Appeal Details
Counselvise Citation
[2021] 109 COUNSELVISE.COM (IT) 2721 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
6 year(s) 2 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-02-2021
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Assessment Year
2008-2009
Appeal Filed On
02-12-2014
Judgement Text
IN TH E INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 : NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUD ICIAL MEMBER ITA NO S . 3241 & 6525 / DEL /201 4 ASSESSMENT YEAR S : 20 07 - 08 & 2008 - 09 DABUR INDIA LTD., PUNJABI BHAWAN, 4 TH F LOOR, 10, ROUSE AVENUE, NEW DELHI. PAN : AAACD0474C VS ADDL. CIT, RANGE - 10, NEW DELHI. ITA NO S . 3114 & 6256/D EL/201 4 ASSESSMENT YEAR S : 20 07 - 08 & 2008 - 09 ADDL. CIT, RANGE - 10, NEW DELHI. VS. DABUR INDIA LTD., PUNJABI BHAWAN, 4 TH FLOOR, 10, ROUSE AVEN UE, NEW DELHI. PAN : AAACD0474C (APP ELL A NT ) (RESPONDENT) A SSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE, SHRI ROHIT JAIN, ADVOCATE, MS DEEPASHREE RAO, CA & SHRI M.P. RASTOGI, ADVOCATE RE VENUE BY : S HRI ANUPAM KANT GARG, CIT - DR DAT E OF HEARING : 20 . 1 1 . 20 20 DATE OF PRONOUNCEMENT : 18 . 02 . 20 2 1 ORDER PER R. K. PANDA, AM : ITA NO.3241/DEL/2014 FILED BY THE ASSESSEE AND ITA NO.3114/DEL/2014 FILED BY THE REVENUE ARE CROSS APPEALS AND ARE DIRECTED AGAINST THE OR DER DATED 28 TH MARCH, 2014 OF THE CIT(A) - 29, NEW DELHI, RELATING TO ASSESSMENT YEAR 2007 - 08. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 2 2. ITA NOS.6525/DEL/2014 FILED BY THE ASSESSEE AND ITA NO.6256/DEL/2014 FILED BY THE REVENUE ARE CROSS APPEALS AND ARE DIRECTED AGAINST THE ORDER DATED 2 ND SEPTEMB ER, 2014 OF THE CIT(A) - 20, NEW DELHI, RELATING TO A.Y. 2008 - 09. SINCE IDENTICAL GROUNDS HAVE BEEN RAISED BY THE ASSESSEE AND THE REVENUE IN THESE CROSS APPEALS, THEREFORE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.3 241/DEL/2014 (BY THE ASSESSEE) & ITA NO.3114/DEL/2014 (BY THE REVENUE) (A.Y. 2007 - 08) 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HERBAL PRODUCTS OF HEALTH AND PERSONAL CARE, C OSMETICS AND VETERINARY PRODUCTS AND FMCG PRODUCTS, ETC. IT FILED ITS RETURN OF INCOME ON 26 TH OCTOBER, 2007 DECLARING NIL INCOME WHICH WAS PROCESSED U/S 143(1) OF THE IT ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) OF TH E IT ACT, 1961 WAS ISSUED AND SERVED ON THE ASSESSEE ON 29 TH SEPTEMBER, 2008. SUBSEQUENTLY, THE ASSESSEE COMPANY REVISED ITS RETURN OF INCOME ON 18 TH MARCH, 2009 WHEREIN IT REVISED ITS BOOK PROFIT U/S 115JB TO RS.2,80 ,57,67,940 / - AS AGAINST RS.263,44,87, 072/ - DECLARED EARLIER. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT NET PROFIT OF RS. 284,22.30 LAKH HAS BEEN DECLARED FROM THE SALES OF RS.1778,02.43 LAKH AND OTHER INCOME OF RS. 16,51.17 LAKH AS PER COPIES OF AUDITED PROFIT & LOSS ACC OUNT, BALANCE SHEET AND ITS ANNEXURES FILED ALONG WITH AUDIT REPORT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. AS PER REVISED COMPUTATION OF TAXABLE INCOME FILED DURING THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 3 COURSE OF ASSESSMENT PROCEEDINGS , AFTER ADJUSTING THE BROUGHT FORWARD LOSS AND UNABSORBED DEPRECIATION OF RS. 24,29,02,607/ - IN RESPECT OF THE ASSESSMENT YEAR 2006 - 07 OUT OF THE TOTAL INCOME RS. 288,01,87,309/ - , THE ASSESSEE COMPUTED THE TOTAL INCOME AT RS. 263,72,84,702/ - AND THE ASSESSEE COMPANY DECLARED NIL INCOME AFTER CLAIMING T OTAL DEDUCTION OF RS. 263,72,84,702/ - U/S 80IB & 80IC INCLUDING THE DEDUCTION OF RS. 2,05,67,500/ - U/S 80G. TOTAL DEDUCTION OF RS. 272,09,75,417/ - HAS BEEN WORKED OUT U/S 80IB & 801C AS PER AUDIT REPORTS IN FORM NO. 10CCB FILED ALONG WITH THE DETAILS OF PR OFIT AND LOSS ACCOUNTS IN RESPECT OF UNITS ELIGIBLE FOR DEDUCTIONS U/S 80IB AND 80IC OF THE I.T. ACT, 1961. THE ADJUSTED BOOK PROFIT OF RS. 280 57,67,940/ - AND TAX PAYABLE THEREON RS. 31,48,07,162/ - HAS BEEN COMPUTED U/S 115JB AS PER ANNEXURE A TO REPORT U /S 115JB OF THE I.T. ACT, 1961 FOR COMPUTING THE BOOK PROFITS OF THE COMPANY IN FORM NO. 29B AND COMPUTATION OF TAXABLE INCOME . 4. SINCE THE ASSESSEE HAS ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES, THE AO MADE A REFEREN CE U/S 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES AS PER REPORT IN FORM NO.3CEB U/S 92E OF THE ACT. THE TPO PROPOSED AN UPWARD ADJUSTMENT OF RS.3 ,95,44,120/ - ON ACCOUNT OF THE FOLLOWING: - A) ADJUSTMENT ON ACCOUNT OF GUARANTEE - RS.32,09,600/ - B) ADJUSTMENT ON ACCOUNT OF INTEREST - RS.96,67,520/ - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 4 C) ADJUSTMENT ON ACCOUNT OF ROYALTY - RS.2,66,67,000/ - 5. THE AO ACCORDINGLY MADE ADDITION OF RS.3,95,44,120/ - ON ACCOUNT OF TP ADJUSTMENT. THE AO, IN THE ORDER PASSED U/S 143(3) ALSO MADE VARIOUS ADDITIONS/DISALLOWANCES AND ACCORDINGLY DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.13,33,24,890/ - AND DETERMINED THE BOOK PROFIT AT RS.28,05,76,794/ - . 6 . THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO GAVE PART RELIEF TO THE ASSESSEE. AGGRIEVED WITH SUCH PART RELIEF BY THE CIT(A), THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE FOLLOWING GROUNDS: - ITA NO. 3241/DEL/2014 (BY ASSESSEE) (A.Y. 2007 - 08) 1) THAT THE TPO HAS NO JURISDICTION TO DETERMINE ARMS LENGTH PRICE IN RESPECT OF THE TRANSACTIONS NOT REFERRED U/S 92CA OF THE INCOME - TAX ACT, 1961 (THE ACT). 2) THAT THE CIT (APPEALS) HAS ERRED IN SUSTAINING THE ADDITION T O THE EXTENT OF 0.50% ALLEGED TO HAVE BEEN CHARGED AS SERVICE FEE FOR THE CORPORATE GUARANTEE GIVEN BY THE APPELLANT TO DABUR EGYPT ON VARIOUS FACTUAL AND LEGAL GROUNDS. 3) THAT WITHOUT PREJUDICE TO GROUND NO. 2 ABOVE, GIVING OF CORPORATE GUARANTEE IS NOT THE INTERNATIONAL TRANSACTION BY WHICH THE CONCERNED AE HAS BEEN BENEFITED AND ACCORDINGLY THE ADDITION TO THE EXTENT OF 0.50% IN RESPECT OF THE SERVICE FEE ALLEGED TO HAVE BEEN CHARGED ON THE CORPORATE GUARANTEE GIVEN TO DABUR EGYPT IS ARBITRARY AND BAD IN LAW. 4) THAT IN THE ABSENCE OF ANY CONTRACT AS EXISTING DURING THE YEAR BETWEEN THE ASSESSEE AND THREE AES, NEITHER ANY ROYALTY ACCRUED DURING THE' YEAR NOR CAN IT BE PRESUMED TO BE RECEIVABLE AND CONSEQUENTLY THE ORDER OF THE TPO AND SUSTAINED BY THE CIT (APPEALS) ARE WITHOUT ANY BASIS/MATERIAL AND ARE BASED ON SURMISES AND CONJECTURES NOT PERMISSIBLE UNDER THE LAW. 5) THAT THE TPO AND CIT (APPEALS) FAILED TO CONSIDER THE GEOGRAPHICAL CONDITIONS OF WORKING OF DABUR INTERNATIONAL UAE, DABUR NEPAL AND ASIAN CONSUMER CARE LTD., BANGLADESH HAVING NO SUBSTANTIAL AWARENESS ABOUT THE DABUR BRAND IN THE AREA AND CONSEQUENTLY THE PRESUMPTION AND ASSUMPTION ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 5 ABOUT THE CHARGEABILITY OF ROYALTY BY INVOKING THE PROVISION OF SECTION 92 OF THE ACT FROM DABUR INTERNAT IONAL UAE, DABUR NEPAL AND ASIAN CONSUMER CARE LTD., BANGLADESH IS ARBITRARY, UNJUST AND WITHOUT ANY BASIS. 6) THAT THE CIT (APPEALS) AND TPO HAVE FAILED TO CONSIDER THAT IN THE ABSENCE OF ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR THE ESTABLISHMENT OF BRAND IN THE GEOGRAPHICAL AREA OF WORKING OF DABUR INTERNATIONAL UAE, DABUR NEPAL AND ASIAN CONSUMER CARE LTD., BANGLADESH, NO ROYALTY CAN BE SAID TO HAVE ACCRUED TO THE ASSESSEE WHEN DABUR INTERNATIONAL UAE, DABUR NEPAL AND ASIAN CONSUMER CARE LTD., BANG LADESH HAVE INCURRED EXPENSES ON ADVERTISEMENT AND SALES PROMOTION IN THEIR RESPECTIVE AREA FOR PROMOTION OF THE BRAND WHICH AMOUNTS TO THE SERVICES PROVIDED BY AES TO THE ASSESSEE FOR BUILDING THE BRAND AND CONSEQUENTLY THE ADDITION AS MADE BY THE TPO AND SUSTAINED BY THE CIT (APPEALS) IN RESPECT OF THE ALLEGED ROYALTY CHARGEABLE FROM DABUR INTERNATIONAL UAE , DABUR NEPAL AND ASIAN CONSUMER CARE LTD., BANGLADESH IS ARBITRARY, UNJUST AND AT ANY RATE VERY EXCESSIVE. 7) THAT IN ABSENCE OF ANY COMPARABLE TRAN SACTION NECESSARY FOR THE DETERMINATION OF ARM LENGTH PRICE, THE ALLEGED ROYALTY SUSTAINED BY CIT (APPEAL) @ 2% ON ELIGIBLE SALES IN CASE OF DABUR INTERNATIONAL, DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD., BANGLADESH IS ARBITRARY, UNJUST AND ANY RA TE VERY EXCESSIVE 8) THAT THE ABOVE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING. ITA NO.3114/DEL/2014 (BY THE R EVENUE) (A.Y. 2007 - 08) 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN HOLDING THAT NO SERVICE FEE TOWARDS CORPORATE GUARANTEE CAN BE CHARGED IN RESPECT OF GUARANTEE FOR RS. 312.50 LACS ON BEHALF OF DABUR NEPAL (PVT. LTD.). 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN ADMITTING ADDITIONAL EVIDENCES WITHOUT ALLOWING ANY OPPORTUNITY TO THE AO/TPO. WHILE DECIDING THE ISSUE REGARDING SERVICE FEE TOWARDS CORPORATE GUARANTEE IN RESPECT OF DABUR NEPA L (PVT. LTD.) AND THAT THE FINDING GIVEN BY HIM IS AT VARIANCE WITH THE OBSERVATIONS/ FINDINGS AS GIVEN IN PARA 6.1 OF THE ORDER. 3. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS. 96,67,520/ - ON ACCO UNT OF INTEREST OF LOAN ADVANCED TO DABUR INTERNATIONAL LTD., UAE, AN ASSOCIATED ENTERPRISES AND HAS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 6 ALSO ERRED IN HOLDING THAT IN CASE OF LOAN GIVEN IN INTERNATIONAL CURRENCY, THE INTEREST RATE TO BE APPLIED SHOULD BE LIBOR PLUS MARGIN. 4. ON THE FACT A ND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN /RESTRICTING THE ADDITION FOR ROYALTY RECEIVABLE BY THE ASSESSEE FROM DABUR INTERNATIONAL .LTD., UAE TO 2% ON TOTAL FOB SALES IN PLACE OF ROYALTY @ 3% OF FOB SALES AS DETERMINED BY THE TPO. 5. O N THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN RESTRICTING THE ADDITION FOR ROYALTY RECEIVABLE, BY THE ASSESSEE FROM DABUR NEPAL PVT. LTD., TO 2% ON TOTAL FOB SALES IN PLACE OF ROYALTY @ 7.5% OF FOB SALES AS DETERMINED BY THE TPO. 6. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS. 70,49,000/ - AND DIRECTING THE AO TO RE - COMPUTE THE DEDUCTION U/S 801B AND 80IC OF THE ACT WITHOUT FURTHER ALLOCATION OF THE HEAD OFFICE & OTHER EXPE NSES TO VARIOUS UNITS ELIGIBLE FOR SUCH DEDUCTION. 7. ON THE FACT AND .IN THE CIRCUMSTANCES OF THE EASE THE C1T (A) HAS ERRED IN THE ADDITION OF RS. 4,09,871/ - IN RESPECT OF BELATED PAYMENT OF EMPLOYEES CONTRIBUTION TO ESI WHICH WAS TREATED AS INCOME U/S 36(L)(VA) OF THE ACT READ WITH SECTION 2(24)(X) OF THE ACT. 8. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 1,57,45,700/ - MADE U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES. 9. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (A) HAS ERRED IN DIRECTING THE AO TO ALLOW DEPRECIATION @ 25% OF THE GOODWILL WHICH WAS NOT SHOWN BY THE ASSESSEE AS ITS ASSETS. 10. THE APPELLANT CRAVES LEAVE, TO ADD. ALTER OR AMEND ANY GROUND OF APPEAL R AISED ABOVE AT THE TIME OF THE HEARING. 7 . THE GROUNDS OF APPEAL NO.1 AND 8 BY THE ASSESSEE BEING GENERAL IN NATURE ARE DISMISSED. THE LD. COUNSEL DID NOT PRESS GROUND OF APPEAL NO.3 FOR WHICH THE LD. DR HAS NO OBJECTION. ACCORDINGLY, GROUND OF APPEAL NO.3 IS ALSO DISMISSED AS NOT PRESSED. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 7 8 . GROUND OF APPEAL NO.2 BY THE ASSESSEE AND GROUNDS OF APPEAL NO.1 AND 2 BY THE REVENUE RELATE TO PART RELIEF GIVEN BY THE CIT(A) OUT OF THE ADDITION OF RS.32,09,600/ - MADE BY THE AO ON ACCOUNT OF CORPORATE GUARANTE E. 9 . FACTS OF THE CASE, IN BRIEF, ARE THAT THE TPO, DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS GIVEN FOLLOWING CORPORATE GUARANTEE ON BEHALF OF ITS AE: - A) GUARANTEE FOR RS.312.50 LAKHS ON BEHALF OF DABUR NEPAL (P) LTD.; AND B) GUARANTEE FOR RS.489.90 LAKHS ON BEHALF OF DABUR EGYPT LTD. 1 0 . THE TPO NOTED THAT THE ASSESSEE HAS NOT CHARGED ANY AMOUNT FOR PROVIDING THE CORPORATE GUARANTEE TO ITS AES. FURTHER, THE TRANSACTION HAS BEEN BENCHMARKED USING TNMM AND HAS BEEN AGGREGATED WITH THE TRANSACTIONS OF SALE OF FINISHED GOODS. THE PLEA OF THE ASSESSEE THAT SUCH CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION WAS REJECTED BY THE TPO. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND OBSERVING THAT THE ASSESSEE H AS EXPOSED ITSELF TO A BIG RISK BY PROVIDING CORPORATE GUARANTEE FOR WHICH THE ASSESSEE HAS NOT CHARGED ANY AMOUNT FROM THE AE, THE TPO ADOPTED 4. 0 5% ON THE VALUE OF BANK GUARANTEE AND, ACCORDINGLY, PROPOSED AN UPWARD ADJUSTMENT OF RS.3 2,09,600 / - BY OBSERV ING AS UNDER: - 8.8 IN VIEW OF THE ABOVE DISCUSSIONS, THERE ARE TWO CUP RATES AVAILABLE (I) THE EXTERNAL CUP IN WHICH THE STATE BANK OF INDIA HAS PROVIDED A RATE OF 2.75% AND (II) AN INTERNAL CUP IN WHICH THE ASSESSEE HAS STATED THAT HSBC HAS CHARGED A RAT E OF 1.25% FOR PROVIDING THE BANK GUARANTEE TO THE ASSESSEE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE I AM INCLINED TO TAKE MEAN OF TWO AVAILABLE RATES. THE MEAN OF TWO AVAILABLE CUP RATES WORK OUT TO 2%. THIS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 8 RATE OF 2% IS FURTHER ENHANCED BY 200 BASIS POINTS BEING THE ADJUSTMENT FOR THE RISK THAT THE ASSESSEE IS BEARING. DETAILED DISCUSSION IN THIS REGARD HAS BEEN DONE IN THE PRECEDING PARAGRAPH. THE WORKING OF THE CORPORATE GUARANTEE CHARGES IS MADE AS BELOW: VALUE OF BANK GUARANTEE RS. 802.40 LACKS CHARGES @4.00% AS DISCUSSED ABOVE RS. 3,209,600 I THEREFORE DETERMINE THE ARM S LENGTH PRICE OF PROVIDING THE SERVICES BY THE ASSESSEE IN THE SHAPE OF BANK GUARANTEE TO AE AT RS. 3,209,600/ - . AN UPWARD ADJUSTMENT OF RS. 3,209,600/ - IS MADE ON THIS ACCOUN T. SINCE THE ASSESSEE HAS NOT CHARGED ANY AMOUNT ON ACCOUNT OF PROVIDING THE GUARANTEE, THE AMOUNT OF RS. 3,209,600/ - IS MORE THAN 5% OF THE VALUE OF INTERNATIONAL TRANSACTION. 11. THE AO ACCORDINGLY MADE THE ADDITION OF RS.32,09,600/ - . 1 2 . IN APPEAL, T HE LD.CIT(A) DIRECTED THE AO TO ADOPT 0.5% AS SERVICE FEE FOR CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO DABUR EGYPT. HE, HOWEVER, HELD THAT NO SERVICE FEE TOWARDS CORPORATE GUARANTEE CAN BE CHARGED FOR THE CORPORATE GUARANTEE IN CASE OF DABUR NEPAL. T HE FINDING OF THE CIT(A) ON THIS ISSUE FROM PARAS 6.1 TO 6.5 ARE AS UNDER: - 6.0 FINDING: 6.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT THE LD. AO HAS OBSERVED THAT THE APPELLANT HAS FAILED TO CHARGE SERVICE FEES FOR THE CORPORA TE GUARANTEE GIVEN TO BANK FOR AVAILING LOAN FACILITY BY ITS AES NAMELY DABUR NEPAL AND DABUR EGYPT. THE ALP FOR SERVICE FEE FOR PROVIDING CORPORATE GUARANTEE HAS BEEN COMPUTED AT 4.00% BY THE LD . AO/TPO AGAINST NIL RATE CHARGED BY THE APPELLANT THE APPELL ANT CONTENDED THAT IN VIEW OF FOUR SOFT RULING OF HYDERABAD TRIBUNAL, CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION. HOWEVER, THIS POINT OF APPELLANT IS NOT VALID IN VIEW OF THE AMENDMENT BROUGHT BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1 - 4 - 2002, BY WAY OF EXPLANATION TO SECTION 92B, GUARANTEE COMMISSION IS NOW CONSIDERED TO BE AN INTERNATIONAL TRANSACTION. HOWEVER, THE APPELLANT FURTHER RELIED UPON RECENT RULING OF BHARTI AIRTEL LTD OF DELHI ITAT - I BENCH WHEREIN IT HAS BEEN CATEGO RICALLY HELD, THAT ISSUANCE OF CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION EVEN AFTER AMENDMENT. I HAVE CONSIDERED THIS POINT OF THE APPELLANT AND THE RULING RELIED UPON, IT SEEMS THERE CANNOT BE ANY DENYING OF THE FACT THAT THE FOREIGN AE COUL D NOT HAVE EITHER AVAILED LOAN OR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 9 WOULD HAVE AVAILED AT VARYING TERMS HAD THE CORPORATE GUARANTEE WAS NOT PROVIDED BY THE APPELLANT. EVEN OTHERWISE, THE APPELLANT WOULD NOT HAVE PROVIDED CORPORATE GUARANTEE TO AN UNRELATED PERSON WITHOUT CHARGING SERVICE F EE. THUS, THE POINT THAT THE FOREIGN AE HAD IMPLICITLY RECEIVED BENEFIT BY PARENT COMPANY S CORPORATE GUARANTEE CANNOT BE DENIED. MOREOVER, IN CASE OF BHARTI AIRTEL LTD., THE CORPORATE GUARANTEE WAS NOT ACTIVATED WHICH ESSENTIALLY MEANS THAT CORPORATE GUAR ANTEE WAS NON - EXISTENT. THUS, PROPOSITION LAID DOWN IN BHARTI AIRTEL CASE IS NOT APPLICABLE TO PRESENT CASE AS ESSENTIAL FACTS ARE DISTINGUISHABLE. NOW, THE DEFINITION OF INTERNATIONAL TRANSACTION GIVEN IN SECTION 92B R.W. EXPLANATION (I) (C) CATEGORICALLY INCLUDES GUARANTEE AS ONE OF MEANS OF CAPITA L FINANCING. THEREFORE, GUARANTEE IN CONTEXT OF INTERNATIONAL TRANSACTION MEANS PROVIDING OF NON FUNDING SUPPORT TC THE OTHER PERSON WHETHER THERE IS A COST OR NOT TO BE INCURRED BY THE GUARANTOR. THE FEET THA T THE GUARANTOR TOOK A RISK IN PROVING SUCH A GUARANTEE CANNOT BE TOTALLY OVERLOOKED. GIVEN THE RISK, THERE IS POSSIBILITY OF IMPACT ON PROFIT, LOSSES, ASSETS OR LIABILITIES OF GUARANTOR. NO PERSON WILL ASSUME THIS RISK WITHOUT BEING ADEQUATELY SECURED AND DEMANDING SOME FORM OF RETURN. ACCORDINGLY, I HOLD THAT ISSUANCE OF CORPORATE GUARANTEE IS AN INTERNATIONAL TRANSACTION AND ALP IS REQUIRED TO BE COMPUTED U/S 92. 6.2 IT NOW CLEARLY EMERGES THAT PROVIDING GUARANTEE IS AN INTERNATIONAL TRANSACTION AND IT NEEDS TO BE BENCHMARKED AS PER PROVISIONS OF SECTION 92(1). THE APPELLANT HAD CHARGED NIL RATE FOR PROVIDING THE CORPORATE GUARANTEE AND IN ITS TP STUDY REPORT, HAS JUSTIFIED ARM S LENGTH COMPLIANCE BY FOLLOWING TNMM. THE APPELLANT HAS TAKEN A POSITION THA T PROVISION OF CORPORATE GUARANTEE IS INTEGRAL PART OF SALE TRANSACTIONS AND HENCE IT NEED NOT BE SEPARATELY BENCHMARKED HOWEVER, THE APPELLANT HAS NOT EXPLAINED HOW THIS TRANSACTION OF PROVIDING CORPORATE GUARANTEE IS PART AND PARCEL OF SALES TRANSACTIONS , I THEREFORE, DO NOT AGREE WITH SUCH APPROACH OF THE APPELLANT BECAUSE PROVISION OF CORPORATE GUARANTEE IS NOT AT ALL LINKED WITH SALES TRANSACTIONS AND IT BEING AN INDEPENDENT TRANSACTION, CAN NOT BE CLUBBED WITH SALE TRANSACTIONS AND NEED TO BE BENCHMAR KED SEPARATELY. THE TPO HAS REJECTED APPROACH OF THE APPELLANT AND HAS APPLIED CUP AS MOST APPROPRIATE METHOD. THE TPO HAS GATHERED INFORMATION FROM BANK (SBI) REGARDING BANK GUARANTEE COMMISSION CHARGED BY THE BANK. THE TPO HAS TAKEN MEAN OF RATE OF BANK GUARANTEE CHARGED BY SBI (2.75%) AS PER INFORMATION OBTAINED U/S 133(6) AND RATE OF BANK GUARANTEE ACTUALLY CHARGED BY HSBC (1.25%) FROM THE APPELLANT. TO THE AVERAGE RATE OF 2%, TPO FURTHER ADDED 200 BASIS POINTS TO ACCOUNT FOR RISKS ASSUMED BY THE APPELL ANT. ACCORDINGLY, TPO WORKED OUT ALP OF CORPORATE GUARANTEE @ 4%. EVEN THE APPROACH FOLLOWED BY TPO DOES NOT APPEAR TO BE QUITE REASONABLE. STRICTEST COMPARABILITY NORMS AS REQUIRED FOR APPLYING CUP HAVE NOT BEEN SATISFIED. IN PRESENT CASE, THE APPELLANT H AS GIVEN CORPORATE GUARANTEE TO A FOREIGN BANK FOR PROVIDING LOAN TO ITS FOREIGN AE IN FOREIGN CURRENCY. THE SITUATION ADOPTED BY THE TPO IN CUP METHOD IS OF INDIAN BANK GIVING GUARANTEE IN INDIA FOR AMOUNT IN INR. BANK GUARANTEE AND CORPORATE GUARANTEE AR E ALSO NOT IDENTICAL INSTRUMENTS. IN CORPORATE GUARANTEE, ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 10 PRIMARY LIABILITY IS OF BORROWER AND LIABILITY OF GUARANTOR ARISES ONLY IN CASE OF DEFAULT ON PART OF BORROWER. IN CASE OF BANK GUARANTEE, LIABILITY IS ONLY OF THE PERSON WHO HAS OBTAINED BANK GUARA NTEE. MOREOVER, IN PRESENT CASE, CONCERNED BANKS HSBC BANK EGYPT AND NABIL BANK NEPAL WHEREAS TPO HAS USED DATA OBTAINED FROM SBI AND HSBC INDIA AND IT IS VERY LIKELY THAT RATES CHARGED BY THE BANKS ARE QUITE DIFFERENT. 6.3 TO SUPPORT ITS CONTENTION FOR L OWER CHARGE OF CORPORATE GUARANTEE FEES, THE APPELLANT HAS SUBMITTED INFORMATION OBTAINED FROM FOREIGN BANKS. THE APPELLANT SUBMITTED THAT LETTERS FROM THE BANKS (HSBC EGYPT AND NABIL, NEPAL) REVEAL AS TO WHAT TANGIBLE BENEFIT WAS DERIVED BY THE OVERSEAS A ES OUT OF CORPORATE GUARANTEE PROVIDED BY THE APPELLANT. AS PER THE LETTER FROM NABIL NEPAL, THERE WAS NO INTEREST SAVING IN CASE OF DABUR NEPAL AND HENCE THERE CANNOT BE ALLEGATION OF SERVICE FEES TOWARDS CORPORATE GUARANTEE. AS REGARDS, DABUR EGYPT A SAV INGS OF 0.60% IS OBTAINED FROM EGP LOAN OF 3550000/ - AND A MINISCULE INTEREST SAVINGS FOR UDS LOAN OF 473000. THE APPELLANT CONTENDED THAT THE ENTIRE INTEREST SAVINGS CANNOT BE SOLELY ATTRIBUTED AS SERVICE FEE DUE FROM ITS OVERSEAS AES BECAUSE OVERSEE AES DO HAVE THEIR OWN CREDIT RATING AND NEGOTIATING POWER WITH THE BANKS. 6.4 I HAVE CAREFULLY EXAMINED THE SUBMISSION OF THE APPELLANT AND OTHER EVIDENCES PLACED ON RECORD. AS REGARDS DABUR NEPAL, NABIL BANK STATED THAT IT WOULD NOT HAVE CHARGED ANY EXTRA IN TEREST WITH OR WITHOUT CORPORATE GUARANTEE. THIS IS EVIDENCE DIRECTLY FROM THE BANK CONCERNED AND HENCE CANNOT BE IGNORED. FURTHER, IT HAS BEEN NOTED THAT CORPORATE GUARANTEE HAS BEEN RELEASED ON 27TH JULY 2006. THIS MEANS THAT CORPORATE GUARANTEE PROVIDED BY THE APPELLANT REMAINED IN OPERATION ONLY FOR FOUR MONTHS PERIOD COMPRISED IN FY UNDER CONSIDERATION. HENCE, WITH RESPECT TO DABUR NEPAL, I HOLD THAT NO SERVICE FEES TOWARDS CORPORATE GUARANTEE CAN BE CHARGED. HENCE, I DIRECT THE AO TO DELETE THE ADDITI ONS MADE ON ACCOUNT OF CORPORATE GUARANTEE IN CASE OF DABUR NEPAL. 6.5 IN CASE OF DABUR EGYPT, THE LETTER FROM HSBC BANK STATES THE LOAN FACILITY WAS AVAILABLE TO DABUR EGYPT AT A RATE OF 11.90% FOR EGYPTIAN LOAN WITH CORPORATE GUARANTEE VERSUS 12 .50% WIT HOUT CORPORATE GUARANTEE. HOWEVER, IT IS NOTED THAT RATES AS MENTIONED BY THE BANK PERTAIN TO THE PERIOD OF DECEMBER 2011 WHEN DABUR EGYPT REQUESTED FOR RELEASE OF CORPORATE GUARANTEE THE BANK HAS ITSELF MENTIONED THAT RATES HAVE UNDERGONE CHANGE SEVERAL T IMES DURING THE PREVALENT PERIOD. THIS MEANS THAT DIFFERENTIAL OF 0.6% INTEREST RATE CANNOT BE AS SUCH APPLIED TO, THE PERIOD UNDER CONSIDERATION. IN THE ABSENCE OF EXACT INFORMATION FOR THE RELEVANT PERIOD, IT WOULD BE REASONABLE TO CONSIDER DIFFERENTIAL OF 1.0% WHICH COULD BE ATTRIBUTED TO PROVISION OF CORPORATE GUARANTEE BY THE APPELLANT FURTHER, AS CONTENDED BY THE APPELLANT, THE DIFFERENCE OF 1.0% CANNOT BE SOLELY ATTRIBUTED AS SERVICE FEE DUE TO APPELLANT. THIS IS BECAUSE SOME DEGREE OF BARGAINING BET WEEN PARTIES ALWAYS REMAINS IN THE TRADE AND ACCORDINGLY A SPLIT OF 50:50 SEEMS MORE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 11 APPROPRIATE. IN LIGHT OF THE SAME, I HOLD THAT 0.50% SHOULD HAVE BEEN CHARGED AS SERVICE FEE FOR THE CORPORATE GUARANTEE GIVEN BY THE APPELLANT TO DABUR EGYPT AND THIS SHA LL BE IN LINE WITH VARIOUS JUDICIAL DECISIONS REFERRED SUPRA ON THE ISSUE. I, ACCORDINGLY DIRECT THE AO TO RECOMPUTE THE ALP FOR CORPORATE GUARANTEE FEE AS PER DIRECTIONS GIVEN ABOVE. THE GROUNDS OF APPEAL ARE PARTLY ALLOWED. 1 3 . AGGRIEVED WITH SUCH ORDE R OF THE CIT(A), THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 1 4 . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS NOT CHARGED ANY SERVICE FEE ON CORPORATE GUARANTEE DUE TO THE FOLLOWING REASONS: - (A) THE LOANS OBTAINED BY THE FOREIGN ASSOCIATED ENTERPRISES OF THE ASSESSEE WERE SECURED LOANS HAVING A CHARGE AGAINST THE ASSETS OF AES AND OTHER COLLATERAL OFFERED BY AES. (B) THE ASSESSEE HAD GIVEN CORPORATE GUARANTEE ON BEHALF OF AES ONLY TO PROVIDE AN ADDITIONAL COVER AGAINST THE LOANS OBTAINED (C) GIVEN THE STRONG FINANCIAL POSITION OF AES AND FUTURE PROJECTIONS, ON THE BASIS OF WHICH LOANS WERE SANCTIONED BY FOREIGN BANK, THERE WAS NOT EVEN A MINIMAL CHANCE OF DEFAULT ON PART OF AES, EVEN IN THE ABSENCE OF CORPO RATE GUARANTEE. (D) NO COST WAS INCURRED BY THE ASSESSEE FOR PROVIDING CORPORATE GUARANTEE TO FOREIGN BANKS AND ACCORDINGLY, NO SERVICE FEE WAS CHARGED FROM THE AES. (E) TO AVOID ANY RISK INVOLVED, THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE WAS FURTH ER SECURED BY WAY OF BACK TO BACK GUARANTEE IN CASE OF DEFAULT IN LOAN REPAYMENT BY FOREIGN AES TO THE FOREIGN BANKS. BESIDES, THE BACK TO BACK ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 12 GUARANTEE, THE ASSESSEE ALSO RESERVED THE RIGHT TO RECEIVE INTEREST FOR PERIOD OF DEFAULT IN EXCESS OF 2% OF PRE VAILING BANK INTEREST. (F) LOAN ADVANCED BY THE BANK TO AES WAS NOT ON THE BASIS OF CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO THE BANK. FURTHER, THE AE GOT NO SIGNIFICANT ADVANTAGE OF LOWER RATE OF INTEREST FROM BANK IF ASSUMPTION OF BENEFIT OF CORPORAT E GUARANTEE IS CON SIDER ED. THE LOAN GIVEN BY BANK WAS ON PURE FINANCIAL CONSIDERATION OF THE AE CONCERNED. TH E BANK HAS SECURED THE LOAN BY WAY OF CHARGE OF ASSETS OF THE BORROWER. HE ACCORDINGLY SUBMITTED THAT NO SERVICE FEE WAS CHARGED BY THE ASSESSEE F ROM ITS AES ON ACCOUNT OF ISSUE OF CORPORATE GUARANTEE. 15. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN CASE OF CORPORATE GUARANTEE DUE TO LACK OF EXTERNAL COMPARABLE TRANSACTIONS , ONE HAS TO DEPLOY A METHOD TO DETERMINE THE ECONOMIC BENEFIT ARIS ING FROM THE FINANCIAL GUARANTEE. THERE IS GUIDANCE PROVIDED BY FOREIGN REVENUE AUTHORITIES WHICH HAVE HELD THAT THE YIELD OR THE INTEREST SAVED COULD BE AN APPROPRIATE METHOD TO QUANTIFY THE ECONOMIC BENEFIT ARISING FROM THE FINANCIAL GUARANTEE. HE SUBM ITTED THAT T HE YIELD APPROACH INVOLVES ESTIMATING THE RATE AT WHICH THE BORROWER WOULD OBTAIN FUNDS ON A STAND - ALONE BASIS ON A GIVEN DATE AND COMPARE THIS INTEREST RATE WITH THE INTEREST RATE AT WHICH IT WOULD OBTAIN FUNDS ON THE SAME DATE AND ON SAME/SIM ILAR TERMS, BUT WITH A PARENTAL CREDIT GUARANTEE. THE DIFFERENCE BETWEEN THESE TWO INTEREST RATES REPRESENTS SAVINGS ARISING OUT OF THE GUARANTEE ARRANGEMENT WHICH REPRESENTS A QUANTIFICATION OF BOTH THE BENEFIT THAT THE GUARANTEED ENTITY RECEIVES FROM THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 13 GUARANTEE AND THE INCREMENTAL RISK THAT THE GUARANTOR INCURS IN PROVIDING THE GUARANTEE. HOWEVER, THE ENTIRE SAVINGS MAY NOT BE PASSED ON TO THE GUARANTOR SINCE, THE BORROWER IN SUCH A CASE WILL NOT HAVE ANY INCENTIVE TO ASK FOR A GUARANTEE IF IT DOES NOT RECEIVE ANY BENEFIT. HE SUBMITTED THAT DURING THE FINANCIAL YEAR 2006 - 07, THE ASSESSEE HAD PROVIDED CORPORATE GUARANTEE ON BEHALF OF ITS AES. TO EVALUATE WHETHER A GUARANTEE FEE IS CHARGEABLE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES, ONE MAY APPLY T HE YIELD APPROACH. 1 6 . SO FAR AS THE DABUR NEPAL PVT. LTD. , NEPAL IS CONCERNED, HE SUBMITTED THAT THE ASSESSEE HAD ISSUED CORPORATE GUARANTEE TO NABIL BANK, NEPAL, AGAINST THE LOAN OF NEPALESE RS.6 CRORES OBTAINED BY DABUR NEPAL PVT. LTD., NEPAL. SUCH GU ARANTEE WAS FOR A SHORT DURATION WHICH WAS THEREAFTER RELEASED ON 27 TH JULY, 2006. HE SUBMITTED THAT THERE WAS NO INTEREST SAVINGS ON ACCOUNT OF CORPORATE GUARANTEE ISSUED BY THE ASSESSEE. REFERRING TO PAGE 346 OF THE PAPER BOOK, THE LD. COUNSEL DREW THE ATTENTION OF THE BENCH TO THE LETTER FILED BY THE ASSESSEE DATED 31.10.2013 OBTAINED FROM NABIL BANK, NEPAL, WHEREIN THE BANK HAS STATED THAT CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE, IN NO WAY, INFLUENCED THE INTEREST CHARGED BY THE BANK TO DABUR NEP AL PVT. LTD. ACCORDINGLY, THERE WAS NO BENEFIT ACCRUING TO DABUR NEPAL PVT. LTD. ON ACCOUNT OF ISSUANCE OF CORPORATE GUARANTEE. SUCH GUARANTEE WAS GIVEN ONLY TO PROVIDE AN EXTRA COVER AND DID NOT, IN ANY WAY, IMPACT THE INTEREST RATES CHARGED BY THE BANK . HE ACCORDINGLY SUBMITTED THAT THE CIT(A) HAS RIGHTLY HELD THAT IN ABSENCE OF ANY SAVINGS/BENEFIT, NO SERVICE FEE CAN BE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 14 ATTRIBUTED TO CORPORATE GUARANTEE ISSUED BY THE ASSESSEE ON BEHALF OF DABUR NEPAL PVT. LTD. 1 7 . SO FAR AS THE CORPORATE GUARANTEE IS SUED TO DABUR EGYPT LTD., EGYPT IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD ISSUED CORPORATE GUARANTEE OF 4.899 CRORES (EGP 3.55 MILLION) TO HSBC BANK, EGYPT, SAE AGAINST THE LOAN OF EGP 3.55 MILLION AND USD 450,000 RAISE D BY DABUR EGYPT LTD., EGYPT. HE SUBMITTED THAT SUCH GUARANTEE WAS RELEASED IN THE YEAR 2011. REFERRING TO PAGE 345 OF THE PAPER BOOK, THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE LETTER DATED 11 TH SEPTEMBER, 2013 ISSUED BY H SBC BANK, EGYPT SAE AND SUBMITTED THAT IN THE SAID LETTER, ON ACCOUNT OF RELEASE OF CORPORATE GUARANTEE REQUESTED BY DABUR EGYPT, THE BANK INCREASED THE INTEREST RATE FROM 11.90% TO 12.5%. THEREFORE, AS PER THE SAID LETTER, THE INCREMENTAL INTEREST SAVED DUE TO GUARANTEE PROVIDED BY THE ASSESSEE WAS 0.60%. HOWEVER, SINCE THE BENEFIT OF AN EXPLICIT GUARANTEE ACCRUED TO BOTH THE GUARANTOR AND THE BORROWER, THE INTEREST BENEFIT SHOULD IDEALLY BE SPLIT BETWEEN THE PARTIES TO THE TRANSACTION I.E., THE BORROWER AND THE GUARANTOR. HE SUBMITTED THAT USUALLY AS A RULE OF THUMB THE INTEREST BENEFIT IS SPLIT BETWEEN THE GUARANTOR AND THE BORROWER ON 50:50 BASIS WHICH IS CONSIDERED TO BE THE MOST EQUITABLE SHARE OF BENEFITS. APPLYING THE AFORESAID RULE, THE LD. COUN SEL FOR THE ASSESSEE SUBMITTED THAT THE BENEFIT THAT CAN BE ATTRIBUTED TO THE SERVICE FEE ON ACCOUNT OF CORPORATE GUARANTEE COULD AT THE MOST BE 0.30%. HE ACCORDINGLY SUBMITTED THAT THE ACTION OF THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 15 CIT(A) IN CHARGING SERVICE FEE AT AN AD HOC RATE OF 0.5 % SHOULD BE REVERSED AND MAY BE RESTRICTED TO 0.30%. 1 8 . THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED ON THE ORDER OF THE AO. HE SUBMITTED THAT THE AO HAS CORRECTLY COMPUTED THE ADJUSTMENT ON ACCOUNT OF GUARANTEE FEE AT RS.32,09,600/ - AND THE LD.CIT(A), WITHOUT ANY VALID REASONS, HAS HELD THAT NO SERVICE FEE TOWARDS CORPORATE GUARANTEE COULD BE CHARGED IN THE CASE OF DABUR NEPAL PVT. LTD. AND HE HAS ERRONEOUSLY AND UNDER MISCONCEPTION HAS REDUCED SUCH CORPORATE GUARANTEE ISSUED ON BEHALF OF DABUR EGYPT, EGYPT TO 0.50%. 19 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES , PERUSED THE ORDERS OF THE AO/TPO /CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US . WE FIND, THE AS SESSEE, DURING THE RELEVANT ASSESSMENT YEAR, HAS ISSUED THE FOLLOWING CORPORATE GUARANTEES ON BEHALF OF ITS ASSOCIATED ENTERPRISES. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 16 20. WE FIND, THE TPO COMPUTED THE NOTIONAL GUARANTEE FEE @ 4% ON THE BASIS OF DATA OBTAINED FROM STATE BANK OF INDIA U/S 133(6) OF THE ACT AND CALCULATED AS UNDER: - PARTICULARS RATE (IN%) EXTERNAL CUP RATE SBI RATE 2.75 INTERNAL CUP RATE HSBC RATE 1.75 MEAN OF CUP RATES 2 ADD: RISK ADJUSTMENT 2 RATE 4 21. ACCORDINGLY, THE TPO MADE ADJUSTMENT OF RS.32,09,600/ - BEING 4% OF CORPORATE GUARANTEE GIVEN TO THE TUNE OF RS.8.02 CRORE TO THE TOTAL INCOME OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE OUGHT TO HAVE CHARGED SERVICE FEE/COMMISSION ON PROVIDING SUCH CORPORATE GUARANTEE ON BEHALF OF ITS AES. WE FIND, IN APP EAL, THE LD.CIT(A) DELETED THE COMMISSION CHARGEABLE ON GUARANTEE ISSUED ON BEHALF OF DABUR NEPAL PVT. LTD., ON THE GROUND THAT THERE WAS NO INTEREST SAVINGS ON ACCOUNT OF CORPORATE GUARANTEE GIVEN TO DABUR NEPAL PVT. LTD. AND FURTHER SUCH GUARANTEE WAS IN OPERATION ONLY FOR A PERIOD OF FOUR MONTHS. THEREFORE, NO SERVICE FEE TOWARDS CORPORATE GUARANTEE COULD BE CHARGED IN SUCH CASE AND ACCORDINGLY DELETED THE ADDITION OF NOTIONAL SERVICE FEE MADE BY THE AO IN CASE OF DABUR NEPAL PVT. LTD. . 21.1. SO FAR AS THE GUARANTEE ISSUED ON BEHALF OF DABUR EGYPT LTD., EGYPT IS CONCERNED, ALTHOUGH THE LD.CIT(A) APPRECIATED THAT INTEREST SAVINGS ON ACCOUNT OF CORPORATE GUARANTEE WAS RESTRICTED TO 0.60% ONLY, BUT, PROCEEDED TO CONSIDER AN AD ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 17 HOC RATE OF 1% TOWARDS CORP ORATE GUARANTEE OUT OF WHICH 50% WAS ATTRIBUTED TOWARDS SERVICE FEE. ACCORDINGLY, HE DETERMINED THE SERVICE FEE ON ACCOUNT OF CORPORATE GUARANTEE AT 0.50% AS AGAINST 4% ADOPTED BY THE TPO AND DELETED THE BALANCE ADDITION MADE BY THE AO. IT IS THE SUBMISS ION OF THE LD. COUNSEL THAT NO COST OR EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR ISSUE OF CORPORATE GUARANTEE IN FAVOUR OF ITS AES. IT IS ALSO HIS SUBMISSION THAT THE LOANS OBTAINED FOR THE FOREIGN AES OF THE ASSESSEE WERE SECURED LOANS HAVING A CHA RGE AGAINST THE ASSETS OF THE AES AND OTHER COLLATERAL S OFFERED BY AES. THE ASSESSEE HAD GIVEN CORPORATE GUARANTEE ON BEHALF OF AES ONLY TO PROVIDE AN ADDITIONAL COVER AGAINST THE LOANS OBTAINED AND, THEREFORE, NO ADDITION IS CALLED FOR . 22. WE FIND SOME FORCE IN THE ABOVE ARGUMENTS ADVANCED BY THE LD. COUNSEL. SO FAR AS THE CORPORATE GUARANTEE TO N ABIL BANK,, NEPAL AGAINST THE LOAN OF NEPALESE RS.6 CRORES OBTAINED FOR DABUR NEPAL PVT. LTD., NEPAL FOR WHICH THE ASSESSEE HA D ISSUED A CORPORATE GUARANTEE I S CONCERNED, WE FIND, SUCH GUARANTEE WAS FOR A SHORT DURATION OF FOUR MONTHS WHICH WAS THEREAFTER RELEASED ON 27 TH JULY, 2006, A FACT NOT DISPUTED BY THE REVENUE. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THERE WAS NO INTEREST SAVINGS ON ACC OUNT OF CORPORATE GUARANTEE ISSUED BY THE ASSESSEE ALSO REMAINS UNCONTROVERTED SINCE THE LETTER FILED BY THE ASSESSEE DATED 31.10.2013 FROM NABIL BANK, NEPAL, COPY OF WHICH IS PLACED AT PAGE 346 OF THE PAPER BOOK CLEARLY SHOWS THAT THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE IN NO WAY INFLUENCED THE INTEREST CHARGED BY THE BANK TO DABUR NEPAL PVT. LTD. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 18 UNDER THESE CIRCUMSTANCES, WE FIND NO INFIRMITY IN THE ORDER OF THE LD.CIT(A) THAT IN ABSENCE OF ANY SAVINGS/BENEFIT NO SERVIC E FEE COULD BE ATTRIBUTED TO CORPORATE GUARANTEE ISSUED BY THE ASSESSEE ON BEHALF OF DABUR NEPAL PVT. LTD. 23. SO FAR AS CORPORATE GUARANTEE ISSUED ON BEHALF OF DABUR EGYPT LTD., EGYPT IS CONCERNED, WE FIND THE ASSESSEE HAD ISSUED CORPORATE GUARANTEE OF RS.4.899 CRORES (EGP 3.55 MILLION) TO HSBC BANK, EGYPT, SAE AGAINST THE LOAN OF EGP 3.55 MILLION AND USD 4,50,000/ - RAISED BY DABUR EGYPT LTD., EGYPT. A PERUSAL OF THE LETTER DATED 11 TH SEPTEMBER, 2013 ISSUED BY HSBC BANK, EGYPT, SAE COPY OF WHICH IS PLACED AT PAGE 345 OF THE PAPE R BOOK SHOWS THAT ON ACCOUNT OF RELEASE OF CORPORATE GUARANTEE REQUESTED FOR BY DABUR EGYPT LTD., EGYPT, THE BANK INCREASED THE INTEREST RATE FROM 11.90% TO 12.50%. THUS, AN INFERENCE CAN BE DRAWN FROM THE SAID LETTER THAT THE INCREMENTAL INTEREST SAVED DUE TO GUARANTEE PROVIDED BY THE ASSESSEE WAS 0.60%. WE FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE BENEFIT OF AN EXPLICIT GUARANTEE ACCRUE TO BOTH THE GUARANTOR AND THE BORROWER, THEREFORE, THE INTEREST BENEFIT SHOULD BE SPLIT BETWEEN THE PARTIES TO THE TRANSACTION, I.E., THE BORROWER AND THE GUARANTOR AND AS PER RULE OF THUMB SUCH BENEFIT SHOULD BE IN 50:50 BASIS. ALTHOUGH THE LD.CIT(A) HAS ATTRIBUTED 50% OF SUCH SAVINGS AS THE SERVICE FEE ON ACCOUNT OF GUARANTEE, HOWEVER, HE HAD TAKEN THE SAVINGS ON INTEREST DUE TO SUCH GUARANTEE PROVIDED BY THE ASSESSEE AT 1%. UNDER THESE CIRCUMSTANCES, WE FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL THAT CHARGING OF SERVICE FEE AT AN AD HOC RATE OF 0.5% SHOULD BE REVERSED AND MAY BE RESTRI CTED TO ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 19 0.30% IN RESPECT OF CORPORATE GUARANTEE ISSUED TO DABUR EGYPT LTD., AS AGAINST 0.5% HELD BY THE CIT(A). THUS, THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED AND THE GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 2 4 . GROUNDS NO.4 TO 7 BY THE ASSESSEE AND GROUNDS NO.4 AND 5 BY THE REVENUE RELATES TO THE PART RELIEF GRANTED BY THE CIT(A) ON ACCOUNT OF ROYALTY ADJUSTMENT. 25. FACTS OF THE CASE, IN BRIEF, ARE THAT THE TPO, DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS NOTED THAT T HE ASSESSEE HAS NOT RECEIVED ANY ROYALTY FROM ITS AES. HE NOTED FROM THE RECORDS THAT IN THE ASSESSMENT YEAR 2005 - 06 AND 2006 - 07, THE ASSESSEE HAD RECEIVED ROYALTY FROM DABUR NEPAL (P) LTD., DABUR INTERNATIONAL, UAE AND ASIAN CONSUMER CARE P. LTD. , BANGLA DESH, THE DETAILS OF WHICH ARE AS UNDER: - COMPANY ROYALTY RECEIVED IN AY 2005 - 06 RS. IN LAKHS ROYALTY RECEIVED IN AY 2006 - 07 RS. IN LAKHS ROYALTY RECEIVED IN AY 2007 - 08 RS. IN LAKHS DABUR NEPAL (P) LTD NEPAL 43.34 5.34 -- ASIAN CONSUMER CARE P. LTD BANGL ADESH 46.87 21.02 -- DABUR INTERNATIONAL UAE 164.41 -- -- 2 5 . 1 THE TPO REFERRED TO THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AES FOR RECEIPT OF ROYALTY. ON BEING CONFRONTED BY THE AO REGARDING NON - CHARGING OF ANY ROYALTY FROM ITS AES, THE ASS ESSEE SUBMITTED ITS OBJECTIONS WHICH THE TPO HAS SUMMARIZED AND WHICH ARE AS UNDER: - THE ASSESSEE DOES NOT HAVE ANY CONTRACTUAL OBLIGATION TO RECEIVE THE ROYALTY. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 20 THE AGREEMENT WITH DABUR NEPAL HAS BEEN TERMINATED IN MAY, 2005 AND HENCE DABUR NEPAL IS UND ER NO OBLIGATION TO PAY THE ROYALTY. THE AGREEMENT WITH DABUR INTERNATIONAL , UAE HAS EXPIRED IN APRIL, 2005 AND HENCE DABUR INTERNATIONAL IS UNDER N O OBLIGATION TO PAY THE ROYALTY. SINCE THERE IS NO CONTRACTUAL OBLIGATION, NO ROYALTY CAN BE RECEIVED FROM T HE AES. THE ASSESSEE HAS PLACED RELIANCE O N THE DECISION O F HIGH COURT OF DELHI IN THE CASE OF MARUTI SUZUKI INDIA LIMITED. THE AES ARE DEVELOPING MARKETING INTANGIBLE BY WAY OF EXTENSIVE ADVERTISEMENT BY VIRTUE OF SPENDING HUGE MONEY ON ADVERTISEMENT AND PUBLICITY THE AES ARE DIRECTLY OR INDIRECTLY PROMOTING THE BRAND NAME OF THE ASSESSEE. THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION O F HIGH COURT OF DELHI IN THE CASE OF MARUTI SUZUKI INDIA LIMITED. IT HAS BEEN ARGUED THAT THE FOREIGN AES ARE NOT DIREC TLY BENEFITED BY THE USE OF DABUR BRAND AND HENCE THERE IS NO JUSTIFICATION OF AS TO PAYMENT OF ROYALTY BY THE AES. HAD THE AES NOT BEEN PROMOTING THE BRAND NAME OF DABUR, THE ASSESSEE COMPANY WOULD HAVE INCURRED SUBSTANTIAL AMOUNT ON ADVERTISEMENT AS COMP ARED TO THE NOTIONAL ROYALTY RECEIVABLE FROM THE AES. 2 6 . HOWEVER, THE TPO WAS NOT SATISFIED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. HE ANALYSED THE VARIOUS AGREEMENTS ENTERED INTO BY THE ASSESSEE WITH ITS AES AND HELD THAT THE AES HAVE USED THE TRA DE NAME/BRAND NAME OWNED BY THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 21 ASSESSEE WITHOUT ANY COMPENSATION. HE, THEREFORE, COMPUTED THE ARM S LENGTH PRICE OF THE ROYALTY FOR USE OF THE BRAND NAME ON THE BASIS OF THE DATA AVAILABLE. FROM THE DETAILS FURNISHED BY THE ASSESSEE REGARDING THE VALUE OF SALES MADE TO THE AES, THE TPO COMPUTED THE ARM S LENGTH PRICE OF THE ROYALTY AT RS.266.67 LAKHS THE DETAILS OF WHICH ARE AS UNDER: - COMPANY FOB SALES RS. IN LAKHS ROYALTY RS. IN LAKHS ROYALTY SHOWN IN THE BOOKS OF ACCOUNTS DIFFERENCE RS. IN LAKHS D ABUR NEPAL (P) LTD NEPAL 2148 161.10 NIL 161.10 DABUR INTERNATIONAL UAE 1129 33.87 NIL . 33.87 ASIAN CONSUMER CARE LIMITED 1195 71.70 NIL 71.70 266.67 266.67 2 7 . THE AO ACCORDINGLY MADE ADDITION OF THE SAME TO THE TOTAL INCOME OF THE ASSESS EE. 2 8 . BEFORE THE CIT(A), IT WAS SUBMITTED THAT THE ASSESSEE HAD TAKEN THE VALUE OF ROYALTY AS NIL FOLLOWING ITS CONSISTENT POSITION POST FY 2004 - 05. IT WAS SUBMITTED THAT A FTER 31 ST MARCH 2005, THE ASSESSEE HAD STOPPED CHARGING ROYALTY FROM DABUR NEPAL AND DABUR INTERNATIONAL OWING TO CHANGE IN THE BUSINESS ARRANGEMENT W.E.F. 01 - 04 - 2005. HOWEVER, THE AO , FOLLOWING ITS EARLIER ORDER F OR AY 2006 - 07, PROPOSED TO CHARGE ROYALTY AT THE OLD AND CONTROLLED RATES. IN DOING SO, THE AO VIOLATED THE BASIC PRINCIPLE OF TRANSFER PRICING I. E. , COMPARISON OF CONTROLLED TRANSACTION WITH THE UNCONTROLLED TRANSACTION. IT WAS ARGUED THAT EVEN IF THE AO HAD TO APPLY THE ROYALTY RATES, SUCH RATE ARRIVED AT SHOULD HAVE BEEN UNCONTROLLED FOR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 22 THE PURPOSES OF TRANSFER PRICING. IT WAS ARGUED THAT THE AO /TPO, WITHOUT GOING INTO THE MERITS OF THIS YEAR S CASE, PROCEEDED TO MAKE ADJUSTMENT ON THE BASIS OF PREVIOUS YEAR . IT WAS BROUGHT TO THE NOTICE OF THE LD. CIT(A) THAT HIS PREDECESSOR HAS DECIDED THE ISSUE PARTLY IN FAVOUR OF THE A SSESSEE AND ALLOWED RELIEF THE DETAILS OF WHICH ARE AS FOLLOWS: S . NO. NAME OF AE RATE LEVIED BY TPO IN ORDER OF AY 2007 - 08 RATE AS PER CIT(A) ORDER OF AY 2006 - 07 1. DABUR NEPAL P LTD 7.50% 2% 2. DABUR INTERNATIONAL LTD 3% 2% 3. ASIAN CONSUMER CARE LIM ITED, BANGLADESH 6% NOT APPLICABLE 2 9 . THE VARIOUS CLAUSES OF THE AGREEMENT WITH THE AE WERE BROUGHT TO THE NOTICE OF THE CIT(A). IT WAS ARGUED THAT THE ASSESSEE HAS NOT CHARGED ROYALTY FROM DABUR INTERNATIONAL LTD., UAE, DABUR NEPAL (P) LTD. AND A SIAN CONSUMER CARE LIMITED, BANGLADESH AS THERE WAS NO LEGALLY ENFORCEABLE AGREEMENT WITH THEM. THEREFORE, IN ABSENCE OF ANY CONTRACTUAL OBLIGATION BETWEEN THE PARTIES, A RIGHT TO RECEIVE ROYALTY CANNOT BE UNILATERALLY BE MADE BY THE ASSESSEE. 30 . B ASED ON THE EXTENSIVE ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS, THE LD.CIT(A) HELD THAT THE USE OF BRAND NAME BY AES IS AN INTERNATIONAL TRANSACTION, THE ARM S LENGTH PRICE OF WHICH IS ASSESSED U/S 92 OF THE ACT. THE LD.CIT(A) , HOWEVER, REDUCED THE AMOUNT OF ROYALTY . SO FAR AS DABUR INTERNATIONAL LTD., UAE IS CONCERNED, HE OBSERVED THAT THE PRODUCTS MANUFACTURED BY DABUR INTERNATIONAL LTD, UAE ARE DIFFERENT FROM THOSE MANUFACTURED IN INDIA ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 23 AND IN SOME CASES, EVEN THE RAW MATERIAL IS DIFFERENT. FURTHER, MOST OF THE PRODUCTS MANUFACTURED IN UAE ARE MANUFACTURED WITHOUT TECHNICAL SUPPORT FROM INDIA. ACCORDINGLY, HE REDUCED THE RATE OF ROYALTY (I.E., 3%) CHARGED BY THE TPO TO 2% AND RESTRICTED THE ARM S LENGTH PRICE ADJUSTMENT AT RS.2 2.58 LAKHS . SO FAR AS DABUR NEPAL PVT. LTD., NEPAL IS CONCERNED, HE OBSERVED THAT (A) RATE OF 3% IS MENTIONED IN THE AMENDED AGREEMENT; AND (B) THE ASSESSEE COULD NOT MEET ITS OBLIGATION TO BEAR ENTIRE MARKETING EXPENSES AND THEREFORE, DABUR NEPAL PVT. LTD , NEPAL DID NOT PAY ANY ROYALTY. HE A CCORDINGLY APPLIED THE SAME RATE OF ROYALTY OF 2% AS IN CASE OF DABUR INTERNATIONAL LTD, UAE AND RESTRICTED THE ARM S LENGTH PRICE FROM DABUR NEPAL PVT. LTD. AT RS.42.96 LAKHS . SO FAR AS ASIAN CONSUMER CARE PVT. LTD., B ANGLADESH IS CONCERNED, T HE CIT(A) OBSERVED THAT (A) NO EVIDENCE HAS BEEN FURNISHED BY THE ASSESSEE TO DEMONSTRATE THAT NO TECHNOLOGY WAS PROVIDED TO ASIAN CONSUMER CARE PVT. LTD.; AND (B) THE ASSOCIATED ENTERPRISE HAS CONTINUED TO USE THE BRAND NAME OF DA BUR . HE A CCORDINGLY APPLIED THE SAME RATE OF ROYALTY OF 2% AS APPLIED IN CASE OF DABUR NEPAL PVT. LTD. AND DABUR INTERNATIONAL LTD, UAE AND RESTRICTED THE ARM S LENGTH PRICE FROM ASIAN CONSUMER CARE PVT. LTD. AT RS.23.90 LAKHS. 31 . THE RELEVANT OBSERVAT IONS OF THE LD.CIT(A) FROM PARA 12 TO 12.9.5 OF HIS ORDER READ AS UNDER: - 12.0 FINDING: 12.1 I HAVE CAREFULLY GONE THROUGH VARIOUS CONTENTIONS RAISED BY THE APPELLANT AND OTHER MATERIAL PLACED ON RECORD. THE RELEVANT FACTS ARE THAT THE APPELLANT (DABUR I NDIA) IS LEGAL OWNER ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 24 OF BRAND DABUR AND OTHER SUB - CATEGORY BRANDS LIKE 'VATIKA , HAJMOLA ETC. OVERSEAS AE S OF THE APPELLANT HAD BEEN USING DABUR INDIA S TRADEMARKS AND TRADE NAMES. UPTO FY 2004 - 05, THE APPELLANT WAS GETTING ROYALTY PAYMENTS FROM ITS A E S, WHEREAS DURING FY 2006 - 07, APPELLANT DID NOT RECEIVE ANY ROYALTY. 12.2 THE CASE OF THE APPELLANT IS THAT THE AGREEMENTS UNDER WHICH ROYALTY WAS RECEIVED IN EARLIER PERIOD WERE NO LONGER IN EXISTENCE. MOREOVER, THE OVERSEAS AE S ARE INCURRING SUBSTANT IAL EXPENSES FOR BRAND PROMOTION IN THEIR RESPECTIVE TERRITORIES AND THEREFORE THERE IS NO PAYMENT OF ROYALTY. IN ORDER U/S 92CA(3), THE TPO COMPUTED ARM S LENGTH PRICE OF ROYALTY AS UNDER: RS.IN LAKHS NAME OF AE FOB SALES RATE OF ROYALTY ROYALTY ROYALTY SHOWN IN BOOKS DIFFERENCE DABUR NEPAL (P) LTD. NEPAL 2148 7.5% 161.10 NIL 161.10 DABUR INTERNATIONAL LTD UAE 1129 3.0% 33.87 NIL 33.87 ASIAN CONSUMER CARE LIMITED 1195 6% 71.70 NIL 71.70 ADJUSTMENT 266.67 12.3 THE TPO COMPUTED ARM S LENGTH ROYAL TY BY APPLYING RATE OF ROYALTY AS MENTIONED IN AGREEMENT DATED 05.11.1992 WITH DABUR NEPAL (P) LTD., NEPAL AND DATED 01.04.2003 WITH DABUR INTERNATIONAL LTD., UAE AND DATED 01.02.1993 WITH ASIAN CONSUMER CARE (P) LIMITED BANGLADESH. 12.4 THE CONTENTIONS O F THE APPELLANT HAVE BEEN DULY CONSIDERED. THE SIMPLE FACT IS THAT THE APPELLANT HAS ALLOWED IT AE IN NEPAL, UAE AND BANGLADESH TO USE ITS BRAND NAME BUT NO ROYALTY HAS BEEN CHARGED FROM THEM. THIS CANNOT BE THE SITUATION IN CASE OF TRANSACTION BETWEEN IND EPENDENT PARTIES. THIS IS AN INTERNATIONAL TRANSACTION THE PRICE OF WHICH IS TO BE DETERMINED U PER TRANSFER PRICING REGULATION U/S 92 OF THE ACT. IN PRESENT CASE, THE APPELLANT HAS TAKEN PRICE OF THE SAID INTERNATIONAL TRANSACTION AT NIL. BUT ACCORDING TO SECTION 92(1), INCOME ARISING FROM SUCH INTERNATIONAL TRANSACTION HAS TO BE COMPUTED HAVING REGARDS TO ARM S LENGTH PRICE. WHETHER THERE IS ANY CONTRACTUAL BASIS OF RECEIPT OF ROYALTY INCOME OR NOR IS NOT RELEVANT FOR COMPUTING INCOME ARISING FROM SUCH IN TERNATIONAL TRANSACTION HAVING REGARDS TO ARM S LENGTH PRICE. AS IN THE PRESENT CASE, IF THERE NO AGREEMENT TO GET ANY ROYALTY INCOME IN RETURN FOR PERMITTING THE USE OF BRAND NAME, IT DOES NOT MEAN THAT TRANSFER PRICING REGULATION SHALL NOT APPLY. THEREFO RE, QUANTUM OF INCOME ARISING FROM AN INTERNATIONAL TRANSACTION HAS TO BE COMPUTED HAVING REGARDS TO ARM S LENGTH PRICE AND IT DOES NOT DEPEND UPON EXISTENCE OR OTHERWISE OF AGREEMENT TO GET ROYALTY INCOME. HENCE CONTENTION OF THE APPELLANT THAT IN ABSENCE OF AN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 25 OPERATIVE AGREEMENT FOR GETTING ROYALTY INCOME, A NOTIONAL ROYALTY CANNOT BE ASSESSED UNDER TP REGULATIONS IS NOT LEGALLY TENABLE. 12.5 UNDISPUTEDLY, DABUR INDIA IS LEGAL OWNER OF BRAND NAME DABUR AND OTHER SUB - BRANDS AND DABUR NEPAL, DABUR UAE A ND DABUR BANGLADESH WHICH ARE AES OF DABUR INDIA HAVE BEEN PERMITTED BY DABUR INDIA TO USE ITS BRAND NAMES. THE APPELLANT HAS CONTENDED THAT DABUR NEPAL, DABUR UAE AND DABUR BANGLADESH HAVE SPENT SIGNIFICANT AMP EXPENSES (ADVERTISEMENT, MARKETING AND PROMO TIONAL EXPENSES) AND THEREFORE DABUR BRAND IS BEING BUILT UP IN FOREIGN TERRITORIES BY THE EFFORTS OF AES OF THE APPELLANT AND HENCE IN FACT AES ARE PROVIDING SERVICE TO THE APPELLANT FOR WHICH AES NEED TO BE REMUNERATED. HOWEVER, NO REMUNERATION FOR SUC H SERVICES IS BEING GIVEN TO AES AND ACCORDINGLY NO ROYALTY IS BEING CHARGED FROM THEM BECAUSE IF SUCH REMUNERATION IS TAKEN INTO ACCOUNT, IT WILL EXCEED THE ROYALTY CHARGEABLE AND HENCE INCOME OF THE APPELLANT SHALL FURTHER GO DOWN. THE APPELLANT HAS FURT HER ARGUED THAT EVEN OTHERWISE, THE VALUE OF BRAND DABUR IS NOT VERY SIGNIFICANT AS NO STATE OF ART TECHNOLOGY IS INVOLVED IN MANUFACTURING PROCESS OF PRODUCTS INVOLVED. THESE CONTENTIONS OF THE APPELLANT HAVE BEEN DULY CONSIDERED. FIRSTLY, IT CANNOT BE SAID THAT VALUE OF BRAND DABUR IS NIL AS NO ROYALTY HAS BEEN ACCOUNTED FOR BY THE APPELLANT. THERE MUST BE SOME VALUE OF THE BRAND FOR WHICH ROYALTY INCOME HAS TO BE DETERMINED HAVING REGARDS TO ARM S LENGTH PRICE. SECONDLY, THE APPELLANT HAS NOT ESTABLI SHED THAT AE IN NEPAL, UAE AND BANGLADESH ARE INCURRING ABNORMAL AMP EXPENSES WHICH EXCEED BRIGHT LINE TEST . THE APPELLANT HAS NOT ESTABLISHED ITS VIEW BY GIVING FIGURES OF AMP IN CASE OF COMPARABLES OPERATING IN RESPECTIVE GEOGRAPHICAL LOCATIONS. THE AP PELLANT HAS NOT ESTABLISHED THAT TAX AUTHORITIES OF NEPAL, UAE AND BANGLADESH HAVE HELD SUCH AMP EXPENSES AS EXCEEDING BRIGHT LINE. UPTO AY 2005 - 06, THE APPELLANT HAS BEEN RECEIVING ROYALTY INCOME FROM ITS AES. THE APPELLANT COULD NOT ESTABLISH THAT AFTER AY 2005 - 06, ITS AMP EXPENSES HAVE DECREASED AND AMP EXPENSES OF ITS AES HAVE INCREASED SUBSTANTIALLY WHICH MAY POINT TOWARDS APPELLANT S CASE THAT ITS AES ARE DOING BRAND BUILDING EFFORTS AND HENCE PROVIDING SERVICE TO IT. THEREFORE, APPELLANT S CONTENTION THAT RATIO OF RECENT DECISION OF HON BLE DELHI ITAT IN CASE OF LG ELECTRONICS INDIA PVT. LTD. (ITA NO. 5140/DEL/2011) IS APPLICABLE IN ITS CASE IS NOT FACTUALLY AND LEGALLY TENABLE. THE APPELLANT HAS FURTHER ARGUED THAT FOREIGN AES DID NOT DERIVE ANY BENE FIT BY USE ITS TRADE MARK/TRADE NAME. THIS CONTENTION OF THE APPELLANT IS SUPERFLUOUS AS AES COULD BE THE BEST JUDGE TO DECIDE WHETHER THEY NEED SUPPORT OF DABUR LOGO OR NOT. IF THEY ARE NOT BEFITTED BY THE ARRANGEMENT, NOBODY IS FORCING THEM TO CONTINUE W ITH IT. 12.6 NOW THE QUESTION ARISES WHAT SHOULD BE THE QUANTUM OF ROYALTY HAVING REGARDS TO ARM S LENGTH PRICE. THE APPELLANT HAS NOT PROVIDED ANY COMPARABLES SO AS TO JUSTIFY ITS NIL ROYALTY INCOME. THE TPO HAS RELIED UPON ROYALTY AGREEMENTS ENTERED INT O BY THE APPELLANT WITH ITS AES TO ARRIVE AT ARM LENGTH PRICE. THE REASONING GIVEN BY TPO IS TWO FOLD. FIRSTLY, ROYALTY AGREEMENTS UNDER WHICH THE APPELLANT HAD BEEN RECEIVED ROYALTY INCOME UPTO AY 2005 - 06 ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 26 ARE OPERATIVE DURING THE YEAR UNDER CONSIDERATION AS THERE IS NO EVIDENCE THAT THESE AGREEMENTS HAVE BEEN TERMINATED. SECONDLY, WITHOUT PREJUDICE, EVEN IF IT IS ASSUMED THAT THESE AGREEMENTS ARE NOT OPERATIVE DURING PERIOD UNDER CONSIDERATION, ROYALTY CHARGEABLE AS PER THESE AGREEMENTS REPRESENTS ARM S LE NGTH PRICE AS PER TP REGULATIONS. IN VIEW OF VARIOUS CONTENTIONS OF THE APPELLANT AND REASONING GIVEN - BY TPO, ROYALTY ISSUE IN RESPECT OF BOTH AES INVOLVED IS BEING DISCUSSED IN FOLLOWING PARAGRAPHS. 12.7 DABUR INTERNATIONAL LTD., UAE THE APPELLANT HAS E NTERED INTO AN AGREEMENT DATED 01.04.2003 WITH REDROCK LTD (PRESENTLY DABUR INTERNATIONAL LTD.) WHICH INTER - ALIA PROVIDED FOR TECHNICAL AND R&D SUPPORT, KNOW - HOW, INFORMATION, OPERATIONAL IMPROVEMENTS AND SKILLS IN AREA OF COST MANAGEMENT, MANUFACTURING, P RODUCTION PROCUREMENT, SALE MARKETING AND DISTRIBUTION OF PRODUCTS. IT ALSO PERMITTED REDROCK TO USE DABUR LOGO ON BOTH PRODUCTS MANUFACTURED BY USING DABUR S TECHNOLOGY AND KNOW - HOW AND ALSO PRODUCTS MANUFACTURED BY ITS WITHOUT DABUR S KNOW - HOW. AS PER CL AUSE 4 OF THE AGREEMENT, DABUR INDIA LTD. IS ENTITLED TO ROYALTY OF 3% OF FOB SALES OF REDROCK OF DABUR BRANDED PRODUCTS WHICH ARE MANUFACTURED USING DABUR S KNOW HOW AND 1% OF FOB SALES OF DABUR BRANDED PRODUCTS MANUFACTURED WITHOUT USING TECHNICAL AND R& D SUPPORT FROM DABUR. BASED ON THIS, THE TPO HAS COMPUTED ROYALTY CHARGEABLE FROM DABUR INTERNATIONAL LTD. @ 3% OF SALES WHILE THE APPELLANT HAS NOT DECLARED ANY ROYALTY INCOME, THE APPELLANT HAS CONTENDED THAT W.E.F. 01,04,2005, THIS AGREEMENT HAS BEEN TE RMINATED AND HAS FURNISHED LETTERS DATED 07.04.2005 AND 01.02.2013. THE APPELLANT HAS FURTHER CONTENDED THAT DABUR INTERNATIONAL WAS NOT SOURCING ANY TECHNICAL KNOWHOW FROM DABUR INDIA FOR ITS PRODUCTS MANUFACTURED IN UAE AND HAS FURNISHED LETTERS DATED 18 .07,2011 AND 20.07.2011 WHICH STATE THAT PRODUCTS MANUFACTURED BY DABUR INTERNATIONAL LTD IN UAE ARE DIFFERENT FROM THOSE MANUFACTURED IN INDIA AND NO TECHNICAL SUPPORT FROM DABUR INDIA IS BEING TAKEN FOR THE PURPOSE. 12.7.1 THE APPLICANT HAS ARGUED THAT AGREEMENT WITH DABUR INTERNATIONAL HAS BECOME INOPERATIVE W.E.F. 01.04.2005 AND HENCE THERE WAS NO OBLIGATION ON PART OF DABUR INTERNATIONAL TO PAY ROYALTY. AS DISCUSSED SUPRA, SINCE INCOME ARISING FROM INTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVING REGARDS TO ARM S LENGTH PRICE, EXISTENCE OF AGREEMENT OR OTHERWISE IS NOT RELEVANT. THEREFORE, ARGUMENT OF THE APPELLANT THAT AGREEMENT WAS NOT IN OPERATION DURING PERIOD UNDER CONSIDERATION IS NOT RELEVANT AS PRICE OF INTERNATIONAL TRANSACTION IS TO BE D ETERMINED BY TP REGULATIONS. THE UNDISPUTED FACT IS THAT DABUR INTERNATIONAL LTD, HAS BEEN PERMITTED TO USE DABUR BRAND NAME AND THE APPELLANT HAD BEEN RECEIVING ROYALTY INCOME FOR THE SAME UPTO AY 2005 - 06. THE TPO HAS ADOPTED SAID AGREEMENT DATED 01.04.20 03 AS BASIS FOR ARM S LENGTH PRICE IN THE ABSENCE OF ANY COMPARABLE PROVIDED BY THE APPELLANT. NOW THE ISSUE IS WHETHER TPO IS CORRECT IS ADOPTING 3% RATE OF ROYALTY CHARGEABLE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 27 FROM DABUR INTERNATIONAL LIMITED. CLAUSE 4 OF SAID AGREEMENT IS REPRODUCED AS U NDER: - IN CONSIDERATION FOR DUE DISCHARGE BY DABUR OF ITS OBLIGATIONS HEREUNDER AND USE OF ITS TRADEMARK/TRADE NAME, DABUR IS ENTITLED DURING TERMS OF AGREEMENT TO A ROYALTY OF: (A) 3% OF FOB SALES ( NET OF TAXES AND SALES RETURN ) OF REDROCK OF DABUR BRANDED PRODUCTS WHICH ARE DEVELOPED AND MARKETED BY REDROCK THROUGH TECHNICAL AND R& D SUPPORT FROM DABUR AND WHICH ARE MANUFACTURED IN ACCORDANCE WITH TECHNICAL SPECIFICATIONS DETAILED BY DABUR (B) 1% OF FOB SALES (NET OF TAXES AND SALES RETURN) OF REDR OCK OF DABUR BRANDED PRODUCTS WHICH ARE DEVELOPED BY REDROCK FROM ANY OTHER PARTY WITHOUT ANY TECHNICAL AND R & D SUPPORT FROM DABUR. 12.7.2 THE APPELLANT HAS ARGUED THAT SINCE DABUR INTERNATIONAL LTD. HAD NOT SOURCED ANY TECHNICAL SUPPORT FROM DABUR IND IA, CLAUSE (A) ABOVE SHALL NOT APPLY. THIS CONTENTION OF THE APPELLANT CAN NOT BE BRUSHED ASIDE COMPLETELY IN VIEW OF LETTERS FURNISHED BY THE APPELLANT MENTIONED SUPRA. THE LD TPO HAS ALSO MENTIONED THIS FACT IN PARA 15.7 AND 15.8 OF TPO S ORDER. HOWEVER, THE LD TPO WORKED OUT THE ROYALTY @ 3% OF FOB SALES ASSUMING THAT TECHNOLOGY WAS ALSO PROVIDED. HOWEVER, CONSIDERING THE EVIDENCE FURNISHED BY THE APPELLANT, IT IS SEEN THAT PRODUCTS MANUFACTURED BY DABUR INTERNATIONAL IN UAE ARE DIFFERENT FROM THOSE MANU FACTURED IN INDIA AND IN CASE OF SAME NAME OF PRODUCTS, IT HAS BEEN SHOWN THAT OIL BASE (RAW MATERIAL) IS DIFFERENT FROM THOSE PRODUCTS MANUFACTURED IN INDIA. THEREFORE, IT CAN BE SAFELY INFERRED THAT MOST OF THE PRODUCTS IF NOT ALL, MANUFACTURED IN UAE AR E BEING MANUFACTURE WITHOUT TECHNICAL SUPPORT FROM DABUR INDIA. IN VIEW OF THIS, THERE SHALL BE A PORTION OF FOB SALE ON WHICH ROYALTY BECOME PAYABLE @3 % AND ANOTHER SUBSTANTIAL PORTION OF FOB SALES ON WHICH ROYALTY' SHALL BECOME PAYABLE @ 1%. IN VIEW OF THESE FACTS, IT SHALL BE MORE REALISTIC AND REASONABLE IF ROYALTY PAYABLE IS WORKED OUT @ 2% ON TOTAL FOB SALES IE. AVERAGE RATE. ACCORDINGLY, I HOLD THAT ARM S LENGTH PRICE OF ROYALTY FROM DABUR INTERNATIONAL IS RS.22.58 LAKHS. THE AO IS DIRECTED TO GIVE RELIEF TO THE APPELLANT ON THIS ACCOUNT ACCORDINGLY. 12.8 DABUR NEPAL PVT. LTD., NEPAL 12.8.1 THE APPELLANT HAS ENTERED INTO AN AGREEMENT DATED 05.11.1992 WITH DABUR NEPAL PVT LTD., CLAUSE 3 OF WHICH IS REPRODUCED AS BELOW: THAT AS DABUR IS ALLOWING DN PL TO USE ITS TRADEMARKS FOR SALE OF PRODUCTS IN NEPAL, INDIA AND OTHER THIRD COUNTRIES AND ALSO ENTIRE MARKETING EXPENSES INCLUDING SALARIES AND ALLOWANCES OF SALES PERSONNEL WOULD BE BORNE BY DABUR, DNPL WILL PAY TO DABUR INFORM OF ROYALTY @7.5% OF NET S ALES. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 28 BASED ON THIS, THE TPO HAS COMPUTED ROYALTY CHARGEABLE FROM DABUR NEPAL @ 7.5% OF SALES WHILE THE APPELLANT HAS DECLARED ROYALLY INCOME OF RS. NIL. THE APPELLANT HAS CONTENDED THAT W.E.F. 01.04.2005, THIS AGREEMENT HAS CEASED TO BE OPERATIVE AND H AS FURNISHED LETTERS DATED MAY, 2005 AND 05.02.2013 IN SUPPORT. THE APPELLANT HAS CONTENDED THAT TPO HAS WRONGLY APPLIED RATE OF 7.5% AS MENTIONED IN AGREEMENT DATED 05.11.1992 WHILE THAT AGREEMENT WAS AMENDED AND RATE OF ROYALTY WAS CHANGED TO 3% W.E.F. 0 1.04.2004. THE APPELLANT HAS FURNISHED COPY OF AMENDED AGREEMENT IN WHICH ONLY RATE OF ROYALTY HAS BEEN CHANGED TO 3% WHILE REST OF THE TERMS REMAINED THE SAME. 12.8.2 AS DISCUSSED SUPRA, SINCE INCOME ARISING FROM INTERNATIONAL TRANSACTION HAS TO BE DETER MINED HAVING REGARDS TO ARM S LENGTH PRICE, EXISTENCE OF AGREEMENT OR OTHERWISE IS NOT RELEVANT. THEREFORE, ARGUMENT OF THE APPELLANT THAT AGREEMENT WAS NOT IN OPERATION DURING PERIOD UNDER CONSIDERATION IS NOT RELEVANT AS PRICE OF INTERNATIONAL TRANSACTIO N IS TO BE DETERMINED BY TP REGULATIONS. THE UNDISPUTED FACT IS THAT DABUR NEPAL HAS BEEN PERMITTED TO USE DABUR BRAND NAME AND THE APPELLANT HAD BEEN RECEIVING ROYALTY INCOME FOR THE SAME UPTO AY 2005 - 06. THE TPO HAS TREATED SAID AGREEMENT DATED 05.11.199 2 AS BASIS FOR ARM S LENGTH PRICE IN THE ABSENCE OF ANY COMPARABLE PROVIDED BY THE APPELLANT. NOW THE ISSUE IS WHETHER TPO IS CORRECT IN ADOPTING 7.5% RATE OF ROYALTY CHARGEABLE FROM DABUR NEPAL. THE APPROACH OF TPO IN RELYING UPON AGREEMENT DATED 05.11.19 92 AND NOT CONSIDERING AMENDED AGREEMENT DATED 01.04.2004 IS FALLACIOUS AS CONTEMPORANEOUS MATERIAL/DOCUMENT SHOULD HAVE BEEN CONSIDERED INSTEAD OF DOCUMENT WHICH IS REMOTE IN TIME. ACCORDINGLY, TPO IS NOT CORRECT IN APPLYING RATE OF 7.5% AND IGNORING RATE OF 3% AS MENTIONED IN AMENDED AGREEMENT. 12.8.3 FURTHER, APPELLANT HAS ARGUED THAT AS PER CLAUSE 3 OF THE AGREEMENT, DABUR INDIA WAS UNDER OBLIGATION TO BEAR ENTIRE MARKETING EXPENSES INCLUDING SALARIES AND ALLOWANCES OF SALES PERSONNEL. HOWEVER, DABUR I NDIA COULD NOT MEET WITH ITS OBLIGATIONS AND HENCE DABUR NEPAL DID NOT PAY ANY ROYALTY. THIS CONTENTION OF THE APPELLANT CARRIES SOME WEIGHT AS RATE OF ROYALTY MIGHT HAVE BEEN FIXED AFTER CONSIDERING REIMBURSEMENT OF MARKETING EXPENSES BY DABUR INDIA. THE TPO HAS NOT ESTABLISHED THAT THIS CONTENTION OF THE APPELLANT IS FACTUALLY INCORRECT 12.8.4 CONSIDERING THE CONTENTIONS OF THE APPELLANT THAT IT HAD NOT MET WITH OBLIGATIONS CAST UPON IT UNDER CLAUSE 3 OF THE AGREEMENT, IT WOULD NOT PRUDENT TO APPLY RATE OF 3% AS MENTIONED IN AMENDED AGREEMENT TO WORK OUT ROYALTY CHARGEABLE. IT IS ALSO SEEN THAT INTERNATIONAL TRANSACTION OF ALLOWING USE OF TRADE NAME/TRADE MARK TO ITS AES BY THE APPELLANT IS THE SAME WITH RESPECT TO DABUR INTERNATIONAL AND DABUR NEPAL. THE REFORE, THERE IS NO REASON TO ASSIGN HIGHER PRICE IN RESPECT OF INTERNATIONAL TRANSACTION WITH DABUR NEPAL THAN THAT WITH DABUR INTERNATIONAL. AS DISCUSSED SUPRA, I HAVE HELD THAT ROYALTY AT RATE OF 2% OF FOB SALES WOULD BE ARM S LENGTH PRICE IN RESPECT OF DABUR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 29 INTERNATIONAL. ACCORDINGLY, I HOLD THAT ROYALTY AT RATE OF 2% OF FOB SALES WOULD BE ARM S LENGTH PRICE IN RESPECT OF DABUR NEPAL ALSO AND THIS WOULD TAKE CARE OF NONDISCHARGE OF OBLIGATIONS ON PART OF THE APPELLANT. IN THIS MANNER, ROYALTY CHARGEAB LE FROM DABUR NEPAL COMES OUT TO BE RS.42.96 LAKHS. THE AO IS THEREFORE, DIRECTED TO GIVE RELIEF ON THIS ACCOUNT ACCORDINGLY. 12.9 ASIAN CONSUMER CARE PVT LTD, BANGLADESH 12.9.1 THE APPELLANT CONTENDS THAT IN CASE OF DABUR BANGLADESH, THE AGREEMENT WAS V ALID FOR 2 YEARS AND EXPIRED IN 2005. FROM 01 - 04 - 20005, THE APPELLANT DID NOT RENEW THE AGREEMENT BUT AN AMENDMENT WAS MADE WITH A CONDITION THAT ROYALTY WILL BE REVISED TO 2% FOR COMPOSITE USAGE OF TRADEMARK AND TECHNICAL KNOW - HOW PROVIDED BY THE APPELLAN T TO BANGLADESH. FURTHER BANGLADESH WILL PAY 1% TECHNICAL KNOW - HOW ROYALTY TO THE APPELLANT AND NO TRADE MARK ROYALTY WILL BE PAYABLE IF BANGLADESH WAS TO INCUR 8% OF AMP SPENT ON SALES. HOWEVER, IT SEEMS FROM THE CONTENTION OF THE APPELLANT THAT EVEN THIS WAS NOT ACTED UPON FROM 01 - 04 - 2005. HOWEVER, COMPOSITE ROYALTY RATES WERE BROUGHT DOWN TO 2% FROM 6% W.E.F. 01 - 04 - 2005. THE APPELLANT CONTENDS THAT EVEN IF ROYALTY RATE IS TO BE USED, THE RATE SHOULD BE ZERO HAS BANGLADESH WAS SPENDING SIGNIFICANT AMP EXC EEDING 8% OF SALES AND FINDING DIFFICULT TO SURVIVE IN THE COMPLETIVE ENVIRONMENT. AS PER THE TPO, THE APPELLANT HAS NOT SHOWN ANY EVIDENCE THAT THE AGREEMENT IS NOT IN FORCE OR ANY AMENDMENT THEREAFTER. IN FACT TILL LAST YEAR, ROYALTY WAS BEING RECEIVED F ROM THE AE. THIS YEAR ALSO THERE WERE TRANSACTIONS WITH THE AE. IT HAS NOT BEEN THE CLAIM OF THE ASSESSEE THAT THE AE HAS STOPPED THE USE OF TRADE MARKS WHICH ARE OWNED BY THE ASSESSEE. 12.9.2 BASED ON THIS, THE TPO HAS COMPUTED ROYALTY CHARGEABLE FROM DA BUR BANGLADESH @ 6% OF SALES WHILE THE APPELLANT HAS DECLARED ROYALTY INCOME OF RS. NIL. BEFORE ME THE THE APPELLANT HAS CONTENDED THAT W.E.F. 01.04.2005, THE AGREEMENT WAS NOT RENEWED AND THAT THE AMENDED AGREEMENT OF 01 - 04 - 2005 WAS NOT ACTED UPON AS THE ORIGINAL AGREEMENT WAS NOT RENEWED. 12.9.3 AS DISCUSSED SUPRA, SINCE INCOME ARISING FROM INTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVING REGARDS TO ARM S LENGTH PRICE, EXISTENCE OF AGREEMENT OR OTHERWISE IS NOT RELEVANT. THEREFORE, ARGUMENT OF THE A PPELLANT THAT AGREEMENT WAS NOT IN OPERATION DURING PERIOD UNDER CONSIDERATION IS NOT RELEVANT AS PRICE OF INTERNATIONAL TRANSACTION IS TO BE DETERMINED BY TP REGULATIONS. THE UNDISPUTED FACT IS THAT DABUR BANGLADESH HAS BEEN PERMITTED TO USE DABUR BRAND N AME AND THE APPELLANT HAD BEEN RECEIVING ROYALTY INCOME FOR THE SAME UPTO AY 2006 - 07. THE TPO HAS TREATED SAID AGREEMENT DATED DECEMBER 2003 AS BASIS FOR ARM S LENGTH PRICE IN THE ABSENCE OF ANY COMPARABLE PROVIDED BY THE APPELLANT NOW THE ISSUE IS WHETHER TPO IS CORRECT IN ADOPTING 6% RATE OF ROYALTY CHARGEABLE FROM DABUR BANGLADESH. THE APPROACH OF TPO IN RELYING UPON AGREEMENT DATED DECEMBER 2003 AND NOT CONSIDERING AMENDED AGREEMENT DATED 01.04.2005 IS FALLACIOUS AS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 30 CONTEMPORANEOUS MATERIAL/DOCUMENT SHO ULD HAVE BEEN CONSIDERED INSTEAD OF DOCUMENT WHICH IS REMOTE IN TIME. ACCORDINGLY, TPO IS NOT CORRECT IN APPLYING RATE OF 6% AND IGNORING RATE OF 2% AS MENTIONED IN AMENDED AGREEMENT. 12.9.4 FURTHER, APPELLANT HAS ARGUED THAT AS PER AMENDED AGREEMENT, THE RE SHOULD NOT BE ANY CHARGE OF TRADEMARK ROYALTY AS DABUR BANGLADESH HAS INCURRED MORE THAN 8% OF AMP ON SALES AS A PRE REQUISITE. BESIDES THIS THE APPELLANT CONTENDS THAT NO TECHNOLOGY HAS BEEN PROVIDED BY THEM TO BANGLADESH. HOWEVER, NO COGENT EVIDENCE H AS BEEN PRODUCED BY THE APPELLANT THAT NO TECHNOLOGY WAS PROVIDED BY THEM AFTER 01 - 04 - 2005. THE CONTENTIONS OF THE APPELLANT THAT AGREEMENT WAS NOT IN FORCE AFTER 01 - 04 - 2005 AND HENCE NO TECHNOLOGY COULD HAVE BEEN PROVIDED HAS NOT BEEN CLEARLY ESTABLISHED. HOWEVER, A FACT REMAINS THAT DABUR LOGO WAS CONTINUED TO BE USED BY DABUR BANGLADESH EVEN AFTER TERMINATION OF AGREEMENT POST 2005. 12.9.5 IN VIEW EVEN IF DABUR BANGLADESH WAS INCURRING AMP IN EXCESS OF 8% OF SALES, A BRIGHT LINE TEST NEED TO BE DEMONSTR ATED TO SHOW THE BENEFIT AVAILED BY THE APPELLANT. HENCE THE CONTENTION THAT NO ROYALTY SHOULD BE CHARGED IN NOT TENABLE. WITH REGARDS TO TECHNOLOGY, NO CONCRETE EVIDENCE HAS BEEN FURNISHED TO SHOW THE CLAIM THAT NO TECHNOLOGY IS RECEIVED BY BANGLADESH. IT IS ALSO SEEN THAT INTERNATIONAL TRANSACTION OF ALLOWING USE OF TRADE NAME/TRADE MARK TO ITS AES BY THE APPELLANT IS THE SAME WITH RESPECT TO DABUR INTERNATIONAL AND DABUR NEPAL. THEREFORE, THERE IS NO REASON TO ASSIGN HIGHER PRICE IN RESPECT OF INTERNATIO NAL TRANSACTION WITH DABUR NEPAL THAN THAT WITH DABUR INTERNATIONAL. AS DISCUSSED SUPRA, I HAVE HELD THAT ROYALTY AT RATE OF 2% OF FOB SALES WOULD BE ARM S LENGTH PRICE IN RESPECT OF DABUR INTERNATIONAL AND DABUR NEPAL. ACCORDINGLY, I HOLD THAT ROYALTY AT RATE OF 2% OF FOB SALES WOULD BE ARM S LENGTH PRICE IN RESPECT OF DABUR BANGLADESH. IN THIS MANNER, ROYALTY CHARGEABLE FROM DABUR BANGLADESH COMES OUT TO BE RS.23.90 IAKHS. THE AO IS THEREFORE, DIRECTED TO GIVE RELIEF ON THIS ACCOUNT ACCORDINGLY. 32 . AGG RIEVED WITH SUCH PART RELIEF GRANTED BY THE CIT(A), THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 3 3 . THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLENGED THE ORDER OF THE CIT(A) IN RESTRICTING THE ROYALTY CHARGED TO 2% IN RESPECT OF ALL THE THREE AES . HE SUBMITTED THAT NOTIONAL INCOME CAN NOT BE IMPUTED UNDER SECTION 92 OF THE INCOME - TAX ACT, 1961. HE SUBMITTED THAT NO ROYALTY WAS ACTUALLY RECEIVED BY THE ASSESSEE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 31 FROM ITS ASSOCIATED ENTERPRISES IN THE RELEVANT ASSESSMENT YEAR AND THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE MERELY ON NOTIONAL BASIS. 34. HE SUBMITTED THAT FOR APPLICATION OF SECTION 92 OF THE ACT, THERE HAS TO BE, FIRST, INCOME EMBEDDED IN THE INTERNATIONAL TRANSACTION. ACCORDINGLY, WHERE AN INTERNATIONAL TRANSACT ION IS ENTERED WITHOUT CONSIDERATION, SECTION 92 OF THE ACT , NOT BEING IN THE NATURE OF CHARGING PROVISION, CANNOT BE APPLIED TO IMPUTE NOTIONAL INCOME. HE SUBMITTED THAT TRANSFER PRICING PROVISIONS CANNOT COMPEL AN ASSESSEE TO MANDATORILY AND NECESSARILY CHARGE CONSIDERATION FOR AN INTERNATIONAL TRANSACTION WITH ANOTHER ASSOCIATED ENTERPRISE. HE ACCORDINGLY SUBMITTED THAT THE ENTIRE ADJUSTMENT OF RS.2.67 CRORES MADE BY THE TPO OUGHT TO BE DIRECTED TO BE DELETED. 