86 2 RENDERING OF SERVICES (CROSS CHARGES RECOVERED) 2 ,403.53 3 REIMBURSEMENT OF EXPENSES (RECEIVED/RECEIVABLE) 4 13.90 4 SELLING COMMISSION INCOME 80.30 5 RENT PAID 129.58 6 RENT RECEIVED 0.66 7 ROYALTY PAID/PAYABLE 4,323.43 8 INTEREST RECEIVED 17.32 9 LOAN ADVANCED 250.00 19 NAME OF ASSOCIATED ENTERPRISES : M/S GSK PHARMACEUT ICALS LTD. S. NO. DESCRIPTION OF THE TRANSACTION AMOUNT (IN RUPEES) 1 NET CONSIGNMENT SALES 5,251.96 2 PURCHASE OF GOODS 3.58 3 RENDERING OF SERVICE (CROSS CHARGES RECOVERED) 37 4.44 4 SHARED SERVICES 7.85 5 REIMBURSEMENT OF EXPENSES (RECEIVED/RECEIVABLE 25 9.95 6 SELLING COMMISSION INCOME 289.38 23. THE ASSESSEE HAD BASED ITS WORKING ON INTERNATI ONAL TRANSACTIONS OF THREE YEARS DATA PERTAINING TO FINANCIAL YEARS 2003 -04, 2004-05 AND 2005-06 AND HAD ANALYZED THE OPERATING PROFITS/TOTA L COST RATIO OF 11 COMPARABLE COMPANIES. ARITHMETIC MEANING OF OPERAT ING PROFIT MARGINS, EARNED BY THE COMPARABLE COMPANIES WAS 6.38% AND TH E ASSESSEE HAD COMPUTED THE SAID MARGINS AT 16.68%. THE TPO DURIN G THE PROCEEDINGS HAD SHOW CAUSED THE ASSESSEE AS TO WHY THE DATA OF RELEVANT FINANCIAL YEAR 2005-06 OF THE SAID COMPANIES SHOULD NOT ONLY BE USED. IN REPLY THE WORKING FOR OPERATING PROFIT MARGINS RELATABLE TO FINANCIAL YEAR 2005-06 FOR THE COMPARABLE COMPANIES WAS FURNISHED AND IT WAS CLAIMED THAT NO ADJUSTMENT IS WARRANTED. THE TPO HAS ACCEP TED THE CONTENTION OF THE ASSESSEE AND HAS NOT MADE ANY ADJUSTMENT ON ACC OUNT OF INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN FORM NO.3C EB OF AUDIT REPORT. HOWEVER, FROM THE PROFIT & LOSS ACCOUNT, THE TPO NO TED THE ASSESSEE TO HAVE INCURRED EXPENDITURE TOTALING RS.18144.86 LACS ON ACCOUNT OF ROYALTY AND AMP EXPENSES, DETAILS OF WHICH ARE AS U NDER : S.NO. NAME OF EXPENSES AMOUNT (RS.LACS) 1. ADVERTISEMENT EXPENSES 8640.06 2. SELLING & DISTRIBUTION 372.17 3. MARKET RESEARCH 790.14 4. SALES PROMOTION 3676.75 5. SERVICE CHARGES PAID TO SELLING AGENT 11.49 6. DISCOUNT SALES 441.05 7. DEVELOPMENT & SCIENTIFIC RESEARCH 97.41 8. ROYALTY 4115.79 9. TOTAL 18144.86 20 24. THE TPO HAD ACCEPTED THE PLEA OF THE ASSESSEE I N RESPECT OF ROYALTY EXPENSES OF RS.4115.79 LACS AND HAD NOT MADE ANY AD JUSTMENT ON ACCOUNT THEREOF. HOWEVER, IN RESPECT OF AMP EXPENSES AGGRE GATING TO RS.14029.07 LACS, THE TPO NOTED THAT THE SAME WAS A T THE RATIO OF 13.60% OF THE SALES. FOR UNDERTAKING THE BENCH MAR KING ANALYSIS OF AMP EXPENDITURE INCURRED BY THE ASSESSEE, THE TPO O BSERVED THAT THE AVERAGE SELLING AND DISTRIBUTION EXPENSE INCURRED B Y THE FOLLOWING COMPARABLE COMPANIES WAS ONLY 2.02% OF SALES: S.NO. NAME OF THE COMPARABLE COMPANIES INDUSTRIAL SALES SELLING & DISTRIBUTION EXPENSES SELLING & DISTRIBUTION EXPENSES AS % AGE OF SALE 1 KWALITY DAIRY (INDIA) LTD. 95.44 0.21 0.22 2 MILK FOOD LTD. 204.14 3.99 1.95 3 MODERN DAIRIES LTD. 92.16 0.61 0.66 4 RAVALGON SUGAR FARM LTD. 48.59 1.18 2.43 5 MAHAAN FOODS LTD. 52.15 1.67 3.20 6 ANIK INDUSTRIES LTD. 123.35 3.94 3.19 7 MILK SPECIALITIES LTD. 64.09 1.18 1.84 8 HATSUN AGRO PRODUCTS LTD. 544.82 14.75 2.70 AVERAGE 2.02 25. THE TPO HELD THAT AS THE RATIO OF SELLING AND D ISTRIBUTION EXPENSES AS A PERCENTAGE OF SALES AT 13.06% WAS HIGHER THAN 2.02% INCURRED BY THE COMPARABLE COMPANIES, THE ASSESSEE HAVING INCUR RED ROUTINE AND NON- ROUTINE AMP EXPENSES, RESULTED IN CREATION OF MARKE TING INTANGIBLES ON ACCOUNT OF PROMOTION AND DEVELOPMENT OF BRAND, VIZ. , HORLICKS OWNED BY THE ASSOCIATED ENTERPRISE. THE TPO, APPLYING BRI GHT LINE TEST, COMPUTED AN ADJUSTMENT OF RS. 1,19,45,81,713/-, BEI NG THE ALLEGED DIFFERENCE ON ACCOUNT OF DEVELOPMENT AND SALES PROM OTION EXPENSES INCURRED BY THE ASSESSEE, FOR WHICH, ACCORDING TO T HE TPO SUBSIDY OUGHT TO BE RECEIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISE. 26. THE ASSESSEE IS IN APPEAL AGAINST THE AFORESAID ADJUSTMENT MADE BY THE TPO, WHICH WAS UPHELD BY THE DISPUTE RESOLUTIO N PANEL AND WAS 21 APPLIED BY THE ASSESSING OFFICER IN MAKING ADDITION IN THE HANDS OF THE ASSESSEE . THE SAID ISSUE HAS BEEN AGITATED BY THE ASSESSEE VIDE GROUND NOS.2.0 TO 2.19 RAISED IN THE PRESENT APPEAL. THE ISSUE BEFORE US NEEDS TO BE ADJUDICATED IN LINE WITH THE BROAD PROPOSITIO NS RAISED BY THE LEARNED A.R. FOR THE ASSESSEE FOR THE ASSESSEE DURI NG THE COURSE OF HEARING, WHICH IN TURN HAVE BEEN REPLIED BY THE LEA RNED D.R. FOR THE REVENUE. WE PROCEED TO DISPOSE OF THE PRESENT GROU NDS OF APPEAL RAISED BY THE ASSESSEE IN LINE WITH THE PROPOSITION RAISED BEFORE US. 27. THE FIRST PROPOSITION RAISED IN THE CASE IS WHE THER THE TRANSACTION CONSIDERED BY THE TPO IS AN INTERNATIONAL TRANSACTI ON? 28. THE LEARNED A.R. FOR THE ASSESSEE IN ADDITION TO THE PROVISIONS OF SECTION 92B OF THE ACT ALSO REFERRED TO THE DEFINIT ION OF CLAUSE (V) OF SECTION 92F OF THE ACT WHEREIN THE TERM TRANSACTIO N IS DEFINED. IT WAS SUBMITTED BY THE LEARNED A.R. FOR THE ASSESSEE IN I TS WRITTEN SUBMISSIONS IN THIS REGARD AS UNDER : FROM CONJOINT READING OF PROVISIONS OF CLAUSE (V) OF SECTION 92F AND SUB-SECTION (1) OF SECTION 92B O F THE ACT IT CAN BE INFERRED THAT TRANSFER PRICING REGULA TION WOULD BE APPLICABLE TO ANY TRANSACTION, BEING AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, IN TER ALIA, IN THE NATURE OF PURCHASE, SALE OR LEASE OF T ANGIBLE OR INTANGIBLE PROPERTY OR ANY OTHER TRANSACTION HAV ING BEARING ON PROFITS, INCOME, LOSSES OR ASSETS OF SUC H ENTERPRISES. THEREFORE, IN ORDER TO BE CHARACTERIZE D AS AN INTERNATIONAL TRANSACTION, IT WOULD TO BE DEMONST RATED THAT THE SAME ARISES PURSUANT TO AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. 29. THEREAFTER MEANING OF TERM ARRANGEMENT, UNDE RSTANDING OF ACTION IN CONCERT, AS PROVIDED IN THE DICTIONARY/ COURT RULINGS WERE REFERRED BY THE LEANED A.R. FOR THE ASSESSEE. 30. FURTHER CONTENTION OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THE INDIAN COMPANY HAD INCURRED EXPENDITURE ON ADVERTIS EMENT, MARKETING AND PUBLICITY TO CATER TO LOCAL MARKET NEEDS. SUCH AMP EXPENDITURE WAS 22 NEITHER INCURRED AT THE INSTANCE OF OVERSEAS ASSOCI ATED ENTERPRISE, NOR WAS THERE ANY MUTUAL AGREEMENT OR UNDERSTANDING OR ARRANGEMENT AS TO ALLOCATION OR CONTRIBUTION BY THE ASSOCIATED ENTERP RISE TOWARDS REIMBURSEMENT OF ANY PART OF AMP EXPENDITURE INCURR ED BY THE DOMESTIC ENTERPRISE FOR THE PURPOSE OF ITS BUSINESS. IN ABSE NCE OF ANY UNDERSTANDING, ARRANGEMENT, ETC., NO TRANSACTION OR INTERNATIONAL TRANSACTION COULD BE SAID TO BE INVOLVED WITH RESP ECT TO SUCH AMP EXPENDITURE INCURRED BY THE DOMESTIC ENTERPRISE, WH ICH MAY BE COVERED WITHIN THE KEN OF TRANSFER PRICING REGULATIONS. 31. THE LEARNED A.R. FOR THE ASSESSEE FURTHER SUBMI TTED THAT THE PAYMENT FOR ADVERTISEMENT AND SALE PROMOTION WAS MA DE BY THE ASSESSEE TO OTHER INDIAN PARTIES AND THE TWIN REQUIREMENTS U NDER SECTION 92B OF THE ACT WERE NON-EXISTING IN THE PRESENT CASE. IN THE ABSENCE OF ANY UNDERSTANDING BETWEEN THE ASSOCIATED ENTERPRISES, N O INTERNATIONAL TRANSACTION WAS ENTERED INTO BY THE ASSESSEE. AS P ER THE LEARNED A.R. FOR THE ASSESSEE THE ALLEGED BENEFIT FROM THE EXPENDITU RE ON ADVERTISEMENT AND BRAND PROMOTION CAN, AT BEST, BE SAID TO UNILAT ERALLY FLOW FROM THE ACTION OF THE ASSESSEE AND COULD NOT, THEREFORE, BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION SO AS TO INVOKE THE PRO VISIONS OF SECTION 92 OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF PUN E BENCH OF THE TRIBUNAL IN THE CASE OF PATNI COMPUTER SYSTEMS LTD. VS. DCIT (ITA NO.426 & 1131/PN/06), WHEREIN THE TRIBUNAL DELETED SIMILAR ADJUSTMENT MADE BY THE TPO IN RESPECT OF EXPENDITURE INCURRED ON CONSULTANCY CHARGES PAID TO THIRD PARTY ALLEGEDLY ON THE BASIS THE SAME RESULTED IN BENEFIT TO THE FOREIGN ASSOCIATED ENTERPRISE WHO WA S LIABLE TO COMPENSATE THE INDIAN ENTITY. 