CADBURY INDIA LTD, MUMBAI V. ADDL CIT RG 5(1), MUMBAI

ITA 7539/MUM/2012

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 7830 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 18-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 20-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JANARDHAN LD
• Assessee Lawyers: J D MISTRY; HITEN CHANDE LD ARS QRLP
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Additional evidence; Valuation report; Rule 8D
• Section: 143(3); 14A; 144C; 32

Judgement Text

1 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI , , BEFORE HONBLE SHRI SAKTIJIT DEY, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.7539/MUM/2012 ( / ASSESSMENT YEAR: 2008-09) MONDELEZ INDIA FOODS PRIVATE LIMITED MONDELEZ HOUSE UNIT NUMBER-2001, 20 TH FLOOR TOWER-3(WING-C), INDIA BULLS FINANCE CENTRE PAREL, MUMBAI-400 013. / VS. ADDL. C IT RANGE - 5(1) AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020. KL ./ ./ PAN/GIR NO. AA A CC - 0460 - H ( LP / APPELLANT ) : ( QRLP / RESPONDENT ) LPS / APPELLANT BY : S/SHRI J.D. MISTRY & HITEN CHANDE - LD. ARS QRLP / RESPON DENT BY : SHRI V . JANARDHAN - LD. DR / DATE OF HEARING : 24/07/2019 / DATE OF PRONOUNCEMENT : 14/10/2019 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): - 1.1 AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEA R [IN SHORT AY] 2008-09 CONTEST CERTAIN ADDITIONS / DISALLOWANCES / ADJUSTMENTS MADE IN FINAL ASSESSMENT ORDER DATED 18/10/2012 PASSED BY L D. ADDL. CIT, RANGE- 2 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 5(1), MUMBAI U/S.143(3) R.W.S.144C PURSUANT TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL-I, MUMBAI [DRP] U/S 144C(5 ) DATED 07/09/2012. 1.2 THE ERSTWHILE ASSESSEE M/S CADBURY INDIA LTD. H AS MERGED WITH M/S MONDELEZ INDIA FOODS PRIVATE LIMITED AND ACCORDINGL Y, THE ASSESSEE HAS FILED REVISED FORM NO. 36B REFLECTING AFORESAID CHA NGE. FINDING THE SAME IN ORDER, WE PROCEED TO ADJUDICATE THE APPEAL AS ARGUE D BEFORE US. 1.3 A CHART HAS BEEN PLACED BEFORE THE BENCH TO SUB MIT THAT MOST OF THE ISSUES, UNDER APPEAL, ARE COVERED BY ORDERS OF TRIB UNAL IN ASSESSEES OWN CASE FOR VARIOUS ASSESSMENT YEARS AND THERE IS NO C HANGE IN MATERIAL FACTS AND THEREFORE, SIMILAR VIEW MAY BE TAKEN IN THE MAT TER. BOTH THE REPRESENTATIVES BROADLY CONVERGE ON THIS POINT. FOR EASE OF REFERENCE, THE DECISIONS RENDERED BY TRIBUNAL FOR VARIOUS YEARS CO ULD BE TABULATED IN THE FOLLOWING MANNER: - NO. CI TATION ASSESSMENT YEAR 1. ITA NO. 7408/MUM/2010 ORDER DATED 13/11/2013 (CROSS -APPEALS) 2002-03 2. ITA NO. 3510/MUM/2011 ORDER DATED 13/05/2015 (CROSS -APPEALS) 2003-04 & 2004-05 3. ITA NO. 5470/MUM/2011 ORDER DATED 18/05/2016 (CROSS -APPEALS) 2005-06 4. ITA NO. 1512/MUM/2013 ORDER DATED 28/11/2018 (CROSS -APPEALS) 2006-07 5. ITA NO. 4225/MUM/2014 ORDER DATED 04/07/2019 (ASSES SEES APPEAL) 2007-08 THE DECISION FOR AY 2006-07 AS TABULATED AT SERIAL NO. 6 HAS BEEN DELIVERED BY THIS VERY BENCH VIDE ORDER DATED 28/11/2018. 1.4 THE GROUNDS OF APPEAL, IN REVISED FORM, READ AS UNDER: - BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, MONDELEZ INDIA FOODS PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE 'APPELLANT') CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE 5( 1) [HEREINAFTER REFERRED TO AS THE 'LEARNED ADDITIONAL CIT] DATED 18 OCTOBER 2012 (RECEIVED BY THE APPELLANT ON 22 OCTOBER 2012) UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT , 1961 (HEREINAFTER REFERRED TO AS THE 'ACT'), IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE HON'BLE D ISPUTE RESOLUTION PANEL-L, (HEREINAFTER REFERRED TO AS THE 'HON'BLE DRP') ON THE FOLLOWING GROUNDS, EACH O F WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER: 3 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED AO BASED ON THE DIRECTIONS OF THE HON'BLE DRP HAS: TRANSFER PRICING ADJUSTMENT 1. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING AN ADJUSTMENT OF RS.281,052,937 TO THE TOTAL INCOME OF THE APPELLANT UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE OF THE INTERNA TIONAL TRANSACTIONS OF THE APPELLANT. ROYALTY PAYMENT 2. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT USING THE TRAN SACTIONAL NET MARGIN METHOD (TNMM'), IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME-TAX RULES, 1962 ('THE RULES'), FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE IN CONNECTI ON WITH THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY TO ITS ASSOCIATED ENTERPRISES ('AE') 3. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN DISALLOWING THE TRADEMARK ROYA LTY OF RS.130,022,203 PAID TO CADBURY SCHWEPPES OVERSEA S LIMITED ON THE GROUND THAT THE SAME WAS SUBSUMED IN THE TECHNICAL ASSISTANCE ROYALTY PAID B Y THE APPELLANT. 4. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN DISALLOWING THE TECHNOLOGY ROY ALTY OF RS.8,761,354 PAID TO CADBURY ADAMS USA LLC ON TH E GROUND THAT LICENSE TO USE THE TECHNOLOGY WAS NOT OBTAINED DIRECTLY FROM THE LICENSOR BUT FRO M A SUB-LICENSOR AND THAT IF THE PAYMENT GETS SUBSUMED IN TRADEMARK ROYALTY, THE SAME CAN BE ALLO WED ONLY UPTO 1%. 5. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN DISALLOWING THE TECHNOLOGY ROY ALTY OF RS.14,251,888 PAID TO CADBURY ENTERPRISES PTE LI MITED ON THE GROUND THAT LICENSE TO USE THE TECHNOLOGY WAS NOT OBTAINED DIRECTLY FROM THE LICEN SOR BUT FROM A SUB-LICENSOR. SERVICE FEES TO CADBURY SCHWEPPES ASIA PACIFIC PTE LIMITED 6. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN COMPLETELY DISALLOWING THE SER VICE FEES OF RS 107,314,992 PAID TO CADBURY SCHWEPPES AS IA PACIFIC PTE LIMITED, SINGAPORE ON THE GROUND THAT THE APPELLANT HAS FAILED TO ESTABLISH THAT THE SERVICES HAVE BEEN RENDERED AT REQUISITE AMOUNT. 7. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT USING THE TNMM METHOD, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, FOR THE DETERMINATION OF T HE ARM'S LENGTH PRICE IN CONNECTION WITH THE INTERNATIONAL TRANSACTION OF PAYMENT OF SERVICE FEE S TO CADBURY SCHWEPPES ASIA PACIFIC PTE LIMITED, SINGAPORE. 8. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN DETERMINING THE VALUE OF THE SERVICES RECEIVED FROM CADBURY SCHWEPPES ASIA PACIF IC PTE LIMITED, SINGAPORE AT NIL, WITHOUT UNDERTAKING ANY COMPARABILITY ANALYSIS FOR THE SAME UNDER ONE OF THE FIVE PRESCRIBED METHODS. SERVICE FEES TO CADBURY HOLDINGS LIMITED 9. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN DISALLOWING THE SERVICE FEES O F RS 20,702,500 PAID TO CADBURY HOLDINGS LIMITED STATING THE APPELLANT DOES NOT SATISFY THE BENEFIT TEST, WITHOUT APPRECIATING THE SUBMISSIONS MADE BY THE AP PELLANT ON THE NATURE OF SERVICES AVAILED AND THE BENEFITS RECEIVED BY THE APPELLANT. 10. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT USING THE TNMM METHOD, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, FOR THE DETERMINATION OF T HE ARM'S LENGTH PRICE IN CONNECTION WITH THE INTERNATIONAL TRANSACTION OF PAYMENT OF SERVICE FEE S TO CADBURY HOLDINGS LIMITED. 11. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, IN QUESTIONING THE COMMERCIAL WISDOM/REASONING OF THE APPELLANT FOR AVAILING THE SERVICES FROM ITS AE. 4 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 CORPORATE TAX ADJUSTMENT 12. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW IN MAKING AN ADJUSTMENT OF RS.264,625,015 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF DISALLOWANCE OF DEPRECIATION ON MARKETING KNOW-HOW, DISALLOWANCE UNDER SECTION 14A OF THE ACT AND REDUCTION OF DEDUCTION CLAIMED UNDER SECTION 80-IC OF THE ACT. DENIAL OF THE DEPRECIATION ON MARKETING KNOW-HOW 13. ERRED IN LAW AND IN FACTS IN DISALLOWING DEP RECIATION OF RS 1,279,972 ON MARKETING KNOW-HOW UNDER SECTION 32(1) OF THE ACT. DISALLOWANCE UNDER SECTION 14A OF THE ACT 14. ERRED IN DISALLOWING A SUM OF RS 23,304,902 UNDER SECTION 14A OF THE ACT. ALLOCATION OF EXPENSES IN RESPECT OF THE UNIT OF TH E APPELLANT IN BADDI 15. ERRED IN ARBITRARILY ALLOCATING THE FOLLOWIN G COMMON EXPENSES INCURRED BY THE APPELLANT TO THE FACTORY OF THE APPELLANT AT BADDI FOR DETERMINING T HE PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80- IC OF THE ACT AND REDUCING THE DEDUCTION CLAIMED UNDER SE CTION 80-IC OF THE ACT TO RS.546,757,710 AS AGAINST THE DEDUCTION CLAIMED BY THE APPELLANT AMOU NTING TO RS.786,797,851: DIRECT MARKETING EXPENSES; EXPENSES INCURRED ON OTHER EMPLOYEES AT HEAD OFFICE; INDIRECT EXPENSES RELATING TO DIRECTORS; SALES AND DISTRIBUTION EXPENSES; INTEREST; INCREASE / (DECREASE) IN THE STOCK. 2. BRIEFLY STATED, THE ASSESSEE BEING RESIDENT CORP ORATE ASSESSEE IS STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURI NG AND MARKETING OF MALTED FOODS, DRINKS AND CHOCOLATES. THE ASSESSMENT WAS FRAMED ON 18/10/2012 PURSUANT TO THE DIRECTIONS OF LD. DRP DE TERMINING THE INCOME AT RS.139.98 CRORES, AFTER CERTAIN ADDITIONS / DISALLO WANCES / ADJUSTMENTS AS AGAINST RETURNED INCOME OF RS.85.49 CRORES E-FILED BY THE ASSESSEE ON 30/09/2008. AS EVIDENT FROM GROUNDS OF APPEAL, THE FOLLOWING QUANTUM ADDITIONS MADE IN FINAL ASSESSMENT ORDER ARE THE SU BJECT MATTER OF PRESENT APPEAL BEFORE US: - N O. N ATURE OF ADD ITION AMOUN T (RS.) (A ) TRANSFER PRICING ADJUSTMENTS 1. TRADEMARK ROYALTY PAID TO CADBURY SCHWEPPES OVERSEAS LIMITED RS.1300.22 LACS 2. TECHNOLOGY ROYALTY PAID TO CADBURY ADAMS USA LLC RS.87.61 LACS 3. TECHNOLOGY ROYALTY PAID TO CADBURY ENTERPRISES PTE LIMITED RS.142.51 LACS 5 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 4. SERVICE FEES PAID TO CADBURY SCHWEPPES ASIA PACIFIC PTE LIMITED, SINGAPORE RS.1073.14 LACS 5. SERVICE FEES PAID TO CADBURY HOLDINGS LIMITED RS.207.02 LACS (B) CORP ORATE TAX A DJUSTMENTS 6. DEPRECIATION ON MARKETING KNOW HOW RS.12.79 LACS 7. DISALLOWANCE U/S 14A RS.233.04 LACS 8. REDUCTION IN DEDUCTION U/S 80-IC BY REALLOCATING EXPENDITURE OF BADDI UNIT RS.2400.40 LACS (A) TRANSFER PRICING ADJUSTMENT 3.1 CERTAIN INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE DURING THE YEAR AND AS REPORTED IN FORM NO. 3CEB WERE REFE RRED TO LD. TRANSFER PRICING OFFICER U/S 92CA(1) FOR DETERMINATION OF AR MS LENGTH PRICE (ALP). IT WAS NOTED THAT THE ASSESSEE WAS SUBSIDIARY OF CADBU RY SCHWEPPES OVERSEAS LTD. UK WITH SHAREHOLDING OF 54.85% WHEREA S CADBURY SCHWEPPES MAURITIUS LTD. WAS HOLDING 42.74% OF THE ASSESSEES SHAREHOLDINGS. THE REMAINING 2.41% WAS HELD BY INDI AN PUBLIC. THE ASSESSEE WAS STATED TO BE INCORPORATED IN THE YEAR 1948 AS CADBURY FRY (INDIA) PVT. LTD. FOR PROCESSING OF CHOCOLATES AND BOURNVITA. OVER THE YEARS, IT EXPANDED TO COVER A RANGE OF PRODUCTS IN THE CHO COLATE, SUGAR CONFECTIONERY AND MALTED FOOD DRINKS SEGMENT. THE C HOCOLATE BUSINESS CONTRIBUTES ABOUT 75% OF ASSESSEES TURNOVER WHEREA S MALTED FOOD DRINKS CONTRIBUTE REMAINING 25%. CADBURY INDIA WAS OPERATI NG IN FOOD SEGMENT OF FAST-MOVING CONSUMER GOODS (FMCG). IT HAS MANUFACTU RING UNITS AT THANE, INDURI, MALANPUR ETC. AND IT EXPORTS ITS PRODUCTS T O VARIOUS OTHER COUNTRIES LIKE BANGLADESH, SRI LANKA, MIDDLE EAST, NIGERIA, S OUTH AFRICA, USA, MALAYSIA, WEST INDIES ETC. THE ASSESSEE REFLECTED A SALE OF RS.1351.55 CRORES DURING THE YEAR UNDER CONSIDERATION. 6 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 3.2 THE DETERMINATION OF ALP OF FOLLOWING INTERNATI ONAL TRANSACTIONS ARE THE SUBJECT MATTER OF PRESENT APPEAL BEFORE US: - TRANSFER PRICING ADJUSTMENTS AMOUNT (RS.) 1. TRADEMARK ROYALTY PAID TO CADBURY SCHWEPPES OVERSEAS LIMITED, LONDON, UK (CSOL) RS.1300.22 LACS 2. TECHNOLOGY ROYALTY PAID TO CADBURY ADAMS USA LLC (CAUSA) RS.87.61 LACS 3. TECHNOLOGY ROYALTY PAID TO CADBURY ENTERPRISES PTE LIMITED (CEPT) RS.142.51 LACS 4. SERVICE FEES PAID TO CADBURY SCHWEPPES ASIA PACIFIC PTE LIMITED, SINGAPORE (CSAPL) RS.1073.14 LACS 5. SERVICE FEES PAID TO CADBURY HOLDINGS LIMITED (CHL) RS.207.02 LACS THE ASSESSEE, IN ITS TRANSFER PRICING STUDY REPORT, BENCHMARKED THE STATED TRANSACTIONS USING ENTITY LEVEL TRANSACTIONAL NET M ARGIN METHOD (TNMM) AND CONTENDED THAT THE TRANSACTIONS WERE AT ARMS L ENGTH AND THEREFORE, NO ADJUSTMENT WOULD BE REQUIRED FOR THE AFORESAID TRAN SACTIONS. TRADEMARK ROYALTY PAID TO CADBURY SCHWEPPES OVERSEA S LIMITED, LONDON, UK (CSOL) 3.3.1 THE LD. TPO DISALLOWED ROYALTY PAYMENT ON TR ADEMARK PAID BY THE ASSESSEE TO SCOL @1% WHILE ALLOWING THE ROYALTY PAYMENT ON TECHNICAL KNOWHOW AT 1.25% OF NET SALES ON THE REAS ONING THAT AS PER EARLIER AGREEMENT APPROVED BY GOVERNMENT, THE ASSES SEE COULD PAY ROYALTY FOR TECHNICAL KNOWHOW AT THE MAXIMUM RATE O F 2%. HOWEVER, IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE PAID AGGREGA TE ROYALTY OF 2.25%. FORMING AN OPINION THAT ROYALTY FOR TECHNICAL KNOW- HOW SUBSUMES ROYALTY FOR TRADEMARK AND THEREFORE, THE SEPARATE ROYALTY F OR TRADEMARK PAID AT 1% WOULD NOT BE ALLOWABLE TO THE ASSESSEE. 