35. SO FAR AS A GREEMENT WITH DABUR NEPAL PV T. LTD., NEPAL , IS CONCERNED, HE SUBMITTED THAT THE ASSOCIATED ENTERPRISES, VIZ, DABUR NEPAL PVT. LTD., NEPAL WAS INCORPORATED IN THE YEAR 1992 WHEREIN 97.5% OF SHAREHOLDING WAS HELD BY THE ASSESSEE DIRECTLY/INDIRECTLY. DURING THE YEAR 1992, THE ASSESSEE, FOR THE PURPOSE OF MANUFACTURING CONSUMER PRODUCTS, ENTERED INTO A MARKETING AGREEMENT DATED 05.11.1992 WITH DABUR NEPAL PVT. LTD UNDER THE APPREHENSION OF EXPECTED TECHNICAL, MARKETING, FINANCIAL AND MANAGERIAL SUPPORT FOR THE MANUFACTURE OF HAIR OIL, LA L DANT MANJAN, DANT MUKTA, TOOTH POWER/TOOTH PASTE AND HERBAL CANDIES, ETC. AS PER THIS AGREEMENT, THE PARTIES AGREED TO THE FOLLOWING: A) THAT DABUR NEPAL WILL BE ENTITLED TO USE THE TRADE MARK OF DABUR FOR SALE OF PRODUCTS IN NEPAL AND ABROAD DURING TH E DURATION OF THE AGREEMENT; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 32 B) THAT THE ASSESSEE WILL ASSIST IN RECRUITMENT OF SPECIALIZED PERSONNEL TO TRAIN AND IMPART INFORMATION ON TECHNICAL KNOW - HOW AND MARKETING OF PRODUCE TO PERSONNEL AT ITS PRODUCTION WORKS IN INDIA AND FOR WHICH DABUR SHALL NOT CHARGE ANY FEE; C) THAT THE ENTIRE MARKETING EXPENSES INCLUDING SALARIES AND ALLOWANCES OF SALE S PERSONNEL WOULD BE BORNE BY THE ASSESSEE. IN CONSIDERATION OF SUCH EXPENSES BEING BORNE BY THE ASSESSEE, DABUR NEPAL AGREED TO PAY ROYALTY @ 7.5% OF ITS NET S ALE. 3 6 . REFERRING TO CLAUSE 7 OF THE AGREEMENT, HE SUBMITTED THAT THAT THE AFORESAID AGREEMENT WAS TO BECOME EFFECTIVE ONLY AFTER THE APPROVAL BY THE GOVERNMENT OF NEPAL AND WAS TO REMAIN VALID FOR A PERIOD OF 10 YEARS FROM THAT DATE UNLESS RENEWED BY MU TUAL CONSENT IN WRITING AND WITH PRIOR APPROVAL OF GOVERNMENT OF NEPAL. 3 7 . HE SUBMITTED THAT I N 2004, THE AFORESAID MARKETING AGREEMENT WAS AMENDED WITH EFFECT FROM 01.04.2004, WHEREIN THE ROYALTY PAYABLE BY DABUR NEPAL WAS REDUCED TO 3% ON LOCAL SALES OF BRANDED PRODUCTS ONLY. HE SUBMITTED THAT DUE TO HIGH OPERATIONAL COST AND EXPENDITURE ON VARIOUS ADMINISTRATIVE COSTS, DABUR NEPAL VIDE LETTER DATED MAY, 2005, INFORMED THE ASSESSEE - COMPANY THAT NO ROYALTY WOULD BE PAYABLE TO THE ASSESSEE. THE SAID LETT ER WAS ACCEPTED BY THE ASSESSEE AS IT HAD FAILED TO BEAR THE MARKETING EXPENSES OF DABUR NEPAL IN ACCORDANCE WITH THE AGREEMENT. REFERRING TO THE LETTER DATED 05.02.2013 ADDRESSED BY THE ASSESSEE TO DABUR NEPAL PVT. LTD ., HE SUBMITTED IT WAS CONFIRMED THAT THE MARKETING AGREEMENT HAS CEASED TO OPERAT E W.E.F. 01.04.2005 AND THAT THE ASSESSEE PERMITTED DABUR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 33 NEPAL TO USE LOGO OF DABUR UPON CONDITION THAT THE COMPANY WILL PROMOTE DABUR TRADEMARK ON ITS OWN COST AND AS PER THE STANDARD NORMS OF THE ASSESSEE RELATING TO QUALITY OF PRODUCT AND OTHER SPECIFIED CONDITIONS. HE ACCORDINGLY SUBMITTED THAT DURING THE ASSESSMENT YEAR 2007 - 08, THE MARKETING AGREEMENTS ON THE BASIS OF WHICH ROYALTY WAS PAYABLE, WAS NOT IN EXISTENCE AND THUS, THE ASSESSEE HAD NOT INCURR ED ANY EXPENDITURE ON ACCOUNT OF THE SAME IN YEAR UNDER CONSIDERATION. 3 8 . THE LD. COUNSEL FOR THE ASSESSEE F URTHER SUBMITTED THAT NO ROYALTY WAS CHARGEABLE FROM DABUR NEPAL FOR THE FOLLOWING REASONS: A) THE ASSESSEE WAS HAVING 97.5% OWNERSHIP IN DABUR NE PAL PVT. LTD., DIRECTLY/INDIRECTLY AND THUS, IT COULD NOT HAVE RECEIVED ANY ROYALTY FROM ITSELF. B) THE AGREEMENT DATED 05.11.1992 HAD EXPIRED AND THE NEPAL GOVERNMENT HAD NOT RENEWED THE SAID AGREEMENT LATER ON. THUS, IN THE ABSENCE OF ANY LEGALLY ENFORCE ABLE AGREEMENT, NO ROYALTY WAS PAYABLE BY M/S DABUR NEPAL PVT. LTD TO THE ASSESSEE; C) EVEN OTHERWISE, SINCE, THE ASSESSEE HAD FAILED TO DISCHARGE ITS OBLIGATION TO BEAR THE MARKETING COSTS WHICH INCLUDED THE ADVERTISEMENT AND REMUNERATION TO SALES PERSONN EL, THE ASSESSEE DOES NOT HAVE ANY RIGHT TO CHARGE ANY ROYALTY FROM DABUR NEPAL PVT. LTD. D) ON APPLICATION OF FAR ANALYSIS AND CONSIDERING SUBSTANTIAL MARKETING EXPENSES INCURRED BY DABUR NEPAL, THERE WAS NO GROUND FOR RECOVERY OF ROYALTY . ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 34 E) THE ASSESSEE ALONG WITH DABUR FOODS LTD, INDIA WAS PURCHASING 72% OF THE PRODUCTS MANUFACTURED BY M/S DABUR NEPAL PVT. LTD., THE DETAILS OF WHICH ARE TABULATED AS UNDER: PARTICULARS AMOUNT (IN NEPAL RS. LAKHS) SALES TO DABUR INDIA LTD. 11,004.83 SALES TO DABUR FOODS LTD., INDIA (RELATED PARTY) 14,224.82 TOTAL SALES TO GROUP COMPANIES IN INDIA 25,229.65 TOTAL SALES OF DABUR NEPAL 35,181.11 % OF SALES TO INDIAN GROUP COMPANIES 72% 39 . HE ACCORDINGLY SUBMITTED THAT IN VIEW OF THE A BOVE, NO ROYALTY COULD HAVE BEEN C HARGED BY THE ASSESSEE IN RESPECT OF THOSE GOODS WHICH WERE SOLD TO THE ASSESSEE AND ITS GROUP COMPANY. 4 0 . WITHOUT PREJUDICE TO THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT E VEN IF IT IS ASSUMED THAT THE ROYALTY WAS TO BE CHARGED BY THE AS SESSEE , THEN SAME AMOUNT WOULD BE ADDED IN THE PURCHASES OF DABUR NEPAL AND THUS THE IMPACT WILL BE REVENUE NEUTRAL I.E. ON THE ONE HAND, INCOME WILL BE INCREASED BY CREDITING THE ROYALTY AND ON THE OTHER HAND, THE COST OF PURCHASES WILL BE INCREASED BY TH E SAME AMOUNT, SINCE THE SALE WAS MADE BY M/S DABUR NEPAL PVT. LTD. TO THE ASSESSEE/GROUP COMPANY. HE ACCORDINGLY SUBMITTED THAT NO ROYALTY WAS CHARGEABLE FROM DABUR NEPAL PVT. LTD. 4 1 . REFERRING TO THE ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, VIDE ITA NO.3257/DEL/2013, ORDER DATED 12 TH APRIL, 2017, THE LD. COUNSEL SUBMITTED THAT THE ISSUE STANDS COVERED IN FAVOUR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 35 OF THE ASSESSEE WHEREIN THE TRIBUNAL HELD THAT NO ROYALTY WAS PAYABLE TO THE ASSESSEE BY M/S DABUR NEPAL (P) LTD. AND DELETED THE ADDITION MADE BY THE TPO/CIT(A) THE RELEVANT PART OF WHICH IS AS PER PARA 36 OF THE ORDER. HE ACCORDINGLY SUBMITTED THAT IN VIEW OF THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE, THE ACTION OF THE CIT(A) HOLDING T HAT THE ROYALTY @2% HAS TO BE CHARGED FROM DABUR NEPAL (P) LTD., IS NOT SUSTAINABLE AND ADDITION SUSTAINED BY CIT(A) IS LIABLE TO BE DELETED. 4 2 . SO FAR AS THE AGREEMENT WITH DABUR INTERNATIONAL LTD., UAE OPERATIONS IS CONCERNED, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE ENTERED INTO AN AGREEMENT DATED 1.04.2003 WITH M/S. REDROCK LTD., ISLE OF MAN, UK, WHICH WAS ENGAGED IN THE BUSINESS OF PRODUCTION AND MANUFACTURE OF FMCG PRODUCTS, TO PROVIDE TECHNICAL, MARKETING AND MANAGERIAL SUPPORT FOR MANUFACTURE O F PRODUCTS, INTER ALIA, IN UAE. SUBSEQUENTLY, THE ASSESSEE, IN THE YEAR 2003 ITSELF, ACQUIRED M/S. REDROCK LTD AND THE SAID COMPANY BECAME 100% SUBSIDIARY OF THE ASSESSEE. LATER ON, THE NAME OF REDROCK LTD WAS CHANGED TO DABUR INTERNATIONAL LTD. AS PER THIS AGREEMENT, THE PARTIES AGREED TO THE FOLLOWING WITH RESPECT TO UAE OPERATIONS: - A) THAT THE ASSESSEE WILL PROVIDE TECHNICAL AND R&D SUPPORT, KNOW - HOW, OPERATIONAL IMPROVEMENTS, ETC., IN THE AREAS OF COST MANAGEMENT, MANUFACTURING, PRODUCTION, PROCUREM ENT, SALE, MARKETING AND DISTRIBUTION, ETC. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 36 B) DABUR INTERNATIONAL WILL BE ENTITLED TO USE THE TRADE MARK OF DABUR IN RELATION TO PRODUCTS WHICH ARE MANUFACTURED THROUGH TECHNICAL AND R&D SUPPORT FROM THE ASSESSEE. C) IN CONSIDERATION, THE ASSESSEE WOULD BE ENTITLED TO ROYALTY AS FOLLOWS: A. 3% OF FOB SALES OF DABUR BRANDED PRODUCTS WHICH ARE DEVELOPED AND MARKETED BY DABUR INTERNATIONAL THROUGH TECHNICAL AND R&D SUPPORT FROM THE ASSESSEE AND WHICH ARE MANUFACTURED IN ACCORDANCE WITH TECHNICAL SPECIFICATI ONS DETAILED BY THE ASSESSEE; B. 1% OF FOB SALES OF DABUR BRANDED PRODUCTS WHICH ARE DEVELOPED BY DABUR INTERNATIONAL FROM ANY OTHER PARTY WITHOUT ANY TECHNICAL AND R&D SUPPORT FROM THE ASSESSEE. 4 3 . REFERRING TO CLAUSE 5 OF THE AGREEMENT, HE SUBMITTED TH AT THE AFORESAID AGREEMENT WAS FOR A PERIOD OF 24 MONTHS (I.E., EXPIRING ON 31.03.2005) . HE SUBMITTED THAT DUE TO HEAVY ADVERTISEMENT EXPENDITURE INCURRED BY DABUR DUBAI AND REFUSAL OF THE ASSESSEE TO REIMBURSE THE BRAND BUILDING EXPENSES, DABUR INTERNATI ONAL VIDE LETTER DATED 07.04.2005, INFORMED THE ASSESSEE - COMPANY THAT NO ROYALTY WOULD BE PAYABLE TO THE ASSESSEE WITH EFFECT FROM FINANCIAL YEAR 2005 - 06. THE SAID LETTER WAS ACCEPTED BY THE ASSESSEE VIDE COMMUNICATION DATED 01.02.2013 ADDRESSED TO DABUR I NTERNATIONAL WHEREIN IT WAS CONFIRMED THAT THE AGREEMENT HAS CEASED TO OPERATE W.E.F. 01.04.2005 AND ALSO THE ASSESSEE PERMITTED DABUR INTERNATIONAL TO USE LOGO OF DABUR UPON CONDITION THAT THE COMPANY WILL PROMOTE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 37 DABUR TRADEMARK ON ITS OWN COST AND AS PER THE STANDARD NORMS OF THE ASSESSEE RELATING TO QUALITY OF PRODUCT AND OTHER SPECIFIED CONDITIONS. 4 4 . HE ACCORDINGLY SUBMITTED THAT DURING THE ASSESSMENT YEAR 2007 - 08, THE AGREEMENT ON THE BASIS OF WHICH ROYALTY WAS PAYABLE, WAS NOT IN EXISTENCE AND THUS, NO ROYALTY WAS DUE TO BE RECEIVED TO THE ASSESSEE IN YEAR UNDER CONSIDERATION. 4 5 . HE F URTHER SUBMITTED THAT NO ROYALTY COULD BE CHARGEABLE FROM DABUR DUBAI DURING THE YEAR UNDER CONSIDERATION DUE TO THE FOLLOWING REASONS: A) THE ASSESSEE WAS HAVI NG 100% OWNERSHIP IN DABUR INTERNATIONAL, DIRECTLY/INDIRECTLY AND THUS, IT COULD NOT HAVE RECEIVED ANY ROYALTY FROM ITSELF. B) THE AGREEMENT WAS NOT RENEWED BY DABUR INTERNATIONAL IN THE YEAR 2005 AND THE SAME WAS DEFUNCT IN THE FINANCIAL YEAR 2006 - 07. THU S, IN THE ABSENCE OF ANY CONTRACTUAL AGREEMENT, THE ASSESSEE WAS NOT ELIGIBLE TO RECEIVE ANY ROYALTY FROM DABUR DUBAI. C) PRODUCTS MANUFACTURED BY DABUR DUBAI WERE TOTALLY DIFFERENT FROM THE PRODUCTS MANUFACTURED IN INDIA BY THE ASSESSEE AND SO MUCH SO EVE N IN THE CASE OF SOME OF THE PRODUCTS HAVING IDENTICAL NAME, THE RAW MATERIAL AND MEDIUM USED IN THE MANUFACTURE WERE TOTALLY DIFFERENT FROM THE RAW MATERIAL AND MEDIUM USED IN INDIA. THUS, MERELY ON THE BASIS OF TRADE NAME OF DABUR', THE PRODUCTS MANUFAC TURED BY DABUR INTERNATIONAL WERE NOT ACCEPTED IN UAE AND THAT IT HAD TO MANUFACTURE THE PRODUCTS AS PER THE LOCAL NEEDS AND TASTE OF THE PUBLIC RESIDING IN THE PUBLIC AREA OF UAE. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 38 D) IN ORDER TO PENETRATE UAE MARKET, DABUR INTERNATIONAL ADOPTED ITS OWN MA RKET STRATEGY AND HAD MADE ALL THE EFFORTS FOR THE ESTABLISHMENT OF 'DABUR' NAME IN THE UAE WHICH WAS VERY LITTLE KNOWN IN THAT GEOGRAPHICAL AREA AND INCURRED LOT OF EXPENSES ON ADVERTISEMENT AND MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, MANUFACTURE AND FINANCE WHICH IS EVIDENT FROM LETTERS DATED 18.07.2011 AND 20.07.2011 ISSUED BY DABUR INTERNATIONAL . E) THE ASSESSEE HAD NEITHER MADE ANY EFFORTS IN ESTABLISHING THE TRADE NAME IN UAE NOR HAD MADE ANY CONTRIBUTION TO DABUR INTERNATIONAL. TH US, DABUR INTERNATIONAL HAD NOT RENEWED THE ROYALTY AGREEMENT BECAUSE THE ASSESSEE WAS NOT WILLING TO UNDERTAKE ANY RISK/OBLIGATION/RESPONSIBILITY. F) ON APPLICATION OF FAR ANALYSIS AND CONSIDERING SUBSTANTIAL MARKETING EXPENSES INCURRED BY DABUR INTERNATI ONAL , THERE WAS NO GROUND FOR RECOVERY OF ROYALTY WHICH HAS BEEN APPRECIATED BY THE LD. CIT(A) AT PAGE 33 AND 33 OF HIS ORDER. 4 6 . HE SUBMITTED THAT AT THE TIME OF ENTERING INTO THE AGREEMENT, DABUR INTERNATIONAL WAS CONSIDERING TO MANUFACTURE PRODUCTS WI TH THE TECHNICAL AND R&D SUPPORT OF THE ASSESSEE IN RESPECT OF THE AYURVEDIC/HERBAL PRODUCTS. HOWEVER, SUBSEQUENTLY, IT REALIZED THAT THE AYURVEDIC PRODUCTS WERE NOT ACCEPTABLE IN UAE BECAUSE THERE WERE NO AYURVEDIC DOCTORS AVAILABLE AND ONLY THE UNANI SYS TEM OF MEDICINES WAS ACCEPTABLE AS PER THE LOCAL TREND AND CUSTOM. AS A RESULT, DABUR INTERNATIONAL ABANDONED ITS IDEA TO MANUFACTURE AYURVEDIC/HERBAL PRODUCTS AND ENTERED INTO THE BUSINESS OF FMCG PRODUCTS WHICH WERE MANUFACTURED BY THEM ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 39 WITH THEIR OWN TE CHNOLOGY AS PER THE REQUIREMENT AND CONSIDERING THE TASTE OF LOCAL PUBLIC. THUS, NO TECHNICAL KNOW - HOW OF THE ASSESSEE WAS UTILIZED BY DABUR INTERNATIONAL. 4 7 . HE F URTHER SUBMITTED THAT BRAND VALUE IN A PARTICULAR AREA DOES NOT DEPEND UPON OWNERSHIP BUT I T DEPENDS UPON VARIOUS FACTORS LIKE QUALITY AND ACCEPTABLE PRODUCTS IN LOCAL PUBLIC AND IN THE PRESENT CASE, DABUR INTERNATIONAL , BY INCURRING EXPENDITURE AND MAKING EFFORTS HAD BECOME THE ECONOMIC OWNER OF THE MARK IN COMMERCIAL SENSE FOR THAT AREA. 4 8 . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DABUR INTERNATIONAL IS WHOLLY OWNED BY THE ASSESSEE, AND THEREFORE, IT WAS NECESSARY FOR DABUR INTERNATIONAL TO USE AND DEPICT THE NAME 'DABUR' WHICH BASICALLY DENOTES THE OWNERSHIP MARK ON THE PRODUCTS MANUF ACTURED AND CONTINUATION OF THE USE OF NAME DABUR ON THE PRODUCTS WAS IN THE NATURE OF SHAREHOLDER'S ACTIVITY, NOT ONLY TO SECURE THE INVESTMENT MADE BY THE ASSESSEE BUT ALSO TO ENHANCE THE VALUE OF 'DABUR' BRAND. 49 . THE LD. COUNSEL FOR THE ASSESSEE D REW THE ATTENTION OF THE BENCH TO THE FAR ANALYSIS OF ROYALTY AS UNDER: S.NO . FAR POINTS DABUR INDIA DABUR DUBAI 1. WHO IS THE LEGAL OWNER OF BRAND YES NO 2. WHO INCURS THE COST OF REGISTRATION AND RENEWAL COST YES NO 3. WHO DECIDES WHAT PRODUCTS TO BE LAUNCHED IN OVERSEAS MARKET NO YES 4. WHO FORMS MARKETING STRATEGY FOR BRAND PROMOTION IN OVERSEAS MARKET NO YES 5. WHO DECIDES ON SALES STRATEGY NO YES ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 40 5 0 . HE SUBMITTED THAT PRIOR TO THE AGREEMENT ENTERED BY THE ASSESSEE WITH DABUR DUBAI, THE PRESENCE OF DABUR IN UAE WAS NEGLIGIBLE. THE DABUR BRAND WAS ALMOST NON - EXISTENT IN UAE. IT WAS ONLY DUE TO THE SIGNIFICANT ADVERTISING AND MARKETING UNDERTAKEN BY DABUR INTERNATIONAL, THE BRAND DABUR WAS BUILT IN UAE. HE SUBMITTED THAT THE ASSESSEE WAS NOT RE QUIRED TO CONTRIBUTE ANY AMOUNT TOWARDS SUCH BRAND BUILDING EXERCISE IN UAE. AT THE COST OF THIS ARRANGEMENT, THE ASSESSEE AGREED TO FOREGO ITS ROYALTY RIGHT FOR USAGE OF DABUR BRAND BY DABUR INTERNATIONAL. THE FUNCTIONALITY/ ACTIVITY OF AMP SPEND BY DABUR DUBAI IS NOTHING BUT PERFORMANCE OF AMP/ MARKETING SERVICE AT THE COST OF ROYALTY WAIVER. HE SUBMITTED THAT THE AFORESAID ARRANGEMENT IS IN ACCORDANCE WITH THE TP PROVISIONS AND REGULATIONS. 5 1 . THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO PROVISIONS OF R ULE 10B (2)(B) WHICH STATES THAT THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE PARTIES TO THE TRANSACTION WILL FORM A VITAL BASIS FOR JUDGING THE ARM'S LENGTH PRICE. SUB CLAUSE (C) STATES THAT THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTION. 5 2 . H E SUBMITTED THAT IF THE ASSESSEE WAS TO CHARGE FOR TRADE MARK ROYALTY FROM DABUR INTERNATIONAL, THEN, THE INDIAN COMPANY WOULD HAVE TO PAY THE AMP EXPENSES OF DABUR INTERNATIONAL, WHICH ARE IN FACT, SIGNIFICANTLY MORE THAN THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 41 ROYALTY THAT WOULD HAVE BEEN RECEIVED BY THE ASSESSEE. FOR THE ABOVE PROPOSITION HE DREW THE ATTENTION OF THE BENCH TO THE ANALYSIS OF AMP SPENT BY DABUR DUBAI WHICH IS AS UNDER: - S. NO. FINANCIAL YEAR SALES (IN LAKHS) AMP (IN LAKHS) % OF AMP TO SALES 1. 2004 - 05 5427 631 11.62% 2. 2005 - 06 7643 1416 18% 3. 2006 - 07 11425 2298 20% 4. 2007 - 08 14926 2241 15% 5. 2008 - 09 21728 2918 13.5% 6. 2009 - 10 27474 5740 21% 7. 2010 - 11 34540 10524 30% 8. 2011 - 12 49823 14284 29% 5 3 . REFERRING TO THE ABOVE, HE SUBMITTED THAT SIGNIFICANT AMOUNT O F AMP EXPENSES OF RS.22.98 CRS. WERE INCURRED BY DABUR INTERNATIONAL ON BRAND BUILDING, WHICH FAR MORE EXCEEDED THE ROYALTY WHICH THE ASSESSEE WOULD HAVE OTHERWISE RECEIVED [ROYALTY OF RS. 1.15 CR @1% ON SALES OF RS.L 14.25 CR.] IN CASE IT HAD AGREED TO RE IMBURSE/BORNE THE AFORESAID AMP EXPENSES. 5 4 . REFERRING TO THE ORDER OF CIT(A), HE SUBMITTED THAT THE LD. CIT(A) HAS INCORRECTLY STATED THAT THE ASSESSEE WAS UNABLE TO ESTABLISH THAT THE ASSOCIATED ENTERPRISE INCURRED ABNORMAL AMP EXPENSES WHICH EXCEEDED THE BRIGHT LINE TEST AS NO AMP SPEND FIGURES WERE PROVIDED, WITHOUT APPRECIATING THAT THE SAID FIGURES WERE DULY FILED BY THE ASSESSEE AND ALSO RE - PRODUCED IN THE APPELLATE ORDER @ PAGE 33, WHICH CLEARLY ESTABLISHED THAT THE ASSOCIATED ENTERPRISE HAD INC URRED SUBSTANTIAL AMP EXPENDITURE, WHICH EXCEEDED THE BRIGHT LINE TEST. FURTHER, THE TPO/AO HAD NOT APPLIED ANY TRANSFER PRICING METHOD AS PRESCRIBED UNDER THE ACT, ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 42 BUT SIMPLY MADE THE ADJUSTMENT IN RESPECT OF ROYALTY BASED ON THE EARLIER AGREEMENT WHICH H AD ALREADY EXPIRED. HE SUBMITTED THAT NO NOTIONAL ROYALTY OUGHT TO BE IMPUTED IN THE INCOME OF THE ASSESSEE MERELY ON THE BASIS OF THE DEFUNCT ROYALTY AGREEMENT DATED 01.04.2003 AND IN THE ABSENCE OF ANY EVIDENCE OF PROVISION OF ANY SERVICES TECHNICAL OR O THERWISE, BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE. HE ACCORDINGLY SUBMITTED THAT ADDITION ON ACCOUNT ROYALTY SUSTAINED BY CIT(A) IS LIABLE TO BE DELETED IN TOTO. 5 5 . REFERRING TO THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR A.Y. 2006 - 07, H E SUBMITTED THAT THE TRIBUNAL, UNDER IDENTICAL CIRCUMSTANCES , HAS HELD THAT RATE OF 0.75% IS TO BE ADOPTED TO COMPUTE THE AMOUNT OF ROYALTY FROM DABUR DUBAI. IN ARRIVING AT THE SAID CONCLUSION, THE TRIBUNAL HAS APPRECIATED THE FOLLOWING FACTS/ FINDINGS: A ) DURING THE YEAR UNDER CONSIDERATION, THERE WAS NO AGREEMENT TO MAKE ANY PAYMENT OF ROYALTY BETWEEN THE ASSESSEE AND DABUR DUBAI; B) THE PRODUCT MANUFACTURED BY DABUR DUBAI WERE TOTALLY DIFFERENT FROM THE PRODUCTS MANUFACTURED IN INDIA AND EVEN THE RAW MA TERIAL USED IN THOSE PRODUCTS MANUFACTURED IN UAE WAS DIFFERENT FROM THE RAW MATERIAL USED IN INDIA; C) THE ASSESSEE HAD NOT MADE ANY EFFORT FOR ESTABLISHING THE TRADE NAME NOR HAD MADE ANY OTHER CONTRIBUTION. THEREFORE, THE ASSESSEE DID NOT RECEIVE ANY RO YALTY FOR THE YEAR UNDER CONSIDERATION; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 43 D) DABUR DUBAI HAD NOT MANUFACTURED ANY PRODUCTS WITH THE TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE BUT HAD MANUFACTURED ON ITS OWN, IN ACCORDANCE WITH THE REQUIREMENT AND LOCAL TASTE OF THE LOCAL PUBLIC; E) INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE WHICH SHALL BE DETERMINED AS PER PROVISIONS OF SECTION 92 AND SECTION 92C OF THE ACT; F) AS PER THE PROVISIONS OF SECTION 92C OF THE ACT READ WITH R ULES 10B AND 10C OF THE INCOME TAX RULES, 1962, FOR THE PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENTS, THE AMI S LENGTH PRICE HAS TO BE DETERMINED ON FINDING OUT SIMILAR TYPE OF PAYMENTS RECEIVED BY SIMILARLY SITUATED AND COMPARABLE INDEPENDENT ENTITIES; G) THE LOWER AUTHORITIES HAVE NOT APPLIED ANY TRANSFER PRICING METHOD AS PRESCRIBED UNDER THE ACT AND SIMPLY MADE THE ADJUSTMENT IN RESPECT OF ROYALTY BASED ON THE EARLIER AGREEMENTS WHICH HAD ALREADY EXPIRED AND THERE WAS NO NEW AGREEMENT BETWEEN THE ASSE SSEE AND ITS AES. 5 6 . HE SUBMITTED THAT THE RATE OF 0.75% ADOPTED BY THE TRIBUNAL IN ITS ORDER FOR ASSESSMENT YEAR 2006 - 07 IS AD - HOC, ARBITRARY AND EXCESSIVE . HE SUBMITTED THAT IN THE ORDER, THE TRIBUNAL THOUGH CORRECTLY APPRECIATED THE FACTS OF THE PRES ENT CASE THAT: (A) THERE WAS NO ENFORCEABLE ROYALTY AGREEMENT DURING THE YEAR UNDER CONSIDERATION; (B) PRODUCTS MANUFACTURED BY DABUR INTERNATIONAL WERE DIFFERENT FROM THE PRODUCTS MANUFACTURED IN INDIA; (C) HEAVY MARKETING EXPENSES WERE BORNE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 44 BY DABUR INT ERNATIONAL; AND (D) NO EXPENSES INCURRED BY DABUR INTERNATIONAL FOR BRAND BUILDING WERE REIMBURSED/BORNE BY THE ASSESSEE, BUT PROCEEDED TO IMPUTE AD - HOC ROYALTY RATE OF 0.75%, WITHOUT GIVING ANY BASIS OR CALCULATION FOR APPLYING SUCH RATE. FURTHER, THE TRI BUNAL FAILED TO APPRECIATE THAT DABUR WAS NOT USED AS A BRAND NAME FOR THE PRODUCTS, BUT IT MERELY REPRESENTED OWNERSHIP TITLE AND NOTHING MORE. 5 7 . HE SUBMITTED THAT THE TRIBUNAL, AT PARA 33 AND 34 OF THE ORDER, HAS GIVEN A FINDING THAT ARM S LENGTH PR ICE IN RESPECT OF AN INTERNATIONAL TRANSACTION IS TO BE CALCULATED BY ADOPTING ANY OF THE FIVE METHODS PRESCRIBED IN SECTION 92 OF THE ACT AND ALSO DISCUSSED THE PROVISIONS OF SECTION 92C OF THE ACT ALONG WITH RULES 10B AND 10 C WHICH PRESCRIBE THE METHODS TO DETERMINE THE ARM S LENGTH PRICE BASED ON SIMILAR TYPE OF PAYMENTS RECEIVED BY SIMILARLY SITUATED AND COMPARABLE INDEPENDENT ENTITIES. FURTHER, THE TRIBUNAL ALSO GAVE A FINDING THAT THE LOWER AUTHORITIES HAVE FAILED TO APPLY ANY TRANSFER PRICING METHOD AS PRESCRIBED UNDER THE ACT. HOWEVER, WHILE CONCLUDING, THE TRIBUNAL STILL PROCEEDED TO IMPUTE AN AD - HOC RATE OF 0.75%, WITHOUT DEFINITIVELY POINTING OUT PRESCRIBED TRANSFER PRICING METHOD USED TO COMPUTE SUCH ARM S LENGTH PRICE. 5 8 . REFERRING TO PROVISIO NS OF SECTION 92C OF THE ACT AND CBDT INSTRUCTION NO.3 OF 2003 DATED 20.05.2003, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SCHEME OF TRANSFER PRICING REGULATION PROVIDES FOR BENCHMARKING OF AN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 45 INTERNATIONAL TRANSACTION BY APPLYING ONE OF THE PRES CRIBED METHODS AND ON THE BASIS OF RULES PROVIDED FOR EACH OF THE METHODS. 59 . REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT IN A.Y. 2006 - 07 OR 2007 - 08, THE PRESCRIBED METHOD TO CALCULATE THE ALP OF THE ROYALTY HAS NOT BEEN APPLIED: - (I) SONY ERICSS ON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT: 374 ITR 118 (DEL) . (II) CIT VS. EKL APPLIANCES LTD: 345 ITR 241 (DEL) . (III) CA COMPUTER ASSOCIATES PVT. LTD. VS. DC IT (I TA NOS. 5420 AND 542I/MUM/2006). (IV) CIT VS CA COMPUTER ASSOCIATES INDIA PVT LTD (ITA NO 20/2011 ). (V) CIT VS CUSHMAN AND WAKEFIELD (INDIA) PVT LTD. (ITA 475/ 2012) (VI) LG ELECTRONICS INDIA PVT. LTD., VS. ACIT (ITA NO.5140/DEL/2011) (VII) NIMBUS COMMUNICATIONS LTD VS ACIT (ITA NO 2361/MUM/2007 (VIII) DRESSER RAND INDIA PVT LTD VS ADDL. CIT (ITA NO 8753/MUM /2010) (IX) THYSSEN KRUPP INDUSTRIES INDIA PVT LTD VS ACIT (ITA NO 7032/MUM/2011) (X) HERO MOTOCORP LTD VS ADDL CIT (ITA NO 5130/DEL/2010) (XI) KODAK INDIA PVT LTD VS ACIT (ITA NO 7349/MUM/2012) (XII) AWB INDIA PVT LTD VS ADDL CIT (ITA NO 4454/DEL/2012) ( XIII) KIRBY BUILDING SYSTEMS INDIA LTD VS. ADDL CIT (ITA 1975/ HYD/ 2010) (XIV) MCCANN ERICKSON INDIA PVT. LTD. (ITA NO.5871/DEL./2011) ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 46 (XV) ERICSSON INDIA PRIVATE LTD. (ITA NO.5141/DEL./2011) (XVI) SC ENVIRO AGRO INDIA LTD VS DCIT (ITA NO 704/MUM/2010) 6 0 . REFERRING TO THE ORDER OF THE TRIBUNAL, HE SUBMITTED THAT IF THE TRIBUNAL WOULD HAVE APPLIED ANY OF THE 5 PRESCRIBED METHOD, IN SUCH SCENARIO, THE RATE OF ROYALTY WOULD HAVE BEEN NIL . HE ACCORDINGLY SUBMITTED THAT THE RATE OF ROYALTY OF 0.75% ADOPTE D BY THE TRIBUNAL IN ASSESSMENT YEAR 2006 - 07, CANNOT BE APPLIED IN ASSESSMENT YEAR 2007 - 08 WITHOUT APPLICATION OF ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT AND THE ADJUSTMENT ON ACCOUNT OF ROYALTY, MADE BY THE TPO/CIT(A), IS UNLAWFUL, NOT SUSTAINABLE AND IS LIABLE TO BE DELETED. 6 1 . THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, POINTED OUT THAT THE ASSESSEE S APPEAL AGAINST THE ORDER OF THE TRIBUNAL HAS BEEN DISMISSED BY THE DELHI HIGH COURT AND REPORTED AS [2018) 253 TAXMAN 129, AS NOT LAYIN G DOWN ANY SUBSTANTIAL QUESTION OF LAW . 6 2 . REFERRING TO THE ORDER OF THE HON BLE HIGH COURT, HE SUBMITTED THAT THE HON BLE COURT DISMISSED THE APPEAL AS NOT LAYING DOWN ANY SUBSTANTIAL QUESTION OF LAW. FURTHER, WHILE DISMISSING THE APPEAL, THE COURT OBS ERVED THAT THE ASSESSEE'S SUBMISSIONS THAT OMISSION TO SHOW AN INITIAL INCOME CANNOT BE SCRUTINIZED AT ALL CANNOT BE ACCEPTED. THE COURT FURTHER OBSERVED THAT THE ASSESSEE IS REQUIRED TO EXPLAIN WHY THE DABUR BRAND HAS BEEN PERMITTED TO AN OVERSEAS ENTITY WITHOUT ANY CHARGE. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 47 6 3 . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AFORESAID OBSERVATIONS ARE ONLY IN THE CONTEXT OF ADJUDICATING WHETHER OR NOT THE ASSESSEE S APPEAL GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW OR NOT, IN ORDER THE HIGH COURT TO ASSUME JURISDICTION TO ENTERTAIN THE APPEAL OR NOT. 6 4 . REFERRING TO THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF SANTOSH HAZARI V. PURUSHOTTAM TIWARI: [2001] 251 ITR 84 (SC) , THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH T O THE FOLLOWING OBSERVATIONS : - THE HIGH COURT CANNOT PROCEED TO HEAR A SECOND APPEAL WITHOUT FORMULATING THE SUBSTANTIAL QUESTION OF LAW INVOLVED IN THE APPEAL AND IF IT DOES SO IT ACTS ILLEGALLY AND IN ABNEGATION OR ABDICATION OF THE DUTY CAST ON COURT. THE EXISTENCE OF SUBSTANTIAL QUESTION OF LAW IS THE SINE QUA NON FOR THE EXERCISE OF THE JURISDICTION UNDER THE AMENDED SECTION 100 OF THE CODE. [SEE KSHITISH CHANDRA PURKAIT VS. SANTOSH KUMAR PURKAIT & ORS., (1997) 5 SCC 438, PANCHUGOPAL BARUA VS. UMESH C HANDRA GOSWAMI, (1997) 4 SCC 713 AND KONDILA DAGADU KADAM VS. SAVITRIBAI SOPAN GUJAR & ORS., (1999) 3 SCC 722]. 6 5 . HE SUBMITTED THAT THE HON BLE SUPREME COURT , THUS, CATEGORICALLY HELD THAT EXISTENCE OF SUBSTANTIAL QUESTION OF LAW IS THE SINE QUA NON FOR THE EXERCISE OF THE JURISDICTION UNDER THE AMENDED SECTION 100 OF THE CODE , MEANING THEREBY THAT UNLESS SUBSTANTIAL QUESTION OF LAW ARISES AND THE SAME IS FORMULATE D , THE HIGH COURT DOES NOT HAVE THE POWER TO EXERCISE JURISDICTION. 6 6 . THE LD. COUNSE L FOR THE ASSESSEE FURTHER SUBMITTED THAT WHILE DISMISSING THE APPEAL, THE HON BLE HIGH COURT OBSERVED THAT THE ASSESSEE'S SUBMISSIONS THAT THE TRANSACTION CANNOT BE SCRUTINIZED CANNOT BE ACCEPTED AND FURTHER OBSERVED THAT THE ASSESSEE IS REQUIRED TO EXPLA IN WHY THE DABUR BRAND HAS BEEN PERMITTED TO AN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 48 OVERSEAS ENTITY WITHOUT ANY CHARGE. HE SUBMITTED THAT DABUR WAS MENTIONED BY THE SUBSIDIARY ONLY AS A RECOGNITION OF OWNERSHIP OF THE COMPANY AND NOT AS A BRAND OUTSIDE INDIA. SECONDLY, HUGE ADVERTISEMENT EXPENDITURE WAS INCURRED BY THE SUBSIDIARY OUTSIDE INDIA AND THEREFORE, THERE WAS NO WARRANT TO JUSTIFY CHARGING OF ANY FURTHER FEE. 6 7 . LASTLY, THE LD. COUNSEL SUBMITTED THAT IT IS SETTLED LAW THAT ANY ADJUSTMENT CAN ONLY BE MADE BY APPLICATION OF ONE OF THE PRESCRIBED METHODS AND THE TRIBUNAL CLEARLY HELD THAT NONE OF THE RECOGNIZED METHODS WERE APPLIED BY THE AUTHORITIES. BEING SO, THE TRIBUNAL, IN ASSESSMENT YEAR 2006 - 07, OUGHT TO HAVE DELETED THE ENTIRE ADDITION RATHER THAN PARTLY CONFIRMING THE SAM E. FURTHER, DABUR INTERNATIONAL HAD SPENT SIGNIFICANT AMP EXPENSES AND ACCORDINGLY, THE BRAND DABUR WAS BUILT IN UAE BY THE EFFORTS OF DABUR INTERNATIONAL ALONE AND HENCE, THERE WAS NO QUESTION OF RECEIVING ANY ROYALTY FROM DABUR INTERNATIONAL ON THIS AC COUNT. HE ACCORDINGLY SUBMITTED THAT SINCE DABUR INTERNATIONAL HAS INCURRED SUBSTANTIAL EXPENSES ON ADVERTISEMENT, MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, MANUFACTURE AND FINANCE, THEREFORE, IT IS IN A WAY ENTITLED TO THE ECONOMIC BENEF ITS RELATED TO THE BRAND DABUR IN UAE. IN VIEW OF THE AFORESAID, IT MAY BE INFERRED THAT THOUGH THE LEGAL OWNERSHIP OF THE DABUR BRAND VESTS WITH THE ASSESSEE - COMPANY, BUT BY INCURRING SIGNIFICANT AMP EXPENSES AND BUILDING THE BRAND OF DABUR IN UAE W HICH WAS ALMOST NON - EXISTENT EARLIER, DABUR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 49 INTERNATIONAL HAS GAINED/ACQUIRED ECONOMIC OWNERSHIP OF THE BRAND DABUR IN UAE. 68 . REFERRING TO THE DECISION OF HON BLE DELHI COURT, IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD VS CIT: 3 74 ITR 118 HE SUBMITTED IT HAS BEEN HELD THAT THE CONCEPT OF ECONOMIC OWNERSHIP IS WELL RECOGNIZED IN INTERNATIONAL TAXATION . IT HAS BEEN HELD IN THE ABOVE DECISION THAT IF THE INDIAN ENTITY IS THE ECONOMIC OWNER OF THE BRAND AND IS INCURRING AMP EXPENSES FOR THE PURPOSE OF PROMOTION OF SUCH BRAND, BENEFIT IS ONLY RECEIVED BY THE INDIAN ENTITY. APPLYING THE SAME RATIONALE TO THE FACTS OF THE PRESENT CASE, DABUR INTERNATIONAL, UAE IS THE ECONOMIC OWNER OF THE BRAND IN UAE AND HAS INCURRED SIGNIFICANT AMP EX PENSES FOR THE PURPOSE OF PROMOTION OF SUCH BRAND. HE SUBMITTED THAT THE ECONOMIC OWNERSHIP OF THE BRAND RESTS WITH THE DABUR INTERNATIONAL AND ACCORDINGLY, IT CANNOT BE EXPECTED TO MAKE ANY PAYMENT TO THE ASSESSEE TOWARDS ROYALTY AS THE ASSET IS ECONOMICA LLY OWNED BY IT. HE ACCORDINGLY SUBMITTED THAT THE ADDITION MADE ON ACCOUNT OF ROYALTY FROM DABUR INTERNATIONAL SHOULD BE DIRECTED TO BE DELETED IN TOTO. 69 . SO FAR AS ROYALTY FROM ASIAN CONSUMER CARE PVT. LTD., BANGLADESH IS CONCERNED, THE LD. COUNSEL SU BMITTED THAT T HE ASSESSEE ENTERED INTO AN AGREEMENT DATED 01.12.2003 WITH ASIAN CONSUMER CARE PVT. LTD., BANGLADESH (ACCPL), WHICH WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND PACKAGING OF CONSUMER ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 50 AND HEALTHCARE PRODUCTS IN BANGLADESH. THE SALIENT FEA TURES OF THE AGREEMENT ARE AS FOLLOWS: THE AGREEMENT WAS ENTERED INTO TO PROVIDE TRADEMARK OF DABUR FOR USE TO ACCPL. THE AGREEMENT WAS FOR A PERIOD OF 2 YEARS [REFER CLAUSE 3 OF THE AGREEMENT], ACCPL HAVE TO PAY ROYALTY TO THE ASSESSEE AT THE RAT E OF 6% OF FOB SALES (NET OF TAXES AND SALES RETURN) WHICH WERE DEVELOPED AND MARKETED BY ACCPL USING TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE. REFERRING TO PAGE 39 OF THE PAPER BOOK, H E SUBMITTED THAT THE AFORESAID AGREEMENT WAS AMENDED WITH EFF ECT FROM 01.04.2005 WHEREIN IT WAS PROVIDED THAT NO TRADEMARK ROYALTY WILL BE PAYABLE TO THE ASSESSEE WHERE ACCPL INCURS COST OF ADVERTISEMENT, MARKETING AND PROMOTION (AMP EXPENSES) IN EXCESS OF 8 PERCENT ON SALES EVERY YEAR. HE SUBMITTED THAT TILL DECEMB ER, 2005, ACCPL WAS USING THE TECHNICAL KNOWHOW OF THE ASSESSE TO MANUFACTURE ITS PRODUCTS. HOWEVER, THE SAID PRODUCTS SO MANUFACTURED DID NOT MEET THE EXPECTATIONS OF BANGLADESH MARKET. ACCORDINGLY, AFTER 2006, ACCPL STARTED USING TECHNICAL KNOW - HOW OF DA BUR INTERNATIONAL, WHICH WAS ABLE TO CATER TO THE NEEDS OF PEOPLE OF DUBAI. ACCORDINGLY, DURING THE ASSESSMENT YEAR 2007 - 08, THERE WAS NO AGREEMENT IN EXISTENCE WITH ACCPL AND THE SAID COMPANY WAS, IN FACT, USING THE TECHNICAL KNOW OF DABUR INTERNATIONAL. HE ACCORDINGLY SUBMITTED THAT NO ROYALTY WAS RECEIVED BY THE ASSESSE DURING THE YEAR UNDER CONSIDERATION DUE TO THE FOLLOWING REASONS: ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 51 A) THE ASSESSEE WAS HAVING 100% OWNERSHIP IN ACCPL, DIRECTLY/INDIRECTLY AND THUS, IT COULD NOT HAVE RECEIVED ANY ROYALTY FROM ITSELF. B) THE AGREEMENT WITH ACCPL BECAME DEFUNCT IN DECEMBER, 2005 AND THE SAME WAS NOT RENEWED THEREAFTER. THUS, IN THE ABSENCE OF ANY CONTRACTUAL AGREEMENT, THE ASSESSEE WAS NOT ELIGIBLE TO RECEIVE ANY ROYALTY FROM ACCPL. C) PRODUCTS MANUFACTURED BY ACCPL USING TECHNICAL KNOWHOW OF THE ASSESSEE DID NOT MEET THE REQUIREMENTS OF CUSTOMERS IN BANGLADESH. ACCORDINGLY, AFTER 2006, ACCPL ENTERED INTO AN AGREEMENT WITH DABUR DUBAI TO PROVIDE TECHNICAL KNOW. D) MERELY ON THE BASIS OF TRADE NAME OF DABUR THE PRODUCTS MANUFACTURED BY ACCPL WERE NOT ACCEPTED IN BANGLADESH AND THAT IT HAD TO MANUFACTURE THE PRODUCTS AS PER THE LOCAL NEEDS AND TASTE OF THE PUBLIC RESIDING IN THE PUBLIC AREA. E) IN ORDER TO PENETRATE BANGLADESH MARKET, ACCPL ADOPTED ITS OWN MAR KET STRATEGY AND HAD MADE ALL THE EFFORTS FOR THE ESTABLISHMENT OF 'DABUR' NAME IN BANGLADESH WHICH WAS VERY LITTLE KNOWN IN THAT GEOGRAPHICAL AREA AND INCURRED LOT OF EXPENSES ON ADVERTISEMENT, MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, M ANUFACTURE AND FINANCE. F) THE ASSESSEE HAD NEITHER MADE ANY EFFORTS IN ESTABLISHING THE TRADE NAME IN BANGLADESH NOR HAD MADE ANY CONTRIBUTION TOWARDS THE SAME TO ACCPL. 7 0 . HE F URTHER SUBMITTED TH AT BRAND VALUE IN A PARTICULAR AREA DOES NOT DEPEND UPON OWNERSHIP BUT IT DEPENDS UPON VARIOUS FACTORS LIKE QUALITY AND ACCEPTABLE PRODUCTS IN LOCAL PUBLIC AND IN THE PRESENT CASE, ACCPL BY INCURRING EXPENDITURE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 52 AND MAKING EFFORTS HAD BECOME THE ECONOMIC OWNER OF THE MARK IN COMMERCIAL SENSE FOR THAT AREA. FURT HER, THE TPO/AO HAD NOT APPLIED ANY TRANSFER PRICING METHOD AS PRESCRIBED UNDER THE ACT, BUT SIMPLY MADE THE ADJUSTMENT IN RESPECT OF ROYALTY BASED ON THE EARLIER AGREEMENT WHICH HAD ALREADY EXPIRED. HE ACCORDINGLY SUBMITTED THAT NO NOTIONAL ROYALTY OUGHT TO BE IMPUTED IN THE INCOME OF THE ASSESSEE MERELY ON THE BASIS OF THE DEFUNCT ROYALTY AGREEMENT DATED 01.12.2003 AND IN THE ABSENCE OF ANY EVIDENCE OF PROVISION OF ANY SERVICES TECHNICAL OR OTHERWISE, BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE. 7 1 . HE SUBMITTED THAT IT IS THE SETTLED LAW THAT FOR THE PURPOSES OF DETERMINING TAX LIABILITY UNDER THE PROVISIONS OF THE ACT, SUBSTANCE OF THE TRANSACTION OVER ITS LEGAL FORM NEEDS TO BE LOOKED AT . HE SUBMITTED THAT PRIOR TO THE AGREEMENT ENTERED BY THE ASSESS EE WITH DABUR INTERNATIONAL, THE PRESENCE OF DABUR IN BANGLADESH WAS NEGLIGIBLE. THE DABUR BRAND WAS ALMOST NON - EXISTENT THERE. IT WAS ONLY DUE TO THE SIGNIFICANT ADVERTISING AND MARKETING UNDERTAKEN BY ACCPL THAT THE BRAND OF DABUR WAS BUILT IN BANGL ADESH. HE SUBMITTED THAT THE ASSESSEE WAS NOT REQUIRED TO CONTRIBUTE ANY AMOUNT TOWARDS SUCH BRAND BUILDING EXERCISE. HE SUBMITTED THAT EVEN OTHERWISE ALSO IF IT IS ASSUMED THAT THE AGREEMENT WAS IN EXISTENCE, EVEN IN SUCH CIRCUMSTANCE, NO ROYALTY WAS REC EIVABLE BY THE ASSESSE AS THE AMP EXPENSES OF ACCPL WERE MORE THAN 8%. 