32. THE LEARNED D.R. FOR THE REVENUE IN HIS WRITTEN SUBMISSIONS POINTED OUT THAT INTERNATIONAL TRANSACTION OF PAYME NT OF ROYALTY OF THE 23 ASSESSEE WAS HELD TO BE A DEEMED INTERNATIONAL TRAN SACTION AS PER SECTION 92B OF THE ACT. IT WAS FURTHER POINTED OUT BY THE LEARNED D.R. FOR THE REVENUE THAT AMP EXPENDITURE IS ITSELF AN INTERNATI ONAL TRANSACTION FOR THE DETAILED REASONS IN PARA 8.2 OF TPOS ORDER AND FURTHER FOR THE REASONS IN PARA 8.6.16 AND 8.6.17 (PAGE NO.41 OF TP OS ORDER). THE ASSESSEE HAD PROVIDED INTRA GROUP SERVICE TO THE AE WHICH REQUIRED REMUNERATION. AS PER THE DEFINITION IN SECTION 92B OF THE ACT, THE REQUIREMENTS ARE TWO FOLD I.E. A) THE TRANSACTION B ETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENT AND B) FURTHER THE SAID TRANSACTION SHALL BE BY WAY OF MUT UAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES. 33. UNDER CHAPTER-X OF THE INCOME TAX ACT SPECIAL P ROVISIONS RELATING TO AVOIDANCE OF TAX ARE PROVIDED. SECTION 92(1) OF THE ACT STIPULATE THAT ANY INCOME ARISING FROM INTERNATIONAL TRANSACTION S HALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. AS PER EX PLANATION UNDER SECTION 92(1) OF THE ACT, ALLOWANCE FOR ANY EXPENSE S OR INTEREST ARISING FROM AN INTERNATIONAL TRANSACTION SHALL ALSO BE DET ERMINED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92A OF THE ACT DEFINES THE TERM ASSOCIATED ENTERPRISE FOR THE PURPOSE OF SECTIONS 92, 92B, 92C, 92D, 92E AND 92F OF THE INCOME TAX ACT. SECTION 92B OF THE ACT DEFINES THE TERM OF INTERNATIONAL TRANSACTIONS FOR THE PURPOS E OF SECTIONS 92, 92C, 92D AND 92E AND THE SAID SECTION READS AS UNDER: MEANING OF INTERNATIONAL TRANSACTION . 92B. (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92 , 92C , 92D AND 92E , INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBL E PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTH ER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNE CTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE O R MORE OF SUCH ENTERPRISES. 24 (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WIT H A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SU B-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATE D ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVAN T TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUC H OTHER PERSON AND THE ASSOCIATED ENTERPRISE. 34. FOR COMPUTING THE ARMS LENGTH PRICE, RESORT IS TO BE MADE TO SECTION 92C OF THE ACT WHICH READS AS UNDER: COMPUTATION OF ARMS LENGTH PRICE . 92C. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERN ATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCT IONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB -SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, I N THE MANNER AS MAY BE PRESCRIBED : [ PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRIC E SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRA NSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED [ FIVE PER CENT OF THE LATTER ] , THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE.] (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN IN TERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE I N ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FU RNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D , THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION IN A CCORDANCE WITH SUB- SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 25 PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSIN G OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ARMS LENGTH PR ICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER. (4) WHERE AN ARMS LENGTH PRICE IS DETERMINED BY THE ASSESSING OFFICER UNDER SUB-SECTION (3), THE ASSESSING OFFICER MAY CO MPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ARMS LENGTH PRICE SO DETERMINED : PROVIDED THAT NO DEDUCTION UNDER SECTION 10A 87 [OR SECTION 10AA ] OR SECTION 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANC ED AFTER COMPUTATION OF INCOME UNDER THIS SUB-SECTION : PROVIDED FURTHER THAT WHERE THE TOTAL INCOME OF AN ASSOCIATED ENTER PRISE IS COMPUTED UNDER THIS SUB-SECTION ON DETERMINATION OF THE ARMS LENGTH PRICE PAID TO ANOTHER ASSOCIATED ENTERPRISE FROM WHICH TAX HAS BEEN DEDUCTED 88 [OR WAS DEDUCTIBLE] UNDER THE PROVISIONS OF CHAPTER XVIIB, THE INCOME O F THE OTHER ASSOCIATED ENTERPRISE SHALL NOT BE RECOMPUTED BY RE ASON OF SUCH DETERMINATION OF ARMS LENGTH PRICE IN THE CASE OF THE FIRST MENTION ED ENTERPRISE. 35. SECTION 92C(1) OF THE ACT SPECIFIES THE METHOD TO BE APPLIED FOR DETERMINING THE ARMS LENGTH PRICE IN RELATION TO I NTERNATIONAL TRANSACTION AND IT IS PROVIDED UNDER SECTION 92C(2) OF THE ACT THAT THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION IS TO BE APPLIED FOR COMPUTING THE ARMS LENGTH PRICE. I T IS FURTHER PROVIDED UNDER SECTION 92C(3) THAT PRIMARILY IT IS THE DUTY OF THE ASSESSING OFFICER TO COMPUTE THE ARMS LENGTH PRICE ON THE BA SIS OF MATERIAL OR INFORMATION OR DOCUMENTS IN HIS POSSESSION FOR WHIC H THE ASSESSING OFFICER IS DUTY BOUND TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ARMS LENGTH PRICE SHOULD NOT B E SO DETERMINED ON THE BASIS OF THE MATERIAL OR INFORMATION OR DOCUMEN TS IN THE POSSESSION OF THE ASSESSING OFFICER. UNDER SUB-SECTION (4) OF SECTION 92C OF THE ACT IT IS PROVIDED THAT WHERE ARMS LENGTH PRICE IS DETERMINED BY THE ASSESSING OFFICER UNDER SUB-SECTION (3) THE ASSESSI NG OFFICER MAY COMPUTE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO SUCH DETERMINATION. IT IS FURTHER PROVIDED THAT NO DEDU CTION UNDER SECTION 10A OR 10AA OR 10B OR UNDER CHAPTER-VIA IS TO BE AL LOWED IN RESPECT OF THE SAID AMOUNT WHICH IS INCLUDED IN THE TOTAL INCO ME OF THE ASSESSEE. HOWEVER, WHERE THE ASSESSING OFFICER CONSIDERS IT N ECESSARY OR 26 EXPEDIENT, HE MAY, WITH THE PREVIOUS APPROVAL OF TH E COMMISSIONER, REFER THE COMPUTATION OF ARMS LENGTH PRICE IN RELA TION TO THE INTERNATIONAL TRANSACTION TO THE TRANSFER PRICING O FFICER, AS PER THE PROVISION OF SECTION 92CA(1) OF THE ACT. SUB-SECTI ON (2) TO 92CA ENTAILS WHERE REFERENCE IS MADE UNDER SUB-SECTION ( 1), THE TPO SHALL SERVE A NOTICE TO THE ASSESSEE REQUIRING HIM TO PRO DUCE EVIDENCE IN SUPPORT OF THE COMPUTATION MADE BY HIM OF ARMS LEN GTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS REFERRED TO IN SU B-SECTION (1) TO SECTION 92CA. SUB-SECTION (2A) TO SECTION 92CA OF THE ACT HAS BEEN INSERTED BY THE FINANCE ACT, 2011 W.E.F. 1.6.2011, UNDER WHI CH IT IS PROVIDED THAT WHERE ANY INTERNATIONAL TRANSACTION OTHER THAN THE ONE REFERRED TO BY THE ASSESSING OFFICER, COMES TO THE NOTICE OF THE TPO, THE PROVISIONS OF CHAPTER SHALL APPLY TO SUCH OTHER INTERNATIONAL TRA NSACTIONS AS TO AN INTERNATIONAL TRANSACTION REFERRED TO HIM UNDER SUB -SECTION (1). THE PROVISIONS OF SECTION 92CA OF THE ACT READS AS UNDE R: REFERENCE TO TRANSFER PRICING OFFICER. 