7 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 3.3.2 IT IS ADMITTED POSITION THAT THE ISSUE STOOD SQUARELY COVERED IN ASSESSEES FAVOR BY THE DECISION OF THIS VERY BENCH IN ASSESSEES OWN CASE FOR AY 2006-07 WHEREIN THE MATTER HAS BEEN CONCLUDE D IN THE FOLLOWING MANNER: - 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIALS ON RECORD. AS COULD BE SEEN FROM THE ORDER OF THE TRANSFER PRICING OFFICER , HE HAS DETERMINED THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT ON TRADEMARK TO SCOL AT ZE RO. IN OTHER WORDS, HE HAS DISALLOWED ROYALTY PAYMENT ON TRADEMARK AT 1% WHILE ALLOWING ROYALTY PAYMENT ON TECHNICAL KNOWHOW AT 1.25% OF NET SALES. THE REASON ING ON WHICH THE ASSESSING OFFICER HAS DENIED ROYALTY PAYMENT ON TRADEMARK ARE BASICAL LY THAT AS PER THE TERMS OF EARLIER AGREEMENT APPROVED BY THE GOVERNMENT, THE ASSESSEE CAN PAY ROYALTY FOR TECHNICAL KNOWHOW AT THE MAXIMUM RATE OF 2%, WHEREAS, THE ASS ESSEE HAS PAID ROYALTY BOTH FOR TECHNICAL KNOWHOW AND TRADEMARK AGGREGATING TO 2.25 %. HE HAS ALSO REFERRED TO THE PRESS NOTE ISSUED BY THE GOVERNMENT CLARIFYING THAT ROYALTY PAYMENT CANNOT EXCEED 2% AND FURTHER THE ROYALTY PAYMENT FOR TECHNICAL KNOWH OW SUBSUMES ROYALTY PAYMENT FOR TRADEMARK. IN THIS CONTEXT, THE TRANSFER PRICING OF FICER HAS ALSO REFERRED TO SIMILAR DISPUTE ARISING IN THE PRECEDING ASSESSMENT YEARS. IT IS EVIDENT THAT THE LEARNED COMMISSIONER (APPEALS) HAS UPHELD THE DISALLOWANCE OF ROYALTY PAYMENT OF TRADEMARK SIMPLY RELYING UPON THE ORDER PASSED BY HIM IN ASSE SSEES OWN CASE FOR ASSESSMENT YEAR 200506. AS COULD BE SEEN FROM THE MATERIAL AV AILABLE ON RECORD, THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH ITS CURRENT COMPANY IN THE YEAR 1993, FOR AVAILING TECHNICAL KNOWHOW FOR WHICH IT WAS REQUIRED TO PAY ROYALTY @ 2%. SUBSEQUENTLY, THE ASSESSEE HAS ENTERED INTO FRESH AGREEMENTS WITH THE PARENT COMPANY FOR TRANSFER OF TECHNICAL KNOWHOW AS WELL AS USE OF TRADE MARK FOR WHICH ASSESSEE IS REQUIRED TO PAY ROYALTY @ 1.25% AND 1% OF THE NET SALES RESPECTIVEL Y. AS COULD BE SEEN FROM THE MATERIALS PLACED ON RECORD, THE PAYMENT OF ROYALTY FOR TECHNICAL KNOWHOW @ 1.25% HAS BEEN APPROVED BY THE MINISTRY OF COMMERCE AND INDUS TRY, GOVERNMENT OF INDIA, VIDE LETTER DATED 14TH SEPTEMBER 2000 (COPY IS PLACED AT PAGE85 OF THE PAPER BOOK). SIMILARLY, PAYMENT OF ROYALTY FOR TRADEMARK @ 1% HA S BEEN APPROVED BY THE RESERVE BANK OF INDIA, VIDE LETTER DATED 25TH JUNE 2001, CO PY AT PAGE119 OF THE PAPER BOOK. THUS, AS COULD BE SEEN, PAYMENT OF ROYALTY FOR TRAD EMARK AT 1% OVER AND ABOVE THE ROYALTY PAID AT 1.25% FOR TECHNICAL KNOWHOW HAS BEE N APPROVED BY THE RESERVE BANK OF INDIA. THOUGH, THE TRANSFER PRICING OFFICER HAS REL IED UPON PRESS NOTE DATED 3RD JANUARY 2002, TO OBSERVE THAT IN CASE OF TECHNOLOGY TRANSFER PAYMENT OF ROYALTY SUBSUMES THE PAYMENT FOR ROYALTY FOR USE OF TRADEMA RK, HOWEVER, IN A SUBSEQUENT PRESS NOTE ISSUED BY THE MINISTRY OF COMMERCE AND I NDUSTRY, GOVERNMENT OF INDIA, VIDE NO.5(5)/2003FC, DATED 24TH JUNE 2003, HAS PERMITTE D ROYALTY PAYMENT UP TO 8% ON EXPORT SALES AND 5% ON DOMESTIC SALES. IT IS ALSO R ELEVANT TO NOTE, THE FACT THAT THE ROYALTY PAID BY THE ASSESSEE @ 2.25% BOTH FOR TECHN ICAL KNOWHOW AND TRADEMARK IS LESSER THAN THE ROYALTY PAID BY OTHER COMPARABLES A ND EVEN GROUP COMPANIES HAS NOT 8 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 BEEN DISPUTED EITHER BY THE TRANSFER PRICING OFFICE R OR BY THE LEARNED COMMISSIONER (APPEALS). IT IS ALSO RELEVANT TO NOTE, IDENTICAL D ISPUTE RELATING TO PAYMENT OF ROYALTY FOR TRADEMARK AT 1% OVER AND ABOVE ROYALTY PAID FOR TEC HNICAL KNOWHOW AT 1.25% AND ITS ALLOWABILITY CAME UP FOR CONSIDERATION BEFORE THE T RIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200203 TO 200506. WHILE DECIDING THE ISSUE IN THE AFORESAID ASSESSMENT YEARS, THE TRIBUNAL HELD THAT THE PAYMEN T OF ROYALTY ON TRADEMARK TO CSOL AT 1% OF SALES IS ALLOWABLE AND AT ARM'S LENGTH. IN FACT, DECISION OF THE TRIBUNAL HAS ALSO BEEN ACCEPTED BY THE REVENUE. IN THIS CONTEXT, WE M AY REFER TO THE RELEVANT OBSERVATIONS OF THE TRIBUNAL WHILE DECIDING IDENTIC AL ISSUE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200506, IN ITA NO.5470/MUM/2012, D ATED 18TH MAY 2016, WHICH IS AS UNDER: 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL BEFORE US. WE FIND THAT WHILE DECIDING THE APPEAL FOR AY 2002- 03(SUPRA) THE TRIBUNAL HAS DECIDED THE ISSUE AS UNDER:- 37. WE HAVE HEARD THE DETAILED ARGUMENTS FROM BOTH THE SIDES. THE BASIC ISSUE IS THE CORRECTNESS OF ALP ON THE ROYALTY PAYM ENTS MADE BY THE ASSESSEE COMPANY TO ITS PARENT AE ON ACCOUNT OF TEC HNICAL KNOWHOW AND TRADEMARK USAGE. 38.FROM THE ARGUMENTS OF THE DR, MADE ON BEHALF OF THE TPO, THE AGREEMENT FOR PAYING ROYALTY ON TECHNICAL KNOW-HOW AT 1.25% AND TRADEMARK USAGE AT 1.25%, WERE OVERLAPPING AND THUS , TNMM METHOD USED BY THE ASSESSEE WAS INCORRECT. ACCORDING TO TH E TPO, THE BEST METHOD TO ASCERTAIN ALP IN THE INTEREST CASE WAS CU P, AS THE TRANSACTIONS WERE CONTROLLED. THIS WAS REASONABLE, AS NO DATA WAS AVAILABLE FROM INDEPENDENT SOURCE TO BENCHMARK THE TRANSACTIONS. 39.ON GOING THROUGH THE RECORDS AND THE ORDERS OF T HE REVENUE AUTHORITIES, WE FIND THAT IN SO FAR AS THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW CONCERNED, THE ASSESSEE HAS BEEN PAYING TO ITS PARE NT AE RIGHT FROM 1993, AS, OTHER GROUP COMPANIES ARE PAYING ACROSS T HE GLOBE. IT HAS BEEN ACCEPTED BY THE TPO THAT THE PAYMENT DOES NOT EFFEC T THE PROFITABILITY OF THE ASSESSEE, IF WE ARE TO EXAMINE THE ISSUE FROM T HAT ANGLE AS WELL. IN ANY CASE THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHO W IS AT PAR WITH THE SIMILAR PAYMENTS FROM THE GROUP COMPANIES IN OTHER COUNTRIES & REGION. BESIDES THIS, THE PAYMENT IS MADE AS PER THE APPROV AL GIVEN BY THE RBI AND SIA, GOVERNMENT OF INDIA. HENCE THERE CANNOT BE ANY SCOPE OF DOUBT THAT THE ROYALTY PAYMENT ON TECHNICAL KNOWHOW IS NO T AT ARM S LENGTH. 40.COMING TO THE ISSUE OF ROYALTY PAYMENT ON TRADEM ARK USAGE, WE FIND THAT THE ASSESSEE, IN FACT IS PAYING A LESSER AMOUN T, IF THE PAYMENTS ARE COMPARED WITH THE PAYMENTS TOWARDS TRADEMARK USAGE, BY THE OTHER GROUP COMPANIES USING THE BRAND CADBURY IN OTHER PA RTS OF THE WORLD. ON THE OTHER HAND, IF WE EXAMINE THE ARGUMENT TAKEN BY THE TPO WITH REGARD TO OECD GUIDELINES. ON THIS POINT THE ASSESSEE S PAYMENT IS COMING TO A LESSER FIGURE, AS DISCUSSED IN DETAIL BY THE CIT(A) . 9 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 41.WE ARE NOT GOING INTO THE ARGUMENTS ADVANCED BY THE DR/TPO ON GEOGRAPHICAL DIFFERENCES, AND PAYMENTS MADE TO HARS HEY, AS THESE ARGUMENTS GETS MERGED IN THE INTERPRETATION AND DET AILS AVAILABLE IN THE TABLE SUPPLIED BY THE ASSESSEE AND TAKEN NOTE OF BY THE TPO AND THE CIT(A). 42.WE ARE ALSO NOT REFERRING TO THE CASE OF MARUTI SUZUKI LTD. AS WE FIND THAT IN SO FAR AS THE INSTANT CASE IS CONCERNED, TH ERE IS REALLY NO RELEVANCE. 43.ON THE BASIS OF THE ABOVE OBSERVATIONS, WE ARE O F THE OPINION THAT THE ROYALTY PAYMENT ON TRADEMARK USAGE IS WITHIN THE AR MS LENGTH AND DOES NOT CALL FOR ANY ADJUSTMENT. RESPECTFULLY, FOLLOWING THE ABOVE ORDER, AND THE OR DER FOR SUBSEQUENT AY.S WE DECIDE THE GROUND OF APPEAL NO.1 IN FAVOUR OF THE A SSESSEE. 