7 2 . THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE ANALYSIS OF AMP SPENT BY BANGLADESH WHICH IS AS UNDER: ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 53 S. NO. FINANCIAL YEAR SALES (IN LAKHS) AMP (IN LAKHS ) % OF AMP TO SALES 1. 2004 - 05 998.81 118.63 11.88% 2. 2005 - 06 1438.89 164.92 11.46% 3. 2006 - 07 1335.93 195.13 14.60% 4. 2007 - 08 988.32 182.63 18.42% 5. 2008 - 09 1548.18 269.82 17.37% 7 3 . REFERRING TO THE ABOVE, HE SUBMITTED THAT SIGNIFICANT AMOUNT O F AMP EXPENSES WERE INCURRED BY ACCPL WHICH DURING THE ASSESSMENT YEAR 2007 - 08 WAS 14.60%. THUS, IN ACCORDANCE WITH THE AMENDED AGREEMENT, NO ROYALTY WAS EVEN OTHERWISE PAYABLE BY ACCPL TO THE ASSESSEE. FURTHER, SINCE THE CIT(A)/TPO HAD ARBITRARILY COMPUTE D THE RATE OF ROYALTY WITHOUT APPLYING ANY OF THE PRESCRIBED METHODS UNDER SECTION 92C OF THE ACT, THEREFORE, THE ADJUSTMENT ON ACCOUNT OF ROYALTY, MADE BY THE TPO/CIT(A), IS UNLAWFUL, NOT SUSTAINABLE AND IS LIABLE TO BE DELETED. 7 4 . THE LD. COUNSEL FOR T HE ASSESSEE F URTHER SUBMITTED THAT SINCE ACCPL HAS INCURRED SUBSTANTIAL EXPENSES ON ADVERTISEMENT, MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, MANUFACTURE AND FINANCE, THEREFORE, IT IS IN A WAY ENTITLED TO THE ECONOMIC BENEFITS RELATED TO T HE BRAND DABUR IN BANGLADESH. HE DREW THE ATTENTION OF THE BENCH TO THE ANALYSIS OF ROYALTY WHICH IS AS UNDER: - S.NO . FAR POINTS DABUR INDIA DABUR DUBAI 1. WHO IS THE LEGAL OWNER OF BRAND YES NO 2. WHO INCURS THE COST OF REGISTRATION AND RENEWAL COST YES NO 3. WHO DECIDES WHAT PRODUCTS TO BE LAUNCHED IN OVERSEAS NO YES ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 54 MARKET 4. WHO FORMS MARKETING STRATEGY FOR BRAND PROMOTION IN OVERSEAS MARKET NO YES 5. WHO DECIDES ON SALES STRATEGY NO YES 7 5 . REFERRING TO THE ABOVE, HE SUBMITTED THAT THOUGH THE LEGAL OWNERSHIP OF THE DABUR BRAND VESTS WITH THE ASSESSEE - COMPANY, BUT BY INCURRING SIGNIFICANT AMP EXPENSES AND BUILDING THE BRAND OF DABUR IN BANGLADESH WHICH WAS ALMOST NON - EXISTENT EARLIER, ACCPL HAS GAINED/ACQUIRED ECONOMIC OWNERSHIP OF THE BRAN D DABUR IN BANGLADESH. 76 . THE LD. DR, ON THE OTHER HAND, REFERRING TO VARIOUS OBSERVATIONS OF THE ORDER OF THE TPO /AO WHILE MAKING SUCH ADJUSTMENT ON ACCOUNT OF ROYALTY, HEAVILY RELIED ON THEIR ORDERS . HE SUBMITTED THAT DABUR INDIA LTD. SHOULD CHARGE T RADE MARK/TRADE NAME ROYALTY FOR ALLOWING THEM TO USE THE TRADE MARK/TRADE NAMES. 77 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO C ONSIDERED VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HERBAL PRODUCTS OF HEALTH AND PERSONAL CARE, COSMETICS AND VETERINARY PRODUCTS AND FMCG PRODUCTS, ETC. THE ASSESSEE IN THE PAST YEARS HAD ENTERED INTO AGREEMENT WITH THE FOLLOWING THREE AES: - A) DABUR NEPAL LTD., NEPAL; B) DABUR INTERNATIONAL LTD., UAE; AND ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 55 C) ASIAN CONSUMER CARE PVT. LTD., BANGLADESH. 78. IN TERMS OF THE AGREEMENT ENTERED INTO WITH THE AFORESAID ENTITIES, THE AS SESSEE ALLOWED ITS ASSOCIATED ENTERPRISES TO PROVIDE ASSISTANCE IN RECRUITMENT AND IMPARTING TECHNICAL KNOW - HOW, ETC,, AND PERMITTED USE OF ITS TRADEMARK DABUR FOR SALE OF PRODUCTS. THE AFORESAID AGREEMENTS WERE, HOWEVER, SUBSEQUENTLY RESCINDED SINCE THE ASSESSEE DID NOT PROVIDE ANY MARKETING SUPPORT NOR IMPARTED ANY TECHNICAL KNOWHOW AND FURTHER CONSIDERING THAT SUBSTANTIAL ADVERTISEMENT AND MARKETING EXPENDITURES WERE INCURRED BY THE AE S OUTSIDE INDIA. ACCORDINGLY, IT WAS STATED THAT NO ROYALTY WAS REC EIVABLE/ RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES DURING THE IMPUGNED ASSESSMENT YEAR 2007 - 08. HOWEVER, THE TPO REJECTED THE ARGUMENTS ADVANCED BY THE ASSESSEE AND HELD THAT THE ASSOCIATED ENTERPRISES HAVE USED THE BRAND - NAME/TRADE MARK OWN ED BY THE ASSESSEE WITHOUT ANY COMPENSATION AND ACCORDINGLY, COMPUTED ARM S LENGTH PRICE OF ROYALTY AS FOLLOWS: COMPANY NAME FOB SALES (RS. IN LAKHS) RATE OF ROYALTY ADOPTED BY TPO ROYALTY (RS. IN LAKHS) DABUR NEPAL PVT. LTD, NEPAL 2,148 7.5% 161.10 DABU R INTERNATIONAL LTD. UAE 1,129 3% 33.87 ASIAN CONSUMER CARE LTD. 1,195 6% 71.70 TOTAL 266.67 79 . WE FIND, IN APPEAL, THE LD. CIT(A) HELD THAT USE OF BRAND NAME BY ASSOCIATED ENTERPRISES IS AN INTERNATIONAL TRANSACTION, AND, THEREFORE, THE ARM S LENGT H PRICE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 56 HAS TO BE ASSESSED UNDER SECTION 92 OF THE ACT. HOWEVER, THE CIT(A) REDUCED SUCH CALCULATION OF ROYALTY. 8 0 . SO FAR AS ROYALTY FROM DABUR INTERNATIONAL LTD., UAE IS CONCERNED, THE LD. CIT(A) OBSERVED THAT THE PRODUCTS MANUFACTURED BY DABUR INTERN ATIONAL LTD, UAE ARE DIFFERENT FROM THOSE MANUFACTURED IN INDIA AND IN SOME CASES, EVEN THE RAW MATERIAL IS DIFFERENT. HE HELD THAT MOST OF THE PRODUCTS MANUFACTURED IN UAE ARE MANUFACTURED WITHOUT TECHNICAL SUPPORT FROM INDIA. HE ACCORDINGLY, REDUCED THE RATE OF ROYALTY TO 2% AS AGAINST 3% CHARGED BY THE TPO AND ACCORDINGLY RESTRICTED THE ARM S LENGTH PRICE AT RS.22.58 LAKHS. 81. SO FAR AS DABUR NEPAL PVT. LTD., NEPAL IS CONCERNED, THE CIT(A) OBSERVED THAT RATE OF 3% IS MENTIONED IN THE AMENDED AGREEME NT AND THE ASSESSEE COULD NOT MEET ITS OBLIGATION TO BEAR ENTIRE MARKETING EXPENSES AND THEREFORE, DABUR NEPAL PVT. LTD, NEPAL DID NOT PAY ANY ROYALTY. ACCORDINGLY, THE LD. CIT(A) APPLIED THE SAME RATE OF ROYALTY OF 2% AS IN CASE OF DABUR INTERNATIONAL LTD , UAE AND RESTRICTED THE ARM S LENGTH PRICE FROM DABUR NEPAL PVT. LTD. AT RS.42.96 LAKHS. 81 .1 . SO FAR AS ASIAN CONSUMER CARE PVT. LTD., BANGLADESH IS CONCERNED, THE LD. CIT(A) OBSERVED THAT NO EVIDENCE HAS BEEN FURNISHED BY THE ASSESSEE TO DEMONSTRATE THAT NO TECHNOLOGY WAS PROVIDED TO ASIAN CONSUMER CARE PVT. LTD.; AND THE ASSOCIATED ENTERPRISES HAVE CONTINUED TO USE THE BRAND NAME OF DABUR. ACCORDINGLY, HE APPLIED THE SAME RATE OF ROYALTY OF 2% AS APPLIED IN CASE OF DABUR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 57 NEPAL PVT. LTD. AND DABUR I NTERNATIONAL LTD, UAE AND RESTRICTED THE ARM S LENGTH PRICE FROM ASIAN CONSUMER CARE PVT. LTD. AT RS.23.90 LAKHS. 81 .2 . IT IS THE SUBMISSION OF THE LD. COUNSEL THAT THE ORDER OF CIT(A) RESTRICTING THE ROYALTY CHARGED AT THE RATE OF 2% IS NOT SUSTAINABLE S INCE NOTIONAL INCOME CANNOT BE COMPUTED UNDER SECTION 92 OF THE IT ACT. IT IS HIS SUBMISSION THAT SO FAR AS AGREEMENT WITH DABUR NEPAL PVT. LTD., NEPAL I S CONCERNED, THE ASSESSEE IS HAVING 97.5% OF SHAREHOLDING IN DABUR NEPAL PVT. LTD., NEPAL DIRECTLY/INDI RECTLY AND, THUS, IT COULD NOT HAVE RECEIVE D ANY ROYALTY FROM ITSELF. IT IS HIS SUBMISSION THAT THE MARKETING AGREEMENT DATED 05.11.1992 WHICH WAS VALID FOR A PERIOD OF TEN YEARS HAD EXPIRED AND THE NEPAL GOVERNMENT HAD NOT RENEWED THE SAID AGREEMENT LATE R ON. THUS, IN THE ABSENCE OF ANY LEGALLY ENFORCEABLE AGREEMENT NO ROYALTY WAS PAYABLE BY DABUR NEPAL PVT. LTD., NEPAL TO THE ASSESSEE. IT IS ALSO HIS SUBMISSION THAT SINCE THE ASSESSEE HAD FAILED TO DISCHARGE ITS OBLIGATION TO BEAR THE MARKETING COST S W HICH INCLUDED THE ADVERTISEMENT AND REMUNERATION TO SALES PERSONNEL, THE ASSESSEE DOES NOT HAVE ANY RIGHT TO CHARGE ANY ROYALTY FROM DABUR NEPAL PVT. LTD. IT IS ALSO HIS SUBMISSION THAT THE ASSESSEE ALONG WITH DABUR FOODS LTD, INDIA WAS PURCHASING 72% OF THE PRODUCTS MANUFACTURED BY M/S DABUR NEPAL PVT. LTD., AND, THEREFORE, NO ROYALTY COULD HAVE BEEN CHARGED BY THE ASSESSEE IN RESPECT OF THOSE GOODS WHICH WERE SOLD TO THE ASSESSEE AND ITS GROUP COMPANY. 81 .3 . SO FAR AS DABUR INTERNATIONAL LTD., UAE IS CONCERNED, IT IS THE SUBMISSION OF THE LD. COUNSEL THAT NO ROYALTY COULD BE CHARGED FROM DABUR INTERNATIONAL LTD., ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 58 UAE DURING THE YEAR , S INCE THE ASSESSEE IS HAVING 100% OWNERSHIP IN DABUR INTERNATIONAL, DIRECTLY/INDIRECTLY AND THUS, IT COULD NOT HAVE RECE IVED ANY ROYALTY FROM ITSELF. IT IS THE SUBMISSION OF THE LD. COUNSEL THAT THE AGREEMENT WHICH WAS ENTERED INTO BY THE ASSESSEE WITH M/S REDROCK LTD., ISLE OF MAN, UK ON 01.04.2003 FOR A PERIOD OF TWO YEARS HAD EXPIRED ON 31.03.2005. THE ASSESSEE IN THE Y EAR 2003 ITSELF HAD ACQUIRED M/S REDROCK LTD. AND THE SAID COMPANY BECAME 100% SUBSIDIARY OF THE ASSESSEE AND NAME WAS CHANGED TO DABUR INTERNATIONAL LTD. AND THE AGREEMENT WAS NOT RENEWED BY DABUR INTERNATIONAL IN THE YEAR 2005 AND THE SAME WAS DEFUNCT IN THE FINANCIAL YEAR 2006 - 07 AND, THEREFORE, IN THE ABSENCE OF ANY CONTRACTUAL AGREEMENT, THE ASSESSEE WAS NOT ELIGIBLE TO RECEIVE ANY ROYALTY FROM DABUR DUBAI. FURTHER, THE PRODUCTS MANUFACTURED BY DABUR DUBAI WERE TOTALLY DIFFERENT FROM THE PRODUCTS MA NUFACTURED IN INDIA BY THE ASSESSEE. IN ORDER TO PENETRATE UAE MARKET, DABUR INTERNATIONAL HAD MADE ALL THE EFFORTS FOR THE ESTABLISHMENT OF 'DABUR' NAME IN THE UAE WHICH WAS VERY LITTLE KNOWN IN THAT GEOGRAPHICAL AREA AND IT HAS INCURRED LOT OF EXPENSES O N ADVERTISEMENT, MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, MANUFACTURE AND FINANCE. THE ASSESSEE HAD NEITHER MADE ANY EFFORTS IN ESTABLISHING THE TRADE NAME IN UAE NOR HAD MADE ANY CONTRIBUTION TO DABUR INTERNATIONAL. FURTHER, DABUR INTER NATIONAL HAD NOT RENEWED THE ROYALTY AGREEMENT BECAUSE THE ASSESSEE WAS NOT WILLING TO UNDERTAKE ANY RISK/OBLIGATION/RESPONSIBILITY. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 59 8 1 .4 . SO FAR AS ASIAN CONSUMER C ARE PVT. LTD., BANGLADESH IS CONCERNED, IT IS HIS SUBMISSION THAT THE ASSESSEE WAS HAVIN G 100% OWNERSHIP IN ACCPL, DIRECTLY/INDIRECTLY AND THUS, IT COULD NOT HAVE RECEIVED ANY ROYALTY FROM ITSELF. THE AGREEMENT WITH ACCPL ENTERED ON 01.12.2003 WHICH WAS FOR A PERIOD OF TWO YEARS BECAME DEFUNCT IN DECEMBER, 2005 A S THE SAME WAS NOT RENEWED THE REAFTER. THEREFORE, IN THE ABSENCE OF ANY CONTRACTUAL AGREEMENT, THE ASSESSEE WAS NOT ELIGIBLE TO RECEIVE ANY ROYALTY FROM ACCPL. IT IS HIS SUBMISSION THAT P RODUCTS MANUFACTURED BY ACCPL USING TECHNICAL KNOWHOW OF THE ASSESSEE DID NOT MEET THE REQUIREMENTS OF CUSTOMERS IN BANGLADESH. ACCORDINGLY, AFTER 2006, ACCPL ENTERED INTO AN AGREEMENT WITH DABUR DUBAI TO PROVIDE TECHNICAL KNOW. IT IS ALSO HIS SUBMISSION THAT MERELY ON THE BASIS OF TRADE NAME OF DABUR , THE PRODUCTS MANUFACTURED BY ACCPL WERE NOT ACCE PTED IN BANGLADESH AND THAT IT HAD TO MANUFACTURE THE PRODUCTS AS PER THE LOCAL NEEDS AND TASTE OF THE PUBLIC RESIDING IN THE PUBLIC AREA. IT IS ALSO HIS SUBMISSION THAT IN ORDER TO PENETRATE THE BANGLADESH MARKET, ACCPL ADOPTED ITS OWN MARKET STRATEGY AN D HAD MADE ALL THE EFFORTS FOR THE ESTABLISHMENT OF DABUR NAME IN THE BANGLADESH WHICH WAS VERY LITTLE KNOWN IN THAT GEOGRAPHICAL AREA AND INCURRED LOT OF EXP ENSES ON ADVERTISEMENT, MARKET ESTABLISHMENT AND HAD BORNE ALL THE RISKS OF MARKET, MANUFACTURE AND FINANCE. ACCORDINGLY, T HE ASSESSEE HAD NEITHER MADE ANY EFFORTS IN ESTABLISHING THE TRADE NAME IN BANGLADESH NOR HAD MADE ANY CONTRIBUTION TOWARDS THE SAME. 81 .5 IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT ALTHOUGH THE TRIBUNAL IN THE ASSESSMENT YEAR 2006 - 07 HAS DELETED THE ROYALTY FROM DABUR NEPAL, ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 60 HOWEVER, HAD RESTRICTED SUCH ROYALTY FROM DABUR DUBAI TO 0.75%. ACCORDING TO HIM, SUCH ROYALTY AT 0.75% FROM DABUR, DUBAI IS INCORRECT SINCE NONE OF THE PRESCRIBED METHOD TO CALCULATE THE ALP OF ROYALTY HAS BEEN APPLIED. THEREFORE, NO ADDITION ON ACCOUNT OF ROYALTY FROM DABUR DUBAI AND ASIAN CONSUMER CARE, BANGLADESH CAN BE MADE . 81 .6 WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEE S OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, I.E., 2006 - 07. WE FIND, THE TRIBUNAL VIDE ITA NO.3257/DEL/2003 AND ITA NO.3492/DEL/2013, ORDER DATED 12.04.2017 HAS THOROUGHLY DISCUSSED THE ISSUE AND HAS DELETED THE ROYALTY RECEIVABLE BY THE ASSESSEE FROM DABUR NEPAL AND HAD RESTRICTED THE ROYALTY RECEIVABLE FROM DABUR INTERNATIONAL LTD., UAE AT 0.75% BY OBSERVING AS UNDER: - 33. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS A N ADMITTED FACT THAT THE ASSESSEE HAD NOT SHOWN ANY RECEIPT ON ACCOUNT OF ROYALTY FROM M/S DABUR INTERNATIONAL LTD., UAE AND HAD SHOWN ROYALTY OF RS.5.34 LACS FROM M/S DABUR NEPAL PVT. LTD. ON THE FOB SALES OF RS.7526.84 LACS AND RS.3319.50 LACS RESPECTIVE LY. THE TPO WORKED OUT THE ROYALTY @ 4% OF THE SALES IN THE CASE OF DABUR INTERNATIONAL LTD. AND @ 7.5% OF THE SALE IN THE CASE OF DABUR NEPAL PVT. LTD. THE LD. CIT(A) REDUCED THE ROYALTY @ 2% OF FOB SALES. IN THE INSTANT CASE, IT IS NOTICED THAT THE ASSES SEE EARLIER ENTERED INTO AN AGREEMENT WITH M/S REDROCK LTD. WHO WAS REGISTERED IN THE CHANNEL ISLAND, U.K WITH ITS PRINCIPAL OFFICE AT 54 - 58, ALTHOL STREET, DOUGHLAS, ISLE OF MAN, U.K. AND HAD BEEN MANUFACTURING AND PRODUCING VARIOUS PRODUCTS FOR SALE AFTE R UTILIZING TECHNICAL INFORMATION PROVIDED TO IT BY THE ASSESSEE IN TERMS OF AGREEMENTS EXECUTED FROM TIME TO TIME AND LASTLY ON 2ND DAY OF APRIL 2001 WHICH HAD EXPIRED ON 31ST DAY OF MARCH 2003. THEREAFTER, ANOTHER AGREEMENT WAS ENTERED ON 1ST APRIL 2003 WHICH IS PLACED AT PAGE NOS. 115 TO 121 OF THE ASSESSEE S PAPER BOOK. THE SAID AGREEMENT WAS EFFECTIVE UPTO 31ST MARCH 2005 AND WAS NOT RENEWED THEREAFTER. THE ASSESSEE ENTERED INTO AGREEMENT WITH M/S RODROCK LTD., UAE FOR PROVIDING TECHNICAL INFORMATION A ND R&D SUPPORT, KNOWHOW, INFORMATION, OPERATIONAL IMPROVEMENTS AND SKILLS IN THE AREAS OF COST MANAGEMENT, MANUFACTURING, PRODUCTION ETC. IN THE TERRITORY OF ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 61 UAE VIDE AGREEMENT DATED 1ST APRIL 2003 AND AS PER THE SAID AGREEMENT, THE PRODUCTS WERE MANUFACTU RED WITH THE R&D SUPPORT. HOWEVER, LATER ON THE ASSESSEE ACQUIRED THE CONTROLLING STAKE OF M/S REDROCK LTD. AND NAME CHANGED TO M/S DABUR INTERNATIONAL LTD. UAE. IN THE PRESENT CASE, ON COMPLETION OF THE AGREEMENT, THE SAID COMPANY INFORMED THE ASSESSEE VI DE LETTER DATED 07.04.2005 THAT HEAVY ADVERTISEMENT EXPENDITURE WERE TO BE INCURRED BY THEM AND THE ASSESSEE HAD NOT AGREED TO REIMBURSE SUCH EXPENDITURE INCURRED, THEREFORE, THE ROYALTY PAYMENT AGREEMENT CEASED TO EXIST W.E.F. FINANCIAL YEAR 2005 - 06. FOR THE SAID PROPOSITION, BOTH THE PARTIES AGREED (COPY OF THE SAID LETTER IS PLACED AT PAGE NO. 122 OF THE ASSESSEE S PAPER BOOK). SO, THERE WAS NO AGREEMENT FOR THE YEAR UNDER CONSIDERATION TO MAKE THE PAYMENT OF ROYALTY AS AGREED IN BETWEEN M/S REDROCK LTD. UAE AND THE ASSESSEE. IN THE INSTANT CASE, WHEN THE AGREEMENT WAS IN EXISTENCE, THE ASSESSEE PROVIDED TECHNICAL KNOW - HOW AND R&D SUPPORT IN RESPECT OF THE PRODUCTS WHICH WERE MAINLY AURVEDIC MEDICINES AND HERBAL PRODUCTS. BUT LATER ON, THE ASSESSEE ENTERE D INTO BUSINESS OF FMCG PRODUCTS AND ACQUIRED M/S REDROCK LTD., UAE AND ALSO CHANGED ITS NAME TO M/S DABUR INTERNATIONAL LTD., UAE. IN THE EARLIER YEAR, M/S DABUR INTERNATIONAL LTD., UAE FORMERLY KNOWN AS M/S REDROCK LTD. HAD PAID THE ROYALTY @ 1% BECAUSE NO PRODUCT HAD BEEN MANUFACTURED WITH THE HELP AND SUPPORT OF THE ASSESSEE AND THE AGREEMENT WAS ONLY UPTO 31ST MARCH 2005, THE PAYMENT OF ROYALTY WAS PAID IN ACCORDANCE WITH THE AGREEMENT WHICH WAS IN EXISTENCE WITH THE SAID PRECEDING YEAR. HOWEVER, FOR T HE YEAR UNDER CONSIDERATION, THERE WAS NO SUCH AGREEMENT AND THE PRODUCT MANUFACTURED BY M/S DABUR INTERNATIONAL LTD., UAE WERE TOTALLY DIFFERENT FROM THE PRODUCTS MANUFACTURED IN INDIA AND EVEN THE RAW MATERIAL USED IN THOSE PRODUCTS MANUFACTURED IN UAE W AS DIFFERENT FROM THE RAW MATERIAL USED IN INDIA. IN THE PRESENT CASE, NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE PRODUCTS MANUFACTURED IN UAE WERE WITH THE HELP OF TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE. ON PERUSAL OF THE PROVISIONS CONTAINED IN SECTION 92 OF THE ACT IT WOULD BE CLEAR THAT THE INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM S LENGTH PRICE WHICH SHALL BE DETERMINED BY ANY OF THE 5 METHODS PRESCRIBED IN SUB - SECTION (1) OF SEC TION 92 OF THE ACT WHICH ARE FOLLOWING: (A) COMPARABLE AND CONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; OR SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. 3 4 . IT IS ALSO NOT IN DISPUTE THAT FOR DETERMINATION OF THE ARM S LENGTH PRICE, THE PROVISIONS CONTAINED IN SUB - SECTION (2) OF SECTION 92C OF THE ACT SHALL BE APPLIED. THE VARIOUS METHODS HAS BEEN PRESCRIBED UNDER RULE 10B OF THE INCOME TAX RULES, 1962 T O DETERMINE THE ARM S LENGTH PRICE U/S 92C OF THE ACT AND RULE 10C OF INCOME TAX RULES, 1962 FURTHER STATES THAT IN SELECTING ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 62 THE MOST APPROPRIATE METHOD, FOLLOWING FACTORS SHALL BE TAKEN INTO CONSIDERATION: (A) THE SPECIFIC CHARACTERISTIC OF THE PROPER TY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTIONS. (B) THE FUNCTION PERFORMED, TAKING INTO ACCOUNT THE ASSETS EMPLOYED AND THE RISK ASSUMPTION BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS. (C) THE CONTRACTUAL TERMS OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSES, RISK AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS. (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE G EOGRAPHICAL LOCATION AND SIZE OF THE MARKET, THE LODGE AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKET, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 3 5 . FROM THE CO - JOINT READING AS CONTEMPLATED U/S 92C OF THE ACT READ WITH RULES 10B AND 10C OF THE INCOME TAX RULES, 1962, IT WOULD BE CLEAR THAT FOR THE PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENTS, THE ARM S LENGTH PRICE HAS TO BE DETERMINED ON FINDING OUT SIMILAR TYPE OF PAYMENTS RECEIVED BY SIMILARLY SITUATED AND COMPARABLE INDEPENDENT ENTITIES. BUT IN THE PRESENT CASE, NO COMPARABLE CASE HAS BEEN BROUGHT ON RECORD BY THE TPO OR THE LD. CIT(A) WHILE MAKING ADJUSTMENT ON ACCOUNT OF ROYALTY. MOREOVER, NO AGREEMENT WAS IN F ORCE TO CHARGE ROYALTY FROM THE AES AND THAT THE FMCG PRODUCTS ARE NEW TO THE ASSESSEE WHO IS KNOWN FOR ITS HERBAL AND AURVEDIC PRODUCTS. IN THE INSTANT CASE, IT IS NOT BROUGHT ON RECORD THAT THE ASSESSEE HAD INCURRED ANY EXPENSES FOR MARKETING THE PRODUCT S MANUFACTURED BY M/S DABUR INTERNATIONAL LTD. (AE) IN UAE AND THAT THE ASSESSEE EITHER MADE ANY EFFORTS OR CONTRIBUTED ANY MONEY FOR THE ESTABLISHMENT OF ITS NAME IN GEOGRAPHICAL AREA OF UAE AND THE PRODUCTS MANUFACTURED BY THE UAE WERE NOT DIFFERENT FROM THE PRODUCTS MANUFACTURED IN INDIA BY THE ASSESSEE. MOREOVER, THE CLAIM OF THE ASSESSEE THAT THE RAW MATERIAL AND MEDIUM USED IN THE MANUFACTURING AT UAE WAS TOTALLY DIFFERENT FROM THE RAW MATERIAL AND MEDIUM USED IN INDIA HAS NOT BEEN REBUTTED. THE PRODU CTS MANUFACTURED BY THE ASSESSEE WERE AS PER THE LOCAL NEEDS AND TASTE OF THE PUBLIC RESIDING IN UAE. FURTHERMORE, THE LD. CIT(A) HIMSELF ADMITTED THAT M/S DABUR INTERNATIONAL LTD., UAE HAD NOT MANUFACTURED ANY PRODUCTS WITH THE TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE BUT HAD MANUFACTURED ON ITS OWN, IN ACCORDANCE WITH THE REQUIREMENT AND LOCAL TASTE OF THE LOCAL PUBLIC, HOWEVER, HE DIRECTED THE AO TO CALCULATE THE ROYALTY @ 2% BUT WITHOUT ANY BASIS. IN THE PRESENT CASE, IT IS AN ADMITTED FACT TH AT THE TPO/AO HAD NOT APPLIED ANY TRANSFER PRICING METHOD AS PRESCRIBED UNDER THE ACT AND SIMPLY MADE THE ADJUSTMENT IN RESPECT OF ROYALTY BASED ON THE EARLIER AGREEMENTS WHICH HAD ALREADY EXPIRED AND THERE WAS NO NEW AGREEMENT BETWEEN THE ASSESSEE AND ITS AES. THE EARLIER AGREEMENT WAS ENTERED BY M/S REDROCK LTD. ON 1ST APRIL 2003, AT THAT POINT OF TIME, THE SAID COMPANY WAS MANUFACTURING THE PRODUCTS WITH THE TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE IN RESPECT OF AURVEDIC/HERBAL PRODUCTS. BUT LA TER ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 63 ON, WHEN THE SAID COMPANY FOUND THAT THE AURVEDIC PRODUCTS WERE NOT ACCEPTABLE IN UAE AS IN THE SAID COUNTRY UNANI SYSTEM OF MEDICINES WAS ACCEPTABLE AS PER THE LOCAL TREND AND CUSTOM. THE SAID AE IN UAE HAD ABANDONED THE MANUFACTURING OF THE AYURVEDIC /HERBAL PRODUCTS AND THEN ENTERED INTO THE BUSINESS OF FMCG PRODUCTS WHICH WERE EARLIER MANUFACTURED BY THE REDROCK LTD. WITH ITS OWN TECHNOLOGY AS PER THE REQUIREMENT AND TASTE OF A LOCAL PUBLIC OF UAE BY KEEPING INTO CONSIDERATION THE GEOGRAPHICAL AND MA RKET SITUATION. THE SAID COMPANY WAS ACQUIRED BY THE ASSESSEE AND NOW FOR THE MANUFACTURING OF ITS PRODUCTS, THE ASSESSEE DID NOT PROVIDE ANY MARKET STRATEGIES, NOTHING IS BROUGHT ON RECORD THAT THE ASSESSEE HAD BORNE THE EXPENSES, PROVIDED THE FUNDS OR CO MPENSATED FOR MARKET FAILURE AND THE QUALITY ETC. IT, THEREFORE, APPEARS THAT THE ASSESSEE HAD NOT MADE ANY EFFORT FOR ESTABLISHING THE TRADE NAME NOR HAD MADE ANY OTHER CONTRIBUTION. THEREFORE, THE ASSESSEE DID NOT RECEIVE ANY ROYALTY FOR THE YEAR UNDER C ONSIDERATION AND IN THE PRECEDING YEAR, THE ROYALTY @ 1% WAS PAID TO THE ASSESSEE FOR THE REASON THAT AYURVEDIC PRODUCTS WERE MADE WITH THE TECHNICAL KNOW - HOW AND R&D SUPPORT OF THE ASSESSEE. HOWEVER, FOR THE YEAR UNDER CONSIDERATION, THE FMCG PRODUCTS WER E MANUFACTURED WHICH WERE DIFFERENT FROM THE INDIAN PRODUCTS HAVING DIFFERENT RAW MATERIAL AND MEDIUM USED IN THE MANUFACTURE. AT THE SAME TIME, THE BRAND NAME OF THE ASSESSEE WAS USED BY THE AE AND IN THE EARLIER YEARS THE ASSESSEE PROVIDED THE R&D SUPPOR T, KNOW - HOW TECHNOLOGIES ETC. WHICH HELPED THE AE FOR THE YEAR UNDER CONSIDERATION ALSO TO SOME EXTENT. IT IS ALSO NOTICED THAT THE ASSESSEE RECEIVED THE ROYALTY @ 1% IN THE PRECEDING YEAR. THE TPO ALSO WHILE WORKING OUT THE ROYALTY RATE FOR THE YEAR UNDER CONSIDERATION WAS OF THE VIEW THAT THE ROYALTY @ 1% WAS CHARGEABLE ON THE PRODUCTS MANUFACTURED WITHOUT THE AID AND SUPPORT OF ASSESSEE COMPANY BUT MARKETED BY USING DABUR NAME, HOWEVER, NO BASIS HAS BEEN GIVEN FOR THE SAME. IN OUR OPINION THE ESTIMATE MADE BY THE TPO FOR THE RATE OF ROYALTY WAS HIGHLY EXCESSIVE. WE, THEREFORE, AFTER CONSIDERING THE TOTALITY OF THE FACTS ARE OF THE VIEW THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN DIRECTING THE AO TO CHARGE THE ROYALTY FROM DABUR INTERNATIONAL UAE @ 2%. PART ICULARLY WHEN, THE ASSESSEE WAS NOT USING THE TECHNICAL KNOW - HOW OR R&D SUPPORT FROM THE ASSESSEE, IN OUR OPINION IT WILL BE FAIR AND REASONABLE TO CHARGE THE ROYALTY @ 0.75% BY CONSIDERING THIS FACT THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD IN CURRED HUGE EXPENSES ON MARKETING, ADVERTISEMENT & BRAND BUILDING ETC. AND THAT IN THE PRECEDING YEAR THE ROYALTY WAS ALTHOUGH CHARGED @ 1% ON THE PRODUCTS MANUFACTURED WITHOUT R&D SUPPORT AND TECHNICAL KNOW - HOW FROM THE ASSESSEE BUT THE AFORESAID EXPENSES WERE COMPARABILITY LESS. 3 6 . AS REGARDS TO THE ROYALTY CHARGED FROM M/S DABUR NEPAL LTD. IS CONCERNED, IT IS NOT IN DISPUTE THAT EARLIER THE ROYALTY RECEIVED WAS @ 7.5% AS THE ASSESSEE WAS BEARING THE COST OF MARKETING EXPENSES BUT LATER ON M/S DABUR NE PAL PVT. LTD. INCURRED LOT OF EXPENDITURE IN ORDER TO PENETRATE THE MARKET AND THE AGREEMENT WAS AMENDED W.E.F. 1ST APRIL, 2004 VIDE WHICH THE ROYALTY HAD BEEN REDUCED FROM 7.5% TO 3% (COPY OF THE SAME IS PLACED AT PAGE NO. 113 OF ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 64 THE ASSESSEE S PAPER BOOK ). IN THE PRECEDING YEAR, ON THE BASIS OF THE SAID AMENDED AGREEMENT, THE ROYALTY WAS CHARGED @ 3%. THEREFORE, THE TPO WAS NOT JUSTIFIED IN WORKING OUT THE ROYALTY @ 7.5% AS PROVIDED IN THE ORIGINAL AGREEMENT DATED 05.11.1992 (COPY OF WHICH IS PLACED AT PA GE NOS. 111 & 112 OF THE ASSESSEE S PAPER BOOK). FOR THE YEAR UNDER CONSIDERATION, M/S DABUR NEPAL PVT. LTD. HAS NOT PAID ANY ROYALTY TO THE ASSESSEE FOR THE REASONS THAT IT HAD TO INCUR THE EXPENSES TO PENETRATE THE MARKET. IN THIS REGARD, VIDE LETTER WRI TTEN IN MAY 2005, IT WAS INFORMED TO THE ASSESSEE THAT NO ROYALTY WILL BE PAYABLE FROM FINANCIAL YEAR 2005 - 06. IT WAS ALSO CLAIMED THAT AS PER THE CLAUSE 7 OF THE ORIGINAL AGREEMENT DATED 05.11.1992, THE AGREEMENT SHALL BECOME EFFECTIVE ONLY AFTER THE APPR OVAL BY HMG NEPAL AND SHALL REMAIN VALID FOR A PERIOD OF 10 YEARS FROM THE SAID DATE, UNLESS RENEWED BY MUTUAL CONSENT IN WRITING AND WITH PRIOR APPROVAL OF HMG NEPAL. IN THE PRESENT CASE, IT IS NOT BROUGHT ON RECORD THAT THE ORIGINAL AGREEMENT DATED 05.11 .1992 VALID FOR 10 YEARS, WAS RENEWED FOR FURTHER PERIOD AND APPROVAL OF HMG NEPAL WAS TAKEN. IN THE PRESENT CASE, THE CONTENTION OF THE ASSESSEE THAT 80% OF THE PRODUCTS MANUFACTURED BY M/S DABUR NEPAL PVT. LTD. WERE PURCHASED BY THE ASSESSEE HAS NOT BEEN REBUTTED. IT IS ALSO NOT IN DISPUTE THAT THE ROYALTY WAS PAYABLE EARLIER ON THE SALES, THEREFORE, IT IS UNBELIEVABLE THAT THE ASSESSEE CHARGED THE ROYALTY ON THE PURCHASES MADE BY IT FROM M/S DABUR NEPAL PVT. LTD. TO INCREASE THE COST OF PURCHASES. EVEN I F IT IS PRESUMED THAT THE ROYALTY WAS TO BE CHARGED BY THE ASSESSEE THEN SAME AMOUNT WAS TO BE ADDED IN THE PURCHASES THUS THE IMPACT WILL BE REVENUE NEUTRAL I.E. ON THE ONE HAND, INCOME WILL BE INCREASED BY CREDITING THE ROYALTY AND ON THE OTHER HAND, THE COST OF PURCHASES WILL BE INCREASED BY THE SAME AMOUNT, SINCE THE SALE WAS MADE BY M/S DABUR NEPAL PVT. LTD. TO THE ASSESSEE. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THERE WAS NO AGREEMENT IN EXISTENCE BETWEEN THE ASSESSEE AND THE AE I.E. M/S DAB UR NEPAL PVT. LTD. AND NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE ASSESSEE INCURRED ANY EXPENDITURE WHICH BENEFITED M/S DABUR NEPAL PVT. LTD. IN ANY MANNER. THEREFORE, NO ROYALTY WAS PAYABLE TO THE ASSESSEE BY M/S DABUR NEPAL PVT. LTD. BY CONSID ERING THE TOTALITY OF THE FACTS AS DISCUSSED HERE IN ABOVE, WE ARE OF THE VIEW THAT THE ROYALTY @ 2% DIRECTED TO BE CHARGED BY THE LD. CIT(A) WAS NOT JUSTIFIED, THEREFORE, THE ADDITION MADE ON THE SAID BASIS IS DELETED. [ 81 .7 SINCE THE FACTS OF THE PRES ENT APPEAL ARE IDENTICAL TO THE FACTS DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE IN THE PRECEDING ASSESSMENT YEAR, THEREFORE, IN ABSENCE OF ANY DISTINGUISHABLE FEATURES BROUGHT BEFORE US BY EITHER SIDE, WE, RESPECTFULLY FOLLOWING THE SAME, HOLD THAT NO ROYALTY IS RECEIVABLE BY THE ASSESSEE FROM DABUR NEPAL AND, THEREFORE, THE ORDER OF THE CIT(A) SUSTAINING THE ADDITION ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 65 ON ACCOUNT OF ROYALTY RECEIVABLE FROM DABUR NEPAL (P) LTD., AT 2% IS DIRECTED TO BE DELETED. SO FAR AS ROYALTY RECEIVABLE FROM DABUR IN TERNATIONAL, UAE IS CONCERNED, THE SAME IS DIRECTED TO BE RESTRICTED TO 0.75% AS HELD BY THE TRIBUNAL. 81 .8 . SO FAR AS THE ARGUMENT OF THE LD. COUNSEL THAT THE ORDER OF THE TRIBUNAL CANNOT BE ACCEPTED BECAUSE THE SAME IS NOT BASED ON CORRECT APPRECIATION OF FACTS IS CONCERNED, WE DO NOT FIND ANY MERIT IN TH E ARGUMENT OF THE LD. COUNSEL SINCE AS FAIRLY CONCEDED BY THE LD. COUNSEL AT THE TIME OF HEARING BEFORE US, THE HON BLE HIGH COURT HAS ALREADY DISMISSED THE APPEAL FILED BY THE ASSESSEE ON THIS VERY ISSU E. 81 .9 SO FAR AS THE ROYALTY FROM ASIAN CONSUMER CARE PVT. LTD., BANDLADESH IS CONCERNED, WE FIND, THE FACTS AND SALIENT FEATURES OF THE AGREEMENT ARE IDENTICAL TO THAT OF THE FACTS AND AGREEMENT WITH DABUR INTERNATIONAL LTD., UAE. SINCE THE TRIBUNAL HAS ALREADY RESTRICTED SUCH ROYALTY TO 0.75% IN CASE OF DABUR INTERNATIONAL LTD., UAE, THEREFORE, RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR WHILE RESTRICTING SUCH ROYALTY TO 0.75% IN CASE OF DABUR INTERNATIONAL LTD., UAE , WE RESTRICT THE ROYALTY FROM ASIAN CONSUMER CARE PVT. LTD., BANGLADESH TO 0.75%. 81 .10 IN VIEW OF THE ABOVE DISCUSSIONS, THE GROUNDS RELATING TO THE ISSUE OF ROYALTY BY THE REVENUE ARE DISMISSE D AND THE GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 66 82. GROUND OF APPEAL NO.3 BY THE REVENUE RELATES TO THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS.96,67,520/ - ON ACCOUNT OF INTEREST ON LOAN ADVANCED TO DABUR INTERNATIONAL, UAE, AN AE. 82.1 FACTS OF THE CASE, IN BRIEF, ARE THAT DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TPO NOTED THAT THE ASSE SSEE HAD GIVEN LOANS TO ITS AE TO THE TUNE OF RS.27 CRORES AND HAS CHARGED INTEREST @ 6.75% ON RS.7 CRORES AND INTEREST @7% ON RS.20 CR ORES. FURTHER, AN AMOUNT OF RS.17 CRORES HAS BEEN REPAID AND AN AMOUNT OF RS.10 CRORES WAS OUTSTANDING. HE NOTED THAT THE ASSESSEE IN THE TP STUDY REPORT HAS APPLIED INTERNAL CUP METHOD WHERE THE INTEREST RATE CHARGED BY BANK OF BARODA FOR COMMERCIAL PAP ERS WAS 5.675%. THE TPO DISAGREED WITH THE APPROACH OF THE ASSESSEE AND ISSUED A SHOW CAUSE NOTICE ASKING THE ASSESSEE AS TO WHY RATE OF 14% SHOULD NOT BE APPLIED INSTEAD OF 7% AND 6.75%. T HE ASSESSEE OBJECTED TO THE TPO S PROPOSITION AND MADE ELABORATE AR GU MENT. 82.2 IT WAS SUBMITTED THAT IT HAS ADVANCED SHORT - TERM LOAN (LESS THAN A YEAR) TO ITS FOREIGN AE AND THE INTER E ST CHARGED BY THE ASSESSEE IS MORE THA N WHAT IT TOOK FROM THE BANK AND, T HEREFORE, THE INTEREST CHARGED FROM THE AE WAS CONSIDERED TO M EET THE ARM S LENGTH PRINCIPLE. IT WAS ARGUED THAT IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS T AKEN LOAN FROM THE BANK AND GAVE TO ITS AE AT NIL RATE OF INTEREST OR LOWER RATE OF INTEREST THAN WHAT IT WAS PAYING TO THE BANK. THE ACTION OF TH E ASSESSEE IN THE INSTANT CASE SUITS TO TOTAL ARM S LENGTH BEHAVIOR. SO FAR AS THE FINANCIAL HEALTH OF THE AE IS CONCERNED, IT WAS SUBMITTED THAT IT IS ONLY THE PARENT ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 67 COMPANY WHICH KNOWS IT. IT WAS SUBMITTED THAT THE LOAN EXTENDED TO AE WAS NOT FOR VERY LONG PERIOD OF TIME AND WAS FOR A SHORT PERIOD OF ONE YEAR OR LESS. THEREFORE, THERE WAS NO BIG RISK IN OFFERING THE LOAN TO THE AE AT A RATE WHICH IS HIGHER THAN PREVAILING BANK RATE. 82.3 HOWEVER, THE TPO WAS NOT SATISFIED WITH THE ARGUMENTS ADVANCE D BY THE ASSESSEE AND MADE UPWARD ADJUSTMENT OF RS.96,67,520/ - BY ADOPTING THE RATE OF 14% TO BE REASONABLE FOR BENCHMARKING THE ARM S LENGTH RATE. 82.4 IN APPEAL, THE LD.CIT(A), RELYING ON VARIOUS DECISIONS, DELETED THE ADDITION MADE BY THE AO/TPO BY OBS ERVING AS UNDER: - 9.0 FINDINGS 9.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT. THE FACTS ARE THAT APPELLANT HAS GIVEN LOAN TO DABUR INTERNATIONAL LTD, UAE AND CHARGED AN INTEREST RATE OF 7% AND 6.75%. THE LOAN/INTEREST TRANSACTION WAS BENCHMARKED BY THE APPELLANT IN THE TP STUDY OF AY 2007 - 08 BY APPLICATION OF INTERNAL GUP WHERE RATE CHARGED BY BANK OF BARODA FOR COMMERCIAL PAPERS WAS 5.675%. HOWEVER, THE LD TPO DID NOT AGREE WITH THE APPROACH OF THE APPELLANT AND APPLIED THE RATE OF 14 %. AS PER THE TPO, THE BENCHMARKING DONE THE BY APPELLANT IS FAULTY AS THE APPELLANT HIMSELF TAKEN ITS AS TESTED PARTY IN THE TP REPORT. ONCE THE APPELLANT BECOMES THE TESTED PARTY, THEN IT BECOMES IMPERATIVE TO SEE WHAT THE TESTED PARTY WOULD HAVE EARNED IN THE SIMILAR SITUATION I.E. IN THE INDIAN MARKET. THEN THE LD TPO PROCEEDED TO ARRIVE THE LIBOR RATES AS PER DETAILS MENTIONED IN THE TP ORDER AT PAGE 4 AND 5 OF THE TP ORDER AY 2007 - 08. HOWEVER, TPO HAS NOT DONE COMPARABILITY ANALYSIS OF LOAN TRANSACTIO N OF THE APPELLANT. AS PER RULE 10(B)(2), THE COMPARABILITY OF CONTROLLED TRANSACTION WITH UNCONTROLLED TRANSACTION REQUIRES COMPARISON ON FOLLOWING FACTORS: FOR THE PURPOSES OF SUB - RULE (1), THE COMPARABILITY OF [AN INTERNATIONAL TRANSACTION OR A SPECIF IED DOMESTIC TRANSACTION] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 68 (B) THE FUNCTIONS PERFORMED, TAKIN G INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION A ND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL 9.2 THUS, FOR LOAN TRANSACTION WHAT IS CR UCIAL IS WHETHER TERMS AND CONDITIONS OF LOAN OFFERED IN A CONTROLLED TRANSACTION CAN BE COMPARED WITH UNCONTROLLED SITUATION. WHAT IT MEANS HERE IS THAT WHETHER LOAN ADVANCED TO FOREIGN SUBSIDIARY WAS WITH BORROWED MONEY, OR ADVANCED FROM INTERNAL SOURCE S IS TOTALLY IRRELEVANT FOR THE DETERMINATION OF ALP U/S 92(1) OF THE IT ACT. HOLDING THIS POSITION, IN CASE OF VVF V DCIT ITA NO. 673/MUM/06, THE HON BLE MUMBAI ITAT HELD AS FOLLOWS: ON A CONCEPTUAL NOTE, THE PURPOSE OF MAKING ARMS LENGTH ADJUSTMENTS, I N PRICES AT WHICH WHICH TRANSACTIONS HAVE BEEN ENTERED INTO WITH ASSOCIATED ENTERPRISES IS TO NULLIFY THE IMPACT OF INTERRELATIONSHIP BETWEEN THE ASSOCIATED ENTERPRISES. UNLESS THE BASIS OF WHICH SUCH HYPOTHETICAL PRICES ARE COMPUTED IS SUCH THAT COSTS ARE TO BE TAKEN INTO ACCOUNT, THESE HYPOTHETICAL PRICES HAVE NOTHING TO DO WITH THE ACTUAL COSTS. CUP METHOD SEEKS TO ASCERTAIN ARMS LENGTH PRICE BY TAKING INTO ACCOUNT PRICES AT WHICH SIMILAR TRANSACTIONS HAVE BEEN ENTERED INTO BY THE ASSESSEE WITH UNRELATED PARTIES (INTERNAL CUP) OR AT WHICH OTHER UNRELATED PARTIES HAVE ENTERED INTO SIMILAR TRANSACTIONS INTER SE (EXTERNAL CUP). NONE OF THESE INPUTS HAVE ANYTHING TO DO WITH THE COSTS: THEY ONLY REFER TO PREVAILING PRICES IN SIMILAR UNRELATED TRANSACTIONS INST EAD OF ADOPTING THE PRICES AT WHICH THE TRANSACTIONS HAVE BEEN ACTUALLY ENTERED IN SUCH CASES, THE HYPOTHETICAL ARMS LENGTH PRICES, AT WHICH THESE ASSOCIATED ENTERPRISES, BUT FOR THEIR RELATIONSHIP, WOULD HAVE ENTERED INTO THE SAME TRANSACTION, ARE TAKEN I NTO ACCOUNT. WHETHER THE FUNDS ARE ADVANCED OUT OF INTEREST BEARING FUNDS OR OUT OF FUNDS ON 14% INTEREST IS BEING PAID, OR WHETHER SUCH INTEREST FREE ADVANCES ARE COMMERCIALLY EXPEDIENT FOR THE ASSESSEE OR NOT, IS WHOLLY IRRELEVANT IN THIS CONTEXT. THE TR ANSACTION IN THE PRESENT CASE IS OF LENDING MONEY, IN FOREIGN CURRENCIES, TO ITS FOREIGN SUBSIDIARIES. THE COMPARABLE TRANSACTION THEREFORE IS OF FOREIGN CURRENCY LENDING BY UNRELATED PARTIES. 9.3 NOW, WHAT IS REQUIRED TO BE SEEN IS WHETHER THE CONTROLLE D TRANSACTION CAN BE COMPARED WITH UNCONTROLLED ONES. AS THE APPELLANT, THE LD - TPO FAILED TO APPLY THE TEST OF RULE 10B(2) WHILE RECOMMENDING AN ALP OF 14% ON INTEREST. AT ONCE PLACE, THE TPO ARRIVED INTEREST RATE BY INVESTMENT THEORY IN BONDS AND ON OTHER , HE TRIED TO USED LIBOR. HOWEVER, THE MANNER IN WHICH THE INTEREST ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 69 RATES WERE ARRIVED BOTH UNDER INVESTMENT THEORY OR LIBOR THEORY CANNOT BE SAID TO MEET THE STANDARDS OF TP COMPARABILITY. 9.4 IN THE COURSE OF SUBMISSION, THE APPELLANT SUBMITTED THE PREV ALENT LIBOR RATES DURING THE FY 2006 - 07 AS FOLLOWS: 1 - MONTH 3 - MONTH 6 - MONTH 12 - MONTH LIBOR RATES - MARCH 2007 5.3195% 5.3479% 5.312% 5.2009% THE LIBOR RATES MENTIONED ABOVE AVERAGE OUTS TO 5,30%. THESE LIBOR RATES ARE USED FOR TRANSACTION IN INTERN ATIONAL TRADE. VERY RECENTLY, IN CASE OF COTTON NATURALS (I) PVT LTD (SUPRA), HON DELHI ITAT HELD AS FOLLOWS: 14. WE NOTE THAT CUP METHOD IS THE MOST APPROPRIATE METHOD IN ORDER TO ASCERTAIN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AS THAT OF TH E APPELLANT. WE AGREE WITH THE ASSESEE S CONTENTION THAT WHERE THE TRANSACTION WAS LENDING MONEY IN FOREIGN CURRENCY TO ITS FOREIGN SUBSIDIARIES THE COMPARABLE TRANSACTIONS, THEREFORE, WAS OF FOREIGN CURRENCY LENDED BY UNRELATED PARTIES. THE FINANCIAL POSI TION AND CREDIT RATING OF THE SUBSIDIARIES WILL BE BROADLY SAME AS THE HOLDING COMPANY. IN SUCH A SITUATION, DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR SHOULD BE TAKEN AS THE BENCHMARK RATE FOR THE INTERNATIONAL TRANSACTION 17. WE FURTHER NOTE THAT THE APPELLANT GAS ARRANGEMENT FOR LOAN FROM CITIBANK FOR LESS THAN 4%. HOWEVER, FOR LOAN PROVIDED TO ITS AES IT HAS CHARGED 4% PA INTEREST. HENCE, ADJUSTMENT SUGGESTED BY THE TPO IS NOT WARRANTED IN THE ABOVE RULING OF COTTON NATURALS (SUPRA) AND OTHER RULINGS AS RELIED UPON THE APPELLANT SUGGEST THAT TO BENCHMARK LOAN TRANSACTION IN CASE OF INTERNATIONAL TRADE, LIBOR IS BEST MEASURE TO COMPUTE THE ALP U/S 92. 9.5 I FIND FORCE IN THE ARGUMENTS OF TH E APPELLANT THAT IN CASE OF INTERNATIONAL LOAN GIVEN IN INTERNATIONAL CURRENCY (USD IN CASE OF APPELLANT), THE INTEREST RATES TO BE APPLIED SHOULD BE LIBOR PLUS MARGIN. THE AVG LIBOR RATE FOR FY 2006 - 07 IS DETERMINED AT 5.20%. THE APPELLANT HAD CHARGED 7% AND 6.75% FOR THE TWO LOANS GIVEN TO DABUR INTERNATIONAL LTD UAE, WHICH SEEMS TO BE COMPLIANT WITH THE REQUIREMENT FOR COMPARABILITY OF ALP RATES FOR INTEREST. THUS, I HOLD THAT, INTEREST RATE OF 14% CHARGED BY THE LD. TPO IS IN CONTRAVENTION OF THE RULE 10B(2) AND THAT INTEREST CHARGED BY THE APPELLANT AT 7% AND 6.75% SATISFIES ARM S LENGTH PRINCIPLE. ACCORDINGLY, THIS GROUND IS ALLOWED IN FAVOUR OF THE APPELLANT. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 70 82.5 AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNA L. 82.6 THE LD. DR HEAVILY RELIED ON THE ORDERS OF THE AO/TPO. 82.7 THE LD. COUNSEL FOR THE ASSESSEE , ON THE OTHER HAND, SUBMITTED THAT IN THE TP DOCUMENT, THE TRANSACTION OF LOAN ADVANCED TO THE AE IS BENCHMARKED BY APPLYING CUP METHOD WHEREIN THE INT EREST CHARGED BY THE BANK OF BARODA FOR COMMERCIAL PAPER S @ 5.675% HAS BEEN TREATED AS APPROPRIATE INTERNAL UNCONTROLLED TRANSACTION. THE LD. COUNSEL DREW THE ATTENTION OF THE BENCH TO CLAUSE (A) OF RULE 10B(1) OF THE IT RULES, 1962 AND SUBMITTED THAT THE SAID PROVISION PROVIDES FOR APPLICATION OF CUP METHOD. HE SUBMITTED THAT THERE ARE TWO TYPES OF COMPARABLE UNCONTROLLED TRANSACTIONS. THE FIRST IS KNOWN AS INTERNAL COMPARABLE AND IS A TRANSACTION BETWEEN ONE OF THE PARTIES TO THE CONTROLLED TRANSACTION AND UNRELATED THIRD PARTY. THE SECOND, KNOWN AS EXTERNAL COMPARABLE IS A TRANSACTION BETWEEN TWO UNRELATED THIRD PARTIES. HE SUBMITTED THAT GENERAL LY SPECIFIC DETAILS REGARDING INTERNAL COMPARABLES ARE MORE READILY AVAILABLE TO THE PARTIES ENGAGED IN THE CONTROLLED TRANSACTION THAN DETAILS REGARDING EXTERNAL COMPARABLES. IN THE LIGHT OF THE ABOVE EXTERNAL CUP SHOULD BE USED WITH UTMOST CAUTION AND IF INTERNAL CUP IS AVAILABLE, IT IS PERFECT OVER EXTERNAL CUP. 82.8 REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT INTERNAL COMPARABLES AVAILABLE IN CASE OF A TAX PAYER OUGHT TO BE PERFECT OVER EXTERNAL COMPARABLES AVAILABLE FOR BENCHMARKING OF INTERNATIONAL TRANSACTIONS: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 71 (I) SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT (374 ITR 118) (II) ACIT VS. BIRLASOFT LIMITED: ITA NO. 44/2015 (DEL) (III) INSLICO LTD VS. DCIT (ITA NO. 4880/DEL/2013) (IV) M/S E4E BUSINESS SOLUTIONS INDIA PVT. LTD. VS. DCIT (ITA NO. 324/BANG/2015) (V) M/S. AGILA SPECIALTIES PVT. LTD. VS. DCIT (ITA NO. 214/BANG/2015) (VI) VALTECH INDIA SYSTEMS P. LTD. VS. DCIT (ITA NO. 22/BANG/2014) (VII) UCB INDIA (P) LTD. V ACIT 30 SOT 95 (VIII) EASTON FLUID POWER LIMITED VS. ACIT (ITA NO. 1623/PN/2011) (IX) CYBERTECH SYSTEMS & SOFTWARE LTD. VS. ACIT (ITA NO. 7307/MUM/2012) (X) GHARDA CHEMICALS LIMITED VS DCIT, 130 TTJ 556 (XI) DESTINATION OF THE WORLD VS. DCIT [ITA NO 5534/DEL/2010] (XII) INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD. VS. DCIT (ITA NO. 5568&5680/DEL/2011) (XIII) HONEYWELL ELECTRICAL DEVICES & SYSTEMS INDIA PVT. LTD. VS. ACIT (ITA NO. 2152/MDS/2011) (XIV) LUMMUS TECHNO LOGY HEAT TRANSFER BV VS. DCIT (ITA NO. 6227/DEL/2012) 82.9 HE ACCORDINGLY SUBMITTED THAT SINCE THE ASSESSEE HAS CHARGED INTEREST ON THE LOAN @ 6.75%/7% FROM DABUR INTERNATIONAL, UAE BEING HIGHER THAN THE INTERNAL ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 72 CUP WHERE THE INTEREST RATE CHARGED BY BA NK OF BARODA FOR COMMERCIAL PAPER S @ 5.675% HAS BEEN TREATED AS APPROPRIATE INTERNAL UNCONTROLLED TRANSACTION, INTERNATIONAL TRANSACTION OF INTEREST RECEIVED SHOULD BE CONSIDERED AS BEING AT ARM S LENGTH APPLYING THE CUP METHOD. 82.10 WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED THAT THE INTEREST RATE CHARGED BY THE ASSESSEE IS ALSO MUCH HIGHER THAN THE AVERAGE LIBOR RATE OF 5.20% AND, THUS, SUCH TRANSACTION OF INTEREST RECEIVED HAS TO BE CONSIDERED AS BEING AT ARM S LENGTH. HE SUBMITTED THAT IN THE PR ESENT CASE, TRANSACTION OF LENDING LOAN TO THE AE IS IN FOREIGN CURRENCIES GIVEN TO FOREIGN AES. ACCORDINGLY, THE COMPARABLE TRANSACTION FOR THE PURPOSE OF APPLYING OF CUP SHOULD BE CONSIDERED TO BE FOREIGN CURRENCY LENDING BY UNRELATED PARTIES WITH THE L IBOR. REFERRING TO THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF DCIT VS. COTTON NATURALS (I) PVT. LTD., 276 CTR 445, HE SUBMITTED THAT THE HON BLE HIGH COURT, WHILE UPHOLDING THE ORDER OF THE TRIBUNAL HAS HELD THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. REFERRING TO THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF BHARTI AIRTEL LIMITED VS. ACIT, 161 TTJ 428, HE SUBMITTED THAT IN T HIS CASE ALSO THE TRIBUNAL HAS HELD THAT IN A CASE WHERE LOANS ARE ADVANCED IN FOREIGN CURRENCY, THE INTEREST RATE ON FOREIGN CURRENCY LOANS BEING QUA L ITATIVELY DIFFERENT AND ACCORDINGLY, EVEN IF ONE HAS TO SEE THE INTEREST THAT THE ASSESSEE WOULD HAVE EAR NED , ONE HAS TO SEE THE INTEREST THAT THE ASSESSEE WOULD HAVE EARNED ON FOREIGN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 73 CURRENCY LOANS AND NOT RUPEE DENOMINATED LOANS. HE ALSO RELIED ON THE FOLLOWING DECISIONS AND SUBMITTED THAT THE ORDER OF THE CIT(A) IS FULLY JUSTIFIED UNDER THE FACTS AND CIR CUMSTANCES OF THE PRESENT CASE: - (I) SIVA INDUSTRIES AND HOLDINGS LTD. VS. ACIT [ITA NO. 2148/MDS/2148] ; (II) TATA AUTOCOMP SYSTEMS LTD. VS. ACIT [ITA NO. 7354/MUM/2011], (III) FOUR SOFT LTD. VS. DC1T: 142 TTJ 358 (HYD.); (IV) DCIT VS. TECH MAHINDRA LTD. : 46 SOT 141 (MUM); (V) TRICOM INDIA LTD. VS. 1TO [ITA NO. 322/MUM/2014]; (VI) PARLE BISCUITS (P.) LTD. VS. DCIT (ITA NO. 9010/MUM/2010); (VII) PMP AUTO COMPONENTS (P.) LTD. VS. DCIT : 66 SOT 42; (VIII) HINDUJA GLOBAL SOLUTIONS LTD. VS. ACIT (ITA NO. 254/MUM/2013); (IX) BHANSALI & CO. VS. ACIT (ITA NO. 825/MU/2014) 82.11 THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE PROVISIONS OF LIBOR RELEVANT FOR F.Y. 2006 - 07 WHICH IS AS UNDER: - 1 - MONTH 3 - MONTH 6 - MONTH 12 - MONTH LIBOR RATES - MARCH 2007 5.3195% 5.3479% 5.312% 5.2009% 82.12 REFERRING TO THE ABOVE, HE SUBMITTED THAT THE LIBOR RATE S MENTIONED ABOVE AVERAGES OUT TO 5.20% WHICH IS MUCH LOWER THAN THE RATE OF INTEREST CHARGED BY THE ASSESSEE ON FOREIGN CURRENCY LOANS ADVANCED TO ITS ASSOCIATED ENTERPRISES. HE ACCORDINGLY SUBMIT TED THAT SINCE THE ASSESSEE HAS CHARGED INTEREST MUCH HIGHER THAN THE LIBOR RATES, NO FURTHER ADJUSTMENT IS REQUIRED. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 74 82.13 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/CIT(A) AND THE PAPER BOOK FILED O N BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE ASSESSEE IN THE INSTANT CASE HAS DISBURSED TWO LOANS TO DABUR INTERNATIONAL, UAE AT THE INTEREST RATE OF 6.5/7% THE DETAILS OF WHICH ARE GIVEN BELOW: - P ARTICULARS AMOUNT (IN RS. CRORES) LOAN GIVEN @ 6.75% RS.7 CRORES LOAN GIVEN AT 7% RS.20 CRORES LESS: REPAYMENT OF LOAN DURING THE YEAR (RS.17 CRORES) LOAN OUTSTANDING AS ON 31.03.2007 10 CRORES 82.14 DURING THE IMPUGNED ASSESSMENT YEAR, THE ASSES SEE HAS EARNED INTEREST OF RS.1,05,27,000/ - ON THE AFORESAID LOANS. IN THE TP STUDY REPORT THE ASSESSEE APPLIED INTERNAL CUP METHOD WHERE THE INTEREST RATE CHARGED BY THE BANK OF BARODA FOR COMMERCIAL PAPERS WAS 5.675%. CONSIDERING THAT THE INTERNATIONAL TRANSACTION OF RECEIPT OF INTEREST FROM DABUR INTERNATIONAL LTD., DUBAI AT 6.75%/7% WAS HIGHER THAN THE BANK S RATE OF INTEREST, THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVED WAS CONSIDERED TO BE AT ARM S LENGTH APPLYING THE CUP METHOD. WE FIND, THE TPO DISREGARDED THE BENCHMARK ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR DETERMINING THE ALP O F INTEREST ON LOAN APPLYING INTERNAL CUP METHOD. ACCORDING TO HIM, FOR LOANS GIVEN THE RATE CHARGED BY INDIAN BANKS ON FOREIGN CURRENCY LOANS IS TO BE TAKEN AS BENC HMARK . APPLYING THE RATE OF INTEREST OF 14% ON THE BASIS OF DATA COLLECTED FROM CRISIL WHERE RATE OF INTEREST FOR BBB BONDS FOR F.Y. 2006 - 07 WAS 15.13%, THE TPO PROPOSED AN ADDITION OF RS.96,67,520 WHICH WAS ADDED BY THE AO TO THE TOTAL INCOME OF THE ASSES SEE ON ACCOUNT OF INTEREST CHARGED ON LOAN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 75 FROM AES. WE FIND, THE LD.CIT(A) DELETED THE ADDITION MADE BY THE AO/TPO ON THE GROUND THAT INTEREST RATE TO BE APPLIED IN CASE OF INTERNATIONAL LOAN GIVEN IN INTERNATIONAL CURRENCY (USD) SHOULD BE LIBOR + MARGIN . HE NOTED THAT IN THE INSTANT CASE, THE AVERAGE LIBOR RATE FOR A.Y. 2006 - 07 WAS 5.20% WHEREAS THE ASSESSEE HAS CHARGED INTEREST @ 6.75/7% WHICH IS MUCH HIGHER THAN THE COMPARABLE ALP RATES. HE FURTHER NOTED THAT THE TPO WHILE ADOPTING THE RATE OF 14% HA S CONTRAVENED THE PROVISIONS OF RULE 10B(2) WHICH PRESCRIBES THE FACTORS FOR COMPARABILITY OF CONTROLLED TRANSACTIONS OF UNCONTROLLED TRANSACTIONS. 82.15 WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION MADE BY THE AO/TPO. THE PROVISIONS OF RULE 10B(1)(A) READ AS UNDER: - 10B . (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, ( I ) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACT ION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; ( II ) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; ( III ) THE ADJUSTED PRICE ARRIVED AT UNDER SUB - CLAUSE ( II ) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES P ROVIDED IN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ; 82.16 WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VVF LTD. VS. DCIT, VIDE ITA NO.673/MUM/2006 WHERE THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 76 TRIBUNAL IN A CASE INVOLVING TRANSACTION OF LOAN ADVANCED TO THE ASSOCIATED ENTERPRISE, HAS HELD AS UNDER: - WE HAVE NOTED THAT AS WAS ALSO NOTED BY THE TRANSFER PRICING OFFICER HIMSELF AT PAGE 3 OF HIS ORDER THE APPELLANT HAS BORROWED FOREIGN CURRENCY LOANS IN US DOLLARS A ND FOR THE PURPOSES OF INVESTING IN SUBSIDIARIES ABROAD, FROM ICICI BANK AT THE RATE OF LIBOR + 3% THE APPELLANT HAS ALSO FILED A LETTER FROM BANK OF INDIA STATING THAT 'DURING MARCH 2002, WE HAVE BEEN CHARGING SPREADS OF 150 BPS TO 300 BPS OVER LIBOR IN R ESPECT OF FOREIGN CURRENCY LOANS BASED ON FINANCIAL POSITION AND CREDIT RATING OF THE BORROWER'. AS FOR THE LIBOR RATE, AS PER THE INFORMATION PROVIDED BY APPELLANT, IT RANGED FROM 1.85000 (2 WEEKS) TO 3.00250 (I YEAR). ON THE GIVEN FACTS, IN OUR CONSIDERE D VIEW, IT WOULD BE APPROPRIATE TO ACCEPT INTERNAL CUP, I.E. THE RATE AT WHICH THE APPELLANT HAS RESORTED TO FOREIGN EXCHANGE BORROWINGS FROM THE ICICI, AS ARMS LENGTH PRICE UNDER CUP METHOD. THE FACT, AS PAINSTAKING BROUGHT ON RECORD BY THE AUTHORITIES BE LOW THAT THIS LOAN FROM ICICI BANK WAS NOT USED FOR THE PURPOSES OF REMITTANCE TO SUBSIDIARIES AS INTEREST FREE LOANS HAS NO BEARING FOR THE PURPOSES OF COMPUTING ALP OF INTEREST FREE LOAN. THE FINANCIAL POSITION AND CREDIT RATING OF THE SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY, AND, THEREFORE, THE PRECISE RATE AT WHICH THE ICICI BANK HAS ADVANCED THE FOREIGN CURRENCY LOANS TO THE APPELLANT COMPANY CAN BE ADOPTED AT ARM S LENGTH PRICE OF INTEREST FREE LOANS ADVANCED BY THE APPELLANT COM PANY TO ITS FOREIGN SUBSIDIARIES.' 82.17 SINCE THE ASSESSEE IN THE INSTANT CASE HA S CHARGED INTEREST ON LOAN @ 6.75%/7% FROM DABUR INTERNATIONAL, UAE, WHICH IS HIGHER THAN THE INTERNAL CUP WHEREIN INTEREST RATE CHARGED BY BANK OF BARODA FOR COMMERCIAL PAPERS WAS 5.675% , T HEREFORE, THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVED, IN OUR OPINION, IS CONSIDERED TO BE AT ARM S LENGTH APPLYING THE CUP METHOD. 82.18 WE FIND, THE HON BLE DELHI HIGH COURT IN THE CASE OF DCIT VS. COTTON NATURALS INDIA (P ) LTD. (SUPRA) WHILE UPHOLDING THE FINDING OF THE TRIBUNAL WITH RESPECT TO APPROPRIATE COMPARABLE RATE OF INTEREST ON FOREIGN CURRENCY DENOMINATED LOAN, HAS HELD AS UNDER: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 77 '39. THE QUESTION WHETHER THE INTEREST RATE PREVAILING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED, FOR THE BORROWER WAS A RESIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. H E HAVE NO HESITATION IN HOLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED O N THE BASIS OF INTEREST PAYABLE ON THE CURRENCY O R LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABLE, TO LOANS AND DEPOSITS IN THE NONE CURRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE IF THE GOVERNMENT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENCY SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE - PAID NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT, I.E., THE RATE OF INTEREST. 82.19 WE FIND, THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BHARTI AIRTEL LIMITED VS. ACIT: 161 TTJ 428, TOO, HAS HELD THAT IN A CASE WHERE LOANS ARE ADVANCED IN FOREIGN CURRENCY, THE INTEREST RATE ON FOREIGN CURRENCY LOANS BEING QUALITATIVELY DIFFERENT, AND ACCORDINGLY, EVEN IF ONE HAS TO SEE THE INTEREST THAT THE ASSESSEE WOULD HAVE EARNED, ONE HAS TO SEE THE INTEREST THAT THE ASSESSEE WOULD HAVE EARNED ON FO REIGN CURRENCY LOANS AND NOT RUPEE DENOMINATED LOANS. 82.20 WE FURTHER FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL THAT THE REVENUE / TPO HIMSELF IN THE CASE OF PEROT SYSTEMS TSI (INDIA) LTD. VS. DCIT (2010 - TIOL - 51 - ITAT - DEL.) AND IN THE CASE OF DDIT VS. DEVELOPMENT BANK OF SINGAPORE: 144 ITD 265 (MUM), HAS APPLIED LIBOR RATE FOR BENCHMARKING OF INTERNATIONAL TRANSACTION OF LOANS UNDERTAKEN WITH THE AE. IT IS THE SETTLED LAW THAT THE REVENUE HAS TO BE CONSISTENT IN ITS APPROACH AND IT IS NOT OPEN TO TH E REVENUE TO TAKE AN INCONSISTENT STAND IN THE CASE OF DIFFERENT ASSESSEE. [REF. KAUMUDINI NARAYAN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 78 DALAI: 249 ITR 219 (SC) AND BERGER PAINTS INDIA LTD. VS. CIT: 266 ITR 99 (SC)]. THEREFORE, CONSISTENT WITH THE STAND TAKEN BY THE REVENUE IN THE CASE OF DIFF ERENT ASSESSES, THE SAID FILTER, IN OUR OPINION, IS TO BE UNIFORMLY APPLIED IN ALL CASES. 82.21 IN VIEW OF THE ABOVE DISCUSSION AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE CIT(A) WHILE DELETING THE ADDITION, WE DO NOT FIND ANY INFIRMITY IN HIS OR DER. ACCORDINGLY, THE ORDER OF THE CIT(A) DELETING THE ADDITION OF RS.96,67,520/ - IS UPHELD AND THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 8 3 . IN GROUND OF APPEAL NO.6, THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS.70,49,000/ - AND DIRECTING THE AO TO RECOMPUTE THE DEDUCTION U/S 80IB AND 80IC OF THE ACT WITHOUT FURTHER ALLOCATION OF THE HEAD OFFICE AND OTHER EXPENSES TO VARIOUS UNITS ELIGIBLE FOR SUCH DEDUCTION. 83. 1 FACTS OF THE CASE, IN BRIEF, ARE TH AT THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS 18 INDUSTRIAL UNITS UNDERTAKING MANUFACTURING OF PRODUCTS OUT OF WHICH TEN UNITS WERE ELIGIBLE FOR DEDUCTION U/S 80IB/80IC OF THE ACT WHICH ARE AS FOLLOWS: - 1) JAMMU UNIT - 1 2) JAMMU UNIT - 2 3) UTTRANCHAL UNIT 4) CHAWYANPRASH - BADDI UNIT ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 79 5) AMLA - HONEY BADDI UNIT 6) GLUCOSE - BADDI UNIT 7) SHAMPOO - BADDI UNIT 8) TOOTHPASTE - BADDI UNIT 9) HONITUS - BADDI UNIT 10) ORAL CARE - BADDI UNIT 84 . HE NOTED THAT THE ASSESSEE COMPANY HAS DECLARED PROFIT OF RS.28,422.29 LAKHS FROM BUSINESS ON THE SALES OF RS.1,77,802.43 LAKHS AND OTHER INCOME OF RS.1651.17 LAKHS WHICH INCLUDE PROFIT OF RS.30285.30 LAKHS RAISED ON THE SALES OF OTHER INCOME AGGREGATING TO RS.1,11,781.27 LAKHS IN RESPECT OF MA NUFACTURING UNITS OF THE ABOVE UNITS AGAINST WHICH THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.27,209.71 LAKHS U/S 80IB AND 80IC. IN VIEW OF THE ABOVE FACTS, THE AO NOTED THAT THERE ARE LOSS OF RS.1863.01 LAKHS FROM BUSINESS ACTIVITIES OF THE REMAINING UNITS . FROM THE VARIOUS DETAILS OF THE PROFIT & LOSS ACCOUNT AND ANNEXURE - 4 OF THE RESPECTIVE UNITS ACCOMPANYING THE AUDIT REPORT U/S 80I(7)/80IA(7)/80IB/80IC IN FORM NO.10CCB AND ITS ANNEXURES IN RESPECT OF UNITS OF THE ABOVE UNDERTAKINGS, THE AO NOTED THAT T RANSACTIONS OF TRANSFERS/SALE OF STOCKS OF SUBSTANTIAL AMOUNT/VALUE FROM AND TO RELATED UNITS AS WELL AS TO CORPORATE OFFICE BY THE ASSESSEE COMPANY HAVE BEEN REPORTED. THE AO NOTED THAT GROSS TOTAL INCOME OF THE ASSESSEE COMPANY INCLUDE S PROFITS OF RS. 3 0285.30 LAKH WITH NET PROFIT RATIO OF 26.90% ON THE SALES AND OTHER INCOME OF RS. 112781.27 LAKH FROM THE UNITS ELIGIBLE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 80 FOR DEDUCTION U/S 80IB AND 801C WHEREAS THE ASSESSEE COMPANY HAS DECLARED NET PROFIT OF RS. 28422.30 LAKH ON THE TOTAL SALES OF RS. 179 453.60 LAKH AS PER CONSOLIDATED PROFIT & LOSS ACCOUNT OF ALL THE UNITS RESULTING IN NET PROFIT RATIO OF 15.83% TO THE TOTAL SALES OF ALL THE UNITS , THEREFORE , DEDUCTION U/S 80IB AND 80IC BE COMPUTED ACCORDINGLY . 85 . THE AO, THEREFORE, ASKED THE ASSESSEE T O EXPLAIN THE DEDUCTION CLAIMED U/S 80IB/80IC TO WHICH THE ASSESSEE COMPLIED. HOWEVER, THE AO DISREGARDED THE ARGUMENTS ADVANCED BY THE ASSESSEE AND ALLOCATED CERTAIN COST ON ACCOUNT OF DEPRECIATION AND OTHER EXPENSES TO THE NON - TAXABLE ZONES AND ACCORDIN GLY REDUCED THE CLAIM OF DEDUCTION U/S 80IB/80IC. AS PER THE DETAILS BELOW, THE AO ALLOCATED THESE COSTS TO SECTION 80IB/80IC UNITS: - S. NO NATURE OF EXPENDITURE AMOUNT 1. DEPRECIATION RS 704.49 LAKHS 2. OTHER HO EXPENSES RS 2214.02 LAKHS 86 . WITH T HE ABOVE ALLOCATIONS OF EXPENSES TO SECTION 80IB/80IC UNITS, THE CLAIM OF TAX H OLIDAY WAS REDUCED BY THE AO FROM RS.2720 7.71 LAKHS TO RS.25403.88 LAKHS THEREBY MAKING AN ADDITION OF RS.1803 .83 LAKHS. 87 . BEFORE THE CIT(A), IT WAS SUBMITTED THAT THE DEPRECI ATION ARRIVED AT BY THE AO IS TOTALLY FAULTY. THE AO HAS TAKEN THE DIFFERENCE BETWEEN DEPRECIATION AVAILABLE UNDER THE INCOME - TAX ACT AND COMPANIES ACT AND HAS ALLOCATED THE SAME TO TAX H OLIDAY UNITS. IT WAS SUBMITTED THAT THE ASSESSEE HAS ALSO ADDED RS. 2197.81 LAKHS IN THE COMPUTATION OF INCOME AS DEPRECIATION UNDER THE COMPANIES ACT AND, ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 81 SIMILARLY, IT HAS TAKEN DEDUCTION OF RS.2903.30 LAKHS FROM THE INCOME AS DEPRECIATION ALLOWABLE UNDER THE INCOME - TAX ACT. THE AO HAS TAKEN THE DIFFERENCE OF RS.70 4.49 LAKHS AND ALLOCATED TO ALL THE UNITS. IT WAS ARGUED THAT WHILE WORKING OUT THE DEDUCTION AVAILABLE U/S 80IB/80IC IN RESPECT OF VARIOUS UNITS, DEPRECIATION AS PER COMPANIES ACT WAS ADDED BACK AND DEPRECIATION AS PER IT ACT WAS CLAIMED. THEREFORE, THERE IS NO SITUATION FOR FURTHER ALLOCATION OF RS.70.50 LAKHS. SIMILARLY, THE ASSESSEE HAD ADDED CERTAIN EXPENSES WHICH WERE ALLOWABLE UNDER THE PROVISIONS OF INCOME - TAX ACT AND, HENCE, THESE EXPENSES WERE NEVER CLAIMED BY THE ASSESSEE. HOWEVER, THE AO HAS ALLO CATED THESE EXPENSES TO ALL UNITS IN THE RATIO OF SALES PERCENTAGE THEREBY REDUCING THE PROFITS OF UNITS. THE DISALLOWANCE AS PER COMPUTATION OF INCOME WAS BROUGHT TO THE NOTICE OF THE CIT(A) WHICH IS AS UNDER: - DISALLOWANCE AS PER COMPUTATION OF INCOME PARTICULARS AMOUNT ( RS LACS) AMOUNT (RS LACS) MISC. EXP WRITTEN OFF ESOP EXP 1035.37 TECHNICAL KNOW HOW 18.75 1054.12 OTHER DISALLOWANCES DONATION 414.05 PROVISION FOR BAD DEBTS 94.85 SCIENTIFIC RESEARCH EXP 651.00 1159.90 TOTAL 2214.02. 88 . IT WAS FURTHER SUBMITTED THAT ESOP EXPENSES, TECHNICAL KNOW - HOW EXPENSES, DONATION AND PROVISION FOR BAD DEBTS HAVE BEEN ADDED BACK IN THE COMPUTATION OF TAXABLE INCOME BY THE ASSESSEE ITSELF AS THESE WERE NOT ALLOWABLE EXPENSES UNDER THE PROVISIONS OF THE ACT. THEREFORE, THESE EXPENSES HAVE NOT BEEN CLAIMED BY THE ASSESSEE. HOWEVER, THE AO HAS ERRONEOUSLY ALLOCATED THESE EXPENSES TO ALL THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 82 UNITS IN THE RATIO OF SALES PERCENTAGE AND ACCORDINGLY HAS WORKED OUT REDUCED PROFITS IN RESPECT OF TAX H OLI DAY UNITS. SO FAR AS THE SCIENTIFIC RESEARCH EXPENSES IS CONCERNED, IT WAS SUBMITTED THAT THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION @ 125% U/S 35(1)(II) OF THE ACT IN RESPECT OF CONTRIBUTION MADE TO AN ASSOCIATION FOR SCIENTIFIC RESEARCH. THE PAYMENT I S VOLUNTARY IN NATURE AND IS NOT FOR ANY SPECIFIC PURPOSE. FURTHER, THESE EXPENDITURE CANNOT BE ALLOCATED TO TAX H OLIDAY UNITS AS IT IS NO T CONNECTED WITH SUCH UNITS. RELYING ON VARIOUS DECISIONS AND THE WORD USED IN SECTION 80IC DERIVED FROM AND NOT ATTRIBUTABLE TO IT WAS ARGUED THAT R&D EXPENSES CANNOT BE ALLOCATED TO UNITS CLAIMING DEDUCTION UNLESS IT HAS A NEXUS. 89. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE, THE LD.CIT(A) DIRECTED THE AO TO RECOMPUTE THE DEDUCTION AVAILABLE U/S 80IB/80IC WITHOUT FURTHER ALLOCATION OF HEAD OFFICE EXPENSES TO VARIOUS UNITS BY OBSERVING AS UNDER: - 15.0 FINDING: 15.1 I HAVE CAREFULLY GONE THROUGH SUBMISSIONS OF THE APPELLANT AND OTHER MATERIAL PLACED ON RECORD. THE APPELLANT HAS CONTENDED THAT ADDITIONS MAD E ON ACCOUNT OF HO ALLOCATIONS WERE ALREADY CONSIDERED AT THE TIME OF COMPUTATION OF INCOME. IT HAS BEEN SEEN THAT THE APPELLANT ITSELF HAS ADDED BACK DEPRECIATION AS COMPANIES ACT AND HAS CLAIMED DEPRECIATION AS PER IT ACT WHILE COMPUTING DEDUCTION AVAILA BLE U/S 80EB/IC. THEREFORE, THE AO HAS WRONGLY ALLOCATED RS. 704.50 LACS TO VARIOUS UNITS WHICH DIFFERENCE OF DEPRECIATION AVAILABLE UNDER IT ACT AND COMPANIES ACT 15.2 FURTHER, THE APPELLANT ITSELF HAS ADDED BACK CERTAIN EXPENSES LIKE ESOP EXPENSES, TECH NICAL KNOW - HOW EXPENSES, DONATION AND PROVISION FOR BAD DEBTS IN COMPUTATION OF INCOME AS NOT ALLOWABLE UNDER PROVISIONS OF IT ACT. THE AO HAS NOT HELD THAT THESE ARE OTHERWISE ALLOWABLE EXPENSES. ONCE THE APPELLANT HAS NOT CLAIMED THESE EXPENSES BY ADDING THEM BACK, THE AO CAN NOT ALLOCATE THEM TO VARIOUS UNITS WHICH WOULD AMOUNT TO ALLOWANCE OF THESE EXPENSES. 15.3 REGARDING SCIENTIFIC RESEARCH EXPENSES, I FIND FORCE IN CONTENTION OF THE APPELLANT THAT THESE EXPENSES ARE NOT AT ALL CONNECTED WITH UNITS EL IGIBLE FOR ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 83 DEDUCTION U/S 80IB/IC. THE AO HAS NOT PROVED ANY NEXUS BETWEEN THESE EXPENSES AND ELIGIBLE UNITS. DEDUCTION U/S 80IB/IC IS AVAILABLE IN RESPECT OF PROFIT DERIVED FROM ELIGIBLE BUSINESS. THE TERM DERIVED FROM REQUIRES EXISTENCE OF DIRECT NEXUS BOTH WITH RESPECT TO ITEMS OF INCOME AND EXPENDITURE. I HAVE CAREFULLY GONE THROUGH THE CASE LAW RELIED UPON BY THE APPELLANT WHEREIN HON BLE ITAT HAS LAID DOWN THE SAME PRINCIPLE. 15.4 IN VIEW OF ABOVE, I DIRECT THE AO TO RECOMPUTE THE DEDUCTION AVAILABL E U/S 80IB/IC WITHOUT FURTHER ALLOCATION OF HO EXPENSES TO VARIOUS UNITS AS DONE BY HIM IN THE IMPUGNED ASSESSMENT ORDER. THE GROUNDS OF APPEAL ARE ALLOWED. 90 . AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 91 . THE LD. DR STRONGLY RELIED ON THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, RELYING ON THE ORDER OF THE CIT(A), SUBMITTED THAT IN THE GROUNDS OF APPEAL PREFERRED BY THE REVENUE, IT HAS ONLY CHALLENGED THE DELETION OF DISALLOWAN CE OF RS.70.49 LAKHS AS AGAINST RS.70 4 .49 LAKHS WHICH IS A TYPOGRAPHICAL ERROR. T HE LD. COUNSEL REFERRING TO PAGE 67 OF PAPER BOOK - I SUBMITTED THAT DURING THE FINANCIAL YEAR UNDER CONSIDERATION, DEPRECIATION AGGREGATING TO RS.2197.81 LAKHS WAS DEBITED TO THE PROFIT & LOSS ACCOUNT . HE SUBMITTED THAT IN THE COMPUTATION OF INCOME , THE ASSESSEE HAS ADDED BACK THE AFORESAID DEPRECIATION UNDER COMPANIES ACT AND CLAIMED DEPRECIATION OF RS.2902.3 LAKHS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32 OF THE ACT WHI CH IS EVIDENT FROM PAGE 425 OF THE PAPER BOOK VOLUME - II. HE SUBMITTED THAT DEPRECIATION AS CLAIMED IN THE RETURN OF INCOME WAS FULLY ALLOCATED AMONG ALL THE UNITS INCLUDING ELIGIBLE UNITS. THEREFORE, WHEN THE ASSESSEE HAS ALREADY DISALLOWED THE DEPRECIAT ION UNDER COMPANIES ACT AN D HAS ONLY CLAIMED DEPRECIATION AS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 84 AVAILABLE UNDER THE I.T. ACT WHICH WAS ALLOCATED TO VARIOUS UNITS, THEREFORE, THERE WAS NO REASON ON THE PART OF THE AO TO ALLOCATE THE DIFFERENCE BETWEEN THE DEPRECIATION CHARGED IN THE P&L ACCO UNT AND DEPRECIATION CLAIMED IN THE RETURN OF INCOME. 91.1 SO FAR AS THE ALLOCATION OF HEAD OFFICE EXPENSES IS CONCERNED, THE LD. COUNSEL DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING TABLE: - S. NO. PARTICULARS AMOUNT (IN RS. LAKHS) 1. MISCELLANEOUS EXPENSES WRITTEN OFF 1054.12 (A) ESOP EXPENSES 1035.37 (B) TECHNICAL KNOW - HOW 18.75 2. DONATION 414.05 3. PROVISION FOR BAD DEBTS 94.85 4. SCIENTIFIC RESEARCH 651.00 TOTAL 2214.02 92 . REFERRING TO THE ABOVE, HE SUBMITTED THAT MISCELLANEOUS EXP ENSES WRITTEN OFF, DONATION AND PROVISION FOR BAD DEBT WERE SUO MOTU DISALLOWED BY THE ASSESSEE WHICH IS EVIDENT AS PER PAGE 424 OF THE PAPER BOOK VOLUME - II . T HEREFORE, THESE EXPENSES CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS AND BE CONSIDERED FOR COMPUTIN G DEDUCTION U/S 80IB AND 80IC OF THE ACT SINCE THESE EXPENSES ARE NOT CLAIMED AS DEDUCTION . SO FAR AS THE SCIENTIFIC RESEARCH EXPENSES IS CONCERNED, HE SUBMITTED THAT THESE EXPENSES HAVE NO NEXUS WITH THE UNITS ELIGIBLE FOR DEDUCTION AND, THEREFORE, SUCH EXPENSES CANNOT BE ALLOCATED TO ELIGIBLE UNITS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80IB AND 80IC OF THE ACT. FOR THE ABOVE PROPOSITION, HE RELIED ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF ZANDU PHARMACEUTICALS WORKS LTD. VS. C IT 305 ITR 366. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 85 93 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES , PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE . WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE ASS ESSEE , DURING THE YEAR UNDER CONSIDERATION , HAD 18 INDUSTRIAL UNITS UNDERTAKING MANUFACTURING OF PRODUCTS OUT OF WHICH 10 UNITS WERE ELIGIBLE FOR DEDUCTION U/S 80IB/80IC OF THE ACT, THE DETAILS OF WHICH WERE GIVEN AT PARA 83 OF THIS ORDER. DURING THE YEA R, THE ASSESSEE DECLARED PROFIT AND GAINS FROM ELIGIBLE BUSINESS ON THE BASIS OF SEPARATE BOOKS OF ACCOUNT AND CLAIMED DEDUCTION AGGREGATING TO RS.27,209.71 LAKHS U/S 80IB AND 80IC OF THE ACT. ACCORDING TO THE AO, THE HEAD OFFICE EXPENSES AMOUNTING TO RS. 2214.02 LAKHS WERE NOT ALLOCATED TO THE UNITS. FURTHER, ACCORDING TO THE AO, DEPRECIATION TO THE TUNE OF RS. 7 04.49 LAKHS ON ASSETS OF THE HEAD OFFICE WAS NOT A LLOCA TED TO THE UNITS. ACCORDINGLY, THE AO ALLOCATED THE HEAD OFFICE EXPENSES AND DEPRECIATION IN THE RATIO OF SALES OF ELIGIBLE UNITS FOR COMPUTING THE DEDUCTION U/S 80IB/80IC AND RESTRICTED SUCH DEDUCTION TO RS.25,404.88 LAKHS AS AGAINST RS.27,207.71 LAKHS CLAIMED BY THE ASSESSEE. WE FIND, THE LD.CIT(A) REVERSED THE ACTION OF THE AO AND DIRECTED HIM TO RECOMPUTE THE DEDUCTION U/S 80IB/80IC OF THE ACT WITHOUT F URTHER ALLOCATION OF HEAD OFFICE EXPENSES AND DEPRECIATION TO VARIOUS UNITS BY OBSERVING THAT THE ASSESSEE HAS ITSELF ADDED BACK THE DEPRECIATION AS PER COMPANIES ACT, 1956 AND CLAIMED DEPREC IATION AS PER THE ACT AND, THEREFORE, THE AO WAS WRONG IN ALLOCATING DIFFERENCE OF DEPRECIATION AVAILABLE UNDER THE COMPANIES ACT AND THE INCOME - TAX ACT TO THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 86 ELIGIBLE UNITS. SO FAR AS THE HEAD OFFICE EXPENSES AGGREGATING TO RS.2,214.02 LAKHS IS CONCERNE D, HE NOTED THAT EXPENSES AGGREGATING TO RS.1,563.02 LAKHS WERE SUO MOTU DISALLOWED BY THE ASSESSEE AND ADDED BACK IN THE COMPUTATION OF INCOME. THEREFORE, ONCE THESE EXPENSES WERE NOT CLAIMED BY THE ASSESSEE, THE SAME CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS FOR COMPUTATION OF DEDUCTION U/S 80IB/80IC OF THE ACT. THE LD.CIT(A) ALSO FURTHER NOTED THAT SCIENTIFIC RESEARCH EXPENSES OF RS.651 LAKHS , WHICH WAS INCLUDED IN THE HEAD OFFICE EXPENSES ALLOCATED BY THE AO ARE NOT CONNECTED WITH THE UNITS ELIGIBLE F OR DEDUCTION U/S 80IB/80IC OF THE ACT AND, THEREFORE, CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS. } 93.1 WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) REVERSING THE ACTION OF THE AO IN ALLOCATING THE HEAD OFFICE EXPENSES AND DEPRECIATION TO VARIOU S ELIGIBLE UNITS FOR THE PURPOSE OF RECOMPUTING THE DEDUCTING U/S 80IB/80IC. THE FACTUAL FINDING OF THE LD.CIT(A) THAT THE ASSESSEE H AS ADDED BACK THE DEPRECIATION AS PER COMPANIES ACT, 1956 AND CLAIMED DEPRECIATION AS PER THE INCOME - TAX AND, THEREFORE, T HE AO WAS WRONG IN ALLOCATING THE DIFFERENCE OF DEPRECIATION AVAILABLE UNDER THE COMPANIES ACT AND THE INCOME - TAX ACT TO THE ELIGIBLE UNITS COULD NOT BE CONTROVERTED BY THE LD. DR. SIMILARLY, THE LD. DR ALSO COULD NOT CONTROVERT THE FACT UAL FINDING GIVEN BY THE CIT(A) THAT EXPENSES AGGREGATING TO RS.1,563.02 LAKHS BEING HEAD OFFICE EXPENSES WERE SUO MOTU DISALLOWED BY THE ASSESSEE AND ADDED BACK IN THE COMPUTATION OF INCOME AND ONCE THESE EXPENSES WERE CLAIMED BY THE ASSESSEE, THE SAME CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS FOR COMPUTATION OF DEDUCTION U/S 80IB/80IC AND, THEREFORE, CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 87 93.2 A PERUSAL OF PAGE 67 OF THE PAPER BOOK VOLUME I SHOWS THAT DURING THE FINANCIAL YEAR UNDER CONSIDERATION, DEPRECIATION AMOUNT ING TO RS.2,197.81 LAKHS WAS DEBITED TO THE P&L ACCOUNT. A PERUSAL OF THE COMPUTATION OF INCOME , COPY OF WHICH IS PLACED AT PAGE 425 OF THE PAPER BOOK VOLUME II, SHOWS THAT THE ASSESSEE HAS ADDED BACK THE AFORESAID DEPRECIATION UNDER COMPANIES ACT AND CLA IMED DEPRECIATION OF RS.2,902.3 LAKHS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32 OF THE ACT. THE DEPRECIATION AS CLAIMED IN THE RETURN OF INCOME WAS DULY ALLOCATED AMONG ALL THE UNITS INCLUDING THE ELIGIBLE UNITS. WE, THEREFORE, FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) IN REVERSING THE ACTION OF THE AO IN ALLOCATING THE DIFFERENCE OF DEPRECIATION AVAILABLE UNDER THE COMPANIES ACT AND INCOME - TAX ACT TO THE ELIGIBLE UNITS. 