ACIT 5(1), MUMBAI V. CADBURY INDIA LTD, MUMBAI

ITA 5876/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3416 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 16-04-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 26-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: JASMIN; J D MISTRY NISHANT THAKKAR
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Retrospective amendment; Fair market value; Valuation report; Scheme of amalgamation
• Section: 92C; 92B; 92F; 92E; 14A; 32; 37; 92

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND C.N. PRA SAD,JUDICIAL MEMBER ./I.T.A./5470/MUM/2012, /ASSESSMENT YEAR: 2005-06 MONDELEZ INDIA FOODS PRIVATE LIMITED (FORMERLY KNOWN AS M/S. CADBURY INDIA LIMITED ) , MONDELEZ HOUSE, UNIT NO.2001, 20 TH FLOOR, TOWER-3 (WING C)INDIA BULLS FINANCE CENTRE, PAREL. MUMBAI-400 013. PAN: AAACH 0460 H VS. ADDL. CIT, RANGE-5(1) MUMBAI. ./I.T.A./5876/MUM/2012, /ASSESSMENT YEAR: 2005-06 ADDL. CIT,6(3),AAYAKAR BHAVAN,M.K. ROAD, MUMBAI-20 VS. MONDELEZ INDIA FOODS PRIVATE LIMITED MUMBAI-400 013. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: S/SHRI N.K.CHAND-CIT ASSESSEE BY: SHRI J.D. MISTRY, NISHANT THAKKAR & MS. JASMIN / DATE OF HEARING: 18.04.2016 / DATE OF PRONOUNCEMENT: 18.05.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER,DATED 12/7/2012, OF THE CIT ( A)-15,MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER(AO) HAVE FILED CROSS APPE ALS FOR THE YEAR UNDER CONSIDERATION.ASSESSEE-COMPANY,ENGAGED IN THE BUSIN ESS OF MANUFACTURING AND MARKETING OF MALTED FOOD,DRINKS AND CHOCOLATES,FILE D ITS RETURN OF INCOME ON 31/10/2005,DECLARING TOTAL INCOME OF RS.61.98 CRORE S.THE AO COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT,ON 31/01/2008,DETE RMINING THE INCOME OF THE ASSESSEE AT RS. 75.67 CRORES. 2. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS. 7.30 CRORES OUT OF THE ROYALTY PAYMENT MADE BY THE ASSESSEE TO ITS ASSOCIA TED ENTERPRISE(AE),M/S. CADBURY SCHWEPPES OVERSEAS LTD.,UK(CSOL)ON THE GROU ND THAT SAME WAS NOT AT ARMS LENGTH PRICE(ALP)DURING THE ASSESSMENT PRO CEEDINGS,THE AO FOUND 5470 & ORS.CADBURY 2 THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSA CTIONS (IT.S)WITH ITS ASSOCIATED ENTERPRISE(AE).FOR DETERMINING THE ALP OF SUCH TRAN SACTIONS,HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO). 2.1. DURING THE TRANSFER PRICING PROCEEDINGS,THE TPO OBS ERVED THAT THE ASSESSEE HAD ENTERED INTO A TECHNICAL ASSISTANCE AND ROYALTY AGREEMENT WITH CSOL ON 09.03.93FOR AVAILING BENEFITS OF TECHNICAL KNOWHOW DEVELOPED BY THE AE RELATING TO THE MANUFACTURING,PROCESSING,DISTRIBUTI NG AND MARKETING OF PRODUCTS AS WELL AS BENEFITS OF CONTINUING RESEARCH AND DEVE LOPMENT (R&D) UNDERTAKEN BY CSOL,THAT IT HAD ALSO ENTERED INTO AN AGREEMENT WITH AE ON 20. 12.2000, THAT THE ASSESSEE HAD AGREED TO PAY ROYALTY TO THE AE @ 1.25%, THAT IT HAD PAID ROYALTY TO THE TUNE OF RS.6.35CRORES,THAT IT ALSO P AID RS.730.41 LAKHS FOR THE USE OF TRADE MARK.THE TPO WAS OF THE OPINION THAT ROYAL TY PAID BY THE ASSESSEE (RS. 7.30CRORE)ON TRADEMARKS COULD NOT BE ALLOWED.IN THE APPELLATE PROCEEDINGS, THE FIRST APPELLATE AUTHORITY(FAA) UPHELD THE DISALLOWA NCE. 2.2. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR) STATED THAT IDENTICAL ISSUE WAS DECIDED IN FAVOUR O F THE ASSESSEE BY THE TRIBUNAL WHILE ADJUDICATING THE APPEAL FOR 2002-03(ITA NO.74 08/MUM/ 2010 & 7641/ M/10;DT.13.11.2013; PARA 37-43; PG-NO.15-16),THAT T HE SAID ORDER WAS FOLLOWED BY THE TRIBUNAL,WHILE DECIDING THE APPEALS FOR AY.S 2003-04 AND 04-05,THAT IN THE TP ORDER FOR THE AY.2010-11 AND 2011-12,THE TPO HAD NOT MADE ANY DISALLOWANCE FOR THE IDENTICAL PAYMENT.THE DEPARTME NTAL REPRESENTATIVE (DR)LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE DECIDING THE APPEAL FOR AY 2002-03( SUPRA) THE TRIBUNAL HAS DECIDED THE ISSUE AS UNDER:- 5470 & ORS.CADBURY 3 37.WE HAVE HEARD THE DETAILED ARGUMENTS FROM BOTH THE SIDES. THE BASIC ISSUE IS THE CORRECTNESS OF ALP ON THE ROYALTY PAYMENTS MADE BY THE ASSESSEE COMPANY TO ITS PARENT AE ON ACCOUNT OF TECHNICAL KNOWHOW AND TRADEMARK US AGE. 38.FROM THE ARGUMENTS OF THE DR, MADE ON BEHALF OF THE TPO, THE AGREEMENT FOR PAYING ROYALTY ON TECHNICAL KNOW HOW AT 1.25% AND T RADEMARK USAGE AT 1.25%, WERE OVERLAPPING AND THUS, TNMM METHOD USED BY THE ASSES SEE WAS INCORRECT. ACCORDING TO THE TPO, THE BEST METHOD TO ASCERTAIN ALP IN THE IN TEREST CASE WAS CUP, AS THE TRANSACTIONS WERE CONTROLLED. THIS WAS REASONABLE, AS NO DATA WAS AVAILABLE FROM INDEPENDENT SOURCE TO BENCHMARK THE TRANSACTIONS. 39.ON GOING THROUGH THE RECORDS AND THE ORDERS OF T HE REVENUE AUTHORITIES, WE FIND THAT IN SO FAR AS THE PAYMENT OF ROYALTY ON TECHNICAL KN OWHOW CONCERNED, THE ASSESSEE HAS BEEN PAYING TO ITS PARENT AE RIGHT FROM 1993, AS, O THER GROUP COMPANIES ARE PAYING ACROSS THE GLOBE. IT HAS BEEN ACCEPTED BY THE TPO T HAT THE PAYMENT DOES NOT EFFECT THE PROFITABILITY OF THE ASSESSEE, IF WE ARE TO EXAMINE THE ISSUE FROM THAT ANGLE AS WELL. IN ANY CASE THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHO W IS AT PAR WITH THE SIMILAR PAYMENTS FROM THE GROUP COMPANIES IN OTHER COUNTRIE S & REGION. BESIDES THIS, THE PAYMENT IS MADE AS PER THE APPROVAL GIVEN BY THE RB I AND SIA, GOVERNMENT OF INDIA. HENCE THERE CANNOT BE ANY SCOPE OF DOUBT THAT THE R OYALTY PAYMENT ON TECHNICAL KNOWHOW IS NOT AT ARMS LENGTH. 40.COMING TO THE ISSUE OF ROYALTY PAYMENT ON TRADEM ARK USAGE, WE FIND THAT THE ASSESSEE, IN FACT IS PAYING A LESSER AMOUNT, IF THE PAYMENTS ARE COMPARED WITH THE PAYMENTS TOWARDS TRADEMARK USAGE, BY THE OTHER GROU P COMPANIES USING THE BRAND CADBURY IN OTHER PARTS OF THE WORLD. ON THE OTHER H AND, IF WE EXAMINE THE ARGUMENT TAKEN BY THE TPO WITH REGARD TO OECD GUIDELINES. ON THIS POINT THE ASSESSEES PAYMENT IS COMING TO A LESSER FIGURE, AS DISCUSSED IN DETAIL BY THE CIT(A). 41.WE ARE NOT GOING INTO THE ARGUMENTS ADVANCED BY THE DR/TPO ON GEOGRAPHICAL DIFFERENCES, AND PAYMENTS MADE TO HARSHEY, AS THESE ARGUMENTS GETS MERGED IN THE INTERPRETATION AND DETAILS AVAILABLE IN THE TABLE S UPPLIED BY THE ASSESSEE AND TAKEN NOTE OF BY THE TPO AND THE CIT(A). 42.WE ARE ALSO NOT REFERRING TO THE CASE OF MARUTI SUZUKI LTD. AS WE FIND THAT IN SO FAR AS THE INSTANT CASE IS CONCERNED, THERE IS REALLY N O RELEVANCE. 43.ON THE BASIS OF THE ABOVE OBSERVATIONS, WE ARE O F THE OPINION THAT THE ROYALTY PAYMENT ON TRADEMARK USAGE IS WITHIN THE ARMS LENG TH AND DOES NOT CALL FOR ANY ADJUSTMENT. RESPECTFULLY,FOLLOWING THE ABOVE ORDER,AND THE ORDE R FOR SUBSEQUENT AY.S WE DECIDE THE GROUND OF APPEAL NO.1 IN FAVOUR OF THE ASSESSEE. 