8. THERE BEING NO DIFFERENCE IN FACTUAL POSITION I N THE IMPUGNED ASSESSMENT YEAR, RESPECTFULLY FOLLOWING THE CONSISTENT VIEW OF THE T RIBUNAL ON IDENTICAL ISSUE IN ASSESSEES OWN CASE AS REFERRED TO ABOVE, WE HOLD THAT THE ROY ALTY PAYMENT ON TRADE MARK TO SCOL @ 1% OF NET SALES IS AT ARM'S LENGTH, HENCE, NO FUR THER ADJUSTMENT IS REQUIRED. ACCORDINGLY, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED. RESPECTFULLY FOLLOWING THE AFORESAID VIEW OF TRIBUN AL IN ASSESSEES OWN CASE, WE DELETE THE IMPUGNED ADJUSTMENT OF RS.1300. 22 LACS AS MADE BY LD. AO IN THE FINAL ASSESSMENT ORDER. NOTHING HAS B EEN SHOWN TO US THAT THE AFORESAID RULING IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. GROUND NO.3 STAND ALLOWED. TECHNOLOGY ROYALTY PAID TO CADBURY ADAMS USA LLC (C AUSA) 3.4.1 THE LD. TPO NOTED THAT AS PER TRADEMARK LICE NSE AGREEMENT DATED 01/06/2006, CAUSA WAS AUTHORIZED TO SUB-LICEN SE THE RIGHTS OF THE TRADEMARK ONLY AND THERE WAS NO REFERENCE TO PRESUM E THAT THE SAME INCLUDED THE RIGHT TO SUB-LICENSE THE TECHNOLOGY AN D KNOW-HOW. SINCE THE MAXIMUM RATE OF TRADEMARK ROYALTY PRESCRIBED BY THE GOVERNMENT WAS 1%, THE ROYALTY OF 2.7% PAID BY THE ASSESSEE TO CAUSA W AS TO BE ALLOWED TO 10 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 THE EXTENT OF 1% ONLY. THE SAME RESULTED INTO TP AD DITION OF RS.87.61 LACS. THE LD. DRP CONFIRMED THE STAND OF LD. TPO, AGAINST WHICH THE ASSESSEE IS UNDER APPEAL BEFORE US. 3.4.2 WE FIND THAT THIS ISSUE IS COVERED BY THE DE CISION OF THIS TRIBUNAL FOR AY 2006-07 WHEREIN IT HAS BEEN HELD AS UNDER: - 22. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D MATERIALS ON RECORD. UNDISPUTEDLY, THE ASSESSEE HAS PAID ROYALTY TO CAUS A @ 2.7% OF NET SALES AS PER THE AGREEMENT EXECUTED ON 1ST JUNE 2006. IT IS THE CLAI M OF THE ASSESSEE THAT THE PAYMENT OF ROYALTY IS FOR USE OF TRADEMARK AS WELL AS TECHN ICAL KNOWHOW. HOWEVER, THE TRANSFER PRICING OFFICER AFTER EXAMINING THE AGREEMENT BETWE EN THE ASSESSEE AND CAUSA HAS OPINED THAT THE AGREEMENT ONLY PROVIDED FOR USE OF TRADEMARK AND IT DOES NOT PROVIDE FOR USE OF TECHNICAL KNOWHOW. IT IS THE SAY OF THE TRAN SFER PRICING OFFICER THAT SINCE AS PER THE GOVERNMENT GUIDELINES, PAYMENT OF ROYALTY ON TR ADE MARK UNDER THE AUTOMATIC ROUTE IS FIXED AT THE MAXIMUM RATE OF 1%. ROYALTY PAID FO R TRADEMARK AT 2.7% IS NOT AT ARM'S LENGTH. ACCORDINGLY, HE HAS ALLOWED PAYMENT OF ROYA LTY FOR TRADEMARK AT 1%. WHILE DOING SO, THE TRANSFER PRICING OFFICER HAS ALSO OBSERVED THAT THE AGREEMENT EXECUTED IN DECEMBER 2007, AMENDING THE TERMS OF THE ORIGINAL A GREEMENT HAVING COME IN TO EXISTENCE AFTER EXPIRY OF RELEVANT FINANCIAL YEAR W OULD NOT BE APPLICABLE FOR A TRANSACTION UNDERTAKEN IN THE RELEVANT FINANCIAL YEAR. THE LEAR NED COMMISSIONER (APPEALS) HAS ALSO ENDORSED THE AFORESAID VIEW OF THE TRANSFER PRICING OFFICER. NO DOUBT, ON A PERUSAL OF THE AGREEMENT DATED 1ST JUNE 2006 BETWEEN THE ASSES SEE AND CAUSA IT APPEARS THAT THE SAID AGREEMENT HAS BEEN TERMED AS TRADEMARK LIC ENSE AGREEMENT. HOWEVER, READING THE AGREEMENT AS A WHOLE AND MORE PARTICULA RLY, CLAUSE7(B) OF THE SAID AGREEMENT, IT BECOMES CLEAR THE LICENSEE (THE ASSES SEE) SHALL MANUFACTURE LICENSED PRODUCT USING ANY TECHNOLOGY OF THE LICENSOR PROVID ED TO THE LICENSEE IN ACCORDANCE WITH ALL SPECIFICATIONS AND INSTRUCTIONS PROVIDED BY THE LICENSOR FROM TIME TO TIME. IT IS NOT THE CASE OF THE REVENUE THAT IN THE RELEVANT PREVIOUS Y EAR ASSESSEE HAS NEITHER MANUFACTURED NOR SOLD HALLS BRAND PRODUCTS IN IND IA. THUS, IT IS NECESSARY TO PONDER WHETHER IN ABSENCE OF NECESSARY TECHNICAL KNOWHOW/K NOWLEDGE IT WOULD HAVE BEEN POSSIBLE FOR THE ASSESSEE TO MANUFACTURE THE AFORES AID PRODUCTS? IN OUR VIEW, THE ANSWER WOULD BENO. FURTHER, THE ASSESSEE AND CAUSA HAVE ENTERED INTO ONE MORE AGREEMENT ON 24TH DECEMBER 2007, AMENDING THE TERMS OF THE ORIGINAL AGREEMENT. AS PER THE AFORESAID AGREEMENT, CERTAIN TERMS OF THE O RIGINAL AGREEMENT WAS AMENDED TO INCLUDE LICENSING / SUBLICENSING OF TECHNOLOGY. IT IS THE CONTENTION OF THE LEARNED SR. COUNSEL FOR THE ASSESSEE THAT THE AMENDMENT AGREEME NT EXECUTED ON 24TH DECEMBER 2007, SHALL OPERATE RETROSPECTIVELY FROM 1ST JANUAR Y 2006, TO EMPHASIZE THIS FACT, THE LEARNED SR. COUNSEL FOR THE ASSESSEE HAS SOUGHT TO PRODUCE LETTER DATED 26TH APRIL 2016, ISSUED BY MONDELEZ INTERNATIONAL AS ADDITIONA L EVIDENCE. FROM A PERUSAL OF THE AFORESAID LETTER, IT APPEARS THAT IT HAS BEEN ISSUE D TO CLARIFY THAT AS PER THE ORIGINAL 11 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 AGREEMENT EXECUTED ON 1ST JUNE 2006, EFFECTIVE FROM 1ST JANUARY 2006, THE PARTIES TO THE AGREEMENT INTENDED TO TRANSFER AND AVAIL TECHNI CAL KNOWHOW / KNOWLEDGE RELATING TO THE LICENSED PRODUCT ALONG WITH TRADEMARK. CONSIDER ING THE SUBMISSIONS OF THE LEARNED SR. COUNSEL FOR THE ASSESSEE THAT IN SUBSEQUENT ASS ESSMENT YEARS ROYALTY PAID BY THE ASSESSEE @ 2.7% OF SALES WAS ACCEPTED BY THE TRANSF ER PRICING OFFICER, THE LETTER DATED 26TH APRIL 2016, SOUGHT TO BE PRODUCED BY THE ASSES SEE AS ADDITIONAL EVIDENCE, IN OUR VIEW, IS OF MUCH SIGNIFICANCE SINCE IT WILL HAVE A CRUCIAL BEARING IN DETERMINING WHETHER CAUSA HAS AUTHORISED THE ASSESSEE TO USE TECHNICAL KNOWHOW ALONG WITH TRADEMARK, HENCE, IS ADMITTED AS ADDITIONAL EVIDENCE. EVEN, WI THOUT TAKING COGNIZANCE OF THE AFORESAID ADDITIONAL EVIDENCE, THE ORIGINAL AS WELL AS AMENDED AGREEMENT MAKE IT ABUNDANTLY CLEAR THAT ASSESSEE HAS ALSO AVAILED TEC HNICAL KNOWHOW FROM CAUSA. FURTHER, THE DEPARTMENTAL AUTHORITIES DON DISPUTE T HE GENUINENESS OR AUTHENTICITY OF THE AMENDED AGREEMENT. WHAT THEY ARE DISPUTING IS THE D ATE FROM WHICH THE AMENDED AGREEMENT IS EFFECTIVE. IF THE DEPARTMENTAL AUTHORI TIES IN THE SUBSEQUENT ASSESSMENT YEARS HAVE ALLOWED PAYMENT OF ROYALTY BOTH FOR TRAD EMARK AND TECHNICAL KNOWHOW, THERE IS NO REASON WHY IT SHOULD NOT BE ALLOWED IN THE IM PUGNED ASSESSMENT YEAR, SINCE, IT CANNOT BE SAID THAT THE ASSESSEE WAS MANUFACTURING HALLS BRAND PRODUCTS WITHOUT OBTAINING THE REQUIRED TECHNICAL KNOWHOW. ACCORDIN GLY, WE HOLD THAT PAYMENT OF ROYALTY TO CAUSA IS AT ARMS LENGTH. THE GROUND IS ALLOWED. RESPECTFULLY FOLLOWING THE SAME, WE DELETE THE IMPU GNED ADDITION OF RS.87.61 LACS. GROUND NO.4 STAND ALLOWED. TECHNOLOGY ROYALTY PAID TO CADBURY ENTERPRISES PTE LIMITED (CEPT) 3.5.1 IT WAS NOTED THAT THE ASSESSEE ENTERED INTO TECHNICAL COLLABORATION AGREEMENT DATED 28/06/2007 WITH CEPT TO AVAIL THE BENEFITS OF TECHNICAL KNOW-HOW, TRADE SECRETS ETC. FOR MIXED FRUIT FLAVORED AND STRAWBERRY FLAVORED SUGAR NON-COATED CENTER FILLED BUBBLE GUMS / CHEWING GUMS. ANOTHER AGREEMENT WAS ENTERED INTO WITH THE S AME ENTITY FOR TRADEMARKS AND COPYRIGHT LICENSES IN RESPECT OF PRO DUCTS BUBBALOO, BUBBA THE CAT & ADAMS. AS PER AGREEMENT, THE ASSESSEE PAID TECHNICAL ROYAL TY @4% AND TRADEMARK ROYALTY @1%. APPLYING THE SAME RE ASONING, IT WAS 12 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 HELD THAT CEPT WAS AUTHORIZED TO SUB-LICENSE THE RI GHTS OF THE TRADEMARK ONLY AND THERE WAS NO REFERENCE TO PRESUME THAT THE SAME INCLUDED THE RIGHT TO SUB-LICENSE THE TECHNOLOGY AND KNOW-HOW RE LATED TO THE PRODUCTS, AN ADJUSTMENT OF RS.142.51 LACS WAS PROPOSED BY LD. TPO. THE LD. DRP, FINDING THE ADJUSTMENT QUITE SIMILAR TO AS MADE FOR ROYALTY PAYMENT TO CAUSA, ENDORSED LD. TPOS ACTION. 3.5.2 SINCE FACTS AS WELL AS REASONING OF LOWER AU THORITIES ARE QUITE SIMILAR AS IN THE CASE OF ROYALTY PAYMENT MADE BY A SSESSEE TO CAUSA, APPLYING THE SAME ANALOGY, WE DELETE THE IMPUGNED A DDITION. ONE MORE REASON TO DELETE THE ADJUSTMENT IS THAT THE ASSESSE E HAS ENTERED INTO TWO SEPARATE AGREEMENT FOR PAYMENT OF TRADEMARK ROYALTY & TECHNICAL ROYALTY AND THEREFORE, THE MATTER WOULD STAND ON A BETTER F OOTING. HENCE, GROUND NO. 5 STAND ALLOWED. SERVICE FEES PAID TO CADBURY SCHWEPPES ASIA PACIFIC PTE LIMITED, SINGAPORE (CSAPL) 3.6.1 GROUND NOS. 6 TO 8 ARE RELATED WITH TRANSFER PRICING (TP) ADJUSTMENT ON ACCOUNT OF SERVICE FEES PAID TO ANOTH ER AE VIZ. CSAPL. THE ASSESSEE IS STATED TO HAVE ENTERED INTO SERVICE AGR EEMENT WITH THE SAID ENTITY ON 21/10/2005 VALID W.E.F. 01/04/2005 TO AVA IL CERTAIN SERVICES IN THE AREAS OF BUSINESS STRATEGY, VALUE BASED MANAGEMENT, FINANCIAL PLANNING AND ACCOUNTING, SUPPLY CHAIN COORDINATION & PLANNIN G, HUMAN RESOURCES, LEGAL, MARKETING ETC. THE CONSIDERATION UNDER THE A GREEMENT WAS FIXED FEE 13 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 OF SGD OF 3.6 MILLION PER ANNUM CHARGEABLE ON QUART ERLY BASIS. THE ASSESSEE BENCHMARKED THE SAME USING ENTITY LEVEL TN MM, THE ASSESSEE BEING THE TESTED PARTY. THE ASSESSEE SUBMITTED THAT OPERATING MARGIN OF 10.20% EARNED BY THE ASSESSEE WERE HIGHER THAN AVER AGE MARGIN OF 4.72% REFLECTED BY COMPARABLE ENTITIES AND THEREFORE, ALL INTERNATIONAL TRANSACTIONS WOULD BE AT ARMS LENGTH. HOWEVER, LD. TPO OPINED T HAT FOR INTRA-GROUP TRANSACTIONS, CUP METHOD OR CPM WAS A RECOMMENDED M ETHOD AS PER OECD GUIDELINES. FURTHER, THE ASSESSEE HAS NOT GIVE N ANY VALUATION OF THE SERVICES, IT IS BENEFITTED BY. FURTHER THE ASSESSEE FAILED TO ESTABLISH THE NECESSITY OF SUCH TRANSACTION SUPPORTED BY PROPER D OCUMENTATION FOR JUSTIFICATION OF ARMS LENGTH PRICES. IN OTHER WORD S, THE DOCUMENTATION PROVIDED BY ASSESSEE NEITHER HELP IN UNDERSTANDING THE JUSTIFICATION FOR ARMS LENGTH PRICES NOR THE DETERMINATION THEREOF. AT PARA (G) OF LD. TPOS ORDER, IT WAS OBSERVED THAT THE ASSESSEE DID NOT PR OVIDE EVIDENCE IN SUPPORT OF THE COST INCURRED BY AE WHILE PROVIDING THE SERVICES. FURTHER, THE ASSESSEE FAILED TO ESTABLISH WHETHER THE SERVICES S O AGREED TO BE RENDERED BY THE AE HAS BEEN RENDERED AT THE REQUISITE AMOUNT . IT WAS ALSO NOTED THAT ALTHOUGH THE ASSESSEE SUBMITTED SEVERAL DOCUMENTS T O SUBSTANTIATE THE RECEIPT OF THE SERVICES WHICH WAS NOT SUBMITTED IN THE PRECEDING YEAR, HOWEVER, CONSIDERING THE FACT THAT SIMILAR ADJUSTME NT WAS MADE BY LD. TPO IN EARLIER YEARS, THE ALP OF THE TRANSACTIONS WAS C ONSIDERED AS NIL AND TP ADJUSTMENT OF RS.1073.14 LACS WAS PROPOSED. THE LD. DRP CONFIRMED THE STAND OF LD. TPO, INTER-ALIA, BY OBSERVING THAT THE ASSESSEE WAS NOT ABLE TO 14 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 JUSTIFY AND DEMONSTRATE THE SCALE AND NATURE OF THE BENEFIT DERIVED AND ALSO COULD NOT DEMONSTRATE THE COST INCURRED BY AE WHILE PROVIDING THE SERVICES. AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 3.6.2 THE LD. SR. COUNSEL SOUGHT TO DISTINGUISH TH E FACTS OF THIS YEAR VIS--VIS EARLIER YEARS BY SUBMITTING THAT SIMILAR ISSUE IN EARLIER YEARS WAS REMITTED BACK FOR WANT OF REQUISITE DOCUMENTARY EVI DENCES AND IN VIEW OF THE FACT THAT ADDITIONAL EVIDENCES WERE SUBMITTED D URING APPELLATE PROCEEDINGS. THE LD. SR. COUNSEL CONTESTED THE DETE RMINATION OF ALP AS NIL BY SUBMITTING THAT NO FAULT HAS BEEN FOUND IN ASSES SEES METHODOLOGY AND LD. TPO COULD NOT QUESTION THE BENEFIT TEST. HOWEVE R, LD. CIT-DR SUBMITTED THAT THE VIEW TAKEN IN EARLIER YEARS SHOU LD BE FOLLOWED SINCE OECD GUIDELINES MANDATE ASSESSEE TO DEMONSTRATE THA T BENEFITS ACCRUED TO THE ASSESSEE BY AVAILING INTRA-GROUP SERVICES. I T WAS FURTHER SUBMITTED THAT BASIS OF COST ALLOCATION ALONG WITH JUSTIFICAT ION THEREOF WAS NOT PROVIDED BY THE ASSESSEE. 3.6.3 UPON CAREFUL CONSIDERATION, IT IS NOTED THAT THIS TRANSACTION HAS NOT BEEN SEPARATELY BENCHMARKED BY THE ASSESSEE RAT HER ENTITY LEVEL TNMM METHOD HAS BEEN USED TO DETERMINE THE ALP OF A LL THE INTERNATIONAL TRANSACTIONS. WE ARE OF THE CONSIDERED OPINION THAT THE INITIAL ONUS WAS ON ASSESSEE TO FURNISH THE REQUISITE DETAILS VIZ. NATU RE OF SERVICES AVAILED, COST ALLOCATION KEYS, JUSTIFICATION OF COSTS AND ESTABLI SH THAT THE SERVICES WERE ACTUALLY AVAILED BY THE ASSESSEE. THEREAFTER, THE O NUS WOULD BE ON REVENUE TO DISLODGE ASSESSEES CLAIM BY BRINGING ON RECORD EVIDENCES TO ESTABLISH 15 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 THAT THE SAID PAYMENT, UNDER NORMAL CIRCUMSTANCES B ETWEEN UNRELATED PARTIES, WOULD NOT HAVE BEEN EXCHANGED BETWEEN THE RESPECTIVE ENTITIES. THEREFORE, WITH A VIEW TO ENABLE THE REVENUE TO TAK E CONSISTENT STAND IN THE MATTER, WE WOULD BE INCLINED TO FOLLOW THE DIRECTIO NS GIVEN IN AY 2006-07, WHICH COULD BE EXTRACTED IN FOLLOWING MANNER: - 27. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D MATERIALS ON RECORD. THE DISPUTE IS WITH REGARD TO PAYMENT OF ` 13.02 CRORE TO ONE OF THE A.ES TOWARDS AVAILING OF VARIOUS SERVICES UNDER AN AGREEMENT EXECUTED WITH T HE A.E. ON A PERUSAL OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER AND THE LEAR NED COMMISSIONER (APPEALS) IT IS EVIDENT, ASSESSEES CLAIM THAT AFORESAID PAYMENT WA S MADE TO THE A.E. FOR SERVICES AVAILED WAS DISBELIEVED AND THE ARM'S LENGTH PRICE WAS DETERMINED AT NIL BASICALLY ON THE ALLEGATION THAT ASSESSEE FAILED TO FURNISH NECE SSARY AND RELEVANT DOCUMENTARY EVIDENCES TO PROVE THAT SERVICES WERE ACTUALLY REND ERED BY THE A.E. AND ANY BENEFIT IN ECONOMIC AND COMMERCIAL TERMS ACCRUED TO THE ASSESS EE AS A RESULT OF SUCH SERVICES. EVEN, THERE IS AN ALLEGATION BY THE TRANSFER PRICIN G OFFICER THAT THE ASSESSEE DID NOT JUSTIFY THE BENCH MARKING UNDER TNMM BY OFFERING CO MPARABLES. OFCOURSE, THE LEARNED SR. COUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE U S THAT VARIOUS DOCUMENTARY EVIDENCES WERE FURNISHED BEFORE THE TRANSFER PRICIN G OFFICER AS WELL AS LEARNED COMMISSIONER (APPEALS) TO DEMONSTRATE THAT SERVICES WERE AVAILED FROM THE A.E. UNDER THE TERMS OF THE AGREEMENT. THE LEARNED SR. COUNSEL , HOWEVER, FAIRLY SUBMITTED THAT THE DETAILS OF COST INCURRED BY THE A.E. WERE NOT FURNI SHED BEFORE THE ASSESSING OFFICER, SINCE, HE NEVER CALLED FOR IT. IT IS NECESSARY TO O BSERVE, IN THE COURSE OF HEARING BEFORE US THE LEARNED SR. COUNSEL HAS FILED AN AFFIDAVIT O BTAINED FROM CSAPL, THE A.E., ASSERTING THAT VARIOUS SERVICES WERE RENDERED TO TH E ASSESSEE ON COST PLUS MARKUP BASIS. ADMITTEDLY, THE AFORESAID ADDITIONAL EVIDENC E WAS NOT BEFORE THE TRANSFER PRICING OFFICER OR THE LEARNED COMMISSIONER (APPEALS). CONS IDERING THE FACT THAT THE AFFIDAVIT PRODUCED BEFORE US MAY HAVE A CRUCIAL BEARING ON DE CIDING THE ISSUE ONE WAY OR THE OTHER, THOUGH, WE ADMIT THE ADDITIONAL EVIDENCE PRO DUCED BY THE ASSESSEE, HOWEVER, SINCE THE AFORESAID ADDITIONAL EVIDENCES HAS NOT BE EN EXAMINED EITHER BY THE TRANSFER PRICING OFFICER OR THE LEARNED COMMISSIONER (APPEAL S), IN OUR VIEW, IT WOULD BE FAIR AND REASONABLE TO ALLOW AN OPPORTUNITY TO THE ASSESSING OFFICER TO CONSIDER THE ADDITIONAL EVIDENCE AND DECIDE THE ISSUE. MOREOVER, THERE IS A LSO ALLEGATION AND COUNTER ALLEGATION WITH REGARD TO PRODUCTION OF EVIDENCES. WHILE THE D EPARTMENTAL AUTHORITIES HAVE ALLEGED THAT RELEVANT DOCUMENTARY EVIDENCES WERE NOT PRODUC ED, THE ASSESSEE CLAIMS THAT ALL EVIDENCES WERE PRODUCED. WITHOUT ENTERING INTO THE CONTROVERSY AS TO WHETHER ASSESSEE HAS PRODUCED THE EVIDENCES OR NOT, WE ARE OF THE OPINION THAT EVIDENCES BROUGHT ON RECORD, AS CONTAINED IN THE PAPER BOOKS FILED BEFORE US, DESERVE TO BE EXAMINED ON THEIR OWN MERIT BEFORE DECIDING THE ISS UE ONE WAY OR THE OTHER. MORE SO, WHEN AS PER ASSESSEES CLAIM IN THE SUBSEQUENT ASSE SSMENT YEARS THE TRANSFER PRICING 16 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 OFFICER HIMSELF HAS ALLOWED A PART OF THE SERVICE C HARGES PAID BY THE ASSESSEE TO CSAPL, THOUGH, THE QUANTUM IS IN DISPUTE. IF IN THE SUBSEQUENT ASSESSMENT YEARS THE TRANSFER PRICING OFFICER HAS ACCEPTED THE FACT THAT THE ASSESSEE HAS AVAILED SERVICES FROM CSAPL UNDER THE VERY SAME AGREEMENT, THERE IS NO REASON TO DISPUTE ASSESSEES CLAIM OF AVAILING SERVICES IN THE IMPUGNED ASSESSME NT YEAR IF THE ASSESSEE CAN DEMONSTRATE SUCH FACT BY FURNISHING PROPER DOCUMENT ARY EVIDENCES. IN THAT EVENT, THE TRANSFER PRICING OFFICER CERTAINLY CANNOT DETERMINE THE ARM'S LENGTH PRICE AT NIL BY APPLYING THE BENEFIT TEST. THEREFORE, ON OVERALL CO NSIDERATION OF FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO RESTORE THE ISSUE T O THE ASSESSING OFFICER FOR DE NOVO ADJUDICATION AFTER DUE OPPORTUNITY OF BEING HEARD T O THE ASSESSING OFFICER. THE ASSESSING OFFICER / TRANSFER PRICING OFFICER MUST P ASS A SPEAKING AND WELL REASONED ORDER DEALING WITH ALL THE SUBMISSIONS OF THE ASSES SEE. ACCORDINGLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. ACCORDINGLY, THE MATTER STAND RESTORED BACK TO THE FILE OF LD. TPO / LD. AO ON SIMILAR LINES. THE GROUNDS OF APPEAL STANDS ALLO WED FOR STATISTICAL PURPOSES. SERVICE FEES PAID TO CADBURY HOLDINGS LIMITED (CHL) 3.7.1 IN GROUND NOS. 9 TO 11, THE ASSESSEE IS SIMI LARLY AGGRIEVED BY TP ADJUSTMENT OF RS.207.02 LACS STATED TO BE PAID A S SERVICE FEES TO ANOTHER AE VIZ. CHL. THE ASSESSEE IS STATED TO HAVE RECEIVED TECHNICAL SERVICES FROM CHL WHICH WAS SIMILARLY BENCHMARKED U SING ENTITY LEVEL TNMM. THE LD. TPO, ON MORE OR LESS SAME REASONING, REACHED A CONCLUSION THAT THE ASSESSEE FAILED TO ESTABLISH TH AT THE SERVICES SO AGREED HAVE BEEN RENDERED BY AE AND RENDERED AT REQUISITE AMOUNT. THEREFORE, THE ASSESSEE FAILED BENEFIT TEST. ACCORDINGLY, THE ALP OF THE TRANSACTIONS WAS CONSIDERED AS NIL RESULTING INTO ADJUSTMENT OF RS.207.02 LACS. THE LD . DRP CONFIRMED THE ADJUSTMENT ON SAME LOGIC, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 17 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 3.7.2 SINCE FACTS AS WELL AS OBSERVATIONS OF LOWER AUTHORITIES ARE PARI- MATERIA THE SAME AS MADE BY SERVICES FEES PAID BY T HE ASSESSEE TO CSAPL, TAKING SIMILAR VIEW, WE RESTORE THE MATTER B ACK TO THE FILE OF LD. TPO / LD. AO FOR RE-ADJUDICATION ON SIMILAR LINES. THESE GROUNDS MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE. (B) CORPORATE TAX ADJUSTMENTS DEPRECIATION ON MARKETING KNOW-HOW 4. THE FACTS ARE THAT DURING PREVIOUS YEAR RELEVANT TO AY 2002-03, THE ASSESSEE ACQUIRED ON-GOING CHOCOLATE CONFECTIONARY BUSINESS OF WARNER LAMBERT (I) PVT. LTD. PURSUANT TO THE WORLD-WIDE ST OCK AND ASSET PURCHASE AGREEMENT BETWEEN PFIZER AND CADBURY SCHWEPPES PLC OF UK (THEIR RESPECTIVE PARENT COMPANY). AS A PART OF SALE CONSI DERATION, THE ASSESSEE ALLOCATED CERTAIN AMOUNT TO MARKETING KNOW-HOW AND CLAIMED DEPRECIATION ON THE SAME, TREATING THE SAME TO BE INTANGIBLES. T HE ALLOCATION WAS BASED ON VALUATION REPORT OF AN INDEPENDENT VALUER. HOWEV ER, THE CLAIM WAS NOT ACCEPTED BY THE DEPARTMENT IN AY 2003-04 AND ACCORD INGLY, FOLLOWING THE SAME, SIMILAR DEPRECIATION OF RS.12.79 LACS CLAIMED DURING THE YEAR WAS DISALLOWED. THE LD. DRP, OBSERVING THAT THE ISSUE U NDER EARLIER YEARS WAS BEING CONTESTED BEFORE TRIBUNAL, THE ASSET COULD NO T BE CATEGORIZED AS AN ASSET ELIGIBLE FOR DEPRECIATION U/S 32 AND THEREFOR E, UPHELD THE STAND OF LD. AO. WE FIND THAT TRIBUNAL, IN AY 2003-04, AT PARA-1 7 ALLOWED DEPRECIATION CLAIM APPLYING THE RATIO OF DECISION OF HONBLE SUP REME COURT RENDERED IN 18 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 M/S SMIFS SECURITIES LTD. [2012 348 ITR 302]. SIMILAR VIEW HAS BEEN TAKEN IN SUBSEQUENT YEARS. THEREFORE, RESPECTFULLY FOLLOWING THE CONSISTENT VIEW OF THE TRIBUNAL ON THIS ISSUE IN ASSESSEES OW N CASE, WE ALLOW ASSESSEES CLAIM OF DEPRECIATION. GROUND NO. 13 STA NDS ALLOWED. DISALLOWANCE U/S 14A 5.1 DURING ASSESSMENT PROCEEDINGS, IT TRANSPIRED TH AT THE ASSESSEE EARNED EXEMPT INCOME OF RS.16.18 CRORES WHICH MAINL Y COMPRISED-OFF OF DIVIDEND ON MUTUAL FUNDS. THE ASSESSEE, INTER-ALIA, SUBMITTED THAT RULE 8D WAS NOT APPLICABLE TO YEAR UNDER CONSIDERATION. IT WAS ALSO SUBMITTED THAT ASSESSEES SURPLUS FUNDS WERE INVESTED IN LIQUID MU TUAL FUND AND THE SAME WERE WITHDRAWN AS PER BUSINESS REQUIREMENTS. T HE ATTENTION WAS ALSO DRAWN TO THE FACT THERE WERE TWO PERSONS IN TH E TREASURY DEPARTMENT TO MANAGE MUTUAL FUNDS INVESTMENT ON REGULAR BASIS AND THE TOTAL SALARY PAID TO THEM WAS RS.9.20 LACS THEREFORE, A PART OF THE S AME COULD BE DISALLOWED. THE ARGUMENTS WERE ALSO RAISED TO SUBMI T THAT INVESTMENTS WERE MADE OUT OF RESERVES AND SURPLUS. HOWEVER, NOT SATISFIED, LD. AO, APPLYING RULE 8D, WORKED OUT AGGREGATE DISALLOWANCE OF RS.233.04 LACS WHICH COMPRISED-OFF OF DIRECT DISALLOWANCE U/R 8D(2 )(I) FOR RS.9.20 LACS, INTEREST DISALLOWANCE U/R 8D(2)(II) FOR RS.80.56 LA CS AND INDIRECT EXPENSE DISALLOWANCE U/R 8D(2)(III) FOR RS.143.28 LACS. THE DIRECT EXPENSE DISALLOWANCE U/R 8D(2)(I) FOR RS.9.20 LACS IS THE S AME DISALLOWANCE WHICH HAS BEEN OFFERED BY THE ASSESSEE AGAINST TREASURY D EPARTMENT EXPENSES. 19 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 THE DISALLOWANCE, UPON CONFIRMATION BY LEARNED DRP, IS UNDER APPEAL BEFORE US. 5.2 THE ARGUMENTS OF LD. SR. COUNSEL ARE TWO-FOLD V IZ. (I) LD. AO HAS NOT RECORDED REQUISITE SATISFACTION BEFORE PROCEEDING T O COMPUTE DISALLOWANCE AS PER RULE 8D; (II) THE ASSESSEE HAD SURPLUS FUNDS TO MAKE THE INVESTMENTS AND THEREFORE, THE PRESUMPTION THAT THE INVESTMENTS WERE OUT OF SURPLUS FUNDS STOOD IN ASSESSEES FAVOR BY THE J UDGMENTS OF HONBLE BOMBAY HIGH COURT RENDERED IN IN HDFC BANK LTD. V/S CIT (2016 95 CCH 61) & CIT V/S HDFC BANK LTD. (2014 366 ITR 505) . 5.3 WE HAVE CONSIDERED THE SAME. UPON PERUSAL OF FI NANCIAL STATEMENTS, WE FIND THAT OWN FUNDS IN THE SHAPE OF SHARE CAPITA L & FREE RESERVES AT YEAR- END STOOD AT RS.46266.97 LACS AS AGAINST INVESTMENT OF RS.31228.98 LACS. NOTHING HAS BEEN BROUGHT ON RECORD BY LD. AO TO EST ABLISH THE NEXUS OF INVESTMENTS WITH BORROWED FUNDS. IN FACT, OPENING I NVESTMENTS STOOD AT RS.26663.91 LACS AND THE ASSESSEE EARNED PROFIT AFT ER TAX FOR RS.15094.68 LACS DURING THE YEAR UNDER CONSIDERATION WHICH IS M ORE THAN INCREMENTAL INVESTMENTS. THEREFORE, APPLYING THE RATIO OF CITED DECISIONS, WE HOLD THAT NO INTEREST DISALLOWANCE WOULD BE JUSTIFIED ON THE FACTS AND CIRCUMSTANCES. WE ORDER SO. SO FAR AS THE DISALLOWANCE OF DIRECT / INDIRECT EXPENSES IS CONCERNED, WE ARE OF THE VIEW THAT SINCE RULE 8D WA S APPLICABLE TO THIS AY, THE FINDINGS GIVEN IN EARLIER ORDERS OF TRIBUNAL WO ULD NOT APPLY TO THIS YEAR AND THE DISALLOWANCE HAS TO BE WORKED OUT IN TERMS OF THE RULE 8D. THE LD. AO, IN DRAFT ASSESSMENT ORDER, AT PARA 6.4, HAS NOT ED THAT THE SUBMISSIONS 20 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 MADE BY ASSESSEE IN DEFENSE OF SUO-MOTO DISALLOWANC E COULD NOT BE ACCEPTED AS AGAINST THE SUBMISSIONS OF THE LD. SR. COUNSEL THAT THE REQUISITE SATISFACTION WAS NOT RECORDED BY LD. AO B EFORE PROCEEDING TO APPLY RULE 8D. WE ARE OF THE CONSIDERED OPINION THA T THERE WAS NO PARTICULAR METHOD OF RECORDING SATISFACTION IN THE QUANTUM ASSESSMENT ORDER AND THEREFORE, UNABLE TO ACCEPT THIS SPECIFIC PLEA OF LD. SR. COUNSEL. HOWEVER, KEEPING IN VIEW THE FACTUAL MATRIX AS WELL AS SUBMISSIONS MADE BEFORE US, WE DEEM IT FIT TO RESTORE THE MATTER OF DIRECT / INDIRECT EXPENSE DISALLOWANCE TO THE FILE OF LD. AO FOR RE-ADJUDICAT ION IN THE LIGHT OF SUO-MOTO DISALLOWANCE OFFERED BY THE ASSESSEE. AS HELD EARLI ER, NO INTEREST DISALLOWANCE WOULD BE JUSTIFIED, KEEPING IN VIEW TH E ASSESSEES FINANCIAL PARAMETERS. GROUND NO. 14 STAND PARTLY ALLOWED. REDUCTION IN DEDUCTION U/S 80-IC BY REALLOCATING EX PENDITURE OF BADDI UNIT 6.1 IT TRANSPIRED THAT THE ASSESSEE CLAIMED DEDUCTI ON U/S 80-IC FOR RS.78.67 CRORES IN RESPECT OF MANUFACTURING UNIT SI TUATED AT BADDI , HIMACHAL PARDESH . IT WAS THE OBSERVATION OF LD.AO THAT EXPENSES CLA IMED AGAINST SALE OF BADDI UNIT IN COMPARISON TO THE EXP ENSES CLAIMED AGAINST SALE OF REMAINING UNITS WAS DISPROPORTIONATE. THE S AID OBSERVATION WAS SOUGHT TO BE FORTIFIED BY THE FACT THAT NET PROFIT OF BADDI WORKED OUT TO BE 23.13% AS AGAINST NET PROFIT OF 8.74% FOR REMAINING UNITS. ON COMPARISON OF SALE AND EXPENSES IN RESPECT OF 80-IC AND NON-80-IC UNITS, IT WAS FOUND THAT THE EXPENSES SHOWN WERE DISPROPORTIONATE TO TH E SALES MADE BY THESE 21 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 UNITS. IN THE ABOVE BACKGROUND, LD. AO PROCEEDED T O RE-ALLOCATE THE EXPENDITURE. IN DEFENSE, THE ASSESSEE SUBMITTED THA T IT HAD FACTORIES AT 5 PLACES THANE, MALANPUR, INDURI, BADDI AND BANGALO RE. AT ALL FACTORIES, IT MANUFACTURED CHOCOLATES WHEREAS ANOTHER PRODUCT NAM ELY BOURNVITA WAS BEING MANUFACTURED ONLY AT BADDI UNIT. AT OTHER PLA CES, BOURNVITA WAS STATED TO BE MANUFACTURED BY THIRD PARTIES ON THE B ASIS OF JOB WORK. IT WAS SUBMITTED THAT ALL THE DIRECT EXPENSES INCURRED FOR A PARTICULAR FACTORY WERE DIRECTLY DEBITED TO THAT FACTORY WHEREAS INDIRECT E XPENSES WERE ALLOCATED IN A PARTICULAR MANNER WHICH HAS BEEN ELABORATED IN PA RA-4 OF ASSESSEES SUBMISSIONS AS EXTRACTED ON PAGE NO. 16 OF THE QUAN TUM ASSESSMENT ORDER. THE SALES, DISTRIBUTION, MARKETING EXPENSES & BRAND LICENSE FEES OF BOURNVITA & CHOCOLATES WERE STATED TO BE ALLOCATED IN THE RATIO OF SALES. THE EMPLOYEE EXPENSES WERE STATED TO BE ALLOCATED O N THE BASIS OF NUMBER OF EMPLOYEES IN EACH OF THE FACTORIES WHEREAS EXPEN SES RELATING TO DIRECTORS WERE SAID TO BE DISTRIBUTED ON THE BASIS OF TYPE OF MANUFACTURING DONE AT VARIOUS FACTORIES. THE ATTENTION WAS DRAWN TO THE FACT THAT RAW MATERIAL COST IN CASE OF BADDI FACTORY WAS 38% OF S ALES AS AGAINST 40% AT OTHER FACTORIES WHICH WAS DUE TO PRODUCT MIX SINCE THE COST OF RAW MATERIAL TO MANUFACTURE BOURNVITA WAS LOWER THAN THE COST OF MANUFACTURING CHOCOLATES. IN BOURNVITA, THE MATERIAL USED WAS MAL T, EXTRACT, DAIRY FAT, SKIMMED MILK POWDER, LIQUID GLUCOSE, SUGAR POWDER E TC. WHILE IN CHOCOLATES, THE MATERIAL USED WOULD BE CRUMB, COCOA , SUGAR, DRY FRUITS, WAFERS ETC. DEPENDING ON THE QUALITY OF CHOCOLATES. THE PRODUCTION OF 22 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 BOURNVITA AND CHOCOLATES AT BADDI UNIT WAS STATED T O BE IN THE PROPORTION OF 62:38. IN THE SIMILAR MANNER, THE ASSESSEE JUSTIFIE D LOWER COSTS UNDER OTHER HEADS WHICH FAVORED BADDI UNIT AND HENCE, MORE PROF ITABILITY FOR BADDI UNIT. HOWEVER, THE AFORESAID METHOD OF ALLOCATION COULD N OT FIND FAVOR WITH LD. AO WHO FORMED AN OPINION THAT APPORTIONMENT NEED TO BE BASED ON UNIFORM AND REASONABLE PRINCIPLES WHICH WERE FAIR AND TRANS PARENT AND ENABLE THE DETERMINATION OF TRUE PROFITS OF EACH INDIVIDUAL UN IT. THEREFORE, THE INDIRECT EXPENSES OF RS.451.54 CRORES WERE UNIFORMLY ALLOCAT ED IN THE RATIO OF SALE OF BADDI UNITS AND REMAINING UNITS WHICH REDUCED TH E PROFITS OF BADDI UNIT TO RS.57.55 CRORES AND THE SAME AFTER ADJUSTMENT OF DE PRECIATION, EXPENSES DISALLOWED U/S 40(A)(IA), DONATIONS, CESS ON ROYALT Y US 43B, EXPENSES DISALLOWED IN EARLIER YEARS ETC. GOT FURTHER REDUCE D TO RS.54.67 CRORES. IN OTHER WORDS, THE REALLOCATION OF EXPENDITURE BY LD. AO RESULTED INTO REDUCTION OF 80-IC DEDUCTION FROM RS.78.67 CRORES T O RS.54.67 CRORES. THE SAME, UPON CONFIRMATION BY LD. DRP, IS UNDER CHALLE NGE BEFORE US. 6.2 UPON CAREFUL CONSIDERATION, WE FIND THAT IDENTI CAL ISSUE OF EXPENSE ALLOCATION AROSE IN ASSESSEES OWN CASE FOR AY 2007 -08, WHEREIN THE MATTER WAS CONCLUDED IN THE FOLLOWING MANNER: - 30. LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS ALLOCATED FOLLOWING ITEMS TO BADDI UNIT ON THE BASI S OF SALES RATIO AS UNDER: - (I) INTEREST (II) OPERATION AND ESTABLISHMENT EXPENSES (III)VOLUNTARY RETIREMENT EXPENSES (IV) DECREASE IN STOCK 31. AS REGARDS DECREASE IN STOCK, LEARNED COUNSEL O F THE ASSESSEE SUBMITTED THAT THIS IS ACTUALLY CHANGE IN INVENTORY AT BADDI UNIT AND I T IS SUBMITTED THAT THERE IS NO QUESTION OF ANY ALLOCATION OF SALES RATIO. AS REGARDS VOLUNT ARY RETIREMENT SCHEME EXPENSES, LEARNED COUNSEL CONTENDED THAT BADDI UNIT WAS A NEW UNIT AND NONE OF THE EMPLOYEE AT 23 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 BADDI UNIT HAS OPTED FOR VRS, HENCE HE SUBMITTED TH AT THERE CANNOT BE ANY ALLOCATION. HOWEVER, LEARNED COUNSEL AGREED THAT FOR ACTUALLY V ERIFYING THIS ASPECT THIS MATTER CAN BE REMITTED TO THE FILE OF THE ASSESSING OFFICER. A S REGARDS INTEREST EXPENDITURE LEARNED COUNSEL SUBMITTED THAT THERE ARE NO FINANCIAL CHARG ES ATTRIBUTABLE TO BADDI UNIT. HE SUBMITTED THAT FINANCIAL CHARGES COMPRISE MAJORITY OF BILL DISCOUNT, LETTER OF CREDIT CHARGES, BANK CHARGES ETC. THEY CANNOT BE ALLOCATED TO BADDI UNIT SINCE BADDI UNIT IS A CASH SURPLUS UNIT. AS REGARDS ALLOCATION OF OPERATI ON AND ESTABLISHMENT COST, LEARNED COUNSEL MADE FOLLOWING WRITTEN SUBMISSIONS: - COST AS PER MIFPLS ALLOCATION KEYS DIRECT EXPENSES SUCH AS POWER & FUEL, FREIGHT, CONSUMABLE REPAIRS AND OTHER SIMILAR DIRECT FACTORY COSTS ACTUAL EXPENDITURE INCURRED AT BADDI DIRECT MARKETING COSTS PROPORTION OF SALE VALUE OF BOURNVITA AND CADBURY DIARY MILK MANUFACTURED AT BADDI TO TOTAL SALES OF THE COMPANY SELLING AND DISTRIBUTION EXPENDITURE PROPORTION O F SALES VOLUME OF BOURNVITA AND CADBURY MILK MANUFACTURED AT BADDI TO TOTAL SALES OF THE COMPANY ROYALTY AND TECHNICAL FEES ROYALTY PERCENTAGE OF SA LES OF BOURNVITA AND CADBURY MILK MANUFACTURED AT BADDI TO TOTAL SALES OF THE COMPANY OTHER OVERHEADS (WHICH INCLUDES DIRECT RELATED EXPENSES) BASED ON SALES RATIO, PRODUCTION RATIO, FULL TIME EQUIVALENT MIFPL MANUFACTURES BOURNVITA AND CADBURY DAIRY MIL K AT ITS BADDI FACTORY WHILE IT MANUFACTURES ONLY CHOCOLATES AT OTHER FACTORIES. BE CAUSE OF THE PRODUCT MIX, COST OF THE MATERIAL FOR BOURNVITA IS LOWER THAN THE COST O F THE MATERIALS FOR MANUFACTURING CHOCOLATES. IN BOURNVITA, THE MATERIALS USED ARE MA LT EXTRACT, DAIRY FAT, SKIMMED MILK POWDER, LIQUID GLUCOSE, SUGAR, COCOA POWDER ETC. WH ILE IN CHOCOLATES THE MATERIALS USED ARE CRUMB (WHICH IS AN EXTRACT OF COCOA, MILK AND SUGAR OF WHICH IS HIGHER) COCOA, SUGAR, DRY FRUITS, WAFERS ETC. DEPENDING ON THE QUALITY OF CHOCOLATE. THE EMPLOYEE COST IN BADDI FACTORY IS LESSER THAN OTHER UNITS SINCE BADDI FACTORY IS SITUATED IN BACKWARD AREA AND THEREFORE, LABOUR COS T IS CHEAPER. FURTHER, NEW STAFF AND LABOUR ARE APPOINTED IN BADDI WHILE IN OTHER UN ITS, OLD STAFF AND LABOUR ARE WORKING SINCE LONG AND HAVE PROPORTIONATELY HIGHER SALARY. EXCISE EXEMPTION IS AVAILABLE TO BADDI UNIT UNDER EXCISE LAW. ACCORDINGLY, THE SALE PRICE AT BADDI UNIT IS TOTAL SALE PRICE WHILE IN OT HER FACTORIES, SALE PRICE IS SALE PRICE MINUS EXCISE DUTY AND THEREBY, THE RATIO OF COST ON SALE IS LOWER AT THE BADDI FACTORY. DUE TO THE EXCISE EXEMPTION, THE NET PROFIT AT BADD I UNIT IS GREATER BY APPROXIMATELY 10-12% THAN OTHER UNITS (AFTER CONSIDERING THE CENV AT CREDIT WHICH IS AVAILABLE ONLY TO OTHER UNITS). 24 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 THE COST OF PACKING MATERIALS OF CHOCOLATES IS HIG HER THAN PACKING MATERIALS FOR BOURNVITA SINCE DIFFERENT TYPES OF WRAPPERS ARE REQ UIRED FOR CHOCOLATES. THE OPERATION AND ESTABLISHMENT EXPENSES ARE LESSE R AT BADDI AS COMPARED TO WARNA DUE TO THE FOLLOWING REASONS :- I) THE BADDI FACTORIES ARE SITUATED IN BACKWARD ARE AS AND OPERATION AND ESTABLISHMENT COST ARE COMPARATIVELY LOWER AS COMPA RED TO WARNA. II) THE FACTORIES LOCATED AT OTHER UNITS ARE OLD. H ENCE, THE OPERATION AND ESTABLISHMENT EXPENSES INCREASE ON YEAR ON YEAR BAS IS. III) FURTHER, BADDI UNIT ENJOYS A SCALE BENEFIT SIN CE THE PRODUCTION OF BOURNVITA AT BADDI UNIT IS MUCH HIGHER THAN PRODUCTION OF BOURNV ITA IN WARNA. THEREFORE THE UNIT FIXED COST AT BADDI IS MOWER RESULTING IN HIGH ER PROFIT PERCENTAGE. III) THUS THE RATIO OF ESTABLISHMENT EXPENSES HAS D ECREASED DUE TO INCREASE IN SALES AT BADDI FACTORY LEADING TO HIGHER MARGIN AT BADDI UNIT. 32. UPON HEARING BOTH THE COUNSEL AND PERUSING THE RECORD, WE AGREE WITH THE SUBMISSIONS OF THE LEARNED COUNSEL OF THE ASSESSEE, AS REGARDS ALLOCATION OF INTEREST, VOLUNTARY RETIREMENT SCHEME AND DECREASE IN STOCK. AS AGREED BY LEARNED COUNSEL ABOVE THE FACT THAT NO VRS EXPENDITURE PERTAINS TO THE EMPLOYEES OF BADDI UNIT MAY BE CHECKED BY THE ASSESSING OFFICER. 33. AS REGARDS OPERATION/ESTABLISHMENT EXPENSES, WE FIND CONSIDERABLE COGENCY IN THE ALLOCATION KEY USED BY THE ASSESSEE FOR DIRECT EXPE NSES, DIRECT MARKETING COST AND SELLING AND DISTRIBUTION EXPENDITURE, ROYALTY AND T ECHNICAL FEES. WE APPROVE THE SAME SUBJECT TO FACTUAL VERIFICATION BY THE ASSESSING OF FICER. WE FIND THAT THE METHOD OF ALLOCATION OF OTHER OVERHEAD AS MENTIONED ABOVE APP EARS TO BE OPAQUE. WE REMIT THE SAME TO THE ASSESSING OFFICER FOR VERIFICATION. IT IS EVIDENT THAT THE MATTER HAS BEEN RESTORED BAC K TO THE FILE OF LD. AO WITH CERTAIN OBSERVATIONS. SINCE THE MATTER IS IDENTICAL , WE DIRECT LD. AO TO ADOPT THE SAME METHODOLOGY AS FINALLY ADOPTED FOR AY 2007 -08 TO APPORTION THE EXPENDITURE PURSUANT TO THE DIRECTIONS OF THE TRIBU NAL. THEREFORE, WITHOUT DELVING MUCH DEEPER INTO THE ISSUE, WE RESTORE THE MATTER BACK TO THE FILE OF LD. AO ON SIMILAR LINES. GROUND NO. 15 MAY BE TREAT ED AS ALLOWED FOR STATISTICAL PURPOSES. 7. THE OTHER GROUNDS, BEING GENERAL IN NATURE, WOUL D NOT REQUIRE ANY SPECIFIC ADJUDICATION ON OUR PART. 25 ITA NO.7539/MUM/2012 MONDELEZ INDIA FOODS PRIVATE LIMITED [FORMERLY KNOWN AS CADBURY INDIA LTD.] ASSESSMENT YEAR-2008-09 8. THE APPEAL STANDS PARTLY ALLOWED IN TERMS OF OUR ABOVE ORDER. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH OCTOBER, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 14/10/2019 SR.PS:-JAISY VARGHESE <= >= / COPY OF THE ORDER FORWARDED TO : 1. LP / THE APPELLANT 2. QRLP / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. ` AQ B , B , / DR, ITAT, MUMBAI 6. A CDE / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.