93.3 SO FAR AS THE HEAD OFFICE EXPENSES ARE CONCERNED, WE FIND THE AO HA S ALLOCATED THE HEAD OFFICE EXPENSES OF RS.2,214.02 LAKHS THE DETAILS OF WHICH ARE AS UNDER: - S. NO. PARTICULARS AMOUNT (IN RS. LAKHS) 1. MISCELLANEOUS EXPENSES WRITTEN OFF 1054.12 (A) ESOP EXPENSES 1035.37 (B) TECHNICAL KNOW - HOW 18.75 2. DONATION 414.05 3. PROVISION FOR BAD DEBTS 94.85 4. SCIENTIFIC RESEARCH 651.00 TOTAL 2214.02 93. 4 A PERUSAL OF PAGE 42 5 OF PAPER BOOK , VOLUME - II SHOWS THAT MISCELLANEOUS EXPENSES WRITTEN OFF, DONATION AND PROVISION FOR BAD DEBTS WERE SUO MOTU DISALLOWED BY THE ASSESSEE IN ITS RETURN OF INCOME. THEREFORE, ONCE THE AFORESAID ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 88 EXPENSES WERE NOT CLAIMED AS A DEDUCTION BY THE ASSESSEE, THE SAME, IN OUR OPINION, CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS AND BE CONSIDERED FOR COMPUTING THE DEDUCTION U/S 80IB/80IC OF THE ACT. 93.5 S O FAR AS SCIENTIFIC RESEARCH EXPENSES OF RS.651 LAKHS IS CONCERNED, THE FINDING OF THE LD. CIT(A) THAT SUCH EXPENSES HAVE NO NEXUS WITH THE UNITS ELIGIBLE FOR DEDUCTION HAS NOT BEEN CONTROVERTED BY THE REVENUE. W E FIND, THE HON BLE BOM BAY HIGH COURT IN THE CASE OF ZANDU PHARMACEUTICALS WORKS LTD. VS. CIT, 350 ITR 366 (BOM) HAS HELD THAT ONCE THE EXPENSES HAVE NO NEXUS WITH THE UNITS ELIGIBLE FOR DEDUCTION, SUCH EXPENSES CANNOT BE ALLOCATED TO UNITS FOR THE PURPOSE OF COMPUTING DEDUCTI ON U/S 80IB/80IC OF THE ACT. SINCE THE SCIENTIFIC RESEARCH EXPENSES OF RS.651 LAKHS WHICH WERE INCLUDED IN THE HEAD OFFICE EXPENSES ALLOCATED BY THE AO ARE NOT CONNECTED WITH THE UNITS ELIGIBLE FOR DEDUCTION U/S 80IB/80IC, THE SAME , IN OUR OPINION, CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS. IN THIS VIEW OF THE MATTER, THE ORDER OF THE CIT(A) IS UPHELD AND THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 94 . IN GROUND OF APPEAL NO.7, THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN DELETI NG THE ADDITION OF RS.4,09,871/ - IN RESPECT OF BELATED PAYMENTS OF EMPLOYEES CONTRIBUTION TO ESI WHICH WAS TREATED U/S 36(1)(VA) OF THE ACT R.W. SECTION 2(24)(10) OF THE ACT. 95 . FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO, DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, OBSERVED FROM THE FORM 3CD ANNEXED TO THE AUDIT REPORT THAT THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 89 ASSESSEE COMPANY HAS DEPOSITED THE EMPLOYEES CONTRIBUTION TO ESIC AFTER THE DUE DATE AS PER THE RESPECTIVE ACT THE CORRECT AMOUNT OF WHICH COMES TO RS.4,09,871/ - . APPLYING THE PROVISIONS OF SECTION 2(24)(X) R.W. SECTION 36 (1)(VA), THE AO ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 95.1 IN APPEAL, THE LD.CIT(A), FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. A IMIL LTD. , REPORTED IN 321 I TR 508, DELETED THE ADDITION ON THE GROUND THAT THE ASSESSEE HAS DEPOSITED THE ABOVE AMOUNT WELL BEFORE THE DUE DATE OF FILING THE TAX RETURN. 96 . AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 97 . THE LD. DR SUB MITTED THAT THE LD.CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITION WHEN THE ASSESSEE HAS NOT PAID THE STATUTORY DUES OF EMPLOYEES CONTRIBUTION TO ESIC BEFORE THE SPECIFIED DATE UNDER THE SAID ACT. 98. THE LD. COUNSEL FOR THE ASSESSEE , ON THE OTHER HA ND, SUBMITTED THAT ALTHOUGH THE ASSESSEE HAS DEPOSITED EMPLOYEES CONTRIBUTION TO ESIC AFTER THE DUE DATE SPECIFIED IN THE ACT, BUT, IT HAS DEPOSITED SUCH DEPOSITS BEFORE THE DUE DATE OF FILING OF THE RETURN U/S 139(1) OF THE ACT. REFERRING TO THE DECISIO N OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE LD. COUNSEL SUBMITTED THAT THE TRIBUNAL AT PARA 68 OF THE ORDER HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DISMISSED THE GROUND RAISED BY THE REVENUE ON TH IS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 90 ISSUE BY FOLLOWING THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD., REPORTED IN 2009 TIO L - 125 - SC - IT. REFERRING TO THE DECISION OF THE HON BLE RAJASTHAN HIGH COURT IN THE CASE OF DCIT VS. RAJASTHAN STATE BEVERAGES C ORPORATION LTD., REPORTED IN 250 TAXMAN 32, HE SUBMITTED THAT WHEN PF AND ESI WAS PAID BEFORE THE DUE DATE OF FILING OF RETURNS, THE SAME COULD NOT BE DISALLOWED UNDER SECTION 43B OR UNDER SECTION 36(1)(VA). HE SUBMITTED THAT THE SLP FILED BY THE REVENUE HAS BEEN DISMISSED BY THE HON BLE SUPREME COURT REPORTED IN 84 TAXMANN.COM 285. REFERRING TO COPY OF LETTER DATED 10.09.2018 ADDRESSED BY PR. DIRECTOR OF INCOME - TAX (LEGAL AND RESEARCH), NEW DELHI REGARDING FILING OF APPEAL IN CASES INVOLVING ISSUE OF ALL OWABILITY OF DEDUCTION OF EMPLOYEES CONTRIBUTION TO PF AND ESIC COPY OF WHICH IS PLACED AT PAGE 442 AND 443 OF THE PAPER BOOK, HE SUBMITTED THAT THE DEPARTMENT SHOULD NOT HAVE FILED APPEAL ON THIS ISSUE. 99 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE AO, IN THE INSTANT CASE, MADE ADDITION OF RS.4,09,871/ - U/S 36(1)(VA) R.W .S. 2(24)(X) OF THE ACT ON THE GROUND THAT THE EMPLOYEES CONTRIBUTION TO ESI C WERE DEPOSITED MUCH AFTER THE SPECIFIED DATES MENTIONED IN THE SAID ACT. WE FIND, THE LD.CIT(A) DELETED THE ADDITION ON THE GROUND THAT ALTHOUGH SUCH PAYMENTS WERE MADE /DEPOSI TED AFTER THE DUE DATE PRESCRIBED IN THE ESI ACT, HOWEVER, SUCH DEPOSITS WERE MADE PRIOR TO THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 91 DATE OF FILING OF THE RETURN U/S 139(1). WE FIND, THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHARAT HOTELS LTD., REPORTED IN (2019) 410 ITR 417 HAS HE LD THAT EMPLOYEES STATE INSURANCE CORPORATION AND PROVIDENT FUND DUES PAID BEYOND PRESCRIBED PERIOD IS NOT AN ALLOWABLE DEDUCTION. SINCE THE HON BLE DELHI HIGH COURT HAS DECIDED THE IDENTICAL ISSUE AGAINST THE ASSESSEE WHICH IS AFTER THE DATE OF SLP DISM ISSED BY THE HON BLE APEX COURT IN THE CASE OF RAJASTHAN STATE BEVERAGES CORPORATION LTD. (SUPRA) AND SINCE THE DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US, THEREFORE, THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSE E CANNOT BE FOLLOWED. IN THIS VIEW OF THE MATTER, THE ORDER OF THE LD.CIT(A) IS REVERSED AND THE GROUND RAISED BY THE REVENUE IS ALLOWED. 10 0 . IN GROUND OF APPEAL NO.8 THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE OF RS .1,57,45,700/ - MADE U/S 14A OF THE ACT R.W. RULE 8D OF THE IT RULES. 10 1 . FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, OBSERVED THAT THE ASSESSEE HAS SHOWN TAX FREE DIVIDEND INCOME OF RS.30,000/ - AND PROFIT OF RS.2,41,98,721/ - ON SALE OF SHARES OF M/S DABUR PHARMA LTD. AND CLAIMED AS EXEMPT WITH REGARD TO EXPENSES INCURRED RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME I.E., EXEMPTED INCOME. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DEDUCTION U/S 14A R.W. RULE 8D SHOULD NOT BE ALLOWED. REJECTING THE EXPLANATION GIVEN BY THE ASSESSEE AND APPLYING THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 92 PROVISION OF RULE 14A R.W. RULE 8D, THE AO MADE DISALLOWANCE OF RS.1,57,45,700/ - AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSE SSEE. 10 2 . IN APPEAL, THE LD.CIT(A) DIRECTED THE AO TO DELETE THE ADDITION ON THE GROUND THAT NO SATISFACTION WAS RECORDED BY THE AO U/S 14A(2) OF THE ACT REGARDING THE INCORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE . FURTHER, NO DISALLOWANCE OF INTEREST ON BORROWED FUND S COULD BE MADE U/S 14A OF THE ACT IN CASE OF MIXED POOL OF FUNDS AS IT IS NOT POSSIBLE TO ASCERTAIN WHETHER THERE EXISTS ANY NEXUS BETWEEN BORROWED FUNDS AND TAX FREE FUNDS. THE RELEVANT OBSERVATIONS OF THE LD. CIT(A) READS AS UNDER: - 2 4.1 I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPELLANT THE FACTS ARE THAT THE APPELLANT HAD NOT DISALLOWED ANY EXPENDITURE U/S 14A ON ITS OWN. THE APPELLANT HAD CONTENDED THAT APART FROM INVESTMENT IN EQUITY SHARES OF DABUR PHARMA LTD., NONE OF ITS INVES TMENTS COULD HAVE EARNED TAX FREE RETURNS U/S 10 OF THE ACT SO AS TO DISALLOW THE EXPENDITURE U/S 14 A. ONLY DIVIDEND INCOME OF RS. 30,000 WHICH IS EXEMPT HAS BEEN EARNED DURING THE PERIOD UNDER CONSIDERATION AND NO EXPENSES HAVE BEEN INCURRED TO EARN THIS INCOME. 24.2 FOLLOWING IS THE INVESTMENT SCHEDULE OF THE APPELLANT HAS ON 31 MARCH 2006/07: DESCRIPTION FY 2006 - 07 FY 2005 - 06 REMARK MUTUAL FUND 7,962 6,266 THESE MFS REPRESENT SHORT TERM MUTUAL FUNDS AND ARE FULLY TAXABLE U/S 45. DABUR I NTERNATIONAL LIMITED, UAE 4,466 2287.5 THIS IS INVESTMENT IN FOREIGN SUBSIDIARY AND FOREIGN DIVIDENDS ARE TAXABLE COMMERCE CENTRE COOPERATIVE HOUSING SOCIETY LIMITED 0.02 0.02 CAPEXIL (AGENCIES) LIMITED 0.01 0.01 DABUR EMPLOYEES CONSUMERS CO - OP STORES LIMITED 0.03 0.03 THERE CAN BE NO EARNINGS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 93 DABUR EMPLOYEES COOPERATIVE CREDIT SOCIETY LTD 0.07 0.07 FROM INVESTMENT IN THESE INSTRUMENT CO - OPERATIVE STORES LIMITED, SUPER BAZAR 0.05 0.05 SARASWAT CO - OP BANK LTD 0.1 0 NATIONAL SAVING CERTIFI CATES 1.07 0 INCOME EARNED ON THIS INVESTMENT IS TAXABLE AS PER INCOME TAX ACT 1961 KISAN VIKAS PATRA 0.07 0 DABUR FOODS LTD 2,000 2,000 BOTH ARE CONSISTENTLY LOSS MAKING COMPANIES. NO DIVIDEND RECEIVED. FURTHER, THESE LONG TERM INVESTMENTS ARE TAXABLE ON SALES/ TRANSFER U/S 45 OF THE ACT. SANAT PRODUCTS LTD 105 105 BALSARA HYGEINE PRODUCT LTD 11,650 SUBSIDIARY OF BALASARA HOME LTD, MERGED WITH DABUR DURING F.Y 2006 - 07 INCOME EARNED ON INVESTMENTS ARE TAXABLE ON SALES/ TRANSFER U/S 45 OF THE ACT. BASARA HOME PRODUCT LTD 3,405 BESTA COSMETIC LTD 1,790 DABUR PHARMA LTD 1 5 DIVIDEND INCOME, TAX FREE U/S 10 TOTAL INVESTMENT AS PER BALANCE SHEET - SCHG 14535 27508 24.3 THE AO HAS COMPUTED DISALLOWANCE U/S 14A R.W. RULE 8D IN PARA 8.5 OF ASSESSMENT ORDER WHICH IS REPRODUCED AS BELOW: CLAUSE (I) EXPENSES DIRECTLY RELATABLE TO EXEMPT INCOME NIL CLAUSE (II) DISALLOWANCE OF INTEREST EXPENSES 52.350 CLAUSE (III) 0.5% OF AVERAGE INVESTMENTS 105.107 TOTAL 157.457 ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 94 24.4 I HAVE CONSIDERE D THE SUBMISSIONS OF THE APPELLANT AND THE COMPUTATION OF DISALLOWANCE U/S 14A DONE BY THE AO. IT IS QUITE APPARENT THAT AO HAS NOT GONE INTO SPECIFICS OF EACH INVESTMENT BEFORE INVOKING SECTION 14A. FROM ABOVE CHART, IT IS SEEN THAT MOST OF THE INVESTMENT S COULD NOT HAVE YIELDED ANY INCOME WHICH IS TAX EXEMPT 24.5 IT IS PERTINENT TO MENTION THAT THE APPELLANT HAS NOT DISALLOWED ANY SUM U/S 14A ON ITS OWN. THE AO IS EMPOWERED UNDER SUBSECTION 2 OF SECTION 14A TO COMPUTE SUCH DISALLOWANCE AS PER PRESCRIBED METHOD (RULE 8D) BUT ONLY AFTER RECORDING HIS SATISFACTION THAT THE CLAIM OF THE APPELLANT IS NOT CORRECT. IN PRESENT CASE, THE AO HAS NOT STATED ANY REASON FOR NOT AGREEING WITH . CLAIM OF THE APPELLANT AND THUS REQUISITE SATISFACTION ON PART OF THE AO IS NOT DISCERNIBLE FROM THE ASSESSMENT ORDER. RESORTING TO PROVISIONS OF SUB - SECTION 2 OF SECTION 14A BY THE AO IS SUBJECT TO PRE - CONDITION OF HIS SATISFACTION ABOUT INCORRECTNESS OF CLAIM OF THE APPELLANT AND THEREFORE WITHOUT SATISFYING THIS PRE - CONDITION, THE AO CAN NOT COMPUTE DISALLOWANCE AS PER SECTION 14A(2). THIS PRINCIPLE HAS BEEN LAID DOWN BY JURISDICTIONAL HON BLE DELHI HIGH COURT IN CASE OF MAXOPP INVESTMENT LTD V CIT [201L - TIOL - 753 - HC - DEL - IT]. 24.6 FURTHER, NO DISALLOWANCE CAN BE MADE U/S 14A OF INTEREST ON BORROWED FUNDS WHERE IN CASE OF MIXED FUNDS, IT IS NOT POSSIBLE TO ASCERTAIN WHETHER THERE EXISTS AN NEXUS BETWEEN BORROWED FUNDS AND TAX FREE INVESTMENT. THIS PRINCIPLE HAS BEEN LAID DOWN IN FOLLOWING CASES: HERO CYCLES 323 ITR 518 (P&H) DCIT V MAHARASHTRA SEAMLESS LTD. (2011) 16 TAXMAN.COM 97 (DEL) 24.7 THE AO HAS MADE A DISALLOWANCE OF RS, 1.57 CRORES U/S 14A AS EXPENSES INCURRED IN RELATION TO TAX FREE DIVIDEND INCOME OF RS. 30000 ONLY. THIS IS NOTHING BUT TRAVESTY OF JUSTICE OBVIOU SLY, INTENTION OF THE LEGISLATURE WAS NOT TO COMPUTE DISALLOWANCE UNDER SUB - SECT ON 2 C F SECTION 14A MECHANICALLY IN A CASE WHERE NO EXPENSES HAVE BEEN ACTUALLY INCURRED IN RELATION TO TAX FREE INCOME. 24.8 IN VIEW OF ABOVE, THE AO IS DIRECTED TO DELETE THE ADDITION MADE ON THIS COUNT THE GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 10 3 . AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 95 10 4 . THE LD. DR HEAVILY RELIED ON THE ORDER OF THE AO. THE LD. COUNSEL, ON THE OTH ER HAND, WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT RULE 8D COULD NOT HAVE BEEN APPLIED MECHANICALLY MORE SO WHEN THE SAID RULE IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. FURTHER, ONLY INVESTMENT YIELDING DIVIDEND INCOME HAS TO BE CON SIDERED FOR THE PURPOSE OF MAKING DISALLOWANCE. HE SUBMITTED THAT INTEREST EXPENDITURE, IF ANY, RELATABLE TO DIVIDEND YIELDING INVESTMENT HAS TO BE CONSIDERED AND DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME. FOR THE ABOVE PROPOSITION, THE LD. COUNSEL RE LIED ON VARIOUS DECISIONS AS MENTIONED IN THE WRITTEN SYNOPSIS. 10 5 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED VA RIOUS DECISIONS CITED BEFORE US. WE FIND, THE AO, IN THE INSTANT CASE, DISALLOWED AN AMOUNT OF RS.1 , 57 ,45,700/ - U/S 14A R.W. RULE 8D ON THE GROUND THAT THE ASSESSEE HAS EARNED TAX FREE DIVIDEND INCOME OF RS.30,000/0 AND PROFIT OF RS.2,41,98,721/ - ON SALE S OF SHARES OF M/S DABUR PHARMA LTD . FURTHER, THE ASSESSEE HAS INCURRED HUGE INTEREST EXPENDITURE. WE FIND, THE LD.CIT(A) DELETED THE ADDITION THE REASONS FOR WHICH HAVE ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. IT IS THE SUBMISSION OF THE LD . COUNSEL THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.30,000/ - ONLY FROM SHARES HELD IN DABUR PHARMA LTD. WHICH WAS CLAIMED AS EXEMPT U/S 10(34) OF THE ACT. FURTHER, RULE 8D COULD NOT HAVE BEEN APPLIED MECHANICALLY, MORE SO, WHEN THE SAID RULE IS ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 96 NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. IT IS ALSO HIS SUBMISSION THAT ONLY INVESTMENT YIELDING DIVIDEND INCOME HAS TO BE CONSIDERED FOR THE PURPOSE OF MAKING DISALLOWANCE U/S 14A AND INTEREST EXPENDITURE, IF ANY, ELIGIBLE RELATABLE TO DIVIDEND Y IELDING INVESTMENT HAS TO BE CONSIDERED. THE ALTERNATE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS THAT DISALLOWANCE, IF ANY, CANNOT EXCEED THE EXEMPT INCOME AS HELD BY VARIOUS DECISIONS. 106. SINCE THE ASSESSMENT YEAR INVOLVED IN THE IMPUGNED APPE AL IS 2007 - 08, THEREFORE, PROVISIONS OF RULE 8D CANNOT BE APPLIED FOR THE IMPUGNED ASSESSMENT YEAR AS HELD IN VARIOUS DECISIONS. FURTHER, IT HAS BEEN HELD IN VARIOUS DECISIONS THAT PROVISIONS OF SECTION 14A ARE APPLICABLE ONLY IF THE ASSESSING OFFICER AT THE FIRST PLACE FINDS THAT THE ASSESSEE HAS ACTUALLY INCURRED EXPENSES WHICH HAVE PROXIMATE NEXUS WITH EARNING OF DIVIDEND INCOME AND NOT OTHERWISE. HOWEVER, IN THE INSTANT CASE, THERE IS NO SUCH RECORDING OF SATISFACTION, THEREFORE, WE FIND SOME FORCE IN THE ARGUMENT OF THE LD. COUNSEL THAT IN ABSENCE OF RECORDING OF ANY SATISFACTION, PROVISIONS OF SECTION 14A CANNOT BE APPLIED MECHANICALLY. FURTHER, THE INTEREST EXPENDITURE, IF ANY, RELATABLE TO DIVIDEND YIELDING INVESTMENT HAS TO BE CONSIDERED AS HELD IN VARIOUS DECISIONS. IT IS ALSO HELD IN VARIOUS DECISIONS THAT ONLY INVESTMENTS YIELDING DIVIDEND INCOME HAS TO BE CONSIDERED FOR THE PURPOSE OF MAKING DISALLOWANCE U/S 14A. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE AO WAS NOT JUSTIFIED IN APPLYING THE PROVISIONS OF SECTION 14A R.W. RULE 8D AND DISALLOW AN AMOUNT OF RS.1,57,45,700/ - U/S 14A R.W. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 97 RULE 8D AS AGAINST THE ACTUAL DIVIDEND INCOME OF RS.30,000/ - . IT HAS BEEN HELD IN VARIOUS DECISIONS THAT THE DISALLOWANCE CANNOT EXCE ED THE EXEMPT INCOME . SINCE THE ASSESSEE IN THE INSTANT CASE HAS EARNED DIVIDEND INCOME OF ONLY RS.30,000/ - DURING THE IMPUGNED ASSESSMENT YEAR, THEREFORE, FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. VS . CIT, 372 ITR 694 WHERE IT HAS BEEN HELD THAT DISALLOWANCE U/S 14A CANNOT EXCEED EXEMPT INCOME AND THE SLP FILED BY THE REVENUE HAS BEEN DISMISSED BY THE HON BLE SUPREME COURT, WE ACCEPT THE ALTERNATE CONTENTION OF THE ASSESSEE THAT THE DISALLOWANCE CANNO T EXCEED THE ACTUAL DIVIDEND INCOME. WE ACCORDINGLY HOLD THAT THE DISALLOWANCE U/S 14A HAS TO BE RESTRICTED TO RS.30,000/ - . THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY PARTLY ALLOWED. 107. IN GROUND OF APPEAL NO.9, THE REVENUE HAS CHALLENGED THE ORD ER OF THE CIT(A) IN DIRECTING THE AO TO ALLOW DEPRECIATION @ 25% OF THE GOODWILL WHICH WERE NOT SHOWN BY THE ASSESSEE AS ITS ASSETS. 108. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE COMPANY, VIDE ITS LETTER DATED 13 TH DECEMBER, 2010, CLAIMED DEPREC IATION ON GOODWILL PAID ON B A LSARA HOME PRODUCT LTD. AND B ESTA COSMETICS LTD. AND ONE SUBSIDIARY , NAMELY, BALSARA HYGENCE LTD. UNDER THE SCHEME OF MERGER APPROVED BY THE HIGH COURTS OF DELHI AND BOMBAY W.E.F. 1 ST APRIL, 2006. SINCE THE ASSESSEE COMPANY HA S NOT TAKEN THE PAYMENT OF GOODWILL IN ITS INTANGIBLE AND HAS SHOWN AS ADJUSTED AGAINST CAPITAL RESERVE AND SHARE PREMIUM ACCOUNT, THEREFORE, THE AO HELD THAT THE SAME IS NOT ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 98 ALLOWABLE. HE F URTHER NOTED THAT THE ASSESSEE HAS NOT CLAIMED THE SAME IN THE R ETURN OF INCOME. THE AO, THEREFORE, REJECTED THE CLAIM OF DEPRECIATION ON GOODWILL. 109. IN APPEAL, THE LD.CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: - 27. FINDING: 27.1 I HAVE GONE THROUGH VARIOUS SUBMISSIONS OF THE APPELLANT AND THE FACTS OF THE CASE. PURSUANT TO THE DELHI AND MUMBAI HIGH COURT S ORDER, BALSARA GROUP OF COMPANIES (BALSARA HYGIENE PRODUCTS LTD, BESTA COSMETICS LTD AND BALSARA HORAE PRODUCTS LTD) MERGED WITH APPELLANT COMPANY W.E.F. 01 - 04 - 2006. THE APPELLANT CONTEND S THAT IT HAS PAID AN EXCESS OF RS 158.75 CRORES OVER THE NET ASSETS AS COST OF MERGER. ACCORDING TO THE APPELLANT, THIS EXCESS AMOUNT WAS PAID TOWARDS GOODWILL OF AMALGAMATING COMPANIES AND IT IS SUBJECT TO DEPRECIATION U/S 32. AS THE PER THE AO, THE CLAI M OF DEPRECIATION ON THIS EXCESS PAID OVER NET ASSETS IS NOT MAINTAINABLE AS THE ASSESSEE HAD NOT CLAIMED THE DEPRECIATION IN THE RETURN OF INCOME AND ALSO HAS NOT SHOWN THIS AMOUNT AS INTANGIBLE ASSETS IN THE ACCOUNTS AND THE SAME WAS ADJUSTED WITH GENERA L RESERVE AND SHARE PREMIUM A/C. 27.2 THE APPELLANT CONTENDS THAT ENTRY IN BOOKS OF ACCOUNTS IS NOT DETERMINATIVE OF THE TAX LIABILITY AND THAT INCOME TAX LIABILITY IS DETERMINED AS PER PROVISIONS OF THE INCOME TAX ACT 1961. IN SUPPORT THIS CONTENTION, TH E APPELLANT RELIED UPON THE RULING OF HON BLE SUPREME COURT IN CASE OF KEDARNATH JUTE MANUFACTURING (SUPRA). BESIDES THIS, THE APPELLANT ALSO CLAIMED THAT DEPRECIATION IS ALLOWABLE ON GOODWILL EVEN THOUGH IT IS NOT CLAIMED IN RETURN OF INCOME, IN VIEW OF E XPLANATION 5 TO SECTION 32 WHICH IS REPRODUCED AS BELOW: 32. DEPRECIATION. (I) IN RESPECT OF DEPRECIATION OF - (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; (II) KNOW - HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY ;: APRIL 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED - . .. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 99 EXPLANATION 5. - FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE PROVISIONS OF THIS SUBSECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED THE DEDUCTION IN RESPECT OF DEPRECIATION IN COMPUTING HIS TOTAL INCOME; 27.3 I HAVE GONE THROUGH THE CONTENTIONS MADE BY THE APPELLANT. I AGREE WITH CONTENTION OF THE APPELLANT THAT MANNER OF MAKING ENTRY IN BOOKS OF ACCOUNTS CANNOT DETERMINE THE STATUTORY LIABILITY UNDER INCOME TAX ACT, ACCORDINGLY, THE POINT OF AO THAT THE APPELLANT HAD NOT BOOKED EXCESS PAYMENT IN ITS BOOKS OF A/C AS GOODWILL IS NOT TENABLE. 27.4 THE ISSUE TO BE ADJUDICATED HERE IS WHETHER THE EXCESS PAYMENT OVER AND ABOVE NET ASSETS MADE AS COST OF MERGER IS IN NATURE OF GOODWILL. THE APPELLANT CONTENDED THAT EVEN IF THE AMOUNT OF EXCESS PAID OVER NET ASSETS IS KNOCKED OFF AGAINST GENERAL RESERVES AND SHARE PREMIUM, THE FACT REMAINS THAT THE EXCESS WAS PAID TO ACQUIRE THE COMPLETE BUSINESS OF THE BALSARA AND THAT VALUATION OF INTANGIBLES (SUCH AS MARKETING , BRAND, CUSTOMER LIST, SUPPLY CHAIN NETWORK, VENDORS, HUMAN RESOURCES ETC) WAS INBUILT IN THE PRICE PAID TO BALSARA. THE FACT THAT BALSARA HAD BUILT ITS BUSINESS OVER A PERIOD OF TIME, IT HAS DEFINITELY ACQUIRED GOODWILL NOT STATED IN THE BOOKS. THE APPEL LANT HAD NOT TO START , THE BUSINESS FROM SCRATCH RELATING TO BALSARA PRODUCTS AND WITH ITS READY MARKET FOR PRODUCTS, SALES AND PROFIT COULD HAVE ACCRUED TO THE APPELLANT FROM THE VERY BEGINNING. NOW TO ACQUIRE A RUNNING BUSINESS WITH AN ESTABLISHED TURNO VER AND BRAND, THERE HAD TO BE SOME PREMIUM PAID OVER THE NET ASSETS. THE APPELLANT CONTENDED THAT THE PREMIUM PAID IS NOTHING BUT GOODWILL WITHIN THE MEANING OF EXPLANATION 3(B) OF SECTION 32(1). 27.5 IN MY VIEW, THERE IS A FORCE IN THE ARGUMENTS OF THE APPELLANT. THE EXCESS AMOUNT PAID OVER NET ASSETS OF RS 158.75 CRORES IS IN NATURE OF GOODWILL AS THE SAME WAS PAID TO ACQUIRE COMPLETE BUSINESS OF BALSARA INCLUDING MARKETING INTANGIBLE, BRANDS, HUMAN RESOURCES, SUPPLY CHAIN NETWORK, CUSTOMERS, VENDORS ET C. GOODWILL HERE IS IN FACT, SUM TOTAL OF ALL COMMERCIAL AND BUSINESS RIGHTS OF BALSARA GROUP WHICH THE APPELLANT ACQUIRED AFTER MERGER WITH BALSARA GROUP COMPANIES. I HAVE CAREFULLY GONE THROUGH SCHEME OF AMALGAMATION / MERGER AS APPROVED BY BOMBAY / DELH I HIGH COURT AS PER THIS SCHEME, ASSETS AND LIABILITIES OF AMALGAMATING COMPANIES WERE TO BE CARRIED / RECORDED IN BOOKS OF THE APPELLANT COMPANY AT BOOK VALUE AND COST OF MERGER WAS TO BE SET OFF AGAINST GENERAL RESERVE AND SHARE PREMIUM ACCOUNTS OF THE A PPELLANT COMPANY. THEREFORE, AS PER SCHEME OF MERGER APPROVED BY HON BLE HIGH COURTS, EXCESS PAYMENT / COST OF MERGER WAS NOT TO BE BOOKED AS GOODWILL A/C. THIS ACCOUNTING PRACTICE IS ALSO AS PER AS - 14 PRESCRIBED BY ICAI FOR ACCOUNTING PROCEDURE OF AMALGAM ATION. FACTS OF THE CASE OF CIT V SMIFS SECURITIES LTD. (SUPRA) ARE ESSENTIALLY SIMILAR TO FACTS OF THE PRESENT CASE. ACCORDINGLY, I HOLD THAT THE EXCESS PAID OVER NET ASSETS AMOUNTING TO RS 158.75 CRORES IS IN NATURE OF GOODWILL WITHIN THE MEANING OF SECT ION 32(1) OF THE ACT R.W. EXPLANATION 3(B). ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 100 27.6 IT S TRITE LAW THAT THE AO IS BOUND TO COMPLETE ASSESSMENT AS PER THE PROVISIONS OF THE ACT THE APPELLANT POINTED OUT TO THE AO IN COURSE OF ASSESSMENT PROCEEDINGS THAT DEPRECIATION OF GOODWILL SHOULD BE AL LOWED TO IT IN VIEW OF EXPLANATION 5 OF SECTION 32(1) OF THE ACT WHICH WAS IGNORED BY THE AO. ONCE IT IS HELD THAT EXCESS PAYMENT IS IN NATURE OF GOODWILL, IN VIEW PROVISIONS OF EXPLANATION 5 OF SECTION 32,(1), THE ALLOWANCE OF DEPRECIATION IS MANDATORY EV EN IF NOT CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME. ACCORDINGLY, I DIRECT THE AO TO ALLOW DEPRECIATION @ 25% ON THE GOODWILL. WITH THIS, THE GROUND OF APPEAL IS ALLOWED. 110. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFOR E THE TRIBUNAL. 111. THE LD. DR, STRONGLY CHALLENGED THE ORDER OF THE CIT(A) IN ALLOWING THE DEPRECIATION ON GOODWILL ON THE GROUND THAT THE ASSESSEE HAS NOT SHOWN THE PAYMENT OF GOODWILL IN ITS INTANGIBLE ASSETS AND HAS ADJUSTED AGAINST ITS RESERVES AND SHARE PREMIUM AND, THEREFORE, THE SAME IS NOT ALLOWABLE ESPECIALLY WHEN THE ASSESSEE HAS NOT CLAIMED THE SAME IN THE RETURN OF INCOME. 112. THE LD. COUNSEL, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE CONSIDERAT ION OF RS.168.47 CRORES WAS PAID BY THE ASSESSEE TO ACQUIRE BALSARA BUSINESS, BEING BHPL ( BALSARA HYGIENE PRODUCTS LIMITED ), BALSARA COSMETICS LTD. AND BALSARA HOME PRODUCTS LTD. HOWEVER, THE NET WORTH OF THESE THREE COMPANIES WAS ONLY 9.72 CRORES AND THE BALANCE AMOUNT OF RS.L5 8.75 CRORES REPRESENT S INTANGIBLES AND OTHER FACTORS. THEREAFTER, AS PART OF INTEGRATION OF THE NEWLY ACQUIRED BALSARA BUSINESS, THE SAID COMPANIES WERE AMALGAMATED WITH THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTI ON ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 101 OF THE BENCH TO T HE SALIENT FEATURES OF THE SCHEME OF AMALGAMATION WHICH ARE AS FOLLOWS: (I) THE SCHEME WAS SANCTIONED BY THE HIGH COURT OF DELHI ON 12.09.2006 WITH EFFECT FROM APRIL 1, 2006, BEING THE APPOINTED DATE OF THE MERGER; (II) ALL THE ASSETS AND LIABILITIES OF BALSARA COMPANIES SHALL STAND TRANSFERRED TO THE ASSESSEE AT THEIR RESPECTIVE BOOK VALUE AS APPEARING IN THE BOOKS OF THE TRANSFEREE COMPANIES [CLAUSE 6.1(C)]; (III) THE DIFFERENCE BETWEEN THE VALUE OF SHARES ISSUED BY THE ASSESSEE AND B OOK VALUE OF NET ASSETS TAKEN OVER SHALL BE DEBITED TO SHARE PREMIUM ACCOUNT, CAPITAL REDEMPTION ACCOUNT AND GENERAL RESERVE ACCOUNT AND THE BALANCE IF ANY SHALL BE ADJUSTED AGAINST ACCUMULATED CREDIT BALANCE IN THE PROFIT & LOSS ACCOUNT [CLAUSE 6.1(E)]; 113. HE SUBMITTED THAT I N ACCORDANCE WITH THE SCHEME OF AMALGAMATION, THE ASSESSEE RECORDED THE ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANIES AT THEIR RESPECTIVE BOOK VALUE. THE DIFFERENCE BETWEEN THE CONSIDERATION OF RS. 168.47 CRORES PAID BY THE A SSESSEE TO ACQUIRE BHPL, BALSARA HOME PRODUCTS LIMITED AND BCL AND NET WORTH OF RS.9.72 CRORES, BEING RS. 158.75 CRORES REPRESENTED INTANGIBLES AND OTHER FACTORS IN THE FORM OF GOODWILL, WHICH WAS, IN ACCORDANCE WITH THE SCHEME OF AMALGAMATION, ADJUSTED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS AS FOLLOWS: A) ADJUSTED AGAINST SHARE PREMIUM ACCOUNT - RS.58.36 CRORES ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 102 B) ADJUSTED AGAINST GENERAL RESERVE ACCOUNT - RS. 100.40 CRORES 114. REFERRING TO THE NOTES TO ACCOUNTS OF THE AUDIT REPORT, HE SUBMITTED THAT T HE AFORESAID FACTS WERE ALSO DULY STATED IN THE NOTES TO ACCOUNTS, APPENDED TO THE AUDITED ACCOUNTS . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE EXCESS CONSIDERATION OF RS. 158.75 CRORES WAS PAID BY THE ASSESSEE TO ACQUIRE VARIOUS INTANGIBLES OF BA LSARA GROUP OF COMPANIES, BEING BRAND AND OTHER COMMERCIAL RIGHTS, ALL REFERRED TO AS GOODWILL. HE SUBMITTED THAT GOODWILL DESCRIBED AS SUCH, IS A COMPENDIOUS OF VARIOUS INTANGIBLE BUSINESS AND COMMERCIAL RIGHTS RESULTI NG IN WHOLE ADVANTAGE TO THE BUSIN ESS, WHICH MAY BE ON ACCOUNT OF VARIOUS FACTORS LIKE LOCATION, CONTRACTS, PERSONNEL INC LUDING MANAGEMENT EXPERIENCE/ HISTORY, EXISTING CUSTOMER BASE, LICENSES, TRADE NAME/ LOGO, ETC. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE FOLLOWING FACTORS JUS TIFY GOODWILL OF BALSARA BUSINESS: A) BALSARA GROUP WAS ESTABLISHED IN THE YEAR 1925. THE GROUP COMPANIES MAINLY FOCUSES ON MANUFACTURING ORAL CARE PRODUCTS, INSECT REPELLENTS, AIR FRESHENERS AND HOUSEHOLD CLEANERS WITH ODONIL, ODOMES, SANI FRESH AS ITS FAMOUS PRODUCTS; B) BALSARA GROUP HAD GAINED A COMMENDABLE POSITION IN BOTH DOMESTIC AND INTERNATIONAL MARKETS BY PRODUCING NATURAL, HERBAL, FLUORIDE, BAKING SODA, TARTAR - CONTROL, GEL, SENSITIVE TEETH AND CHILDREN'S TOOTHPASTE FORMULATIONS. SOME OF THE FA MOUS TOOTHPASTE OF THE COMPANIES ARE NEW BABOOL, MESWAK, ETC; C) BALSARA'S TOOTHPASTES ARE ALSO VERY POPULAR IN GLOBAL MARKETS INCLUDING RUSSIA, UKRAINE, CIS, MIDDLE EAST, FIJI AND AFRICAN MARKETS. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 103 D) RESEARCH AND PRODUCT DEVELOPMENT - RESEARCH AND PRODUCT DEVELOPMENT IS A MAJOR STRENGTH AND COMPETITIVE ADVANTAGE OF THE BALSARA GROUP. BALSARA'S STATE - OF - THE - ART RESEARCH CENTER, LOCATED IN THANE, HAS BEEN RECOGNIZED BY THE GOVERNMENT OF INDIA. E) MANUFACTURING AND SUPPLY CHAIN - BALSARA'S MANUFACTURING HUBS AR E LOCATED AT SILVASSA, KANPUR AND BADDI. BALSARA'S MANUFACTURING FACILITIES ARE APPROVED BY THE FDA, POLLUTION CONTROL BOARD AND OTHER AUTHORITIES . F) HUMAN RESOURCES AND MARKETINS - BALSARA GROUP'S CORPORATE, MANUFACTURING, SALES, DISTRIBUTION AND ADMINIST RATIVE OPERATIONS ARE PROFESSIONALLY MANAGED. G) BALSARA GROUP PRODUCES BRANDED PRODUCTS OF WORLD - CLASS STANDARD AS WELL AS PRIVATE LABEL PRODUCTS AND MARKETS THEM IN BOTH THE INDIAN AND INTERNATIONAL MARKETS AT RELATIVELY COMPETITIVE RATES. THE BALSARA GR OUP IS ALSO ENGAGED IN MANUFACTURING HERBAL EXTRACTS AND COMPLEXES UNDER SOME LEADING WORLDWIDE BRANDS OF NATURAL COSMETICS NAMELY THE BODY SHOP ETC. THE BALSARA GROUP HAS MANUFACTURED PRIVATE LABEL PRODUCTS FOR SOME LARGE - SCALE COMPANIES SUCH AS COLGATE PALMOLIVE, BEECHAM GROUP, HENKEL COSMETICS AND RECKITT & COLEMAN. H) BALSARA HAS A WIDE NATIONAL SALES AND DISTRIBUTION SYSTEM THAT MAKES PRODUCTS AVAILABLE IN 700,000 RETAIL OUTLETS. THE SYSTEM IS SUPPORTED BY A DISTRIBUTION NETWORK OF 4 ZONAL OFFICES, 10 BRANCHES, 23 REGIONAL WAREHOUSES, AND 1700 DISTRIBUTORS IN 1500 TOWNS. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 104 114.1 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT BRAND IS A SPECIAL INTANGIBLE THAT IN MANY BUSINESSES IT IS THE MOST IMPORTANT ASSET. THIS IS BECAUSE OF THE ECONOMIC IMPACT TH AT BRANDS HAVE. THEY INFLUENCE THE CHOICES OF CUSTOMERS, EMPLOYEES, INVESTORS AND THE GOVERNMENT AUTHORITIES. IN A WORLD OF ABUNDANT CHOICES, SUCH INFLUENCE IS CRUCIAL FOR THE COMMERCIAL SUCCESS AN D CREATION OF SHAREHOLDER VALUE E SPECIALLY IN CASE OF COMPA NIES ENGAGED IN FMCG PRODUCTS, BRAND PLAYS A VERY IMPORTANT ROLE CONTRIBUTING TOWARDS THE OVERALL BUSINESS VALUE. THE MAJOR SALES OF SUCH COMPANIES DEPEND UPON THEIR BRAND NAME. HE SUBMITTED THAT I N THE FMCG SECTOR, ONE NEEDS TO BE FAST IN TRANSLATING THE IDEAS INTO NEW PRODUCTS. THERE IS A REQUIREMENT TO CREATE THE PRODUCTS THAT PEOPLE TRUST, ENJOY AND USE IN THEIR DAILY LIVES. ADVERTISING AND MARKETING HAVE A VITAL ROLE TO PLAY IN THIS. PEOPLE NOW ARE GETTING MORE & MORE HEALTH CONSCIOUS AND ARE GETTING C ONCERNED ABOUT WHAT THEY ARE USING. THEY BUY ONLY THOSE PRODUCTS WHICH ARE OF A GOOD QUALITY AND ARE OF A RELIABLE BRAND. 