ASST CIT 10(3) (OSD), MUMBAI V. COLGATE PALMOLIVE (I) LTD, MUMBAI

ITA 6073/MUM/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7223 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2007-2008
• Appeal Filed On: 29-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JENARDHANAN LD
• Assessee Lawyers: MUM CO NOS MUM
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Question of law; Fair market value; Arm length price
• Section: 92C; 143(3); 92D; 92B; 92F; 92E; 14A; 10B; 92

Judgement Text

ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , , BEFORE SHRI MAHAVIR SINGH, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./I.T.A. NO. 6073/MUM/2014 & CROSS OBJECTION NO.243/MUM/2014 ( / ASSESSMENT YEAR: 2007-08) ASSISTANT COMMISSIONER OF INCOME TAX 10(3) (OSD) ROOM NO.403,4 TH FLOOR AAYKAR BHAVAN MUMBAI 400 020 / VS. COLGATE PALMOLIVE (INDIA) LIMITED COLGATE RESEARCH CENTRE MAIN STREET HIRANANDANI GARDENS, POWAI MUMBAI 400 076 ./ ./PAN/GIR NO. AACCC-4309-B ( ! /APPELLANT ) : ( '#! / RESPONDENT ) & ./I.T.A. NO. 2778/MUM/2011 & CROSS OBJECTION NO.126/MUM/2011 ( / ASSESSMENT YEAR: 2005-06) ASSISTANT COMMISSIONER OF INCOME TAX 10(3) ROOM NO.451,4 TH FLOOR AAYKAR BHAVAN, M.K.ROAD MUMBAI 400 020 / VS. COLGATE PALMOLIVE (INDIA) LIMITED COLGATE RESEARCH CENTRE MAIN STREET HIRANANDANI GARDENS, POWAI MUMBAI 400 076 ./ ./PAN/GIR NO. AACCC-4309-B ( ! /APPELLANT ) : ( '#! / RESPONDENT ) ASSESSEE BY : ARVIND V. SONDE, LD. AR ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 2 REVENUE BY : V. JENARDHANAN, LD. DR / DATE OF HEARING : 09/04/2018 / DATE OF PRONOUNCEMENT : 04 /05/2018 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THE CAPTIONED APPEALS BY REVENUE FOR ASSESSMENT YEARS [AY] 2005-06 & 2007-08 CONTEST SEPARATE ORDERS OF LOWER AUTHORITIES. THE ASSESSEE HAS FILED CROSS-OBJECTIONS AGAINST THE SAM E. SINCE COMMON ISSUES ARE INVOLVED, THE SAME ARE BEING DISPOSED-OF F BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVIT Y. CROSS APPEALS FOR AY 2005-06 2.1 THE CROSS APPEALS FOR AT 2005-06 CONTEST THE OR DER OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-15, MUMBAI [CI T(A)], APPEAL NO. CIT(A)-15/IT-194/08-09 DATED 25/01/2011. THE REVENUE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL:- 1(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE ASSESSING OF FICER IN TAXING THE REMISSION/ CESSATION OF SALES TAX LIABILITY OF RS.7 ,63,289/- UNDER SECTION 41(1) OF THE INCOME TAX ACT,1961 OR ANY OTHER PROVISIONS OF THE INCOME TAX ACT,1961. 1(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE DIFFERENTIAL AMOUNT OF RS .7,63,289/- REPRESENTING THE ACTUAL LOAN AMOUNT AND THE PRESENT VALUE OF THE FUT URE LIABILITY PAID BY THE ASSESSEE IS ON CAPITAL ACCOUNT AND NOT TAXABLE U/S 41(1) OR ANY OTHER PROVISION OF THE INCOME TAX AC,1961. 2(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT NO MARKETING INTANGIBLES WERE CREATED BY THE ASSESSEE ON BEHALF OF ITS ASSOCIATED ENTERPRISE IN USA AND T HE ASSESSEES ADVERTISING ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 3 & MARKETING EXPENSES ARE BEING INCURRED PURELY IN R ESPECT OF ITS OWN OPERATIONS IN INDIA. 2(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADJUSTMENT OF RS.1,31,36,000/ - MADE BY THE TRANSFER PRICING OFFICER AND ASSESSING OFFICER IN RESPECT OF COST ALLOCATION TO THE ASSOCIATED ENTERPRISE COLGATE USA OUT OF THE ADVERT ISING AND MARKETING EXPENSES DEBITED BY THE ASSESSEE IN DIFFERENT YEARS . 2(III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THAT THE ROYALTY PAYMENT TO TH E ASSOCIATED ENTERPRISE HAS BEEN INCREASING ALONG WITH THE ADVERTISEMENT AND MA RKETING EXPENSES AND AS SUCH, THE APPORTIONMENT OF COST INCURRED BY THE ASSESSEE FOR THE BENEFIT ACCRUING TO THE OVERSEAS ASSOCIATED ENTERPRISE WAS REQUIRED. THE CROSS OBJECTIONS RAISED BY ASSESSEE READS AS UN DER:- THE COMMISSIONER OF INCOME TAX (APPEALS)-15, MUMBAI ERRED IN CONSIDERING THAT THE TRANSACTIONS RELATING TO ADVERTISEMENT AND MARK ETING EXPENSE BETWEEN COLGATE- PALMOLIVE (INDIA) LIMITED AND THIRD PARTIES ARE OUT SIDE THE PURVIEW OF INDIAN TRANSFER PRICING REGULATIONS. THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD. ASSISTANT COMMISSIONER OF INCOME TAX-10(3) , MUMBAI [AO] U/S 143(3) ON 05/12/2008. 2.2 FACTS IN BRIEF ARE THAT THE ASSESSEE BEING RESIDENT CORPORATE ASSESSEE ENGAGED IN MANUFACTURING & TRADING OF DIVERSIFIED PRODUCTS WAS ASSESSED AT RS.187.74 CRORES AFTER CERTAIN DISA LLOWANCES AS AGAINST RETURNED INCOME OF RS.184.95 CRORES FILED B Y THE ASSESSEE ON 28/10/2004. THE DISALLOWANCE OF RS.7.63 LACS REPRES ENTING GAIN ON REPAYMENT OF DEFERRAL LOAN AND ADJUSTMENT OF RS.144.39 LACS (PART) MADE U/S 92CA(3) ARE THE SUBJECT MATTER OF THIS APP EAL. 2.3 BOTH THE REPRESENTATIVE, AT THE OUTSET, CONVERG E ON THE POINT THAT DISALLOWANCE OF RS.7.63 LACS MADE BY LD. AO U/S 41( 1) REPRESENTING GAIN ON REPAYMENT OF DEFERRAL SALES TAX LIABILITY STOOD COVERED IN ASSESSEES FAVOR IN ASSESSEES OWN CASE FOR AY 2003 -04 BY THE ORDER OF HONBLE BOMBAY HIGH COURT [370 ITR 728] AND ALSO BY THE ORDER OF THIS ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 4 TRIBUNAL FOR AY 2004-05 ITA NO. 1855/MUM/2011 DATED 08/05/2014, THE COPIES OF WHICH HAS BEEN PLACED ON RECORD. WE FIND THAT LD. AO HAS MADE THE AFORESAID DISALLOWANCE RELYING ON AY 2003- 04 & 2004-05 AND THE SAME HAS BEEN DELETED BY THE TRIBUNAL IN AY 200 4-05 BY FOLLOWING THE DECISION RENDERED BY MUMBAI TRIBUNAL (SPECIAL BENCH) IN SULZER INDIA LIMITED VS. DCIT [134 TTJ 385]. FURTHER, THE REVENUES APPEAL ON THIS ISSUE FOR AY 2003-04 HAS BEEN DISMISSED BY AFO RESAID ORDER OF HONBLE BOMBAY HIGH COURT. FINALLY, THE HONBLE APE X COURT IN CIT VS. BALKRISHNA INDUSTRIES LTD. [2017 88 TAXMANN.COM 273 ] HAS APPROVED THE VIEW OF HONBLE BOMBAY HIGH COURT ON MERITS RENDERE D IN CIT VS. SULZER INDIA LTD. [369 ITR 717]. IN VIEW OF THE ADMITTED POSITION, GROUND NO. 1 RAISED IN REVENUES APPEAL STANDS DISMISSED. 