COLGATE PALMOLIVE (INDIA) LTD, MUMBAI V. ADDL CIT 10(3), MUMBAI

ITA 6766/MUM/2012

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9015 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2008-2009
• Appeal Filed On: 05-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MICHAEL JERALD DR LAST
• Keywords: Transfer pricing; Business expenditure; International transaction; Earning of tax free income; Question of law; Wholly owned subsidiary; Revenue expenditure; Capital expenditure; Rule 8D
• Section: 143(3); 14A; 115JB; 10B; 80IC; 64; 80IC; 43; 13; 22; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 6766/MUM/2012 ASSESSMENT YEAR: 2008 - 09 COLGATE PALMOLIVE (INDIA) LTD., COLGATE RESEARCH CENTRE, MAIN STREET, HIRANANDANI GARDENS, POWAI, MUMBAI - 400076. VS. ADDL. COMMISSIONER OF INCOME TAX - 10(3), MUMBAI. PAN NO. AAACC4309B APPELLANT RESPONDENT ASSESSEE BY : MS. SOUMYA KULKARNI/MR. ARVIND V. SONDE , AR REVENUE BY : MR. MICHAEL JERALD, DR LAST DATE OF HEARING : 06/03/2020 DATE OF PRONOUNCEMENT : 31/07/2020 ORDER PER N.K. PRADHAN, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2008 - 09 . THE APPEAL IS DIRECTED AGAINST THE ORDER PASSED BY THE ADDL. COMMISSIONER OF INCOME TAX - 10(3) , MUMBAI (IN SHORT AO) U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE 1 ST GROUND OF APPEAL 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / THE DISPUTE RESOLUTION PANEL - 1 (DRP') ERRED IN DISALLOWING A SUM OF RS.66,18,230/ - UNDER SECTION 14A OF THE ACT HAVING FAILED TO APPRECIATE THAT THE APPELLANT COMPANY COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 2 HAS NOT INCURRED ANY EXPENSE DIRECTLY IN RELATION TO THE EA RNING OF TAX FREE INCOME. THAT THE SUM OF RS.66,18,230/ - BE ALLOWED AS BUSINESS EXPENDITURE AND THE DISALLOWANCE MAY BE DELETED. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN COMPUTING THE DISALLOWANCE AS PER THE METHOD PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962 ('THE RULES') WITHOUT CONSIDERING THE S PECIFIC FACTS IN THE APPELLANT'S CASE. THAT DISALLOWANCE AMOUNTING TO RS.37,03,813/ - AS PER RULE 8D(2)(II) OF THE RULES BE DELETED. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE APPELLANT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR (AY) 2008 - 09 ON 29.09.2008 DECLARING INCOME OF RS.878,582,710/ - UNDER NORMAL PROVISIONS AND RS.2,831,882,739/ - UNDER U/S 115JB OF THE ACT . DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A O NOTICED THAT THE APPELLANT HAS EARNED TAX - FREE INTEREST INCOME OF RS.49,908,623/ - . THIS INTEREST WAS EARNED FROM VARIOUS TAX - FREE BONDS LIKE KONKAN RAILWAY CORPORATION, INDIAN RAILWAY FINANCE CORPORATION, HU DCO, UNIT TRUST OF INDIA AND NABARD. IN RESPONSE TO QUERY RAISED BY THE AO TO EXPLAIN WHY THE PROVISIONS OF SECTION 1 4A(2) AND (3) AND RULE 8D SHALL NOT BE APPLICABLE, THE APPELLANT FILED A REPLY. HOWEVER, THE AO WAS NOT CONVINCED WITH THE SAID REPLY ON TH E GROUND THAT THE APPELLANT HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR EARNING THE EXEMPT INCOME AND IT IS HAVING A COMMON FUNDS FOR EARNING TAXABLE AS WELL AS NON - TAXABLE INCOME. THEREFORE, THE AO COMPUTED THE DISALLOWANCE U/S 14A COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 3 R.W. RULE 8D AT R S.66,18,230/ - . THE BREAK - UP OF THE SAID DISALLOWANCE IS RS.37,03,813/ - UNDER RULE 8D(2)(II) AND RS.29,14,417/ - UNDER RULE 8D(2)(III). 4. BEFORE US, THE LD. COUNSEL FOR THE APPELLANT SUBMITS THAT ALL THE INVESTMENTS FROM WHICH THE TAX - FREE INCOME IS EARNED WERE MADE FROM ITS OWN SURPLUS FUNDS/ACCUMULATED PROFITS AND THERE WAS NO BORROWING IN THE YEAR IN WHICH THE INVESTMENTS WERE MADE IN TAX - FREE SECURITIES. FURTHER, IT IS STATED THAT MOST OF THESE INVESTMENTS WERE MADE IN EARLIER YEARS AND THE APPELLANT IS HOLDING THEM FROM VERY LONG PERIOD OF TIMES ; THESE INVESTMENTS WERE MADE WITH A LONG TERM HORIZON IN MIND WITH A MATURITY PERIOD RANGING FROM 5 TO 10 YEAR PERIOD, HENCE, IT DOES NOT INVOLVE ANY DAY - TO - DAY MONITORING. ALSO IT IS STATED THAT THE INTEREST EX PENDITURE PERTAINS TO INTEREST PAYABLE ON DEPOSITS PLACED BY THE LANDLORDS IN RESPECT OF RENT - FREE ACCOMMODATION PROVIDED TO THE EMPLOYEES OF THE COMPANY AND THE INTEREST IS IN NO WAY CONNECTED TO TAX - FREE BONDS. THUS IT IS STATED THAT NO DISALLOWANCE IS W ARRANTED U/S 14A R.W. RULE 8D. REFERRING TO THE AY 2007 - 08, THE LD. COUNSEL SUBMITS THAT THE CIT(A) HAS HELD THAT FACTORING CHARGES PAID BY THE ASSESSEE CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT AND THE TRIBUNAL HAS TAKEN NO TE OF THIS RELIEF. IT IS STATED THAT THE REVENUE HAS ACCEPTED THE ORDER OF THE CIT(A) AND HAS NOT FILED AN APPEAL BEFORE THE TRIBUNAL AND THEREFORE, THE AO BE DIRECTED NOT TO CONSIDER FACTORING CHARGES FOR DISALLOWANCE U/S 14A. AS REGARDS THE DISALLOWANCE OF BALANCE INTEREST AS WELL AS ADMINISTRATIVE EXPENSES, IT IS EXPLAINED THAT THE TRIBUNAL HAS RESTORED THE MATTER TO THE FILE OF THE AO TO RE - CONSIDER THE ASSESSEES ALTERNATIVE SUBMISSION AS RAISED BEFORE THE CIT(A) QUA EXPENSE DISALLOWANCE AND ALSO RE - AD JUDICATE THE ISSUE OF COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 4 INTEREST DISALLOWANCE IN THE LIGHT OF THE ASSESSEES SUBMISSION. THUS THE LD. COUNSEL SUBMITS THAT SIMILAR DIRECTION BE GIVEN FOR THE YEAR UNDER APPEAL AS WELL. 5. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESENTATIVE (DR) SUBMITS T HAT THE AO HAS RIGHTLY FOLLOWED THE DIRECTION OF DRP THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT (2010) 328 ITR 81 (MUM) , THE AO IS DUTY BOUND TO ADOPT RULE 8D FOR MAKING DISALLOWANCE U/S 14A, WHERE HE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. FURTHER, IT IS STATED THAT IN THE INSTANT CASE THE APPELLANT HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR EARNING THE EXEMPT INCOME. THUS THE LD. DR SUPPORTS THE OR DER PASSED BY THE AO. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. A PERUSAL OF THE BALANCE SHEET OF THE APPELLANT AS AT MARCH 31, 2008 CLEARLY INDICATES THAT THE SHA REHOLDERS FUNDS (SHARE CAPITAL AND RESERVE AND SURPLUS) ARE AT RS.162,20.62 LACS, WHEREAS THE INVESTMENTS ARE AT RS.72,58.77 LACS. IN HDFC BANK LTD. VS. DCIT [2016] 67 TAXMANN.COM 42 (BOM), THE HON'BLE BOMBAY HIGH COURT REFERRING TO THE DECISION IN CIT VS. HDFC BANK LTD. [2014] 366 ITR 505 (BOM) AND CIT V. RELIANCE UTILITIES & POWER LTD. [2009] 313 ITR 340 (BOM) HELD AS UNDER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CASE OF HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PRESUMPTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES & POWER LTD . (SUPRA) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 5 OUT OF ASSESSEE'S OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERNED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DEC ISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) FOR THE FIRST TIME ON 23RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIES AND POWER LTD . (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE IN AS MUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN VIZ. BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID DOWN IN RELIANCE UTILITIES & POWER LTD . (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. AS THE INVESTMENTS FROM WHICH THE TAX - FREE INCOME IS EARNED WERE MADE FROM THE APPELLANTS OWN SURPLUS FUNDS/ACCUMULATED PROFITS, FOLLOWING THE ABOVE DECISION, WE DELETE THE DISALLOWANCE OF RS.37,03,813/ - MADE UNDER RULE 8D(2)(II). 6.1 NOW WE TURN TO THE DISALLOWANCE OF RS.29,14,417/ - MADE BY THE AO UNDER RULE 8D(2)(III). IN THE INSTANT CASE, THE APPELLANT HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF EXEMPT INCOME. IT IS RELEVANT TO MENTION HERE THAT RULE 8D WAS NOTIFIED BY CENTRAL BOARD OF DIRECT TAXES (CBDT) BY THE IT (5 TH AMDT) RULES, 2008 W.E.F. 24.03.2008. THUS IT IS APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR. THE RELIANCE PLACED BY THE LD. COUNSEL FOR AY 2007 - 08 STANDS ON A DIFFERENT PEDESTAL FROM AY 2008 - 09. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 6 IN G ODREJ & BOYCE MFG. CO. LTD. (SUPRA), THE HON'BLE BOMBAY HIGH COURT HAS EXPLAINED RULE 8D(2)(III) AS UNDER : AS REGARD RULE 8D(2)(III), IT HAD BEEN SUBMITTED THAT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE / MA NAGERIAL EXPENSES TO TAX - EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO TAX - FREE INVESTMENT INCOME HAVE A FIXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE IN VESTMENT RATHER THAN THE AMOUNT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEMES (PMS), THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFIT ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPENSES WERE EXCLUDED ON THE GROUND THAT IN THE CASE OF A LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE COMPUTED AT ONE - HALF PER CENT OF THE VALUE OF THE INVESTMENT. HAVING CONSIDERED THE FACTS OF THE CASE AND FOLLOWING THE ABOVE DECISION, WE CONFIRM THE DISALLOWANCE OF RS.29,14,417/ - MADE BY THE AO. 7. THUS THE 1 ST GROUND OF APPEAL IS PARTLY ALLOWED. 8 . THE 2 ND GROUND OF APPEAL 2. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE AO/ DRP ERRED IN DISALLOWING A SUM OF RS.18,38,936/ - INCURRED IN CONNECTION WITH THE REDUCTION OF SHARE CAPITAL OF THE COMPANY CONSIDERING THE SAME AS CAPITAL EXPENDITURE. T HAT THE SUM OF RS.1,86,38,936/ - BE ALLOWED AS BUSINESS EXP ENDITURE AND THE DISALLOWANCE BE DELETED. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 7 9 . DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS REDUCED THE FACE VALUE OF ITS EQUITY SHARE FROM RS.10/ - TO RS.1/ - PER SHARE , PURSUING THE CAPITAL REDUCTION SCHEME. ACCORDINGLY, THE CAPITAL OF THE APPE LLANT REDUCED FROM RS.136 CRORES TO RS.13.6 CRORES. THE APPELLANT INCURRED TOTAL REVENUE EXPENDITURE OF RS.1,86,38,936/ - COMPRISING MAINLY OF PROFESSIONAL CHARGES, LEGAL CHARGES, POSTAGE, PRINTING ETC. THE APPELLANT CONTENDED BEFORE THE AO THAT THESE EXPEN DITURES WERE INCURRED TO INCREASE OPERATIONAL EFFI CIENCY OF THE C OMPANY AND THEREFORE, RIGHTLY THE SAME IS CLAIMED AS REVENUE EXPENDITURE. HOWEVER, THE AO WAS NOT CONVINCED WITH THE EXPLANATION FOR THE REASON THAT THE SAID EXPENDITURE IS INCURRED FOR CHANG ING THE CAPITAL STRUCTURE OF THE COMPANY AND THEREFORE, THE SAME IS TO BE TREATED AS CAPITAL EXPENDITURE. THEREFORE HE MADE A DISALLOWANCE OF THE ABOVE SUM OF RS.1,86,38,936/ - TREATING IT AS CAPITAL EXPENDITURE. 10 . BEFORE US, THE LD. COUNSEL SUBMITS THAT THE APPELLANT HAS RIGHTLY CLAIMED THE SAID EXPENDITURE AS REVENUE IN NATURE. IN THIS REGARD, RELIANCE IS PLACED BY THE HIM ON THE DECISION IN PCIT V. M/S BAYER VAPI PVT. LTD. (R/TAX APPEAL NO. 166 OF 2019 (GUJ - HC); CIT V. SELAN EXPLORATION TECHNOLOGY LTD . (188 TAXMAN 1) (DELHI HC), STERLING AND WILL PVT. LTD. V. ACIT [TS - 413 - ITAT - 2018 (MUM - TRIB) ], M ERK LTD. V. DCIT (69 TAXAMAN.COM 45) (MUM - TRIB) AND ECHJAY INDUSTRIES LTD. V. DCIT (88 TTJ 1089) (MUM - TRIB) . 