114.2 HE SUBMITTED THAT THE PRODUCTS OFFERED BY BALSARA COMPANIES ARE OF A GOOD STANDARD QUALITY AND RELIABLE WHICH IS THE MAIN FAC TOR CONTRIBUTING TO THE WHY PEOPLE PREFER BUYING ITS PRODUCTS. HE SUBMITTED THAT BALSARA BRAND WAS WELL ESTABLISHED. TO BUILD SUCH A BRAND, IT TAKES A LOT OF EFFORT, TIME AND ENERGY. A LOT OF TIME GOES INTO BUILDING UP A GOOD BRAND NAME. THERE ARE VERY FEW BRANDED PRODUCTS LIKE PROCTER AND GAMBLE, COLGATE, GODREJ, ETC. BRAND CREATES ENTRY BARRIERS AND IS CREATED OVER THE YEARS. A NEW PLAYER, WHO ENTERS A MARKET, ALSO ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 105 NEEDS TO SPEND TIME, ENERGY AND EFFORT TO BUILD ITS NAME IN THE MARKET. THUS A NEW PLAYER C AN BREAK A MARKET ONLY OVER A PERIOD OF TIME. THE ASSESSEE, THUS, ACQUIRED SUBSTANTIAL INTANGIBLES/ COMMERCIAL RIGHTS IN THE FORM OF A WELL - ESTABLISHED BRAND, I.E., BALSARA ALONG WITH ITS MARKETING STRENGTH, TECHNOLOGICAL STRENGTH, DISTRIBUTION NETWORK, THE HUMAN WORKFORCE, ETC., ELABORATELY DISCUSSED SUPRA. HE ACCORDINGLY SUBMITTED THAT THERE CAN BE NO DISPUTE, WHATSOEVER, THAT THE EXCESS CONSIDERATION OF RS. 158.76 CR., BEING EXCESS OF CONSIDERATION OVER THE NET ASSETS, WAS ON ACCOUNT OF VARIOUS INTANGI BLES/ COMMERCIAL RIGHTS, BEING REFERRED TO AS GOODWILL OF THE BALSARA COMPANIES. 114.3 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT GOODWILL FUNDAMENTALLY REPRESENTS THE INTRINSIC WORTH OF THE BUSINESS OF THE TRANSFEROR COMPANIES INASMUCH AS THE VAL UATION OF EXISTING BUSINESS IS MUCH MORE THAN THE FAIR VALUE OF THE EXISTING TANGIBLE ASSETS AND THE DIFFERENCE, IN FACT, FUNDAMENTALLY REFLECTS THE VALUE OF INTANGIBLE ASSETS (LIKE, BUSINESS AND COMMERCIAL RIGHTS, GOODWILL, LICENCES, TRADE MARK, ETC.) NOT REFLECTED IN THE BOOKS OF THE AMALGAMATING COMPANIES. 114.4 HE DREW THE ATTENTION OF THE BENCH TO PROVISIONS OF SECTION 32 OF THE ACT WHICH DEALS WITH DEPRECIATION ALLOWANCE ON TANGIBLE AND INTANGIBLE ASSETS USED FOR THE PURPOSES OF BUSINESS . HE SUBM ITTED THAT C LAUSE (II) OF THE AFORESAID SECTION PROVIDES FOR DEPRECIATION ON INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1.4.1998. THE AFORESAID CLAUSE PROVIDES FOR DEPRECIATION ON INTANGIBLE ASSETS IN THE NATURE OF, INTER ALIA, KNOW - HOW , PATENT , COPY RIGH TS , TRADE MARK , LICENSE AND ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 106 FRANCHISE . THE AFORESAID CATEGORY OF INTANGIBLE ASSET IS SUCCEEDED BY THE RESIDUAL CATEGORY, VIZ., INTANGIBLE ASSETS BEING BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE . HE SUBMITTED THAT THE AMOUNT REPRESENTING THE E XCESS OF CONSIDERATION PAID OVER THE FAIR VALUE NET ASSETS OF TRANSFEROR COMPANY(IES), RECOGNISED AS GOODWILL, FALL WITHIN THE AMBIT OF THE EXPRESSION BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE , SO AS TO QUALIFY FOR DEPRECIATION UNDER SECTION 32 OF THE ACT. REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT DEPRECIATION IS ALLOWABLE ON GOODWILL: - 1) CIT VS. SMIFS SECURITIES LTD.: (2012) 348 ITR 302 (SC); 2) AREVA T AND D INDIA LTD. V. DCIT: 345 ITR 421 (DEL); 3) TRIUNE ENERGY SERVICES PRIVATE LIMITED VS. DCIT: 237 TAXMAN 230 (DEL); 4) ZYDUS WELLNESS LTD: [2017] 87 TAXMANN.COM 82 (GUJ); 5) CIT V. HINDUSTAN COCA - COLA BEVERAGES (P) LTD.: 331 ITR 192 (DEL.) - SLP FILED BY REVENUE HAS BEEN DISMISSED BY THE SUPREME COURT IN SLP NO. 26151/2011 ; 6) PCIT VS. RICOH IN DIA LTD: ITA NO. 1127 OF 2017 (BOM HC) ; 7) B. RAVEENDRAN PILLAI: 332 ITR 531 (KER.) ; 8) CIT V. MANIPAL UNIVERSAL LEARNING (P.) LTD : 215 TAXMAN 151 (KAR.) ; 9) PR. CIT V. SWASTIK INDUSTRIES: 240 TAXMAN 510 (GUJ) ; 10) ACIT VS. M/S BIRLA GLOBAL ASSET FINANCE CO. LTD.: ITA NO. 4898 - 4900/MUM/2008 - AFFIRMED BY THE BOMBAY HIGH COURT: (2014) 221 TAXMAN 176 ; 11) CIT VS. RFCL LTD.: (2015) 277 CTR 272 (HP.) ; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 107 12) D ECISION OF SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF M/S. CLC & SONS PVT LTD. VS. ACIT: 171 ITD 139, 13) DCIT VS. TOYO ENGINEERING I NDIA LTD: ITA NO. 3279/M/ 2008; 14) ARICENT TECHNOLOGIES (HOLDINGS) LTD. VS. DCIT: 109 TAXMANN.COM 47 (DELHI ITAT) , 15) SARTORIOUS MECHATRONICS INDIA (P.) LTD. VS. ACIT: 982/BANG/2013 (BANG.) ; 16) DCIT VS. BOSCH LTD: ITA NO. 329/BANG/2009 (BANG.) ; 17) S AMSUNG R&D INSTITUTE INDIA BANGALORE PVT. LTD. VS. ACIT: ITA NO. 672/BANG/2014 (BANG. TRIB.) ; 18) THYSSENKRUPP ELEVATOR (INDIA) (P.) LTD. V. ACIT: 167 TTJ 131 (DEL. TRIB.) ; 19) CYBER INDIA ONLINE LTD.: 64 SOT 1/ 42 TAXMANN.COM 108 (DEL. TRIB.) ; 20) GURUJI ENTERTAINM ENT NETWORK LTD. V. ACIT: 108 TTJ 180 (DEL. TRIB.) 21) TAJ SATS AIR CATERING LTD. VS. ACIT: 146 ITD 231 (MUM TRIB.) ; 22) SKYLINE CATERERS (P) LTD. V. ITO: 116 ITD 348 (MUM. TRIB) ; 23) JUST DIAL LTD. VS. ACIT: 289/MUM/2013 (MUM. TRIB.) ; 24) THE AP PAPER MILLS LTD. VS. ACIT : 128 TTJ 596 (HYD. TRIB.) ; 25) SKS MICRO FINANCE LTD. VS. DCIT: 160 ITD 364 (HYD. TRIB.) ; 26) SHAMRAO VITHAL COOP BA NK LTD. VS DCIT : ITA NOS. 4092 /MUM/2011 ; AND 27) DCIT VS. RICOH INDIA LIMITED : ITA NO. 4700/MUM/2015 114.5 REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT THE ENTRIES MADE IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE AMBIT OF TAXATION. IF AN ITEM OF ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 108 INCOME/EXPENDITURE IS TAXABLE/DEDUCTIBLE, THE SAME HAS TO BE TAKEN INTO ACCOUNT AS PER THE PROVISIONS OF THE ACT AND NOT AS PER BOOKS OF ACCOUNT: - I) KEDARNATH JUT E MANUFACTURING COMPANY VS. CIT, 82 ITR 363 (SC); II) SUTLEJ COTTON MILLS LTD. VS. CIT, 116 ITR 1 (SC); III) BHARAT CARBON AND RIBBON MFG. CO. (P) LTD. VS. CIT, 239 ITR 505 (SC); IV) CIT VS. UP ELECTRONICS CORPORATION LTD., 282 ITR 470 (ALL) 114.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES , PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE AO, IN TH E INSTANT CASE, DISALLOWED THE CLAIM OF DEPRECIATION ON GOODWILL ON THE GROUND THAT THE ASSESSEE HAS NOT SHOWN THE PAYMENT OF GOODWILL IN ITS INTANGIBLE ASSETS AND HAS ADJUSTED IT AGAINST THE RESERVES AND SHARE PREMIUM AND THE ASSESSEE HAS ALSO NOT CLAIMED DEPRECIATION ON GOODWILL IN THE RETURN OF INCOME AND, THEREFORE, THE SAME IS NOT ALLOWABLE. WE FIND, THE LD.CIT(A) ALLOWED THE CLAIM OF DEPRECIATION ON GOODWILL AS CLAIMED BY THE ASSESSEE THE REASONS OF WHICH HAVE ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. IT IS THE SUBMISSION OF THE LD. DR THAT WHEN THE ASSESSEE HAS NOT CLAIMED SUCH DEPRECIATION IN THE RETURN OF INCOME AND HAS NOT SHOWN THE PAYMENT OF GOODWILL IN ITS INTANGIBLE ASSETS AND HAS ADJUSTED IT AGAINST THE RESERVES AND SHARE PREMIUMS, THEREFORE, THE LD.CIT(A) IS NOT JUSTIFIED IN ALLOWING THE CLAIM OF DEPRECIATION ON GOODWILL. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE DIFFERENCE BETWEEN THE CONSIDERATION PAID ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 109 BY THE ASSESSEE TO ACQUIRE THE BUSINESS AND NET WORTH OF THE COMPANIES ACQUIRED BY IT REPRESENT S THE INTANGIBLES AND OTHER FACTORS IN THE FORM OF GOODWILL WHICH WERE IN ACCORDANCE WITH THE SCHEME OF AMALGAMATION. IT IS HIS SUBMISSION THAT THE AMOUNT REPRESENTING THE EXCESS OF CONSIDERATION OF RS.158.75 CROR ES PAID OVER THE FAIR VALUE OF NET ASSETS OF TRANSFEROR COMPANIES RECOGNIZE D AS GOODWILL FALL WITHIN THE AMBIT OF THE EXPRESSION BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE SO AS TO QUALIFY FOR DEPRECIATION U/S 32 OF THE IT ACT. 114.7 WE FIND, FOR CE IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE . WE FIND, THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. (SUPRA) WHILE DISCUSSING AN IDENTICAL ISSUE HAS OBSERVED AS UNDER: - 1. NONE APPEARS FOR THE RESPONDENT, THOUGH SERVED. HEARD LEARNED COUNSEL FOR THE DEPARTMENT. LEAVE GRANTED. THIS CIVIL APPEAL CONCERNS THE ASSESSMENT YEAR 2003 - 2004. THREE QUESTIONS ARISE FOR DETERMINATION BY THIS COURT. THEY ARE AS FOLLOWS: QUESTION NO.[A]: 'WHETHER STOCK EXCHANGE MEMBERSHIP CAR DS ARE ASSETS ELIGIBLE FOR DEPRECIATION UNDER SECTION 32 OF THE INCOME TAX ACT, 1961? WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, DELETION OF RS.53,84,766/ - HAS BEEN MADE CORRECTLY?' ANSWER: LEARNED ADDITIONAL SOLICITOR GENERAL FAIRLY CON CEDES THAT THE SAID QUESTION IS COVERED BY THE DECISION OF THIS COURT IN THE CASE OF TECHNO SHARES AND STOCKS LIMITED VS. COMMISSIONER OF INCOME TAX, REPORTED IN [2010] 327 I.T.R. 323, IN FAVOUR OF THE ASSESSEE. QUESTION NO.[B]: 'WHETHER GOODWILL IS AN A SSET WITHIN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT, 1961, AND WHETHER DEPRECIATION ON `GOODWILL' IS ALLOWABLE UNDER THE SAID SECTION?' ANSWER: IN THE PRESENT CASE, THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.54,85,430/ - AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING ORIGIN OF SUCH GOODWILL WAS GIVEN AS UNDER: ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 110 'IN ACCORDANCE WITH SCHEME OF AMALGAMATION OF YSN SHARES & SECURITIES (P) LTD WITH SMIFS SECURITIES LTD (DULY SANCTIONED BY HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RETROSPECTIVE EFECT FROM 1ST APRIL, 1998, ASSETS AND LIABILITIES OF YSN SHARES & SECURITIES (P) LTD WERE TRANSFERRED TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COMPANY.' 2. IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PRIVATE LIMITED [AMALGAMATING COMPANY] SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAMATION. IT WAS CLAIMED THAT THE EXTRA CONSIDERATION W AS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIENTELE. 3. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT, 1961 [` ACT', FOR SHORT]. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: 'EXPLANATION 3. -- FOR THE PURPOSES OF THIS SUB - SECTION, THE EXPRESSIONS `ASSETS' AND `BLOCK OF ASSETS' SHALL MEAN -- [A] TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; [B] INTANGIBLE ASSETS, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE.' 4. EXPLANATION 3 STATES THAT THE EXPRESSION `ASSET' SHALL MEAN AN INTANGIBLE ASSE T, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE 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 WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). 5. IN THE CIRC UMSTANCES, WE ARE OF THE VIEW THAT `GOODWILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. 6. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PRESENT CASE, THE ASSESSING OFFICER, AS A MATTER OF FACT, CAME TO THE CONCLUSION THAT NO AMOU NT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. THIS IS A FACTUAL FINDING. THE COMMISSIONER OF INCOME TAX (APPEALS) [`CIT(A)', FOR SHORT] HAS COME TO THE CONCLUSION THAT THE AUTHORISED REPRESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT ORDERING AMALGAMATION OF THE ABOVE TWO COMPANIES; THAT THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 111 ASSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES PRIVATE LIMITED WERE TRANSFERRED TO THE ASSESSEE FOR A CONSIDERATION; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTE D GOODWILL AND THAT THE ASSESSEECOMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE ASSESSEE - COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY INCOME TAX APPELLATE TRIBUNAL [`ITAT', FOR SHORT]. WE SEE NO REASON TO INTERFERE WITH THE FACTUAL FINDING. 7. ONE MORE ASPECT WHICH NEEDS TO BE MENTIONED IS THAT, AGAINST THE DECISION OF ITAT, THE REVENUE HAD PREFERRED AN APPEAL TO THE HIGH COURT IN WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHETHER 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 HEREINABOVE. 8. FOR THE AFORE - STATED REASONS, WE ANSWER QUEST ION NO.[B] ALSO IN FAVOUR OF THE ASSESSEE. QUESTION NO.[C]: 114.8 WE FIND, THE HON BLE DELHI HIGH COURT IN THE CASE OF AREVA T&D INDIA LTD. VS. DCIT, REPORTED IN 345 ITR 421 (DEL) HAS HELD THAT SPECIFIED INTANGIBLE ASSETS, VIZ, BUSINESS CLAIMS, BUSINESS INFORMATION, BUSINESS RECORDS, CONTRACTS, EMPLOYEES AND KNOW - HOW ACQUIRED BY ASSESSEE UNDER SLUMP SALE AGREEMENT ARE IN NATURE OF BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE SPECIFIED IN SECTION 32(1(II) AND ARE ACCORDINGLY ELIGIBLE FOR DEPRECIATION UNDER THAT SECTION. THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE ALSO SUPPORTS HIS CASE THAT DEPRECIATION IS ALLOWABLE ON GOODWILL. 114.9 SO FAR AS THE CASE OF THE REVENUE THAT GOODWILL WAS NOT SHOWN BY THE ASSESSEE AS ITS ASSETS IS CONCERNED, IT IS THE SETTLED PROPOSITION OF LAW THAT THE ENTRIES MADE IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE AMBIT OF TAXATION. IF AN ITEM OF INCOME/EXPENDITURE IS TAXABLE/DEDUCTIBLE, THE SAME HAS TO BE TAKEN INTO ACCOUNT AS PER T HE PROVISIONS OF THE ACT AND NOT AS PER THE BOOK ENTRIES. WE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 112 ALSO FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN TERMS OF EXPLANATION 5 TO SECTION 32 OF THE ACT, IT IS NOW MANDATORY TO CLAIM/ALLOW DEPRECIATION, WHETHER OR NOT THE A SSESSEE HAS CLAIMED THE SAME. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE AO SHOULD NOT HAVE REFUSED TO CONSIDER THE CLAIM OF DEPRECIATION DESPITE THE FACT THAT THE ASSESSEE RAISED SUCH CLAIM VIDE ITS LETTER DATED 13.12.2010 ADDRESSED TO THE AO. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE CIT(A) ON THIS ISSUE, WE FIND NO INFIRMITY IN HIS ORDER ALLOWING CLAIM OF DEPRECIATION ON GOODWILL. THE ORDER OF THE LD.CIT(A) ON THIS ISSUE IS ACCORDINGLY UPHELD AND THE GROUN D RAISED BY THE REVENUE ON THIS ISSUE IS ACCORDINGLY DISMISSED. 115. NOW, COMING TO THE ADDITIONAL GROUND OF APPEAL, WE FIND, THE ASSESSEE IN THE IMPUGNED ASSESSMENT YEAR HAS RAISED THE FOLLOWING ADDITIONAL GROUND: - THAT THE ESOP EXPENSES OF RS. 10,35,3 6,606/ - DEBITED IN THE PROFIT & LOSS ACCOUNT OUGHT TO HAVE BEEN ALLOWED AS DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS. 115.1 THE ID. COUNSEL FOR THE ASSESSEE, REFERRING TO THE ABOVE ADDITIONAL GROUND, SUBMITTED THAT TH IS GROUND DESERVES TO BE ADMITTED IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF LAW. HE SUBMITTED THAT THE ABOVE GROUND DOES NOT REQUIRE ANY NEW FACT OR OTHER THAN THE FACTS ALREADY ON RECORD. REFERRING TO THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF NTPC VS. CIT, 229 ITR 383, HE SUBMITTED THAT THE TRIBUNAL HAS WIDE POWERS TO ADMIT AN ADDITIONAL GROUND WHICH IS NECESSARY TO DETERMINE THE TAX LIABILITY OF AN ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 113 ASSESSEE IN ACCORDANCE WITH LAW IF THE RELATED FACTS ARE ALREADY ON RECORD. REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT THIS GROUND IS PURELY A LEGAL GROUND PLACED ON THE FOLLOWING DECISIONS: - I) BIOCON LTD. VS DCIT REPORTED AT 155 TTJ 649 (BANG. SB) II) LEMON TREE HOTELS LT D. VS ADDL. CIT IN ITA NO. 4588/DEL/2013 ORDER DATED 23.06.2014 (DEL. IT AT) III) CIT VS LEMON TREE HOTELS LTD. IN I TA NO. 107/2015 ORDER DATED 18.08.2015 (DEL. H.C.) IV) CIT VS PVP VENTURES LTD. 90 DTR 340 (MAD.) 115.2 HE ACCORDINGLY SUBMITTED TH AT SINCE THE ADDITIONAL GROUND IS PURELY LEGAL IN NATURE AND ALL FACTS ARE AVAILABLE ON RECORD, THEREFORE, THE ADDITIONAL GROUND SHOULD BE ADMITTED. REFERRING TO THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT Y EAR, HE SUBMITTED THAT IDENTICAL ADDITIONAL GROUND WAS RAISED BY THE ASSESSEE BEFORE THE TRIBUNAL AND THE TRIBUNAL AFTER CONSIDERING THE ARGUMENTS MADE BY BOTH THE SIDES, HAS ADMITTED THE SAID ADDITIONAL GROUND AND RESTORED THE ISSUE TO THE FILE OF THE AO/ TPO TO DECIDE THE ISSUE IN ACCORDANCE WITH THE LAW, AFTER PROVIDING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 115.3 THE ID. DR, ON THE OTHER HAND, STRONGLY OBJECTED TO THE ADMISSION OF THE ADDITIONAL GROUND. 115.4 WE HAVE CONSIDERED THE RIVAL AR GUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 114 ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE ASSESSEE IN THE INSTANT CASE, HAS RAISED THE ADDITIO NAL GROUND BEFORE THE TRIBUNAL RELATING TO THE ESOP EXPENSES WHICH WERE DEBITED IN THE PROFIT & LOSS ACCOUNT, BUT, ADDED BACK WHILE COMPUTING THE INCOME UNDER SOME MISCONCEPTION OF FACTS AND LAW. HOWEVER, THE ISSUE, IN OUR OPINION, IS LEGAL IN NATURE. WE F IND, IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ITA NO.3257/DEL/2013 (BY THE ASSESSEE) AND ITA NO.3492/DEL/2013 (BY THE REVENUE) AND THE TRIBUNAL VIDE ORDER DATED 12.04.2017 FOR A.Y. 2006 - 07 HAS ADMITTED THE ADDITIONAL GROUND AND HAS RESTORED THE I SSUE TO THE FILE OF THE AO FOR DECIDING THE ISSUE IN ACCORDANCE WITH LAW, AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL READ AS UNDER: - 87. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT THE ADDITIONAL GROUND HAS BEEN RAISED BY THE ASSESSEE RELATING TO THE ESOP EXPENSES WHICH WERE DEBITED IN THE PROFIT AND LOSS ACCOUNT BUT ADDED BACK WHILE COMPUTING THE INCOME ALLEGEDLY UNDER SOME MISCONCEPTION OF FACTS AND LAW. THE ISSUE RAISED BY THE ASSESSEE IS A LEGAL ISSUE. 88. AS REGARD TO THE ADMISSION OF THE LEGAL GROUND, THE HON BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER COMPANY LTD. VS CIT (1998) 229 ITR 383 (SUPRA) HELD AS UNDER: THE POWER OF THE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES IS TO ASSESSEE CORRECTLY THE TAX LIABILITY OF AN ASSESSE E IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON - TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, THERE IS NO REASON WHY THE ASSESSEE SHOU LD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THE ITEM. THERE IS NO REASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER SECTION 254 ONLY TO DECIDE THE GROUNDS WHI CH ARISE FROM THE ORDER OF THE COMMISSION OF INCOME - TAX (APPEALS). BOTH THE ASSESSEE AS WELL AS THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 115 DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS - OBJECTIONS BEFORE THE TRIBUNAL. THE TRIBUNAL SHOULD NOT BE PREVENTED FROM CONSIDERING QUESTIONS OF LAW ARISI NG IN ASSESSMENT PROCEEDINGS, ALTHOUGH NOT RAISED EARLIER. THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISSUES ARISING OUT OF THE APPEAL BEFORE THE COMMISSIONER (APPEALS) IS TOO NARROW A VIEW TO TAKE OF THE POWERS OF THE TRIBUNAL. IT HAS FURTHER BEEN H ELD THAT: UNDOUBTEDLY, THE TRIBUNAL HAS THE DISCRETION TO ALLOW OR NOT TO ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER THE QUESTION OF LAW ARISING FROM FACTS WHICH ARE ON RECORD IN THE ASSESSMENT PROCEEDINGS, THERE IS NO REASON WHY SUCH A QUESTION SHOULD NOT BE ALLOWED TO BE RAISED WHEN IT IS NECESSARY TO CONSIDER THAT QUESTION IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. 89. WE, THEREFORE, BY KEEPING IN VIEW THE RATIO LAID DOWN BY THE HON BLE SU PREME COURT IN THE AFORESAID REFERRED TO CASE ADMIT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE. HOWEVER, IT IS AN ADMITTED FACT THAT THIS ISSUE HAS BEEN RAISED BY THE ASSESSEE FIRST TIME AND THE AUTHORITIES BELOW HAD NO OCCASION TO DEAL WITH THIS ISSUE. WE, THEREFORE, DEEM IT APPROPRIATE TO REMAND THIS ISSUE TO THE FILE OF THE AO/TPO TO BE DECIDED IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 115.5 SINCE THE FACTS OF THE IMPUGNED ASSESSMENT YEAR ARE IDENTICAL TO THE FACTS OF THE CASE DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE WE ADMIT THE ADDITIONAL GROUND AND RE STORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO ADJUDICATE THE ISSUE IN ACCORDANCE WITH THE LAW, AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ACCORDIN GLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.6256/DEL/2014 (BY THE REVENUE - A.Y. 2008 - 09) 11 6 . THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 116 ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN ALLOWING APPEAL OF THE ASSESSEE AND DIRECTING TO DELETED ADDITION OF RS. 1,64,36,480/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF CORPORATE GUARANTEE GIVEN TO THE ASSOCIATED ENTERPRISES. 1. ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN ALLOWING APPEAL OF THE ASSESS EE AND DELETED ADDITION OF RS. 2,80,55,365/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST ON LOAN TO THE ASSOCIATED ENTERPRISES. 2. ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE THE LD.CIT(A) HAS ERRED IN ALLOWING APPEAL OF THE ASSESSEE AND DELETED A DDITION OF RS. 1,91,30,000/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ROYALTY ADJUSTMENT. 3. ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE THE LD.CIT(A) HAS ERRED IN ALLOWING APPEAL OF THE ASSESSEE AND DIRECTING THE ASSESSING OFFICER TO RECOMPUTE THE DEDU CTION U/S 80IB AND 80IC WITHOUT FURTHER ALLOCATION THE HEAD OFFICE EXPENSES TO VARIOUS UNITS AND ALLOWED THE APPEAL OF THE ASSESSEE. 4. ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE THE LD.CIT(A) HAS ERRED IN ALLOWING APPEAL OF THE ASSESSEE AND DELETED DISAL LOWANCE OF RS. 2,85,39,000/ - MADE BY THE ASSESSING OFFICER U/S 14A R.W.R. 8D OF THE I.T.RULES, 1962. 5. THE APPELLANT CRAVES TO LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. 6. THE ORDER OF THE LD CIT(A), BEING CO NTRARY TO THE FACTS ON RECORD AND THE SETTLED POSITION OF LAW, BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. ITA NO.6525/DEL/2014 ( BY THE ASSESSEE - A.Y. 2008 - 09 ) 11 7 . THE GROUNDS OF APPEAL READ AS UNDER: - 1. THAT THERE IS NO INTERNATION AL TRANSACTION IS CONTEMPLATED U/S 92CA OF THE INCOME - TAX ACT, 1961 (THE ACT) IN RESPECT OF THE ALLEGED ROYALTY CHARGEABLE FROM THREE ASSOCIATED ENTERPRISES (AES) AS CONTEMPLATED U/S 92CA OF THE ACT AND CONSEQUENTLY THE ORDER OF THE CIT (APPEALS) UPHOLDING THE CHARGEABILITY OF ROYALTY FROM THREE AES, AS ALLEGED BY TPO, IS ARBITRARY, UNJUST AND BAD IN LAW. 2. THAT IN THE ABSENCE OF ANY CONTRACT AS EXISTING DURING THE YEAR BETWEEN THE ASSESSEE AND THREE AES, NEITHER ANY ROYALTY ACCRUED DURING THE YEAR NOR CA N IT BE PRESUMED TO BE RECEIVABLE AND CONSEQUENTLY THE ORDER OF THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 117 TPO AND SUSTAINED BY THE CIT (APPEALS) ARE WITHOUT ANY BASIS/MATERIAL AND ARE BASED ON SURMISES AND CONJECTURES NOT PERMISSIBLE UNDER THE LAW. 3. THAT THE TPO AND CIT (APPEALS) FAILED TO CONSIDER THE GEOGRAPHICAL CONDITIONS OF WORKING OF DABUR INTERNATIONAL LTD., DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD., HAVING NO SUBSTANTIAL AWARENESS ABOUT THE DABUR BRAND IN THE AREA AND CONSEQUENTLY THE PRESUMPTION AND ASSUMPTION ABOUT THE CHA RGEABILITY OF ROYALTY BY INVOKING THE PROVISION OF SECTION 92CA OF THE ACT FROM DABUR INTERNATIONAL LTD., DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD. IS ARBITRARY, UNJUST AND WITHOUT ANY BASIS. 4. THAT THE CIT (APPEALS) AND TPO HAVE FAILED TO CONSI DER THAT IN THE ABSENCE OF ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR THE ESTABLISHMENT OF BRAND IN THE GEOGRAPHICAL AREA OF WORKING OF DABUR INTERNATIONAL LTD., DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD., NO ROYALTY CAN BE SAID TO HAVE ACCRUED T O THE ASSESSEE WHEN DABUR INTERNATIONAL LTD., DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD. HAVE INCURRED EXPE NSES ON ADVERTISEMENT AND SALE PROMOTION IN THEIR RESPECTIVE AREA FOR PROMOTION OF THE BRAND WHICH AMOUNTS TO THE SERVICES PROVIDED BY THE AE S TO THE ASSES SEE FOR COMPLETING THE BRAND AND CONSEQUENTLY THE ADDITION AS MADE BY THE TPO AND SUSTAINED BY THE CIT (APPEALS) IN RESPECT OF THE ALLEGED ROYALTY CHARGEABLE FROM DABUR INTERNATIONAL LTD., DABUR NEPAL PVT. LTD. AND ASIAN CONSUMER CARE LTD. I S ARBITRARY, UNJUST AND AT ANY RATE VERY EXCESSIVE. 5. THAT THE TPO AND CIT (APPEALS) FAILED TO APPRECIATE THE RELEVANT CLAUSE OF THE AGREEMENT AS EXISTED IN EARLIER YEARS WHEREIN AS PER THE AGREEMENT, DABUR INDIA LTD. FAILED TO INCUR THE EXPENSES FOR THE PROMOTION OF THE BRAND AND MARKETING EXPENSES IN DABUR NEPAL PVT. LTD., WHICH ULTIMATELY AND ACTUALLY WERE INCURRED BY DABUR NEPAL PVT. LTD., WHICH RESULTED INTO TERMINATION OF THE ROYALTY CHARGEABLE UNDER THE THEN CONTRACT AND CONSEQUENTLY THE CIT (APPEA LS) HAS ERRED ON FACTS AND UNDER THE LAW IN UPHOLDING THE CHARGEABILITY OF THE ROYALTY FROM DABUR NEPAL PVT. LTD. 6. THAT THE TPO AND CIT (APPEALS) FAILED TO CONSIDER THAT MOST OF THE MANUFACTURED PRODUCTS BY DABUR NEPAL PVT. LTD. HAD BEEN SOLD TO DABUR I NDIA LTD. WHICH CANNOT BE THE BASIS FOR CHARGING ROYALTY HAVING NO CONNECTION WITH THE BRAND USED BY DABUR NEPAL PVT. LTD. IN NEPAL. 7. THAT IN THE ABSENCE OF ANY LOAN AVAILED BY DABUR EGYPT ON THE BASIS OF CORPORATE GUARANTEE, THE CIT (APPEALS) HAS ERRED IN SUSTAINING THE ALLEGED SERVICE FEE IN THE FORM OF CORPORATE GUARANTEE FROM DABUR EGYPT @ 0.50% IN RESPECT OF LOAN FROM HSBC AND NSGB BANK IS ARBITRARY, UNJUST, WITHOUT ANY BASIS AND AT ANY RATE VERY EXCESSIVE. 8. THAT THE CIT (APPEALS) HAS ERRED IN SU STAINING THE ALLEGED SERVICE FEE ON ACCOUNT OF THE CORPORATE GUARANTEE IN THE CASE OF NATURELLE LLC ON THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 118 LOANS AVAILED FROM ROYAL BANK OF SCOTLAND, IN THE ABSENCE OF ANY BENEFIT ACCRUED TO NATERELLE LLC, IS ARBITRARY, UNJUST, WITHOUT ANY BASIS AND AT ANY RATE VERY EXCESSIVE. 9 . THAT THE ABOVE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING. 11 8 . GROUND OF APPEAL NOS. 1 TO 6 BY THE ASSESSEE AND GROUND NO.2 BY THE REVENUE RELATE TO THE PART RELIEF GRANTED BY THE CIT(A) ON ACCOUNT OF ROYALTY RECEIVED. 11 9 . AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUNDS ARE IDENTICAL TO GROUNDS OF APPEAL NO . 4 TO 7 IN ASSESSEE S APPEAL AND GROUNDS OF APPEAL NO . 4 AND 5 IN REVENUE S APPEAL FOR A.Y. 2007 - 08 VIDE ITA NO.3241/DEL2014 AND ITA NO.3114/DEL/2014. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUNDS RAISED BY THE ASSESSEE HAVE BEEN PARTLY ALLOWED AND THE GROUNDS OF THE REV ENUE HA VE BEEN DISMISSED. FOLLOWING SIMILAR REASONINGS, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED AND THE GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 1 20 . GROUNDS OF APPEAL NO.7 AND 8 OF THE APPEAL FILED BY THE ASSESSEE RELATE TO THE ORDER OF THE CIT(A) IN SUSTAINING ADDITION TO THE EXTENT OF 0.05% AS SERVICE FEE FOR THE CORPORATE GUARANTEE TO DABUR ENERGY AND ADDITION TO THE EXTENT OF 0.513% AS SERVICE FEE FOR THE CORPORATE GUARANTEE TO NATURELLE LLC, UAE. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 119 12 1 . AFTER HEARING BOTH THE SIDES , W E FIND T HE A SSESSEE DURING THE IMPUGNED ASSESSMENT YEAR HAD ISSUED THE FOLLOWING CORPORATE GUARANTEES ON BEHALF OF ITS ASSOCIATED ENTERPRISES: IN FAVOUR OF FINANCE FACILITY OBTAINED AMOUNT OF GUARANTEE PROVIDED (IN CRORES) NAME OF THE BANK INTEREST RATE FOR AVAILING LOAN DABUR EGYPT LTD, EGYPT USD 450,000 RS. 15.46 CRORES HSBC BANK, EGYPT, SAE USD 3MONTHS LIBOR + 2.90% P.A. USD 2,750,000 NSGB BANK, EGYPT 6 MONTHS LIBOR + 1.35% P.A NATURALLE LLC, UAE USD 0.60 CRORES RS. 13.06 CRORES THE ROYAL BANK OF SCOTLAND, UAE 3 MNTHS LIBOR + 1.50% (20.05.2007 TO 15.09.2007) 3 MNTHS LIBOR + 0.475% (16.09.2007 TO 23.03.2008) 3 MNTHS LIBOR + 0.475%/0.875% FOR USD 28 LAKHS AND 32 LAKHS RESP. (24.03.2008 TO 31.03.2008) TOTAL RS.28.52 CRORES ' ' 12 2 . IT WAS CONTEN DED IN THE TP REPORT THAT THE TRANSACTION BEING IN THE NATURE OF SHAREHOLDER ACTIVITY, COULD NOT BE CONSIDERED AS AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE INCOME TAX ACT, 1961 AND, ACCORDINGLY NO BENCHMARKING WAS UNDERTAKEN. HOWEVER, TH E TPO REJECTED THE CONTENTION OF THE ASSESSEE AND COM PUTED GUARANTEE FEE AT THE RATE OF 4.68% ON THE BASIS OF DATA OBTAINED FROM STATE BANK OF INDIA U/S 133(6) OF THE ACT AND CALCULATED AS UNDER: - PARTICULARS RATE (IN %) AVERAGE RATE OF BANK RATE OF COM MISSION CHARGED 2.68 ADD: - RISK ADJUSTMENT 2 RATE 4.68 ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 120 12 3 . HE ACCORDINGLY, MADE AN UPWARD ADJUSTMENT OF RS.1,12,23,576 (4% OF RS.39.44 CRORES) TO THE TOTAL INCOME OF THE A SSESSEE. 12 4 . IN APPEAL, THE CIT(A) HELD THAT ISSUANCE OF CORPORATE GUARA NTEE IS AN INTERNATIONAL TRANSACTION AND ARM'S LENGTH PRICE (ALP) IS REQUIRED TO BE COMPUTED UNDER SECTION 92 OF THE AC T . SO FAR AS THE ACTION OF THE TPO IN COMPUTING THE GUARANTEE/SERVICE FEES @ 4.68%, IN RESPECT OF GUARANTEE I SSUED ON B EHALF OF DABUR EG YPT LTD, EGYPT IS CONCERNED, THE C1T(A), FOLLOWING HI S ORDER FOR ASSESSMENT YEAR 2007 - 08, DETERMINED THE SERVICE FEE ON ACCOUNT OF CORPORATE GUARANTEE AT 0.50% AS AGAINST 4.68% ADOPTED BY THE TPO AND DELETED THE BALANCE A MOUNT. SO FAR AS THE GUARANTEE IS SUED ON BEHALF OF NATURALLE LLC, UAE, HE CONCLUDED THAT THE INTEREST SAVINGS ON ACCOUNT OF CORPORATE GUARANTEE WERE 1.025%, OUT OF WHICH 50% (I.E. 0.513%) WAS ATTRIBUTED TOWARDS SERVICE FEE AND, A CCORDINGLY, HE DETERMINED SUCH SERVICE FEE ON ACCOUNT O N COR PORATE GUARANTEE AT 0.513% AS AGAINST 4.68% ADOPTED BY THE TPO. 12 5 . AGGRIEVED WITH SUCH PART RELIEF GRANTED BY CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 12 6 . WE HAVE HEARD THE RIVAL ARGUMENTS AND PERUSED THE RECORD. SO FAR AS THE GUARANTEE ISSUED ON BEHALF OF DABUR EGYPT LTD., EGYPT IS CONCERNED, WE HAVE ALREADY DEALT WITH THIS ISSUE WHILE DECIDING GROUND OF APPEAL NO . 2AND 3 FOR A.Y. 2007 - 08 AND THE SAME HAS BEEN DETERMINED AT 0.30%. FOLLOWING SIMILAR REASONINGS, WE MODIFY THE ORDER OF TH E CIT(A) AND DIRECT THE AO TO ADOPT THE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 121 SERVICE FEE ON ACCOUNT OF CORPORATE GUARANTEE AT 0.30% IN RESPECT OF GUARANTEE ISSUED ON BEHALF OF DABUR EGYPT LTD., EGYPT . 12 7 . SO FAR AS THE CORPORATE GUARANTEE ISSUED ON BEHALF OF NATURALLE LLC, UAE IS CONCERNED, A PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK SHOWS THAT THE ASSESSEE HAS SAVED INCREMENTAL INTEREST OF 1.025% DUE TO GUARANTEE PROVIDED BY THE ASSESSEE WHICH WAS ONLY WITH EFFECT FROM SEPTEMBER, 2007. THEREFORE, WE FIND MERIT IN TH E ARGUMENT OF THE LD. COUNSEL THAT THE PROPORTIONATE INTEREST SAVED BY THE NATURALLE, LLC WAS ONLY FOR A PERIOD OF 7 MONTHS AND ACCORDINGLY, INTEREST SAVING ON ONLY 0.60% WAS MADE BY NATURALLE, LLC. WE HAVE HELD IN THE PRECEDING YEARS THAT INTEREST BENEFI T BE SPLIT BETWEEN THE GUARANTOR AND BORROWER ON 50:50 BASIS . T HEREFORE, APPLYING THE SAID RULE, THE BENEFIT CAN BE ATTRIBUTED TO THE SERVICE FEE ON ACCOUNT OF GUARANTEE AT 0.30%. WE ACCORDINGLY MODIFY THE ORDER OF THE CIT(A) AND DIRECT THE AO TO RESTRICT THE SERVICE FEE/COMMISSION FOR PROVIDING SUCH CORPORATE GUARANTEE AT 0.30% ON THE AMOUNT OF RS. 13.06 CRORES PROVIDED TO NATURALLE LLC, UAE. THE GROUNDS OF APPEAL NOS.7 AND 8 FILED BY THE ASSESSEE ARE ACCORDINGLY PARTLY ALLOWED. 12 8 . GROUND OF APPEAL NO. 1 FILED BY THE REVENUE RELATES TO THE ORDER OF THE CIT(A) IN DEL ETING THE ADDITION OF RS.2,80,55,365/ - MADE BY THE AO ON ACCOUNT OF INTEREST ON LOAN TO THE ASSOCIATED ENTERPRISE. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 12 2 12 9 . AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO .3 IN ITA NO.3114/DEL/2014 FILED BY THE REVENUE FOR A.Y. 2007 - 08. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE REVENUE HAS BEEN DISMISSED. FOLLOWING SIMILAR REASONINGS, THIS GROUND FILED BY THE REVENUE IS DISMISSED. 1 30 . GROUND NO.3 RAISED BY THE REVENUE RELATES TO THE ORDER OF THE CIT(A) IN DIRECTING THE AO TO RECOMPUTE THE DEDUCTION U/S 80IB AND 80IC WITHOUT FURTHER ALLOCATION THE HEAD OFFICE EXPENSES TO VARIOUS UNITS ELIGIBLE FOR SUCH DEDUCTION. 13 1 . AFTER HEARI NG BOTH THE SIDES, WE FIND THE ASSESSEE IN THE INSTANT CASE HAS ALREADY DISALLOWED DEPRECIATION UNDER COMPANIES ACT AND HAS CLAIMED DEPRECIATION UNDER INCOME - TAX ACT AND HAS DULY ALLOCATED TO VARIOUS UNITS. SIMILARLY, SELLING AND DISTRIBUTION EXPENSES OF RS.789.37 LAKHS WAS SUO MOTO DISALLOWED IN THE COMPUTATION OF INCOME, THE SALES TAX EXPENSES OF RS.135.78 LAKHS WHICH DOES NOT HAVE ANY IMPACT ON PROFIT CANNOT BE ALLOCATED TO THE ELIGIBLE UNITS. THE MISCELLANEOUS EXPENSES OF RS.566.79 LAKHS WAS SUO MOTU DISALLOWED IN THE COMPUTATION OF INCOME. WE FIND, THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO .6 IN ITA NO .3114/DEL/2014 FILED BY THE REVENUE. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE REVENUE HAS BEEN DISMISSED. FOLLOWING S IMILAR REASONINGS, THIS GROUND FILED BY THE REVENUE IS DISMISSED. 13 2 . GROUND OF APPEAL NO.4 BY THE REVENUE RELATES TO THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D OF THE IT RULES, 1962. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 123 13 3 . AFTER HEARING BOTH THE SIDES, WE FIND, THE ASSESSEE HAS NOT RECE IVED ANY EXEMPT INCOME DURING THE IMPUGNED ASSESSMENT YEAR AND, THEREFORE, FOLLOWING THE DECISION S OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT REPORTED IN 272 CTR 282, NO DISALLOWANCE U/S 14A CAN BE MADE. T HEREFORE, IN ABSENCE O F ANY EXEMPT INCOME EARNED BY THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR NO DISALLOWANCE U/S 14A COULD HAVE BEEN MADE. THE GROUND RAISED BY THE REVENUE IS, THEREFORE, DISMISSED. 13 4 . THE FIRST ADDITIONAL GROUND RAISED BY THE ASSESSEE READ S AS UNDER: - THAT THE ESOP EXPENSES OF RS.8,45,34,851/ - (RUPEES EIGHT CRORE FORTY FIVE LAKHS THIRTY FOUR THOUSAND EIGHT HUNDRED FIFTY ONE ONLY) DEBITED IN THE PROFIT & LOSS ACCOUNT OUGHT TO HAVE BEEN ALLOWED AS DEDUCTION IN COMPUTING THE INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS. 13 5 . AFTER HEARING BOTH THE SIDES, WE FIND IDENTICAL ADDITIONAL GROUND WAS DECIDED BY US IN THE PRECEDING PARAGRAPHS WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR A.Y. 2007 - 08 . WE HAVE ALREADY ADMITTED THE SAME AND THE ISSUE HAS BEEN RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE ISSUE IN ACCORDANCE WITH THE LAW, AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. FOLLOWING SIMILAR REASONINGS, THE FIRST ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ADMITTED AND RESTORED TO THE FILE OF THE AO TO DECIDE THE ISSUE AS PER LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE FIRST ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 13 6 . THE SECOND ADDITIONAL GROUND RAISED BY THE ASSESSEE READS AS UNDER: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 124 THAT THE AMOUNT OF RS.5,85,61,165/ - (RUPEES FIVE CRORE EIGHTY FIVE LAKHS SIXTY ONE THOUSAND ONE HUNDRED SIXTY FIVE ONLY) BEING THE EXEMPTED EXCISE DUTY EMBEDDED IN SALES OF GLUCOSE UNIT, BADDI (HP), ALLOWED INCENTIVE FOR INDUSTRIALIZATION AND SETTING UP OF NEW UNIT BY NOTIFICATION NO. 1(10)/2001 - NER DATED 701/2003, READ WITH NOTIFICATION NO. 49/2003 AND NOTIFICATION NO. 50 OF 2003 OF CENTRAL EXCISE DATED 10/06/2003, IS A CAPITAL RECEIPT NOT LIABLE TO TAX AND ACCORDINGLY THE AMOUNT OF RS.5,85,61,165/ - (RUPEES (RUPEES FIVE CRORE EIGHTY FIVE LAKHS SIXTY ONE THOUSAND ONE HUNDRED SIXTY FIVE ONLY) BE EXCLUDED FROM THE INCOME ASSESSED. 13 7 . THE LD. COUNSEL FOR THE ASSESSEE WHILE EXPLAINING THE REASONS FOR ADMISSI ON OF THE ADDITIONAL GROUND IN HIS APPLICATION SUBMITTED THAT THE ASSESSEE HAS A MANUFACTURING UNIT LOCATED AT BADDI, HIMACHAL PRADESH WHICH WAS SET UP IN 2003 (25.01.2003) FOR THE MANUFACTURE OF GLUCOSE W HICH WAS ELIGIBLE FOR DEDUCTION U/S 80IC OF THE AC T. SINCE ASSESSMENT YEAR 2003 - 04, ALL THE RELATED PARTICULARS WERE DULY FURNISHED BEFORE THE AO. THE MANUFACTURING UNIT WAS SET UP UNDER THE POLICY OF THE CENTRAL GOVERNMENT TO BOOST INDUSTRIALIZATION OF HIMACHAL PRADESH AND UTTARAKHAND. THE SAID SCHEME WAS INTRODUCED VIDE NOTIFICATION F. NO. 1(10)/2001 - NER, DATED 7TH JANUARY 2003, WHICH PROVIDED FOR VARIOUS FISCAL INCENTIVES IN THE FORM OF TAX AND CENTRAL EXCISE CONCESSIONS TO ATTRACT INVESTMENTS IN HIMACHAL PRADESH WHERE THE IMPUGNED INDUSTRIAL UNIT I S SITUATED. THE LD. COUNSEL DREW THE ATTENTION OF THE BENCH TO THE RELEVANT EXTRACTS OF VARIOUS NOTIFICATIONS ISSUED BY THE GOVERNMENT AGENCIES WHICH ARE AS FOLLOWS: - NO. 1(10)/2001 - NER GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY (DEPARTMENT OF I NDUSTRIAL POLICY & PROMOTION) NEW DELHI, DATED 7TH JANUARY, 2003 OFFICE MEMORANDUM ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 125 SUBJECT: NEW INDUSTRIAL POLICY AND OTHER CONCESSIONS FOR THE STATE OF UTTARANCHAL AND THE STATE OF HIMACHAL PRADESH. THE HON BLE PRIME MINISTER, DURING THE VISI T TO UTTRANCHAL FROM 29TH TO 31ST MARCH, 2002, HAD, INTER - ALIA MADE AN ANNOUNCEMENT THAT TAX AND CENTRAL EXCISE CONCESSIONS TO ATTRACT INVESTMENTS IN THE INDUSTRIAL SECTOR WILL BE WORKED OUT FOR THE SPECIAL CATEGORY STATES INCLUDING UTTRANCHAL. THE INDUST RIES ELIGIBLE FOR SUCH INCENTIVES WILL BE ENVIRONMENT FRIENDLY WITH POTENTIAL FOR LOCAL EMPLOYMENT GENERATION AND USE OF LOCAL RESOURCES. 2. IN PURSUANCE OF THE ABOVE ANNOUNCEMENT, DISCUSSION ON STRATEGY AND ACTION PLAN FOR DEVELOPMENT OF INDUSTRIES AND G ENERATION OF EMPLOYMENT IN THE STATES OF UTTRANCHAL AND HIMACHAL PRADESH WERE HELD WITH THE VARIOUS RELATED MINISTRIES/AGENCIES ON THE ISSUE, INTER - ALIA, INFRASTRUCTURE, DEVELOPMENT, FINANCIAL CONCESSIONS AND TO PROVIDE EASY MARKET ACCESS. THE NEW INITIATI VES WOULD PROVIDE THE REQUIRED INCENTIVES AS WELL AS AN ENABLING ENVIRONMENT FOR INDUSTRIAL DEVELOPMENT, IMPROVE AVAILABILITY OF CAPITAL AND INCREASE MARKET ACCESS TO PROVIDE A FILLIP TO THE PRIVATE INVESTMENT IN THE STATE. 3. ACCORDINGLY, IT HAS BEEN DEC IDED TO PROVIDE THE FOLLOWING PACKAGE OF INCENTIVES FOR THE STATES OF UTTRANCHAL AND HIMACHAL PRADESH. 3.1 FISCAL INCENTIVES TO NEW INDUSTRIAL UNITS AND TO EXISTING UNITS ON THEIR SUBSTANTIAL EXPANSION: (I). NEW INDUSTRIAL UNITS AND EXISTING INDUSTRIAL U NITS ON THEIR SUBSTANTIAL EXPANSION AS DEFINED, SET UP IN GROWTH CENTRES, INDUSTRIAL INFRASTRUCTURE DEVELOPMENT CENTRES (IIDCS), INDUSTRIAL ESTATES, EXPORT PROCESSING ZONES, THEME PARKS (FOOD PROCESSING PARKS, SOFTWARE TECHNOLOGY PARKS, ETC.) AS STATED IN ANNEXURE - I AND OTHER AREAS AS NOTIFIED FROM TIME TO TIME BY THE CENTRAL GOVERNMENT, ARE ENTITLED TO : (A) 100% (HUNDRED PERCENT) OUTRIGHT EXCISE DUTY EXEMPTION FOR A PERIOD OF 10 YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. (B) 100% INCOME TAX E XEMPTION FOR INITIAL PERIOD OF FIVE YEARS AND THEREAFTER 30% FOR COMPANIES AND 25% FOR OTHER THAN COMPANIES FOR A FURTHER PERIOD OF FIVE YEARS FOR THE ENTIRE STATES OF UTTARANCHAL AND HIMACHAL PRADESH FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. (II) ALL NEW INDUSTRIES IN THE NOTIFIED LOCATION WOULD BE ELIGIBLE FOR CAPITAL INVESTMENT SUBSIDY @ 15% OF THEIR INVESTMENT IN PLANT & MACHINERY, SUBJECT TO A CEILING OFRS.30 LAKH. THE EXISTING UNITS WILL ALSO BE ENTITLED TO THIS SUBSIDY ON THEIR SUBSTAN TIAL EXPANSION, AS DEFINED. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 126 (III). THRUST SECTOR INDUSTRIES AS MENTIONED IN ANNEXURE - II ARE ENTITLED TO SIMILAR CONCESSIONS AS MENTIONED IN PARA 3(1) & (II) ABOVE IN THE ENTIRE STATE OF UTTRANCHAL AND HIMACHAL PRADESH WITHOUT ANY AREA RESTRICTIONS. (EMP HASIS SUPPLIED) 13 8 . IN PURSUANCE OF THE SAID SCHEME, NOTIFICATION WAS ALSO PASSED BY THE CENTRAL EXCISE AUTHORITIES VIDE NOTIFICATION NO. 49/2003, DATED 10 TH JUNE 2003, THE RELEVANT EXTRACT OF WHICH IS AS UNDER: IN EXERCISE OF THE POWERS CONFERRED BY SU B - SECTION (1) OF SECTION 5 A OF THE CENTRAL EXCISE ACT, 1944 (I OF 1944), READ WITH SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (GOODS OF SPECIAL IMPORTANCE) ACT, 1957 (58 OF1957) AND SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIE S OF EXCISE (TEXTILES AND TEXTILE ARTICLES) ACT, 1978 (40 OF 1978), THE CENTRAL GOVERNMENT, BEING SATISFIED THAT IT IS NECESSARY IN THE PUBLIC INTEREST SO TO DO, HEREBY EXEMPTS THE GOODS SPECIFIED IN THE SCHEDULE APPENDED HERETO, OTHER THAN THE SOODS SPECI FIED IN THE ANNEXURE APPENDED HERETO. AND CLEARED FROM A UNIT LOCATED IN THE STATE OF UTTRANCHAL OR STATE OF HIMACHAL PRADESH, FROM THE WHOLE OF THE DUTY OF EXCISE OR ADDITIONAL DUTY OF EXCISE, AS THE CASE MAY BE, LEVIABLE THEREON UNDER ANY OF THE SAID ACT S. 2. THE EXEMPTION CONTAINED IN THIS NOTIFICATION SHALL APPLY ONLY TO THE FOLLOWING KINDS OF UNITS, NAMELY: - (A) NEW INDUSTRIAL UNITS WHICH HAVE COMMENCED THEIR COMMERCIAL PRODUCTION ON OR AFTER THE 7TH DAY OF JANUARY, 2003; (B) INDUSTRIAL UNITS EXISTING BEFOR E THE 7 TH DAY OF JANUARY, 2003, BUT WHICH HAVE UNDERTAKEN SUBSTANTIAL EXPANSION BY WAY OF INCREASE IN INSTALLED CAPACITY BY NOT LESS THAN TWENTY FIVE PER CENT, ON OR AFTER THE 7 TH DAY OF JANUARY, 2003. 3. THE EXEMPTION CONTAINED IN THIS NOTIFICATION SHALL APPLY TO ANY OF THE SAID UNITS FOR A PERIOD NOT EXCEEDING TEN YEARS FROM THE DATE OF PUBLICATION OF THIS NOTIFICATION IN THE OFFICIAL GAZETTE OR FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, WHICHEVER IS LATER. (EMPHASIS SUPPLIED) 13 9 . FURTHE R, NOTIFICATION NO. 50/2003, DATED 10TH JUNE 2003, WAS PASSED BY THE CENTRAL EXCISE AUTHORITIES, WHICH READS AS UNDER: NOTIFICATION NO. 50/2003 - CENTRAL EXCISE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 127 G.S.R (E) . - IN EXERCISE OF THE POWERS CONFERRED BY SUB - SECTION (I) OF SECTION 5A OF THE CENT RAL EXCISE ACT, 1944 (1 OF 1944) READ WITH SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (GOODS OF SPECIAL IMPORTANCE) ACT, 1957 (58 OF 1957) AND SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (TEXTILES AND TEXTILE ARTICL ES) ACT, 1978 (40 OF1978), THE CENTRAL GOVERNMENT, BEING SATISFIED THAT IT IS NECESSARY IN THE PUBLIC INTEREST SO TO DO, HEREBY EXEMPTS THE GOODS SPECIFIED IN THE FIRST SCHEDULE AND THE SECOND SCHEDULE TO THE CENTRAL EXCISE TARIFF ACT, 1985 (5 OF1986), OTH ER THAN THE GOODS SPECIFIED IN ANNEXURE - I APPENDED HERETO, AND CLEARED FROM A UNIT LOCATED IN THE INDUSTRIAL GROWTH CENTRE OR INDUSTRIAL INFRASTRUCTURE DEVELOPMENT CENTRE OR EXPORT PROMOTION INDUSTRIAL PARK OR INDUSTRIAL ESTATE OR INDUSTRIAL AREA OR COMMER CIAL ESTATE OR SCHEME AREA, AS THE CASE MAY BE, SPECIFIED IN ANNEXURE - II APPENDED HERETO, FROM THE WHOLE OF THE DUTY OF EXCISE OR ADDITIONAL DUTY OF EXCISE, AS THE CASE MAY BE, LEVIABLE THEREON UNDER ANY OF THE SAID ACTS. 2. THE EXEMPTION CONTAINED IN THI S NOTIFICATION SHALL APPLY ONLY TO THE FOLLOWING KINDS OF UNITS, NAMELY (A) NEW INDUSTRIAL UNITS WHICH HAVE COMMENCED THEIR COMMERCIAL PRODUCTION ON OR AFTER THE 7 TH DAY OF JANUARY, 2003; (B) INDUSTRIAL UNITS EXISTING BEFORE THE 7 TH DAY OF JANUARY, 200 3, BUT WHICH HAVE UNDERTAKEN SUBSTANTIAL EXPANSION BY WAY OF INCREASE IN INSTALLED CAPACITY BY NOT LESS THAN TWENTY FIVE PER CENT, ON OR AFTER THE 7 TH DAY OF JANUARY, 2003. 3. THE EXEMPTION CONTAINED IN THIS NOTIFICATION SHALL APPLY TO ANY OF THE SAID UN ITS FOR A PERIOD NOT EXCEEDING TEN YEARS FROM THE DATE OF PUBLICATION OF THIS NOTIFICATION IN THE OFFICIAL GAZETTE OR FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, WHICHEVER IS LATER. 1 40 . ON THE BASIS OF AFORESAID SCHEME AND SUBMISSION OF TH E CLAIM, THE ASSESSEE HAS BEEN GRANTED EXEMPTION FROM PAYMENT OF EXCISE DUTY IN RESPECT OF GOODS MANUFACTURED AND CLEARED FROM THE GLUCOSE UNIT, BADDI FOR A PERIOD OF 10 YEARS, BEGINNING FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. 14 1 . FOR ACC OUNTING, THE ASSESSEE MAINTAINED CONSISTENT SALES POLICY IN RESPECT OF THE ELIGIBLE AND NON - ELIGIBLE UNITS AND THE VALUE OF EXCISE DUTY AND VALUE ADDED TAX ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 128 IS ALWAYS IMBIBED/ EMBEDDED/ INCLUDED IN THE SALE VALUE. HOWEVER, THE EXCISE DUTY IN RESPECT OF NON - ELIGIBLE UNIT IS DEPOSITED WITH THE EXCISE AUTHORITIES. IN THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008 - 09, THE EXCISE DUTY RELATING TO THE PRODUCTS CLEARED FROM BADDI UNIT HAS BEEN OFFERED TO TAX FORMING PART OF TAXABLE INCOME. HE SUBMITTED THAT SUC H EXCISE DUTY EXEMPTION AVAILABLE TO BADDI UNIT UNDER THE SCHEME IS IN THE NATURE OF FISCAL INCENTIVE PROVIDED FOR TO ATTRACT INVESTMENT FOR THE PURPOSE OF INDUSTRIALIZATION OF HIMACHAL PRADESH WHICH WAS A BACKWARD INDUSTRIAL STATE. HE SUBMITTED THAT THE TAXABILITY OF INCENTIVE PROVIDED TO BOOST INDUSTRIALIZATION IN VARIOUS STATES BY THE CENTRAL GOVERNMENT/STATE GOVERNMENT IS NO MORE RES INTEGRA AND THE COURTS ARE CONSISTENTLY HOLDING THAT SUCH FISCAL INCENTIVE/SUBSIDY ARE BASICALLY CAPITAL IN NATURE NOT L IABLE TO TAX. HE SUBMITTED THAT IN ORDER TO WORK OUT THE NATURE OF FISCAL INCENTIVE IT HAS BEEN HELD BY VARIOUS COURTS THAT IT HAS TO BE DETERMINED WITH REFERENCE TO THE PURPOSE FOR WHICH SUCH INCENTIVE HAS BEEN PROVIDED. IF THE INCENTIVE HAS BEEN PROVID ED TO ASSIST THE OPERATION OF BUSINESS, THEN, IT IS REVENUE, BUT, IF THE BENEFITS HAVE BEEN PROVIDED FOR INDUSTRIALIZATION AND SETTING UP OF NEW INDUSTRY, THEN, IT IS CAPITAL IN NATURE. IN OTHER WORDS, THE CHARACTER OF FISCAL INCENTIVE SUBSIDY HAS TO BE D ETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH SUBSIDY WAS GIVEN. FOR THE ABOVE PROPOSITION, THE LD. COUNSEL RELIED ON THE DECISIONS OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. PONNI SUGAR AND CHEMICALS LIMITED: 306 ITR 392, SAHNEY STEEL AND PRE SS WORKS VS. CIT: 228 ITR 253; AND V.S.S.V. MEENAKSHI ACHI: 60 ITR 253 AND VARIOUS OTHER DECISIONS. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 129 14 2 . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF PONNI SUGAR AND CHEMICALS LTD. THE HON BLE SUPREME COURT, AFTER FOLLOWING THE PURPOSE TEST AS EXPLAINED IN SAHNEY STEEL (SUPRA) HELD THAT THE POINT OF TIME AT WHICH SUBSIDY IS PAID IS NOT RELEVANT. THE SOURCE AND FORM OF SUBSIDY IS ALSO MATERIAL. IF THE OBJECT OF INCENTIVE IS TO SET UP A NEW UNIT OR EXTEND THE EXISTING UNIT, THEN, IT WOUL D BE ON CAPITAL ACCOUNT. REFERRING TO THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF PONNI SUGAR & CHEMICALS LTD. (SUPRA) HE DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING OBSERVATION OF THE HON BLE APEX COURT: - 14. IN OUR VIEW, THE CONTROVER SY IN HAND CAN BE RESOLVED IF WE APPLY THE TEST LAID DOWN IN THE JUDGMENT OF THIS COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. (SUPRA). IN THAT CASE, ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT THE SUBSIDY GIVEN WAS UP TO 10% OF THE CAPITAL INVESTMENT CALCULATED ON THE BASIS OF THE QUANTUM OF INVESTMENT IN CAPITAL AND, THEREFORE, RECEIPT OF SUCH SUBSIDY WAS ON CAPITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. IT WAS ALSO URGED IN THAT CASE THAT SUBSIDY GRANTED ON THE BASIS OF REFUND OF SALES TAX ON RAW MATERIALS, MACHINERY AND FINISHED GOODS WERE ALSO OF CAPITAL NATURE AS THE OBJECT OF GRANTING REFUND OF SALES TAX WAS THAT THE ASS E SSEE COULD SET UP NEW BUSINESS OR EXPAND HIS EXISTING BUSINESS. THE CONTENTION OF THE ASSE S SEE IN THAT CASE WAS DISMISSE D BY THE TRIBUNAL AND, THEREFORE, THE ASSESSEE HAD COME TO THIS COURT BY WAY OF A SPECIAL LEAVE PETITION. IT WAS HELD BY THIS COURT ON THE FACTS OF THAT CASE AND ON THE BASIS OF THE ANALYSES OF THE SCHEME THEREIN THAT THE SUBSIDY GIVEN WAS ON REVENUE ACCOU NT BECAUSE IT WAS GIVEN BY WAY OF ASSISTANCE IN CARRYING ON OF TRADE OR BUSINESS. ON THE FACTS OF THAT CASE, IT WAS HELD THAT THE SUBSIDY GIVEN WAS TO MEET RECURRING EXPENSES. IT WAS NOT FOR ACQUIRING THE CAPITAL ASSET. IT WAS NOT TO MEET PART OF THE COST. IT WAS NOT GRANTED FOR PRODUCTION OF OR BRINING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDIES IN THAT CASE WERE GRANTED YEAR AFTER YEAR ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND ONLY AFTER COMMENCEMENT OF PRODUCTION AND, THEREFORE, SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. CONSEQUENTLY, THE CONTENTIONS RAISED ON BEHALF OF THE ASSESSEE ON THE FACTS OF THAT CASE STOOD REJECTED AND IT WAS HELD THAT THE SUBSIDY RECEIVED BY SAHNEY STE EL COULD NOT BE REGARDED AS ANYTHING BUT A REVENUE RECEIPT. ACCORDINGLY THE MATTER WAS DECIDED AGAINST THE ASSESSEE. THE IMPORTANCE OF THE JUDGMENT OF THIS COURT IN SAHNEY STEEL CASE LIES IN THE FACT THAT IT HAS DISCUSSED AND ANALYSED THE ENTIRE CASE LAW A ND IT HAS LAID DOWN THE BASIC TEST TO BE APPLIED IN JUDGING THE CHARACTER OF A SUBSIDY. THAT TEST IS THAT ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 130 THE CHARACTER OF THE RECEIPT IN THE HANDS OF THE ASSESSEE HAS TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. IN OTHER WO RDS. IN SUCH CASES, ONE HAS TO APPLY THE PURPOSE TEST. THE POINT OF TIME AT WHICH THE SUBSIDY IS PAID IS NOT RELEVANT. THE SOURCE IS IMMATERIAL. THE FORM OF SUBSIDY IS IMMATERIAL. THE MAIN ELIGIBILITY CONDITION IN THE SCHEME WITH WHICH WE ARE CONCERNED IN THIS CASE IS THAT THE INCENTIVE MUST BE UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF EXISTIN G UNITS. ON THIS ASPECT THERE IS NO DISPUTE. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSE SSEE TO RUN THE BUSINESS MORE PROFITABLY THEN THE RECEIPT IS ON REVENUE ACCOUNT. ON THE OTHER HAND, IF THE OBJECT OF THE ASSISTANCE UNDER THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THEN THE RECEIPT OF THE SUBSIDY WAS ON CAPITAL ACCOUNT. THEREFORE, IT IS THE OBJECT FOR WHICH THE SUBSIDY/ASSISTANCE IS GIVEN WHICH DETERMINES THE NATURE OF THE INCENTIVE SUBSIDY. THE FORM OF THE MECHANISM THROUGH WHICH THE SUBSIDY IS GIVEN IS IRRELEVANT. 14 3 . HE SUBMITTE D THAT S IMILAR PRINCIPLE HAS BEEN REITERATED BY THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. CHAPHALKAR BROTHERS: 351 ITR 309 (BOM). IN THAT CASE, THE SUBSIDY SCHEME OF THE STATE GOVERNMENT PROVIDED FOR AN EXEMPTION OF ENTERTAINMENT DUTY IN MULTIPLEX T HEATRE COMPLEXES NEWLY SET UP, FOR A PERIOD OF THREE YEARS, AND THEREAFTER PAYMENT OF ENTERTAINMENT DUTY AT THE RATE OF 25 PER CENT FOR THE SUBSEQUENT TWO YEARS. IN THE ASSESSMENT ORDER IT WAS FOUND THAT THE AFORESAID SCHEME WAS REALLY TO SUPPORT THE ON - GO ING ACTIVITIES OF THE MULTIPLEX AND NOT FOR ITS CONSTRUCTION. THE ASSESSING OFFICER HELD THAT SINCE THE SCHEME TOOK THE FORM OF A CHANGE IN THE GROSS VALUE OF THE TICKET AND CONTRIBUTED TOWARDS THE DAY - TO - DAY RUNNING EXPENSES, IT WAS IN THE NATURE OF A REV ENUE RECEIPT. THE LD. CIT(A) DISMISSED THE APPEAL. ON FURTHER APPEAL, THE TRIBUNAL DECIDED THE GROUND IN FAVOUR OF THE ASSESSEE HOLDING THAT THE RECEIPT WAS IN THE NATURE OF A CAPITAL RECEIPT BEING AN INCENTIVE TO SUPPLEMENT THE CONSTRUCTION EXPENDITURE OF NEW SET UP OF MULTIPLEXES HENCE IN THE NATURE OF CAPITAL RECEIPT. ON FURTHER APPEAL, THE HON BLE ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 131 HIGH COURT, APPLYING THE PURPOSE TEST, HELD THAT ENTERTAINMENT TAX SUBSIDY WAS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. 14 4 . THE LD. COUNSEL FOR T HE ASSESSEE ALSO DREW THE ATTENTION TO THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. BOUGAINVILLEA MULTIPLEX ENTERTAINMENT CENTRE (P.) LTD.: 373 ITR 14, WHEREIN THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF RUNNING OF MULTIPLEX CINEMA H ALLS AND SHOPPING MALLS. IT HAD BEEN THE BENEFICIARY OF A SCHEME PROMULGATED BY THE STATE GOVERNMENT WHEREIN IT HAD BEEN GRANTED EXEMPTION FROM ENTERTAINMENT TAX PAYMENT. IT CLAIMED DEDUCTION TO THE EXTENT OF ENTERTAINMENT TAX COLLECTED IN THE CORRESPONDIN G FINANCIAL YEARS TERMING THE AMOUNTS AS CAPITAL RECEIPTS. THE ASSESSING OFFICER DISALLOWED THE SAID CLAIMS. ON APPEAL, THE COMMISSIONER (APPEALS) AS WELL AS THE TRIBUNAL ALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE. ON FURTHER APPEAL PREFERRED BY THE REV ENUE, THE HON BLE HIGH COURT HELD THAT EXEMPTION FROM PAYMENT OF ENTERTAINMENT TAX TO A MULTIPLEX UNDER THE UP SCHEME WAS HELD TO BE A CAPITAL RECEIPT. HE DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING OBSERVATIONS OF THE HON BLE COURT : - 34. SEEN IN THE ABOVE LIGHT, WE ARE OF THE CONSIDERED VIEW THAT IT WAS UNREASONABLE ON THE PART OF THE ASSESSING OFFICER TO DECLINE THE CLAIM OF THE ASSESSEE ABOUT THE SUBSIDY BEING CAPITAL RECEIPT. SUCH A SUBSIDY BY ITS VERY NATURE, WAS BOUND TO COME IN THE HANDS OF THE ASSESSEE AFTER THE CINEMA HALL HAD BECOME FUNCTIONAL AND DEFINITELY NOT BEFORE THE COMMENCEMENT OF PRODUCTION. SINCE THE PURPOSE WAS TO OFFSET THE EXPENDITURE INCURRED IN SETTING UP OF THE PROJECT, SUCH RECEIPT (SUBJECT, OF COURSE, TO THE CAP OF AMOUNT AN D PERIOD UNDER THE SCHEME) COULD NOT HAVE BEEN TREATED AS ASSISTANCE FOR THE PURPOSES OF TRADE. 35. THE FACTS THAT THE SUBSIDY GRANTED THROUGH DEEMED DEPOSIT OF ENTERTAINMENT TAX COLLECTED DOES NOT REQUIRE IT TO BE LINKED TO ANY PARTICULAR FIXED ASSET OR THAT IS ACCORDED 'YEAR AFTER YEAR' DO NOT MAKE ANY DIFFERENCE. THE SCHEME MAKES IT ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 132 CLEAR THAT THE GRANT WOULD STAND EXHAUSTED THE MOMENT ENTERTAINMENT TAX HAS BEEN COLLECTED (AND RETAINED) BY THE MULTIPLEX OWNER MEETING THE ENTIRE COST OF CONSTRUCTION (APP ARATUS, INTERIORS ETC. INCLUDED), EVEN IF IT WERE 'BEFORE COMPLETION OF FIVE YEARS ' 36. AS HELD BY THE SUPREME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. (SUPRA), THE CHARACTER OF THE SUBSIDY IS TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH IT IS GRANTED. THE 'PURPOSE TEST', REFERRED TO IN PONNI SUGARS & CHEMICALS LTD. (SUPRA) WHEN APPLIED TO THE CASE AT HAND, LEAVES NO ROOM FOR DOUBT THAT THE ASSISTANCE IN THE FORM OF ENTERTAINMENT TAX EXEMPTION IS SHOWN TO HAVE COME IN THE HANDS OF A SSESSEE TO ENABLE IT TO SET UP THE NEW UNIT WHICH RENDERS IT A RECEIPT ON CAPITAL ACCOUNT. THE PERIODICITY (YEAR TO YEAR) OF THE SUBSIDY, ITS SOURCE (COLLECTIONS FROM THE PUBLIC AT LARGE) AND THE FORM (DEEMED DEPOSIT) ARE IRRELEVANT CONSIDERATIONS. .. 39. FOR THE FOREGOING REASONS, WE FIND THAT ITAT IN THE IMPUGNED ORDERS HAS TAKEN A CORRECT VIEW OF LAW ON THE BASIS OF AVAILABLE FACTS TO CONCLUDE THAT THE ASSESSEE IS ENTITLED, IN TERMS OF THE UP SCHEME, TO TREAT THE AMOUNTS COLLECTED TOWARDS ENTERTA INMENT TAX AS CAPITAL. THE QUESTION OF LAW RAISED IN THESE APPEALS IS, THUS, ANSWERED IN THE NEGATIVE AGAINST THE REVENUE/APPELLANT. 14 5 . THE LD. COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE 2 ND ADDITIONAL GROUND DESERVES TO BE ADMITTED IN ORDER TO COR RECTLY ASSESS THE TAX LIABILITY OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF LAW. 14 6 . REFERRING TO THE FOLLOWING DECISIONS, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ADDITIONAL GROUN D OF APPEAL RELATING TO A LEGAL PLEA CAN BE RAISED AT AN Y S TAGE : - I) K.C. KHAZANCHI V. IT AT: C.W. NO. 2164/99 (DEL. HC) ; II) ZAKIR HUSSAIN V. CIT & ANR.: 202 CTR 40 (RAJ.) ; III) JINDAI POLYESTER & STEEL LTD. V. DCIT: ITA NO. 2521 & 3044/ DEL/97 (DEL. TRIB) ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 133 14 6 . REFERRING TO THE FOLLOWING DECISIONS, THE LD. COUNS EL FOR THE ASSESSEE SUBMITTED THAT THERE IS NO BAR/ PROHIBITION ON THE JURISDICTION OF AN AUTHORITY TO CONSIDER FRESH C L AIM(S) MADE BY THE ASSESSEE: - I) JU T E CORPORATION OF INDIA LIMITED VS. CIT: 187 ITR 688 (SC) ; II) C IT V. JAI PARABOLIC SPRINGS LTD.: 306 ITR 42 (DEL.) ; III) CIT V. SAM GLOBAL SECURITIES LTD: 360 ITR 682 (DEL) ; IV) CIT V. RAMCO INTERNATIONAL: 332 ITR 306 (P& H ) ; V) CIT V. PRUTHVI BROKERS AND SHAREHOLDERS (P) LTD. : 208 TAXMAN 498(BOM) /349 ITR 336: VI) CIT V ARVIND MILLS LTD: ITA NO. 1407 OF 2011 (GU J ) ; VII) CIT V. ASPENTECH INDIA PVT. LTD.: ITA NO. 1233/ 201 1 (DEL. H C) ; VIII) JCIT V. HERO HONDA FINLEASE LTD.: I 15 TTJ 752 (DEL ITAT) (TM) ; IX) AISH W ARYA RAI V. DCIT: ITA NO. 1159/MUM/04: (MUM ITAT) ; X) IDEA CELLULAR LTD. V. AC I T: 65 SOT 15 (MUM.) ; XI) ADVIK HI TECH (P.) LTD V . AC1T: 67 S O T 158 (PUNE) . 147. REFERRING TO THE FOLLOWING DECISIONS, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT W HERE INCOME IS WRONGLY O FFERED BY AN ASSESSEE OR ON PREVIOUSLY ASSERTED LEGAL STAND, I T WOULD NOT OPERATE AS ESTOPPEL AGAINST THE ASSESSEE TO REVISE SUCH STAND AND MAKE A LEGITIMATE CLAIM OTHERWISE ENTITLED IN LAW (NO ESTOPPEL IN LAW): - I) CIT V. SHELLY PRODUCTS: 261 ITR 367 (SC) ; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 134 II) CIT V. BHARAT GENERAL RE - INSURANCE CO. LTD.: 81 ITR 303 (DEL.) ; III) HCL TECHNOLOGIES VS AC IT : 377 ITR 483 (DEL) ; IV) CTI VS C . PARAKH & CO (INDIA) LTD: 29 ITR 661 (SC) ; V) CIT VS VMRP FIRM: 56 ITR 67 (SC) ; VI) PULLANGODE RUBBER PRODUCE CO. LTD. V. STATE OF KERALA: 91, ITR 1 8 (SC) ; VII) PT. SHEO NATH PRASAD SHARMA V. CIT : 66 ITR 647 (ALL.) ; VIII) ABDUL QAYUME VS CIT: I 84 ITR 404 (ALL) ; IX) NIRMALA L MEHTA VS CIT: 269 ITR 1 (BOM) ; X) CIT VS BERGER PAINTS: 254 ITR 503 (CAL) ; XI) R. B. JESSA RAM FATEH CHAND VS CIT: 81 ITR 409 (ALL) ; XII) CIT VS ENRON EXPAT SERVICES INC : 327 ITR 626 (UTTKHD) ; XIII) SMT. SNEHLATA JAIN V. CIT: 192 CTR 50 (J&K) ; XIV) S.R. KOSHTI V. CIT: 276 IT R 165 (GUJ.) ; XV) DCIT V. SANMUKHDAS WADHWANI: 85 ITD 734 (NAG) ; XVI) INDO JAVA & CO. V. I AC: 30 ITD 161 (DELHI SB) ; AND XVII) ITO V. GE HAWN : 2L ITD 553 (ALL.) 148. REFERRING TO THE FOLLOWING DECISIONS, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ADDITIONAL GROUND ON I SSUE O F SUBSID Y WAS RAISED F OR THE FIRST T IME BEFORE THE TRIBUNAL IN THE FOLLOWING CASES AND WERE ADMITTED : - I) SHREE BALAJI ALLOYS VS. ITO: 127 T 'TJ 129 (ASR ITAT ) - CONFIRMED BY SUPREME COURT IN CIVIL APPEAL NO. 10061 OF 201 1; ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 135 II) INDO JAVA & CO. VS. I AC: 30 I T ID 161 (DEL ITAT)(S B ) ; III) CRYSTAL CROP PROTECTION PVT LTD. VS. D CIT : ITA NO. 1539 O F 20L6 (DEL I TAT); IV) TRIPTI MANTHOL INDS VS. ITO: ITA NO, 58 OF 201 1 (ASR I TAT ) . 1 49 . HE SUBMITTED THAT THE APPEAL AGAINST THE DECISION OF J&K HIGH COURT IN THE CASE OF SHRE E BALAJI ALLOYS VS. CIT, 333 ITR 355 HA S BEEN DISMISSED BY THE HON BLE SUPREME COURT IN THE ORDER DATED 19 TH APRIL, 2016 IN CIVIL APPEAL NO.10061 OF 2011. 150. REFERRING TO THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF NTPC VS. CIT, 229 ITR 383, HE SUBMITTED THAT THE TRIBUNAL HAS WIDE POWERS TO ADMIT AN ADDITIONAL GROUND WHICH IS NECESSARY TO DETERMINE THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW IF THE RELATED FACTS ARE ALREADY ON RECORD. REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTE D THAT THIS GROUND IS PURELY A LEGAL GROUND PLACED ON THE FOLLOWING DECISIONS: - I) BIOCON LTD. VS DCIT REPORTED AT 155 TTJ 649 (BANG. SB) II) LEMON TREE HOTELS LTD. VS ADDL. CIT IN ITA NO. 4588/DEL/2013 ORDER DATED 23.06.2014 (DEL. ITAT) III) CIT VS LEMON TREE HOTELS LTD. IN ITA NO. 107/2015 ORDER DATED 18.08.2015 (DEL. H.C.) IV) CIT VS PVP VENTURES LTD. 90 DTR 340 (MAD.) 1 5 1 . HE ACCORDINGLY SUBMITTED THAT SINCE THE SECOND ADDITIONAL GROUND IS PURELY LEGAL IN NATURE AND ALL FACTS ARE AVAILABLE ON RECORD OR IN PUBLIC D OMAIN , WHICH ARE GOVERNMENT NOTIFICATIONS, THEREFORE, THE ADDITIONAL GROUND SHOULD BE ADMITTED. ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 136 REFERRING TO THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, HE SUBMITTED THAT THE ADDITIONAL GROUND IN RESP ECT OF ESOP WAS RAISED BY THE ASSESSEE BEFORE THE TRIBUNAL FOR THE FIRST TIME AND THE TRIBUNAL AFTER CONSIDERING THE ARGUMENTS MADE BY BOTH THE SIDES, HAS ADMITTED THE SAID ADDITIONAL GROUND AND RESTORED THE ISSUE TO THE FILE OF THE AO/TPO TO DECIDE THE IS SUE IN ACCORDANCE WITH THE LAW, AFTER PROVIDING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 1 5 1 . 1 THE LD. DR, ON THE OTHER HAND, STRONGLY OBJECTED TO THE ADMISSION OF THE ADDITIONAL GROUND. HE SUBMITTED THAT THIS GROUND SHOULD NOT BE ADMITTED AT ALL AS IT IS FOR THE FIRST TIME THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL WITH A NEW PLEA. 152. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE H AVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND, THE ASSESSEE IN THE INSTANT CASE, HAS RAISED THE SECOND ADDITIONAL GROUND BEFORE THE TRIBUNAL RELATING TO TREATMENT OF RS.5,85,61,165/ - BEING THE EXEMPTED EXCISE DUTY TO BE EXCLUDED FROM THE INCOME ASSESSED ON THE GROUND THAT SAME BEING A CAPITAL IS NOT LIABLE TO TAX AND BE EXCLUDED FROM THE INCOME ASSESSED. 15 3 . THE ISSUE IN OUR OPINION, IS LEGAL IN NATURE. THE HON BLE SUPREME COURT IN THE CASE OF NTPC LTD. VS. CIT REPORTED IN 229 ITR 383 HAS HELD AS UNDER: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 137 THE POWER OF THE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES IS TO ASSESSEE CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON - TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, THERE IS NO REASON WHY THE ASSESSEE SHOULD B E PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THE ITEM. THERE IS NO REASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER SECTION 254 ONLY TO DECIDE THE GROUNDS WHICH A RISE FROM THE ORDER OF THE COMMISSION OF INCOME - TAX (APPEALS). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS - OBJECTIONS BEFORE THE TRIBUNAL. THE TRIBUNAL SHOULD NOT BE PREVENTED FROM CONSIDERING QUESTIONS OF LAW ARISING I N ASSESSMENT PROCEEDINGS, ALTHOUGH NOT RAISED EARLIER. THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISSUES ARISING OUT OF THE APPEAL BEFORE THE COMMISSIONER (APPEALS) IS TOO NARROW A VIEW TO TAKE OF THE POWERS OF THE TRIBUNAL. 1 5 3 . 1 IT HAS FURTHER BE EN HELD THAT: UNDOUBTEDLY, THE TRIBUNAL HAS THE DISCRETION TO ALLOW OR NOT TO ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER THE QUESTION OF LAW ARISING FROM FACTS WHICH ARE ON RECORD IN THE ASSESSMENT PROCEEDINGS, THERE IS NO REASON WHY SUCH A QUESTION SHOULD NOT BE ALLOWED TO BE RAISED WHEN IT IS NECESSARY TO CONSIDER THAT QUESTION IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. 154. WE FIND, THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. JAI PAR ABOLIC SPRINGS LTD. (SUPRA), WHILE ADJUDICATING THE CLAIM OF DEDUCTION OF ENTIRE DEFERRED REVENUE EXPENSES RAISED AS ADDITIONAL GROUND HAS HELD AS UNDER: - 19. IN VIEW OF THE ABOVE DISCUSSION, IT IS VERY CLEAR THAT THERE IS NO PROHIBITION ON THE POWERS OF THE TRIBUNAL TO ENTERTAIN AN ADDITIONAL GROUND WHICH ACCORDING TO THE TRIBUNAL ARISES IN THE MATTER AND FOR THE JUST DECISION OF THE CASE. THEREFORE, THERE IS NO INFIRMITY IN THE ORDER OF THE TRIBUNAL. 155. WE FIND, THE HON BLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. PRUTHVI BROKERS & SHAREHOLDERS (P) LTD. (SUPRA), WHILE ADJUDICATING THE POWERS OF APPELLATE AUTHORITIES TO CONSIDER A CLAIM NOT MADE IN THE RETURN HAS HELD AS UNDER: - ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 138 29. IT IS CLEAR TO US THAT THE SUPREME COURT DID NOT HOLD ANYTHING CONTRARY TO WHAT WAS HELD IN THE PREVIOUS JUDGMENTS TO THE EFFECT THAT EVEN IF A CLAIM IS NOT MADE BEFORE THE ASSESSING OFFICER, IT CAN BE MADE BEFORE THE APPELLATE AUTHORITIES. THE JURISDICTION OF THE APPELLATE AUTHORITIES TO ENTERTAIN SUCH A CLAIM HAS NOT BEEN NEGA TED BY THE SUPREME COURT IN THIS JUDGMENT. IN FACT, THE SUPREME COURT MADE IT CLEAR THAT THE ISSUE IN THE CASE WAS LIMITED TO THE POWER OF THE ASSESSING AUTHORITY AND THAT THE JUDGMENT DOES NOT IMPINGE ON THE POWER OF THE TRIBUNAL UNDER SECTION 254. 30. A DIVISION BENCH OF THE DELHI HIGH COURT DEALT WITH A SIMILAR SUBMISSION IN COMMISSIONER OF INCOME TAX V. JAI PARABOLIC SPRINGS LIMITED, (2008) 306 ITR 42. THE DIVISION BENCH, IN PARAGRAPH 17 OF THE JUDGMENT HELD THAT THE SUPREME COURT DISMISSED THE APPEAL MAKING IT CLEAR THAT THE DECISION WAS LIMITED TO THE POWER OF THE ASSESSING AUTHORITY TO ENTERTAIN A CLAIM FOR DEDUCTION OTHERWISE THAN BY A REVISED RETURN AND DID NOT IMPINGE ON THE POWERS OF THE TRIBUNAL. IN PARAGRAPH 19, THE DIVISION BENCH HELD THAT TH ERE WAS NO PROHIBITION ON THE POWERS OF THE TRIBUNAL TO ENTERTAIN AN ADDITIONAL GROUND WHICH, ACCORDING TO THE TRIBUNAL, ARISES IN THE MATTER AND FOR THE JUST DECISION OF THE CASE. 31. IN THE CIRCUMSTANCES, IT IS NOT NECESSARY TO DECIDE THE OTHER QUESTIO NS RAISED BY MR. MISTRI. 32. THE APPEAL IS, THEREFORE, DISMISSED. 1 5 6 . IN VIEW OF THE ABOVE DISCUSSION AND KEEPING IN MIND THE RATIO LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF NTPC LTD. (SUPRA), THE HON BLE DELHI HIGH COURT IN THE CASE OF JAI PARABOLIC SPRINGS LTD. (SUPRA) THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF PRUTHVI BROKERS AND SHAREHOLDERS (P) LTD. (SUPRA) AND VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE, WE ADMIT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE. HOWEVER, IT IS AN ADMITTED FACT THAT THIS ISSUE HAS BEEN RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE TRIBUNAL AND THE AUTHORITIES BELOW HAD NO OCCASION TO DEAL WITH THIS IS SUE. WE, THEREFORE, DEEM IT PROP ER TO REMAND THIS ISSUE TO THE FILE OF THE AO/TPO TO DECIDE THIS ISSUE IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF ITA NOS.3241, 3114, 6525 & 6256/DEL/2014 139 BEING HEARD TO THE ASSESSEE. THE SECOND ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 1 5 7 . IN THE RESULT, THE APPEAL S FILED BY THE REVENUE ARE PARTLY ALLOWED AND THE APPEAL S FILED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18 . 02 .202 1 . SD/ - SD/ - ( SUCHITRA KAMBLE ) ( R. K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 18 TH FEBRUARY, 202 1 . DK COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASSTT. REGISTRAR, I TAT, NEW DELHI
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