3.1 REST OF THE GROUNDS RAISED IN REVENUES APPEAL AS WELL AS IN CROSS- OBJECTIONS OF THE ASSESSEE ARE RELATED WITH CERTAIN TRANSFER PRICING [TP] ADJUSTMENT AGAINST ADVERTISING, MARKETING & SALES PROMOTION EXPENSES [AMP] INCURRED BY THE ASSESSEE DURING IMPUGNED AY. FACTS QUA DISALLOWANCE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT U/S 92CA ARE THAT DURING ASSESSMENT PROCEEDINGS, THE INTERNATION AL TRANSACTIONS REPORTED BY THE ASSESSEE IN FORM NO. 3CEB WERE REFERRED BY LD. AO FOR DETERMINATION OF ARM LENGTH PRICE [ALP] TO LD. TRANSFER PRICING OFFICER [TPO] ON 05/01/2007 WHO PROPOSED AN ADJUSTMENT OF RS.131 .36 LAKHS ON ACCOUNT OF COST ALLOCATION OF AMP EXPENSES DEBITED BY THE ASSESSEE. INCORPORATING THE SAME, THE ASSESSEE HAS BEEN SADDL ED WITH ADDITION THEREOF BY LD. AO IN ASSESSMENT ORDER DATED 05/12/2 008. ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 5 3.2 LD. TPO NOTED THAT THE ASSESSEE [CPIL] WAS 51% SUBSIDIARY OF COLGATE PALMOLIVE INC., USA AND WAS ENGAGED IN MANUFACTURING AND MARKETING OF DIVERSIFIED PHARMACEUTICAL PRODUCTS. IT REFLECTED TURNOVER & PROFIT BEFORE TAX AT RS.1075.76 CRORES & RS.177.36 CRORES RESPECTIVELY. THE ASSESSEE REFLECTED VARIOUS SALE / PURCHASE TRAN SACTIONS WITH ITS 30 ASSOCIATED ENTERPRISES [AE] AS EXTRACTED ON PAGE NUMBERS 2 & 3 OF LD. TPOS ORDER WHICH WERE SUBJECTED TO COMPUTATION OF ALP. 3.3. BESIDES ABOVE TRANSACTIONS, LD. TPO UPON PERUS AL OF FINANCIAL ACCOUNTS NOTICED THAT THE ASSESSEE DEBITED AMP EXPENSES AMOUNTING TO RS.136.83 CRORES WHICH CONSTITUTED APPROX. 13% OF T HE SALES ACHIEVED BY THE ASSESSEE AS AGAINST INDUSTRY AVERAGE RATE OF 6.39%. THE LD. TPO FURTHER NOTED THAT THE ROYALTY PAYMENT MADE BY THE ASSESSEE REFLECTED STEEP GROWTH FROM 0.15% IN AY 1999-2000 TO 0.96% IN AY 2005-06 WHICH, IN ABSOLUTE TERM INCREASED FROM 1.50 CRORES IN AY 1999-2000 TO 10.32 CRORES IN AY 2005-06. THE SAME LED LD. TPO TO CONCLUDE THAT THE RELEVANT SALES ON WHICH ROYALTY WAS BEING PAID BY T HE ASSESSEE HAS RECORDED A FASTER GROWTH AND THEREFORE, AE STOOD BE NEFITTED FROM WORKING OF THE BUSINESS OF THE ASSESSEE IN A MAJOR WAY. IN THE LIGHT OF THE SAME, AMP EXPENSES WHICH WERE THE DRIVING FORCE FOR ENHANCIN G THE BUSINESS WERE TO BE SHARED BY OVERSEAS AE IN PROPOR TION TO BENEFIT ACCRUING TO IT. THE ASSESSEE SUBMITTED THAT ENTIRE EXPENDITURE WAS RELATED TO BUSINESS OF THE ASSESSEE AND THERE WAS N O AGREEMENT, WHATSOEVER, WITH ITS AE IN THIS REGARD AND THEREFOR E, THE PROVISIONS OF SECTION 92(2)/92B WERE NOT APPLICABLE TO THE AFORES AID TRANSACTIONS. HOWEVER, NOT CONVINCED, LD. TPO APPORTIONED THE AMP EXPENSES IN THE ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 6 RATIO OF ROYALTY PAYMENT TO TOTAL PAYMENT I.E. 0.96 % AND ACCORDINGLY, PROPOSED IMPUGNED DISALLOWANCE OF RS.131.36 LACS IN ITS ORDER U/S 92CA(3) DATED 31/12/2007. INCORPORATING THE SAME, Q UANTUM ASSESSMENT DATED 05/12/2008 WAS PASSED BY LD. AO WH ICH WAS SUBJECTED TO APPEAL BEFORE LD. FIRST APPELLATE AUTH ORITY. 3.4 AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITH SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 25/01/2011 WHE RE LD. CIT(A) CONCURRED WITH ASSESSEES STAND BY MAKING FOLLOWING OBSERVATIONS:- 6.9 I HAVE PERUSED THE TPOS ORDER AND THE WRITTEN SUBMISSIONS. THE STAND TAKEN BY THE TPO IS NOT TENABLE BECAUSE OF THE FOLLOWING REASONS: A) THE APPELLANT IS OPERATING AS A FULL FLEDGED MA NUFACTURER WHO INCURS ADVERTISEMENT EXPENSES FOR ITS OWN BUSINESS. THE TP O HAS FAILED TO ANALYZE THE STATUS OF THE APPELLANT IN PROPER PERSPECTIVE. THE AE COLGATE USA IS NOT BEING MANAGED ON A GLOBAL PRODUCT LINE BASIS AS I F IT MANUFACTURES PRODUCTS WHICH THE INDIAN ENTITY DISTRIBUTES. RATHER INDIAN AE IS A FULL FLEDGED ENTREPRENEUR AND SO THIS ATTEMPT TO ALLOCATE CERTAI N A&M COSTS TO OVERSEAS AE IS NOT CORRECT. HAD THE INDIAN ENTITY BEEN ONLY A DISTRIBUTOR, THEN THIS ISSUE COULD HAVE CARRIED WEIGHT. IN THE PRESENT CONTEXT, IT HAS NOT RELEVANCE. THE APPELLANT PLAYS THE ROLE OF AN ENTREPRENEUR AND RET AINS THE PROFITS EMANATING FROM ITS BUSINESS ENTERPRISE. IT NOT ONLY MANUFACTU RES BUT MARKETS AND DISTRIBUTES ALL ITS PRODUCTS FOR WHICH IT INCURS A& M EXPENDITURE. B) THERE ARE NO DIRECT BENEFITS FLOWING FROM THE A PPELLANTS A&M EXPENSES TO ITS AES SINCE THE EXPENSES ARE INCURRED SOLELY FOR THE PROMOTION OF THE APPELLANTS PRODUCTS IN THE INDIAN MARKET. INCIDENT AL BENEFITS FLOWING TO THE AE, IF ANY, CANNOT CHANGE THE CHARACTER OF THE EXPE NSES INCURRED BY THE APPELLANT. C) MOREOVER, THE APPELLANT HAS NOT MADE ANY BRAND ROYALTY PAYMENTS TO ITS AES DURING THE RELEVANT ASSESSMENT YEAR. HENCE, BASED ON THE ABOVE REASONING, THERE DOES NOT APPEAR TO BE ANY MARKETING INTANGIBLES BEING CREATED BY THE APPELLANT ON BEHAL F OF THE AE IN USA AND THE APPELLANTS A&M EXPENSES ARE BEING INCURRED PURELY IN RESPECT OF ITS OWN OPERATIONS IN INDIA. ACCORDINGLY, NO ADJUSTMENT IS PROPOSED TO BE MADE WITH RESPECT TO A&M EXPENSE. THE ADDITION OF RS.13,16,000/- SO MADE IS DELETED. AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US WHEREAS THE ASSESSEE, BY WAY OF CROSS OBJECTIONS, HAS CONTENDED THAT THE AFORESAID ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 7 TRANSACTIONS ARE OUT OF THE PURVIEW OF TRANSFER PRICING PROVISIONS AS CONTAINED IN CHAPTER-X. 4.1 THE LD. DEPARTMENTAL REPRESENTATIVE [DR] DREW O UR ATTENTION TO THE FACT THAT THE ASSESSEE WAS LICENSED MANUFACTURER EXPOSED TO LESS THAN NORMAL RISKS AND IT WAS RESPONSIBLE TO CARRY O UT AMP FUNCTIONS WHICH WERE THE KEY DRIVERS FOR A FMCG ENTITY. THE LD. DR FURTHER SUBMITTED THAT OVERALL BRAND VALUE OF THE GROUP REF LECTED STEEP GROWTH DURING THE YEARS 2000 TO 2006 WHICH WERE THE RESULT OF HEAVY AMP EXPENSES BEING INCURRED BY THE ASSESSEE DURING THIS PERIOD A ND THEREFORE, SINCE THE BENEFIT THEREOF HAS BEEN DERIV ED BY THE GROUP AS A WHOLE, THE SAME HAS TO BE PROPERLY BENCHMARKED / AL LOCATED. OUR ATTENTION IS DRAWN TO PAGE NO. 133 OF TRANSFER PRICING [TP] STUDY CARRIED OUT BY THE ASSESSEE TO SUBMIT THAT THERE WERE INTER -COMPANY TRANSACTIONS RELATING TO AMP EXPENDITURE WITHIN THE MEANING OF SECTION 92B. IT WAS FAIRLY SUBMITTED THAT SINCE LD. TPO HAS NOT SEGREGATED THE ROUTINE AND NON-ROUTINE AMP EXPENDITURE AND APPLIED BRIGHT LINE TEST [BLT] AND THEREFORE, THE ISSUE MAY BE REMITTED BACK TO T HE FILE OF LOWER AUTHORITIES FOR PROPER BENCHMARKING THEREOF. RELIAN CE HAS BEEN PLACED ON FOLLOWING JUDICIAL PRONOUNCEMENTS FOR VARIOUS SU BMISSIONS / CONTENTIONS:- NO. NAME CITATION / REF. NO. DATED AUTHORITY (I) SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. ITA NO. 16/2014 16/03/2015 HONBLE DELHI HIGH COURT (II) MARUTI SUZUKI INDIA LTD. 381 ITR 117 11/12/201 5 HONBLE DELHI HIGH COURT (III) CIT VS. CUSHMAN & WAKEFIELD INDIA PVT LTD ITA NO. 475/2012 23/05/2014 HONBLE DELHI HIGH COUR T (IV) BMW INDIA PVT. LTD. VS DCIT ITA NO. 1406/DEL/2015 10/11/2017 ITAT, DELHI (V) PERFETTI VAN MELLE INDIA PVT. LTD. VS DCIT ITA NO. 1073/DEL/2017 24/05/2017 ITAT, DELHI ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 8 4.2 PER CONTRA , LD. SENIOR COUNSEL [AR], SH. ARVIND SONDE , SUBMITTED THAT THERE HAS TO BE AN INTERNATIONAL TRANSACTION A T THE OUTSET BEFORE ANY BENCHMARKING THEREOF COULD BE DONE BY LD. TPO. THE LD. AR RELYING ON THE OBSERVATIONS OF LD. CIT(A) SUBMITTED THAT NO AG REEMENT / ARRANGEMENT WHATSOEVER WAS ENTERED INTO BY THE ASSE SSEE WITH ITS AE IN THIS REGARD AND THEREFORE, THERE WAS NO QUESTION OF ANY COST ALLOCATIONS OR BENCHMARKING THEREOF. RELIANCE HAS BEEN PLACED O N FOLLOWING JUDICIAL PRONOUNCEMENT TO CONTROVERT THE STAND OF REVENUE AN D TO SUPPORT HIS OWN SUBMISSIONS:- NO. NAME CITA TION / REF. NO. DATED AUTHORITY (I) JOHNSON & JOHNSON LTD. VS. CIT ITA NO. 83/MUM/2011 05/02/2014 ITAT, MUMBAI AS UPHELD BY HONBLE BOMBAY HIGH COURT REPORTED AT 80 TAXMANN.COM 269 03/04/2017 (II) MARUTI SUZUKI INDIA LTD. 381 ITR 117 11/12/201 5 HONBLE DELHI HIGH COURT 5.1 WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS A ND PERUSED RELEVANT MATERIAL ON RECORD. AT THE OUTSET, SOME PERTINENT F ACTS TO BE NOTED ARE THAT THERE EXISTS NO ARRANGEMENT OR AGREEMENT BETWE EN THE ASSESSEE AND ITS AE WHICH OBLIGED THE ASSESSEE TO UNDERTAKE ANY SORT O F BRAND BUILDING ON BEHALF OF ITS AE. SECONDLY, NOTHING HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT INCURRING OF AMP EXPENDITURE HAS, IN ANY MANNER, RESULTED INTO BRAND BUILDING EXERCISE OR CREATING M ARKETING INTANGIBLES FOR THE AE OR AE STOOD BENEFITTED BY STATED EXPENDITURE IN ANY MANNER. THE ONLY ARGUMENT ADVANCED BY THE REVENUE IS THAT THE B RAND VALUE OF THE ASSESSEE GROUP, AS A WHOLE, HAS REFLECTED HEALTHY G ROWTH DURING THE PERIOD 2000 TO 2006. HOWEVER, NO EVIDENCE TO DEMONS TRATE THAT THERE WAS ANY CO-RELATION BETWEEN THE AFORESAID GROWTH VI S--VIS QUANTUM OF ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 9 AMP EXPENDITURE INCURRED BY THE ASSESSEE HAS BEEN PLACED ON RECORD. IN OUR OPINION, NO ADDITION COULD BE MADE ON MERE A SSUMPTION OF CERTAIN FACTS. 5.2 SO FAR AS THE REIMBURSEMENT OF AMP EXPENSES AS URGED BY THE REVENUE IS CONCERNED, UPON PERUSAL OF TRANSACTIONS AS REPORTED IN TRANSFER PRICING [TP] STUDY CARRIED OUT BY ASSESSEE, WE FIND THAT THESE EXPENSES ARE IN MOSTLY IN THE NATURE OF MEETING EXPENSES, TRAVELLING EXPENSES, HOTEL EXPENSES WHICH HAS BEEN RECEIVED AS WELL AS PAID BY THE ASSESSEE ON THE SAME BASIS I.E. THIRD PARTY COST. THE NATURE OF THESE EXPENSES, PER-SE, DO NOT INSTILL CONFIDENCE IN US TO CONCLUDE THAT TH E INCURRING OF SAID EXPENDITURE, HAS IN ANY WAY, RESU LTED INTO BRAND BUILDING OR CREATING MARKETING INTANGIBLES FOR THE ASSESSEE. 5.3 PROCEEDING FURTHER, THE CONTENTION OF THE ASSES SEE THAT HAS INCURRED THE SAID EXPENDITURE TO PROMOTE ITS OWN PR ODUCTS IN THE MARKET HAS REMAINED UNCONTROVERTED. IT IS ALSO UNCONTROVER TED THAT THE AFORESAID PAYMENTS WERE PRIMARILY MADE TO INDEPENDENT THIRD P ARTIES WITHOUT RENDERING ANY SERVICES TO ITS AE . 5.4 FURTHER, WE FIND THAT LD. TPO HAS COMPUTED THE SAID ADJUSTMENT BY APPLYING BRIGHT LINE TEST WITHOUT CARRYING OUT ANY ANALYSIS OF THE IMPUGNED EXPENDITURE TO CORROBORATE HIS STAND. THE AFORESAID METHODOLOGY, AS PER SETTLED LEGAL POSITION, IS NOT A RECOGNIZED METHODOLOGY AND NOT ONE OF THE PRESCRIBED METHODS A S ENVISAGED BY RULE 10B. 5.4 UPON DUE CONSIDERATION, WE FIND THAT THE FACTS OF THE ABOVE CASE ARE QUITE SIMILAR TO FACTS IN THE DECISION OF MUMBA I TRIBUNAL RENDERED IN ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 10 JOHNSON & JOHNSON LTD. VS. CIT [43 TAXMANN.COM 15] WHEREIN IT HAS HELD AS UNDER:- 37. RELEVANT FACTS ARE THAT THE TPO HAS STATED THAT TH E ASSESSEE INCURRED PUBLICITY AND SALES PROMOTION EXPENSES OF RS.163.27 CRORES DU RING THE RELEVANT FINANCIAL YEAR. THE TPO HAS STATED THAT SAID EXPENSES ON PUBL ICITY AND SALES PROMOTION HAS RESULTED INTO HIGHER SALES ON WHICH CORRESPONDINGLY HIGHER ROYALTY HAS BEEN PAID TO THE PARENT COMPANY J&J US. THEREFORE, THE BENEFIT O F HIGHER PUBLICITY AND SALES PROMOTION EXPENSES ARE ACCRUED TO THE PARENT COMPAN Y J&J US BUT THE COST THEREOF IS NOT APPORTIONED TO THE PARENT COMPANY. THE TPO S OUGHT EXPLANATION FROM THE ASSESSEE AS TO WHY THE COST OF ARRANGEMENT AS EMANA TING FROM THE RECORDS, IS RESULTING INTO THE BENEFIT TO THE PARENT AE, BUT NO T APPORTIONED AS PER SECTION 92(2) OF THE ACT. THE TPO STATED THAT THE ASSESSEE AND TH E PARENT COMPANY J&J US SHOULD HAVE SHARED SALES PROMOTION EXPENSES IN THE RATIO OF ROYALTY TO SALES OR WOULD HAVE RENEGOTIATED A LOWER ROYALTY RATE. THE A SSESSEE FILED ITS REPLY STATING INTER-ALIA THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF DISTRIBUTING THE PRODUCTS IN THE INDIAN MARKET ON ITS OWN ACCOUNT. IT WAS ALSO CONTE NDED THAT THE ADVERTISEMENT AND MARKETING EXPENSES ARE INCURRED IN INDIA ONLY FOR P ROMOTING SALES BY ASSESSEE OF ITS PRODUCTS IN INDIA AND IT IS NOT IN ANY WAY BENEFITE D TO J&J US. THAT J&J US IS NOT DIRECTLY INVOLVED IN THE BUSINESS OF MANUFACTURING OR TRADING OF SAID GOODS IN INDIA EITHER OF ITS OWN OR THROUGH ANY OF ITS SUBSIDIARY. HENCE, THE ENTIRE ADVERTISEMENT AND MARKETING EXPENSES INCURRED ARE PURELY FOR ASSE SSEE'S OWN BENEFIT AND THERE IS NO ELEMENT OF ANY SERVICE BEING RENDERED TO J&J US. IT WAS ALSO STATED THAT ASSESSEE-COMPANY IS AN INDEPENDENT RISK BEARING ENT ITY AND ANY COST INCURRED TOWARDS ADVERTISEMENT AND MARKETING WOULD BE FOR TH E SOLE BENEFIT OF ASSESSEE- COMPANY, AS IT ENJOYS THE INCREASED SALES OF PRODUC TS AS A RESULT OF SUCH MARKETING ACTIVITIES. THE ASSESSEE ALSO FURNISHED DETAILS OF PUBLICITY AND SALES PROMOTION EXPENSES BEFORE TPO. HOWEVER, TPO DID NOT ACCEPT TH E CONTENTION OF THE ASSESSEE AND STATED THAT THE SAID GROWTH IN NET SALES SO ACH IEVED THROUGH HIGHER AND HIGHER PUBLICITY AND SALES PROMOTION AND EXPENSES HAVE RES ULTED INTO HIGHER PAYMENT OF ROYALTY WHICH THE ASSESSEE IS PAYING AT A FIXED PER CENTAGE OF SALES TO ITS PARENT COMPANY. THUS, THERE IS A CO-RELATION BETWEEN THE R OYALTY PAYMENT AND SALES ON THE ONE HAND AND PUBLICITY AND SALES PROMOTION EXPENSES ON THE OTHER HAND AND IT IS NOT A MATTER OF COINCIDENCE. THE TPO AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE HAS STATED THAT J&J US, THE PARENT COMPANY OF THE A SSESSEE IS REAPING THE BENEFIT OF HIGHER ROYALTY YEAR AFTER YEAR AS A RESULT OF HI GHER SALES REALIZED BY ASSESSEE THROUGH HIGHER AND HIGHER EXPENSES BY WAY OF PUBLIC ITY AND SALES PROMOTION UNDERTAKEN BY ASSESSEE WITHOUT THE OVERSEAS AE BEAR ING ANY COST THERETO HE STATED THAT IT CONSTITUTES ARRANGEMENT BETWEEN THE TWO ENTITIES WHEREIN THE ENTIRE COST IS BORNE BY ASSESSEE, WHEREAS THE PARENT COMPA NY J&J US IS GETTING ITS SHARE OF BENEFIT FROM THOSE INCREASED SALES. THE TPO WORK ED OUT THE COST AT THE RATE OF 4.22% OF THE PUBLICITY AND SALES PROMOTION EXPENSES WHICH COMES TO RS.6.88 CRORES. HOWEVER, THE TPO STATED THAT THE COST IS RE STRICTED TO 200.82 LAKHS (BEING 1.23% OF RS.163.27 CRORES) IN VIEW OF DISALLOWANCE/ ADJUSTMENT IN INCOME MADE ON ACCOUNT OF ROYALTY ON TECHNICAL KNOW-HOW, THE INCOM E TAX, R&D CESS AND SERVICE TAX PAID THEREON AGGREGATING TO RS.41.27 CRORES OUT OF TOTAL PAYMENT OF RS.58.37 CRORES. ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 11 HENCE, TPO DISALLOWED RS.200.82 LAKHS FROM THE PUBL ICITY AND SALES PROMOTION EXPENSES INCURRED TOWARDS COST ALLOCABLE TO PARENT COMPANY. DRP AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE COMPANY CONFIRMED T HE ACTION OF THE TPO. ACCORDINGLY THE AO DISALLOWED A SUM OF RS.200.82 LA KHS WHILE MAKING ASSESSMENT. HENCE, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 38. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THA T IT WAS AN ADHOC DISALLOWANCE MADE BY TPO AND RELIED ON THE DECISION OF MUMBAI BE NCH OF TRIBUNAL IN THE CASE OF KODAK INDIA (P.) LTD . V. ADDL. CIT [2013] 37 TAXMANN.COM 233 AND SUBMITTED THAT THE TRIBUNAL DELETED SIMILAR KIND OF ADJUSTMENT SUG GESTED BY TPO ON THE GROUND THAT TPO CANNOT MAKE A DISALLOWANCE WHICH IS NOT WITHIN THE PRECINCT OF SPECIFIC METHOD PRESCRIBED UNDER SECTION 92C(1) OF THE ACT. HE SUBM ITTED THAT NO ADHOC DISALLOWANCE CAN BE MADE UNDER THE TRANSFER PRICING PROVISIONS. 39. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER OF A O/TPO AND SUBMITTED THAT TO CONSIDER MARKETING EXPENSES THE COST PLUS METHOD CO ULD BE APPLIED. SINCE TPO HAS NOT FOLLOWED ANY SPECIFIC METHOD AS 2006-07 IS THE FIRST YEAR, THE MATTER COULD BE RESTORED TO TPO TO DECIDE IT AFRESH AFTER CONSIDERI NG THE GUIDELINES LAID DOWN BY SPECIAL BENCH (DELHI) IN THE CASE OF L.G. ELECTRONICS INDIA (P.) LTD . V. ASSTT. CIT [2013]140 ITD 41/29 TAXMANN.COM 300. HE SUBMITTED T HAT THE AE, PARENT COMPANY OF THE ASSESSEE SHOULD REIMBURSE THE EXPENSES AS AS SESSEE COMPANY HAS CREATED BRAND IN INDIA WHICH IS OWNED BY PARENT COMPANY BY INCURRING THE EXPENDITURE. 40. WE HAVE CONSIDERED THE ORDER OF THE TPO/AO AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE OBSERVE THAT THE TPO HAS SUGGESTED DISALLOWANCE ON THE GROUND THAT THE AE OF THE ASSES SEE VIZ J&J US IS REAPING THE BENEFIT OF HIGHER ROYALTY AMOUNT AS A RESULT OF HIG HER SALES REALIZED BY ASSESSEE BY INCURRING HIGHER EXPENSES BY WAY OF PUBLICITY AND S ALES PROMOTION UNDERTAKEN BY ASSESSEE AND THEREFORE THE PARENT COMPANY OF THE AS SESSEE-COMPANY SHOULD SHARE SOME OF THE EXPENSES. IT IS A FACT THAT TPO WHILE S UGGESTING ANY DISALLOWANCE/ADJUSTMENT HAS TO STATE THAT THE TRANS ACTIONS BETWEEN THE ASSESSEE- COMPANY AND ITS AE IS NOT AT ARM'S LENGTH. THE TPO IS TO DETERMINE THE ARM'S LENGTH BY FOLLOWING ONE OF THE METHOD AND /OR MOST APPROPRIATE METHOD AS PRESCRIBED IN SECTION 92C(1) OF THE ACT. THE TPO CA NNOT SUGGEST ADJUSTMENT/DISALLOWANCE ON THE BASIS OF HIS ASSUMPT IONS THAT THE PAYMENT IS EXCESSIVE THOUGH IT IS AT ARM'S LENGTH. SIMILAR ISS UE WAS ALSO CONSIDERED BY ITAT MUMBAI BENCH IN THE CASE OF KODAK INDIA (P.) LTD . ( SUPRA ). FURTHER, RULE 10B SPECIFICALLY PROVIDES THE PROCEDURE TO BE FOLLOWED FOR DETERMINING ARM'S LENGTH PRICE. WE OBSERVE THAT THE TPO WHILE SUGGESTING THE DISALLOWANCE OF 200.82 LAKHS OUT OF THE EXPENSES INCURRED BY ASSESSEE ON PUBLICI TY AND SALES PROMOTION HAS NOT FOLLOWED ANY OF THE METHOD AND THEREFORE THE SAID A DJUSTMENT/DISALLOWANCE SUGGESTED BY TPO IS OUTSIDE ITS JURISDICTION. DURIN G THE COURSE OF HEARING, LD. DR SUBMITTED THAT THE MATTER COULD BE RESTORED TO TPO TO DECIDE AFRESH AFTER CONSIDERING THE GUIDELINES LAID DOWN BY SPECIAL BEN CH (DELHI) IN THE CASE OF L.G. ELECTRONICS INDIA (P.) LTD . ( SUPRA ). SINCE NO SPECIFIC SUBMISSIONS WERE MADE AND CONSIDERING THE FACT THAT THE ASSESSEE JUSTIFIED TH E PAYMENT OF TECHNICAL KNOW-HOW ROYALTY AT THE RATE OF 4% OF NET SALES WHICH IS LOW ER THAN ARM'S LENGTH RATE OF 4.84% AND THE SAID FACT, WE HAVE ALSO DISCUSSED HEREIN AB OVE IN PARA 33 OF THIS ORDER, THAT THE PAYMENT OF ROYALTY BY ASSESSEE TO ITS PARENT CO MPANY IS AT ARM'S LENGTH, WE DO NOT FIND ANY JUSTIFICATION TO MAKE THE SAID DISALLO WANCE OF RS.200.82 LAKHS AS ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 12 SUGGESTED BY TPO TOWARDS THE SHARES TO BE CONTRIBUT ED BY AE OF THE ASSESSEE- COMPANY. THEREFORE, WE DELETE THE SAID DISALLOWANCE MADE BY AO BY ALLOWING GROUND NO.18 OF THE APPEAL TAKEN BY ASSESSEE. UPON FURTHER APPEAL BY REVENUE [80 TAXMANN.COM 269] , HONBLE BOMBAY HIGH COURT HAS UPHELD THE AFORESAID VIEW OF THE TRIBUNAL BY MAKING THE FOLLOWING OBSERVATIONS:- 4. RE QUESTION (L) : ( I ) THE IMPUGNED ORDER OF THE TRIBUNAL ALLOWED THE RE SPONDENT- A SSESSEE'S APPEAL BEFORE IT BY DELETING THE ADDITION OF RS.200 .82 LAKHS BEING THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF SALES PROMOTION AN D PUBLICITY EXPENSES BEING PAYABLE BY THE RESPONDENT- ASSESSEE' PARENT M/S. JOHNSON & JOHNSON, USA. THIS ON THE GRO UND THAT THE TRANSFER PRICING OFFICER (TPO) HAS, WHILE HOLDING THAT THE PARENT COMPANY SHOULD S HARE THIS EXPENDITURE ON PUBLICITY AND SALES PROMOTION AS IT BENEFITS THEREF ROM, AS HIGHER SALES RESULT IN HIGHER ROYALTY, HAS NOT DETERMINED THE ARMS LENG TH PRI CE (ALP) BY FOLLOWING ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C(1) OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES, 1962. ( II ) THE TPO IS OBLIGED UNDER THE LAW TO DETERMINE THE A LP BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS OF DETERMININ G THE ALP AS DETAILED IN SECTION 92C(1) OF THE ACT. IN THIS CASE, THERE IS NOTHING O N RECORD TO INDICATE THAT THE TPO HAD APPLIED ANY ONE OF THE PRESCRIBED METHODS I N SECTION 92C(1) OF THE ACT TO DETERMINE THE ALP BEFORE DISALLOWING THE PAY MENT OF RS.200.8 2 LAKHS INCURRED BY THE RESPONDENT ON ACCOUNT OF PUBLICITY AND SALES MANAGEMENT AS BEING EXCESSIVE AND/OR PAYABLE BY ITS PARENT, M/ S. JOHNSON & JOHNSON, USA. ( III ) THE IMPUGNED ORDER HOLDS THAT TRANSFER PRICING ADJU STMENT DONE BY DISALLOWING THE PAYMENT , ON THE BASIS OF AN ASSUMPTION THAT IT IS EXCESSIV E, IS AN ACTION COMPLETELY DEHORS THE PROVISIONS OF TRANS FER PRICING ADJUSTMENT FOUND IN CHAPTER X OF THE ACT. THE DETERMINATION OF THE ALP HAS TO BE DONE ONLY BY FOLLOWING ONE OF THE METHODS PRESCRIBED UND ER THE ACT. ( IV ) IN VIEW OF THE ABOVE, AS THE REVENUE HAS NOT ACTED IN ACCORDANCE WITH THE CLEAR MANDATE OF LAW, THE QUESTIONS AS PROPOSED DOE S NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTERTAINED. 5.5 SIMILAR VIEW HAS BEEN TAKEN BY HONBLE DELHI HI GH COURT IN CATENA OF SUBSEQUENT DECISIONS, FEW OF WHICH ARE AS FOLLOW S:- ( I ) MARUTI SUZUKI INDIA LTD. V. CIT 2015 64 TAXMNN.COM 150 ( II ) CIT V. WHIRLPOOL OF INDIA LTD. 381 ITR 154 ( III ) BAUSCH & LOMB EYECARE ( INDIA ) ( P. ) LTD. V. ADDL.CIT 381 ITR 237 ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 13 ( IV ) YUM RESTAURANTS ( INDIA ) ( P. ) LTD. V. ITO 380 ITR 637 IN THE ABOVE-MENTIONED DECISIONS, IT HAS CATEGORICA LLY BEEN HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN THE ASSESSEE AND I TS AE OBLIGING THE ASSESSEE TO INCUR AMP EXPENDITURE ON BEHALF OF ITS AE, NO INTERNATIONAL TRANSACTION CAN BE PRESUMED. EVEN IF SOME INDIRECT BENEFIT HAS ACCRUED TO THE AE BY AFORESAID EXPENDITURE, IT COULD NOT BE HELD THAT THE SAME WAS INCURRED TO PROMOTE THE BRAND OF FOREIGN AE. AN OTHER ASPECT OF THE ISSUE IS ABSENCE OF MACHINERY PROVISIONS AS OBSERVE D BY HONBLE DELHI HIGH COURT, IN BAUSCH & LOMB EYECARE ( INDIA ) ( P. ) LTD. [381 ITR 237] WHERE HONBLE COURT AFTER CONSIDERING VARIOUS JUDGM ENTS HAS ELABORATELY DISCUSSED THE ISSUE IN THE FOLLOWING MANNER:- 51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF A N INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES REQUIRES THE INTERPRETATION OF PROVISIONS OF CHAPTER X OF THE ACT, AND TO DETERMINE WHETHER THE REVENUE HAS BEEN ABLE TO SHOW PRIMA FACIE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AM P BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THES E CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALREADY B EEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11TH DECEMBER 201 5 IN ITA NO. 110/2014 ( MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX ) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 ( THE COMMISSIONER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD. ) AND MANY OF THE POINTS URGED BY THE COUNSEL IN TH ESE APPEALS HAVE BEEN CONSIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTA TION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE'] AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE D IFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUS TMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRA NSFER 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 TRANSACTION. 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 SPECIFIED I N SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION TH AT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 14 55. SECTION 92B DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C , 92D AND 92E , 'INTERNATIONAL TRA NSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBL E 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 EN TERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCI ATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVIC E OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANS ACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE S HALL, FOR THE PURPOSES OF SUB- SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN R ELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUC H 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 ARE NON-RESIDENT ( B ) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANG IBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORROWING MONEY OR ANY OTH ER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND ( C ) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FO R ALLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRE D OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR T O BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES ( B ) AND ( C ) ABOVE CANNOT BE READ DISJUNCTIVELY. EVEN IF RESOR T IS HAD TO THE RESIDUARY PART OF CLAUSE ( B ) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHE R 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 REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BET WEEN 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 CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES ( I ) ( A ) TO ( E ) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS MIGHT 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' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUG GESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V ) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCER T', 'WHETHER FORMAL OR IN WRITING', IT ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 15 IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXIST ENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL A ND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE ' MEANS' PART AND THE 'INCLUDES' PART OF SECTION 92B (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CER TAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND 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 W HETHER AT THE RELEVANT TIME THE APPELLANT, I.E., DAIICHI SANKYO COMPANY AND RANBAXY 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 TAKEOVERS) R EGULATIONS, 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 SUBSTANT IAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMPANY. THERE CAN BE NO 'PERSO NS ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWE EN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGE T COMPANY. FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE T HE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY W ITHOUT ANY AGREEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR C HANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETW EEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE O F ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. I T IS ANOTHER MATTER 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 DIRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPE RATE IN ACTUAL ACQUISITION OF SHARES ETC. OR THEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHELESS, THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE I S THE SINE QUA NON FOR THE RELATIONSHIP 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 INTE RNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFE RENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON ( SUPRA ), THE QUESTION OF APPLYING THE BLT TO DETERMINE TH E EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDIT URE 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 'TRANSACTI ON'. FURTHER, THE REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPENDITURE INCURRED A S 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 P OSITION EXPLAINED IN CIT V. EKL ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 16 APPLIANCES LTD. ( SUPRA ) WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATION AL TRANSACTION' AS HE ACTUALLY FINDS 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 I PSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPENDITURE BY THE ASSES SEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD, WITH B&L, USA. A SIMILA R CONTENTION BY THE REVENUE, NAMELY, THAT EVEN IF THERE IS NO EXPLICIT ARRANGEME NT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO THE AE IS ITSELF S UFFICIENT 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 SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTHO RITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE '. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE C OURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES , MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F ( II ) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLI ED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER T HAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO '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 CHARG ED 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 FA CT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. . 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF AN I NTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT , TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT I S AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE O BJECTIVE 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 ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PE RMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, W HAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATI VE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATIO N OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONA L 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 ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 17 BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION . AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSAC TIONS LISTED UNDER THE EXPLANATION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STO P HERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED B EFORE THE COURT 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 ) THE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE F OLLOWING 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 EXPENDITURE 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 REG ARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDIT URE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWE D AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESS MENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. T HERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD B E ENTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFF ICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDU STRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL A ND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR 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 ENCAPSULATING THE LEGISLATIVE POLI CY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRIN GING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS IN CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN T O EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOKED 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 INCURRE D BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED 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 EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) ( XV ) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SA TISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW'.' ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 18 ALTHOUGH WE ARE CONSCIOUS OF THE FACT THAT SPECIAL LEAVE PETITION AGAINST THE SAME HAS BEEN ADMITTED BY HONBLE APEX COURT [77 TAXMANN.COM 54] , HOWEVER, WE FIND THAT THE OPERATION OF THE SAID J UDGMENT HAS NOT BEEN, IN ANY MANNER, STAYED BY HONBLE COURT AND TH EREFORE VALID IN THE PRESENT CONTEXT. 5.6 SO FAR AS THE DECISIONS RELIED UPON BY REVENUE ARE CONCERNED, WE FIND THAT THE DECISION OF HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. WAS RENDERED IN THE CONTEXT WHERE THE ASSESSEES WERE DISTRIBUTORS OF PRODUCTS M ANUFACTURED BY THE FOREIGN AE. THE SAID ASSESSEES THEMSELVES WERE NOT MANUFACTURERS. MORE OVER NONE OF THE SAID ASSESSES APPEARS TO HAVE QUESTIONED THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION WITH FO REIGN AE. IT WAS ALSO NOT DISPUTED THAT THE SAID INTERNATIONAL TRANSACTIO N OF INCURRING AMP EXPENDITURE COULD BE SUBJECT MATTER OF TP ADJUSTMEN TS IN TERMS OF SEC.92 OF THE ACT. THEREFORE, THE SAME IS DISTINGUI SHABLE ON FACTS. SIMILARLY, THE DECISIONS RENDERED IN BMW INDIA PRIVATE LIMITED AND PERFETTI VAN MELLE INDIA PVT. LTD. HAS BEEN RENDERED IN A SITUATION WHERE THERE EXISTED AN AGREEMENT BETWEEN THE ASSESSEE AND ITS AE TO UNDERTAKE ADVERTISEMENT AND SALES PROMOTION . THE CASE LAW OF CUSHMAN & WAKEFIED IS NOT RELATED WITH DETERMINATION OF ALP OF AMP EXPENDITURE AND FURTHER IN THAT CASE THE BENCHMARKI NG OF REIMBURSEMENT OF EXPENSES WAS NOT DONE BY THE ASSESSEE. HENCE, T HE CITED CASE LAWS COULD NOT HELP THE REVENUE ON FACTUAL MATRIX. THE C ASE LAW OF MARUTI SUZUKI INDIA LTD., IN FACT, SUPPORT THE STAND OF THE ASSESSEE WHICH IS EVIDENT FROM THE FACT THAT LD. DRP, IN AY 2011-12, FOLLOWING THE RATIO OF ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 19 THIS DECISION DELETED THE IMPUGNED ADDITIONS AND AL LOWED THE APPEAL OF THE ASSESSEE. 5.7 TO CONCLUDE, RESPECTFULLY FOLLOWING THE RATIO O F DECISION OF HONBLE BOMBAY HIGH COURT AS CITED ABOVE ALONG WITH THE CIT ED DECISIONS OF HONBLE DELHI HIGH COURT, WE UPHELD THE ORDER OF LD . FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND OF REVENUES APPE AL. THE ASSESSEES CROSS-OBJECTIONS BECOME INFRUCTUOUS. CROSS APPEALS FOR AY 2007-08 6.1 THE GROUNDS RAISED BY THE REVENUE READS AS UNDE R:- 1. IN THE FACTS AND CIRCUMSTANCES OF CASE, THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE DUTY BENEFIT OR ANY EXPORT INCENTIVE CANNOT BE DIRECTLY ATTRIBUTED TO THE CORE R&D ACTIVITY SINCE INCOME ARISES FROM ANCILLARY ACTIVITIES. 2. IN THE FACTS AND CIRCUMSTANCES OF CASE, THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT THE ISSUE INVOLVED IN THE CASE IS SIMILAR TO THAT OF GOOD YEAR INDIA LTD. VS, DCIT[ITA NO.4360/DEL/2010], WHEREIN , THE HONBLE DELHI ITAT HAS HELD THAT EXPORT INCENTIVES DO NOT FORM PART OF THE INVOICE PRICE OF GOODS SOLD. IN SUCH A CASE, IT CANNOT BE REDUCED FROM THE COST OF GOODS SOLD. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HIS FINDINGS THAT THERE ARE NO DIRECT BENEFITS FLOWING FROM THE APPELLANTS ADVERTISEMENT AND MARKETING EXPENSES TO ITS ASSOCIA TED ENTERPRISES, SINCE THE EXPENSES ARE INCURRED SOLELY FOR THE PROMOTION OF APPELLANTS PRODUCTS IN THE INDIAN MARKET. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN CONCLUDING THAT THE AMP EXPENSES DO NOT BENEFIT AE WHEN THE AS SESSEE ITSELF ADMITS THAT THE BRANDS UNDER WHICH IT SELLS THE GOODS IS O WNED BY THE ASSOCIATED ENTERPRISE. 5. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN NOT TAKING NOTE OF THE FACT THAT DURING THE PREVIOUS YEAR, THE ASSESSEE IMPORTED FINISHED GOODS AMOUNTING TO RS.36,76,26,555/- (AS PER APPEND IX TO FORM 3CEB) FROM ITS ASSOCIATED ENTERPRISES WHICH WERE SOLD IN INDIA UNDER THE BRAND NAME BELONGING TO COLGATE PALMOLIVE, US AND HENCE, THE A SSOCIATED ENTERPRISE IS DIRECTLY BENEFITTED ON ACCOUNT OF THE BRAND PROMOTE D BY THE ASSESSEE IN INDIA. 6. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT THE TRANSFER PRICING OFFICER HAD NOT ADOPTED A NY PRESCRIBED METHOD, AS HE FAILED TO TAKE NOTE OF THE FACT THAT THE ASSESSE E HAD ALSO NOT BENCHMARKED AMP TRANSACTION BY OF THE PRESCRIBED METHODS. ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 20 6.2 THE GROUNDS RAISED BY ASSESSEE IN CROSS OBJECTI ONS READS AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) ERRED IN NOT DELETING THE DISALLOWANCE OF RS.61,31, 140 MADE BY THE LEARNED AO UNDER SECTION 14A OF THE ACT. THE ASSESSEE COMPANY PRAYS THAT THE DISALLOWANCE MA DE BY THE LEARNED AO UNDER SECTION 14A OF THE ACT MERITS TO BE DELETED. 2. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT CONSIDE RING THE ALTERNATIVE COMPUTATION OF DISALLOWANCE UNDER SECTION 14A OF TH E ACT SUBMITTED BY THE ASSESSEE COMPANY WITHOUT PROVIDING JUSTIFICATION FO R REJECTING THE SAME. THE ASSESSEE COMPANY PRAYS THAT THE ALTERNATIVE COM PUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT PROVIDED BY THE ASSESSEE COMPANY BE CONSIDERED FOR DISALLOWANCE UNDER SECTIO N 14A OF THE ACT. 3. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING T HE DISALLOWANCE UNDER SECTION 14A OF THE ACT AS PER RULE 8D OF THE INCOME TAX RULES,1962 (THE RULES) WITHOUT CONSIDERING THE FACT THAT THE PROVI SIONS OF RULE 8D OF THE RULES ARE APPLICABLE WITH EFFECT FROM AY 2008-09 (I .E. SUBSEQUENT YEAR) AND THEREBY NOT RESTRICTING THE DISALLOWANCE TO RS.5,38 ,740 S PER THE WITHOUT PREJUDICE COMPUTATION SUBMITTED DURING THE APPELLA TE PROCEEDINGS. THE ASSESSEE COMPANY PRAYS THAT THE DISALLOWANCE UN DER SECTION 14A OF THE ACT MERITS TO BE RESTRICTED TO RS.5,38,740. 4. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A), ERRED IN NOT DIRECT ING THE LEARNED AO TO EXCLUDE A SUM OF RS.34.20 LACS [(RS.33 LACS+1.2 LAC S) AS MENTIONED ON PAGE 3 OF THE LEARNED CIT(A)S ORDER] WHILE COMPUTING TH E DISALLOWANCE AS PER RULE 8D(2)(II) OF THE RULES. THE ASSESSEE COMPANY PRAYS THAT A SUM OF RS.34.2 LA CS MERITS TO BE EXCLUDED WHILE COMPUTING DISALLOWANCE UNDER RULE 8D (2)(II) OF THE RULES. 7.1 FACTS QUA GROUND NUMBERS 1 & 2 OF REVENUES APPEAL ARE THAT T HE ASSESSEE RECEIVED AN AMOUNT OF RS.5.20 CRORES FROM ITS PARENT COMPANY FOR PROVIDING CERTAIN RESEARCH & DEVELOPMENT SERVICES [R & D SERVICES] . THE SAID SERVICES WERE BEING CHARGED AT MARK-UP OF 5%. THE ASSESSEE WAS ENTITLED FOR DUTY BENEFIT OF 10% OF EX PORT VALUE OF R & D SERVICES FROM GOVERNMENT OF INDIAN UNDER SERVED FOR INDIA SCHEME . AFTER CONSIDERING THE SAID DUTY BENEFIT, THE NET MA RGIN (OPERATING PROFIT / TOTAL COST) OF THE ASSESSEE WORKED OUT TO 15.87% AS AGAINST ME AN ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 21 MARGIN OF 15.60% OF TEN COMPARABLES AS SELECTED BY THE ASSESSEE. HOWEVER, LD. TPO OPINED THAT THE BENEFIT OF SAID DU TY BENEFIT COULD NOT BE CONSIDERED FOR THE PURPOSE OF COMPARISON. THE AN OTHER POINT OF DIFFERENCE WAS INCLUSION OF TWO COMPARABLES NAMELY RITES & WATER & POWER CONSULTANCY SERVICES INDIA LTD. AS SELECTED BY LD. TPO BY RELYING UPON THE ORDER FOR AY 2006-07, WHICH AS PER ASSESSEES SUBMISSIONS WERE FUNCTIONALLY NOT COMPARABLE. IN TH E FINAL ANALYSIS, LD. TPO HAS WORKED OUT MEAN MARGIN OF SEVEN COMPARABLES INCLUDING THESE TWO COMPARABLE AS 14.82% AND ACCORDINGLY, CONSIDERI NG ASSESSEES MARGIN OF 5%, WORKED OUT TP ADJUSTMENT OF RS.5.69 C RORES AGAINST THE SAME WHICH WAS THE SUBJECT MATTER OF APPEAL BEFORE LD FIRST APPELLATE AUTHORITY. 7.2 AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITH SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 28/03/2014 WH ERE THE AFORESAID ADJUSTMENT WAS DELETED ON THE REASONING THAT THE EXPORT BENEFIT WAS DIRECTLY RELATED TO PROVISION OF R & D SERVICES AND SECONDLY, DEPB BENEFIT WAS PART OF OPERATING INCOME AS PER THE JUDGMENT OF MUMBAI TRIBUNAL RENDERED IN WELSPUN ZUCCHI TEXTILES LTD ITA NO. 7371/MUM/2010. AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US. THE LD. DR HAS PLACED RELIANCE ON THE STAND OF LD. TPO WHEREAS LD. AR CONTENDED THAT THE ISSUE STOOD COVERED IN ASSESSEE S FAVOR BY THE DECISION OF THE TRIBUNAL AND THEREFORE, THE DECISIO N OF THE LD. CIT(A) WAS FAIR & REASONABLE IN THE CIRCUMSTANCES. 7.3 UPON DUE CONSIDERATION, WE FIND THAT THE EXPORT BENEFITS WERE RECEIVED BY THE ASSESSEE IN CONNECTION WITH EXPORT OF R & D SERVICES ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 22 AND HAD DIRECT AND INTIMATE CONNECTION WITH THE SAI D RECEIPTS AND THEREFORE, THERE WAS NO REASON TO EXCLUDE THE SAME FOR THE PURPOSE OF COMPUTATION OF MARGINS FROM R & D ACTIVITIES. FURTH ER, THE SAID BENEFIT AROSE FROM USUAL ACTIVITIES CARRIED BY THE ASSESSEE AND PART & PARCEL OF THE SAME TRANSACTION AND THEREFORE, FORMED PART OF OPERATING INCOME ONLY. THE REVENUE HAS NOT CONTROVERTED THE STATED F ACT OR BROUGHT ON RECORD ANY CONTRARY JUDGMENT TO REFUTE THE FINDINGS OF LD. FIRST APPELLATE AUTHORITY. THEREFORE, ON FACTUAL MATRIX, WE FIND TO REASON TO INTERFERE WITH THE STAND OF LD. FIRST APPELLATE AUTHORITY IN THIS REGARD. THE GROUNDS STANDS DISMISSED. 8. GROUND NUMBERS 3 TO 6 RAISED IN REVENUES APPEAL ARE RELATED WITH TP ADJUSTMENT OF RS.5.06 CRORES AS DELETED BY LD. CIT(A) ON ACCO UNT OF AMP EXPENSES. THE MATERIAL FACTS AND CIRCUMSTANCES BEIN G SIMILAR AS IN AY 2005-06, TAKING SAME STAND, WE CONCUR WITH THE D ECISION OF LD. CIT(A). ACCORDINGLY, THESE GROUNDS STANDS DISMISSED . 9.1 THE SOLE GROUND RAISED IN ASSESSEES CROSS OBJE CTION PERTAINS TO DISALLOWANCE U/S 14A. DURING ASSESSMENT PROCEEDINGS , IT WAS NOTED THAT THE ASSESSEE EARNED TAX FREE INTEREST INCOME AGGREG ATING TO RS.6.68 CRORES WHICH CALLED FOR DISALLOWANCE U/S 14A READ WITH RULE 8D. THE ASSESSEE CONTESTED THE SAME BY PUTTING FORTH VARIOU S SUBMISSIONS AS EXTRACTED BY LD. AO IN THE QUANTUM ASSESSMENT ORDER , WHERE IT INTER-ALIA CONTENDED THAT IN THE ABSENCE OF SPECIFIC EXPENDITU RE TO EARN THE EXEMPT INCOME, DISALLOWANCE WAS NOT CALLED FOR. THE ATTENT ION WAS DRAWN TO THE FACT THAT THE INVESTMENT WAS MADE OUT OF SURPLUS FU NDS GENERATED BY THE ASSESSEE. HOWEVER, NOT CONVINCED, LD. AO COMPUTED A GGREGATE ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 23 DISALLOWANCE OF RS.83.54 LACS U/R 8D(2) WHICH COMPR ISED OF INTEREST DISALLOWANCE U/R 8D(2)(II) FOR RS.34.39 LACS AND EX PENSE DISALLOWANCE U/R 8D(2)(III) FOR RS.49.14 LACS. 9.2 UPON FURTHER APPEAL, LD. CIT(A) HAS ALLOWED PAR T RELIEF AGAINST INTEREST DISALLOWANCE AS STATED IN PARA-4 OF THE IMPUGNED ORDER BUT CONFIRMED EXPENSES DISALLOWANCE U/R 8D(2)(III). AGG RIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 9.3 THE LD. SR. COUNSEL FAIRLY SUBMITTED THAT THE E XPENSES DISALLOWANCE U/S 14A MAY BE RESTRICTED TO RS.5,37,8 40/- AS PER ALTERNATIVE COMPUTATIONS SUBMITTED BY THE ASSESSEE BEFORE LD. FIRST APPELLATE AUTHORITY WHEREAS INTEREST DISALLOWANCE W AS NOT CALLED FOR IN THE CIRCUMSTANCES. BOTH THE REPRESENTATIVE PLEADED THAT THE ISSUE MAY BE REMITTED BACK TO THE FILE OF LD. AO FOR RE-ADJUD ICATION ON FACTUAL MATRIX. 9.4 UPON DUE CONSIDERATION, WE DEEM IT FIT TO RESTO RE THE MATTER BACK TO THE FILE OF LD. AO TO RECONSIDER THE ASSESSEES ALT ERNATIVE SUBMISSIONS AS RAISED BEFORE LD. FIRST APPELLATE AUTHORITY QUA EXPENSE DISALLOWANCE AND ALSO RE-ADJUDICATE THE ISSUE OF INTEREST DISALL OWANCE IN THE LIGHT OF ASSESSEES SUBMISSIONS. THE ASSESSEE, IN TURN, IS D IRECTED TO SUBSTANTIATE HIS STAND IN THIS REGARD. NEEDLESS TO ADD THAT THE PROVISIONS OF RULE 8D, AS PER SETTLED JUDICIAL PRONOUNCEMENTS, COULD BE APPLIED ONLY FROM AY 2008-09 AND WERE NOT APPLICABLE IN THE IMPU GNED AY. THE ASSESSEES CROSS-OBJECTIONS STANDS ALLOWED FOR STAT ISTICAL PURPOSES. ITA NOS.6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIVE (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 24 CONCLUSION 10. RESULTANTLY, REVENUES APPEALS ITA NOS. 6073/MU M/2014 & 2778/MUM/2011 STANDS DISMISSED. CO NO. 126/MUM/2011 STANDS DISMISSED AS BEING INFRUCTUOUS. CO NO. 243/MUM/2014 STAND ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH MAY, 2018 SD/- SD/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 04.05.2018 SR.PS:-THIRUMALESH ! / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '#! / THE RESPONDENT 3. * ( ) / THE CIT(A) 4. * / CIT CONCERNED 5. +, '%- , - , / DR, ITAT, MUMBAI 6. ,./0 / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI