M/s Reckitt Benckiser (I) Ltd., Kolkata V. JCIT, R-12, KOLKATA, Kolkata

ITA 1671/KOL/2008

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4812 (ITAT-KOLKATA)
• Duration Of Justice: 7 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 11-03-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 28-08-2008
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: R N BAJORIA SENIOR
• Keywords: Transfer pricing; Salary income; Double taxation relief; International transaction; Earning of tax free income; Retrospective amendment; Permanent establishment; Bad and doubtful debts; Tax effect; Revenue expenditure
• Section: 143(3); 14A; 145

Judgement Text

I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 1 OF 34 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA C BENCH, KOLKATA BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER I.T.A. NO. 1671/KOL/ 2008 ASSESSMENT YEAR : 2003-2004 RECKITT BENCKISER (INDIA) LIMITED,................. .......................APPELLANT 206, A.J.C. BOSE ROAD, BUSINESS TOWERS, UNIT 7C, 7 TH FLOOR, KOLKATA-700 017 [PAN : AABCR 2655 Q] -VS.- JOINT COMMISSIONER OF INCOME TAX,.................. ...................RESPONDENT RANGE-12, KOLKATA, 3, GOVERNMENT PLACE (WEST), KOLKATA-700 001 & I.T.A. NO. 1024/KOL/ 2009 ASSESSMENT YEAR : 2004-2005 RECKITT BENCKISER (INDIA) LIMITED,................. .......................APPELLANT 206, A.J.C. BOSE ROAD, BUSINESS TOWERS, UNIT 7C, 7 TH FLOOR, KOLKATA-700 017 [PAN : AABCR 2655 Q] -VS.- JOINT COMMISSIONER OF INCOME TAX,.................. ...................RESPONDENT RANGE-12, KOLKATA, 3, GOVERNMENT PLACE (WEST), KOLKATA-700 001 & I.T.A. NO. 1699/KOL/ 2008 ASSESSMENT YEAR : 2003-2004 DEPUTY COMMISSIONER OF INCOME TAX,................. ...................APPELLANT CIRCLE-12, KOLKATA, 3, GOVERNMENT PLACE (WEST), KOLKATA-700 001 -VS.- RECKITT BENCKISER (INDIA) LIMITED,................. .......................RESPONDENT 206, A.J.C. BOSE ROAD, BUSINESS TOWERS, I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 2 OF 34 UNIT 7C, 7 TH FLOOR, KOLKATA-700 017 [PAN : AABCR 2655 Q] & I.T.A. NO. 973/KOL/ 2009 ASSESSMENT YEAR : 2004-2005 DEPUTY COMMISSIONER OF INCOME TAX,................. ...................APPELLANT CIRCLE-12, KOLKATA, 3, GOVERNMENT PLACE (WEST), KOLKATA-700 001 -VS.- RECKITT BENCKISER (INDIA) LIMITED,................. .......................RESPONDENT 206, A.J.C. BOSE ROAD, BUSINESS TOWERS, UNIT 7C, 7 TH FLOOR, KOLKATA-700 017 [PAN : AABCR 2655 Q] APPEARANCES BY: SHRI R.N. BAJORIA, SENIOR ADVOCATE , FOR THE ASSESSEE SHRI G. MALLIKARJUNA, CIT, D.R., FOR THE DEPARTMENT DATE OF CONCLUDING THE HEARING : MARCH 11, 2016 DATE OF PRONOUNCING THE ORDER : MAY 25, 2016 O R D E R PER SHRI P.M. JAGTAP :- THESE FOUR APPEALS, TWO FILED BY THE ASSESSEE BEING ITA NOS. 1671/KOL/2008 AND 1024/KOL/2009 AND TWO FILED BY TH E REVENUE BEING ITA NOS. 1699/KOL/2008 AND 973/KOL/2009, ARE CROSS APPEALS FOR A.YS. 2003-04 AND 2004-05. SINCE SOME OF THE ISSUES INVOL VED IN THESE APPEALS ARE COMMON AND INTER-LINKED, THE SAME HAVE BEEN HEA RD TOGETHER AND ARE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FO R THE SAKE OF CONVENIENCE. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 3 OF 34 2. FIRST WE TAKE UP THE APPEAL OF THE ASSESSEE FOR A.Y. 2003-04 BEING ITA NO. 1671/KOL/2008 , WHICH IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XII, KOLKATA D ATED 13.06.2008. 3. THE ISSUE RAISED IN GROUND NO. 1 OF THIS APPEAL RELATES TO THE DISALLOWANCE OF RS.1,35,14,449/- MADE BY THE ASSESS ING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) UNDER SECTION 40( A)(I) ON ACCOUNT OF PAYMENT MADE BY THE ASSESSEE TO M/S. RECKITT BENCKI SER EXPATRIATE SERVICES LIMITED, UK (IN SHORT RBESL-UK) AS EXPATRI ATE FEES. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY, W HICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HOUSEH OLD PRODUCTS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION W AS FILED BY IT ON 28.11.2003 DECLARING TOTAL INCOME OF RS.68,78,30,02 0/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE-COMPANY HAS MADE A PAYMENT OF RS. 1.35 CRORES TO M/S. RBESL-UK TOWARDS EXPATRIATE FEES. THE ASSESSEE-COMP ANY WAS CALLED UPON BY THE ASSESSING OFFICER TO EXPLAIN THE NATURE OF THIS PAYMENT AS WELL AS TO FURNISH THE DETAILS OF TAX, IF ANY, DEDU CTED AT SOURCE THEREFROM. IN REPLY, IT WAS SUBMITTED BY THE ASSESSEE THAT THE SAID PAYMENT WAS MADE TO M/S. RBESL-UK TOWARDS REIMBURSEMENT OF SALA RIES PAID TO MR. ROJAN BOGAC AND MR. EMESTO BLANCH, WHO WERE DEPUTED IN INDIA FOR RENDERING TECHNICAL SERVICES. IT WAS SUBMITTED THAT THE SAID TWO INDIVIDUALS WERE EMPLOYEES OF THE ASSESSEE-COMPANY DURING THE YEAR UNDER CONSIDERATION AND THEIR REMUNERATION WAS PART LY PAID BY THE ASSESSEE-COMPANY IN INDIA AND PARTLY BY M/S. RBESL IN UK, WHICH WAS SUBSEQUENTLY REIMBURSED BY THE ASSESSEE-COMPANY TO M/S. RBESL-UK. IT WAS ALSO SUBMITTED THAT TAX AT SOURCE WAS DEDUCTED ON THE ENTIRE COMPENSATION PAID TO THE SAID EMPLOYEES AND THE SAM E WAS DULY DEPOSITED. IT WAS CONTENDED THAT THE AMOUNT OF RS.1 .35 CRORES IN QUESTION THUS WAS PAID BY THE ASSESSEE-COMPANY TO M/S. RBESL -UK TOWARDS I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 4 OF 34 REIMBURSEMENT OF SALARY PAID BY THE SAID COMPANY ON BEHALF OF THE ASSESSEE-COMPANY AND IT COULD NOT BE TREATED AS FEE S FOR TECHNICAL SERVICES. 5. THE EXPLANATION OFFERED BY THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER FOR THE FOLLOWING REASONS GIVEN IN THE ASSESSMENT ORDER:- AS PER THE COPIES OF INVOICES SUBMITTED BY THE ASSESSEE COMPANY, THE PAYMENT HAS BEEN MADE FOR 'EX PAT FEES'. THE PAYMENTS ARE MADE IN FOREIGN CURRENCY. T HE ASSESSEE COMPANY IS PAYING TO RRESL AS EXPAT FEES W HEREIN M/S. RBESL HAS DEPUTED TWO PERSONS IN INDIA FOR CAR RYING OUT THE JOB. THE ASSESSEE COULD NOT PRODUCE THE COP Y OF THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND RBESL. T HE ASSESSEE COMPANY HAS PRODUCED THE COPY OF AN AGREEM ENT BETWEEN RCCKITT BENCKISER PLC, THE HOLDING COMPANY OF THE ASSESSEE AND JOSE ERNESTO BLANCH BORAU AND MARKED A S EMPLOYMENT AGREEMENT UNDER WHICH MR. JOSE ERNESTO BLANCH BORAU WAS TO SERVE IN RECKITT BENCKISER PLC AS THE REGIONAL MARKETING DIRECTOR, SOUTH ASIA. IT ALSO CO NTAINED THE OTHER TERMS AND CONDITIONS RELATING TO EMPLOYME NT. ALTHOUGH IT HAS BEEN CLAIMED BY THE ASSESSEE COMPAN Y THAT THEY HAVE ENTERED IN TO A SEPARATE EMPLOYMENT AGREE MENT WITH MR. JOSE EMESTO BLANCH BORAU BUT THE SAME COUL D NOT BE PRODUCED DESPITE BEING GIVEN SEVERAL OPPORTUNITI ES. THIS AGREEMENT CLEARLY SHOWS THAT MR. JOSE ERNESTO BLANC H BORAU IS AN EMPLOYEE OF RECKITT BENCKISER PLC. THERE IS ONE MORE AGREEMENT TITLED AS EMPLOYMENT AGREEMENT BETWEEN RECKITT BENCKISER INDIA LIMITED, THE ASSESSEE COMPANY AND BOJAN ROJAC. IN THIS AGREEMENT MR. ROJAC WHOSE ADDRESS IS SHOWN AS C/O RECKITT BENCKIS ER ADRIATICS SLOVENIA. AS PER THIS AGREEMENT THE EXECU TIVE SHALL SERVE THE ASSESSEE COMPANY AS SALES DIRECTOR INDIA. IN ALL THESE AGREEMENT THERE IS NO MENTION WHATSOEVER OF M /S, RBESL U.K. AS PER THE AGREEMENT PRODUCED IN. THE CO URSE OF HEARING M'S, RBESL IS NEITHER A PARTY TO THESE AGRE EMENTS NOR IN ANY WAY CONNECTED WITH THESE AGREEMENTS. THI S CLEARLY SHOWS THAT THERE ARE TWO LIMBS OF THIS TRAN SACTION. THE FIRST ONE IS THE TRANSACTION BETWEEN THE ASSESS EE COMPANY AND RBSEL BY WHICH THE ASSESSEE COMPANY WAS SUPPOSED TO PAY THE EXPATRIATE FEES TO THESE COMPAN Y FOR THE SERVICES TO BE RENDERED. THESE SERVICES CAN BE REND ERED I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 5 OF 34 EITHER FROM OUTSIDE INDIA OR THROUGH AN EMPLOYEE AN D/OR A PERSON DEPUTED IN INDIA TO CARRY OUT THE WORK. IN T HIS CASE THE SERVICES HAVE BEEN PROVIDED BY RBESL BY DEPUTIN G TWO EXECUTIVES IN INDIA FOR WHICH M/S. RBESL IS BEING PAID/REMUNERATED. IT IS WORTHWHILE TO MENTION HERE THAT M/S. RBESL IS AN ASSOCIATE ENTERPRISE OF THE ASSESSEE COMPANY. NOW L ET US EXAMINE WHETHER THE PAYMENT TO BE MADE TO RBESL ARE TAXABLE IN INDIA OR NOT AS PER THE INCOME TAX ACT. THE TAX RESIDENCE CERTIFICATE FOR RBESL CLEARLY ESTABLISHES THAT IT IS TAX RESIDENT OF U.K. THE TAXABILITY OF THESE PAYMEN TS WILL BE DETERMINED AS PER THE PROVISIONS OF DTAA BETWEEN IN DIA AND UK. AS PER THE PROVISIONS OF THE DTAA, THE INCOME OF RBESL IS TAXABLE IN INDIA IF EITHER IT HAS A PERMANENT ESTABLISHMENT IN INDIA OR IT IS RENDERING FEES FOR TECHNICAL SERVICES ROYALTY. LET US EXAMINE WHETHER THESE PAYM ENTS WOULD QUALIFY AS FEES FOR TECHNICAL SERVICES. PARA 4 OF ARTICLE 13 OF THE DTTA STATES THAT FOR TH E PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE, AND SUBJEC T TO PARAGRAPH 5 OF THIS ARTICLE, THE TERM 'FEES FOR TEC HNICAL SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SE RVICES OF TECHNICAL OR OTHER PERSONNEL) WHICH (A) ARE ANCILLA RY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE R IGHT, PROPERLY OR INFORMATION FOR WHICH A PAYMENT DESCRIB ED IN PARAGRAPH 3(A) OF THIS ARTICLE IS RECEIVED: OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF THE PR OPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECEIVED: OR (C) MAKE AVAILABLE TECHNICA L KNOWLEDGE, EXPERIENCE, SKILL, KNOW HOW OR PROCESSES , OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN. THE SERVICES WHICH WERE RENDERED BY THESE TWO EXECUTIVES CLEARLY FALLS IN CLAUSE (C ) OF ARTICLE ) 3 OF THE DTAA. THESE TWO EXECUTIVES BEING THE IN-CHARGE OF S ALES AND MARKETING FUNCTION ARC MAKING AVAILABLE THE TECHNIC AL KNOWLEDGE, EXPERIENCE AND SKILL. THIS CLEARLY ESTAB LISHES BEYOND DOUBT THAT THE SAME ARE TAXABLE AS FEES FOR TECHNICAL SERVICES. THERE IS NO FORCE IN THE ASSESSEE'S ARGUMENT THAT T HE TAXES HAVE BEEN PAID ON THE SALARIES BEING PAID TO THESE EXECUTIVES BECAUSE THESE: PERSONS ARE CLEARLY TAXAB LE UNDER I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 6 OF 34 ARTICLE 16 OF THE DTAA, AS 'DEPENDENT PERSONAL SERV ICES' AS THEY STAYED IN INDIA FOR MORE THAN ONE YEAR. IN ANY CASE, THESE EMPLOYEES ARE TAXABLE AT INDIVIDUAL LEVEL IN INDIVIDUAL CAPACITY AS WELL ON THEIR SALARY RECEIPTS AS THEY STAYED IN INDIA FOR MORE THAN ONE YEAR. SO THE ASSESSEE HAS F AILED TO PAY TAXES/DEDUCT TDS ON THE FIRST LIMB OF THE TRANS ACTION I.E, THE PAYMENT BY THE ASSESSEE COMPANY TO RBSEL THE ASSESSEES PAYMENT OF TAX FOR THE SECOND LIMB OF TH E TRANSACTION I.E. THE PAYMENT FROM RBESL TO THESE EM PLOYEES WILL NOT HELP BECAUSE THE ASSESSEE IS REQUIRED TO D EDUCT PAY TAXES ON THE FIRST LIMB OF THE TRANSACTION AS WELL AS PER THE PROVISIONS OF THE INCOME TAX ACT READ WITH THE PROV ISIONS OF DTAA BETWEEN INDIA AND UK SINCE THESE PAYMENTS WERE MADE TO A NON-RESIDENT, THE ASSESSEE WAS REQUIRED TO DEDUCT TDS UNDER SECTI ON 195 OF THE INCOME TAX ACT. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF TRANSMISSION CORPORATION OF INDIA VS.- CIT HAS CLEARLY STATED THAT ASSESEE IS BOUND TO DEDUCT TDS ON PAYMENT TO NON-RESIDENT AS PER THE PROVISIONS OF SE CTION 195 UNTIL AND UNLESS THEY OBTAIN A NIL CERTIFICATE FROM THE DEPARTMENT. AS THE ASSESSEE HAS FAILED TO DEDUCT TD S ON THIS PAYMENT. SECTION 40(A)(I) COMES INTO APPLY WHICH CL EARLY STATES THAT WHEN THE ASSESSEE HAS FAILED TO DEDUCT TDS FOR ANY SUM PAYABLE OUTSIDE INDIA ON WHICH THE TAX HAS NOT BEEN DEDUCTED, THE SAME IS NOT TO BE ALLOWED AS DED UCTION WHILE COMPUTING THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER THUS INVOKED THE PROVISIONS O F SECTION 40(A)(I) AND DISALLOWED THE PAYMENT OF RS.1.35 CRORES MADE BY TH E ASSESSEE TO M/S. RBESL-UK TOWARDS EXPATRIATE FEES. 6. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U NDER SECTION 40(A)(I) WAS CHALLENGED BY THE ASSESSEE IN THE APPE AL FILED BEFORE THE LD. CIT(APPEALS). DURING THE COURSE OF APPELLATE PROCEE DINGS BEFORE THE LD. CIT(APPEALS), IT WAS REITERATED BY THE ASSESSEE-COM PANY THAT MR. ROJAN BOGAC AND MR. ERNESTO BLANCH WERE ITS EMPLOYEES, WH O EFFECTIVELY WORKED UNDER ITS DIRECT CONTROL AND SUPERVISION. THE PART OF THEIR SALARIES WAS PAID BY M/S. RBESL-UK FOR AND ON BEHALF OF THE ASSE SSEE-COMPANY AND THE SAME WAS ACCORDINGLY REIMBURSED BY THE ASSESSEE-COM PANY TO M/S. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 7 OF 34 RBESL-UK. THE EMPLOYMENT AGREEMENT UNDER WHICH THE TWO EXPARTRIATE EMPLOYEES WORKED WITH THE ASSESSEE-COMPANY WAS ALSO PRODUCED BY THE ASSESSEE. IT WAS ALSO BROUGHT TO THE NOTICE OF THE LD. CIT(APPEALS) BY THE ASSESESE-COMPANY THAT TAX AT SOURCE ON THE ENTIRE S ALARIES PAID TO THE SAID EMPLOYEES INCLUDING THAT PART WHICH WAS PAID B Y M/S. RBESL-UK AND SUBSEQUENTLY REIMBURSED WAS ALSO DULY MADE AND DEPO SITED. IT WAS CONTENDED THAT THE AMOUNT IN QUESTION PAID TO M/S. RBESL-UK THUS WAS NOT IN THE NATURE OF FEES FOR TECHNICAL SERVICES AN D THE SAME BEING SIMPLY IN THE NATURE OF REIMBURSEMENT OF SALARIES PAID BY M/S. RBESL-UK FOR AND ON BEHALF OF THE ASSESSEE-COMPANY TO ITS EXPARTRIAT E EMPLOYEES, NO TAX AT SOURCE WAS LIABLE TO BE DEDUCTED AND THERE WAS NO Q UESTION OF DISALLOWANCE UNDER SECTION 40(A)(I). THIS CONTENTIO N OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE LD. CIT(APPEALS) AND KE EPING IN VIEW THE REASONS GIVEN BY THE ASSESSING OFFICER IN THE ASSES SMENT ORDER, HE PROCEEDED TO CONFIRM THE DISALLOWANCE MADE BY THE A SSESSING OFFICER UNDER SECTION 40(A)(I). 7. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OUTSET, INVITED OUR ATTENTION TO A COPY OF THE EMPLOYMENT AGREEMENT PLACED AT PAG E NO. 9 TO 21 OF THE PAPER BOOK AND POINTED OUT THE RELEVANT CLAUSES OF THE SAID AGREEMENT TO SHOW THAT THE AMOUNT OF SALARIES PAID TO THE CONCER NED TWO EMPLOYEES WAS TO BE PARTLY PAID IN LOCAL CURRENCY AND PARTLY IN FOREIGN CURRENCY. HE SUBMITTED THAT THE PART OF SALARY PAYABLE IN FOREIG N CURRENCY WAS PAID BY M/S. RBESL-UK ON BEHALF OF THE ASSESSEE-COMPANY AND THE SAME WAS SUBSEQUENTLY REIMBURSED BY THE ASSESSEE-COMPANY TO M/S. RBESL-UK. HE ALSO INVITED OUR ATTENTION TO THE RELEVANT TDS CERT IFICATES IN FORM NO. 16 TO SHOW THAT TAX AT SOURCE WAS DEDUCTED BY THE ASSE SSEE-COMPANY ON THE ENTIRE SALARIES PAID TO THE TWO EMPLOYEES IN LOCAL CURRENCY AS WELL AS THE FOREIGN CURRENCY. HE CONTENDED THAT THE AMOUNT IN Q UESTION PAID TO BOTH THE EMPLOYEES OUTSIDE INDIA BY M/S. RBESL-UK AND SU BSEQUENTLY REIMBURSED BY THE ASSESSEE-COMPANY THUS WAS ALREADY SUBJECTED TO TDS I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 8 OF 34 AS SALARY INCOME AND THERE WAS NO QUESTION OF MAKIN G ANY DISALLOWANCE UNDER SECTION 40(A)(I) FOR THE ALLEGED FAILURE OF T HE ASSESSEE TO DEDUCT TAX AT SOURCE. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE DECISIONS OF MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS.- NAGASE INDIA PVT. LIMITED (ITA NOS. 7866 & 8022/MUM./2011 DATED 05.03 .2014) AND IN THE CASE OF TEMASEK HOLDINGS ADVISERS INDIA PVT. LIMITE D VS.-DCIT [160 TTJ 556]. 8 THE LD. D.R., ON THE OTHER HAND, INVITED OUR ATTE NTION TO THE EMPLOYMENT AGREEMENT PLACED ON RECORD BY THE ASSESS EE AND POINTED OUT CERTAIN ANOMALIES AND SHORTCOMINGS THERE. ACCORDING TO HIM, THE SAID AGREEMENT WAS NOT DULY SIGNED BY THE CONCERNED PART IES AND IDENTITY OF ONE PERSON MR. FRANK RUTHER IS NOT PROVED. HE SUBMI TTED THAT EVEN THE TDS CERTIFICATES FILED BY THE ASSESSEE IN FORM NO. 16 DO NOT CONTAIN PERMANENT ACCOUNT NUMBER. HE CONTENDED THAT ALL THE SE INFIRMITIES IN THE RELEVANT DOCUMENTARY EVIDENCE PRODUCED BY THE ASSE SSEE AS WELL AS OTHER INFIRMITIES SPECIFICALLY POINTED OUT BY THE A SSESSING OFFICER CLEARLY SHOW THAT THE CLAIM OF THE ASSESSEE OF HAVING PAID THE AMOUNT IN QUESTION AS REIMBURSEMENT TO SALARIES PAID TO ITS EMPLOYEES WAS NOT GENUINE AND AS HELD BY THE ASSESSING OFFICER, THE SAID PAYMENT BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES, TAX WAS LIABLE TO BE D EDUCTED WHICH THE ASSESSEE CLEARLY FAILED TO DO. HE CONTENDED THAT TH E PROVISIONS OF SECTION 40(A)(I) THUS ARE CLEARLY ATTRACTED AND THE DISALLO WANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPE ALS) BY INVOKING THE SAID PROVISIONS IS FULLY JUSTIFIED. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE AMOUNT I N QUESTION PAID BY THE ASSESSEE-COMPANY TO M/S. RBESL-UK IS CLAIMED TO BE REIMBURSEMENT OF SALARY PAID BY THE SAID CONCERN ON BEHALF OF THE AS SESSEE-COMPANY TO ITS EMPLOYEES. ALTHOUGH THIS CLAIM OF THE ASSESSEE IS D ULY SUPPORTED BY AN I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 9 OF 34 EMPLOYMENT AGREEMENT, THE SAME HAS NOT BEEN FOUND T O BE RELIABLE EVIDENCE BY THE AUTHORITIES BELOW ON THE BASIS OF S AME INFIRMITIES AND ANOMALIES POINTED OUT BY THEM. AT THE TIME OF HEARI NG BEFORE US, THE LD. D.R. HAS ALSO TAKEN THE SAME STAND. HOWEVER, THE FA CT, WHICH IS NOT IN DISPUTE, IS THAT TAX AT SOURCE WAS DULY DEDUCTED BY THE ASSESSEE FROM THE ENTIRE SALARIES PAID TO THE CONCERNED TWO EMPLOYEES INCLUDING THAT PART, WHICH WAS PAID BY M/S. RBESL-UK IN FOREIGN CURRENCY AND SUBSEQUENTLY CLAIMED TO BE REIMBURSED BY THE ASSESSEE-COMPANY TO M/S. RBESL-UK. THIS CLAIM OF THE ASSESSEE OF HAVING PAID AND DEDUC TED TAX AT SOURCE FROM THE AMOUNT IN QUESTION AS SALARY INCOME IS DULY SUP PORTED BY TDS CERTIFICATES ISSUED IN FORM NO. 16 AND THE SAME, IN OUR OPINION, IS SUFFICIENT NOT ONLY TO ESTABLISH THAT THE AMOUNT IN QUESTION IS ALREADY SUBJECTED TO TDS BUT ALSO THAT THERE WAS EMPLOYER-E MPLOYEE RELATIONSHIP BETWEEN THE ASSESSEE-COMPANY AND THE CONCERNED TWO EMPLOYEES. IN THE CASE OF NAGASE INDIA PVT. LIMITED (SUPRA), A SIMILA R FACT SITUATION WAS INVOLVED, INASMUCH AS, THE AMOUNT PAID BY THE ASSES SEE ON ACCOUNT OF REIMBURSEMENT OF SALARY WAS DISALLOWED BY THE ASSES SING OFFICER UNDER SECTION 40(A)(I) FOR WANT OF TDS. HOWEVER, KEEPING IN VIEW THAT THE ASSESSEE HAD ALREADY DEDUCTED TAX UNDER SECTION 192 ON ENTIRE SALARY REIMBURSED BY HIM, IT WAS HELD BY THE TRIBUNAL THAT THERE WAS NO CASE OF DISALLOWANCE UNDER SECTION 40(A)(I). IN THE SAID CA SE, NOTHING WAS BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SHOW AS TO HOW REIMBURSEMENT OF SALARY MADE BY THE ASSESSEE WAS IN THE NATURE OF FEES FOR TECHNICAL SERVICES AND KEEPING IN VIEW THIS SIT UATION, WHICH IS SIMILAR TO THE PRESENT CASE, IT WAS HELD BY THE TRIBUNAL TH AT THERE WAS NO ELEMENT OF INCOME IN THE PAYMENT MADE BY THE ASSESSEE TO JA PANESE COMPANY SO AS TO WARRANT DISALLOWANCE UNDER SECTION 40(A)(I) F OR THE ALLEGED FAILURE OF DEDUCTION OF TAX AT SOURCE. A SIMILAR FACT SITUA TION WAS INVOLVED IN THE CASE OF TEMASEC HOLDINGS ADVISORS INDIA PVT. LIMITE D (SUPRA), WHEREIN MUMBAI BENCH OF ITAT HELD THAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TDS UNDER SECTION 194 ON THE REIMBURSEMENT OF SALAR Y OF SECONDED I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 10 OF 34 EMPLOYEES. KEEPING IN VIEW THESE DECISIONS OF COORD INATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. NAGASE INDIA PVT. LIMI TED (SUPRA) AND TEMASEK HOLDINGS ADVISERS INDIA PVT. LIMITED (SUPRA ) AND HAVING REGARD TO ALL THE FACTS OF THE CASE, WE ARE OF THE VIEW TH AT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FROM THE AMOUNT IN Q UESTION PAID TO M/S. RBESL-UK TOWARDS REIMBURSEMENT OF SALARY PAID TO EX PATRIATE EMPLOYEES AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(I) FOR THE ALLEGED FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURCE IS NOT SUSTAINABLE. WE ACCORDINGLY DELETE THE SAID DIS ALLOWANCE AND ALLOW GROUND NO. 1 OF THE ASSESSEES APPEAL. 10. THE ISSUE RAISED IN GROUND NO. 2 RELATES TO THE DISALLOWANCE OF RS.1,69,27,615/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF PROVISION MADE FOR MARKE TING EXPENSES. 11. AS NOTICED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD MADE A PROVISION OF R S.19.90 CRORES FOR MARKETING EXPENSES. HE, THEREFORE, REQUIRED THE ASS ESSEE TO FURNISH THE COMPLETE DETAILS SHOWING THE NATURE AND BASIS OF PR OVISION MADE FOR MARKETING EXPENSES. IN REPLY, THE FOLLOWING SUBMISS ION WAS MADE BY THE ASSESSEE IN WRITING:- DURING THE PREVIOUS YEAR RELEVANT TO THE AY 2003-0 4, RBIL HAS MADE A PROVISION OF RS.199,003,162/- IN RESPECT OF MARKETING EXPENSES. THE SAID PROVISION WAS REQUIRED TO BE MADE BY RBIL SINCE IT IS FOLLOWING THE MERCANTILE S YSTEM OF ACCOUNTING, PROVISIONS REQUIRED TO BE MADE IN RESPE CT OF ALL EXPENSES INCURRED DURING THE ACCOUNTING PERIOD IRRE SPECTIVE AT THE TIME PAYMENT. SINCE RBIL IS FOLLOWING MERCANTILE SYSTEM OF ACCOUN TING WHICH IS A PERMISSIBLE METHOD OF ACCOUNTING AS PER SECTION 145 OF THE ACT AND THE ACCOUNTS ARE AUDITED AND PRO VISION MADE AS PER THE PRESCRIBED ACCOUNTING POLICIES SHOU LD NOT BE DISALLOWED UNLESS SPECIFICALLY PROVIDED IN THE P ROVISION OF THE ACT. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 11 OF 34 FURTHER, OUT OF THE PROVISION OF RS.199,033,162/-, A SUBSTANTIAL AMOUNT HAS BEEN PAID SUBSEQUENTLY AND B ALANCE IS LIKELY TO BE PAID IN DUE COURSE. HENCE, NO DISAL LOWANCE IS WARRANTED ON THIS ACCOUNT. WITHOUT PREJUDICE TO THE AFORESAID SUBMISSION, PLEA SE NOTE THAT IN CASE OF WRITE BACK OF THE AFORESAID PROVISI ON, IF IT IS FOUND TO BE IN EXCESS OR FOR ANY OTHER REASONS, THE SAME WILL LIABLE TO TAX IN VIEW OF THE PROVISIONS OF SECTION 41 OF THE ACT. HENCE, THERE WILL BE NO LOSS TO THE REVENUE ON THAT ACCOUNT ALSO. IN VIEW OF THE AFORESAID WE SUBMIT THAT NO DISALLOW ANCE IS WARRANTED IN RESPECT OF THE IMPUGNED PROVISION OF RS.199,003,162/-. 12. THE ABOVE EXPLANATION OFFERED BY THE ASSESSEE W AS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER. ACCORDING TO H IM, THE ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, WAS ENTI TLED TO CREATE PROVISION ONLY AGAINST ASCERTAINED LIABILITIES. IN THIS REGARD, HE FOUND FROM THE RELEVANT DETAILS FILED BY THE ASSESSEE THA T OUT OF THE PROVISION OF RS.19.90 CRORES MADE BY THE ASSESSEE, THE ACTUAL A MOUNT SPENT WAS ONLY RS.18.20 CRORES AND THE BALANCE AMOUNT OF RS.1.69 C RORES WAS FOUND TO BE EXCESS. HE HELD THAT THIS EXCESS PROVISION WAS LIAB LE TO BE DISALLOWED NOT BEING PERTINENT TO THE YEAR UNDER CONSIDERATION AND ACCORDINGLY THE DISALLOWANCE OF RS.1,69,27,615/- WAS MADE BY HIM ON ACCOUNT OF PROVISION FOR MARKETING EXPENSES. 13. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OUT OF THE PROVISION FOR MARKETING EXPENSES WAS DISPUTED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(APPEALS). BESIDES REITERATING TH E SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER, IT WAS ALSO BROUGHT T O THE NOTICE OF THE LD. CIT(APPEALS) BY THE ASSESSEE THAT THE EXCESS PROVIS ION OF RS.1.69 CRORES HAVING BEEN OFFERED TO TAX IN THE SUBSEQUENT YEARS UNDER SECTION 41(1) AT THE SAME RATE, THERE WAS NO LOSS TO THE REVENUE. TH E LD. CIT(APPEALS), HOWEVER, DID NOT FIND MERIT IN THE STAND OF ASSESSE E AND REJECTING THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 12 OF 34 SAME, HE PROCEEDED TO CONFIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXCESS PROVISION MADE FOR MAR KETING EXPENSES. 14. THE LD. COUNSEL FOR THE ASSESSEE EXPLAINED THE NATURE OF PROVISION MADE FOR MARKETING EXPENSES AND SUBMITTED THAT SUCH PROVISION IS REQUIRED TO BE MADE IN THE RELEVANT YEAR ON ESTIMAT ED BASIS. HE SUBMITTED THAT DUE TO THE CHANGES THAT TAKE PLACE, THE ACTUAL EXPENDITURE FINALLY INCURRED ON MARKETING GETS CHANGED AND DEPE NDING ON THE QUANTUM OF EXPENDITURE ACTUALLY INCURRED, THE EXCES S PROVISION IS WRITTEN BACK IN THE SUBSEQUENT YEARS AND OFFERED TO TAX. HE CONTENDED THAT SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING, THE PROVISION FOR MARKETING EXPENSES IS REQUIRED TO BE MADE FOR T HE RELEVANT YEAR ON ESTIMATED BASIS AND SINCE SUCH PROVISION, IF FOUND TO BE EXCESS, IS BEING OFFERED TO TAX IN THE SUBSEQUENT YEARS AT VIRTUALLY THE SAME RATE, THE DISALLOWANCE MADE IN THE YEAR UNDER CONSIDERATION O N ACCOUNT OF SUCH EXCESS PROVISION IS NOT JUSTIFIED. 15. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT THE PROVISION MADE BY THE ASSESSEE FOR MARKETING EXPENSES ON ESTIMATED BASIS IS ALWAYS FOUND TO BE ON THE HIGHER SIDE. HE SUBMITTED THAT I T IS NOT CLEAR AS TO WHY THERE SHOULD BE DIFFERENCE BETWEEN PROVISION MADE A ND ACTUAL AMOUNT OF EXPENSES INCURRED. HE CONTENDED THAT IN THE ABSENCE OF ANY SOUND BASIS GIVEN BY THE ASSESSEE FOR MAKING THE ESTIMATE, THE EXCESS PROVISION IS LIABLE TO BE DISALLOWED AS RIGHTLY HELD BY THE AUTH ORITIES BELOW. 16. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE QUESTION THAT ARISES FOR OUR CONSIDERATION IN THE PRESENT CONTEXT IS WHETHER THE ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IS RIGHT IN RECOGNI ZING AND MAKING THE PROVISION FOR MARKETING EXPENSES IN THE FACTS AND C IRCUMSTANCES OF THE CASE. IN THIS REGARD, A USEFUL REFERENCE MAY BE MAD E TO THE DECISION OF I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 13 OF 34 HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDI (PVT.) LIMITED VS.- CIT REPORTED IN 314 ITR 62 CITED BY THE LD. C OUNSEL FOR THE ASSESESE, WHEREIN IT WAS HELD BY THE HONBLE APEX COURT THAT A PROVISION CAN BE RECOGNIZED WHEN (A) AN ENTERPRISE HAS A PRESENT OBL IGATION AS A RESULT OF A PAST EVENT, (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, (C) A RELIABLE E STIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IN THE PRESENT CASE, THE PROVISION MADE BY THE ASSESSEE-COMPANY FOR MARKETING EXPENSES AMOUNTI NG TO RS.19.90 CRORES IS ALLOWED BY THE ASSESSING OFFICER TO THE E XTENT OF RS.18.20 CRORES THEREBY ACCEPTING THAT THE ASSESSEE-COMPANY HAD A P RESENT OBLIGATION ON ACCOUNT OF SUCH MARKETING EXPENSES AND THERE WAS RE QUIREMENT TO MAKE PROVISION TO SETTLE THE SAME. HIS ONLY OBJECTION IS THAT THE PROVISION SO MADE WAS EXCESS GOING BY THE AMOUNT ACTUALLY REQUIR ED BY THE ASSESSEE SUBSEQUENTLY TO SETTLE THE OBLIGATION AND ACCORDING LY A DISALLOWANCE TO THE EXTENT OF SUCH EXCESS PROVISION AMOUNTING TO RS .1.69 CRORES WAS MADE BY HIM. THE ASSESSING OFFICER THUS FINALLY OBJECTED TO THE QUANTUM OF PROVISION MADE BY THE ASSESSEE FOR MARKETING EXPENS ES ON THE GROUND THAT THE ESTIMATE MADE BY THE ASSESSEE OF THE AMOUN T OF OBLIGATION IS NOT RELIABLE. 17. AT THE TIME OF HEARING BEFORE US, THE LD. D.R. HAS ALSO REITERATED THIS STAND BY SUBMITTING THAT THE PROVISION MADE BY THE ASSESESE FOR MARKETING EXPENSES IS FOUND TO BE ALWAYS ON THE HIG HER SIDE, WHICH CLEARLY SHOWS THAT THE ESTIMATE MADE BY THE ASSESSE E OF THIS LIABILITY IS NOT RELIABLE. WE FIND IT DIFFICULT TO ACCEPT THIS S TAND OF THE REVENUE. IT IS PERTINENT TO NOTE HERE THAT OUT OF THE TOTAL PROVIS ION OF RS.19.90 CRORES MADE BY THE ASSESSEE FOR MARKETING EXPENSES, A SUM OF RS.18.20 CRORES WAS REQUIRED TO SETTLE THE OBLIGATION AND ONLY THE BALANCE AMOUNT OF RS.1.69 CRORES, WHICH IS LESS THAN 10% OF THE TOTAL PROVISION MADE BY THE ASSESSEE REMAINED EXCESS. MOREOVER, SUCH EXCESS PRO VISION WAS SUBSEQUENTLY REVERSED BY THE ASSESSEE AND OFFERED T O TAX AS THE SAME RATE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 14 OF 34 AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE RE SULTING INTO NO LOSS WITH THE REVENUE. HAVING REGARD TO ALL THESE FACTS OF THE CASE, IT CANNOT BE SAID THAT THE ESTIMATE MADE BY THE ASSESSEE OF THE PROVISIONS FOR MARKETING EXPENSES WAS NOT RELIABLE. IN OUR OPINION , THE PROVISION FOR MARKETING EXPENSES WAS RIGHTLY RECOGNIZED AND MADE BY THE ASSESSEE BEING ITS LIABILITY FOR THE EXPENSES OF ITS BUSINES S AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) MERELY ON THE BASIS THAT SUCH PROVISION IS FOUND TO BE FINALLY EXCESSIVE IS NOT SUSTAINABLE. WE, ACCORDINGLY, DELETE THE DISALL OWANCE MADE ON THIS ISSUE AND ALLOW GROUND NO. 2 OF THE ASSESSEES APPE AL. 18. THE ISSUE RAISED IN GROUND NO. 3 RELATES TO THE DISALLOWANCE OF RS.1,76,50,483/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF COST OF FILMS PRODUCED B Y THE ASSESSEE FOR THE PURPOSE OF BUSINESS PROMOTION. 19. IN THE ADVERTISEMENT EXPENSES DEBITED TO THE PR OFIT & LOSS ACCOUNT, THE COST INCURRED ON PRODUCTION OF FILMS WAS INCLUD ED BY THE ASSESSEE- COMPANY. IN THIS REGARD, EXPLANATION OFFERED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE FILMS PRODUCED FOR B USINESS PROMOTION ARE GENERALLY CONCEPT OR THEME BASED AND THE SAME ARE C HANGED QUITE OFTEN. IT WAS SUBMITTED THAT THESE FILMS ARE NOT USED FOR MORE THAN A YEAR AND SOME OF THEM ARE OF ONLY ONE TIME USE. IT WAS ALSO POINTED OUT THAT SUCH FILMS DO NOT HAVE ANY VALUE AFTER THE PROMOTION IS OVER AND THE EXPENSES INCURRED ON PRODUCTION OF SUCH FILMS ARE ONETIME EX PENSES, WHICH ARE REVENUE IN NATURE HAVING NO ENDURING BENEFIT. ON FU RTHER QUERY RAISED BY THE ASSESSING OFFICER, IT WAS ALSO CLARIFIED BY THE ASSESSEE-COMPANY THAT THE FILMS PRODUCED FOR PROMOTION ARE OF TWO CATEGOR IES, ONE IS AUDIO/VISUALS, WHICH ARE PRODUCED FOR SMALL EVENTS AND NORMALLY AIRED FOR NOT MORE THAN ONE MONTH AND SECOND IS THE REGUL AR FILMS, WHICH ARE NORMALLY AIRED FOR NOT MORE THAN ONE YEAR. IN THIS REGARD, THE ASSESSING I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 15 OF 34 OFFICER FOUND THAT THE ASSESSEE HAS INCURRED EXPENS ES ON PRODUCTION OF FILMS THROUGHOUT THE YEAR INCLUDING THE MONTH OF FE BRUARY AND MARCH, 2003. ACCORDING TO HIM, EVEN GOING BY THE ASSESSEE S SUBMISSION THAT USEFUL LIFE OF SOME FILMS WAS ONE YEAR, THE COST IN CURRED ON PRODUCTION OF SUCH FILM COULD BE ALLOWED ONLY ON PRO-RATA BASIS D EPENDING ON THE NUMBER OF MONTHS IN WHICH THE FILMS HAD BEEN USED I N THE YEAR UNDER CONSIDERATION. HE ACCORDINGLY REQUIRED THE ASSESSEE TO FURNISH THE RELEVANT DETAILS OF EXPENDITURE INCURRED ON PRODUCT ION OF FILMS DURING THE YEAR UNDER CONSIDERATION MONTH-WISE AND ON THAT BAS IS MADE A DISALLOWANCE ON PRO-RATA BASIS AT RS.1,76,50,483/-. 20. BEFORE THE LD. CIT(APPEALS), RELIANCE WAS PLACE D BY THE ASSESSEE ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS.- BERGER PAINTS INDIA LIMITED REPORTED IN 254 ITR 503 TO CONTEND THAT ADVERTISEMENT EXPENSES WHICH ARE NORMALLY TO BE TRE ATED AS REVENUE EXPENSES SINCE THE MEMORY OF PURCHASING MARKET IS S HORT AND THE ADVERTISEMENT IS NEEDED FROM YEAR TO YEAR. IT WAS A LSO SUBMITTED THAT THE LIFE SPAN OF REGULAR AD-FILMS IS ABOUT A YEAR AND S INCE EXPENSES ON PRODUCTION OF SUCH FILMS ARE REQUIRED TO BE INCURRE D THROUGHOUT THE YEAR, THERE IS NO QUESTION OF ANY ENDURING BENEFIT ARISIN G FROM THE EXPENSES INCURRED ON PRODUCTION OF FILMS. THE LD. CIT(APPEAL S) DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE. ACCORDING TO HIM, THE CASE OF BERGER PAINTS INDIA LIMITED (SUPRA) CITED BY THE LD. COUNS EL FOR THE ASSESSEE WAS DISTINGUISHABLE ON FACTS AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF COST OF FILMS ON PRO-RATA BAS IS WAS FULLY JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HE ACCORDI NGLY CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE. 21. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LIFE OF AD-FILMS IS GENERALLY ABOVE ONE YEAR AND ON THIS BASIS ALONE , THE ASSESSING OFFICER HELD THAT THE EXPENSES INCURRED ON PRODUCTION OF FI LMS AT THE END OF THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 16 OF 34 YEAR UNDER CONSIDERATION WILL HAVE ITS BENEFIT EVEN IN THE SUBSEQUENT YEAR. HE CONTENDED THAT THE ASSESSING OFFICER AS WE LL AS LD. CIT(APPEALS) HOWEVER COMPLETELY IGNORED THE FACT THAT THE EXPEND ITURE IN QUESTION INCURRED BY THE ASSESSEE ON PRODUCTION OF FILMS BY ITSELF IS REVENUE IN NATURE AND THE SAME CANNOT BE DISALLOWED ON PRO-RAT A BASIS AND DEFERRED TO THE NEXT YEAR AS THE CONCEPT OF DEFERRED REVENUE EXPENDITURE IS NOT RECOGNIZED BY THE INCOME TAX ACT. HE SUBMITTED THAT A SIMILAR EXPENDITURE INCURRED ON PRODUCTION OF FILMS WAS ALL OWED BY THE ASSESSING OFFICER HIMSELF IN THE EARLIER YEARS AND EVEN IN TH E IMMEDIATELY SUCCEEDING YEAR, I.E. A.Y. 2004-05, THE LD. CIT(APP EALS) HAS ALLOWED SIMILAR EXPENDITURE WHICH IS CHALLENGED BY THE REVE NUE IN THE APPEAL FILED BEFORE THE TRIBUNAL. HE ALSO CONTENDED THAT T HE ASSESSING OFFICER HIMSELF HAS ACCEPTED THE NATURE OF EXPENDITURE IN Q UESTION AS REVENUE BY NOT TREATING THE SAME AS CAPITAL AND THIS BEING SO, THERE IS NO QUESTION OF ATTRIBUTING THE SAME TO THE NEXT YEAR ON PRO-RATA B ASIS UNDER THE INCOME TAX ACT. IN SUPPORT OF THIS CONTENTION, THE LD. COU NSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE AHMEDABAD SPECIAL BEN CH OF ITAT IN THE CASE OF ACIT VS.- ASHIMA SYNTEX LIMITED REPORTED IN 170 ITD 1 AND THE HONBLE GUJARAT HIGH COURT IN THE CASE OF DCIT VS. - CORE HEALTH CARE LIMITED REPORTED IN 308 ITR 263. 22. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT THE MATCHING PRINCIPLE SHOULD BE APPLIED WHILE ALLOWING THE EXPE NDITURE INCURRED BY THE ASSESSEE ON THE PRODUCTION OF FILMS AND SINCE T HE BENEFIT OF SUCH EXPENDITURE WAS PARTLY AVAILABLE TO THE ASSESSEE IN THE SUBSEQUENT YEAR, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON PRO-RATA BASIS IS FULLY JUSTIFIED. HE ALSO CONTENDED THAT SUCH DISALLOWANCE ON PRO-RATA BASIS IS WORKED OUT B Y THE ASSESSING OFFICER ON THE BASIS OF WORKING GIVEN BY THE ASSESS EE HIMSELF AND THE ASSESSEE THEREFORE, IS NOT JUSTIFIED TO FIND FAULT IN SUCH DISALLOWANCE MADE BY THE ASSESSING OFFICER ON PRO-RATA BASIS. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 17 OF 34 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE EXPENDITURE IN QUESTION INCURRED BY THE ASSESSEE ON PRODUCTION OF AD-FILMS IS REVENUE IN NATURE AND AS RIGHTLY SUBMITTED BY THE LD. COUNS EL FOR THE ASSESSEE, THIS POSITION HAS BEEN ACCEPTED EVEN BY THE ASSESSING OF FICER AS WELL AS BY THE LD. CIT(APPEALS) BY NOT TREATING THE SAME AS CAPITA L EXPENDITURE. THIS, HOWEVER, CONSIDERED THAT THE BENEFIT OF AD-FILMS WA S PARTLY AVAILABLE TO THE ASSESSEE EVEN IN THE IMMEDIATELY SUCCEEDING YEA R GOING BY THE USEFUL LIFE OF THE FILMS OF ONE YEAR AND ACCORDINGLY MADE A DISALLOWANCE ON PRO- RATA BASIS AND DEFERRED THE SAME TO THE SUBSEQUENT YEAR. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF AHMEDABAD SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF ASHIM A SYNTEX LIMITED (SUPRA), WHEREIN THE QUESTION RELATING TO THE TREAT MENT TO BE GIVEN TO THE DEFERRED REVENUE EXPENDITURE UNDER THE INCOME TAX A CT HAD COME UP FOR CONSIDERATION. IN THIS REGARD, IT WAS HELD BY THE T RIBUNAL THAT THE DEFERRED REVENUE EXPENDITURES DENOTES EXPENDITURE F OR WHICH A PAYMENT HAS BEEN MADE OR A LIABILITY INCURRED WHICH IS ESSE NTIALLY REVENUE IN NATURE BUT IS WRITTEN OFF OVER A PERIOD OF TIME FOR VARIOUS REASONS LIKE QUANTUM AND EXPECTED FUTURE BENEFIT. IT WAS HELD TH AT FOR THE PURPOSE OF ALLOWABILITY OF ANY EXPENDITURE FOR THE PURPOSE OF INCOME TAX ACT, WHAT IS MATERIAL IS THE CLASSIFICATION BETWEEN CAPITAL A ND REVENUE AND THE INCOME TAX ACT DOES NOT RECOGNIZE ANY CONCEPT OF DE FERRED REVENUE EXPENDITURE. IN THE SAID CASE, THERE WAS NOTHING BR OUGHT ON RECORD TO SUGGEST THAT ANY ASSET, TANGIBLE OR INTANGIBLE, HAD BEEN CREATED BY INCURRING THE EXPENDITURE IN QUESTION AND IT WAS HE LD BY THE TRIBUNAL THAT THE DEFERRED REVENUE EXPENDITURE WAS RIGHTLY CLAIME D BY THE ASSESSEE AS DEDUCTION IN THE YEAR IN WHICH IT WAS INCURRED. 24. IN THE CASE OF CORE HEALTH CARE LIMITED (SUPRA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, A SIMILAR ISSUE WAS INVOL VED INASMUCH AS I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 18 OF 34 SUBSTANTIAL EXPENDITURE WAS INCURRED BY THE ASSESSE E ON A SPECIAL ADVERTISEMENT CAMPAIGN RESULTING INTO BENEFIT FOR M ORE THAN A YEAR AND WHILE DEALING WITH THE ISSUE OF ALLOWABILITY OF SUC H EXPENDITURE, HONBLE GUJARAT HIGH COURT HELD THAT THERE IS NO SUCH CATEG ORY OF DEFERRED REVENUE EXPENDITURE UNDER THE INCOME TAX ACT. IT WA S HELD THAT THE BENEFIT TO THE BUSINESS CANNOT BE TERMED CAPITAL OR REVENUE ONLY ON THE BASIS OF THE PERIOD FOR WHICH THE BENEFIT IS DERIVE D BY THE ASSESSEE. IT WAS HELD THAT ANY BENEFIT RESULTING TO A BUSINESS NEED NOT BE CONFINED TO THE YEAR OF EXPENDITURE AND THIS IS AN ORDINARY INCIDEN T OF A RUNNING BUSINESS. ACCORDINGLY, THE ADVERTISEMENT EXPENSES I NCURRED BY THE ASSESESE TO CREATE BRAND IMAGE WAS HELD TO BE ALLOW ABLE AS REVENUE EXPENDITURE BY THE HONBLE GUJARAT HIGH COURT. IN T HE PRESENT CASE ALSO, THERE IS NO DISPUTE THAT THE EXPENDITURE IN QUESTIO N INCURRED BY THE ASSESSEE ON PRODUCTION OF AD-FILMS IS REVENUE EXPEN DITURE AND THE SAME IS DISALLOWED ON PRO-RATA BASIS BY THE AUTHORITIES BELOW ONLY ON THE GROUND THAT THE RESULTANT BENEFIT WAS NOT CONFINED TO THE YEAR UNDER CONSIDERATION AND THE SAME WAS PARTLY AVAILABLE EVE N IN THE SUBSEQUENT YEAR. THE RATIO OF THE DECISION OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF CORE HEALTH CARE LIMITED (SUPRA) AND THAT O F THE AHMEDABAD SPECIAL BENCH DECISION OF ITAT IN THE CASE OF ASHIM A SYNTEX LIMITED (SUPRA) THUS IS SQUARELY APPLICABLE IN THE FACTS OF THE PRESENT CASE AND RESPECTFULLY FOLLOWING THE SAME, WE DELETE THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPE ALS) ON ACCOUNT OF COST OF AD-FILMS ON PRO-RATA BASIS. GROUND NO. 3 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 25. THE ISSUE RAISED IN GROUND NO. 4 OF THE ASSESSE ES APPEAL RELATES TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF ASSESSEES CLAIM FOR DED UCTION UNDER SECTION 80IA TO THE EXTENT OF RS.47,34,361/-. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 19 OF 34 26. IN THE RETURN OF INCOME FILED FOR THE YEAR UNDE R CONSIDERATION, THE ASSESSEE-COMPANY HAD CLAIMED DEDUCTION OF RS.2,08,6 4,312/- UNDER SECTION 80IA BEING 30% OF THE PROFIT OF RS.6,95,47, 705/- OF ITS INSECTICIDES PLANT AT HOSUR IN TAMIL NADU. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE CLAIM OF THE ASSESSEE F OR DEDUCTION UNDER SECTION 80IA WAS EXAMINED BY THE ASSESSING OFFICER AND ON SUCH EXAMINATION, HE WAS OF THE VIEW THAT THE ALLOCATION OF INDIRECT EXPENSES MADE BY THE ASSESSEE AMONG THE DIFFERENT UNITS WAS NOT ON SOUND BASIS. THE ASSESSEE ALSO COULD NOT PRODUCE THE PRODUCT-WIS E DETAILS OF DEBTS WRITTEN OFF AS REQUIRED BY THE ASSESSING OFFICER. I N THE ABSENCE OF THESE DETAILS AND THE FAILURE OF THE ASSESSEE TO EXPLAIN AND JUSTIFY AND THE BASIS ADOPTED BY IT FOR ALLOCATION OF INDIRECT EXPENSES, THE ASSESSING OFFICER PROCEEDED TO ALLOCATE THE EXPENSES IN THE RATIO OF SALES OF EACH UNIT AND WORK OUT THE PROFIT OF THE ELIGIBLE UNIT OF THE ASS ESSEE AT HOSUR AT RS.5,37,66,504/-. ACCORDINGLY, THE CLAIM OF THE ASS ESSEE FOR DEDUCTION OF RS.2,08,64,312/- WAS RESTRICTED BY HIM TO RS.1,61,2 9,951/-. ON APPEAL, THE LD. CIT(APPEALS) UPHELD THE ACTION OF THE ASSES SING OFFICER ON THIS ISSUE FOR THE SAME REASONS AS GIVEN BY THE ASSESSIN G OFFICER. 27. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LD. COUN SEL FOR THE ASSESSEE HAS VERY FAIRLY AND FRANKLY ADMITTED THAT THE RELEVANT DETAILS AS REQUIRED BY THE ASSESSING OFFICER TO JUSTIFY THE ALLOCATION OF INDIRECT EXPENSES ARE NOT AVAILABLE WITH THE ASSESSEE AND IN THE ABSENCE OF T HE SAME, THERE IS NOTHING TO DISPUTE THE ALLOCATION OF INDIRECT EXPEN SES MADE BY THE ASSESSING OFFICER IN THE RATIO OF SALES OF EACH UNI T. WE, THEREFORE, FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMPUGNED O RDER OF THE LD. CIT(APPEALS) CONFIRMING THE DISALLOWANCE MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF ASSESSEES CLAIM FOR DEDUCTION UNDER SECTION 80IA TO THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 20 OF 34 EXTENT OF RS.47,34,361/- AND UPHOLDING THE SAME, WE DISMISS GROUND NO. 4 OF THE ASSESSEES APPEAL. 28. THE ISSUE RAISED IN GROUND NO. 5 OF THE ASSESSE ES APPEAL RELATES TO THE ADDITION OF RS.19,56,989/- MADE BY THE ASSESSIN G OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT. 29. DURING THE COURSE OF ITS REGULAR BUSINESS OF DE ALING IN CORE HEALTH CARE AND PERSONAL CARE PRODUCTS, THE ASSESSEE-COMPA NY HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (IN SHORT AE), INTER ALIA, OF EXPORT OF RAW MATERIALS AND FINISHED GOODS FOR A TOTAL VALUE OF RS.2,59,44,394/-. THE ASSESSEE-COMPANY HAD ALSO ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AES OF IMPORT O F MICRO-WAX FOR A VALUE OF RS.1,73,153/- DURING THE YEAR UNDER CONSIDERATIO N. IN ORDER TO ASCERTAIN THE ARMS LENGTH PRICE (IN SHORT ALP) O F THESE INTERNATIONAL TRANSACTIONS, A REFERENCE UNDER SECTION 92CA(1) OF THE ACT WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFIC ER (IN SHORT TPO). IN THE TRANSFER PRICING STUDY REPORT FILED BY THE ASSE SSEE, THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS INVOLVIN G EXPORT OF RAW MATERIALS AND FINISHED PRODUCTS WAS DETERMINED BY T HE ASSESSING OFFICER BY USING TRANSACTIONS NET MARGIN METHOD (IN SHORT TNMM) AS THE MOST APPROPRIATE METHOD. THE OPERATING PROFIT TO TOTAL C OST (OP/TC) WAS TAKEN AS THE PRICE LEVEL INDICATOR (IN SHORT PLI) A ND SINCE THE OP/TC OF THESE TRANSACTIONS AS WORKED OUT BY THE ASSESSEE AT 7.96% WAS WITHIN THE PERMISSIBLE RANGE OF DEVIATION OF THE AVERAGE OP/TC OF FIVE ENTITIES SELECTED AS COMPARABLES, THE PRICE CHARGED TO ITS A ES FOR EXPORT OF RAW MATERIALS AND FINISHED PRODUCTS WAS CLAIMED BY THE ASSESSEE TO BE AT ARMS LENGTH. THE TNMM ADOPTED BY THE ASSESSEE TO B ENCH MARK THESE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 21 OF 34 INTERNATIONAL TRANSACTIONS WAS NOT DISPUTED BY THE TPO. HE, HOWEVER, NOTED FROM THE WORKING OF OP/TC MADE BY THE ASSESSE E OF ALL THE RELEVANT INTERNATIONAL TRANSACTIONS THAT THE EXPORT MADE BY THE ASSESSEE TO ITS AES WAS COMPRISING OF INTERMEDIATES WORTH RS.1,59,00,35 6/- AND FINISHED GOODS WORTH RS.1,58,85,038/-. HE ALSO FOUND THAT OU T OF THE EXPORT OF RS.1,59,00,356/- OF INTERMEDIATES, A SUM OF RS.85,8 5,289/- WAS ON ACCOUNT OF EXPORT OF ONE PRODUCT, I.E. PCMX. IN THI S REGARD, HE NOTED FROM THE COST AUDIT REPORT PREPARED BY THE COST ACCOUNTA NT THAT THE ASSESSEE- COMPANY HAD INCURRED A LOSS ON THE EXPORT OF PCMX I N THE CALENDAR YEAR 2002. HE, THEREFORE, REQUIRED THE ASSESSEE TO SHOW- CAUSE AS TO WHY THE LOSS SHOWN IN THE COST AUDIT REPORT SHOULD NOT BE T AKEN AS AN ACTUAL RESULT FOR THE PURPOSE OF DETERMINING THE ALP OF THE RELEV ANT INTERNATIONAL TRANSACTIONS BY USING TNMM. IN REPLY, IT WAS SUBMIT TED BY THE ASSESSEE THAT THE COST AUDIT REPORT WAS FOR THE CALENDAR YEA R OF 2002, WHILE THE WORKING MADE BY IT OF OP/TC OF THE RELEVANT INTERNA TIONAL TRANSACTIONS WAS FOR THE FINANCIAL YEAR 01.04.2002 TO 31.03.2003 . THE ASSESSING OFFICER, HOWEVER, NOTED FROM THE RELEVANT DETAILS F URNISHED BY THE ASSESSEE THAT ALL THE RELEVANT EXPORTS WERE MADE BY THE ASSESSEE- COMPANY TILL 31 ST DECEMBER, 2002 EXCEPT ONE INVOICE, WHICH WAS RAISE D ON 31.03.2003. ACCORDING TO HIM, IT WAS THUS CLEAR THA T THE ASSESEE-COMPANY HAD ACTUALLY SUFFERED LOSS IN THE EXPORT OF PCMX AS POINTED OUT IN THE COST AUDIT REPORT. THE SAID LOSS, THEREFORE, WAS ALSO TA KEN FOR CONSIDERATION BY THE ASSESSING OFFICER TO RE-COMPUTE THE OP/TC OF TH E RELEVANT TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS AE AT 3.54%. HE ALSO NOTED THAT THE ENTITIES SELECTED BY THE ASSESSEE AS COMPA RABLES IN THE TRANSFER PRICING STUDY REPORT WERE DEALING IN DETERGENT AND SOAP AND THE SAME, THEREFORE, WERE NOT COMPARABLES. HE ALSO NOTED THAT THE ASSESSEE- COMPANY HAD ENTERED INTO VOLUMINOUS TRANSACTIONS WI TH THIRD PARTIES DURING THE YEAR UNDER CONSIDERATION AND THE SAME RE PRESENTING INTERNAL COMPARABLES WERE MORE APPROPRIATE TO ADOPT FOR THE PURPOSE OF COMPARABILITY ANALYSIS. HE ACCORDINGLY WORKED OUT T HE OP/TC OF THESE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 22 OF 34 TRANSACTIONS OF THE ASSESSEE WITH THIRD PARTIES AT 10.11% AND APPLYING THE SAME, THE ARMS LENGTH PRICE OF THE INTERNATION AL TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS AE INVOLVING EXPORT OF RA W MATERIALS AND FINISHED PRODUCTS WAS WORKED OUT BY HIM AT RS.2,78, 38,983/- AS AGAINST THE PRICE OF RS.2,59,44,394/- CHARGED BY THE ASSESS EE. THE DIFFERENCE OF RS.18,94,589/- ACCORDINGLY WAS WORKED OUT BY HIM AS TRANSFER PRICING ADJUSTMENT. 30. AS REGARDS THE INTERNATIONAL TRANSACTIONS WITH AES INVOLVING IMPORT OF WAX, COMPARABLE UNCONTROLLED PRICE (IN SHORT CU P) METHOD WAS ADOPTED BY THE ASSESESE AS THE MOST APPROPRIATE MET HOD TO BENCH MARK THESE TRANSACTIONS. IN THIS REGARD, THE CLAIM OF TH E ASSESSEE-COMPANY WAS THAT SINCE NO MARKING WAS CHARGED BY THE ASSOCIATED ENTERPRISES IN THESE TRANSACTIONS, THE PRICE CHARGED WAS AT ARMS LENGTH . IN THIS REGARD, IT WAS FOUND BY THE TPO THAT THE ASSESSEE HAS IMPORTED THE SAME PRODUCT AT RS.184/- PER KG. FROM THIRD PARTY ON 01.03.2005 AS AGAINST THE PRICE OF RS.288/- PER KG. CHARGED BY ITS A.E. ALTHOUGH THE S AID TRANSACTION DATED 01.03.2005 WAS NOT IN THE SAME YEAR, THE SAME BEING THE SOLITARY CUP AVAILABLE, THE TPO ADOPTED IT AND WORKED OUT THE AL P OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE FOR IMPORT OF WAX AT RS.1,10,753/- AS AGAINST THE ACTUAL PRICE OF RS.1,7 3,153/- CHARGED BY THE AE RESULTING INTO T.P. ADJUSTMENT OF RS.62,400/-. A CCORDINGLY, IN THE ORDER PASSED UNDER SECTION 92CA(3) DATED 17.03.2006 , THE TOTAL TRANSFER PRICING ADJUSTMENT REQUIRED TO BE DONE IN RESPECT O F THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE WAS WORKED OUT BY THE TPO AT RS.19,56,989/- AND CONSEQUENTLY THE ADDITION TO THA T EXTENT WAS MADE BY THE ASSESSEE TO THE TOTAL INCOME OF THE ASSESEE IN THE ASSESSMENT COMPLETED UNDER SECTION 143(3) VIDE AN ORDER DATED 27.03.2006. ON APPEAL, THE LD. CIT(APPEALS) CONFIRMED THE SAID ADD ITION MADE BY THE ASSESSING OFFICER. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 23 OF 34 31. THE LD. COUNSEL FOR THE ASSESSEE TOOK US THROUG H THE TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSESSEE TO S HOW THE REASONS FOR SELECTIAL TNMM AS THE MOST APPROPRIATE METHOD TO BE NCHMARK THE TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS AE IN VOLVING EXPORT OF INTERMEDIATES AND FINISHED PRODUCTS AS ALSO THE WOR KING MADE BY THE ASSESSEE OF OP/TC OF SUCH TRANSACTIONS AT 7.96%. HE SUBMITTED THAT THE TPO HAS NEITHER DISPUTED THE METHOD ADOPTED BY THE ASSESSEE TO BENCHMARK THESE INTERNATIONAL TRANSACTIONS NOR THE WORKING MADE BY THE ASSESSEE OF OP/TC OF SUCH TRANSACTIONS. HE SUBMITTE D THAT THE TPO, HOWEVER, ADJUSTED THE OP/TC WORKED OUT BY THE ASSES SEE ON THE BASIS OF COST AUDIT REPORT WHERE THE LOSS WAS SHOWN IN RESPE CT OF EXPORT OF ONE PRODUCT, I.E. PCMX. HE CONTENDED THAT THE SAID COST AUDIT REPORT, HOWEVER, WAS PREPARED FOR THE CALENDAR YEAR OF 2002 WHILE TH E WORKING MADE BY THE ASSESESE OF OP/TC OF THE RELEVANT INTERNATIONAL TRANSACTIONS WAS FOR THE FINANCIAL YEAR 2002-03. HE ALSO CONTENDED THAT THE EXPORT OF PCMX WAS ONLY THE PART OF EXPORT AND THE TPO WRONGLY FOC USSED ON THE SAME IGNORING THAT THE OVERALL EXPORT OF THE ASSESSEE-CO MPANY TO ITS AES HAD RESULTED INTO OPERATING MARGIN OF 7.96%. HE FURTHER CONTENDED THAT THE TPO HAS ALSO MADE A MISTAKE IN COMPARING THE EXPORT SALE OF THE ASSESSEE WITH DOMESTIC SALE IGNORING THAT THE PRODUCT MIX OR PRODUCT RANGE OF THESE TWO SECTORS WAS DIFFERENT AND THE ASSESESE WA S ENTITLED FOR INCENTIVES IN RESPECT OF EXPORT SALES, WHICH WAS NO T AVAILABLE IN CASE OF DOMESTIC SALES. HE SUBMITTED THAT THE ALP DETERMINE D BY THE TPO THUS SUFFERS FROM VARIOUS INFIRMITIES AND MISTAKES AND I F AT ALL THE BENCH- MARKING DONE BY THE ASSESSEE IN THE TRANSFER PRICIN G STUDY REPORT IS ALSO NOT FOUND ACCEPTABLE FOR ANY DEFECTS, THE MATTER MA Y BE SENT BACK TO THE TPO FOR DOING THE EXERCISE OF DETERMINATION OF ALP AFRESH. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 24 OF 34 32. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT EVEN THOUGH THE COST AUDIT REPORT WAS FOR THE CALENDAR YEAR, 2002 ENDING ON 31.12.2012, THE EXPORT OF PCMX WAS MAINLY MADE BY THE ASSESSEE IN T HE PERIOD COVERED BY THE COST AUDIT REPORT WITH ONLY ONE EXPORT MADE ON 31.03.2003 AS POINTED OUT BY THE TPO. HE CONTENDED THAT THE RELEVANT FIGU RES APPEARING IN THE COST AUDIT REPORT AND SHOWING LOSS IN CASE OF EXPOR T OF PCMX HAS NOT BEEN DISPUTED BY THE ASSESSEE AT ANY STAGE AND THE SAME, THEREFORE, CANNOT BE IGNORED. HE ALSO INVITED OUR ATTENTION TO THE RELEV ANT PORTION OF THE TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSE SSEE TO POINT OUT THAT THE OP/TC OF THE FIVE COMPARABLES SELECTED BY THE A SSESSEE WAS WORKED OUT BY USING MULTIPLE YEAR DATA OF THREE YEARS. HE ALSO POINTED OUT THAT THE PRODUCTS DEALT IN BY THE SAID ENTITIES TAKEN AS COMPARABLES ARE NOT EXACTLY SIMILAR OR COMPARABLES TO THAT OF THE ASSES SEE. HE FURTHER CONTENDED THAT THE EXPORT OF PCMX CONSTITUTED NEARL Y 33% OF THE TOTAL EXPORT OF THE ASSESSEE-COMPANY TO ITS AES AND THE F ACT THAT THE EXPORT OF PCMX HAD RESULTED IN LOSS AS SHOWN IN THE COST AUDI T REPORT IS SUFFICIENT TO SHOW THAT THE SEGMENTAL FINANCIALS TAKEN BY THE ASSESSEE TO WORK OUT THE OP/TC OF THE RELEVANT INTERNATIONAL TRANSACTION S WITH AE ARE NOT RELIABLE. 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS RIGHTLY S UBMITTED BY THE LD. D.R., THE FACT THAT THE EXPORT OF PCMX, WHICH CONSTITUTED ABOUT 1/3 RD OF THE EXPORT MADE BY THE ASSESSEE TO ITS AE, RESULTED IN A LOSS AS SHOWN IN THE COST AUDIT REPORT CLEARLY CREATES DOUBT ABOUT THE R ELIABILITY OF THE SEGMENTAL FINANCIALS TAKEN BY THE ASSESSEE TO WORK OUT THE OP/TC OF ITS EXPORT WITH AES AT 7.96%. IT IS PERTINENT TO NOTE H ERE THAT NOTHING HAS BEEN BROUGHT ON RECORD EITHER BEFORE THE AUTHORITIE S BELOW OR BEFORE US TO SHOWS THAT THE FIGURES REPORTED IN THE COST AUDI T REPORT SHOWING THE LOSS IN THE EXPORT OF PCMX ARE NOT CORRECT. IN REPL Y TO A SPECIFIC QUERY I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 25 OF 34 RAISED BY US, THE LD. COUNSEL FOR THE ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN THE BASIS ON WHICH THESE SEGMENTAL FINANCIALS SHOWI NG OP/TC OF THE EXPORT OF THE ASSESSEE-COMPANY TO ITS AE AT 7.96% A RE TAKEN. IN OUR OPINION, THE OP/TC OF THE RELEVANT TRANSACTIONS WOR KED OUT BY THE ASSESSEE, THEREFORE, CANNOT BE TAKEN AS BASIS FOR B ENCH MARKING THE RELEVANT TRANSACTIONS BY ADOPTING TNMM AND IT WOULD BE MORE APPROPRIATE TO TAKE THE OP/TC AT THE ENTITY LEVEL B Y TAKING INTO CONSIDERATION THE ENTIRE TRANSACTIONS OF THE ASSESS EE. THE ENTITY LEVEL OP/TC THUS TAKEN IS REQUIRED TO BE COMPARED WITH TH E OP/TC OF THE ENTITIES WHICH ARE FUNCTIONALLY SIMILAR BY TAKING T HE FINANCIAL DATA OF ONLY THE RELEVANT YEAR AND NOT ON THE BASIS OF MULTIPLE YEAR DATA AS TAKEN BY THE ASSESESE IN THE TRANSFER PRICING STUDY REPORT, WHICH IS NOT PERMISSIBLE AS PER THE RELEVANT RULES. WE, THEREFOR E, SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSU E AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TRANSFE R PRICING OFFICER WITH A DIRECTION TO DO AFRESH THE EXERCISE OF DETERMINING THE ALP OF THE RELEVANT INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS AES BY FOLLOWING TNMM AND BY TAKING OP/TC AT ENTITY LEGAL AS PLI. WHILE DOING THE COMPARABILITY ANALYSIS, THE TPO MAY CONSIDER TH E ENTITIES ALREADY SELECTED AS COMPARABLES BY THE ASSESSEE AND/OR SELE CT FRESH/NEW COMPARABLES AS HE MAY THINK FIT IN ACCORDANCE WITH THE PROCEDURE LAID DOWN IN THE RELEVANT RULES. IF THE AVERAGE MARGIN O F THE ENTITIES FINALLY SELECTED IS FOUND TO BE BEYOND THE DEVIATION LIMIT PRESCRIBED IN LAW, THE SAME MAY BE APPLIED TO THE RELEVANT INTERNATIONAL T RANSACTIONS OF THE ASSESSEE-COMPANY TO WORK OUT THE ALP AND THE TP ADJ USTMENT. AS THE TPO IS NOW DIRECTED TO TAKE OP/TC AT ENTITY LEVEL TO BE NCH MARK THE RELEVANT INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES BY ADOPTING TNMM, NO SEPARATE BENCH MARKING IS REQU IRED TO BE DONE IN CASE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSES SEE-COMPANY WITH ITS AE INVOLVING IMPORT OF WAX AND THE SAME CAN BE BENC H MARKED ON THE SAME BASIS AS THE OTHER INTERNATIONAL TRANSACTIONS INVOLVING EXPORT OF I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 26 OF 34 INTERMEDIATES AND FINISHED PRODUCTS. GROUND NO. 5 O F THE ASSESSEES APPEAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATIS TICAL PURPOSES. 34. AS REGARDS THE REVENUES APPEAL FOR A.Y. 2003-0 4 BEING ITA NO. 1699/KOL/2008, THE LD. COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT THE TAX EFFECT INVOLVED THEREIN IS LESS THAN THE REVISE D MONETARY LIMIT RECENTLY FIXED BY THE CBDT VIDE CIRCULAR NO. 21/201 5 DATED 10 TH DECEMBER, 2015 AT RS.10,00,000/- FOR FILING THE APP EAL BY THE REVENUE BEFORE THE TRIBUNAL AND THIS POSITION CLEARLY EVIDE NT FROM THE GROUNDS RAISED BY THE REVENUE IN THIS APPEAL IS NOT DISPUTE D EVEN BY THE LD. D.R. IN CIRCULAR NO. 21/2015 (SUPRA) RECENTLY ISSUED BY THE CBDT, THE MONETARY LIMIT FOR FILING THE APPEALS BY THE REVENU E BEFORE THE TRIBUNAL HAS BEEN INCREASED TO RS.10,00,000/- AND AS CLARIFI ED IN THE SAID CIRCULAR, THE SAID MONETARY LIMIT IS APPLICABLE RETROSPECTIVE LY EVEN TO THE APPEALS PENDING BEFORE THE TRIBUNAL. THE CBDT HAS ALSO INST RUCTED THAT SUCH PENDING APPEALS BELOW THIS SPECIFIED TAX LIMIT OF R S.10,00,000/- MAY BE WITHDRAWN/ NOT PRESSED. KEEPING IN VIEW THE INSTRUC TION GIVEN BY THE CBDT VIDE CIRCULAR NO. 21/2015 DATED 10.12.2015, WH ICH IS SQUARELY APPLICABLE IN THE PRESENT CASE, THE APPEAL FILED BY THE REVENUE FOR A.Y. 2003-04 IS TREATED AS WITHDRAWN/NOT PRESSED AND DIS MISSED ACCORDINGLY. 35. NOW WE SHALL TAKE UP THE CROSS APPEALS FOR A.Y. 2004-05 BEING ITA NO. 1024/KOL/2009 (ASSESSEES APPEAL) AND ITA NO. 9 73/KOL/2009 (REVENUES APPEAL), WHICH ARE DIRECTED AGAINST THE ORDER OF LD. CIT(APPEALS)-XII, KOLKATA DATED 30.03.2009. 36. AS REGARDS THE GROUND NO. 1 RAISED IN THE APPEA L OF THE ASSESSEE FOR AY 2004-05, IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATING TO THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 27 OF 34 DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SE CTION 40A(I) AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF PAY MENT MADE BY THE ASSESSEE TO RBESL-UK TOWARDS EXPATRIATE FEES FOR NO N-DEDUCTION OF TAX AT SOURCE BY TREATING THE SAME AS IN THE NATURE OF FEE S OF TECHNICAL SERVICES IS SIMILAR TO THE ONE INVOLVED IN GROUND NO. 1 OF T HE ASSESSEES APPEAL FOR AY 2003-04, WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDER. FOLLOWING OUR CONCLUSION DRA WN IN AY 2003-04, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFIC ER AND CONFIRMED BY THE LD. CIT(APPEALS) ON THIS ISSUE AND ALLOW GROUND NO. 1. 37. IN GROUND NO. 2 RAISED IN ITS APPEAL FOR AY 200 4-05, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF RS.60,54,560/- M ADE BY THE ASSESSING OFFICER UNDER SECTION 40A(I) AND CONFIRMED BY THE L D. CIT(APPEALS) ON ACCOUNT OF PAYMENT MADE FOR AVAILING CONNECTIVITY S ERVICES WITHOUT DEDUCTION OF TAX AT SOURCE. 38. DURING THE YEAR UNDER CONSIDERATION, THE ASSESE E-COMPANY HAD MADE PAYMENT OF RS.16,54,516/- FOR GLOBAL CONNECTIV ITY TO RECKITT BENCKISER INDIA LIMITED AS REIMBURSEMENT. ACCORDING TO THE ASSESSING OFFICER, THE SAID AMOUNT PAID BY THE ASSESESE FOR U SE OF SERVER/CONNECTIVITY WAS CLEARLY TAXABLE IN INDIA AS ROYALTY AND THE ASSESSEE, THEREFORE, WAS LIABLE TO DEDUCT TAX AT SO URCE FROM THE SAME. SINCE THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DEDUCT SUCH TAX, A DISALLOWANCE OF RS.16,54,516/- WAS MADE BY THE ASSE SSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 40A(I). ON APPEA L, THE LD. CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE MADE BY THE ASSESSI NG OFFICER FOR THE SAME REASONS AS GIVEN BY THE ASSESSING OFFICER. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 28 OF 34 39. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LIMITED CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESESE IS THAT THE TAX FR OM THE AMOUNT IN QUESTION HAS BEEN DEDUCTED AND PAID BY THE ASSESEE IN ASSESSMENT YEAR 2009-10 AND THE ASSESSEE, THEREFORE, IS ELIGIBLE TO CLAIM DEDUCTION FOR THE SAME IN AY 2009-10. SINCE THE APPEAL OF THE ASSESSE E FOR AY 2009-10 IS PENDING BEFORE THE TRIBUNAL, THE ASSESSEE IS AT LIB ERTY TO RAISE THIS ISSUE DURING THE COURSE OF HEARING OF THE SAID APPEAL SEE KING SUITABLE DIRECTION AS THE BENCH MAY THINK FIT. WITH THIS OBSERVATION, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) CONFIRMING T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE AND DISMISS GROUND NO. 2. 40. THE ISSUE INVOLVED IN GROUND NO. 3 RELATING TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF EXCESS PROVISION MADE BY THE ASSESSEE F OR MARKETING EXPENSES IS SIMILAR TO GROUND NO. 2 INVOLVED IN THE APPEAL O F THE ASSESSEE FOR AY 2003-04, WHICH HAS ALREADY BEEN DECIDED BY US IN TH E FOREGOING PORTION OF THIS ORDER. FOLLOWING OUR CONCLUSION DRAWN IN AY 2003-04, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON THIS ISSUE AND ALLOW GROUND NO. 3. 41. THE ISSUE INVOLVED IN GROUND NO. 4 OF THE ASSES SEES APPEAL FOR AY 2004-05 RELATES TO THE DETERMINATION OF RATE OF TAX PAYABLE BY THE ASSESESE ON CAPITAL GAIN ARISING FROM THE SALE OF F LATS. 42. IN THE YEAR UNDER CONSIDERATION, FLATS OWNED BY THE ASSESSEE WERE SOLD AND SINCE THE SAID FLATS WERE HELD BY THE ASSE SSEE FOR MORE THAN 36 MONTHS, THE CAPITAL GAIN ARISING FROM THE SALE THER EOF WAS OFFERED TO TAX BY THE ASSESESE AT CONCESSIONAL RATE APPLICABLE TO LONG-TERM CAPITAL GAIN. SINCE THE FLATS SOLD BY THE ASSESSEE WERE DEPRECIAB LE ASSETS, THE ASSESSING I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 29 OF 34 OFFICER INVOKED THE PROVISION OF SECTION 50 AND BRO UGHT TO TAX THE CAPITAL GAIN ARISING FROM THE SALE THEREOF AT NORMAL RATE A PPLICABLE TO SHORT-TERM CAPITAL GAIN. ON APPEAL, THE LD. CIT(APPEALS) UPHEL D THE ACTION OF THE ASSESSING OFFICER ON THIS ISSUE BY OBSERVING THAT T HE PROVISIONS OF SECTION 50 WERE CLEARLY APPLICABLE TO THE CAPITAL GAINS ARI SING ON ACCOUNT OF SALE OF DEPRECIABLE ASSETS NOT ONLY FOR COMPUTATION BUT ALSO FOR THE RATE OF TAX. 43. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON REC ORD. ALTHOUGH THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON CERTAIN JUDI CIAL PRONOUNCEMENTS, IT IS OBSERVED THAT THE SAME ARE NOT APPLICABLE IN THE PRESENT CONTEXT INVOLVING THE ISSUE RELATING TO RATE OF TAX APPLICA BLE TO THE CAPITAL GAIN ARISING FROM SALE OF DEPRECIABLE ASSETS. ON THE OTH ER HAND, THE RELEVANT PROVISIONS OF SECTION 50 AS APPLICABLE IN THE PRESE NT CONTEXT ARE VERY CLEAR AND SPECIFIC AS RIGHTLY HELD BY THE LD. CIT(A PPALS) AND AS PER THE SAID PROVISIONS, WHICH ARE OVERRIDING IN NATURE, TH E CAPITAL GAIN ARISING FROM THE SALE OF DEPRECIABLE ASSETS IS CHARGEABLE T O TAX AT THE RATE APPLICABLE TO SHORT-TERM CAPITAL GAINS IRRESPECTIVE OF THE HOLDING PERIOD. WE, THEREFORE, FIND NO MERIT IN GROUND NO. 4 RAISED BY THE ASSESEE AND DISMISS THE SAME. 44. THE ISSUE RAISED IN GROUND NO. 5 RELATES TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A WHICH IS CONFIRMED BY THE LD. CIT(APPALS) BY APPLYING RULE 8D. 45. IN THE YEAR UNDER CONSIDERATION, THE ASSESESE-C OMPANY HAD EARNED INTEREST OF RS.98,26,464/- ON TAX-FREE BONDS AND TH E SAME WAS CLAIMED TO BE EXEMPT FROM TAX IN THE RETURN OF INCOME FILED. T HE DISALLOWANCE ON I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 30 OF 34 ACCOUNT OF EXPENSES INCURRED IN RELATION TO THE SAI D EXEMPT INCOME, HOWEVER, WAS NOT OFFERED BY THE ASSESSEE AS REQUIRE D BY THE PROVISIONS OF SECTION 14A. IN THIS REGARD, THE CLAIM OF THE ASSES ESE THAT NO DIRECT EXPENDITURE WAS INCURRED IN RELATION TO THE EXEMPT INTEREST INCOME WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER. HE E STIMATED SUCH EXPENSES AT 5% OF THE EXEMPT INCOME AND MADE A DISA LLOWANCE OF RS.4,91,323/- UNDER SECTION 14A. ON APPEAL, THE LD. CIT(APPEALS) HELD THAT RULE 8D OF INCOME TAX RULES WAS APPLICABLE TO THE YEAR UNDER CONSIDERATION WITH RETROSPECTIVE EFFECT AS HELD BY THE HONBLE MUMBAI SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL M ANAGEMENT PVT. LIMITED (ITA NO. 8057/MUM./2003 DATED 20.10.2008). HE ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO RE-COMPUTE THE DI SALLOWANCE TO BE MADE UNDER SECTION 14A BY APPLYING RULE 8D. 46. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS RIGHTLY P OINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, THE DECISION OF THE MUMBA I SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LT D. (SUPRA) HAS BEEN SUBSEQUENTLY OVERRULED BY THE HONBLE BOMBAY HIGH C OURT IN ITS DECISION RENDERED IN THE CASE OF GODREJ & BOYCEE MANUFACTURI NG CO. LTD. VS.- DCIT REPORTED IN 328 ITR 81 BY HOLDING THAT RULE 8D IS A PPLICABLE ONLY PROSPECTIVELY FROM AY 2008-09. AS FURTHER HELD BY T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCEE MANUFACTU RING CO. LIMITED (SUPRA), DISALLOWANCE UNDER SECTION 14A FOR THE YEA RS PRIOR TO 2008-09 IS REQUIRED TO BE DETERMINED ON SOME REASONABLE BASIS. IN THIS REGARD, IT IS OBSERVED THAT THE COORDINATE BENCHES OF THIS TRIBUN AL HAS TAKEN A CONSISTENT VIEW BY HOLDING THAT DISALLOWANCE UNDER SECTION 14A TO THE EXTENT OF 1% OF THE EXEMPT INCOME WOULD BE FAIR AND REASONABLE. FOLLOWING THIS CONSISTENT VIEW TAKEN BY THE TRIBUNA L, WE MODIFY THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSU E AND DIRECT THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 31 OF 34 ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE UNDE R SECTION 14A TO THE EXTENT OF 1% OF THE EXEMPT INCOME EARNED BY THE ASS ESSEE. GROUND NO. 5 IS THUS PARTLY ALLOWED. 47. AS REGARDS GROUND NO. 6 OF THE ASSESSEES APPEA L FOR AY 2004-05, IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATIN G TO THE DEDUCTIBILITY OF LOSS SUFFERED BY THE ASSESSEE ON ABANDONED CAPITAL WIP IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF BENANI SERVICES LIMITED VS.- CIT REPORTED IN 233 TAXMAN 340, WHEREIN IT WAS HELD THAT EXPENDITUR E INCURRED FOR CONSTRUCTION/ ACQUISITION OF NEW FACILITY, WHICH WA S SUBSEQUENTLY ABANDONED AT WORK-IN-PROGRESS STAGE IS ALLOWABLE IN ORDER TO WRITE OFF AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE HONBLE JURISDIC TIONAL HIGH COURT, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE LOSS CLAI MED BY THE ASSESSEE ON ACCOUNT OF ABANDONED CAPITAL WIP. GROUND NO. 6 IS A CCORDINGLY ALLOWED. 48. AS REGARDS THE GROUND NO. 7, IT IS OBSERVED THA T THE ISSUE INVOLVED THEREIN RELATING TO DISALLOWANCE MADE BY THE ASSESS ING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) UNDER SECTION 80I A IS SIMILAR TO THE ONE INVOLVED IN GROUND NO. 4 OF THE ASSESSEES APPEAL F OR AY 2003-04 WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING POR TION OF THIS ORDER. FOLLOWING OUR CONCLUSION DRAWN IN AY 2003-04, WE UP HOLD THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSUE AND DIS MISS GROUND NO. 7. 49. THE ISSUE RAISED IN GROUND NO. 8 RELATING TO TH E ADDITION OF RS.2,38,356/- MADE BY THE ASSESSING OFFICER AND CON FIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF T.P. ADJUSTMENT HAS NOT BEEN PRESSED BY THE I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 32 OF 34 LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. 50. IN THE ADDITIONAL GROUND RAISED IN AY 2004-05, THE ASSESSEE HAS RAISED AN ISSUE RELATING TO ITS ALTERNATIVE CLAIM F OR DEDUCTION ON ACCOUNT OF COST OF ADVERTISEMENT FILMS, IF THE SAME IS HELD TO BE NOT ALLOWABLE FOR AY 2003-04 ON THE GROUND THAT IT PERTAINS TO AY 200 4-05. SINCE WE HAVE ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF ENTIRE EXPENDITURE INCURRED ON PRODUCTION OF AD-FILMS AS M ADE IN AY 2003-04, THE ISSUE RAISED IN ADDITIONAL GROUND HAS BECOME IN FRUCTUOUS. THE SAME IS ACCORDINGLY DISMISSED. 51. AS REGARDS THE REVENUES APPEAL FOR AY 2004-05, IT IS OBSERVED THAT THE ISSUE INVOLVED IN GROUND NO. 1 RAISED THEREIN R ELATING TO THE ASSESSEES CLAIM FOR DEDUCTION ON ACCOUNT OF EXPEND ITURE INCURRED FOR PRODUCTION OF AD-FILMS IS SIMILAR TO THE ONE INVOLV ED IN GROUND NO. 3 OF THE ASSESSEES APPEAL FOR AY 2003-04, WHICH HAS ALR EADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDER. FOLLOWIN G OUR CONCLUSION DRAWN FOR AY 2003-04, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ALLOWING THE CLAIM OF THE ASSESSEE ON THIS ISSUE AN D DISMISS GROUND NO. 1 OF THE REVENUES APPEAL. 52. IN GROUND NO.2 OF ITS APPEAL, THE REVENUE HAS C HALLENGED THE ACTION OF THE LD. CIT(APPALS) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ASSESSEES CLAIM FOR WRITING OFF OF DEPOSIT GIVEN FOR GAS AND ELECTRICITY AMOUNTING TO RS.55,000/-. I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 33 OF 34 53. THE AMOUNT OF RS.55,000/- GIVEN TOWARDS GAS AND ELECTRICITY DEPOSIT WAS WRITTEN OFF BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION AND THE SAME WAS CLAIMED AS DEDUCTION. ACCORDING TO THE ASSESSING OFFICER, THE SAID AMOUNT OF DEPOSITS HAVING NOT BEE N OFFERED BY THE ASSESESE FOR TAX IN THE EARLIER YEARS, DEDUCTION FO R THE SAME AS BAD DEBTS WAS NOT ALLOWABLE. ON APPEAL, THE LD. CIT(APPEALS) ALLOWED THE CLAIM OF THE ASSESESE ON THE GROUND THAT THE LOSS SUFFERED B Y THE ASSESESE AS A RESULT OF NON-RECOVERY OF DEPOSITS WAS INCIDENTAL T O THE BUSINESS OF THE ASSESSEE. 54. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON REC ORD. IT IS NOT IN DISPUTE THAT THE DEPOSITS TOWARDS GAS AND ELECTRICI TY WERE PAID BY THE ASSESSEE DURING THE COURSE OF ITS NORMAL BUSINESS A ND THE LOSS SUFFERED AS A RESULT OF NON-RECOVERY OF THE SAID DEPOSITS WAS A LOSS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE LD. CIT(APPEALS), IN OUR OPINION, THEREFORE WAS FULLY JUSTIFIED IN ALLOWING THE CLAIM OF THE AS SESSEE FOR THE SAID LOSS AND WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF T HE LD. CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE ON THIS ISSUE. GROUND NO. 2 OF THE REVENUES APPEAL FOR AY 2004-05 IS ACCORDINGLY DISMISSED. 55. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED WHILE BOTH THE APPEALS OF THE REVENUE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON MAY 25, 2016 . SD/- SD/- (S.S. VISWANETHRA RAVI) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER KOLKATA, THE 25 TH DAY OF MAY, 2016 I.T.A. NOS. 1671/KOL./2008 & 1024/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 & I.T.A. NOS. 1699/KOL/2008 & 973/KOL/2009 ASSESSMENT YEARS: 2003-2004 & 2004-2005 PAGE 34 OF 34 COPIES TO : (1) RECKITT BENCKISER (INDIA) LIMITED, 206, A.J.C. BOSE ROAD, BUSINESS TOWERS, UNIT 7C, 7 TH FLOOR, KOLKATA-700 017 (2) JOINT /DEPUTY COMMISSIONER OF INCOME TAX, RANGE-12, KOLKATA, 3, GOVERNMENT PLACE (WEST), KOLKATA-700 001 (3) COMMISSIONER OF INCOME-TAX (APPEALS)-XII, KOLK ATA (4) COMMISSIONER OF INCOME TAX, KOLKATA (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.