3. THE SECOND GROUND OF APPEAL IS ABOUT DISALLOWANCE O F AMP EXPENSES (RS.71. LAKHS)TOWARDS THE COST ALLOCABLE TO CSOL FOR THE BE NEFIT ACCRUING TO IT.ON PERUSAL OF THE ACCOUNTS OF THE ASSESSEE,THE TPO NOT ICED THAT THE ASSESSEE HAD DEBITED ADVERTISEMENT AND MARKETING EXPENSES AMOUNT ING TO RS.85.15CRORES, THAT IT WAS 11.11% OF THE SALES RECORDED BY THE ASS ESSEE DURING THE YEAR,THAT INDUSTRY AVERAGE UNDER THE SAID HEAD WORKED OUT TO 6.55% ONLY.THE TPO 5470 & ORS.CADBURY 4 DIRECTED THE ASSESSEE TO FILE THE DETAILS OF AMP EX PENSES, SALES AND ROYALTY PAID FOR A PERIOD OF LAST 10 YEARS.AFTER ANALYSING THE D ETAILS,THE TPO CONCLUDED THAT THE ASSESSEE WAS PAYING HIGHER AND HIGHER ROYALTY T O THE AE,THAT THE AMP HAD ALSO RECORDED STEADY GROWTH OVER TIME AND SO HAD TH E SALES,THAT THE MARKETING EXPENDITURE WHICH WAS RS.20.13CRORES IN THE AY19 96 -97 HAD INCREASED TO RS.85.15CRORES FOR THE YEAR UNDER APPEAL, THAT THE ROYALTY HAD INCREASED FROM RS.2.07 CRORES TO RS.13.56CRORES FOR THE SAME PERIO D.HE HELD THAT HIGH DEGREE OF CORRELATION BETWEEN THE ROYALTY PAYMENT AND SALES O N ONE HAND AND MARKETING AND ADVERTISEMENT EXPENDITURE AND SALES ON THE OTHE R WAS NOT A MATTER OF COINCIDENCE, THAT IT WAS COMING OUT AS A FEATURE OF BUSINESS UNDERTAKEN BY THE ASSESSEE,THAT THE AMP EXPENSES DEBITED BY THE ASSES SEE IN THE P&L ACCOUNT WAS BORNE BY IT,THAT THE BENEFIT OF HIGHER NET SALE S WAS ACCRUING IN PART TO THE AE AS WELL.VIDE HIS SHOWCAUSE NOTICE,DT.12.12.07,HE ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE COST OF HIGHER MARKETING EXPEND ITURE ENTIRELY BORNE BY IT SHOULD NOT BE APPORTIONED/ALLOCATED IN THE RATIO OF BENEFIT ACCRUING TO THE OVERSEAS AE AS A RESULT OF HIGHER SALES.THE COST OF BENEFIT ACCRUING TO THE ASSESSEE WAS COMPUTED AT THE SAME LEVEL AT WHICH TH E BENEFIT WAS ACCRUING TO THE AE.HE HELD THAT THE BENEFIT TO THE ASSESSEE FRO M THE SALES WAS 1.78% OF THE NET SALES,THAT THE OVERSEAS AE SHOULD BEAR 1.7% OF THE AMP EXPENSES THAT WERE ENTIRELY BORNE BY THE ASSESSEE.THE TPO COMPUTED RS. 1.52 CRORES(1.78%) AS THE COST APPORTIONED/ALLOCABLE OUT OF THE AMP COST INCU RRED BY THE ASSESSEE FOR THE BENEFIT ACCRUING TO THE AE.HOWEVER,THE COST WAS RES TRICTED TO RS.71.00 LAKHS (BEING 0.87% OF RS.85.15CRORES), IN VIEW OF THE DIS ALLOWANCE/ADJUSTMENT IN INCOME MADE ON ACCOUNT OF ROYALTY FOR TRADE MARK. T HE AO PASSED THE ORDER AND MADE THE SAID ADDITION. 3.1. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.BEFORE HIM,THE ASSESSEE ARGUED THAT IT WAS PRIMARILY OPERATING A CHOCOLATE CONFECTIONARY SEGMENT,THAT IT WAS THE MAR KET LEADER IN SO FAR AS IT 5470 & ORS.CADBURY 5 RELATED TO THE CHOCOLATE MARKET IN INDIA,THAT IT WA S COMMANDING 70% OF THE MARKET SHARE,THAT IN ORDER TO MAINTAIN ITS LEADERSH IP AND FURTHER MAINTAIN ITS MARKET SHARE IT WAS REQUIRED TO INCUR AN EXPENDITUR E ON AMP FOR THE PRODUCTS MANUFACTURED BY IT,THAT THE EXPENDITURE WAS INCURR ED WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS IN THE LICENSED TERRITORY,THAT THE PRODUCTS MANUFACTURED BY THE ASSESSEE WERE IN THE IMPULSE-PURCHASE CATEGORY,THAT FOR SUCH PRODUCTS HIGHER ADVERTISING AND MARKETING WAS A PRE-REQUISITE TO IN CREASE PRODUCT AWARENESS, THAT THE AMP EXPENDITURE WAS INCURRED FOR CREATION OF PRODUCT-AWARENESS OF NEW PRODUCTS AND RECALL-VALUE OF EXISTING PRODUCT I N THE MINDS OF INDIAN CUSTOMERS PRIMARILY,THAT IT HAD A LOCAL MARKETING S TRATEGY OF MAKING ADVERTISE- MENT CAMPAIGNS AND SLOGANS IN THE LOCAL LANGUAGE,TH AT LOCAL ADVERTISEMENT CAMPAIGNS WERE DRIVEN TOWARDS CREATING CONSUMER APP EAL,THAT GIVEN THE NUMBER OF NEW MULTI-NATIONAL PLAYERS IN THE INDUSTRY IT WA S IMPORTANT TO ADVERTISE ITS PRODUCTS,THAT THE INTELLECTUAL PROPERTY OWNER OF TH E CADBURY BRAND WERE THE OVERSEAS AE.S,THAT THEY WERE RESPONSIBLE FOR BRAND POSITIONING,DESIGN AND THE OVERALL STRATEGIC DIRECTION,THAT THE AE.S HAD PROVI DED STRICT BRAND GUIDELINES TO ENSURE THAT OVERALL STRATEGY AND VISION ASSOCIATED WITH THE BRAND WAS ADHERED TO BY THE ASSESSEE IN INDIA,THAT THE AE.S WOULD ALSO D O THEIR BRAND RELATED EXERCISE AT THEIR OWN COST FOR OVER ALL BRAND POSITIONING AN D MANAGEMENT ON GLOBAL BASIS WHICH WOULD ALSO BENEFIT THE ASSESSEE IN AN INDIREC T MANNER,THAT THE EXPENDITURE THE AE WOULD INCUR AS BRAND OWNER HAD SUBSTANTIALLY BENEFITTED THE ASSESSEE FROM A COMMERCIAL STAND POINT,THAT ONE OF THE KEY B ENEFIT TO THE ASSESSEE WAS THE BRAND ITSELF,THAT IT SIGNIFIED QUALITY AND THER EBY ALLOWED THE ASSESSEE TO CHARGE A PREMIUM PRICE,THAT THE INCREASED SALES MIG HT HAVE BENEFITTED THE AE BY WAY OF INCREASED ROYALTY AT 1% ON THE INCREMENTAL S ALE,THAT SAME WAS INSIGNIFICANT AS COMPARED TO THE INCREMENTAL QUANTU M OF PROFITS EARNED BY THE ASSESSEE ON THE INCREASED SALES WITH HIGHER PROFITA BILITY,THAT THE CORRECT WAY OF LOOKING AT BUSINESS NEED WAS TO SEE THE TURNOVER AS A RESULT OF THE LICENSE,THAT IF 5470 & ORS.CADBURY 6 THE ASSESSEE COULD NOT HAVE ACHIEVED THE TURNOVER W ITHOUT THE LICENSE IT CLEARLY MEANT THAT THE NET TURNOVER OF RS.766.21CRORES HAD BEEN ACHIEVED ON ACCOUNT OF LICENSE,THAT PAYMENT OF RS.13.66 CRORES TO ACHIEVE THE TURNOVER AND TO REALISE THE NET PROFIT OF RS.46.36 CRORES WAS REASONABLY AT ARMS LENGTH,THAT THE AMP EXEPENSES INCURRED BY THE ASSESSEE FOR PROMOTING TH E SALES OF ITS PRODUCTS IN INDIA DID NOT BENEFIT THE AE.S DIRECTLY,THAT THEY W ERE NOT INVOLVED IN THE BUSINESS OF MANUFACTURING/TRADING OF SUCH PRODUCTS IN INDIA EITHER ON ITS OWN OR THROUGH ANY OF ITS SUBSIDIARIES,THAT THE ENTIRE AMP EXPENSES INCURRED BY IT WERE PURELY FOR ASSESSEES OWN BENEFIT,THAT THE PROFIT O F THE ASSESSEE BELONGED TO THE IT ON WHICH TAXED WERE PAID IN INDIA,THAT THE AVERA GE EXPENDITURE UNDER THE HEAD AMP BY THE LEADING FMCG COMPANIES FOR THE PERIOD 20 01-05 WAS 10.28%, THAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE DURING THE SAME PERIOD WAS 10.45%,THAT THE INCREASED AMP EXPENDITURE THAT LED TO ENHANCED SALES AND PROFITABILITY ON YEAR ON YEAR BASIS,THAT FOR THE PU RPOSE OF ANALYING THE AMP EXPENDITURE INCURRED BY THE ASSESSEE VIS-A-VIS THE COMPARABLES IT WOULD BE NECESSARY TO CONSIDER THE FACTORS LIKE GROWTH RATE, NATURE OF BUSINESS, NUMBER OF PRODUCTS LAUNCHED, TERRITORIES SERVICED AND TURNOVE R/PROFITS ACHIEVED,THAT THE ENTIRE EXPENDITURE WAS FOCUSED ON THE INDIAN CONSUM ER,THAT THE SAID FACT WAS EVIDENT FROM THE LOCAL FLAVOUR/LANGUAGE/CONCEPTS,TH AT THERE WAS NEITHER ANY REASON NOR ANY CONTRACTUAL OBLIGATION TO RECOVER MO NEY FROM THE AE.S.THE ASSESSEE RELIED UPON THE CASE OF MARUTI SUZUKI INDI A LTD,DECIDED BY THE HONBLE DELHI HIGH COURT. 3.2 .DURING THE COURSE OF APPELLATE PROCEEDINGS,THE FAA DIRECTED THE ASSESSEE TO SUBMIT THE AVERAGE EXPENDITURE INCURRED BY THE COMP ANIES IN THE FMCG SECTOR/ COMPARABLES.THE ASSESSEE FILED DETAILS BY ITS LETTE R DATED 14/12/2011.THE FAA OBSERVED THAT THE AVERAGE OF EXPENDITURE OF THE COM PANIES IN THE FMCG SEGMENT WAS 8.89% ON SALES IS AGAINST SUCH EXPENDIT URE OF THE ASSESSEE AT THE RATE OF 10.45%. HE HELD THAT THE COMPANIES CHOSEN B Y THE ASSESSEE WERE NOT THE 5470 & ORS.CADBURY 7 SAME THAT COULD BE CONSIDERED FOR BENCHMARKING,THAT IF THE AMOUNT CORRESPOND - ING TO THE DIFFERENCE IN AVERAGE MARKETING AND ADVE RTISEMENT EXPENSES OF THOSE COMPANIES(@8.89%)AND THAT OF THE ASSESSEE (@10.45%) WOULD BE AT 1.56%. HE APPLIED THE DIFFERENCE TO THE TOTAL SALE (RS.766.21 CRORES) AND DETERMINE THE ADJUSTMENT TO RS.11.95 CRORES.HE FURTHER HELD THAT THE SAID AMOUNT WOULD POSSIBLY BE THE AMOUNT OF CONTRIBUTION THAT THE AE SHOULD BE PAYING TO THE ASSESSEE IF THE CONCEPT OF BRIGHT LINE WAS APPLIED, THAT THE TPO HAD TAKEN MUCH CONSERVATIVE APPROACH BY CONSIDERING ONLY THE AMOUN T OF EXPENDITURE INCURRED BY THE ASSESSEE ON AMP,THAT HE HAD APPLIED RATIO OF ROYALTY PAID FOR USE OF KNOW-HOW TO SALE AND HAD ARRIVED AT THE TOTAL ADJUS TMENT OF RS. 71 LACS ONLY, THAT THE ASSESSEE HAD CONTENDED THAT AVERAGE PROFIT ABILITY(PBT TO SALES RATIO) AT 10.85%WERE MUCH HIGHER COMPARED TO THE AVERAGE PROF ITABILITY OF THE COMPARABLES AT 3.57% IN THE FMCG SECTOR,THAT HIGHER RATE OF PROFITABILITY COULD NOT BE