1 1 . ON THE OTHER HAND, THE LD. DR RELIES ON THE DE CISION IN BROOKE BOND INDIA LTD. V. CIT (1997) 91 TAXMAN 26 (SC) . 12 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 8 IN M/S BAYER VAPI PVT. LTD . (SUPRA), THE ASSESSEE DEBITED LEGAL AND PROFESSIONAL EXPENSES OF RS.10,25,500/ - INCURRED IN RELATION TO BUY BACK OF SHARES OF THE COMPANY FROM ITS SHAREHOLDER S WHICH PERTAINS TO REDUCTION OF SHARES CAPITAL OF THE COMPANY. THE AO DISALLOWED SUCH EXPENDITURE ON THE GROUND THAT TH E SAME IS INCURRED FOR REDUCTION OF SHARE CAPITAL AND CAPITAL REDUCTION IS NOT DAY - TO - DAY AFFAIR OF THE COMPANY NOR IT IS RELATED TO BUSINESS AND THEREFORE, IT PARTAKES THE CHARACTER OF CAPITAL EXPENDITURE. THE HONBLE GUJARAT HIGH COURT VIDE ORDER DATED 22.04.2019 HELD THAT : 3.5 FROM FACTS STATED ABOVE, IT IS CLEAR THAT EXPENDITURE INCURRED DOES NOT INCLUDE THE PRICE PAID TO SHARE HOLDERS FOR BUYING BACK THE SHARES, BUT IT ONLY RELATES TO EXPENDITURE INCURRED FOR CARRYING OUT BUYBACK SCHEM E. ASSESSEE HAS CLAIMED DEDUCTION IN RESPECT OF EXPENDITURE INCURRED FOR PROCEEDING OF IMPLEMENTATION OF BUYBACK OF SHARES WHICH WOULD NOT IN ANY MANNER EN HANCE THE CAPITAL STRUCTURE OF THE ASSESSEE BUT THERE IS OUTFLOW OF CAPITAL AND NO DEDUCTION IS CLAIM ED FOR OUTFLOW OF CAPITAL. THEREFORE, TRIBUNAL HAS RIGHTLY ALLOWED SUCH EXPENDITURE AS REVENUE EXPENDITURE. IN SELAN EXPLORATION TECHNOLOGY LTD . (SUPRA), THE AO DISALLOWED THE CLAIM OF THE ASSESSEE OF RS.20,40,000/ - INCURRED FOR BUYBACK OF SHARES AND TR EATED THE SAME AS CAPITAL EXPENDITURE OF THE ASSESSEE AND THUS ADDED IT TO THE INCOME. IN SO FAR AS THE ABOVE AMOUNT IS CONCERNED, IT WAS PAID BY THE ASSESSEE TO HSBC SECURITIES AND CAPITAL MARKETS (INDIA) (P.) LTD. FOR ADVISORY SERVICES. SUCH PAYMENT OF A DVISORY SERVICES WAS IN CONNECTION WITH BUYBACK OF SHARES AND INSTEAD OF INCREASE IN THE SHARE CAPITAL, IT WAS GOING TO RESULT IN THE DECREASE IN FUNDS WITH THE BUYBACK OF THE SHARES. IN THESE CIRCUMSTANCES, THE TRIBUNAL HELD THAT THE ASSESSEE HAD NOT ACQU IRED THE BENEFIT OR ADDITION OF ENDURING NATURE AND THE EXPENDITURE WAS THEREFORE, ALLOWABLE AS REVENUE COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 9 EXPENDITURE. IN FURTHER APPEAL BY THE REVENUE, THE HONBLE HIGH COURT REFERRING INTER ALIA THE DECISION IN BROOKE BOND INDIA LTD . (SUPRA) HELD : 8. WE MAY ALSO MENTION AT THIS STAGE THAT TO THE SAME EFFECT IS THE JUDGMENT OF THE SUPREME COURT IN EMPIRE JUTE CO. V. CIT [1980] 124 ITR 1 , WHEREIN THE FOLLOWING PRINCIPLE OF LAW WAS ENUNCIATED: 'I N SHORT, WHAT HAS BEEN HELD IN THIS CASE IS THAT IF THE EXPENDITURE IS MADE ONCE AND FOR ALL WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING NATURE OF A TRADE THEN THERE IS GOOD REASON FOR TREATING SUCH AN EXPENDITURE AS PR OPERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPITAL. THIS IS SO, IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPOSITE CONCLUSION.' 9. IT WOULD BE OF INTEREST TO NOTE THAT IN EMPIRE JUTE CO.'S CASE (SUPRA), THE SUPREME COURT CONSIDERED ITS EARLIER T WO JUDGMENTS IN THE CASE OF BROOKE BOND INDIA LTD. V. CIT [1997] 225 ITR 798 AND PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPN. LTD. V. CIT [1997] 225 ITR 792 . DISTINGUISHING THESE TWO JUDGMENTS, THE SUPREME COURT POINTED OUT THAT THOSE CASES RELATED TO THE ISSUE OF FRESH SHARES WHICH LED TO AN INFLOW OF FRESH FUNDS INTO THE COMPANY, WHICH EXPANDS OR ADDS TO ITS CAPITAL EMPLOYED IN THE COMPA NY RESULTING IN THE EXPANSION OF ITS PROFIT MAKING APPARATUS. THE EXPENDITURE INCURRED FOR THE PURPOSE OF INCREASING THE COMPANY'S SHARE CAPITAL BY THE ISSUE OF FRESH SHARES WOULD BE TREATED AS CAPITAL EXPENDITURE, AS HELD IN THOSE CASES. FURTHER, WHEN THE EXPENSE INCURRED IN CONNECTION WITH BONUS SHARES, THERE IS NO INCREASE IN THE CAPITAL EMPLOYED, WHICH REMAINS THE SAME. FOR THIS REASON, AND ON THIS DISTINCTI ON, THE COURT HELD THAT SUCH AN EXPENDITURE WOULD BE TREATED AS REVENUE EXPENDITURE/BUSINESS EXPE NDITURE AS IT CANNOT BE SUCH THAT IN THAT CASE THE COMPANY HAD ACQUIRED BENEFIT OR ADDITION OF ENDURING NATURE BECAUSE THE TOTAL FUNDS AVAILABLE WITH THE ASSESSEE - COMPANY WOULD REMAIN THE SAME. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 10 10. IT IS CLEAR FROM THE AFORESAID JUDGMENTS THAT A FINE DISTI NCTION IS MADE BY THE SUPREME COURT IN CLASSIFYING THE EXPENDITURE UNDER TWO CATEGORIES: - (A)WHEN THE EXPENSE INCURRED RELATES TO THE ISSUE OF FRESH SHARES, WHICH LEADS TO AN INFLOW OF FRESH FUNDS INTO THE COMPANY, SUCH EXPENDITURE IS TO BE TREATED AS CAPI TAL EXPENDITURE. (B)ON THE OTHER HAND, WHERE NO SUCH FLOW OF FUNDS OR INCREASE IN THE CAPITAL EMPLOYED, THE EXPENDITURE INCURRED WOULD BE REVENUE EXPENDITURE, AS IN SUCH A CASE THE COMPANY WOULD NOT ACQUIRE BENEFIT OR ADDITION OF ENDURING NATURE. 11. IN TH E PRESENT CASE, CONSULTANCY FEE FOR ADVISORY SERVICES WAS PAID BY THE ASSESSEE - COMPANY FOR BUYBACK OF SHARES. INSTEAD OF INCREASE IN THE SHARE CAPITAL, IT WAS GOING TO RESULT IN THE DECREASE IN FUNDS WITH THE BUYBACK OF THE SHARES. IN THESE CIRCUMSTANCES, THE TRIBUNAL RIGHTLY HELD THAT THE ASSESSEE HAD NOT ACQUIRED THE BENEFIT OR ADDITION OF ENDURING NATURE BECAUSE AFTER THE BUYBACK, BENEFIT OR ADDITION OF ENDURING NATURE WOULD NOT ARISE AS CAPITAL EMPLOYED HAD, IN FACT, GONE DOWN. THE EXPENDITURE INCURRED HAD NOT RESULTED INTO BRINGING INTO EXISTENCE ANY ASSET. THEREFORE, IT WAS RIGHTLY HELD TO BE AN EXPENSE OF REVENUE NATURE. 