92CA. (1) WHERE ANY PERSON, BEING THE ASSESSEE, HAS ENTER ED INTO AN INTERNATIONAL TRANSACTION IN ANY PREVIOUS YEAR, AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, HE MAY, WITH TH E PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE COMPUTATION OF THE ARMS LE NGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION UNDER SECTION 92C TO THE TRANSFER PRICING OFFICER. (2) WHERE A REFERENCE IS MADE UNDER SUB-SECTION (1) , THE TRANSFER PRICING OFFICER SHALL SERVE A NOTICE ON THE ASSESSEE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED ON A DATE TO BE SPECIFIED THEREIN, ANY EVI DENCE ON WHICH THE ASSESSEE MAY RELY IN SUPPORT OF THE COMPUTATION MADE BY HIM OF THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION REFERRED TO IN SUB-SECTION (1). [ (2A) WHERE ANY OTHER INTERNATIONAL TRANSACTION [OTHER TH AN AN INTERNATIONAL TRANSACTION REFERRED UNDER SUB-SECTION (1)], COMES TO THE NOTICE OF THE TRANSFER PRICING OFFICER DURING THE COURSE OF THE PROCEEDING S BEFORE HIM, THE PROVISIONS OF THIS CHAPTER SHALL APPLY AS IF SUCH OTHER INTERNATI ONAL TRANSACTION IS AN INTERNATIONAL TRANSACTION REFERRED TO HIM UNDER SUB-SECTION (1) . ] (3) ON THE DATE SPECIFIED IN THE NOTICE UNDER SUB-S ECTION (2), OR AS SOON THEREAFTER AS MAY BE, AFTER HEARING SUCH EVIDENCE AS THE ASSES SEE MAY PRODUCE, INCLUDING ANY INFORMATION OR DOCUMENTS REFERRED TO IN SUB-SECTION (3) OF SECTION 92D AND AFTER CONSIDERING SUCH EVIDENCE AS THE TRANSFER PRICING O FFICER MAY REQUIRE ON ANY SPECIFIED POINTS AND AFTER TAKING INTO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, THE TRANSFER PRICING OFFICER SHALL, BY OR DER IN WRITING, DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C AND SEND A COPY OF HIS ORDER TO THE ASSESSING OFFI CER AND TO THE ASSESSEE. 27 [(3A) WHERE A REFERENCE WAS MADE UNDER SUB-SECTION (1) BEFORE THE 1ST DAY OF JUNE, 2007 BUT THE ORDER UNDER SUB-SECTION (3) HAS NOT BEEN MADE BY THE TRANSFER PRICING OFFICER BEFORE THE SAID DATE, OR A REFERENC E UNDER SUB-SECTION (1) IS MADE ON OR AFTER THE 1ST DAY OF JUNE, 2007, AN ORDER UND ER SUB-SECTION (3) MAY BE MADE AT ANY TIME BEFORE SIXTY DAYS PRIOR TO THE DATE ON WHICH THE PERIOD OF LIMITATION REFERRED TO IN SECTION 153 , OR AS THE CASE MAY BE, IN SECTION 153B FOR MAKING THE ORDER OF ASSESSMENT OR REASSESSMENT OR RECOMPUTATIO N OR FRESH ASSESSMENT, AS THE CASE MAY BE, EXPIRES.] [(4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3) , THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C IN CONFORMITY WITH THE ARMS LENGTH PRICE AS SO DE TERMINED BY THE TRANSFER PRICING OFFICER.] (5) WITH A VIEW TO RECTIFYING ANY MISTAKE APPARENT FROM THE RECORD, THE TRANSFER PRICING OFFICER MAY AMEND ANY ORDER PASSED BY HIM U NDER SUB-SECTION (3), AND THE PROVISIONS OF SECTION 154 SHALL, SO FAR AS MAY BE, APPLY ACCORDINGLY. (6) WHERE ANY AMENDMENT IS MADE BY THE TRANSFER PRI CING OFFICER UNDER SUB- SECTION (5), HE SHALL SEND A COPY OF HIS ORDER TO T HE ASSESSING OFFICER WHO SHALL THEREAFTER PROCEED TO AMEND THE ORDER OF ASSESSMENT IN CONFORMITY WITH SUCH ORDER OF THE TRANSFER PRICING OFFICER. (7) THE TRANSFER PRICING OFFICER MAY, FOR THE PURPO SES OF DETERMINING THE ARMS LENGTH PRICE UNDER THIS SECTION, EXERCISE ALL OR AN Y OF THE POWERS SPECIFIED IN CLAUSES ( A ) TO ( D ) OF SUB-SECTION (1) OF SECTION 131 OR SUB-SECTION (6) OF SECTION 133 [ OR SECTION 133A ] . EXPLANATION. FOR THE PURPOSES OF THIS SECTION, TRANSFER PRICING OFFICER MEANS A JOINT COMMISSIONER OR DEPUTY COMMISSIONER OR ASSIST ANT COMMISSIONER AUTHORISED BY THE BOARD TO PERFORM ALL OR ANY OF TH E FUNCTIONS OF AN ASSESSING OFFICER SPECIFIED IN SECTIONS 92C AND 92D IN RESPECT OF ANY PERSON OR CLASS OF PERSONS.] 36. FROM THE COMBINED READING OF PROVISIONS OF CHAP TER-X OF THE ACT IT IS CLEAR THAT IT IS THE DUTY OF THE ASSESSING OF FICER TO COMPUTE ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION HA VING REGARD TO THE ARMS LENGTH PRICE. THE ASSESSING OFFICER MAY DETE RMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION ON ITS OWN OR WHERE THE ASSESSING OFFICER CONSIDERS IT NECESSARY, SUBJECT T O THE APPROVAL OF THE COMMISSIONER, HE MAY REFER THE SAID COMPUTATION OF ARMS LENGTH PRICE IN RELATION OF INTERNATIONAL TRANSACTION UNDER SECT ION 92CA OF THE ACT TO THE TPO. IN VIEW OF THE RELEVANT PROVISIONS OF THE ACT THE ASSESSING OFFICER IS TO DETERMINE WHETHER THE TRANSACTION INV OLVED IS AN INTERNATIONAL TRANSACTION AND HE MAY EITHER DETERMI NE THE ARMS LENGTH PRICE OF THE SAID TRANSACTION ON ITS OWN OR WHERE N ECESSARY, SUBJECT TO APPROVAL OF THE COMMISSIONER, REFER THE SAME TO THE TPO. 28 37. WITHOUT GOING INTO THE ISSUE WHETHER THE TRANSA CTION INVOLVED IS AN INTERNATIONAL TRANSACTION, WE FIRST REFER TO THE SE COND PROPOSITION RAISED BY THE ASSESSEE. THE SECOND PROPOSITION RAISED BY THE ASSESSEE IS THAT WHETHER INFERENCE BY TPO WAS PERMISSIBLE WITHOUT RE FERENCE FROM THE AO? IN THE FACTS OF THE PRESENT CASE THE ASSESSING OFFICER HAD MADE A REFERENCE UNDER SECTION 92CA(1) OF THE INCOME TAX A CT IN RESPECT OF THE TRANSACTIONS REPORTED IN AUDIT REPORT IN FORM NO.3C EB, WHICH ARE REFERRED TO BY US IN PARAS 21 AND 22 HEREINABOVE. THE TPO HAD ACCEPTED THE SAID TRANSACTIONS AND HELD THAT NO ADJUSTMENT O N ACCOUNT OF ARMS LENGTH PRICE WAS TO BE MADE IN RESPECT OF THE AFORE SAID TRANSACTIONS. HOWEVER, WHILE PERUSING THE DETAILS FURNISHED VIS- -VIS SUCH INTERNATIONAL TRANSACTIONS AND OTHER ALLIED INFORMA TION AVAILABLE BEFORE HIM, THE TPO HAD RAISED THE ISSUE OF THE EXPENDITUR E INCURRED ON PAYMENT OF ROYALTY AND AMP EXPENSES, TO BE INTERNAT IONAL TRANSACTIONS. THOUGH THE PAYMENT OF ROYALTY WAS HELD TO BE DEEMED INTERNATIONAL TRANSACTIONS BY THE TPO, BUT NO ADJUSTMENT WAS PROP OSED ON ACCOUNT OF THE SAID PAYMENT. HOWEVER, IN RESPECT OF THE AMP E XPENDITURE INCURRED BY THE ASSESSEE AGGREGATING TO RS.14029.07 LACS, TH E TPO HAD HELD THAT SUCH EXPENDITURE HAD RESULTED IN CREATION OF ADVERT ISING INTANGIBLES IN FAVOUR OF THE AE AND CONSEQUENTLY THE SAID EXPENDIT URE IS TO BE COMPUTED ON ARMS LENGTH PRICE. 38 THE AMBIT OF SECTION 92CA OF THE ACT FLOWS WHERE THE ASSESSING OFFICER, WITH THE PREVIOUS APPROVAL OF THE COMMISSI ONER, REFERS, THE COMPUTATION OF ARMS LENGTH PRICE, IN RELATION TO T HE INTERNATIONAL TRANSACTIONS, TO THE TPO. THE PROVISION OF SUB-SEC TION (1) OF SECTION 92CA OF THE ACT PROVIDES THAT REFERENCE BY THE ASSE SSING OFFICER, WHICH IN TURN IS SUBJECT TO PREVIOUS APPROVAL OF THE COMM ISSIONER, IS IN RELATION TO AN INTERNATIONAL TRANSACTION AND WHERE THERE ARE SEVERAL 29 INTERNATIONAL TRANSACTIONS VIS--VIS SAME ENTITY, T HE DUTY OF THE ASSESSING OFFICER IS TO REFER EACH SUCH INTERNATION AL TRANSACTIONS TO THE TPO. IN OTHER WORDS, THE REFERENCE BY THE ASSESSIN G OFFICER UNDER SECTION 92CA(1) OF THE ACT IS TRANSACTION BASED AND NOT ENTITY BASED. THERE MAY BE SEVERAL INTERNATIONAL TRANSACTIONS WIT H THE SAME ENTITY, BUT THE REFERENCE MADE BY THE ASSESSING OFFICER IS EACH TRANSACTION SPECIFIC I.E. ONLY THE INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN REFERRED TO BY THE ASSESSING OFFICER AFTER TAKING THE APPROVAL OF THE COMMISSIONER, CAN BE LOOKED INTO BY THE TPO. IN THE ABSENCE OF THE R EFERENCE BEING MADE BY THE ASSESSING OFFICER TO THE TPO, THE SUO MOTO A CTION TAKEN BY THE TPO IN WORKING OUT THE ARMS LENGTH PRICE OF A PART ICULAR INTERNATIONAL TRANSACTION, NOT REFERRED TO HIM BY THE ASSESSING O FFICER, IS NOT WARRANTED UNDER THE PROVISIONS OF SECTION 92CA OF T HE ACT. 39.THE AFORESAID POSITION IN LAW HAS ALSO BEEN CLAR IFIED BY THE CBDT VIDE INSTRUCTION NO. 3 OF 2003, DATED 20-05-2003, W HICH READ AS UNDER: SUBJECT : COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION HAVING REGARD TO ARMS LENGTH PRICE SECTION 92 OF THE INCOME TAX A CT REFERENCE TO TRANSFER PRICING OFFICER AND HIS ROLE REGARDING. THE PROVISIONS RELATING TO TRANSFER PRICE CONTAINED IN SECTIONS 92 TO 92F OF THE INCOME TAX ACT HAVE COME INTO FORCE WITH EFFECT FROM ASSES SMENT YEAR 2002-03. IN TERMS OF THE PROVISIONS, INCOME FROM AN INTERNATIONAL TRANSACTIO N IS TO BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE BETWEEN THE ASSOCIATED ENTERP RISES. FURTHER, IN TERMS OF SECTION 92CA, A TRANSFER PRICING OFFICER, ON A REFERENCE RE CEIVED FROM THE ASSESSING OFFICER, IS REQUIRED TO DETERMINE ARMS LENGTH PRICE OF AN INTE RNATIONAL TRANSACTION BY AN ORDER AND THE ASSESSING OFFICER IS REQUIRED TO COMPUTE T HE INCOME HAVING REGARD TO THE PRICE SO DETERMINED BY THE TPO . THE NOTIFICATION REGARDING JURISDICTION OF TPOS AN D THEIR CONTROLLING OFFICERS HAVE BEEN ISSUED BY THE CENTRA L BOARD OF DIRECT TAXES AND THE COPIES THEREOF ARE ENCLOSED FOR READY REFERENCE AS ANNEXURE II. IN ORDER TO MAINTAIN UNIFORMITY OF PROCEDURE AND TO ENSURE THAT WORK IN THIS IMPORTANT AREA PROCEEDS SMOOTHLY AND EFFECTIVELY, THE FOLLOWING GUIDELINES ARE HEREBY ISSUES: (I) REFERENCE TO TRANSFER PRICING OFFICER (TPO): THE POWER TO DETERMINE ARMS LENGTH PRICE IN AN INT ERNATIONAL TRANSACTION IS CONTAINED IN SUB-SECTION (3) OF SECTION 92C. HOWEVER, SECTION 92CA PROVIDES THAT WHERE THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDI ENT SO TO DO, HE MAY REFER THE COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION TO THE TPO. SUB-SECTION (3) OF SECTION 92CA PROVIDES THAT THE TPO AFTER TAKING INTO ACCOUNT THE MATERIAL AVAILABLE WITH HIM SHALL, BY AN ORDER IN WRITING, DETERMINE THE ARMS LENGTH PRICE IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C. SUB-SECTION (4) OF SECTION 92CA PROVIDES THAT ON RECEIPT OF THE ORDER OF THE T PO, THE ASSESSING OFFICER SHALL 30 PROCEED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ARMS LENGTH PRICE DETERMINED BY THE TPO. THUS, WHEREAS THE DETE RMINATION OF THE ARMS LENGTH PRICE, WHEREVER REFERENCE IS MADE TO HIM, IS REQUIR ED TO BE DONE BY THE TPO UNDER SUB- SECTION (3) OF SECTION 92CA READ WITH SUB-SECTION ( 3) OF SECTION 92C, THE COMPUTATION OF TOTAL INCOME HAVING REGARD TO THE ARMS LENGTH P RICE SO DETERMINED BY THE TPO IS REQUIRED TO BE DONE BY THE ASSESSING OFFICER UNDER SUB-SECTION (4) OF SECTION 92C READ WITH SUB-SECTION (4) OF SECTION 92CA. IN ORDER TO MAKE A REFERENCE TO THE TPO, THE ASSESS ING OFFICER HAS TO SATISFY HIMSELF THAT THE TAXPAYER HAS ENTERED INTO AN INTERNATIONAL TRANSACTION WITH AN ASSOCIATED ENTERPRISE. ONE OF THE SOURCES FROM WHICH THE FACTU AL INFORMATION REGARDING INTERNATIONAL TRANSACTION CAN BE FATHERED IS FORM N O. 2CEB FILED WITH THE RETURN WHICH IS IN THE NATURE OF AN ACCOUNTANTS REPORT CONTAININ G BASIC DETAILS OF AN INTERNATIONAL TRANSACTION ENTERED INTO BY TRANSACTION IS ENTERED INTO, THE NATURE OF DOCUMENTS MAINTAINED AND THE METHOD FOLLOWED. THUS, THE PRIMA RY DETAILS REGARDING SUCH INTERNATIONAL TRANSACTIONS WOULD NORMALLY BE AVAILA BLE IN THE ACCOUNTANTS REPORT. THE ASSESSING OFFICER CAN ARRIVE A PRIMA FACIE BELIEF O N THE BASIS OF THESE DETAILS WHETHER A REFERENCE IS CONSIDERED NECESSARY. NO DETAILED ENQU IRIES ARE NEEDED AT THIS STAGE AND THE ASSESSING OFFICER SHOULD NOT EMBARK UPON SCRUTI NISHING THE CORRECTNESS OR OTHERWISE OF THE PRICE OF THE INTERNATIONAL TRANSAC TION AT THIS STAGE. IN THE INITIAL YEARS OF IMPLEMENTATION OF THESE PROVISIONS AND PENDING D EVELOPMENT OF ADEQUATE DATE BASE, IT WOULD BE APPROPRIATE IF A SMALL NUMBER OF CASES ARE SELECTED FOR SCRUTINY OF TRANSFER PRICE AND THESE ARE DEALT WITH EFFECTIVELY. THE CEN TRAL BOARD OF DIRECT TAXES, THEREFORE, HAVE DECIDED THAT WHEREVER THE AGGREGATE VALUE OF I NTERNATIONAL TRANSACTION EXCEED RS. 5 CRORES, THE CASE SHOULD BE PRICKED UP FOR SCRUTIN Y AND REFERENCE UNDER SECTION 92CA BE MADE TO THE TPO. IF THERE ARE MORE THAN ONE TRAN SACTION WITH AN ASSOCIATED ENTERPRISE OR THERE ARE TRANSACTIONS WITH MORE THAN ONE ASSOCIATED ENTERPRISE THE AGGREGATE VALUE OF WHICH EXCEEDS RS. 5 CRORES. THE TRANSACTIONS SHOULD BE REFERRED TO THE TPO. BEFORE MAKING REFERENCE TO THE TPO, THE AS SESSING OFFICER HAS TO SEEK APPROVAL OF THE COMMISSIONER/DIRECTOR AS CONTEMPLAT ED UNDER THE ACT. UNDER THE PROVISIONS OF SECTION 92CA REFERENCE IS IN RELATION TO THE INTERNATIONAL TRANSACTION. HENCE ALL TRANSACTIONS HAVE TO BE EXPLICITLY MENTIO NED IN THE LETTER OF REFERENCE. SINCE THE CASE WILL BE SELECTED FOR SCRUTINY BEFORE MAKIN G REFERENCE TO THE TPO, THE ASSESSING OFFICER MAY PROCEED TO EXAMINE OTHER ASPECT OF THE CASE DURING PENDENCY OF ASSESSMENT PROCEEDINGS BUT AWAIT THE REPORT OF THE TPO ON THE VALUE OF INTERNATIONAL TRANSACTION BEFORE MAKING FINAL ASSESSMENT. THE THRESHOLD LIMIT OF RS 5 CRORES WILL BE REVIEWED DEPENDING UPON THE WORKLOAD OF THE TPOS. THE WORK RELATING TO SELECTION OF CASES FOR SCRUTIN Y AND REFERENCE TO TPO ON THE ABOVE BASIS IN RESPECT OF PENDING RETURNS FILED FOR THE A SSESSMENT YEAR 2002-2003 SHOULD BE COMPLETED BY JUNE 30, 2003. (II) ROLE OF TRANSFER PRICING OFFICER: THE ROLE OF THE TPO BEGINS AFTER A REFERENCE IS REC EIVED FROM THE ASSESSING OFFICER. IN TERMS OF SECTION 92CA THIS ROLE IS LIMITED TO THE D ETERMINATION OF ARMSS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION(S) REFERR ED TO HIM BY THE ASSESSING OFFICER. IF DURING THE COURSE OF PROCEEDINGS BEFORE HIM IT IS F OUND THAT THERE ARE CERTAIN OTHER TRANSACTIONS WHICH HAVE NOT BEEN REFERRED TO HIM BY THE ASSESSING OFFICER, HE WILL HAVE TO TAKE UP THE MATTER WITH THE ASSESSING OFFICER SO THAT A FRESH REFERENCE IS RECEIVED WITH REGARD TO SUCH TRANSACTIONS. IT MAY BE NOTED T HAT THE REFERENCE TO THE TPO IS TRANSACTION AND ENTERPRISE SPECIFIC. THE TRANSFER PRICE HAS TO BE DETERMINED BY THE TPO IN TERMS OF SECTION 92C. THE PRICE HAS TO BE DETERMINED BY ANY ONE OF THE METHOD STIPU LATED IN SUBSECTION (1) OF SECTION (2) 31 THEREOF. THERE MAY BE OCCASI9ONS WHERE APPLICATION OF THE MOST APPROPRIATE METHOD PROVIDES RESULTS WHICH ARE DEFERENT BUT EQUALLY REL IABLE. IN ALL SUCH CASES, FURTHER SCRUTINY MAY BE NECESSARY TO EVALUATE THE APPROPRIA TENESS OF THE METHOD, THE CORRECTNESS OF THE DATA, WEIGHT GIVEN TO VARIOUS FA CTORS AND SO ON. THE SELECTION OF THE MOST APPROPRIATE METHOD WILL DEPEND UPON THE FACTS OF THE CASE AND THE FACTORS MENTIONED IN RULES CONTAINED IN RULE 10C. THE TPO A FTER TAKING INTO ACCOUNT ALL RELEVANT FACTS AND DATA AVAILABLE TO HIM SHALL DETE RMINE ARMS LENGTH PRICE AND PASS A SPEAKING ORDER AFTER OBTAINING THE APPROVAL OF THE DIT(TP). THE ORDER SHOULD CONTAIN DETAILS OF THE DATA USED, REASONS FOR ARRIVING AT A CERTAIN PRICE AND THE APPLICABILITY OF METHODS. IT MAY BE EMPHASIZED THAT THE APPLICATION OF METHOD INCLUDING THE APPLICATION OF THE MOST APPROPRIATE METHOD, THE DATA USED, FACT ORS GOVERNING THE APPLICABILITY OF RESPECTIVE METHODS, COMPUTATION OF PRICE UNDER A GI VEN METHOD WILL ALL BE SUBJECTED TO JUDICIAL SCRUTINY. IT IS, THEREFORE, NECESSARY THAT THE ORDER THAT OF THE TPO CONTAINS ADEQUATE REASONS ON ALL THESE COUNTS. COPIES OF THE DOCUMENTS OR THE RELEVANT DATA USED IN ARRIVING AT THE ARMS LENGTH PRICE SHOULD BE MAD E AVAILABLE TO THE ASSESSING OFFICER FOR HIS RECORDS AND USE AT SUBSEQUENT STAGES OF APP ELLATE OR PANEL OR PROCEEDINGS. 40. THE LEARNED A.R. FOR THE ASSESSEE IN THIS REGAR D HAD PLACED RELIANCE ON THE UNDERMENTIONED CASE LAWS: 1) AMADEUS INDIA PVT. LTD. VS. ACIT, ITA NO.5203/DEL/10 2) 3I INFOTECH LIMITED VS. DCIT, 136 TTJ 641 (MUM) 3. DIAGEO INDIA PRIVATE LIMITED VS. DCIT, ITA NO.8602/MUM/2010 (47 SOT 252 (DEL) 41. THE TRIBUNAL IN AMADEUS INDIA PVT. LTD. (SUPRA) HAD HELD AS UNDER: 10. ON BARE PERUSAL OF SUB-SECTION(1) OF SECTION 9 2CA IT REVEALS CERTAIN CONDITIONS I.E. THE ASSESSEE SHOULD HAVE ENTERED INTO AN INTERNATIONAL TRANSACTION IN ANY PREVIOUS YEAR. THE ASSESSING OFFICER MAY CONSIDERED IT NECESSARY AND EXPEDIENT TO VERIFY THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S. THE ASSESSING OFFICER WOULD TAKEN PREVIOUS APPROVAL FROM THE COMMISSIONER FOR REFERRING THE COMPUTATION OF THE ARMS LENGTH PRICE IN RELATION T O THE SAID INTERNATIONAL TRANSACTION. THE EXPRESSION SAID INTERNATIONAL TRANSACTION EMPLOYED AT THE END OF THE SUB-SECTION WOULD INDICATE THAT OPERATIV E FORCE OF THIS EXPRESSION RELATED TO THAT INTERNATIO NAL TRANSACTION WHICH HAS BEEN CONSIDERED BY THE ASSESSING OFFICER FOR COMPUTATION OF THE ARMS LENGTH PRICE AND FOR WHICH HE TOOK APPROVAL FROM THE COMMISSIONER. THE ROLE OF THE TPO HAS BEEN RESTRICTED TO THAT TRANSACTION WHICH HAS BEEN REFERRED TO HIM BY THE ASSESSING OFFICER FOR COMPUTATION OF THE ARMS LENGTH PRICE. THE PLAIN READING OF THIS SECTION NOWHERE REVEALS THAT LD. TPO CAN TAKE ANY TRANSACTION SUO MOTO FOR VERIFICATION AND THEN SUGGESTED NECESSARY ADJUSTMENT. ON A PLAIN READING OF SUB SECTION (1) ACCORDING TO ITS LANGUAGE THIS MEANING ALONE IS 32 DISCERNABLE. APART FROM THAT, WE FIND SUPPORT FROM THE CBDT INSTRUCTIONS VIDE INSTRUMENT NO.2/2003 WHEREIN ROLE OF TPO HAS BEEN EXPLAINED. THESE INSTRUCTIONS HAVE BEEN PLACED ON RECORD BY THE LD. COUNSEL OF THE ASSESSEE AT PAGE NO.331 OF THE PB. THE RELEVANT PART OF THE INSTRUCTIONS READ AS UNDER :- ROLE OF TRANSFER PRICING OFFICER : THE ROLE OF THE TPO BEGINS AFTER A REFERENCE IS RECEIVED FROM THE ASSESSING OFFICER. IN TERMS OF SECTION 92CA THIS ROLE IS LIMITED TO THE DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION(S) REFERRED TO HIM BY THE ASSESSING OFFICER. IF DURING THE COURSE OF PROCEEDINGS BEFORE HIM IT IS FOUND THAT THERE ARE CERTAIN OTHER TRANSACTIONS WHICH HAVE NOT BEEN REFERRED TO HIM BY THE ASSESSING OFFICER, HE WILL HAVE TO TAKE UP THE MATTER WITH THE ASSESSING OFFICER SO THAT A FRESH REFERENCE IS RECEIVED WITH REGARD TO SUCH TRANSACTIONS. IT MAY BE NOTED THAT THE REFERENCE TO THE TPO IS TRANSACTION AND ENTERPRISE SPECIFIC 12. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT AS PER SECTION 92CA(1), THE TPO CAN SUGGEST ADJUSTMENT ON THE INTERNATIONAL TRANSACTION ENTERED INTO BY AN ASSESSEE WITH ITS ASSOCIATE ENTERPRISES WHICH WERE SENT TO HIM FOR COMPUTATION OF THE ARMS LENGTH PRICE BY THE ASSESSING OFFICER. SUO MOTO, H E CANNOT TAKE COGNIZANCE OF ANY INTERNATIONAL TRANSACTION FOR SUGGESTING ADJUSTMENT IN ARMS LENGTH PRICE. 42. THE MUMBAI BENCH OF THE TRIBUNAL IN DIAGEO INDI A PRIVATE LIMITED (SUPRA), IN TURN RELYING ON THE RATIO LAID DOWN BY COORDINATE BENCHE OF THE TRIBUNAL IN 3I INFOTECH LIMITED (SUPRA) VIDE PA RAS 23 AND 24 HELD AS UNDER : 23. AS FAR AS THIS ADJUSTMENT IS CONCERNED, IT IS AN U NDISPUTED POSITION THAT THE ASSESSING OFFICER HAD NOT MADE ANY REFERENCE TO THE TRANSFER PRICING OFFICER FOR ASCERTAINING ALP IN RESPECT OF ADVERTIS ING, MARKETING AND PROMOTION EXPENSES ALLEGED TO HAVE BEEN INCURRED FO R BRAND STRENGTHENING OF THE BRANDS OWNED BY THE AE. THE QUESTION WHETHER TPO CAN MAKE ADJUSTMENTS IN SUCH A SITUATION IS SQUARELY COVERED BY A DECISION OF THE COORDINATE BENCH IN THE CASE OF 3I INFOTECH LTD. V. DY. CIT [2010] 136 TTJ 641 /[2011] 129 ITD 422 (MUM.) WHEREIN COORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 38. UNDER THE PROVISIONS OF SECTION 92E, AN ASSE SSEE WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION DURING A PREVIOUS YEAR HAS TO OBTAIN A REPORT FROM AN ACCOUNTANT AND FURNISH S UCH REPORT IN THE PRESCRIBED FORM, I.E., FORM NO. 3CEB. SECTION 92C(3 ) PROVIDES AS FOLLOWS: 33 '(3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF M ATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT (A)THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TR ANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B)ANY INFORMATION AND DOCUMENT RELATING TO AN INTE RNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE I N ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C)THE INFORMATION OR DATA USED IN COMPUTATION OF T HE ALP IS NOT RELIABLE OR CORRECT; OR (D)THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE S PECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FU RNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ALP IN RELATION TO THE SAID INTERNATIONAL TRANSACTION IN ACCORDANCE WITH S UB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOC UMENT AVAILABLE WITH HIM : PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSIN G OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ALP SHOULD N OT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER.' SECTION 92CA(1) TO (3) EMPOWERS THE ASSESSING OFFIC ER TO MAKE A REFERENCE TO THE TPO AND IT READS AS FOLLOWS: '92CA. REFERENCE TO TPO.(1) WHERE ANY PERSON, BEIN G THE ASSESSEE, HAS ENTERED INTO AN INTERNATIONAL TRANSACTION IN ANY PR EVIOUS YEAR, AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIE NT SO TO DO, HE MAY, WITH THE PREVIOUS APPROVAL OF THE CIT, REFER THE COMPUTA TION OF THE ALP IN RELATION TO THE SAID INTERNATIONAL TRANSACTION UNDE R SECTION 92C TO THE TPO. (2) WHERE A REFERENCE IS MADE UNDER SUB-SECTION (1) , THE TPO SHALL SERVE A NOTICE ON THE ASSESSEE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED ON A DATE TO BE SPECIFIED THEREIN, ANY EVIDENCE ON WHI CH THE ASSESSEE MAY RELY IN SUPPORT OF THE COMPUTATION MADE BY HIM OF THE AL P IN RELATION TO THE INTERNATIONAL TRANSACTION REFERRED TO IN SUB-SECTIO N (1). (3) ON THE DATE SPECIFIED IN THE NOTICE UNDER SUB-S ECTION (2), OR AS SOON THEREAFTER AS MAY BE, AFTER HEARING SUCH EVIDENCE A S THE ASSESSEE MAY PRODUCE, INCLUDING ANY INFORMATION OR DOCUMENTS REF ERRED TO IN SUB-SECTION (3) OF SECTION 92D AND AFTER CONSIDERING SUCH EVIDE NCE AS THE TPO MAY REQUIRE ON ANY SPECIFIED POINTS AND AFTER TAKING IN TO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, THE TPO SHALL, BY ORDER IN WRITING, DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C AND SEND A COPY OF HIS ORDER TO THE ASSESSING OFFICER AND TO THE ASSESSEE.' IN THE PRESENT CASE, THE ASSESSING OFFICER REFERRED TO THE TPO FOR DETERMINATION OF ALP THE TRANSACTIONS SET OUT IN FO RM NO. 3CEB BY HIS LETTER DATED 29-9-2003. THE DETAILS OF THESE TRANSA CTIONS HAVE ALREADY BEEN SET OUT ABOVE IN THE EARLIER PARAS. THE TRANSACTION BY WHICH THE ASSESSEE DEPUTED THREE OF ITS EMPLOYEES TO ICICI INFOTECH, U SA, WAS NOT CONSIDERED AS AN INTERNATIONAL TRANSACTION TO BE SET OUT IN FO RM NO. 3CEB BY THE ASSESSEE. THE ASSESSING OFFICER THEREFORE NEVER REF ERRED THE COMPUTATION OF ALP TO THE TPO THE TRANSACTION OF DEPUTATION OF THR EE OF ITS EMPLOYEES BY THE ASSESSEE TO ICICI INFOTECH, USA. THE JURISDICTI ON OF THE TPO IS THEREFORE RESTRICTED TO THE TRANSACTIONS REFERRED TO HIM BY T HE ASSESSING OFFICER UNDER 34 SECTION 92CA(1). THE TPO THEREFORE COULD NOT UNDER SECTION 92CA(3) DETERMINE THE ALP IN RELATION TO AN INTERNATIONAL T RANSACTION NOT REFERRED TO HIM BY THE ASSESSING OFFICER UNDER SECTION 92CA(1). IN THIS REGARD INSTRUCTION NO. 3 OF 2003, DATED 20-5-2003 ISSUED B Y THE CBDT REGARDING COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIO N HAVING REGARD TO ALP, IS VERY CLEAR. IN THE SAID INSTRUCTIONS, THE C BDT EXPLAINING THE ROLE OF TPO HAS INSTRUCTED THAT IN TERMS OF SECTION 92CA OF THE ACT, THE TPO'S ROLE IS LIMITED TO THE DETERMINATION OF ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS REFERRED TO HIM BY THE ASSESSING OFFIC ER AND IF DURING THE COURSE OF PROCEEDINGS BEFORE HIM IT IS FOUND THAT T HERE ARE CERTAIN OTHER TRANSACTIONS WHICH HAVE NOT BEEN REFERRED TO HIM BY THE ASSESSING OFFICER, HE WILL HAVE TO TAKE UP THE MATTER WITH THE ASSESSI NG OFFICER SO THAT A FRESH REFERENCE IS RECEIVED WITH REGARD TO SUCH TRANSACTI ON. THE BOARD HAS FURTHER OPINED THAT REFERENCE TO THE TPO IS TRANSACTION SPE CIFIC AND NOT ENTERPRISE SPECIFIC. IN THE PRESENT CASE, THE DETERMINATION OF ALP IN RESPECT OF THE TRANSACTION BY WHICH THE ASSESSEE DEPUTED THREE OF ITS EMPLOYEES TO ICICI INFOTECH, USA, BY THE TPO IS THEREFORE NON EST TO T HAT EXTENT AND CANNOT FORM THE BASIS FOR MAKING AN ADDITION TO THE TOTAL INCOME. THE ASSESSING OFFICER THEREFORE COULD NOT HAVE MADE THE IMPUGNED ADDITION ON THE BASIS OF THE ORDER OF THE TPO. SINCE THE IMPUGNED ADDITION H AS BEEN MADE BY THE ASSESSING OFFICER ONLY BY PLACING RELIANCE ON THE R EPORT OF THE TPO, THE ADDITION CANNOT BE SUSTAINED. 24. WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEWS SO E XPRESSED BY THE COORDINATE BENCH. IT IS ONLY ELEMENTARY THAT AS THE REFERENCE TO THE TPO IS TRANSACTION SPECIFIC AND NOT ENTERPRISE SPECIFIC, T HE TRANSFER PRICING OFFICER HAS NO POWERS TO GO INTO A MATTER WHICH HAS NOT BEE N REFERRED TO HIM BY THE ASSESSING OFFICER, AND EVEN THE INSTRUCTIONS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES, WHICH ARE BINDING ON ALL FIELD AUTHOR ITIES, MAKE THAT POSITION VERY CLEAR AND UNAMBIGUOUS. TO THAT EXTENT, TPO'S O RDER IS TO BE TREATED AS NON EST, AND ANY ALP ADJUSTMENTS MADE ON THE BASIS OF SUCH A TPO ORDER CANNOT BE LEGALLY SUSTAINED. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ADDITION OF RS. 31.54 CRORES IN RESPECT OF, WHAT THE AUTHORITIES BELOW HAVE TERMED AS, BUILDING BRAND OF THE AE. HOWEVER, AS WE HAVE DELETED THE IMPUGNED ADDITION ON THIS SHORT GR OUND OF JURISDICTION, WE SEE NO NEED TO DEAL WITH THE MATTER ON MERITS. 43. WE FURTHER FIND THAT THE HON'BLE DELHI HIGH COU RT IN ITA 938/2011 IN CIT VS. AMADEUS INDIA PVT. LTD., VIDE JUDGMENT D ELIVERED ON 28.11.2011 HAD DISMISSED THE APPEAL OF THE REVENUE UPHOLDING THE ORDER OF TRIBUNAL, HOLDING AS UNDER: 17. A PLAIN READING OF SECTION 92CA MAKES IT CLEAR THA T THE ASSESSING OFFICER, IF HE CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, MAY, WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE COMPUTATION OF THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION UNDER SECTION 92C TO THE TRANSFER PRICING OFFICER. AT THIS JUNCTURE, WE MAY REITERATE THAT IT IS PRIMARIL Y THE DUTY OF THE ASSESSING OFFICER TO COMPUTE ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO THE ARMS LENGTH PRICE. HE MAY DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACT ION HIMSELF OR, IF HE FEELS THAT IT IS NECESSARY OR EXP EDIENT SO TO DO, HE MAY SEEK THE APPROVAL OF THE COMMISSIO NER 35 AND, THEREAFTER, REFER THE COMPUTATION OF THE ARMS LENGTH PRICE IN RESPECT OF AN INTERNATIONAL TRANSAC TION TO THE TRANSFER PRICING OFFICER. THIS MAKES IT CLE AR THAT IT IS THE ASSESSING OFFICER WHO HAS TO DETERMI NE, FIRST OF ALL, WHETHER A TRANSACTION IS AN INTERNATI ONAL TRANSACTION UNDER SECTION 92B OF THE SAID ACT. SECONDLY, IF IT IS AN INTERNATIONAL TRANSACTION IN HIS VIEW, HE HAS TO PROCEED TO DETERMINE THE ARMS LENG TH PRICE IN TERMS OF SECTION 92C OF THE SAID ACT. HOWEVER, IF, FOR ANY REASON, HE FEELS THAT IT IS NECESSARY OR EXPEDIENT SO TO DO, HE MAY SEEK THE APPROVAL OF THE COMMISSIONER AND THEN REFER THE COMPUTATION OF THE ARMS LENGTH PRICE IN RELATION T O THE SAID INTERNATIONAL TRANSACTION TO THE TRANSFER PRIC ING OFFICER. THE ROLE OF THE TRANSFER PRICING OFFICER, AS INDICATED IN SECTION 92CA, IS RESTRICTED TO DETERM INING THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATI ONAL TRANSACTION WHICH HAS BEEN REFERRED TO HIM BY THE ASSESSING OFFICER AND SUCH COMPUTATION OF THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION HAS TO BE DONE IN TERMS OF SECTION 92C OF THE SAID ACT. ON A PLAIN READING, WE ARE OF THE VI EW THAT IT IS NOT WITHIN THE DOMAIN OF THE TRANSFER PR ICING OFFICER TO DETERMINE WHETHER A PARTICULAR TRANSACTI ON, WHICH HAS COME TO HIS NOTICE, BUT WHICH HAS NOT BEE N REFERRED TO HIM, IS OR IS NOT AN INTERNATIONAL TRANSACTION AND THEN TO GO ON AND DETERMINE THE ARM S LENGTH PRICE THEREOF. THAT, WE FEEL IS IN THE EXCL USIVE JURISDICTION OF THE ASSESSING OFFICER. IT OUGHT TO BE POINTED OUT THAT THESE VIEWS ARE ON THE BASIS OF TH E PROVISIONS OF SECTION 92 CA, AS APPLICABLE TO THE ASSESSMENT YEAR 2006-07, THAT IS, PRIOR TO THE INTRODUCTION OF SUB-SECTION (2A) OF SECTION 92CA B Y VIRTUE OF THE FINANCE ACT, 2011 WITH EFFECT FROM 1.6.2011. INSOFAR AS THE PRESENT APPEAL IS CONCERN ED, SECTION 92CA WOULD HAVE TO BE READ WITHOUT SUB- SECTION 2A. WE AGREE WITH MR SYALI THAT SUB-SECTIO N (2A) CANNOT HAVE RETROSPECTIVE EFFECT INASMUCH AS I T DEALS WITH THE JURISDICTION OF THE TRANSFER PRICING OFFICER AND, THEREFORE, SUB-SECTION (2A) CANNOT BE REGARDED AS BEING A MERE PROCEDURAL PROVISION. 24. WE DO NOT AGREE WITH THE SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE REVENUE THAT WHEN A REFEREN CE IS MADE BY AN ASSESSING OFFICER TO THE TRANSFER PRI CING OFFICER, THE REFERENCE INCLUDES THE ENTIRE GAMUT OF TRANSACTIONS BETWEEN THE ASSESSEE AND ITS ASSOCIATE D ENTERPRISE. THE ASSESSING OFFICER IS THE PERSON WH O HAS BEEN ENTRUSTED WITH THE DUTY TO DETERMINE AS TO WHETHER A TRANSACTION IS AN INTERNATIONAL TRANSACTI ON OR NOT. THEN, IF IT IS AN INTERNATIONAL TRANSACTIO N OF THE NATURE SPECIFIED IN SECTION 92B OF THE SAID ACT , THE ASSESSING OFFICER HAS TO DETERMINE THE INCOME OF TH E ASSESSEE HAVING REGARD TO THE ARMS LENGTH PRICE BY FOLLOWING THE METHOD PRESCRIBED IN SECTION 92C. IF , FOR SOME REASON, THE ASSESSING OFFICER FEELS THAT IT IS NECESSARY OR EXPEDIENT SO TO DO, HE MAY REFER THE 36 COMPUTATION OF THE ARMS LENGTH PRICE OF SPECIFIC INTERNATIONAL TRANSACTIONS, AFTER OBTAINING THE PRI OR APPROVAL OF THE COMMISSIONER OF INCOME-TAX, TO THE TRANSFER PRICING OFFICER. IT IS QUITE POSSIBLE THA T IN THE CASE OF A PARTICULAR ASSESSEE, THERE MAY BE SEV ERAL INTERNATIONAL TRANSACTIONS AND THE ASSESSING OFFICE R MAY ONLY WISH TO REFER SOME OF THOSE INTERNATIONAL TRANSACTIONS FOR THE PURPOSES OF COMPUTING THE ARM S LENGTH PRICE WHILE IN RESPECT OF OTHERS, HE MAY COM PUTE THE ARMS LENGTH PRICE HIMSELF. THUS, THE JURISDIC TION OF THE TRANSFER PRICING OFFICER IS LIMITED AND REST RICTED TO COMPUTING THE ARMS LENGTH PRICE OF ONLY THOSE INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN SPECIFIC ALLY REFERRED TO HIM BY THE ASSESSING OFFICER. WE ONCE AGAIN CLARIFY THAT THIS IS THE POSITION PRIOR TO TH E INTRODUCTION OF SUB-SECTION (2A) OF THE SAID ACT WH ICH WE HAVE HELD TO BE PROSPECTIVE IN OPERATION. 44. THE HON'BLE DELHI HIGH COURT IN RESPECT OF SUB- SECTION (2A) INTRODUCED W.E.F. 1.6.2011 HELD THAT THE SAID SECTI ON WAS TO BE APPLIED ONLY PROSPECTIVELY BY OBSERVING AS UNDER: 20. SIMILARLY, IN THE CASE BEFORE US, WE FIND THAT THERE IS NOTHING IN THE STATUTE TO INDICATE THAT SUB-SECTION (2A) WAS INTRODUCED IN A MANNER SO AS TO OPERATE WITH RETROSPECTIVE EFFECT. SUB-SECTION (2A) EXPAND S THE JURISDICTION OF THE TRANSFER PRICING OFFICER BY EMPOWERING HIM TO DETERMINE THE ARMS LENGTH PRICE OF ANY INTERNATIONAL TRANSACTION OTHER THAN AN INTERNATIONAL TRANSACTION REFERRED TO HIM BY THE ASSESSING OFFICER UNDER SUB-SECTION (1) OF SECTION 92CA. THIS IS CLEARLY AN EXPANSION OF THE JURISDICTION OF THE TRANSFER PRICING OFFICER AND, THEREFORE, SUB-SECTION (2A) CAN ONLY HAVE PROSPECTIVE EFFECT FROM 01.06.2011 AND WOULD HAVE NO APPLICATION TO THE PRESENT APPEAL WHICH IS IN RESPECT OF THE ASSESSMENT YEAR 2006-07. 45. THE LEARNED D.R. FOR THE REVENUE IN THE WRITTEN SUBMISSIONS POINTED OUT THAT REFERENCES WERE MADE BY THE ASSESS ING OFFICER IN RESPECT OF CERTAIN TRANSACTIONS BUT THE INTERNATION AL TRANSACTION OF PAYMENT OF ROYALTY WAS NOT DISCLOSED BY THE ASSESSE E AS THE INTERNATIONAL TRANSACTION WITH AE. IT WAS FURTHER POINTED OUT BY THE LEARNED D.R. FOR THE REVENUE THAT IN VIEW OF THE EXPENDITURE INCURRE D BY THE ASSESSEE ON BEHALF OF THE AE IN INDIA FOR BRAND PROMOTION OF TH E BRANDS OF AE IN INDIA, IT COULD NOT BE PRESUMED THAT THE TPO SUO MO TO ASSUMED 37 JURISDICTION. WE FIND NO MERIT IN THE PROPOSITION FORWARDED BY THE TPO IN VIEW OF THE RATIO LAID DOWN BY THE COORDINATE BE NCHES OF THE TRIBUNAL AND ALSO THE JUDGMENT IN THE CASE OF AMADEUS INDIA PVT. LTD.(SUPRA). WE ARE IN AGREEMENT WITH THE RATIO LAID DOWN BY THE COORDINATE BENCHES OF THE TRIBUNAL, WHICH IN THE CASE OF AMADEUS INDIA PVT. LTD. HAS BEEN UPHELD BY HON'BLE DELHI HIGH COURT. IN THE ABSENCE OF ANY REFERENCE BEING MADE BY THE ASSESSING OFFICER UNDER SECTION 9 2CA(1) OF THE ACT, IN RESPECT OF THE AMP EXPENDITURE, THE ASSUMPTION O F JURISDICTION BY THE TPO IN WORKING OUT ARMS LENGTH PRICE IN RESPECT OF THE AFORESAID AMP EXPENDITURE, IS NOT JUSTIFIED AND THE ORDER OF THE TPO IN THIS REGARD IS NON-EST. WE HAVE DECIDED THE PRESENT ISSUE ON APPL ICABILITY OF THE PROVISIONS OF SECTION 92CA OF THE ACT WITHOUT ADJUD ICATING THE FIRST PROPOSITION RAISED BY THE ASSESSEE THAT THE TRANSAC TION IN QUESTION IS NOT AN INTERNATIONAL TRANSACTION. THE ASSESSING OFFICER IS, THEREFORE, DIRECTED TO DELETE THE IMPUGNED ADDITION OF RS.1194 5.81 LACS. THE ASSESSEE IS ALSO IN APPEAL IN RESPECT OF THE COMPUT ATION MADE BY THE TPO BY HOLDING SEVERAL EXPENSES AS AMP EXPENDITURE AND MANNER OF COMPUTATION AND ALSO THE COMPARABLES PICKED UP BY T HE TPO. THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL AGAIN ST THE SAME AND BOTH THE AUTHORIZED REPRESENTATIVES HAD MADE ELABORATE S UBMISSIONS ON THE SAID ISSUES. HOWEVER, IN VIEW OF OUR DECISION IN H OLDING THE ORDER OF TPO TO BE NON EST, WE ARE NOT ADDRESSING THE SAID I SSUES. THE GROUNDS OF APPEAL NOS. 2.0 TO 2.19 RAISED BY THE ASSESSEE ARE THUS PARTLY ALLOWED. 46. THE ISSUE IN GROUND NO.3 RAISED BY THE ASSESSEE IS IN RELATION TO ROYALTY PAYMENT. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THERE WAS NO REVENUE IMPACT ON ACCOUNT OF OBSERVATI ONS OF ASSESSING OFFICER/TPO. HE FURTHER FAIRLY ADMITTED THAT THE G ROUND OF APPEAL IS PREMATURE. IN VIEW THEREOF, THE SAME IS DISMISSED. 38 47. THE ISSUE RAISED IN GROUND NO.4 AGAINST NON-ALL OWANCE OF DEDUCTION FOR INCREMENTAL BALANCE LYING IN PROFIT & LOSS ACCOUNT UNDER SECTION 43B OF THE ACT WAS CONSIDERED BY THE SPECIA L BENCH OF CHANDIGARH TRIBUNAL IN ASSESSEES OWN CASE, REPORTE D IN 107 ITD 343 (SB)(CHD). THE SPECIAL BENCH HAD HELD THE SAID DEP OSITS AS ELIGIBLE FOR DEDUCTION UNDER SECTION 43B OF THE ACT. THE ASSESS ING OFFICER HAD NOT APPLIED THE SAID RATIO AS THE REVENUE HAD PREFERRED AN APPEAL BEFORE THE HON'BLE HIGH COURT AGAINST THE ORDER OF THE SPECIAL BENCH. 48. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT THE ISSUE STANDS COVERED BY THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS. RAJ & SAN DEEPS LTD. [293 ITR 12 (P&H)]. 49. THE PRESENT ISSUE IS COVERED BY THE DECISION OF SPECIAL BENCH IN THE CASE OF THE ASSESSEE ITSELF. FURTHER THE JURIS DICTIONAL HIGH COURT IN RAJ & SAN DEEPS LTD. (SUPRA) HAS HELD THAT WHERE TH E ASSESSEE HAD DEPOSITED THE EXCISE DUTY PAYABLE IN ADVANCE IN ACC OUNT-CURRENT, AFTER THE GOODS WERE MANUFACTURED, SUCH AMOUNT WAS DEDUCT IBLE. FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE IN RESPECT OF INCREMENTAL BALANCE AMOUNTIN G TO RS.25,23,710/- LYING IN PLA ACCOUNT, UNDER SECTION 43B OF THE ACT. THE GROUND NO.4 IS ALLOWED. 50. THE ISSUE RAISED VIDE GROUND NO.5 IS IN RELATIO N TO DEDUCTION OF CONSUMER PRODUCT RESEARCH EXPENSES AMOUNTING TO RS .623,17,381/-. 51. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT SIMILAR EXPENDITURE HAS BEEN ALLOWED IN THE HANDS OF THE AS SESSEE BY THE TRIBUNAL IN APPEALS RELATING TO ASSESSMENT YEARS 19 98-99 TO 2002-03. 52. THE LEARNED D.R. FOR THE REVENUE HAS FAILED TO CONTROVERT THE SAME. 39 53. WE FIND THAT SIMILAR ISSUE OF DEDUCTION OF CONS UMER PRODUCT RESEARCH EXPENSES AROSE BEFORE THE TRIBUNAL IN ASSE SSEES APPEAL IN ITA NO.379/CHD/2004 RELATING TO ASSESSMENT YEAR 1998-99 . THE TRIBUNAL VIDE ORDER DATED 21.3.2007 ALLOWED THE CLAIM VIDE P ARAS 7 TO 13 OF THE SAID ORDER HOLDING AS UNDER: 7. WE HAVE CONSIDERED THE SUBMISSIONS CAREFULLY. FIRST OF ALL WE MAY REFER TO THE DETAILS OF THE EXP ENDITURE INCURRED BY THE ASSESSEE WHICH HAS BEEN PLACED IN T HE PAPER-BOOK AT PAGE 42. THE DETAILS OF EXPENDITURE I NCURRED BY THE ASSESSEE ARE AS FOLLOWS: PARTICULARS AMOUNT (RS.) A. PROMOTIONAL AND TRADE MARKETING EXPENSES BOOST BADMINTON RACKETS 5319600 BOOST CRICKET BAT 5040000 TENNIS BALLS FOR BOOST 2146001 EVERFRESH CONTAINERS FOR PACKING 980724 HORLIKS GP FOR NEPAL PRINTING FOR STICKERS 8710 PURCHASE OF HORLIKS BASKETS 88000 HIX GLOW SIGN BOARD 648050 OUTDOOR PUBLICITY 98022 GP PACKAGING MATERIAL 140000 RSO-NORTH TRADE MKTG. 26703 RSO-WEST TRADE MKTG. 21059 SOUVENIR ADVERTISING 636993 15781862 B. PRODUCT DEVELOPMENT EXPENSES DEVELOPMENT EXP. FOR NUTRIBAR CHOCOLATE 14415 89 NUTRIBAR STOCK WRITTEN OFF 1043028 NUTRIBAR TRIALS 112216 LOTUS NUTRIBAR EXPENSES 1297430 NUTRIBAR RESEARCH EXPENSES 2923870 DEVELOPMENT EXP. FOR RIBENA SOFTDRINK 158938 DEVELOPMENT EXP. FOR RIBENA 4225539 HORLICKS 3-IN-1 PACKAGING EXPENSES 700620 FOR FREE SAMPLES MARKET RESEARCH & CONSUMER ANALYSIS FOR NEW PRODUCES VIZ. 1567281 DEVELOPMENT EXP. EXISTING PRODUCTS 2850497 (HORLICKS RELAUNCH) 40 16321008 TOTAL : RS.321,02,870/- 8. A BARE PERUSAL OF THE AFORESAID DETAILS OF EXPEN DITURE INCURRED BY THE ASSESSEE SHOWS A FACT POSITION THAT THE EXPENDITURE IS IN RELATION THE BUSINESS OF THE ASSE SSEE. THIS ASPECT HAS ALSO NOT BEEN DISPUTED BY THE REVENUE, A S IS EVIDENT FROM THE ORDERS OF THE LOWER AUTHORITIES. N OW THE ISSUE WHETHER A PARTICULAR EXPENDITURE IS CAPITAL O R REVENUE HAS BEEN A SUBJECT MATTER OF NUMEROUS JUDICIAL PRONOUNCEMENTS. IT IS ALSO A WELL ACCEPTED PROPOSIT ION THAT THERE IS NO SINGLE DEFINITE CRITERION WHICH BY ITSE LF CAN DETERMINE WHETHER A PARTICULAR EXPENDITURE IS CAPIT AL OR REVENUE. IT IS A TRITE LAW THAT WHAT IS RELEVANT IS TO EVALUATE THE PURPOSE OF THE OUTGOING AND ITS INTENDED OBJECT AND EFFECT AND CONSIDERED IN THE LIGHT OF BUSINESS REAL ITIES. THE APEX COURT IN THE CASE OF ALEMBIC CHEMICALS WORKS C O. LTD (SUPRA) OBSERVED THAT EVEN THE TEST OF ENDURING BE NEFIT COULD FAIL WHILE DETERMINING THE TRUE NATURE OF EXP ENDITURE. IN OTHER WORDS WHAT IS OF RELEVANCE IS TO APPRECIAT E THE PECULIAR FACTS AND CIRCUMSTANCES OF EACH CASE TO DE TERMINE WHETHER A PARTICULAR OUTGOING IS CAPITAL OR REVENUE . 9. IN THIS BACKGROUND WE MAY PERUSE THE EXPENSES INCURRED BY THE ASSESSEE UNDER THE HEAD PROMOTIONA L AND TRADE MARKETING EXPENSES. SUCH EXPENDITURE HAS BEE N INCURRED ON EXISTING PRODUCTS OF THE ASSESSEE AND I NCLUDE COST OF PRESENTATION ITEMS, GIFTS, ETC. GIVEN TO TH E CUSTOMERS ON THE SALE OF THE PRODUCT, EXPENDITURE ON ADVERTIS EMENT MATERIAL ETC. THE EXPENDITURE CAN BE VIEWED AS IN A CTUALITY DISCOUNT-IN-KIND ALLOWED TO THE CUSTOMERS AND EXPEN DITURE ON ADVERTISEMENT OF THE EXISTING PRODUCTS OF THE AS SESSEE. CLEARLY THE EXPENSES INCURRED ARE OF REVENUE NATURE . THE EXPENSES IN QUESTION HAVE MERELY FACILITATED THE CA RRYING ON THE BUSINESS OF THE ASSESSEE MORE FRUITFULLY. THE A RGUMENT OF THE REVENUE THAT SUCH EXPENDITURE RESULT IN ENDU RING BENEFIT IN AS MUCH AS THE EXPENDITURE RESULTS IN EN HANCING OF THE BRAND, IN OUR VIEW, CANNOT BE TAKEN TO MEAN THAT THE EXPENDITURE IS CAPITAL IN NATURE. AS WE HAVE NOTED EARLIER, IT IS NOT EACH AND EVERY ENDURING BENEFIT WHICH IS TO BE CONCLUDED AS A CAPITAL OUTGOING. AT THIS POINT IT IS PERTINENT TO REFER TO THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF EMPIRE JUTE CO.LTD. (SUPRA). ACCORDING TO THE HO NBLE APEX COURT WHAT HAS TO BE SEEN IS THE NATURE AND IM PORT OF THE EXPENSED IN QUESTION IN A COMMERCIAL SENSE. IN THIS CASE ALTHOUGH WE ARE OF THE VIEW THAT THE SAID EXPENDITU RE DOES NOT RESULT IN ANY ENDURING BENEFIT TO THE ASSESSEE YET EVEN IF ONE IS TO CONCEDE TO THIS ARGUMENT OF THE REVENU E, STILL IT IS NOT POSSIBLE TO DEDUCE THAT THE EXPENDITURE IS C APITAL IN NATURE. THIS IS FOR THE REASON THAT SUCH ENDURING B ENEFIT IS NOT IN THE CAPITAL FIELD BUT IS IN THE REVENUE FIEL D, THEREBY IMBIBING THE SAID EXPENDITURE WITH CHARACTER OF A R EVENUE EXPENDITURE. WE MAY REFER TO THE FOLLOWING OBSERVAT IONS OF 41 THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUT E CO. (SUPRA) THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCUR RED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, MAY , NONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSE E THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS NATURE O F THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CO NSISTS MERELY IN FACILITATING THE ASSESSEES TRADING OPERA TIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENT LY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE OF REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR A N INDEFINITE FUTURE. THE AFORESAID DECISION OF THE HONBLE APEX COURT CLEARLY SHOWS THAT THE TEST OF ENDURING BENEFIT I S NOT CONCLUSIVE TO JUDGE TRUE NATURE OF EXPENDITURE. ONE HAS TO GO FURTHER AND ASCERTAIN AS TO WHETHER PARTICULAR EXPENDITURE RESULTS INTO AN ADVANTAGE OF ENDURING N ATURE IN THE CAPITAL FIELD OR REVENUE FILED. IN THE INSTANT CASE HAVING REGARD TO THE NATURE AND DETAILS OF EXPENDITURE IT IS CLEAR THAT THE EXPENDITURE UNDER THE HEAD PROMOTIONAL AN D TRADE MARKETING EXPENSES IS AN EXPENDITURE WHICH IS INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND IS IN THE REVENUE FIELD. THE SAME IS ALLOWABLE AS A RE VENUE EXPENDITURE. 10. NOW WE MAY EXAMINE THE EXPENDITURE UNDER THE HEAD PRODUCT DEVELOPMENT EXPENSES. THE DETAILS OF THE EXPENDITURE SHOW THAT THE SAME HAS BEEN INCURRED FO R INTRODUCING AND DEVELOPING NEW PRODUCTS. THE ASSESS EE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF FOOD AND HEALTH CARE PRODUCTS UNDER A WELL KNOWN BRAND. THE EXPENSES INCLUDE DEVELOPMENT EXPENSES FOR NEW PRODU CTS NAMELY NUTIRBAR CHOCOLATE, RIBENA SOFT DRINK, HORLI CKS RE- LAUNCH EXPENSES. CERTAINLY SUCH EXPENDITURE HAS THE POTENTIAL TO IMPROVE THE PROFITABILITY OF THE ASSES SEE. HOWEVER THE ISSUE TO BE CONSIDERED IS WHETHER THE EXPENDITURE SEEKS TO ENLARGE THE PROFIT YIELDING CA PACITY OR IT INCREASES THE EFFICIENCY OF THE BUSINESS. THIS A SPECT, IN OUR CONSIDERED OPINION, IS TO BE DECIDED IN THE LIG HT OF THE BUSINESS REALITIES UNDER WHICH THE ASSESSEE IS OPER ATING. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING OF FAST MOVING CONSUMER GOODS. THE BUSINESS OF THE 42 ASSESSEE IS SUBJECTED TO VOLATILITY IN CONSUMER PRE FERENCES, TASTES AND WANTS. THE ASSESSEE IS THEREFORE REQUIRE D TO PERENNIALLY STUDY THE MARKET AND LAUNCH NEW VARIETI ES IN ITS PRODUCTS LINE AND MEET THE COMPETITION IN THE M ARKET. IT IS IN THIS BACKGROUND ONE HAS TO EXAMINE AS TO WHET HER THE IMPUGNED EXPENDITURE INCURRED ON DEVELOPMENT, INTRO DUCTION AND LAUNCHING OF NEWER PRODUCTS IS AN ADVANTAGE IN THE REVENUE FILED OR NOT. IN OUR HUMBLE OPINION THE EXP ENDITURE IN QUESTION HAS MERELY ENABLED THE ASSESSEE TO REMA IN COMPETITIVE IN THE MARKET AND RETAIN THE CUSTOMER PREFERENCES AND LOYALTY TOWARDS ITS BRAND OF PRODUC TS. THE SAID ADVANTAGE CERTAINLY IS NOT LIMITED TO THE PERI OD UNDER CONSIDERATION BUT SPILLS OVER TO THE FUTURE ALSO. S O HOWEVER THIS IS NOT CONCLUSIVE TO HOLD THAT THE EXPENDITURE IN QUESTION IS A CAPITAL EXPENDITURE. THE PARITY OF RE ASONING LAID DOWN BY THE APEX COURT IN THE CASE OF EMPIRE J UTE CO. LTD. (SUPRA) DISCUSSED BY US IN THE EARLIER PARAGRA PH IS SQUARELY APPLICABLE WITH RESPECT TO SUCH EXPENDITUR E ALSO. 11. WE MAY MENTION HERE THE STAND OF REVENUE THAT THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS CR EATE A NEW LINE OF BUSINESS FOR THE ASSESSEE AND THUS EXPE NDITURE RELATED THEREOF IS TO BE TREATED AS CAPITAL EXPENDI TURE. ON THIS ASPECT WE ARE UNABLE TO APPRECIATE AS TO HOW C AN IT BE SAID THAT MERE DEVELOPMENT AND INTRODUCTION OF NEW VARIETIES OF PRODUCTS RESULT IN CREATION OF A NEW L INE OF BUSINESS. FACTUALLY SPEAKING, PRIOR TO THE DEVELOPM ENT AND INTRODUCTION OF THE IMPUGNED NEW PRODUCTS THE ASSES SEE WAS IN THE BUSINESS OF MANUFACTURING AND SALE OF FO OD AND HEALTH CARE PRODUCTS. EVEN POST DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS, THE BUSINESS OF THE A SSESSEE REMAINS THAT OF MANUFACTURING AND SALE OF FOOD AND HEALTH CARE PRODUCTS. THEREFORE IT IS ERRONEOUS TO CONCLUD E THAT THE ASSESSEE ACQUIRED A NEW LINE OF BUSINESS BY MERELY DEVELOPING AND INTRODUCING NEW PRODUCTS IN THE EXIS TING LINE OF BUSINESS. THE NEW PRODUCTS CLEARLY RELATE TO THE SAME LINE OF BUSINESS THAT THE ASSESSEE HAS BEEN HITHERT O CARRYING ON. THEREFORE, ON ABOVE CONSIDERATION ALSO THE PLEA OF THE ASSESSEE THAT THE EXPENDITURE IN QUESTION IS A REVENUE EXPENDITURE DESERVES TO BE UPHELD. 12. AS A MATTER OF PASSING WE MAY REFER TO THE JUD GEMENT OF THE HONBLE KARANTAKA HIGH COURT IN THE CASE OF CIT VS. BHARAT EARTH MOVERS LIMITED 155-ITR-353(KAR) WHEREIN IT HA S BEEN HELD THAT EXPENDITURE INCURRED ON DEVELOPMENT OF PRODUCT S IS A REVENUE EXPENDITURE. THE LD. COUNSEL FOR THE ASSESSEE RELIE D UPON AN UNREPORTED DECISION OF THE DELHI BENCH OF TRIBUNAL IN THE CASE OF M/S HONDA SIEL CARS INDIA LIMITED (ITA NO.3688 & 3689/D EL/2005) DATED 21.02.2006 TO ARGUE THAT EXPENDITURE INCURRED IN IN TRODUCTION OF A NEW MODEL OF CAR BY AN EXISTING CAR MANUFACTURE IS A REVENUE EXPENDITURE. TO THE SIMILAR EFFECT RELIANCE HAS BEE N PLACED ON THE JUDGMENT OF THE AMRITSAR BENCH OF THE TRIBUNAL IN T HE CASE OF DCIT VS. MAX INDIA LTD. (ITA NO.230/ASR/2000) DATED 9.6. 2006. 13. IN CONCLUSION, WE HOLD, THAT HAVING REGARD TO THE AFORESAID DISCUSSION THE CLAIM OF THE ASSESSEE FOR ALLOWABILITY OF IMPUGNED EXPENDITURE AS REVENUE 43 EXPENDITURE IS JUSTIFIED. WE, THEREFORE SET-ASIDE T HE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELE TE THE ADDITION. 54. THE SAID PROPOSITION WAS FOLLOWED BY THE TRIBUN AL IN ASSESSMENT YEARS 1999-2000, 2000-01 AND 2002-03 IN ITA NOS. 57 5/CHD/2004, 320/CHD/2005 AND 29/CHD/2007 VIDE ORDER DATED 21.9. 2007. THE SAID EXPENDITURE HAS ALSO BEEN ALLOWED BY THE TRIBUNAL I N ASSESSMENT YEARS 2003-04 AND 2004-05. FOLLOWING THE PRECEDENT, WE D IRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. THE G ROUND NO.5 IS ALLOWED. 55. THE GROUND NO.5.1 RAISED BY THE ASSESSEE IS AN ALTERNATE PLEA AND THE SAME DOES NOT SURVIVE IN VIEW OF OUR DECISION T O GROUND NOS.2 TO 2.19 HEREINABOVE. 56. THE GROUND NO.6 RAISED BY THE ASSESSEE AGAINST CHARGING OF INTEREST UNDER SECTION 234B AND 234D OF THE ACT, AS ADMITTED BY LEARNED A.R. FOR THE ASSESSEE FOR THE ASSESSEE IS CONSEQUENTIAL. HE NCE THE SAME IS DISMISSED BEING CONSEQUENTIAL. 57. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH DAY OF JANUARY, 2012. SD/- SD/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 25 TH JANUARY, 2012 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH 44 45