JUSTIFICATION OF DISPROPORTIONATE AND HIGHER EXPENDITURE, THAT THERE COULD NOT BE ANY JUSTIFICATION TO INCUR SUCH EXPENDITURE WHICH WAS BENEFITING IT AS WELL AS ITS AE,THAT IN AN ALP SITUATION FOR ANY BE NEFIT WHICH HAD BEEN ENJOYED BY THE AE AND WHICH WAS PAYABLE IN MONETARY TERMS H AD TO BE ADEQUATELY COMP -ENSATED TO THE ASSESSEE. THE ASSESSEE HAD CONTENDED THAT THE COMPANIES IN TH E FMCG SECTOR WERE,IN GENERAL,PAYING HIGHER ROYALTY FOLLOWING THE AUTOMAT IC ROUTE,THAT IT WAS ONLY PAYING ROYALTY OF 1.25% OF KNOW-HOW AND 1% FOR USE OF BRAND/TRADEMARK, THAT THE TPO HAD NOT DISTURBED THE ARMS LENGTH RATE OF ROYALTY PAID BY THE ASSESSEE AT 1.25%FOR THE USE OF KNOW-HOW,THAT THE HIGHER ROY ALTY PAID BY THE COMPARABLES IN THE FMCG SEGMENT COULD NOT BE CONSID ERED TO BE ANY JUSTIFICA - TION FOR THE ASSESSEE TO INCUR CERTAIN EXPENDITURE BY IT WHICH WAS OTHERWISE BENEFITING THE AE,THAT THE FAA HAD GIVEN THE RELIEF TO THE ASSESSEE IN THE EARLIER YEARS FOLLOWING THE JUDGEMENT OF MARUTI SUZUKI LTD. ,THAT LATER ON THE HONBLE APEX COURT HAD DIRECTED THE TPO TO COMPUTE THE ALP WITHOUT BEING INFLUENCED 5470 & ORS.CADBURY 8 BY THE DECISION OF THE HONBLE HIGH COURT,THAT WHIL E DECIDING THE APPEAL FOR THE EARLIER YEAR THE FAA HAD ADOPTED INCORRECT FIGURES. FINALLY,HE UPHELD THE ORDER OF THE TPO. 3.3. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE (AR) CONTENDED THAT AMP EXPENSES WAS NOT AN IT,THAT THER E WAS NO EXPRESS PROVISION IN THE ACT DEEMING THE AMP EXPENDITURE TO BE AN IT, THAT THE TPO/FAA HAD NOT SHOWN ANY EXISTENCE OF AN AGREEMENT/ ARRANGEMENT/ U NDERSTANDING BETWEEN THE ASSESSEE AND ITS AE WHEREBY IT WAS OBLIGED TO INCUR AMP EXPENDITURE IN EXCESS OF THE BONA FIDE REQUIREMENTS OF ITS OWN BUSINESS, THAT THE ASSESSEE WAS RISK BEARING ENTITY,THAT THE EXPENDITURE WAS INCURRED TO PROMOTE ITS OWN PRODUCTS, THAT IT HAD NOT ADVERTISED THE BRAND OWNED BY ITS A ES.HE RELIED UPON THE CASES OF MARUTI SUZUKI INDIA LTD.(64 TAXMANN.COM 150), HO NDA CIEL POWER PRODUCTS (64TAXMANN.COM328),WHIRLPOOL OF INDIA LTD.(64 TAXMA NN.COM 324),DELIVERED BY THE HONBLE DELHI HIGH COURT.REFERRING TO THE CA SE OF SONY ERICSSON MOBILE COMMUNICATION INDIA PRIVATE LTD.(231 TAXMANN 113),H E STATED THAT MATTER SHOULD NOT BE REMANDED BACK TO THE FILE OF THE TPO IN VIEW OF THE SAID DECISION. HE FURTHER ARGUED THAT THE ASSESSEE HAD MADE INVEST MENT AS PER THE POLICY DECLARED BY GOVERNMENT OF INDIA,THAT THE MONEY HAD COME THROUGH AUTOMATIC INVESTMENT ROUTE.HE REFERRED TO THE PRESS NOTE OF 2 002.(PAGE 84 OF THE PAPER BOOK). THE DEPARTMENTAL REPRESENTATIVE (DR)STATED THAT IN THE CASE OF LG ELECTRONICS (140ITD41)THE SPECIAL BENCH OF THE TRIBUNAL HAD HEL D THAT AMP WAS A SEPARATE IT,THAT IT HAD APPROVED THE BLT FOR THE PURPOSES OF DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION OF AMP,THAT THE HONBLE H IGH COURT OF DELHI,IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION, (SUPRA) HAD HELD AMP TO BE AN INTERNATIONAL TRANSACTION,THAT BLT WAS NOT APPROVED BY THE COURT,THAT THE HONBLE COURT HAD LAID DOWN CERTAIN IMPORTANT PRINC IPLES OF TP,THAT THE COURT 5470 & ORS.CADBURY 9 HAD LAID EMPHASIS ON CONDUCTING DETAILED FUNCTIONAL ANALYSIS THAT WOULD INCLUDE AMP FUNCTIONS/EXPENSES,THAT THE COURT HAD OBSERVED THAT SELECTION OF COMPARAB -LES ALSO REQUIRED TO BE MATCHED WITH THE FUNCTIONS AND OBLIGATIONS PERFORMED BY TESTED PARTIES INCLUDING AMP EXPENSES, THAT BUND LED TRANSACTION APPROACH HAD TO BE FOLLOWED IN SUCH CASES AND THAT DETAILED FUNCTIONAL ANALYSIS HAD TO BE CONDUCTED.HE REFERRED TO EIGHT CASES, DECIDED BY TH E DELHI TRIBUNAL,WHEREIN THE ISSUE OF AMP EXPENDITURE WAS RESTORED BACK TO THE F ILE OF THE AO IN LIGHT OF THE JUDGMENT OF SONY ERICSSON. WITH REGARD TO THE DECIS ION OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI,THE DR STATED TH AT UP TO THE DATE OF DECISION I.E.11/12/2015,THE DEPARTMENTAL AUTHORITIES DID NOT HAVE THE BENEFIT OF THE DECISION,THAT THEY WERE FOLLOWING THE ORDER OF THE LG ELECTRONICS (SUPRA)USING BLT, THAT IN SOME CASES BLT HAD BEEN FOLLOWED AND T HE EXPENDITURE ON AMP HAD BEEN SLICED INTO TWO PORTIONS,THAT THE NON ROUT INE EXPENDITURE IN EXCESS OF BLT WAS CONSIDERED SEPARATELY AS INTERNATIONAL TRAN SACTION AND BENCHMARKED ACCORDINGLY FOR THE PURPOSE OF ALP,THAT NON-ROUTINE EXCESS EXPENDITURE TAKEN OUT FOR BENCHMARKING OF AMP WOULD BE REQUIRED TO BE CONSIDERED AS THE PART OF COST BASE/EXPENDITURE HE REFERRED TO THE CASES OF T OSHIBA INDIA PRIVATE LIMITED, INDIA MEDTRONICS PRIVATE LIMITED, JOHNSON & JOHNSON INDIA LTD,ESSILOR INDIA PRIVATE LIMITED AND MOLSON COORS INDIA LTD.AND STAT ED THAT THE TRIBUNAL HAD RESTORED BACK THE ISSUE OF AMP EXPENSES TO THE FILE OF THE AO.S IN ALL THE CASES,THAT THE CASE UNDER CONSIDERATION SHOULD ALSO BE SENT BACK TO THE FILE OF THE AO. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. BEFORE PROCEEDING FURTHER,IT WOULD BE USEFUL TO UND ERSTAND THE PHILOSOPHY AND TO CONSIDER THE HISTORICAL BACKGROUND OF THE TP PRO VISIONS.IT IS SAID THAT THE PURPOSE AND OBJECT OF INTRODUCTION OF THE PROVISION S CONTAINED IN CHAPTER X IS TO PREVENT AN ASSESSEE FROM AVOIDING PAYMENT OF TAX BY TRANSFERRING INCOME YIELDING ASSETS TO NON-RESIDENTS EVEN WHILE RETAINI NG THE POWER TO ENJOY THE 5470 & ORS.CADBURY 10 FRUITS OF SUCH TRANSACTIONS I.E. THE INCOME SO GENE RATED.AS A CONCEPT,IT IS NOT TOTALLY A NEW IDEA.A REFERENCE TO THE PROVISIONS OF SECTION 42(2)TO THE INDIAN INCOME TAX ACT,1922,COULD BE MADE IN THIS REGARD-AS IT WAS A SOMEWHAT SIMILAR SECTION AND DEALT WITH THE TRANS-BORDER TRANSACTION S.THE PROVISIONS OF THE SAID SECTION BROADLY PROVIDED THAT WHERE A NON-RESIDENT CARRIED OUT BUSINESS WITH THE PERSON RESIDENT IN THE TAXABLE TERRITORY AND IT APP EARED TO THE AO THAT ON ACCOUNT OF A CLOSE CONNECTION BETWEEN SUCH PERSONS THE BUSI NESS WAS SO ARRANGED THAT THE BUSINESS CONDUCTED BY THE RESIDENT WITH THE NON -RESIDENT EITHER YIELDED NO PROFIT OR,LESS THAN ORDINARY PROFIT,WHICH MAY BE EX PECTED TO ARISE IN THAT BUSINESS THEN,THE AO WAS EMPOWERED TO TAX PROFITS W HICH WERE DERIVED OR WHICH MAY REASONABLY BE DEEMED TO BE DERIVED FROM T HE BUSINESS IN THE HANDS OF A PERSON RESIDENT IN THE TAXABLE TERRITORY.THUS, IT CAN SAFELY BE CONCLUDED THAT TP PROVISIONS WERE PART OF TAX ADMINISTRATION EVEN DURING THE 1922 ACT DAYS- THOUGH AT INFANCY STAGE.THE PRESENT PROVISIONS WERE BEEN INCORPORATED VIDE FINANCE ACT,2001.SAME WERE FURTHER AMENDED VIDE FIN ANCE ACT,2002 AND ARE BEING AMENDED FROM TIME TO TIME TO MEET THE NEW CHA LLENGES THROWN UP BY THE DYNAMISM OF THE CURRENT COMMERCIAL AND BUSINESS REA LITIES.HAVING REGARD TO THE OBJECT FOR WHICH PROVISIONS HAVE BEEN ENACTED,APPLI CABILITY OF THE SAID PROVISIONS HAS TO BE LIMITED TO SITUATIONS WHERE TH ERE IS DIVERSION OF PROFITS OUT OF INDIA OR WHERE THERE MAY BE EROSION OF TAX REVEN UE IN INTRA GROUP TRANSACTION. SO,INTRA-GROUP TRANSACTION IS THE FIRST PRE-CONDITI ON FOR INVOKING THE TP PROVISIONS.CALCULATION OF ALP IS THE NEXT AND LOGIC AL STEP.BUT,IF THE FIRST STEP ITSELF IS MISSING,THE AO CANNOT GO TO THE SECOND ST AGE.IN OTHER WORDS,THE AOS CANNOT CLIMB THE SECOND STOREY OF A BUILDING WITHOU T REACHING TO THE FIRST STOREY- IF THE EXISTENCE OF AN IT AND CALCULATION OF ALP CA N BE COMPARED WITH A DOUBLE- STOREYED BUILDING. 3.4.1. WE FIND THAT THE ASSESSEE IS THE MARKET LEADER OF T HE CHOCOLATE MARKET IN INDIA,THAT IT WAS COMMANDING 70% OF THE MARKET SHAR E IN THE YEAR UNDER 5470 & ORS.CADBURY 11 APPEAL,THAT IT HAD DEBITED AMP EXPENSES,AMOUNTING T O RS.85.15CRORES TO ITS P& L.A/C,THAT THE NET TURNOVER OF THE ASSESSEE WAS OF RS.766.21CRORES,THAT IT WAS 11.11% OF THE SALES RECORDED BY THE ASSESSEE DURING THE YEAR,THAT IT HAD ALSO PAID ROYALTY AMOUNTING TO RS.13.56 CRORES FOR THE S AME PERIOD,THAT THE TPO COMPUTED RS.1.52 CRORES(1.78%) AS THE COST APPORTIO NED/ALLOCABLE OUT OF THE A&M COST INCURRED BY THE ASSESSEE FOR THE BENEFIT A CCRUING TO THE AE,THAT HE RESTRICTED THE COST TO RS.71 LAKHS(BEING0.87% OF RS .85.15CRORES)IN VIEW OF THE DISALLOWANCE/ ADJUSTMENT IN INCOME MADE ON ACCOUNT OF ROYALTY FOR TRADE MARK,THAT THE AVERAGE AMP EXPENDITURE BY THE LEADIN G FMCG COMPANIES FOR THE PERIOD 2001-05 WAS 10.28%,THAT THE AMP EXPENDIT URE INCURRED BY THE ASSESSEE DURING THE SAME PERIOD WAS 10.45%,THAT THE ASSESSEE HAD CONTENDED THAT ITS PROFITABILITY(PBT TO SALES RATIO) @10.85%W AS MUCH HIGHER COMPARED TO THE AVERAGE PROFITABILITY OF THE COMPARABLES AT THE RATE OF 3.57%,THAT THE FAA HAD HELD THAT HIGHER RATE PROFITABILITY COULD NOT B E A JUSTIFICATION OF THIS PROPORTIONATE EXPENDITURE, THAT IN THE APPELLATE PR OCEEDINGS THE FAA HAD PROPOSED FURTHER ADDITION,THAT FINALLY HE UPHELD TH E ORDER OF THE TPO AND CONFIRMED THE ADDITION OF RS.71 LAKHS,THAT THERE WA S NO CONTRACTUAL OBLIGATION TO RECOVER MONEY FROM THE AE,THAT IT WAS SEPARATELY PA YING ROYALTY FOR USE OF BRAND AND TRADEMARK. THERE IS NO REASON FOR NOT HOL DING THAT THE INCREASED AMP EXPENDITURE LED TO ENHANCED SALES AND PROFITABILITY ,THAT FOR THE PURPOSE OF ANALYSING THE AMP EXPENDITURE INCURRED BY AND THE C OMPARABLES IT IS NECESSARY TO CONSIDER VARIOUS FACTORS.IF FACTORS LIKE GROWTH RATE, NATURE OF BUSINESS,NUMBER OF PRODUCTS LAUNCHED,TERRITORIES SERVICED AND TURNO VER/PROFITS ACHIEVED HAVE NECESSARILY TO BE CONSIDERED FOR DETERMINING THE AM P EXPENSES.THE ENTIRE EXPENDITURE WAS FOCUSED ON THE INDIAN CONSUMER AND IT IS EVIDENT FROM THE LOCAL FLAVOUR/ LANGUAGE/CONCEPTS.IT IS ALSO AN UNDENIABLE FACT THAT NEW PLAYERS WERE ENTERING INDIA AFTER LIBERALISATION-ERA STARTED.IF THE EXPENDITURE INCURRED BY THE ASSESSEE IS CONSIDERED IN THE BACK GROUND OF THE GR OWTH ACHIEVED BY IT ONE HAS 5470 & ORS.CADBURY 12 TO AGREE WITH THE ARGUMENT OF THE ASSESSEE THAT IT MADE RAPID PROGRESS IN THE INDIAN MARKET POST LIBERALISATION PERIOD AND AMP PL AYED AN IMPORTANT ROLE IN IT. HERE,WE WOULD ALSO LIKE TO MENTION THAT THERE EXIST S A FUNDAMENTAL AND BASIC DISTINCTION BETWEEN THE PROVISIONS OF SECTION 37 AN D SECTION 92 OF THE ACT-AS THE FIRST IS EXPENSE ORIENTED AND THE SECOND IS PRICING ORIENTED.THE FAA TRIED TO INCORPORATE THE INGREDIENTS OF SECTION 37 WHILE DEA LING WITH THE TP ADJUSTMENTS, WHEN HE TALKED OF THEHIGHER EXPENDITUREANDJUSTIF ICATIONOF SUCH EXPENDITURE. IN OUR OPINION,THE APPROACH OF THE FAA WAS NOT IN A CCORDANCE WITH THE BASIC PHILOSOPHY OF TP PROVISIONS.IN OUR OPINION,IT IS TH E ASSESSEE WHO HAS TO DECIDE HOW MUCH TO SPEND FOR EARNING HIS INCOME.THE TAX AU THORITIES ARE PREVENTED FROM ENTERING INTO THE PROVERBIAL SHOES OF THE ASSE SSEE TO DECIDE THE JUSTIFICATION OF THE EXPENDITURE.THE ACT STIPULATES THAT IN CERTA IN CONDITIONS ONLY THE SO- CALLED HIGHER EXPENDITURE CAN BE QUESTIONED.THE FAA HAD NOT PROVED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR ADVERTISEM ENT ETC.WAS COVERED BY THOSE SECTIONS.IF IT WAS THE CASE THEN THE TRANSACTION WO ULD NOT FALL UNDER SECTION 92 OF THE ACT.THEREFORE, IN OUR OPINION HE HAD ADOPTED A TOTALLY INCORRECT APPROACH, WHILE DEALING THE ALLOWABILITY OF AMP EXPENDITURE. 3.4.2. WE FURTHER HOLD THAT THE CLAIM OF THE ASSESSEE IS F ACTUALLY CORRECT THAT IT HAD INCURRED THE AMP EXPENDITURE FOR CREATING PROD UCT AWARENESS AND TO RECALL THE VALUE OF EXISTING PRODUCTS AND THAT IT HAD A LO CAL MARKETING STRATEGY OF MAKING ADVERTISEMENT/SLOGANS IN THE LOCAL LANGUAGE. IN OUR OPINION,KUCH MEETHA HO JAY CAMPAIGN PROVES THE CLAIM MADE BY TH E ASSESSEE.THE TPO HAD IGNORED THE FACT THAT FILMS/TV ADVERTISEMENTS O F THE ASSESSEE HAD THE LOCAL MESSAGING CONCEPT.SUCH LOCAL ADVERTISEMENT CAMPAIGN S CAN NEVER BE HELD TO BE DRIVEN TOWARDS SERVING THE INTERESTS OF THE AE.IT I S ALSO A FACT THAT NEW MULTINATIONAL PLAYERS IN THE INDUSTRY HAD ENTERED THE INDIAN MARKET.THE COMMERCIAL WISDOM OF ANY ASSESSEE,IN SUCH A SITUATI ON,WOULD COMPEL IT TO BE 5470 & ORS.CADBURY 13 INNOVATIVE AND TO SPENT REASONABLE EXPENDITURE FOR MAINTAINING ITS POSITION IN THE MARKET.THE TPO/FAA HAD NOT CONTROVERTED THE FAC T THAT THE AE WAS THE OWNER OF INTELLECTUAL PROPERTY OF THE CADBURYBRAN D AND THAT IT WAS RESPONSIBLE FOR PROMOTING THE BRAND ALL OVER THE GLOBE AND THAT THE BRAND RELATED EXERCISE AT THE COST OF THE AE FOR THE OVERALL BRAND POSITIONIN G AND MANAGEMENT BENEFITED THE ASSESSEE ALSO IN AN INDIRECT MANNER.NOTHING HAS BEEN BROUGHT ON RECORD TO PROVE THAT THE ASSESSEE WAS DIRECTLY OR INDIRECTLY PROMOTING THE GLOBAL BRAND RATHER THAN PROMOTING ITS OWN PRODUCTS.IN OUR OPINI ON, THERE EXISTS A FINE BUT VERY IMPORTANT DISTINCTION BETWEEN PRODUCTS PROMOTE D AND NURTURED BY AN ASSESSEE AND THE BRAND OWNED AND SUPPORTED BY ITS A E.IN THE MODERN WORLD BOTH EXIST AND PLAY DIFFERENT AND SPECIFIED ROLES.T HEREFORE,UNTIL AND UNLESS SOME -THING POSITIVE IS BROUGHT ON RECORD ABOUT SHARING/ INCURRING AMP EXPENDITURE UNDER THE HEAD BY AN ASSESSEE ON BEHALF OF ITS AE,I T CANNOT BE HELD THAT IT SHOULD HAVE RECOVERED SOME AMOUNT FROM THE AE AS THE EXPEN DITURE BY IT INDIRECTLY HELPED IN AUGMENTING THE BRAND VALUE OWNED BY ITS O VERSEAS AE.IN THE CASE UNDER CONSIDERATION,THE ASSESSEE WAS INCURRING EXPE NDITURE FOR ITS PRODUCTS WHEREAS THE AE WAS LOOKING AFTER THE GROUND AT GLOB AL LEVEL.IF THE AMP EXPENDITURE INCURRED BY THEM BENEFITED INDIRECTLY I N THE LOCAL/ INTERNATIONAL MARKET IT WOULD NOT MEAN THAT IT WAS AN IT. THE BAS IC PURPOSE OF INTRODUCING THE VARIOUS PROVISIONS OF CHAPTER X,AS STATED EARLIER,W AS TO PREVENT TAX EVASION IN THE TRANSACTIONS UNDERTAKEN BETWEEN AN INDIAN ENTIT Y AND ITS OVERSEAS AE.IN OUR OPINION,A PERCEIVED/NOTIONAL INDIRECT BENEFIT TO TH E AE,DUE TO INCURRING OF CERTAIN EXPENDITURE BY AN ASSESSEE IN INDIA, IS NOT COVERED BY THE TP PROVISIONS. IT IS A FACT THAT THE PAYMENT UNDER THE HEAD AMP EX PENDITURE WAS MADE TO THIRD PARTIES AND THAT THOSE PARTIES WERE LOCATED IN INDI A. 3.4.3. WE FIND THAT IN THE CASES OF MARUTI SUZUKI(SUPRA),W HIRLPOOL INDIA(SUPRA), BAUSCH & LOMB EYECARE(INDIA)PVT.LTD(ITA 643 OF 2014 OF HONBLE DELHI HC), THE ISSUE OF AMP EXPENSES HAD BEEN DELIBERATED UPON EXTENSIVELY AND EACH AND 5470 & ORS.CADBURY 14 EVERY ARGUMENT RAISED BY THE TPO/DRP HAVE BEEN ANAL YSED THREAD BARE.WE WOULD LIKE TO REPRODUCE RELEVANT PORTION OF THE JUD GMENT OF BAUSCH & LOMB EYECARE(INDIA) PVT.LTD.(SUPRA) AND SAME READS AS UN DER: 53.AREADING OF THE HEADING OF CHAPTER X['COMPUTATI ON OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE']A ND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRAN SACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS O UT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANS FER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACT ION. TO BEGIN WITH THERE HAS TO BE AN INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE.THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F, THE PRE-REQUISITE FO R COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACT ION. THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS S PECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTI ON THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUT ING THE ALP FOR THE CONTRACT PRICE. 55. SECTION 928 DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEANING OF INTERNATIONAL TRANSACTION. 928.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92,92C,92D AND 92E ,'INTERNATIONAL TRANSA CTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS; IN THE NATURE OF PURCHASE, SALE OR LEAS E OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BE TWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST. OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTIO N WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SU CH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES 'OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO 5470 & ORS.CADBURY 15 BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXIST S A PRIOR AGREEMENT IN RELATION TO' THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMIN ED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE.' 56.THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TR ANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM AR E NON-RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BOR ROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME S OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANG EMENT BETWEEN TWO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION- WITH THE - BENEFI T, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJU NCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT T HE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCO MES OR LOSSES, FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURP OSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART. OF CLAUSE (C), THE RE VENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR' 'UNDERSTANDING' B ETWEEN BLI -AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS C ONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUS ES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS M IGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY' IT DOES NOT LIST AMP SPENDING AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA), ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTI VE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT . THIS WAS NEGATIVED BY THE COURT BY POINTING OUT; 'EVEN IF THE WORD 'TRANSACTION' I S GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTE N AGREEMENT AS SUGGESTED BY THE 5470 & ORS.CADBURY 16 REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V), WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS', PART AND THE 'INCLUDES' PART OF SECTION 928 (1) WH AT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBL IGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BR AND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT REFERRED TO THE DECISI ON OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V.. JAYARAM CHIGURUPATI 2010(6 )MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZE NOTECH LABORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., 'DAIICHI SANKYO COMPANY AND R ANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOV ERS) REGULATIONS, 1997. IN. PARA 44, IT WAS OBSERVED AS UNDER: 'THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPOSE OF SUBSTAN TIAL ACQUISITION OF SHARES ETC. OF A- CERTAIN TARGET COMPANY, THERE CAN BE NO 'PERSON S ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO O R MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY, FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE' OR PURPOSE THE IDEA OF 'P ERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGR EEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' I S NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RE LATIONSHIP' CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER M ATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT' OR AN UNDERSTANDING, FORMAL OR INFORMAL; 'THE ACQUISITION OF SHARES ETC. MAY BE D IRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITI ON OF SHARES ETC. OR THEY MAY AGREE 5470 & ORS.CADBURY 17 TO, COOPERATE IN SUCH ACQUISITION. NONETHELESS, TH E ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE R ELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING. ' 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INT ERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFF ERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED , FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON (SUPRE), -- THE QUESTION OF APPLY ING THE BLT TO DETERMINE THE EXISTENCE-OF AN-INTERNATIONAL TRANSACTION INVOLVIN G AMP EXPENDITURE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION, CANNOT BE CONSTRUED AS A 'TR ANSACTION'. FURTHER, THE- REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT VS. EKL APPLIANCES LTD. (SUPRA) W HICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FIN DS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY THE FACT THAT EVEN IF THERE IS NO E XPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENCURE TO T HE AE IS ITSELF SELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURM ISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTH ORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAG E'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISIO N FOR DETERMINING THE EXISTENCE OF 5470 & ORS.CADBURY 18 AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES , MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER T HAN AES IN UNCONTROLLED CONDITIONS',SINCE THE REFERENCE IS TO 'PRICE' AND T O 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS , IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHAR GED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP . THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY -IN-LIGHT OF THE F ACT THAT -THE-BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLIS HED DE HORS THE BLT, 70. WHAT IS CLEAR IS THAT IT. IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED: THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ALP, AN ADJUSTMENT HAD TO BE MADE. THE -BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, T O ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS A N ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW.THE OBJECT IVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSA CTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER.AN ' ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT. ' 71- SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUST - MENT UNDER CHAPTER X,EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBETORE,WHAT THE R EVENUE HAS SOUGHT TO DO IN THE PRESENT. CASE IS TO RESORT TO A QUANTITATIVE ADJUS TMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON- APPLICATION OF THE B LT,IS EXCESSIVE,THEREBY EVIDENC - ING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE. 74.THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTION S LISTED UNDER THE EXPLANATION TO 5470 & ORS.CADBURY 19 SECTION 928 OF THE ACT.THE PROBLEM DOES NOT STOP HE RE.EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATE D IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE CO URT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. '(SUPRA) T HE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY; AND FOR-NO OTHER PURPOSE; IN TH E- CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY' BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TYPES OF EXPENDIT URE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, SO MUCH OF THE EXPENDITURE AS IS SO CON SIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPON DING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES' AN AO TO DETERMINE WHAT S HOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOU ND' THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, AB SENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH O F A BRAND,WHICH COULD BE PRODUCT SPECIFIC, MAY BE 'IMPACTED BY NUMEROUS OTHER IMPOND ERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, EC ONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOU R AND SO ON.A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINS T ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRI NGING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS IN CIT V. B.C. S RINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V, CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION 5470 & ORS.CADBURY 20 EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INT ERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS- UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOK ED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS A N INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPENSES INCURR ED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONE D-IN- SASSOON -J DAVID-(SUPRA)- 'THE--FACT THAT- SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPEN DITURE BEING 'ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (IN DIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW '. CONSIDERING THE FACTS-LIKE ABSENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND THE AE.S.FOR SHARING AMP EXPENSES,PAYMENT MADE BY T HE ASSESSEE UNDER THE HEAD AMP TO THE DOMESTIC PARTIES,FAILURE OF THE TPO PROVE THAT EXPENSES WERE NOT FOR THE BUSINESS CARRIED OUT BY THE ASSESSEE IN INDIA-AND FOLLOWING THE JUDGMENTS OF THE HONBLE DELHI HIGH COURT DELIVERE D IN THE CASE OF BAUSCH AND LOMB(INDIA)PVT.LTD(SUPRA),WE ARE OF THE OPINION THA T THE TRANSACTION-IN - QUESTION WAS NOT AN INTERNATIONAL TRANSACTION AND T HAT THE TPO HAD WRONGLY INVOKED THE PROVISIONS OF CHAPTER X OF THE ACT FOR THE SAID TRANSACTION. 3.4.4. WITH REGARD TO THE SUBMISSIONS OF THE AR THAT THE I SSUE OF AMP SHOULD BE RESTORED BACK TO THE FILE OF THE AO,WE WANT TO MENT ION THAT LAW AS A CONCEPT IS SUPPOSED TO EVOLVE WITH PASSAGE OF TIME-IT CANNOT B E STATIC ALWAYS.NON- AVAILABILITY OF A PARTICULAR DECISION OF THE HIGHER FORUM CANNOT JUSTIFY THE RESTORA -TION OF ISSUE/CASES TO THE FILE OF AO IN EACH AND EVERY CASE.UNNECESSARY LITIGATION HAS TO BE AVOIDED AND ISSUES HAVE TO BE SETTLED FOR ONCE AND ALL.WE ARE OF THE OPINION THAT AFTER THE JUDGMENTS OF MARUTI S UZUKI AND BAUSCH & LOMB (SUPRA)THERE IS NO SCOPE OF ANY OTHER INTERPRETATIO N ABOUT THE AMP EXPENDITURE. IN THE CASE UNDER CONSIDERATION,THE AO/TPO HAS NOT BROUGHT ANYTHING ON RECORD 5470 & ORS.CADBURY 21 THAT THERE EXISTED AND AGREEMENT,FORMAL OR INFORMAL ,BETWEEN THE ASSESSEE AND THE AE TO SHARE/REIMBURSE THE AMP EXPENSES INCURRED BY THE ASSESSEE IN INDIA. IN ABSENCE OF SUCH AN AGREEMENT THE FIRST AND PRIMA RY PRECONDITION OF TREATING THE TRANSACTION-IN-QUESTION AN IT REMAINS UNFULFILL ED.CONDUCTING FAR ANALYSIS OR ADOPTING AN APPROPRIATE METHOD IS THE SECOND STA GE OF TP ADJUSTMENTS. THE FIRST THING IS TO FIND OUT WHETHER THE DISPUTED TRA NSACTION IN IS IT OR NOT.WITHOUT CROSSING THE FIRST THRESHOLD SECOND CANNOT BE APPRO ACHED,AS STATED EARLIER.IN THE CASE UNDER CONSIDERATION,WE ARE OF THE OPINION THAT AMP EXPENDITURE IS NOT AN IT AND THEREFORE WE ARE NOT INCLINED TO RESTORE BAC K THE ISSUE TO THE FILE OF THE AO.CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE C ASE UNDER CONSIDERATION,WE ARE OF THE OPINION THAT THE FAA WAS NOT JUSTIFIED I N UPHOLDING THE ORDER OF THE TPO.THEREFORE,REVERSING HIS ORDER,WE DECIDE SECOND GROUND IN FAVOUR OF THE ASSESSEE. 4. NEXT GROUND OF APPEAL DEALS WITH DISALLOWANCE OF DE DUCTION IN RESPECT OF PAYMENT FOR ADDITIONAL EXCISE DUTY PAYABLE BY THIRD -PARTY MANUFACTURERS (TMPS).THE AR FAIRLY CONCEDED THAT THE IDENTICAL I SSUE WAS DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL,WHILE DECIDING THE APPEALS FOR THE EARLIER YEARS (ITA/282/MUM/2000-AY.1994-95,ITA/4135/MUM/2010-AY.1 997- 98,ITA3510/MUM/2011-AY.2003-04,ITA/4205/MUM/2011-AY .2004-05). WE FIND THAT WHILE DECIDING THE APPEAL FOR THE YEAR AY .1994-95,THE TRIBUNAL HAD DISCUSSED AND DECIDED THE ISSUE AS UNDER: 33.GROUND NO.12 OF THIS APPEAL RELATES TO THE ADD ITION MADE BY THE A.O. AND CONFIRMED THE LEARNED CIT(A) BY WAY OF DISALLOWANCE MADE ON ACCOUNT OF ASSESSEES CLAIM FOR DEDUCTION OF EXCISE DUTY LIABILITY OF THI RD PARTY MANUFACTURERS/CONVERTERS. XXXXXXXXXXXXXXX 49. AS SUCH CONSIDERING ALL THE FACTS OF THE CASE A ND KEEPING IN VIEW THE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE PROVISION MADE BY THE ASSESSEE FOR TH E AMOUNT PAYABLE TO THIRD PARTY MANUFACTURERS/CONVERTORS ON ACCOUNT OF EXCISE DUTY PAYABLE BY THEM AS PER THE 5470 & ORS.CADBURY 22 AGREEMENT HAD NOT BEEN CRYSTALLISED OR ASCERTAINED DURING THE YEAR UNDER CONSIDERATION AS THE SUM WAS NOT PAID BY THE THIRD PARTY MANUFACTURERS/CONVERTORS BUT WAS DISPUTED BY THEM, WHICH DISPUTE WAS NOT SET TLED IN THE YEAR UNDER CONSIDERATION. THE SAID LIABILITY WAS A CONTINGENT LIABILITY AND IT WAS NOT WHILE COMPUTING THE BUSINESS INCOME OF THE ASSESSEE FOR T HE YEAR UNDER CONSDIRATION. IN THAT VIEW OF THE MATTER, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE A.O. ON THIS ISSUE SAND DI SMISS GROUND NO.12 OF ASSESSEES APPEAL. RESPECTFULLY,FOLLOWING THE ORDERS OF THE TRIBUNAL F OR THE EARLIER YEARS,WE DECIDE GROUND NUMBER FOUR AGAINST THE ASSESSEE. 5. FIFTH GROUND IS ABOUT DISALLOWANCE OF APPRECIATION ON MARKETING KNOW-HOW (IN PURSUANCE OF WORLDWIDE STOCK AND ASSET PURCHASE AGREEMENT ENTERED INTO BY PFIZER US AND THE PARENT COMPANY OF THE ASSESSEE). THE AR STATED THAT WHILE DECIDING THE APPEALS FOR T HE AY.S.2003-04 AND 2004- 05(ITA/3510/MUM/2011&ITA/4205/MUM/2011)HAD ADJUDICA TED THE IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE.WE WOULD LIKE TO RE PRODUCE THE RELEVANT PORTION OF THE ORDER AND SAME READS AS UNDER: 12. THE GROUND NO.5 IS REGARDING DISALLOWANCE OF DE PRECIATION ON MARKETING KNOWHOW. 13. THE ASSESSEE ACQUIRED ON GOING NON-CHOCOLATE CO NFECTIONARY BUSINESS OF M/S. WARNER LAMBERT (I) PVT. LTD IN PURSUANCE OF WORLDWI DE STOCK AND ASSET PURCHASE AGREEMENT BETWEEN PFIZER AND CADBURY SCHWEPPES PLC OF UK, THE RESPECTIVE PARENT COMPANIES OF THE PARTIES. THE ASSESSEE HAS PAID TOT AL CONSIDERATION OF RS.33,35,00,000/-. IN THE VALUATION REPORT SUBMITTE D BY THE ASSESSEE OUT OF THE TOTAL CONSIDERATION, THE ASSESSEE HAS ALLOCATED A SUM OF RS.18,49,30,000/- TOWARDS MARKET KNOW HOW. THE ASSESSEE CLAIMED DEPRECIATION ON THE MARKET KNOW HOW BEING TANGIBLE ASSETS. THE AO HAS QUESTIONED THE CLAIM OF THE ASSE SSEE AND HELD THAT IT IS NOT ACCEPTABLE. THE AO ACCORDINGLY, DISALLOWED THE CLAI M OF THE DEPRECIATION ON THE MARKETING KNOW HOW. ON APPEAL, THE LD. CIT(A) HAS C ONFIRMED THE ACTION OF THE AO. 14. BEFORE US, THE LD.SR.COUNSEL OF THE ASSESSEE H AS SUBMITTED THAT THE ISSUE IS NOW COVERED BY THE SERIES OF JUDGMENTS INCLUDING THE JU DGMENT OF THE HONBLE DELHI HIGH 5470 & ORS.CADBURY 23 COURT IN THE CASE OF CIT V/S HINDUSTAN COCO COLA BE VERAGES P. LTD [2011] 331 ITR 192 (DEL) WHEREIN THE HONBLE HIGH COURT AF TER CONSIDERING THE FACTS THAT THE SPECIFIC PAYMENT FOR GOODWILL REPRESENTS THE CONSID ERATION FOR MARKETING AND TRADING REPUTATION, TRADE STYLE AND NAME, MARKETING AND DIS TRIBUTION, TERRITORIAL KNOW-HOW, INCLUDING INFORMATION OF THE TERRITORY AND ALLOWED THE DEPRECIATION ON SUCH PAYMENT ON INTANGIBLE ASSETS. HE HAS ALSO RELIED UPON THE DECI SION OF THE TRIBUNAL IN THE CASE OF DCIT V/S WEIZMANN FOREX LTD. [2012] 51 SOT 525 (ITA T)[MUM]) AS WELL AS THE SERIES OF OTHER DECISIONS OF THIS TRIBUNAL, WHEREIN THE TRIBUNAL HELD THAT MARKETING STRATEGIES AND DISTRIBUTION NETWORK, CUSTOMER LISTS , MARKETING STRATEGIES, AND SOFTWARE AS INTANGIBLE ASSETS ELIGIBLE FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. THE SR.COUNSEL FURTHER SUBMITTED THAT THE AO HAS DISALLOWED THE DE PRECIATION ON THE MARKETING KNOWHOW ON THE GROUND THAT THE AMOUNT IS CONSIDERED TOWARDS GOODWILL AND NO DEPRECIATION IS ALLOWED ON THIS. HE HAS ALSO RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V/S SMIFS SECURITI ES LTD.[2012] 348 ITR 302 (SC) AND SUBMITTED THAT THE HONBLE SUPREME COURT H AS HELD THAT GOODWILL IS AN ASSET U/S 32 OF THE ACT AND ELIGIBLE FOR DEDUCTION UNDER SECTION 32 OF THE ACT. 15. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ERS OF AUTHORITIES BELOW. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL AVAILABLE ON RECORD. THE AO HAS DENIED THE CLAIM OF DEPRECIATION ON MARKETING KNOWHOW. THE CONCLUDING PARAGRAPH OF THE ASSESSMENT ORDER IS REP RODUCED FOR THE SAKE OF CONVENIENCE AS UNDER: 11.6 WITH REGARD TO THE ASSESSEES SUBMISSION THAT THE MARKET KNOWHOW IS A MARKETABLE RIGHT WHICH CAN BE VALUED AND ON WHICH DEPRECIATION MAY BE CLAIMED IT IS TO BE NOTED THAT EVEN LIST OF TELEPHONE NUMBERS MAY BE A MARKET ABLE COMMODITY. HOWEVER, WHEN SOMETHING HAS TO BE A RIGHT THEN IT CONNOTES MUCH M ORE THAN A MERE COMMODITY. THE SAID OBJECT SHOULD BE IN EXCLUSIVE POSITION OF THE RIGHT HOLDER AND AT THE EXCLUSION OF OTHERS. THE ASSESSEE HAS NOT SHOWN ANY EVIDENCE THA T IT HAS ACQUIRED ANYTHING FROM WARNER LAMBERT TO THIS EFFECT. SECONDLY, THE REPORT OF BANSI MEHTA AND & CO,ALSO STATES THAT MARKET VALUE CAN BE TAKEN AS 3 MONTHS A DVERTISING COST. THIS ALSO SHOWS THAT THIS KNOW HOW IS GENERAL IN NATURE AND NOT IN EXCLU SIVE POSSESSION OF' ANYBODY. MOREOVER, IT CAN BE AN INTANGIBLE ASSET WHICH WOULD DEPRECIATE IN VALUE WITH USAGE AND TIME. IN VIEW OF THIS THE ASSESSEES STAND IS NOT A CCEPTED AND ALLOCATION OF 184.93 LAKHS UNDER THE HEAD INTANGIBLE ASSET VIZ. MARKET KNOWHOW IS REJECTED. THIS AMOUNT IS 5470 & ORS.CADBURY 24 CONSIDERED AS TOWARDS GOODWILL AND NO DEPRECIATION IS ALLOWED ON THIS. HENCE, DEPRECIATION @12.5% (FOR LESS THAN 180 DAYS) CLAIME D BY THE ASSESSEE ONTHIS ASSET IS DISALLOWED. THE DISALLOWANCE WORKS OUT TO RS.23,11, 625 (EMPHASIS IS OURS) 17. IT IS CLEAR THAT THE AO HAS DENIED THE CLAIM OF DEPRECIATION BY TREATING THE AMOUNT PAID BY THE ASSESSEE AS CONSIDERATION TOWARDS GOODW ILL. THUS, THE AO HAS TREATED THE SAID PAYMENT TOWARDS GOODWILL. ONCE, THE PAYMENT IS ACCEPTED FOR GOODWILL THEN THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF M/ S SMIFS SECURITIES LTD (SUPRA) IS APPLICABLE ON THE ISSUE. THE HONBL SUPR EME COURT HAS DECIDED THE ISSUE OF DEPRECIATION ON GOODWILL AS UNDER : 'WHETHER GOODWILL IS AN ASSET WITHIN THE MEANING O F SECTION 32 OF THE INCOME-TAX ACT, 1961, AND WHETHER DEPRECIATION ON 'GOODWILL' IS ALL OWABLE UNDER THE SAID SECTION ?' ANSWER IN THE PRESENT CASE, THE ASSESSEE HAD CLAIM ED DEDUCTION OF RS.54,85,430 AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING THE ORIGIN OF SUCH GOODWILL WAS GIVEN AS UNDER : 'IN ACCORDANCE WITH THE SCHEME OF AMALGAMATION OF Y SN SHARES AND SECURITIES (P.) LTD. WITH SMIFS SECURITIES LTD. (DULY SANCTIONED BY THE HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RETROSPECTIVE EFFECT FROM 1ST AP RIL, 1998, ASSETS AND LIABILITIES OF YSN SHARES AND SECURITIES (P.) LTD. WERE TRANSFERRE D TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COM PANY.' IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES P. LTD. (AMALGAMATING COMPANY) SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAM ATION. IT WAS CLAIMED THAT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIENT ELE. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME-TAX ACT, 1961 ('THE ACT', FOR SHORT). WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1 ) OF THE ACT : 'EXPLANATION 3.FOR THE PURPOSES OF THIS SUB-SECTI ON, THE EXPRES SIONS 'ASSETS' AND 'BLOCK OF ASSETS' SHALL MEAN (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PL ANT OR FURNITURE ; (B) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, CO PYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE :' 5470 & ORS.CADBURY 25 EXPLANATION 3 STATES THAT THE EXPRESSION 'ASSET' SH ALL MEAN AN INTANGIBLE ASSET, BEING KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING T HE WORDS 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION 'ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS W OULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT 'GOO DWILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PR ESENT CASE, THE ASSESSING OFFICER, AS A MATTER OF FACT, CAME TO THE CONCLUSION THAT NO AM OUNT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. THIS IS A FACTUAL FINDING. THE COMMISSION ER OF INCOME-TAX (APPEALS) ('THE CIT(A)', FOR SHORT) HAS COME TO THE CONCLUSION THAT THE AUTHORISED REPRESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT ORDERI NG AMALGAMATION OF THE ABOVE TWO COMPANIES ; THAT THE ASSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES P. LTD. WERE TRANSFERRED TO THE ASSESSEE FOR A CONSIDERATIO N ; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTED GO ODWILL AND THAT THE ASSESSEE- COMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE A SSESSEE-COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY THE INCOME-TAX APPELLATE TRIBUNAL ('THE ITAT', FOR SHORT). WE SEE NO REASON TO INTERFERE WITH THE FACTUAL FINDING. ONE MORE ASPECT WHICH NEEDS TO BE MENTIONED IS THA T, AGAINST THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, THE REVENUE HAD PREF ERRED AN APPEAL TO THE HIGH COURT IN WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHET HER GOODWILL IS AN ASSET UNDER SECTION 32 OF THE ACT. IN THE CIRCUMSTANCES, BEFORE THE HIGH COURT, THE REVENUE DID NOT FILE AN APPEAL ON THE FINDING OF FACT REFERRED TO H EREINABOVE. FOR THE AFORE-STATED REASONS, WE ANSWER QUESTION NO . (B) ALSO IN FAVOUR OF THE ASSESSEE. QUESTION NO. (C) WITHOUT GOING INTO THE CONTROVERSY OF ALLOWBILITY OF DEPRECIATION ON OTHER TANGIBLE ASSETS WHEN THE AO HAS ACCEPTED THE PAYMENT IN QUES TION FOR GOODWILL THEN IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF M/S SMIFS SECURITIES LTD (SUPRA), THE DEPRECIATION IS ALLOWABLE ON THE M ARKETING KNOWHOW. HENCE, WE ALLOW THE CLAIM OF THE ASSESSEE. 5470 & ORS.CADBURY 26 CONSIDERING THE ABOVE DISCUSSION,GROUND NUMBER 5 IS DECIDED IN FAVOUR OF THE ASSESSEE. 6. LAST GROUND PERTAINS TO DISALLOWANCE MADE U/S.14A O F THE ACT,AMOUNTING TO RS.2,00,52,715/-.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD CLAIMED EXEMPTED INCOME OF RS.5.29 CRO RES (DIVIDEND INCOME- 5.27 CRORES,INTERESTS RECEIVED ON US 64 TAX FREE BO NDS -RS. 2.90 LAKHS).THE AO RAISED A QUERY AS TO WHAT EXPENSES HAD BEEN INCURRE D FOR EARNING THE EXEMPT INCOME,SO THAT SAME COULD BE DISALLOWED AS PER THE PROVISIONS OF SECTION 14A OF THE ACT.THE ASSESSEE SUBMITTED THAT IT HAD MADE INV ESTMENT IN THE MUTUAL FUND SCHEMES PERIODICALLY OUT OF ITS SURPLUS FUNDS WHICH WERE NOT NEEDED IMMEDIATE -LY,THAT IT HAD NOT TAKEN ANY LOANS AND HAD NOT PAI D ANY INTEREST,THAT FOR MANAGING THE INVESTMENT IN THE MUTUAL FUNDS NO EXPE NSE WAS INCURRED EXCEPT ONE PERSON IN THE FINANCE DEPARTMENT WHO WOULD SPEN D AN HOUR A DAY ON AN AVERAGE FOR MONITORING SUCH INVESTMENTS, THAT NO OT HER EXPENDITURE HAD BEEN INCURRED FOR EARNING THE EXEMPT INCOME,THAT THE SAL ARY OF TREASURY MANAGER, WHO WAS MANAGING THE INVESTMENT OF THE ASSESSEE,WAS RS. 10.76 LAKHS, THAT IF AT ALL ANY DISALLOWANCE WAS TO BE MADE THAN 10% OF HIS SAL ARY COULD BE ATTRIBUTED TO THE EARNING OF EXEMPT INCOME.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, HELD THAT THE ASSESSEE HAD SHOWN NET PROFIT TO BE 6 7.64 CRORES,THAT THE TOTAL EXEMPT RECEIPTS WERE AT RS.5.29 CRORES,THAT PERCENT CONTRIBUTION TO THE NET PROFIT OF THE EXEMPT INCOME WAS7.82%,THAT 7.82% OF THE COM MON EXPENSES OF RS.32. 73 CRORES WOULD BE A JUSTIFIABLE DISALLOWANCE.FINA LLY, HE MADE A DISALLOWANCE OF RS. 2.55 CRORES,INVOKING THE PROVISIONS OF SECTI ON 14 A OF THE ACT. 6.1. AGGREIVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA.BEFORE HIM THE ASSESSEE MADE ELABORATE SUBM ISSIONS AND RELIED UPON NUMBER OF CASES.IT WAS ARGUED THAT ADMINISTRATIVE E XPENSES AMOUNTING TO RS. 2.13 LACS(SALARY PAID TO THE MANAGER AND EXECUTIVE OF THE TREASURY DEPARTMENT) 5470 & ORS.CADBURY 27 INCURRED DURING THE YEAR COULD ONLY BE CONSIDERED T O HAVE BEEN INCURRED FOR EARNING OF EXEMPT INCOME,THAT DISALLOWANCE U/S.14A SHOULD BE RESTRICTED TO RS. 2.13 LACS.THE FAA ISSUED A SHOW CAUSE NOTICE ON 24/ 10/2011 ASKING THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S.14 A SHOULD NOT BE COMPUTED IN ACCORDANCE WITH THE FORMULA MENTIONED THEREIN.THE A SSESSEE SUBMITTED THAT THE FORMULA MENTIONED IN THE NOTICE WAS AKIN TO THE MET HOD PRESCRIBED BY THE RULE 8D OF THE INCOME TAX RULES,1962(RULES),THAT IT WAS ONLY WITH EFFECT FROM AY. 2007-08THAT THE AO.S HAD BEEN EMPOWERED TO DETERMIN E THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME I N ACCORDANCE WITH A PRESCRIBED METHOD IF THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THAT THE RULE 8D WAS NOT APPLICABL E RETROSPECTIVELY. THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT DELIVERED IN THE CASE OF GODREJ AND BOYCE MANUFACTURING LTD.(43 DTR 177).AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT O RDER,THE FAA WORKED OUT THE DISALLOWANCE AT RS.2,00,52,715/- AND THUS PARTL Y ALLOWED THE APPEAL. 6.2. BEFORE US,THE AR STATED THAT WHILE DECIDING THE APP EAL FOR THE AY.2004-05 (SUPRA)THE TRIBUNAL HAD AT PARAGRAPHS 38-40 AT PAGE S 18-19 HAD DEALT WITH THE ISSUE,THAT IN EARLIER YEARS THE DISALLOWANCE WAS RE STRICTED TO 1% -2% OF THE DIVIDEND INCOME,THAT SAME DISALLOWANCE SHOULD BE MA DE FOR THE YEAR UNDER CONSIDERATION ALSO.HE RELIED UPON THE CASES OF GREA VES LEASING FINANCE LTD. (ITA/5634/MUM.2009)J.R.ENTERPRISES(124ITD493),THE D IAMOND COMPANY LTD.(ITA/ 1265/KOL/2010).THE DR STATED THAT DISALLO WANCE SUGGESTED BY THE ASSESSEE WAS NOT REASONABLE. 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT WHILE DECIDING THE APPEAL FOR THE EARLIER YEAR, THE TRIBUNAL HAD DECIDED THE ISSUE AS UNDER: 38. GROUND NO.2 IS REGARDING DISALLOWANCE MADE UNDE R SECTION 14A OF THE ACT. 5470 & ORS.CADBURY 28 39. THE ASSESSEE HAS RECEIVED DIVIDEND INCOME FROM MUTUAL FUNDS AMOUNTING TO RS.3,64,10,101/- AND INTEREST ON US64 BONDS AMOUNTI NG TO RS.1,09,093/- ITA NOS.3510/M/11,3726/M/11, 4205/M/11 AND 4561/M/2011 19 AND CLAIMED THE SAME EXEMPT UNDER SECTION 10(35) OF THE ACT. THE AO DISA LLOWED THE HEAD OFFICE EXPENSE AMOUNTING TO RS.1,57,00,000/- U/S 14A OF THE ACT BY ALLOCATING IN PROPORTION OF EXEMPT INCOME AND NET PROFIT. ON APPEAL, THE ASSESS EE HAS CONTENDED THAT FOR MANAGING SUCH INVESTMENTS IN THE MUTUAL FUNDS PERIO DICALLY TWO EXECUTIVES IN THE TREASURY DEPARTMENT SPEND AN HOUR EVERY DAY ON AN A VERAGE FOR MONITORING SUCH INVESTMENTS. ACCORDINGLY, THE ASSESSEE CLAIMED THAT 10% OF SALARY OF THE MANAGER AND 20% OF SALARY OF FINANCE OFFICER MAY BE CONSIDE RED AS ALLOWABLE FOR EARNING THE EXEMPT INCOME. THE LD. CIT(A) HAS ACCEPTED THE CONT ENTION OF THE ASSESSEE AND RESTRICTED THE DISALLOWANCE TO 10% OF SALARY OF MAN AGER AND 20% OF FINANCE OFFICER RESPECTIVELY AMOUNTING TO RS.1,76,271/- U/S 14A OF THE ACT. 40. WE HAVE HEARD THE LD.DR AS WELL AS LD.SR.COUNS EL FOR THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE AO HAS ALLOCATED HEAD OFFICE EXPENSES IN THE RATIO OF NET PROFIT AND EXEMPT INCO ME WHICH CANNOT BE ACCEPTED AS THERE IS NO BASIS OF SUCH ALLOCATION OF THE HEAD OF FICE EXPENSES IN PROPORTIONATE OF THE INCOME THE ADMINISTRATIVE EXPENSES CANNOT BE APPORT IONED EQUALLY ON THE REGULAR BUSINESS INCOME AND EXEMPT INCOME BECAUSE THE EXEMP T INCOME IS EARNED FROM MERE INVESTMENT WHICH DOES NOT REQUIRE THE SAME DEGREE O F ATTENTION AND REGULAR ADMINISTRATIVE MANAGEMENT AS IN THE CASE OF REGULAR BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE, WE DO NOT FIND ANY BASIS OF ALLOCATION A DOPTED BY THE AO. AT THE SAME TIME, THE LD. CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESS EE ON THE BASIS OF THE SUBMISSIONS WITHOUT TAKING INTO CONSIDERATION ANY RECORD OR MAT ERIAL IN SUPPORT OF THE CLAIM THAT ONLY ONE HOUR IS SPENT BY THE OFFICERS OF THE ASSES SEE IN THE TREASURY DEPARTMENT FOR THIS PURPOSES. ACCORDINGLY, IN THE FACTS AND CIRCUM STANCES OF THE CASE AND IN THE INTEREST OF JUSTICE AS WELL AS CONSISTENT WITH THE VIEW TAKEN BY THIS TRIBUNAL IN SERIES OF DECISIONS THAT REASONABLE BASIS SHOULD BE ADOPTED F OR MAKING DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A, WE ARE OF THE OPINIO N THAT THE REASONABLE DISALLOWANCE WOULD BE 2% OF THE EXEMPT INCOME. ACCO RDINGLY, WE MODIFY THE ORDERS OF AUTHORITIES BELOW. 5470 & ORS.CADBURY 29 RESPECTFULLY FOLLOWING THE ABOVE, WE ARE OF THE OPI NION THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO 2% OF THE EXEMPT INCOME. AC CORDINGLY, GROUND NUMBER SIX IS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. I.T.A./5876/MUM/2012, AY: 2005-06: 7. THE SOLITARY GROUND OF APPEAL,RAISED BY THE AO,IS A BOUT DISALLOWANCE U/S.14A OF THE ACT.HE HAS OBJECTED TO THE REDUCTION OF DISA LLOWANCE BY THE FAA. IN THE EARLIER PARAGRAPH,WE HAVE DEALT WITH THE ISSUE OF D ISALLOWANCE TO BE MADE WITH REGARD TO EXEMPT INCOME.FOLLOWING THE SAME WE HOLD THAT DISALLOWANCE OF TWO PERCENT OF THE EXEMPT INCOME WOULD BE REASONABLE.TH E ISSUE RAISED BY THE AO IS DECIDED ACCORDINGLY. AS A RESULT APPEALS FILED BY THE ASSESSEE AND THE AO STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MAY, 2016. ! 18 , 2016 SD/- SD /- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 18.05.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.