12. THE CONTENTION OF LEARNED COUNSEL FOR THE REVENUE THAT WITH LESSER CAPITAL DIVIDEND IN FUTURE PAYABLE SHALL BE LESS AND, THEREFO RE, IT SHALL BE TREATED AS A BENEFIT OF ENDURING NATURE CANNOT BE ACCEPTED. WE FURTHER FIND THAT IN THESE CIRCUMSTANCES THE TRIBUNAL RIGHTLY HELD THAT SUCH AN EXPENDITURE WAS ALLOWED UNDER SECTION 37 OF THE ACT AS EXPENSE INCURRED FOR BUSINESS PURPOSE IN T HE FOLLOWING MANNER : - '15. ONCE WE DECIDE THAT THE IMPUGNED EXPENDITURE IS NOT CAPITAL IN NATURE, WE HAVE TO SEE ITS ALLOWABILITY UNDER SECTION 37. IN THIS REGARD, WE FIND THAT THE EXPENSES WERE INCURRED BY THE ASSESSEE COMPANY FOR COMPLIANCE OF SEBI GUID ELINES WITH REGARD TO BUYBACK OF SHARES. THE BUYBACK OF SHARES IS STATED TO BE FOR THE PURPOSE OF PROVIDING AN EXISTING OPPORTUNITY TO THE EXISTING SHAREHOLDERS WHO SO DESIRE. THIS TRIBUNAL IS TAKING A CONSISTENT VIEW THAT COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 11 EXPENDITURE INCURRED WITH REGARD TO AGM IS BUSINESS EXPENDITURE. THE AGM IS HELD BY A COMPANY FOR THE BENEFIT OF EXISTING SHAREHOLDERS. ON THE SAME REASONING, THE IMPUGNED EXPENDITURE WHICH WERE ALSO INCURRED FOR THE BENEFIT OF EXISTING SHAREHOLDERS IN THE ORDINARY COURSE OF BUSINESS IS A LSO AN EXPENDITURE INCURRED FOR BUSINESS PURPOSE AND HENCE THE SAME IS ALLOWABLE UNDER SECTION 37. WE, THEREFORE, DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE.' SIMILAR CONCLUSION HAS BEEN DRAWN BY THE TRIBUNAL IN STERLING AND WILL PVT. LTD .; MERK LTD. V. DCIT ; ECHJAY INDUSTRIES LTD . (SUPRA). IN THE CASE OF BROOKE BOND INDIA LTD. (SUPRA), DURING THE AY 1969 - 70, THE ASSESSEE - COMPANY ISSUED SHARE TO INCREASE ITS SHARE CAPITAL AND CLAIMED DEDUCTION OF EXPENDITURE INCURRED IN CONNECTION THEREWITH AS REVENUE EXP ENDITURE BUT THE SAME WAS DISALLOWED AS CAPITAL EXPENDITURE. THE HONBLE SUPREME COURT HELD THAT : THOUGH THE INCREASE IN THE CAPITAL RESULTS IN EXPANSION OF THE CAPITAL BASE OF THE COMPANY AND INCIDENTALLY THAT WOULD HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELP IN THE PROFIT MAKING, THE EXPENSES INCURRED IN THAT CONNECTION STILL RETAINS THE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE IS DIRECTLY RELATED TO TH E EXPANSION OF THE CAPITAL BASE OF THE COMPANY. HENCE, EXPENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL EXPENDITURE. IN THE INSTANT CASE, AS RECORDED BY THE AO, THE ASSESSEE INCURRED RS.1,86,38,936/ - COMPRISING MAINLY OF PROFESSIONAL CHARGES, LEGAL CHARGES, POSTAGE, PRINTING ETC. HER EIN THERE IS A REDUCTION OF SHARE CAPITAL WHICH HAS RESULTED IN DECREASE IN FUND. THE APPELLANT HAS NEITHER ACQUIRED ANY BENEFIT OF ENDURING NATURE NOR HAS SUCH EXPENDITURE RESULTED INTO ANY ASSET. WE ARE OF THE CONSIDERED VIEW THAT THE RATIO LAID DOWN IN SELAN EXPLORATION TECHNOLOGY LTD. (SUPRA) BY THE HONBLE DELHI HIGH COURT AFTER CONSIDERING THE DECISION IN COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 12 BROOKE BOND INDIA LTD . (SUPRA) SQUARELY APPLIES TO THE PRESENT CASE. FOLLOWING THE SAME, WE DELETE THE DISALLOWANCE OF RS.1,86,38,936/ - MADE BY THE AO AND ALLOW THE 2 ND GROUND OF APPEAL. 1 3 . AS THE APPELLANT HAS NOT PRESSED THE 3 RD GROUND OF APPEAL, THE SAME IS DISMISSED. 14 . THE 4 TH GROUND OF APPEAL 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/DRP ERRED IN CONFIRMING THE UPWARD ADJUSTMENT OF RS.572,554,441/ - TO THE INCOME OF THE APPELLANT, IN RESPECT OF ADVERTISEMENT, MARKETING AND SALES PROMOTION ('AMP') EXPENSES INCURRED BY THE APPELLANT, BY: A FAILING TO APPRECIATE THAT THE AMP EXPENSE WHICH IS INCURRED BY WAY OF PAYMENTS TO THIRD PARTIES IS INCURRED 'WHOLLY AND EXCLUSIVELY' FOR PURPOSE OF BUSINESS OF THE APPELLANT IN INDIA AND THAT THE AMP EXPENSES DO NOT BENEFIT COLGATE PALMOLIVE COMPANY, U.S.A ('CP USA'); B ALLEGING THAT THERE EXISTS AN ARRANGEMENT BETWEEN THE APPELLANT A ND CP USA FOR AMP EXPENSES THEREBY ERRED IN CONTENDING THAT CP USA NEEDS TO COMPENSATE THE APPELLANT TOWARDS AMP EXPENSES; C APPLYING THE BRIGHT LINE TEST FOR DETERMINING THE COMPENSATION TOWARDS THE AMP EXPENSES; D CONCLUDING THAT THE AMP EXPENSES OF THE APPE LLANT, WHICH IS INCURRED BY WAY OF PAYMENT TO THE THIRD PARTIES, AS AN INTERNATIONAL TRANSACTION; E APPLYING INDIAN TRANSFER PRICING REGULATIONS TO THE TRANSACTION BETWEEN THE APPELLANT AND THIRD PARTIES AS THERE WAS NO REFERENCE MADE BY THE AO TO THE TRANSF ER PRICING OFFICER IN THIS REGARD; AND F NOT GRA NTING THE (+/ - ) 5% RANGE BENEFIT AVAILABLE UNDER PROVISO TO SECTION 92C(2) ACT. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 13 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/ DRP HAS ERRED IN CONFIRMING THE FOLLOWING WHILE APPLYING THE BRIGHT TEST FOR DETERMINING THE COMPENSATION TOWARDS THE AMP EXPENSE - SELECTING COMPARABLES WHICH ARE INTO VARIED PRODUCTS I.E . NOT SIMILAR TO THE APPELLANT (ORAL CARE SEGMENT); - AD HOC REDUCTION OF 4.53% FROM AMP/ SALES RATI O OF THE COMPARABLES; - THE APPELLANT IS PROVIDING A SERVICE TO CP USA VIS - A - VIS AMP EXPENSES THEREBY APPLYING A MARK - UP OF 8.92% ON THE EXCESSIVE AMP EXPENSES. 15 . IN THE INSTANT CASE, THE TPO OBSERVED THAT THE FUNCTIONS CARRIED OUT BY THE APPELLANT INVOLVE CREATION OF BRAND INTANGIBLE, WHICH IS A MAJOR FACTOR DERIVING REVENUES IN THE FMCG SECTOR. DURING THE YEAR UNDER APPEAL, ON A NET SALE OF RS.1473.38 CRORES FOR FY 2007 - 08, THE APPELLANT SPENT AN AMOUNT OF RS.256.51 CRORES TOWARDS ADVERTISEMENT, MARKETING AND PROMOTION (AMP). THE TPO HELD THAT WHEN CP INDIA AND COLGATE - PALMOLIVE US ARE EFFECTIVELY DEVELOPING BRAND INTANGIBLE JOINTLY, PROFIT SPLIT METHOD (PSM) IS THE MOST APPROPRIATE METHOD TO DETERMINE THE COMPENSATION RECEIVABLE BY THE APPELLANT FOR ITS B RAND DEVELOPMENT ACTIVITY. FURTHER, THE TPO RELYING ON THE DECISION OF THE TRIBUNAL IN THE CASE OF ROLLS ROYCE PLC. V. DDIT [TIOL - 408 - ITAT - DELHI] PROCEEDED TO SPLIT THE PROFIT BETWEEN THE 3 SIGNIFICANT FUNCTIONS OF THE APPELLANT VIZ. MANUFACTURING, RESEARCH AND DEVELOPMENT AND AMP. THE APPELLANT CONTENDED BEFORE THE TPO THAT THE ENTIRE AMP EXPENSES OF RS.256.50 CRORE ARE NOT T O BE INCLUDED FOR PROFIT SPLIT , AS A SUBSTANTIAL PORTION OF THE EXPENSES WERE IN THE NATURE OF TRADE DISCOUNTS, WHICH COULD NOT BE SAID TO CONTRIBUTE TO BRAND DEVELOPMENT. HOWEVER, THE TPO WAS NOT CONVINCED WITH THE SAID EXPLANATION OF THE APPELLANT AND PR OPOSED AN ADJUSTMENT OF RS.63.91 CRORE FOR PROFITS ATTRIBUTABLE TO THE BRAND DEVELOPED BY CP INDIA FOR COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 14 CP US, ADOPTING PSM METHOD. THE AO FOLLOWING THE DIRECTION OF THE DRP MADE AN UPWARD ADJUSTMENT OF RS.572,554,441/ - TO THE INCOME OF THE APPELLANT IN RES PECT OF AMP EXPENSES. 16 . BEFORE US, THE LD. COUNSEL SUBMITS THAT THE ABOVE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AYS 2005 - 06 & 2007 - 08, WHEREIN IT HAS BEEN HELD THAT (I) THERE EXISTS NO ARRANGE MENT OR AGREEMENT BETWEEN THE TAXPAYER AND ITS AE AND ACCORDINGLY, NO ADDITION COULD BE MADE ON MERE ASSUMPTION OF CERTAIN FACTS, (II) THE CASE OF THE ASSESSEE IS IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE BOMBAY HIGH COURT IN JOHNSON & JOHNSON LTD . (80 TAXMANN.COM 269) AND DELHI HIGH COURT IN MARUTI SUZUKI INDIA LTD. V. CIT (2015) 64 TAXMANN.COM 150 ; CIT V. WHIRLPOOL OF INDIA LTD. 381 ITR 154; BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. V. ADDL. CIT 381 ITR 237, (III) IN AY 2011 - 12, THE DRP HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION IN THE CASE OF MARUTI SUZUKI (SUPRA). ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER PASSED BY THE AO AS PER THE DIRECTION OF THE DRP. 17 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE REL EVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. WE FIND THAT ON SIMILAR FACTS IN APPELLANTS OWN CASE FOR AYS 2005 - 06 & 2007 - 08, THE TRIBUNAL HAS FOLLOWED THE DECISION OF THE CO - ORDINATE BENCH IN JOHNSON & JOHNSON LTD. V. CIT (4 3 TAXMANN.COM 15). IN FURTHER APPEAL BY THE REVENUE, THE HONBLE BOMBAY HIGH COURT HAS UPHELD THE VIEW OF THE TRIBUNAL IN JOHNSON & JOHNSON LTD (SUPRA) BY OBSERVING THAT : 4. RE QUESTION (I) : COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 15 I. THE IMPUGNED ORDER OF THE TRIBUNAL ALLOWED THE RESPONDENT - ASSESSEE'S APPEAL BEFORE IT BY DELETING THE ADDITION OF RS.200.82 LAKHS BEING THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF SALES PROMOTION AND PUBLICITY EXPENSES BEING PAYABLE BY THE RESPONDENT - A SSESSEE' PARENT M/S. JOHNSON & JOHNSON, USA. THIS ON THE GROUND THAT THE TRANSFER PRICING OFFICER (TPO) HAS, WHILE HOLDING THAT THE PARENT COMPANY SHOULD SHARE THIS EXPENDITURE ON PUBLICITY AND SALES PROMOTION AS IT BENEFITS THERE FROM , AS HIGHER SALES RES ULT IN HIGHER ROYALTY, HAS NOT DETERMINED THE ARMS LENGTH PRICE (ALP) BY FOLLOWING ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C(1) OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES, 1962. II. T HE TPO IS OBLIGED UNDER THE LAW TO DETERMINE THE ALP BY FOL LOWING ANY ONE OF THE PRESCRIBED METHODS OF DETERMINING THE ALP AS DETAILED IN SECTION 92C(1) OF THE ACT. IN THIS CASE, THERE IS NOTHING ON RECORD TO INDICATE THAT THE TPO HAD APPLIED ANY ONE OF THE PRESCRIBED METHODS IN SECTION 92C(1) OF THE ACT TO DETERM INE THE ALP BEFORE DISALLOWING THE PAYMENT OF RS.200.82 LAKHS INCURRED BY THE RESPONDENT ON ACCOUNT OF PUBLICITY AND SALES MANAGEMENT AS BEING EXCESSIVE AND/OR PAYABLE BY ITS PARENT, M/S. JOHNSON & JOHNSON, USA. III. THE IMPUGNED ORDER HOLDS THAT TRANSFER PRIC ING ADJUSTMENT DONE BY DISALLOWING THE PAYMENT, ON THE BASIS OF AN ASSUMPTION THAT IT IS EXCESSIVE, IS AN ACTION COMPLETELY DEHORS THE PROVISIONS OF TRANSFER PRICING ADJUSTMENT FOUND IN CHAPTER X OF THE ACT. THE DETERMINATION OF THE ALP HAS TO BE DONE ONLY BY FOLLOWING ONE OF THE METHODS PRESCRIBED UNDER THE ACT. IV. IN VIEW OF THE ABOVE, AS THE REVENUE HAS NOT ACTED IN ACCORDANCE WITH THE CLEAR MANDATE OF LAW, THE QUESTIONS AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTERTAIN ED. 17 .1 SIMILAR VIEW HAS BEEN TAKEN BY HONBLE DELHI HIGH COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA); WHIRLPOOL OF INDIA LTD . (SUPRA); B AUSCH & LOMB EYECARE (INDIA) (P.) LTD . (SUPRA); AND YUM RESTAURANTS (INDIA ) (P.) LTD. V. ITO 380 ITR 637. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 16 IN THE ABOVE - MENTIONED DECISIONS, IT HAS CATEGORICALLY BEEN HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN THE ASSESSEE AND ITS AE OBLIGING THE ASSESSEE TO INCUR AMP EXPENDITURE ON BEHALF OF ITS AE, NO INTERNATIONAL TRANSACTION CAN BE PRESUMED. EVEN IF SOME INDIRE CT BENEFIT HAS ACCRUED TO THE AE BY AFORESAID EXPENDITURE, IT COULD NOT BE HELD THAT THE SAME WAS INCURRED TO PROMOTE THE BRAND OF FOREIGN AE. FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE CO - ORDINATE BENCH IN APPELLANTS OWN CASE FOR AYS 2005 - 0 6 & 2007 - 08 AND DELETE THE UPWARD ADJUSTMENT OF RS.572,554,441/ - MADE BY THE AO. THUS THE 4 TH GROUND OF APPEAL IS ALLOWED. 18 . THE 5 TH GROUND OF APPEAL 5. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE AO/DRP ERRED IN CONFIRMING THE UPWARD ADJUSTMENT OF RS.8,659,200/ - TO THE INCOME OF THE APPELLANT, IN RESPECT OF PROVISION OF RESEARCH AND DEVELOPMENT/ TESTING SERVICES, BY: A. FAILING TO APPRECIATE THAT NONE OF THE CONDITIONS SET OUT IN SECTION 92C(3) WERE SATISFIED AND THAT THE APPELLANT HAD PREPARED THE TRANSFER PRICING DOCUMENTATION BONA FIDE AND IN GOOD FAITH IN COMPLIANCE WITH THE ACT AND THE RULES; B. USING SINGLE YEAR DATA (I.E. FINANCIAL YEAR 2007 - 08) AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT FOR THE COMPARABILITY ANALYS IS; C. REJECTING 5 COMPARABLE COMPANIES WITHOUT APPROPRIATE REASONS FROM THE COMPARABILITY ANALYSIS CARRIED OUT BY THE APPELLANT; D. NOT GRANTING THE ECONOMIC ADJUSTMENTS TO THE APPELLANT ON ACCOUNT OF DIFFERENCES BETWEEN RISK PROFILE, WORKING CAPITAL CYCLE OF T HE APPELLANT VIS - - VIS THE COMPARABLES; AND COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 17 E. NOT GRANTING THE (+/ - ) 5% RANGE BENEFIT AVAILABLE UNDER PROVISO TO SECTION 92C(2) OF THE ACT. ACCORDINGLY, THE ADDITION OFRS.8,659,200/ - MAY BE DELETED. 1 9 . FOR RENDERING R&D SERVICES, THE APPELLANT WAS REIMBUR SED AT COST PLUS A MARKUP OF 5%. IT RECEIVED AN AMOUNT OF RS.6,44,86,343/ - FROM ITS AES FOR RENDERING THE SAID SERVICES. THE ALP OF THE INTERNATIONAL TRANSACTION REPRESENTING R&D SERVICES PROVIDED TO THE AES WAS DETERMINED BY APPLYING TNMM. THE PLI OF THE APPELLANT WAS ARRIVED AT 12.65% ON COST, WHEREAS THE AVERAGE PLI OF THE COMPARABLES WAS ARRIVED AT 16.96% AS PER THE ANALYSIS IN THE TP DOCUMENT. AS THE ARITHMETICAL MEAN PRICE WAS WITHIN +/ - 5% RANGE FROM THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION, THE PRICE WAS TREATED BY THE APPELLANT AS AT ARMS LENGTH. THE TPO OBSERVED THAT THE APPELLANT ARRIVED AT THE PLI OF THE COMPARABLES BY CONSIDERING MARGIN BASED ON THE DATA FOR THE FYS 2005 - 06 AND 2006 - 07. AS PER RULE 10B(4), IT IS MANDATORY TO USE THE CU RRENT YEAR DATA I.E. THE DATA FOR THE FY 2007 - 08. THE TPO OBSERVING THAT THE APPELLANT FAILED TO SHOW HOW EARLIER YEAR DATA HAD AN INFLUENCE ON THE PRICES/MARGINS IN THE CASE OF THE APPELLANT OR COMPARABLE COMPANIES, REJECTED THE USE OF EARLIER YEAR DATA. ACCORDINGLY, THE TPO SELECTED 4 COMPANIES AS COMPARABLES OUT OF 9 COMPANIES SELECTED BY THE APPELLANT IN ITS TP DOCUMENTATION, AFTER CONSIDERING THE DATA AVAILABILITY FOR FY 2007 - 08. ACCORDINGLY, HE WORKED OUT THE MEAN MARGIN AT 29.20%, THUS MAKING AN UPWA RD ADJUSTMENT OF RS.86,59,200/ - . THE SUMMARY OF THE PROCEEDINGS BEFORE THE TPO IS SUMMARIZED BELOW: SR. NO. NAME OF THE COMPANY OP/TC (AS PER TPOS ORDER) OP/TC (AS PER TP STUDY) 1. ALPHAGEO (INDIA) LTD. 41.05% 41.05% COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 18 2. CHOKSI LABORATORIES LTD. 29.95% 29.95% 3. VIMTA LABS LTD. 15.84% 15.84% 4. TCG LIFESCIENCES LTD. 29.97% 29.97% 5. DOLPHIN MEDICAL SERVICES LIMITED 9.24% 6. MEDINOVA DIAGNOSTICS SERVICES LTD. REJECTED BY LD. TPO 4.47% 7. N G INDUSTRIES LIMITED 21.56% 8. NEEMAN MEDICAL INTERNATIONAL (ASIA) LIMITED 12.74% 9. PFIZER LIMITED SERVICES 13.63% COUNT 4 9 AVERAGE 29.20% 19.83% THE DRP CONFIRMED THE ACTION OF THE TPO. THE AO, FOLLOWING THE DIRECTION OF THE DRP MADE AN ADJUSTMENT OF RS.86,59,200/ - . 20 . BEFORE US, THE LD. COUNSEL SUBMITS THAT THE APPELLANT HAS TAKEN INTO ACCOUNT 9 COMPARABLES IN THE TP STUDY. THE TPO EXCLUDED 5 COMPARABLES AND COMPUTED SINGLE YEAR MARGIN OF 4 CO MPARABLES WHICH COMES TO 29.20%. IT IS EXPLAINED OUT OF 5 COMPARABLES REJECTED BY THE TPO, 3 COMPARABLES ARE NOT PRESSED FOR INCLUSION AND THE APPELLANT SUBMITS FOR INCLUSION OF (I) DOLPHIN MEDICAL SERVICES LTD., (II) MEDINOVA DIAGNOSTIC SERVICES LTD. AND EXCLUSION OF ALPHAGEO (INDIA) LT D. ELABORATING FURTHER, FOR INCLUSION OF DOLPHIN MEDICAL SERVICES LTD., IT IS STATED THAT THE SAME IS ENGAGED IN PROVIDING AND MAINTAINING DIAGNOSTIC LABORATORIES AND EQUIPMENTS FOR TESTING AND SETTING UP LABORATORIES FOR MEDICAL INVESTIGATION AND RESEAR CH. IN THIS REGARD, RELIANCE IS PLACED ON THE DECISION IN WATSON PHARMA (P.) LTD . (38 ITR 97). COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 19 FOR INCLUSION OF MEDINOVA DIAGNOSTIC SERVICES LTD., IT IS STATED THAT THE SAME IS ENGAGED IN THE BUSINESS OF DIAGNOSTIC SERVICES AND RELATED BUSINESS. FOR EXC LUSION OF ALPHAGEO (INDIA) LTD., IT IS STATED THAT THE SAME IS ENGAGED IN PROVIDING SEISMIC RESEARCH ACTIVITY SUCH AS 2D AND 3D SEISMIC SERVICES FOR DESIGN AND PLANNING OF 2D AND 3D SURVEYS, SEISMIC DATA ACQUISITION. IN THIS REGARD, RELIANCE IS PLACED ON T HE DECISION IN SYNGENTA BIOSCIENCES (P.) LTD. (180 TTJ 61) AND APOTEX RESEARCH PVT. LTD. (ITA NO. 1286/BANG/2010). 21 . ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE TPO/AO HAS RIGHTLY EXCLUDED DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. BECAUSE THESE COMPANIES ARE BASICALLY INTO DIAGNOSTIC SERVICES I.E. PROVIDING AND MAINTAINING DIAGNOSTIC LABORATORIES, EQUIPMENTS FOR TESTING ETC. BESIDES THESE COMPANIES ARE ALSO HAVING INCOME FROM SALE OF INVESTMENTS. IT IS FURTHER EXPLAINED BY THE LD. DR THAT THE ABOVE TWO COMPANIES CANNOT BE CONSIDERED AS ENGAGED IN RESEARCH OR RELATED SERVICES, WHEREAS THE APPELLANT IS CARRYING OUT TESTING SERVICES, WHICH FORM AN INTEGRAL PART OF R&D SERVICES. 2 2 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. A PERUSAL OF THE ANNUAL REPORT (2007 - 08) OF ALPHAGEO (INDIA) LTD. CLEARLY INDICATES THAT THEY PROVIDE 2D AND 3D SEISMIC AND RELATED SERVICES LIKE SEISMIC DATA ACQUISITION, PROCESSING AND INTERPRETATION. THE COMPANYS COMPREHENSIVE PORTFOLIO OF SERVICES COMPRISES : SEISMIC DATA ACQUISITION COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 20 DESIGNING AND PREPLANNING OF 2D AND 3D SURVEYS SEISMIC DATA ACQUISITION IN 2D AND 3D SEISMIC DATA PROCESSING SEISMIC DATA PROCESSING OF 2 D AND 3D DATA REPROCESSING SPECIAL PROCESSING INCLUDING PRE - STACK IMAGING AVO INVERSION AND OTHER SERVICES SEISMIC DATA INTERPRETATION STRUCTURAL AND STRATIGRAPHIC INTERPRETATION GENERATION, EVALUATION AND RANKING OF PROSPECTS RESERVOIR DATA ACQUISITION RESERVOIR ANALYSIS ALSO WE OBSERVE THAT THE PROFIT AND LOSS ACCOUNT OF THE COMPANY REFLECTS THAT THE WHOLE OPERATING INCOME IS FROM SEISMIC SURVEY AND RELATED SERVICE. THE COMPANYS BUSINESS CONSISTS OF ONE REPORTABLE AND GEOGRA PHICAL SEGMENT OF SEISMIC DATA ACQUISITION AND ITS RELATED SERVICE WITHIN INDIA. IN THE CASE OF THE APPELLANT BEFORE US , THEY PROVIDE TESTING RELATED SERVICES TO COLGATE PALMOLIVE USA. THEREFORE, WE HAVE NO HESITATION IN EXCLUDING ALPHAGEO (INDIA) LTD. FRO M THE SET OF COMPARABLES ARRIVED AT BY THE TPO/AO. ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE ALPHAGEO (INDIA) LTD. FROM THE FINAL SET OF COMPARABLES. 2 2 .1 A PERUSAL OF THE ANNUAL REPORT (2007 - 08) OF DOLPHIN MEDICAL SERVICES LTD. CLEARLY INDICATES THAT IT I S A SERVICE INDUSTRY (PAGE 5). IT IS ENGAGED IN THE BUSINESS INTER ALIA OF ESTABLISHING, PROVIDING AND MAINTAINING DIAGNOSTIC COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 21 LABORATORIES AND EQUIPMENTS FOR TESTING AND SETTING UP LABORATORIES FOR MEDICAL INVESTIGATIONS AND RESEARCH (PAGE 7). THE GENERIC NAMES OF 3 PRINCIPAL PRODUCTS/SERVICES OF DOLPHIN ARE DIAGNOSTIC, OPHTHALMIC AND SOFTWARE SERVICES (PAGE 25). THE APPELLANT HAS RELIED ON THE DECISION IN WATSON PHARMA PVT. LTD. (SUPRA) IN SUPPORT OF ITS CONTENTION FOR INCLUDING DOLPHIN MEDICAL SERVICES LTD. WE FIND FROM THE ORDER OF THE TRIBUNAL THAT WATSON PHARMA P. LTD. IS A WHOLLY OWNED SUBSIDIARY OF WATSONS LABS, USA. THE ASSESSEE (WATSON) FROM ITS FACILITIES MANUFACTURES RAW MATERIALS, API AND INTERMEDIATES TO SUPPORT ITS INTERNAL PRODUCT DEVELOPME NT. IT ALSO FACILITATES DEVELOPMENT OF APIS FOR THIRD PARTIES AS WELL. ON THE WHOLE, THE ASSESSEE (WATSON) PROVIDES CONTRACT MANUFACTURE, CONTRACT RESEARCH AND DEVELOPMENT TO ITS PARENT AE AT THE US. THE PARENT AE IN THE US IS ENGAGED IN DEVELOPMENT, MANUF ACTURE, SALE AND DISTRIBUTION OF PROPRIETARY AND OFF PATENT GENERIC PHARMACEUTICAL PRODUCTS. THE TRIBUNAL FOUND THAT DOLPHIN MEDICAL SERVICES BEING ENGAGED IN THE BUSINESS OF CLINICAL TRIAL SERVICES, WHICH IS BROADLY SIMILAR TO THE CONTRACT RESEARCH AND DEVELOPMENT SEGMENT OF THE ASSESSEE (WATSON), IS FUNCTIONALLY COMPARABLE. THE CONCERNED ASSESSMENT YEAR WAS 2009 - 10. IN THE INSTANT CASE, AS PER THE WRITTEN SUBMISSION DATED 12.03.2020 THE IMPUGNED SERVICES BROADLY INCLUDE (I) QUALITY IMPROVEMENT CONDU CTING TEST ON PRODUCTS, (II) ANALYTICAL SUPPORT CONDUCTING ANALYSIS OF THE COMPETITORS PRODUCT, (III) ASSISTANCE IN SELECTING NEW VENDOR ASSISTING THE VARIOUS CP GROUP ENTITIES IN SELECTION OF A NEW VENDOR BY TESTING THE FORMULATIONS PROVIDED BY THE ID ENTIFIED METHOD AND TESTING THEIR PRODUCTS TO DETERMINE THAT THE SAME ADHERES TO THE REQUIREMENTS OF THE CP GROUP. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 22 ALSO AS PER THE ABOVE WRITTEN SUBMISSION THE APPELLANT HAS CARRIED OUT UNDER ARM CLINICAL STUDIES TO SUPPORT THE GLOBAL UNDER ARM BUSINESS FOR CP US AND FOR THE SAID SERVICES, THE APPELLANT IS REMUNERATED WITH A MARKUP OF 12.65% ON ITS OPERATING COSTS. IN VIEW OF THE ABOVE FACTS, THE CASE OF WATSON PHARMA LTD . (SUPRA) IS DISTINGUISHABLE FROM THE CASE OF THE APPELLANT. A PERUSAL OF ANNUAL REPORT (2007 - 08) OF MEDINOVA DIAGNOSTIC SERVICES LTD. CLEARLY INDICATES THAT THE COMPANY IS IN THE BUSINESS OF DIAGNOSTIC SERVICES (PAGE 19). IN THE INSTANT CASE, THE APPELLANT ALSO RENDERS R&D RELATED SERVICES TO GROUP ENTITIES ON AN ASSIGNMENT BASIS. AS PER THE TP STUDY REPORT AT PAGE 41 - 42 : 8.2.11 CP INDIA CONDUCTS R&D RELATED SERVICES ON AN ASSIGNMENT BASIS WHEREBY SEPARATE RECORDS ARE MAINTAINED IN RESPECT OF EACH SEGMENT UNDERTAKEN. ON COMPLETION OF A GIVEN ASSIGNMENT, CP INDIA PREPARES A REPORT OF ITS WORK PERFORMED, METHODOLOGY ADOPTED AND FINDINGS. THIS REPORT IS THEN SENT TO THE ENTITY REQUESTING FOR THE ASSIGNMENT. 8.2.12 DURING THE YEAR, CP INDIA HAD CARRIED OUT VARIOUS ACTIVITIES LIKE UNDER ARM CLINICAL STUDIES, ADVANCED TECHNOLOGY ORAL CA RE STUDIES, UAP STABILITY STUDIES, ETC. 8.2.13 IT IS PERTINENT THE NOTE THAT ALL THE ABOVE ACTIVITIES ARE CARRIED OUT BY CP INDIA WITHIN THE BROAD PARAMETERS LAID DOWN BY THE RESPECTIVE ASSOCIATED ENTERPRISES. ONE MAY ALSO EXAMINE FUNCTIONS PERFORMED, ASSETS EMPLOYED, RISKS ASSUMED MENTIONED AT PAGE 40 - 43 OF THE TP STUDY OF THE APPELLANT. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 23 22 .2. FUNCTIONAL ANALYSIS ENABLES COMPARISON OF CONTROLLED TRANSACTIONS WITH UNCONTROLLED TRANSACTIONS. THE HONBLE SUPRE ME COURT IN THE CASE OF MORGAN STANLEY & COMPANY INC (2007) 292 ITR 416(SC) HAS PLACED SIGNIFICANT EMPHASIS ON FAR (FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED BY THE ASSOCIATED ENTERPRISES INVOLVED) ANALYSIS FOR BENCHMARKING EXERCISE, ALSO KNOWN A S COMPARABILITY ANALYSIS, FOR DETERMINATION OF ARMS LENGTH PRICE OF A TRANSACTION BETWEEN ASSOCIATED ENTERPRISES. UNDER RULE 10D(1)(E), A TAXPAYER WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION IS REQUIRED TO KEEP AND MAINTAIN A DESCRIPTION OF THE FUN CTIONS PERFORMED, RISKS ASSUMED AND ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ASSESSEE AND BY THE ASSOCIATED ENTERPRISES INVOLVED IN THE INTERNATIONAL TRANSACTION. UNDER RULE 10C(2)(B) IN SELECTING THE MOST APPROPRIATE METHOD, AMONG OTHER FACTORS, THE CLAS S OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED B Y THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RI SKS ASSUMED BY SUCH ENTERPRISES, SHALL BE TAKEN INTO ACCOUNT. AND UNDER RULE 10B(2)(B), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED, AMONG OTHER FACTORS, WITH REFERENCE TO THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY THE RESPECTIVE PA RTIES TO THE TRANSACTIONS. 2 2 .3 IN VIEW OF THE FACTUAL SCENARIO AND POSITION OF LAW DELINEATED AT PARA 22.1 TO 22.2 HEREINABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 24 COMPARABILITY OF DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. NEE D TO BE RE - EXAMINED BY THE AO/TPO. THEREFORE, WE RESTORE THE MATTER REGARDING COMPARABILITY OF DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. TO THE FILE OF THE AO/TPO WITH A DIRECTION TO MAKE AN ORDER AFRESH AFTER GIVING REASONABLE OP PORTUNITY OF BEING HEARD TO THE APPELLANT. THE AO WOULD ALSO CONSIDER THE CONTENTIONS OF THE APPELLANT REGARDING RISK ADJUSTMENT , WORKING CAPITAL ADJUSTMENT , IF DETAILS ARE FILED. WE DIRECT THE APPELLANT TO FILE THE RELEVANT DOCUMENTS/EVIDENCE ON THE ABOVE BEFORE THE AO/TPO. THUS THE 5 TH GROUND OF APPEAL IS PARTLY ALLOWED. 2 3 . THE APPELLANT HAS ALSO FILED AN ADDITIONAL GROUND STATING THAT THE AO/DRP HAS ERRED IN CONSEQUENTLY NOT REVISING THE PROFIT FROM THE BADDI UNIT ELIGIBLE FOR DEDUCTION U/S 80IC OF T HE ACT BY THE AMOUNT OF AMP EXPENDITURE ALLEGED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OF APPELLANTS UNDERTAKING. AS WE HAVE DECIDED THE 4 TH GROUND OF APPEAL IN FAVOUR OF THE APPELLANT, THE ABOVE ADDITIONAL GROUND OF APPEAL BECOMES INFRUCTUOU S. 24 . HOWEVER, BEFORE WE PART WITH THE MATTER, WE MUST DEAL WITH ONE PROCEDURAL ISSUE AS WELL. WHILE HEARING OF THESE APPEALS WAS CONCLUDED ON 06.03.2020, THIS ORDER THEREON IS BEING PRONOUNCED TODAY, MUCH AFTER THE EXPIRY OF 90 DAYS FROM THE DATE OF CON CLUSION OF HEARING. WE ARE ALSO ALIVE TO THE FACT THAT RULE 34(5) OF THE INCOME TAX APPELLATE TRIBUNAL RULES 1963, WHICH DEALS WITH PRONOUNCEMENT OF ORDERS. LET US IN THIS LIGHT REVERT TO THE PREVAILING SITUATION IN THE COUNTRY. ON 24TH MARCH, 2020, A NATIONWIDE COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 25 LOCKDOWN WAS IMPOSED FOR 21 DAYS TO PREVENT THE SPREAD OF COVID - 19 EPIDEMIC, AND THIS LOCKDOWN WAS EXTENDED FROM TIME TO TIME. AS A MATTER OF FACT, EV EN BEFORE THIS FORMAL NATIONWIDE LOCKDOWN, THE FUNCTIONING OF THE INCOME TAX APPELLATE TRIBUNAL AT MUMBAI WAS SEVERELY RESTRICTED ON ACCOUNT OF LOCKDOWN BY THE MAHARASHTRA GOVERNMENT, AND ON ACCOUNT OF STRICT ENFORCEMENT OF HEALTH ADVISORIES WITH A VIEW OF CHECKING SPREAD OF COVID - 19. THE EPIDEMIC SITUATION IN MUMBAI BEING GRAVE, THERE WAS NOT MUCH OF A RELAXATION IN SUBSEQUENT LOCKDOWNS ALSO. IN ANY CASE, THERE WAS UNPRECEDENTED DISRUPTION OF JUDICIAL WORK ALL OVER THE COUNTRY. AS A MATTER OF FACT, IT HAS BEEN SUCH AN UNPRECEDENTED SITUATION, CAUSING DISRUPTION IN THE FUNCTIONING OF JUDICIAL MACHINERY, THAT HON'BLE SUPREME COURT OF INDIA, IN AN UNPRECEDENTED ORDER IN THE HISTORY OF INDIA AND VIDE ORDER DATED 6.5.2020 READ WITH ORDER DATED 23.3.2020, EXTENDE D THE LIMITATION TO EXCLUDE NOT ONLY THIS LOCKDOWN PERIOD BUT ALSO A FEW MORE DAYS PRIOR TO, AND AFTER, THE LOCKDOWN BY OBSERVING THAT 'IN CASE THE LIMITATION HAS EXPIRED AFTER 15.03.2020 THEN THE PERIOD FROM 15.03.2020 TILL THE DATE ON WHICH THE LOCKDOWN IS LIFTED IN THE JURISDICTIONAL AREA WHERE THE DISPUTE LIES OR WHERE THE CAUSE OF ACTION ARISES SHALL BE EXTENDED FOR A PERIOD OF 15 DAYS AFTER THE LIFTING OF LOCKDOWN'. HON'BLE BOMBAY HIGH COURT, IN AN ORDER DATED 15TH APRIL 2020, HAS, BESIDES EXTENDING T HE VALIDITY OF ALL INTERIM ORDERS, HAS ALSO OBSERVED THAT, 'IT IS ALSO CLARIFIED THAT WHILE CALCULATING TIME FOR DISPOSAL OF MATTERS MADE TIME - BOUND BY THIS COURT, THE PERIOD FOR WHICH THE ORDER DATED 26TH MARCH 2020 CONTINUES TO OPERATE SHALL BE ADDED AND TIME SHALL STAND EXTENDED ACCORDINGLY', AND ALSO OBSERVED THAT 'ARRANGEMENT CONTINUED BY AN ORDER DATED 26TH MARCH 2020 TILL 30TH APRIL 2020 SHALL CONTINUE FURTHER TILL 15TH JUNE 2020'. COLGATE PALMOLIVE (INDIA) LTD. ITA NO. 6766/M/2012 26 THE HONBLE BOMBAY HIGH COURT ITSELF HAS, VIDE JUDGMENT DATED 15 TH AP RIL 2020, HELD THAT 'WHILE CALCULATING THE TIME FOR DISPOSAL OF MATTERS MADE TIME - BOUND BY THIS COURT, THE PERIOD FOR WHICH THE ORDER DATED 26TH MARCH 2020 CONTINUES TO OPERATE SHALL BE ADDED AND TIME SHALL STAND EXTENDED ACCORDINGLY'. VIEWED THUS, THE EX CEPTION TO 90 DAY TIME LIMIT FOR PRONOUNCEMENT OF ORDERS INHERENT IN RULE 34(5)(C) CLEARLY COMES INTO PLAY IN THE PRESENT CASE. 2 5 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED UNDER RULE 34(4) OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1962, BY PLACING THE DETAILS ON THE NOTICE BOARD. SD/ - SD/ - ( SAKTIJIT DEY ) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 31/07/2020 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI