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

ITA 7641/MUM/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71725 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 22-10-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 04-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Additional evidence; Permanent establishment; Commercial expediency; Revenue expenditure; Capital expenditure

Judgement Text

` IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI . , !'# $ % & , ' !'# !( BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER !. : 7408 / / 2010 A.Y. 2002-2003 ITA NO. : 7408/MUM/2010 (ASSESSMENT YEAR: 2002-2003) M/S. CADBURY INDIA LTD, CADBURY HOUSE, 19, B DESAI ROAD, MUMBAI 400 026 VS ADDL COMMISSIONER OF INCOME TAX, RANGE -5(1), MUMBAI (APPELLANT) (RESPONDENT) !. : 7641 / / 2010 A.Y. 2002-2003 ITA NO. : 7641/MUM/2010 (ASSESSMENT YEAR: 2002-2003) ADDL COMMISSIONER OF INCOME TAX, RANGE -5(1), MUMBAI VS M/S. CADBURY INDIA LTD, MUMBAI 400 026 .: PAN: AAACC 0460 H (APPELLANT) (RESPONDENT) APPELLANT-ASSESSEE BY : SHRI J.D. MISTRY SHRI NISHANT THAKKAR RESPONDENT-REVENUE BY : SHRI AJEET KUMAR JAIN SHRI O.P. SINGH /DATE OF HEARING : 22-10-2013 !' / DATE OF PRONOUNCEMENT : 13-11-2013 ' + O R D E R % & , !: PER VIVEK VARMA, JM: THE CROSS APPEALS HAVE BEEN FILED BY THE DEPARTMENT AND THE ASSESSEE AGAINST THE ORDER OF CIT(A) 15, MUMBAI, DATED 25 .08.2010. FOR THE SAKE OF BREVITY AND CONVENIENCE, WE PASSING A C OMMON AND CONSOLIDATED ORDER. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 2 ITA NO. 7641/MUM/2010: (APPEAL FILED BY THE DEPARTME NT) : 2. THE DEPARTMENT HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN CONCLUDING THAT M/S. CADBURY IN DIA LIMITED HAS RECEIVED SEVERAL BENEFITS ON ACCOUNT OF PAYMENT OF TECHNICAL KNO WHOW ROYALTY AND WHETHER THE LD. CIT(A) WAS JUSTIFIED IN CONCLUDING THA T ROYALTY FOR TRADEMARK AT 1% AND TECHNICAL KNOWHOW AT 1.25% FOR HT ENTIRE FY 2001-02 IS AT ARMS LENGTH. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN TREATING 50% THE EXPENSES INCU RRED ON ARCHITECT & INTERIOR DESIGN AMOUNTING TO RS. 21.94 LACS AND EXPENSES INCURR ED ON SUPPLY & INSTALLATION OF ELECTRICAL ITEMS AMOUNTING TO RS. 14.44 LACS AS REVENUE? 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS IN THE BUS INESS OF MANUFACTURE, DISTRIBUTION AND MARKETING OF MALTED FOOD DRINKS, COCOA POWDER, CHOCOLATES, TOFFEES, DRINKING CHOCOLATES AND SUGAR CONFECTIONARIES. THE ASSESSEE, HAVING ITS HEAD OFFICE AT MUM BAI, IS HAVING ITS FACTORIES AT THANE, INDURI AND MALANPUR AND MA RKETING OFFICES LOCATED AT DELHI, CHENNAI, KOLKATA AND MUMBAI. 4. THE ASSESSEE IS A SUBSIDIARY OF M/S CADBURY SCHEWEPP S PLC, U.K. CADBURY GROUP HAS PRESENCE IN MORE THEN 200 COUNT RIES AND IT ENJOYS THE DISTINCTION OF BEING WORLDS THIRD LARGEST SOFT D RINKS COMPANY IN SALES VOLUME AND IS AMONG THE FOURTH LARGEST CONFECTIONARY COMPANY IN THE WORLD. 5. CADBURY INDIA LTD., THE ASSESSEE ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES), WHICH ARE AS FOLLOWS: S NO. NAME OF THE ASSOCIATED ENTERPRISE (AES) COUNTRY OF TAX RESIDENCE OF AES NATURE OF RELATIONSH IP DESCRIPTION OF TRANSACTION WITH AES AMOUNT RECEIVED/RECEIV ABLE PAID/PAYABLE AS PER BOOKS OF ACCOUNTS (RS) (1) (2) (3) (4) (5) (6) 1 M/S CADBURY INTERNATIONAL LIMITED U.K. 92A(2)(B) (I) PURCHASE OF CDM FLAVOR OILS (II) COCOA BUYING SERVICE CHARGES 277,238 3,460,441 2 M/S CADBURY SCHWEPPES PTY LIMITED, AUSTRALIA AUSTRALIA 92A(2)(B) PURCHASE OF COCOA BEANS 1,243,244 3 M/S CADBURY CONFECTIONERY, MALAYSIA 92A(2)(B) PURCHASE OF CHOCOLATES 10,110,412 M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 3 MALAYSIS SDN. BHD, MALAYSIA 4 M/S CADBURY (PTY) LIMITED, SOUTH AFRICA SOUTH AFRICA 92A(2)(B) PURCHASE OF CHOCOLATES 1,047,364 5 M/S CADBURY MIDDLE EAST FZE, DUBAI, UNITED ARAB EMIRATES UNITED ARAB EMIRATES 92A(2)(B) SALE OF CHOCOLATES AND MALTED FOOD DRINKS 4,343,153 6 M/S CADBURY SCHWEPPES OVERSEAS LIMITED, UK U.K. 92A(2)(A) (I) ROYALTY FOR THE USE OF TRADE MARK (II) ROYALTY FOR TECHNICAL KNOW-HOW 63,668,247 56,624,003 7 M/S CADBURY SCHWEPPES PLC., UK U.K. 92A(1)(A) PAYMENT OF ERP LICENSE AND MAINTENANCE FEES 3,601,240 THE ISSUE OF ALP WAS REFERRED TO THE TPO U/S 92CA WITH REGARD TO TRANSACTIONS RELATING TO ROYALTY FOR THE USE OF TRADEMARK S AT RS. 6,36,68,247/- AND ROYALTY FOR TECHNICAL KNOWHOW AT RS. 5,66,24,003/- 6. WITH REGARD TO ROYALTY ON TECHNICAL KNOWHOW, IT WAS FOU ND THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH ITS PA RENT AE ON 09.03.1993, WITH THE APPROVAL(S) OF SIA, GOVERNMENT OF INDIA , WHICH WERE GRANTED AT VARIOUS POINTS OF TIME. 7. ACCORDING TO THE AGREEMENT, THE ASSESSEE SHALL PAY ROYALTY AT 1.25% OF INTERNAL SALES AND EXPORTS (NET SALES), AGAINST WHIC H THE PARENT AE SHALL SUPPLY AND DISCLOSE AND MAKE AVAILABLE TO CIL (INDIAN CO.) ALL KNOWHOW, ADVICE AND ASSISTANCE AT ALL SUCH TIME THAT MAY BE MUTUALLY AGREED BETWEEN THE PARTIES. 8. THE TPO, GATHERING INFORMATION FROM OTHER CADBURY UNIT S ACROSS THE GLOBE REQUIRED THE ASSESSEE TO SUBMIT A REPLY, AS T O WHY 1% OF GROSS SALES BE NOT TAKEN TO BE AT ARMS LENGTH INSTEAD OF 1.25% TAKEN BY THE ASSESSEE IN THE CASE OF TECHNICAL KNOWHOW. 9. LOOKING INTO THE FACTS OF THE CASE, THE TPO FOUND OUT THAT THE ASSESSEE HAS USED TNMM FOR COMPUTING ALP OF THE INTERN ATIONAL TRANSACTIONS BY COMPARING THE NET MARGIN OF THE COMPANY AT ENTITY LEVEL, WITH THAT OF COMPANIES ENGAGED IN FOOD PRODUCTS, BEV ERAGES AND TOBACCO BUSINESS. ACCORDING TO THE TPO TRANSACTIONS PER TAINING TO M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 4 PAYMENT OF ROYALTY IS NOT SEPARATELY AND INDEPENDENTLY BENCHMARKED. HE FURTHER NOTED THAT COMPANIES IDENTIFIED BY THE ASSESS EE COMPANY I.E. DFM FOODS LTD., BAKEMAN INDUSTRIES LTD., MODERN FOOD INDUSTRIES (INDIA) LTD., PARRYS CONFECTIONARY LTD AND RAVALGAON SUGAR FARM LTD., DID NOT PAY ANY TECHNICAL FEE/ROYALTY. ACCORDING TO HIM, THE SE COMPANIES COULD NOT BE USED IN THE ANALYSIS FOR BENCHMAR KING THE ROYALTY PAYMENTS. SINCE THE TOTAL SALES OF THE COMPANY IS AT RS. 645 CRORES AND INTERNATIONAL TRANSACTIONS PERTAINING TO THIS S EGMENT IS ONLY 14.50 CRORES, BEING ONLY 2.24% WOULD NOT EFFECT THE P ROFITABILITY, IF THE ALP IS TO BE DETERMINED AT TNMM AT ENTITY LEVEL. ACC ORDING TO THE TPO, THE MOST APPROPRIATE METHOD, THEREFORE, WOULD BE CUP BECAUSE ALL OTHER COMPARABLES, AS SUPPLIED BY THE ASSESSEE, EITHER DEVELOPED THEIR OWN TECHNOLOGY, OR THEY HAD ACQUIRED THE TECHNOLOG Y LONG BACK AND ARE NO MORE PAYING FOR THE TRANSFER OF TECHNOLOGY. TH IS, IN THE CASE OF THE ASSESSEE IS NOT THE CASE, BECAUSE, THE ASSESSEE COMPANY, I.E. CADBURY INDIA LTD., IS REQUIRED TO PAY ROYALTY TO ITS PARE NT AE, CSDL, FOR THE CONTINUOUS UPGRADATION OF TECHNOLOGY. 10. THE TPO, THEREFORE, CONCLUDED THAT IN THE CASE OF R OYALTY ON TECHNICAL KNOWHOW THE ALP SHOULD BE COMPUTED AT 1% OF S ALES, WHICH COMES TO RS. 4,52,99,207/- AGAINST 1.25% TAKEN BY THE ASSESSEE AT RS . 5,66,24,003/-. 11. SIMILARLY, THE TPO COMPUTED ROYALTY PAID ON TRADEMARK S, AT RS. 5,03,31,678/- IN PLACE OF RS. 6,36,68,247/- TAKEN BY THE ASSESSEE. 12. BEFORE THE TPO, IT WAS SUBMITTED THIS WAS THE FIRST YE AR FOR THE PAYMENT OF ROYALTY ON TRADEMARK USE, BECAUSE, EARLIER, THE PAYMENT WAS BANNED UNDER FERA RULES. 13. AFTER THE PROHIBITION WAS LIFTED, THE ASSESSEE IN THE BO ARD MEETING HELD ON 24.04.2001 AUTHORIZED THE COMPANY TO PA Y THE ROYALTY ON USE OF TRADEMARK AT 1% OF THE NET SALES VALUE, W.E. FROM APRIL 2001. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 5 AFTER GETTING THE APPROVAL FROM THE RESERVE BANK OF INDIA (RBI) AN AGREEMENT WAS ENTERED INTO BETWEEN CADBURY LIMITED, TRE BOR BASSETT LIMITED, CADBURY SCHEWEPPES OVERSEAS LTD. AND CADBURY I NDIA LTD., ON 12.02.2002, ACCORDING TO WHICH CADBURY AND TREBOR GRA NTED CADBURY OVERSEAS THE EXCLUSIVE RIGHTS TO DISTRIBUTE ITS P RODUCTS AND USE THE TRADEMARKS AND TECHNICAL INFORMATION THROUGHOUT THE TERRITORY. THE SAID AGREEMENT PROVIDED THAT CADBURY OVERSEAS HEREBY GRANTS TO COMPANY AND THE COMPANY HEREBY ACCEPTS TH E EXCLUSIVE NON TRANSFERABLE LICENCE TO MANUFACTURE, MARKET AND SELL T HE PRODUCTS UNDER THE CADBURY TRADE MARKS AND TREBOR TRADE MARKS IN T HE TERRITORY IN ACCORDANCE WITH THE TECHNICAL INFORMATION AND SPECIFI CATIONS. HEREIN TERRITORY MEANT INDIA, NEPAL, BANGLADESH, BHUTAN AND SRI LANKA. 14. ACCORDING TO THE TPO, THE AGREEMENTS SEEMED TO BE OVERLAPPING, THEREFORE, HE ASKED THE ASSESSEE TO SUBMIT THE INFORMATIO N REGARDING PAYMENTS RECEIVED BY CSOL FROM ALL GROUP COMPANIES. THE C OMPANY VIDE ITS LETTER DATED 04.02.2005 SUBMITTED THE COPY OF EMA IL SENT TO IT FROM CSOL, WHICH IS AS UNDER: S NO. OVERSEAS COMPANY TERRITORY ROYALTY RATE/ FEE NET BASIS TYPE OF AGREEMENT (1) (2) (3) (4) (5) 1 CADBURY ADAMS CANADA INC. CANADA & EXPORT TERRITORY 2.50% TRADE MARK LICENCE- EXCLUSIVE & TRANSFERABLE 2 CADBURY FOOD CO. LTD., CHINA NOT SPECIFIED BUT EXCLUDES EXPORTS 3.5% TRADEMARK LICENCE SOLE NON-TRANSFERABLE RIGHTS 3 CADBURY EGYPT S.A.E. REPUBLIC OF EGYPT EXPORT TERRITORIES LISTED 2% TRADE MARK LICENCE EXCLUSIVE 4 CADBURY FRANCE FRANCE AND SUCH OTHER TERRITORIES 2.00% TRADE MARK LICENCE 5 CADBURY GHANA LIMITED GHANA 2.00% COMBINED TECHNICAL SERVICES & TRADEMARK USER AGREEMENT 6 PT CIPTA RASA PRIMATAMA THE REPUBLIC OF INDONESIA 2.50% TRADE MARK LICENCE EXCLUSIVE & NON- TRANSFERABLE 7 CADBURY KENYA LIMITED KENYA, UGANDA AND TANZANIA AND ANY OTHER TERRITORIES 2.00% TRADE MARK LICENCE 8 CADBURY CONFECTIONERY MALAYSIA SDN BHD EAST & WEST MALAYSIA & BRUNEI & SUCH OTHER TERRITORIES 2.00% ROYALTY TECHNICAL INFORMATION AND TRADE MARK LICENCE AGREEMENT EXCLUSIVE & NON- TRANSFERABLE 9 CADBURY NIGERIA PLC NIGERIA 2.00% TRADE MARK LICENCE (1) (2) (3) (4) (5) 10 CADBURY POLAND SP ZO.O POLAND 2.5% TRADEMARK LICENC E- M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 6 EXCLUSIVE AND NON- TRANSFERABLE 11 DLROL CADBURY LLC RUSSIA PLUS NAMED EXPORT TERRITORIES 3% FOR CONFECTIONERY ** TRADE MARK LICENCE EXCLUSIVE AND NON- TRANSFERABLE 12 CADBURY DULCIORA SA SPAIN AND SUCH OTHER COUNTRIES 3.00% TRADEMARK LICENCE AND NON-TRANSFERABLE 13 CRYSTAL CANDY (PVT) LIMITED ZIMBAWE AND SUCH OTHER TERRITORIES 2.00% TRADE MARK LICENCE EXCLUSIVE & NON- TRANSFERABLE 14 CADBURY NIGERIA PLC NIGERIA 2.00% TECHNICAL SERVICE AGREEMENT 15. FROM THE CHART, THE TPO INFERRED THAT ROYALTY ON TR ADEMARKS USAGE IS 2% BUT THE ASSESSEE COMPANY IS PAYING THE ROY ALTY BETWEEN 1 TO 2.5% AND THE AVERAGE ON THE ABOVE COMES TO 2.32%. T HE ISSUE WAS PUT TO THE ASSESSEE WHO REPLIED, THE COMPANY CONTENDED THAT, TECHNICAL ASSISTANCE AND ROYALTY AGREEMENT WAS APPROVED BY GOVT. OF INDIA, MINISTRY OF INDUSTRY, VIDE LETTER DATED 14.09.2000. THE RATE OF ROYALTY PAYABLE AS PER APPRO VAL LETTER WAS AUTHORIZED AT 1.25%. THE COMPARABILITY OF INTERNATIONAL TRANSACTION OF PAYMENT TOWARDS TECHNICAL ASSISTANCE CAN ALSO BE JUDGED WITH REFERENCE TO THE LAWS AND GOVERNMENT ORDERS IN FORCE [RULE 10B(2)(D)]. ACCORDING LY, UNDER THE FACTS OF THE CASE, THE PAYMENT TOWARDS TECHNICAL ASSISTANCE TO SQL CAN BE SAID TO COMPLY WITH THE ARMS LENGTH PRINCIOLE. THE COMPANY SUBMITTED THE COPY OF APPLICATION DATED 30 .04.2001. ADDRESSED TO THE GENERAL MANAGER, RESERVE BANK OF INDIA, EXCHANGE CONTROL DEPARTMENT, REGIONAL OFFICE, MUMBAI, FOR AUTOMATIC APPROVAL FOR PAYME NT OF ROYALTY TOWARDS TRADEMARKS TO CADBURY SCHWEPPES OVERSEAS LIMITED, U. K. IN THE APPLICATION, IT IS MENTIONED THAT THE TRADEMARKS BELONGING TO CADBURY SCHWEPPES OVERSEAS LIMITED, U.K. IN THE APPLICATION, IT IS MENTIONED THAT THE TRADEMARKS CADBURY AND SEVERAL OTHER TRADEMARKS BELONGING TO CSOL ARE USE D BY US ON OUR CHOCOLATE, DRINKING CHOCOLATE, MALTED FOODS AND SUGAR C ONFECTIONERY PRODUCTS WHICH ARE BEING MANUFACTURED AND SOLD BY OUR COMPANY IN INDIA AND CERTAIN OTHER COUNTRIES. IT REQUESTED TO ISSUE THE AUTOMATIC A PPROVAL EFFECTIVE 01.04.2001. THE RESERVE BANK OF INDIA, EXCHANGE CON TROL DEPARTMENT, VIDE LETTER DATED 25.06.2001, HAS GIVEN THE APPROVAL TO ENT ER INTO TECHNICAL COLLABORATION FOR MANUFACTURE/USE OF TRADEMARKS. THE P RESS NOTE NO.9 (2000 SERIES), OF THE GOVERNMENT OF INDIA, MINISTRY OF COMM ERCE & INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION (SIA) ALLOWED PAYMENT OF ROYALTY UPTO 2% FOR EXPORTS AND 1% FOR DOMESTIC SALES UNDER A UTOMATIC ROUTE ON USE OF TRADEMARKS AND BRAND NAME OF THE FOREIGN COLLABORATOR WITHOUT TECHNOLOGY TRANSFER. FROM THE ABOVE, IT IS SEEN THAT THE APPROVAL WAS SOUGH T BY THE COMPANY AND GRANTED BY THE RESERVE BANK OF INDIA, UNDER THE EXC HANGE CONTROL POLICY OF THE GOVERNMENT OF INDIA. THE BRANDING FEE PAYMENT, AS A GENERAL RULE IS ALLOWED BY A PRESS NOTE NO.9 ISSUED BY MINISTRY OF COMMERCE AND I NDUSTRY. THIS APPROVAL INDICATES THAT SUCH PAYMENTS ARE NOT PREVENTED OR BLOC KED BY THE GOVERNMENT, CONSIDERING THE PRESENT EXCHANGE CONTROL POLICY. THERE IS NO INTERVENTION FROM THE GOVERNMENT FOR SUCH PAYMENTS CONSIDERING THE EXCH ANGE CONTROL POLICY, BUT SUCH TRANSACTION SATISFIES THE PRINCIPLES OF ARMS LENGT H OR NOT IS NOT THE CONCERN OR WITHIN THE JURISDICTION OF THE RESERVE BANK OF INDIA. THIS REQUIRES TO BE DECIDED AS PER THE PROVISIONS OF INCOME TAX ACT, 1 961. THE PAYMENT SHOULD SATISFY THE PROVISIONS OF THE ACT, SEPARATELY AND INDEP ENDENTLY, IRRESPECTIVE OF THE ALLOWABILITY OF PAYMENT AS PER EXCHANGE CONTROL POLICY . SIMILAR IS THE VIEW OF TAX ADMINISTRATION OF MOST OF THE COUNTRIES. THE GUID ELINES OF TAX ADMINISTRATION OF FRANCE, ON THE ISSUE, REFERS TO PLE ASE NOTE, FINALLY, THAT, ALTHOUGH THE AUTHORIZATION GIVEN BY THE MINISTRY OF INDU STRIES OR BY ANY OTHER TECHNICAL DEPARTMENT, WITH RESPECT TO THE RATE OF A R OYALTY OR OF THE AMOUNT M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 7 WHICH MAY BE TRANSFERRED ABROAD, IS NOT BINDING ON THE TAX ADMINISTRATION, THE INSPECTOR, NEVERTHELESS HAVE REGARD TO IT (SOURCE IBF D PUBLICATIONS) THE COMPANY ALSO CITED CBDT CIRCULAR NO.6-P, DATED 06.07 .1968 AND THE DECISION OF PUNE ITAT, IN THE CASE OF KINETIC HONDA MO TOR LIMITED VS. JT. CIT [77 ITD 396), IN SUPPORT OF ITS CONTENTIONS. THE BOARDS C IRCULAR AND THE DECISION ARE GONE THROUGH. THE CIRCULAR AS WELL AS THE DECISION OF ITAT, PUNE, DEALS WITH PAYMENTS COVERED U/S.40A(2)(B) OF THE I.T. RULES, 1962 HONBLE TRIBUNAL REFERRED TO THE CIRCULAR NO.6-P, DATED 06.07.1968 AND OBSERVED THAT, WHEN PAYMENTS ARE APPROVED BY ONE WING OF THE GOVERNMENT, THERE IS NO QUESTION OF SUCH PAYMENTS BEING TREATED S EXCESSIVE OR UNREASONAB LE HAVING REGARD TO LEGITIMATE BUSINESS NEEDS. THE TRIBUNALS DECISION DEALS WI TH THE REMUNERATION OF DIRECTOR OF A COMPANY APPROVED BY COMPANY LAW BOA RD. IN THE PRESENT CASE, AS DISCUSSED ABOVE, THE APPROVAL BY THE RESERVE BANK OF INDIA CANNOT BE CONSIDERED AS AN APPROVAL FOR MAKING PAYMENTS AT ARMS LENGTH. THE APPROVALS FROM THE FOREIGN INVESTMENT PROMOTION BOARD/ SIA/RBI, ARE FOR THE PURPOSE OF SATISFYING THE REQUIREMENTS OF FOREIGN EXCHA NGE REGULATIONS. IN ALL THE APPLICATIONS, THE COMPANIES WERE REQUIRED TO JUSTIFY THE PAYMENTS IN FOREIGN EXCHANGE, BY INDICATING, HOW THE COUNTRY WILL BE BENEFITING BY THE NET FOREIGN EXCHANGE EARNING IN THE ARRANGEMENTS. THESE APPROVALS ARE FOR CHECKING THE EFFECT OF AGREEMENTS ON THE FOREIGN EXCHANGE RESERVE OF THE COUNTRY. DUE TO THIS, THE CONTENTION OF THE COMPANY THAT, THE AGREEMENT IS APPROVED BY THE RESERVE BANK OF INDIA, ON ITS OWN, DOES NOT SUPP ORT THE ARMS LENGTH NATURE OF THE PAYMENT, ACCORDINGLY, REJECTED. (II) IT FURTHER CONTENDED THAT, THE TRANSFER PRICING REGULATIONS INTRODUCED IN INDIA REQUIRES COMPLYING WITH ARMS LENGTH PRINCIPLE BY TE STING THE CONTROLLED TRANSACTIONS WITH THAT OF COMPARABLE UNCONTROLLED TRANS ACTIONS. IN OTHER WORDS, IT IS RESPECTFULLY SUBMITTED THAT TRANSACTIONS ENTERED INT O INTER-SE BETWEEN ASSOCIATED ENTERPRISES-CONTROLLED TRANSACTIONS CANNOT B E APPLIED TO TEST THE COMPLIANCE WITH ARMS LENGTH PRINCIPLE. 16. THE TPO REJECTED THE REPLY OF THE ASSESSEE, OBSER VING THAT CONTROLLED TRANSACTIONS CANNOT BE USED FOR COMPUTING ALP , AS PER OECD GUIDELINES IN PARA 1.70, WHICH CLASSIFIED, THAT EVIDENCE FROM ENTERPRISES ENGAGED IN CONTROLLED TRANSACTIONS WITH ASSOCIATED ENTERPRISE MAY BE USEFUL IN UNDERSTANDING TH E TRANSACTIONS WITH ASSOCIATED ENTERPRISE MAY BE USEFUL IN UNDERSTANDING TH E TRANSACTION UNDER REVIEW OR AS A POINTER TO FURTHER INVESTIGATION. THE DE ALINGS BETWEEN ASSOCIATED ENTERPRISES, FOR COMPARISON, CAN ALSO BE USED IN THE CA SES OF LAST RESORT WHERE: (I) THERE IS SUFFICIENT DATA AVAILABLE TO DEMONSTRATE THEIR RELIABILITY. (II) RELATED PARTY COMPARABLE DATA PROVIDES THE MOST R ELIABLE AVAILABLE DATA UPON WHICH TO DETERMINE OR ESTIMATE AN ARMS LENG TH OUTCOME. (III) IN THE FMCG SECTOR, MOST OF THE BIG COMPANIES IN INDIA , ARE PART OF MULTI-NATIONAL ENTERPRISES, AND THEIR TRANSACTIONS WOULD CE RTAINLY BE THE CONTROLLED TRANSACTIONS. THERE WOULD BE VERY FEW CO MPANIES, IN THE FMCG SECTOR OTHER THAN MNCS, WHEREIN, ANY ROYALTY IS PAID BY THEM TO UNRELATED PARTIES. THE DETAILS REGARDING ANY SUCH COMPA NY COULD NOT BE FOUND ON THE WEBSITE OF SIA/RBI WWW.SIADIPP.NIC.IN/PUBLICAT/NEWSLTR MEANING THEREBY IN FMCG SECTOR, SUCH ROYALTY PAYMENTS ARE NOT APPROVED. CONSIDERING THE ABOVE AND AS THE INFORMATION REGARDING P AYMENT OF ROYALTY BY THE CADBURY GROUP ENTITIES TO CSOL IS AVAILABLE, THE SA ME IS USED AS A BENCH MARK TO DECIDE THE ARMS LENGTH RATE OF ROYALTY AND T HE CONTENTION OF THE COMPANY IS REJECTED. THE COMPANY, ITSELF, VIDE LETTER DATED 20.01.2005 SU BMITTED THE MEANING OF THE TERM TRADEMARK IN THE COMMERCIAL PARLANCE, THE SAME IS REPRODUCED BELOW A MARKET PLACE DEVICE BY WHICH CONSUMERS IDENTIFY GOO D AND SERVICES AND THEIR SOURCE. IN THE CONTEXT OF TRADEMARK NOMENCLATU RE, IT IS THAT THE CONSUMERS WILL MAKE FUTURE PURCHASE OF THE SAME GOODS AND SERVIC ES. TRADEMARK RECOGNITION DEVELOPS FROM YEARS OF CUSTOMER SERVICE, CONSISTENT PACKAGING, AND QUALITY CONTROL. DEPENDING ON THE STREN GTH OF A TRADEMARK, THE M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 8 MAINTENANCE OF THE DESIRED CONSUMER AWARENESS LEVEL G ENERALLY REQUIRES SIGNIFICANT, CONTINUING ADVERTISING INVESTMENT. IN THE CASE OF COMPANY, CADBURY INDIA IS INVESTING HUG E AMOUNTS IN ADVERTISING CAMPAIGNS; THEREFORE, IT IS CADBURY INDIA, WHO IS BUILDIN G THE BRAND VALUE, WITHOUT COMMENSURATE COMPENSATION FROM CSOL. DUE TO THESE REASONS, IT WOULD BE MORE APPROPRIATE, TO CLUB THE PAYMENTS MADE FOR TWO AGREEMENTS AND COMPARE THE SAME WITH THE PAYMENTS MADE BY OTHER AF FILIATED COMPANIES. (IV) CADBURY INDIA ARGUED THAT, THE COMPANY IN CONFOR MITY WITH THE REGULATIONS AND THE GUIDELINES, BENCHMARKED THE PAYMENT OF BRAND F EES BY APPLICATION OF TNMM. THE TNMM METHOD WAS APPLIED BY COMPARING THE MAR GIN EARNED BY COMPARABLES INDEPENDENT ENTERPRISES. AS PER THE SAID AN ALYSIS, THE NET PROFIT MARGIN OF THE COMPANY IS WITHIN THE RANGE OF THE MARGIN S EARNED BY COMPARABLE COMPANIES. ACCORDINGLY, UNDER THE FACTS OF THE CASE, T HE PAYMENT TOWARDS TECHNICAL ASSISTANCE CAN BE SAID TO COMPLY WITH THE ARMS LENGTH PRINCIPLES/ THE ASSESSEE HAS USED TRANSACTIONAL NET MARGIN METHOD FOR COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BY COMPARING THE NET PROFIT MARGIN OF THE COMPANY :AT ENTITY LEVEL WITH THAT OF OT HER COMPANIES ENGAGED IN FOOD PRODUCTS1 BEVERAGES AND TOBACCO BUSINESS. THE T RANSACTION PERTAINING TO PAYMENT OF ROYALTY IS NOT SEPARATELY AND INDEPENDENTL Y BENCHMARKED. THE COMPANY HAS IDENTIFIED DFM FOODS LTD., BAKEMANS INDUS TRIES LTD., MODERN FOOD INDS. (INDIA) LTD., PARRYS CONFECTIONERY LTD. A ND RAVALGAON SUGAR FARM LTD. FROM THE PROWESS/CAPITALINE DATABASE, IT IS SEEN THAT NONE OF THESE COMPANIES ARE PAYING ANY TECHNICAL FEES/ROYALTY. THEREF ORE, THESE COMPANIES CANNOT BE USED IN THE ANALYSIS FOR BENCHMARKING THE ROY ALTY PAYMENTS. THE TOTAL SALES OF CADBURY INDIA LTD. IS NEARLY RS.645 CRO RES AND ALL INTERNATIONAL TRANSACTIONS, ARE OF VALUE OF 14.50 CRORES, WHICH IS ON LY 2.24% OF THE TURNOVER. THE USE OF TRANSACTIONAL NET MARGIN METHOD, AT ENTITY LEVEL, FOR BENCHMARKING SUCH A SMALL TRANSACTION, WILL NOT BE THE MOST APPROPRIA TE METHOD, BECAUSE, SUCH A TRANSACTION DOES NOT IN A BIG WAY AFFECT THE P ROFITABILITY OF THE COMPANY. IN THE PRESENT CASE, THE DATA REGARDING COMPARABLE, T HOUGH CONTROLLED TRANSACTIONS ARE AVAILABLE, AND THEREFORE, COMPARABLE U NCONTROLLED PRICE METHOD IS THE MOST APPROPRIATE METHOD. THE TOTAL ROYALTY WORKED OUT BY THE COMPANY IS RS.6 3,668,246/-. THE COMPANY WAS ASKED TO SUBMIT THE WORKING OF ROYALTY AS PER PR ESS NOTE NO.1 (2002 SERIES), ISSUED BY SECRETARIAT FOR INDUSTRIAL ASSISTANC E, GOVERNMENT OF INDIA. AS PER THIS PRESS NOTE, THE FORMULA FOR CALCULATION OF ROY ALTY FOR THE USE OF TRADEMARK AND BRAND NAME IS: ROYALTY ON BRAND NAME/TRADE MARK SHALL BE PAID AS A P ERCENTAGE OF NET SALES, VIZ., GROSS SALES LESS AGENTS/DEALERS COMMISSION, TRANSPO RT COST, INCLUDING OCEAN FREIGHT, INSURANCE, DUTIES, TAXES AND OTHER CHAR GES, AND COST OF RAW MATERIALS, PARTS, COMPONENTS IMPORTS FROM THE FOREIGN I/CENSOR OR ITS SUBSIDIARY/AFFILIATED COMPANY. THE COMPANY SUBMITTED THE WORKING FOR THE SAME IN ANN EXURE 4 OF THE LETTER DATED 11.02.2005. THE REVISED ROYALTY PAYMENT WORKS OUT TO RS.61,840,438/- TAX DEDUCTION: THE CHRONOLOGICAL EVENTS LEADING TO PAYMENTS OF THIS ROY ALTY ARE (I) DATE : 26.04.2001 - CADBURY BOARD PASSES THE RESO LUTION FOR PAYMENT OF ROYALTY W.E.F. 01.04.200 1. (II) DATE : 30.04.2001 - APPLICATION MADE TO RBI FOR APP ROVAL OF ROYALTY PAYMENT. (III) DATE : 25.06.2001 - DATE OF APPROVAL OF EXCHANGE CONTROL DEPARTMENT OF RESERVE BANK OF INDIA, PROVIDING APPROVAL TO ENTER INTO TECHNICAL COLLABORATION, FOR USE OF TRADEMARKS. AS PER THE APPROVAL, THE DUR ATION OF AGREEMENT WILL BE 10 YEARS FROM THE DATE OF AGREEMENT OR 7 YEARS FROM TH E DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION WHICHEVER IS EARLIER. (IV) DATE : 12.02.2002 - TRADEMARK LICENSE AGREEMENT M ADE, THOUGH COMMENCEMENT DATE IS MENTIONED AT 01.04.2001. THE ROYALTY COULD NOT HAVE BEEN PAID WITHOUT THE APPR OVAL OF RBI, THEREFORE, THE COMPANY WAS ASKED TO SUBMIT OBJECTION TO THE INTENTION OF THIS OFFICE TO COMPUTE THE ROYALTY FOR TAX DEDUCTION PURPOSE, FOR THE PERIOD OF 25.06.2001 TO 31.03.2002 ONLY. THE COMPANY SUBMITTED THAT, THE RES ERVE BANK OF INDIA, AFTER CONSIDERING THE APPLICATION OF THE COMPANY, APPROVED PAY MENT OF TRADEMARK ROYALTY FROM 01.04.2001. THE APPLICATION OF THE COMPAN Y MADE TO RB! IS GONE THROUGH, WHEREIN, THE COMPANY REQUESTED TO ISSUE AUTO MATIC APPROVAL EFFECTIVE 01.04.2001 SO THAT THE PAYMENT CAN COMMENCE FROM TH AT DATE. THE APPROVAL OF M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 9 RBI, DOES NOT REFER TO EFFECTIVE DATE OF PAYMENT, TH EREFORE, THE ROYALTY FOR THE PERIOD OF JULY, 2001 TO MARCH, 2002 ONLY, IS ALLOWABLE AS TAX DEDUCTION FOR THE YEAR. FOR THESE MONTHS, THE BRAND ROYALTY IS COMPUTE D AT RS. 51,819,324/- AND THE SAME WORKED OUT AS PER THE COMPUTATION PROVID ED IN PRESS NOTE NO.1 AMOUNTS TO RS. 5O,331,678/-. HE, THEREFORE, COMPUTED THE ROYALTY PAYMENT ON TRADEMAR K USAGE AT RS. 5,03,31,678/-. 17. THE TPO, THEREFORE, SUGGESTED A NET ADJUSTMENT OF RS. 2,46,61,370/- ON PAYMENT OF BOTH KINDS OF ROYALTIES, I.E. ROYALT Y ON TECHNICAL KNOWHOW AND ROYALTY ON TRADEMARKS AS: S. NO. TRANSACTION AS PER BOOKS ALP AS PER TPO DIFFERENCE 1. ROYALTY ON TECH. KNOWHOW 5,66,24,003 4,52,99,202 1,13,24,801 2 ROYALTY ON TRADE MARKS 6,36,68,247 50,33,678 1,33,36,569 TOTAL 12,02,92,250 9,56,30,880 2,46,61,370 18. THE AO, IN ACCORDANCE WITH THE ABOVE, MADE ADDITION TO THE TUN E OF RS. 2,46,61,370/- TO THE INCOME OF THE ASSESSEE. 19. THE ASSESSEE APPROACHED THE CIT(A), BEFORE WHOM TH E ASSESSEE REITERATED ITS SUBMISSIONS MADE BEFORE THE TPO/AO. THE C IT(A) ON EXAMINING THE SUBMISSIONS, MADE PROPOSAL FOR ENHANCEMENT FO R DISALLOWING THE ENTIRE PAYMENT OF ROYALTY ON TRADEMARK USA GE TECHNICAL KNOWHOW AT 1.25%, AS THE SAME WERE NOT WHOLLY AND EXCLU SIVELY INCURRED FOR THE PURPOSE OF THE APPELLANTS BUSINESS. 20. ON RECEIPT OF THE SHOW CAUSE NOTICE FOR ENHANCEMENT , THE ASSESSEE GAVE A DETAILED REPLY WITH REGARD TO THE GENU INENESS AND CORRECTNESS OF ROYALTY PAYMENTS ON BOTH COUNTS. THE CI T(A), ON RECEIPT OF THE DETAILED SUBMISSION FROM THE ASSESSEE HELD, BASED ON THE SUBMISSIONS FILED ON RECORD, EXPLANATIO NS PROVIDED FROM TIME TO TIME, DOCUMENTS EVIDENCING PROVISION OF TECHNICAL KNO W-HOW, I AM SATISFIED THAT THE APPELLANT HAS RECEIVED SEVERAL BENEFITS ON ACCOUNT OF PAYMENT OF TECHNICAL KNOW-HOW ROYALTY AND THE SAME HAVE BEEN E VIDENCED BY SUPPORTING DOCUMENTS 21. ON OBSERVATIONS WITH REGARD TO BRAND OWNERSHIP, THE CIT(A) HELD, 5.7 THE APPELLANT, HAS SUBMITTED THAT THE OVERSEAS AES HAVE MERELY GRANTED THE APPELLANT, THE RIGHTS TO USE THE TRADEMARK S AND ALL THE RIGHTS WITH REGARD TO DECISION MAKING ON LICENSING / EXPLOITATION / SA1E OF TRADEMARKS, M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 10 MAINTAINING THE TRADEMARKS, PROTECTING THE TRADEMARKS E TC CONTINUES TO LIE WITH THE OVERSEAS AES. EXTRACTS FROM THE REPORT ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS DATED 17 JULY 2008 ISSUED BY THE OECD WE RE BROUGHT TO MY ATTENTION THAT DEFINES, ECONOMIC OWNERSHIP IN THE CONT EXT OF ARTICLE 7, AS UNDER: THE ECONOMIC OWNERSHIP OVER AN INTANGIBLE ASSET RELATES TO THE ONGOING CONTRIBUTION AND INVESTMENT IN THE PROPERTY TO MAINTAIN THE DEVELOPMENT AND VALUE OF THE INTANGIBLE. THIS IS GENERALLY EVIDENCED BY MA RKETING EXPENDITURE BUT IS NOT LIMITED TO THIS. IT ALSO RELATES TO THE EXERTIO N OF PRACTICAL CONTROL OVER THE INTELLECTUAL PROPERTY AND HENCE DECISION MAKING WITH RESPECT TO THE USE AND EXPLOITATION OF THE ASSET. IN RESPECT OF TRADEMARKS FO R EXAMPLE, WHILE EXPENDITURE FOR PROMOTIONS AND ADVERTISING MAY BE CONTR IBUTING TO THE VALUE OF THE ASSET THROUGH PROMOTION OF THE BRAND THIS MAY NOT BE SUFFICIENT OF ITSELF TO DEMONSTRATE ECONOMIC OWNERSHIP OF THE ASSET. IN THIS REGARD, THE APPELLANT SUBMITTED THAT THE ECONO MIC OWNERSHIP OVER AN INTANGIBLE ASSET COULD RELATE TO THE ONGOING SIGNIFICANT C ONTRIBUTION AND INVESTMENT IN THE INTELLECTUAL PROPERTY TO MAINTAIN AND .DE VELOP THE VALUE OF .THE INTANGIBLE. THUS, THE ECONOMIC OWNER MUST HAVE THE RIGHT S TO USE AND EXPLOIT THE ASSET IN THE FIRST INSTANCE. THEREAFTER THE EXTENT TO WHICH THE EXPLOITATION AND ECONOMIC CONTROL OVER THE INTELLECTUAL PROPERTY IS POSSIBLE SUBJECT TO THE LEGAL CONTRACTUAL RELATIONSHIP BETWEEN THE TWO PARTIES WHICH GOVERNS THE TERMS AND CONDITIONS. THE APPELLANT EXPLAINED THAT OVERSEAS AE IS THE INTELLECT UAL PROPERTY OWNER OF THE TRADEMARKS AND WITHOUT ACCESS TO THIS TRADEMARKS , THE APPELLANT WOULD BE UNABLE TO EXPLOIT THE INTELLECTUAL PROPERTY IN THE INDIAN M ARKET. WITH RESPECT TO THE EXPLOITATION OF THE INTELLECTUAL PROPERTY, IT WAS SUB MITTED THAT THE APPELLANT HAS MERELY BEEN GRANTED THE RIGHT TO USE THE TRADEMAR KS ON THE LICENSED PRODUCTS MANUFACTURED IN ACCORDANCE WITH THE PRESCRIB ED SPECIFICATIONS. THE APPELLANT THEREAFTER UNDERTAKES MARKETING AND SELLING OF THE PRODUCTS USING THE BRAND CADBURY. IT WAS FURTHER EXPLAINED THAT ECONOMIC AND COMMERCIAL V ALUE OF, A BRAND IS TYPICALLY DRIVEN BY THE INCOME-STREAM IT GENERATES. HOWE VER, THE APPELLANT HAS MERELY CONTRIBUTED APPROXIMATELY 1% OF THE TOTAL SALES O F CSOL OVER THE YEARS FROM 2001-2008. THIS CLEARLY INDICATES THE APPELLANT HAS HARDLY CONTRIBUTED TO THE TOTAL GROUP TURNOVER AND HENCE IT CANNOT BE TERME D AS THE ECONOMIC OWNER OF THE CADBURY BRAND. IN FACT, IT IS BECAUSE OF THE GLOB AL BRAND THAT IT REPRESENTS THAT THE APPELLANT HAS BEEN ABLE TO CAPTURE APPROXIMATE LY 75% OF THE MARKET SHARE. IT WAS ALSO STATED THAT WHILE CADBURY HAS BEEN IN INDIA FROM 1948, THE BRAND PER-SE HAS BEEN IN EXISTENCE SINCE 1824 AND IT WAS A WELL DEVELOPED BRAND EVEN BEFORE IT WAS INTRODUCED IN INDIA. 5.8 ADVERTISEMENT EXPENSES INCURRED BY THE APPELLANT WITH RESPECT TO THE ADVERTISEMENT EXPENDITURE INCURRED BY THE APPELLANT, IT WAS SUBMITTED THAT MARKETING EXPENDITURE IN ITSELF IS INSUFFI CIENT FOR A CLAIM TO ECONOMIC OWNERSHIP OVER AN ASSET. THE APPELLANT HAS CONTENDED THAT IT IS IN THE BUSINESS O F MANUFACTURING AND DISTRIBUTION OF CHOCOLATES, SUGAR CONFECTIONERY AND MALT ED FOOD DRINKS IN INDIA BASED ON THE TECHNOLOGY LICENSED BY OVERSEAS AES, AND IN THIS REGARD, IT INCURS VARIOUS BUSINESS RELATED EXPENSES INTER-ALIA FOR UNDER TAKING ADVERTISEMENTS FOR THE CREATION OF PRODUCT AWARENESS OF NEW PRODUCTS AND RECALL VALUE OF EXISTING PRODUCT PORTFOLIO IN THE MINDS OF ITS CUSTOMERS. IT WAS FURTHER STATED THE ADVERTISING EXPENDITURE IS T YPICALLY INCURRED BY THE APPELLANT FOR THE PURPOSES OF; A) INCREASING SALES OF EXISTING PRODUCTS BY CONTINUOUS LY REMINDING THE CUSTOMERS OF ITS PRODUCTS ESPECIALLY IN CASE OF A END IN SALES OR WHEN COMPETITORS LAUNCHES NEW PRODUCTS / ADVERTISEMENT CA MPAIGNS SUCH AS KIT KAT, MUNCH, ECLAIRS ETC B) COUNTE RING COMPETITION / ACTING AS ENTRY BARRIERS FOR NEW PLAYERS EG. LINDT, MARS ETC C) INFORMING CONSUMERS OF ITS NEW PRODUCT LAUNCHES S UCH AS BOURNVILLE, CADBURY SILK, ETC D) CREATING AWARENESS OF DISCOUNTS OFFERED ON VARIOUS PRODUCTS AT A PARTICULAR POINT OF TIME E) CREATING A RECALL VALUE OF CHOCOLATES (AS AN ALTERNATIV E TO INDIAN SWEETS) ON FESTIVE OCCASIONS SUCH AS DIWALI, NEW YEAR, HOLI ETC M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 11 F) REACHING OUT TO RURAL MARKETS FOR ITS LOW COST PRODU CTS G) MARKETING ITS HEALTH DRINKS/NUTRACEUTICAL PRODUCTS (BOURNVITA) THE APPELLANT HAS ALSO PLACED ON RECORD SAMPLE COPIES OF THE ADVERTISEMENT MANDATES PROVIDED TO THE ADVERTISING AGENCIES WHICH EVIDE NCE THE OBJECTIVE AND DESIRED OUTCOME OF THE ADVERTISING TO BE ACHIEVED. IT HAS BEEN CONTENDED THAT ADVERTISEMENTS ARE LARGEL Y UNDERTAKEN TO CREATE PRODUCT RECALL, POPULARIZE PRODUCTS IN THE MARKET C OUNTER COMPETITION ETC. IT WAS REEMPHASIZED BASED ON THE ADVERTISING MANDATED FILED BY THE APPELLANT, THAT CREATING BRAND AWARENESS WAS NOT THE OBJECTIVE OF THE ADVERTISEMENTS SINCE CADBURY BRAND IS ALREADY WELL KNOWN RESPECTED IN INDIA. IT HAS BEEN SUBMITTED THAT THE OVERSEAS AES PROVIDE S TRICT BRAND GUIDELINES SO AS TO ENSURE THAT THE OVERALL STRATEGY AND VISION ASSOC IATED WITH THE BRAND IS ADHERED TO BY THE APPELLANT IN INDIA. THE APPELLANT HAS ALSO SUBMITTED THE COPY OF BRANDING GUIDELINES BEFORE ME TO CORROBORATE THE ABO VE. IT HAS ALSO BEEN HIGHLIGHTED BY THE APPELLANT THAT WHILE TH E INCREASED SALES MAY HAVE BENEFITED THE. OVERSEAS AES BY WAY OF INCREA SED ROYALTY AT 1% ON THE INCREMENTAL SALES, THE SAME IS INSIGNIFICANT AS COMPAR ED TO THE INCREMENTAL QUANTUM OF PROFITS EARNED BY THE APPELLANT ON THE INCR EASED SALES AND THE TAXES PAID THEREON TO THE INDIAN GOVERNMENT TREASURY . THE APPELLANT HAS CONTENDED THAT THE CORRECT WAY OF LO OKING AT ROYALTY PAYMENT IS TO SEE THE TURNOVER ACHIEVED BY THE APPELLANT AS A R ESULT OF THE LICENSE. IT HAS BEEN CONTENDED THAT THE PAYMENT OF RS 635.68 LAKHS T O ACHIEVE A TURNOVER OF RS 63,606.53 LAKHS AND TO REALIZE THE NET PROFIT OF RS 8,8 92.88 LAKHS IS CERTAINLY REASONABLE AND AT ARMS LENGTH. FURTHER THE APPELLANT HAS ALSO HIGHLIGHTED THAT THAT THE ADVERTISEMENT AND MARKETING EFFORTS UNDERTAKEN BY THE APPELLANT, FOR PRO MOTING THE SALES OF ITS PRODUCTS IN INDIA, DOES NOT BENEFIT THE OVERSEAS AES DIRECTLY, AS THEY ARE NOT INVOLVED IN THE BUSINESS OF MANUFACTURE/TRADING OF SUCH PRODUCTS IN INDIA EITHER ON ITS OWN OR THROUGH ANY OF ITS OTHER SUBSIDIARIES. HEN CE, THE ENTIRE ADVERTISEMENT AND MARKETING EXPENSES INCURRED ARE PUR ELY FOR ITS OWN, BENEFIT AND NO DIRECT BENEFIT ACCRUES TO OVERSEAS AES AS SUCH . 5.9. WITH RESPECT TO POINTS RAISED BY ME DURING THE APP ELLATE PROCEEDINGS ON THE RULING OF THE AAR IN CASE OF FOSTERS AUSTRALIA LTD, THE APPELLANT SUBMITTED THAT EVEN THE AAR AND THE REVENUE DEPARTMENT, IN THE CASE OF FOSTERS AUSTRALIA LIMITED HAD ACCEPTED THAT THE OWNER OF THE TRADEMARK AND THE TECHNOLOGY WAS FOSTERS AUSTRALIA, OVERSEAS COMPANY AND THAT THE IND IAN COMPANY WAS ONLY LICENSED THE TRADEMARK AND TECHNOLOGY FOR ITS USAGE. AC CORDINGLY, IT IS SUBMITTED THAT CONSIDERING THE DECISION OF THE AAR IN THE CASE O F FOSTERS AUSTRALIA, THE APPELLANT CANNOT BE CONSIDERED AS THE ECONOMIC OWNER O F THE TRADEMARK CADBURY. 22. THE CIT(A) ALSO TOOK INTO CONSIDERATION THE AA RULING IN THE CASE OF FOSTERS AUSTRALIA LTD., WHERE FOSTERS AUSTRALIA WAS THE OWNER OF THE TRADEMARK AND TECHNOLOGY AND THE INDIAN COMPANY WAS T HE LICENSED USER. IN THE DECISION, IT WAS HELD THAT THE APPLICANT CANN OT BE CONSIDERED AS THE ECONOMIC USER OF THE TRADEMARK. BEFORE THE CIT(A) THE ASSESSEE ALSO RELIED ON CERTAIN THIRD PARTY AGREEMEN TS AND OTHER GROUP COMPANIES, WHEREIN TERMS AND CONDITIONS, ASSIGNED IN THE AGREEMENTS WERE SIMILAR. THE ASSESSEE PLACED THE COPY OF AGREEMENT WITH HARSHEY FOOD CORP. US, WHO HAD BEEN GIVEN RIGHT TO PRODUCE, MARKET, ADVERTISE, PROMOTE, SELL AND DISTRIBUTE CADBURY LICEN SED PRODUCTS UNDER THE TRADEMARK OF CADBURY UK. IT WAS ALS O ARGUED THAT THE GROUP COMPANIES AND THIRD PARTIES TO WHOM LICENSE H AS BEEN M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 12 GRANTED ARE LEGALLY OBLIGED TO INCUR MARKETING/ADVERTISING EXPENDITURE WHILE PAYING ROYALTY TO THE LICENSOR AND NONE OF THESE PAR TNERS HAD FACED ANY TP ADJUSTMENT ON THE ISSUE OF ROYALTY PAYMENT TO THE OVERSEAS AE, WHILE UNDERGOING TP AUDITS. 23. THE CIT(A), WHILE EXAMINING THE DETAILED ARGUMENTS HELD, 6.5. THE APPELLANT HAD BENCHMARKED ITS ROYALTY FOR TRADE M ARK AND TECHNICAL KNOW HOW UNDER THE TNMM. ITS OPERATING MARGIN ON OPERATING REVENUE CAME TO 13.28% WHEREAS THOSE OF ITS COMPARABLES IN CONFECTIONA RY INDUSTRY CAME TO 2.17% ONLY. TNMM IS A PROFIT BASED METHOD. A ROYALTY RATE FOR THE RELATED PARTY IS DETERMINED INDIRECTLY BY SELECTING A ROYALTY RATE THAT WOULD GIVE THE LICENSEE POST ROYALTY OPERATING PROFITS THAT ARE SIMILAR TO WHAT AN UNRELATED PARTY WOULD EARN BY USING THE INTANGIBLES. THE THEORETICAL BASIS OF THE TNMM TAKES THE STANCE THA T, IF INTANGIBLE PROPERTY IS CONTRIBUTING TO AN ENTITY NATURE, THE ENTITY WILL EARN P ROFITS IN EXCESS OF WHAT COULD BE OBSERVED IN THE ABSENCE OF SUCH INTANGIBLE PRO PERTY. APPLIED TO THE FACTS OF THIS CASE, THE APPELLANTS 13.28% MARGIN VIS A V IS AVERAGE MARGIN OF COMPARABLES AT 2.17% CLEARLY ESTABLISHES THAT THE INTAN GIBLE PROPERTY (TRADEMARK AND TECHNICAL KNOW HOW) HAS CONTRIBUTED TO ITS EXCESS PROFITS. THE TPO HAS NO OBJECTION TO THE SELECTION OF COMPARABLE COM PANIES FOR BENCHMARKING BUT HAS TAKEN THE STAND THAT SINCE THEY (COMPARABLES) ARE NOT PAYING TRADEMARK ROYALTY AND TECHNICAL KNOW HOW FEES, HENCE CANNOT BE USED FOR BENCHMARKING THIS TRANSACTION LACKS FORCE. IN FACT WHAT DISTINGUISHES THE APPELLANT (CADBURY) FROM ITS COMPETITORS IN THE CHOCOLAT E & CONFECTIONARY MARKET IS ITS VALUABLE BRAND NAME BACKED BY THE HIGH QUALITY PRO DUCTS AND IT IS THIS CRUCIAL FACTOR THAT GIVES IT A TREMENDOUS COMPETITIVE AD VANTAGE TRANSLATING INTO AN OPERATING MARGIN OF 13.28% DESPITE HUGE TURNOVER. IN THE ABSENCE OF SUCH INTANGIBLE PROPERTY THE COMPARABLES AVERAGE IS LANGUISHING AT 2.17% ONLY. THIS HUGE GAP JUSTIFIES THE 2.25% PAYMENT BY THE APPELLAN T TO ITS AE. THERE IS A DIRECT CO-RELATION BETWEEN CADBURYS INTANGIBLE CAPITAL AND ITS PERFORMANCE. 6.6. AS REGARD THE ISSUE OF PERIOD OF ROYALTY PAYME NT BASED ON THE SUBMISSIONS FILED BEFORE ME AND THE EXPLANATIONS PROVIDED, AND REVIEWING T HE CHAIN OF EVENTS, I AM OF CONSIDERED VIEW THAT THE APPELLANT ALWAYS INTENDE D TO PAY BRANDNAME ROYALTY FROM 1 APRIL 2001 AND THE SAME WAS ACCORDINGLY STATED IN ITS APPLICATION TO THE RBI. THE PAYMENT OF BRANDNAME ROYAL TY WAS APPROVED BY THE RBI AND RBI HAS NOT RAISED ANY QUESTION ON THE EFFECT IVE DATE OF ROYALTY PAYMENTS. IT IS MERELY THAT THE APPELLANT RECEIVED THE R BI APPROVAL AT A SUBSEQUENT DATE. THIS WOULD HOWEVER NOT CHANGE THE EF FECTIVE DATE OF PAYMENT, APPROVED BY THE RBI AND HENCE THE SAME IS ALLOWED. 6.7. TO SUM UP THE APPELLANT HAS DEMONSTRATED THAT THE ROYALTY PAYMENT FOR TRADE MARK AND KNOW HOW MEETS THE ARMS LENGTH TEST UNDER TNMM. IT HAS BACKED IT WITH CUP METHOD INCLUDING THIRD PARTY COMPARABLES LIKE HE RSHEY, UNRELATED THIRD PARTIES IN ASIA TO WHOM LICENSE HAS BEEN GRANTED. I T ALSO DEMONSTRATED THAT ITS ADVERTISEMENT, MARKETING AND PROMOTION EXPENS ES ARE AT PAR WITH OTHER IN THE SAME LINE OF BUSINESS. HENCE, FOR REASONS RECOR DED AS AFORESAID AND AFTER TAKING INTO ACCOUNT ALL FACTS AND CIRCUMSTANCES THE ROY ALTY FOR TRADEMARK AT 1% AND TECHNICAL KNOWHOW 1.25% FOR THE ENTIRE F.Y. 2001-0 2 IS CONSIDERED TO BE AT ARMS LENGTH. THE CONSEQUENT ADDITION OF RS. 11,13,24 ,801/- FOR TECHNICAL KNOW HOW AND RS. 1,33,36,564/- FOR TRADE MARKS SO MADE IS DELETED. 24. THE CIT(A), NOT ONLY DROPPED THE ENHANCEMENT PROCE EDINGS, HE DELETED THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT. 25. AGAINST THIS DECISION, THE DEPARTMENT HAS FILED THE APP EAL BEFORE THE ITAT. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 13 26. BEFORE US, THE DR SUBMITTED THAT THE REVENUE AUTHO RITIES PICKED UP TWO OF THE OTHER INTERNATIONAL TRANSACTIONS, WHICH REALL Y PERTAINED TO ROYALTY PAYMENT FOR TECHNICAL KNOWHOW AND USE OF TRA DEMARKS. IT HAS BEEN SUBMITTED THAT ROYALTY ON TECHNICAL KNOWHOW WA S BEING PAID BY THE ASSESSEE COMPANY TO ITS PARENT AE SINCE THE SIG NING OF THE AGREEMENT DATED 19.03.1993 WHICH WAS VALID UPTO 08.03.200 0, WHICH WAS EXTENDED BY SIA VIDE APPROVAL UPTO 08.03.2000, WHICH WAS EXTENDED BY SIA VIDE APPROVAL UPTO 14.09.2000. HE FURTHE R SUBMITTED THAT SINCE AGREEMENT DATED 20.12.2000 UPTO PRESENT DAT E, THE ASSESSEE COMPANY HAS BEEN PAYING ROYALTY ON TECHNICAL K NOWHOW AT THE RATE OF 1.25%. THIS IS BEING IN ACCORDANCE WITH THE AG REEMENTS SIGNED ON VARIOUS DATES. 27. HE FURTHER SUBMITTED THAT THE ASSESSEE STARTED TO PAY ROYALTY ON USE OF TRADEMARK AFTER TAKING APPROVAL OF THE BOARD OF DIRECTORS ON 26.04.2001 AND CONSEQUENTIAL APPROVAL BY THE RBI. IT WAS SUBMITTED THAT THE ASSESSEE HAD BEEN PAYING ROYALTY FROM 12.02.200 2 TO ITS PARENT AE. 28. THE DR, ADVANCING THE OBJECTION MADE BY THE TPO S UBMITTED THAT THE AGREEMENTS ENTERED INTO BY GROUP COMPANIES IN OTHER PARTS OF THE WORLD HAD BEEN PAYING COMPOSITE ROYALTY, WHICH CAME T O 2%, WHEREAS, THE ASSESSEE HAD BEEN PAYING ROYALTY RANGING B ETWEEN 1% TO 1.25% AND THAT THE AGREEMENTS ENTERED INTO BY THE ASS ESSEE COMPANY AND ITS PARENT AE HAVE OVERLAPPING CLAUSES, PERTAINING TO THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW AND TRADEMARK USAGE. 29. BESIDES THIS OBJECTION, THE DR SUBMITTED THAT IN THE COURSE OF PROCEEDINGS BEFORE TPO, THE TPO RAISED THE ISSUE OF PAYME NT OF AMP, WHICH HAD BEEN LEFT WITHOUT ANY COMMENTS, IN RESPECT OF CO MPUTATION OF ALP. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 14 30. THE DR ALSO SUBMITTED THAT CUP METHOD WOULD BE MOS T SUITABLE METHOD, AS THERE ARE NO SEGMENT WISE DATA AVAILABLE. THE DR FURTHER SUBMITTED THAT THE ASSESSEE BROUGHT ON RECORD FRESH A GREEMENTS, WHICH HAVE NOT BEEN SEEN BY THE AO/TPO ALONG WITH AMP ISSUE AND FOR THIS REASON, THE ISSUE DESERVES TO BE RESTORED TO T HE AO WHO SHALL REEXAMINE THE ISSUE AFRESH. 31. THE SENIOR COUNSEL APPEARING ON BEHALF OF THE ASSESSE E RESPONDED THAT IN SO FAR AS THE ROYALTY ON TECHNICAL K NOWHOW IS CONCERNED, 2% HAS BEEN ACCEPTED IN THE CASE OF THE ASS ESSEE OVER THE YEARS. HE FURTHER POINTED OUT THAT AS PER THE DATA PLAC ED BEFORE THE TPO AND THEN BEFORE THE CIT(A) THE AVERAGE ROYALTY RECE IVED BY THE PARENT AE FROM GLOBAL ENTITIES IS COMING TO 2.32% (AS RECORD ED BY THE REVENUE AUTHORITIES IN THEIR ORDERS). ACCORDING TO THE SEN IOR COUNSEL, EVEN THE GUIDELINES ISSUED BY OECD IS AT A HIGHER PERCEN TAGE AT 2.25%, THEREFORE, THE ROYALTY PAID TO THE PARENT AE IS WELL WITHIN THE PRESCRIBED LIMITS AND THEREFORE, NO AL ADJUSTMENT IS CALLED FOR. SIMILARLY, THE ROYALTY PAYMENT ON TRADEMARK USAGE, AT 1% IS WELL WITHIN THE ARMS LENGTH AND HAS BEEN CONTINUED FROM THE P RECEDING YEAR. 32. ON THE ISSUE OF AMP ISSUE, THE SENIOR COUNSEL SUBMITT ED THAT SINCE THE ISSUE WAS NEVER BEFORE THE TPO, THE ENHANCEM ENT PROCEEDINGS AS INITIATED BY THE CIT(A) WERE DROPPED, AFTER BEING FULLY SATISFIED. 33. THE SENIOR COUNSEL PLACED RELIANCE ON THE DECISION OF LUMAX INDUSTRIES LTD. VS ACIT, IN ITA NO. 4456/DEL/2012, WHEREIN THE COORDINATE BENCH AT DELHI HAS ACCEPTED TNMM ON ROYALTY PAYMENTS. HE SUBMITTED THAT THE CASE LAW RELIED UPON BY THE DR, WH EREIN THE ITAT REJECTED TNMM AND RESTORED THE ISSUE TO THE FILE O F THE AO, DOES NOT HAVE ANY RELEVANCE, WHEN A DEFINITE FINDING FROM THE COO RDINATE BENCH IS THERE. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 15 34. HE FURTHER RELIED ON THE DECISION IN THE CASE OF ITO V S INDUSTRIAL ROADWAYS, REPORTED IN 112 ITD 293, WHEREIN THE COORDINAT E BENCH AT MUMBAI HELD, THAT IF ADDITIONAL EVIDENCE FURNISHED BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY IS IN NATURE OF A CLINCHING EVIDENCE, LEAVING NO FURTHER ROOM FOR DOUBT OR CONTROVERSY, IN SUCH A CASE NO USEFUL PURPOSE WOULD BE SERVED BY FOLLOWING EVIDENCE/MA TERIAL TO AO TO OBTAIN REPORT AND IN SUCH EXCEPTIONAL CIRCUMSTANCES, SAID REQUIREMENT MAY BE DISPENSED WITH. HE THEREFORE, SUBMITTED THAT THERE IS NO OCCASION FOR RESTORING THE TP ISSUE TO THE FILE OF THE AO T O LOOK INTO THE ISSUE OF AMP, WHICH IS NOT IMPUGNED BEFORE US. 35. THE SENIOR COUNSEL, THEREFORE, SUBMITTED THAT THE CI T(A) WAS CORRECT IN HOLDING THAT THE PAYMENTS MADE UNDER BOTH T HE TYPES OF ROYALTIES WERE AT ARMS LENGTH AND NO ADJUSTMENT ADDITION NEEDS TO BE MADE. 36. THE DR IN THE REJOINDER SUBMITTED THAT THE IN THE INTERESTS OF JUSTICE THE ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE TPO. 37. WE HAVE HEARD THE DETAILED ARGUMENTS FROM BOTH THE SIDES. THE BASIC ISSUE IS THE CORRECTNESS OF ALP ON THE ROYALTY PAY MENTS MADE BY THE ASSESSEE COMPANY TO ITS PARENT AE ON ACCOUNT OF T ECHNICAL 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 1.2 5% AND TRADEMARK USAGE AT 1.25%, WERE OVERLAPPING AND THUS, TNM M METHOD USED BY THE ASSESSEE WAS INCORRECT. ACCORDING TO THE TPO, THE BEST METHOD TO ASCERTAIN ALP IN THE INTEREST CASE WAS CUP, A S 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 TH E REVENUE AUTHORITIES, WE FIND THAT IN SO FAR AS THE PAYMENT OF ROYALT Y ON TECHNICAL KNOWHOW CONCERNED, THE ASSESSEE HAS BEEN PAY ING TO ITS M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 16 PARENT AE RIGHT FROM 1993, AS, OTHER GROUP COMPANIES ARE PAYING ACROSS THE GLOBE. IT HAS BEEN ACCEPTED BY THE TPO THA T THE PAYMENT DOES NOT EFFECT THE PROFITABILITY OF THE ASSESSEE, IF WE ARE T O EXAMINE THE ISSUE FROM THAT ANGLE AS WELL. IN ANY CASE THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW IS AT PAR WITH THE SIMILAR PAYMENTS FRO M THE GROUP COMPANIES IN OTHER COUNTRIES & REGION. BESIDES THIS, THE P AYMENT IS MADE AS PER THE APPROVAL GIVEN BY THE RBI AND SIA, GOV ERNMENT OF INDIA. HENCE THERE CANNOT BE ANY SCOPE OF DOUBT THAT T HE ROYALTY PAYMENT ON TECHNICAL KNOWHOW IS NOT AT ARMS LENGTH. 40. COMING TO THE ISSUE OF ROYALTY PAYMENT ON TRADEMARK USAGE, WE FIND THAT THE ASSESSEE, IN FACT IS PAYING A LESSER AMOUNT, IF THE PAYMENTS ARE COMPARED WITH THE PAYMENTS TOWARDS TRAD EMARK USAGE, BY THE OTHER GROUP COMPANIES USING THE BRAND CADBURY IN OTHER PARTS OF THE WORLD. ON THE OTHER HAND, IF WE EXAMINE THE ARGUME NT TAKEN BY THE TPO WITH REGARD TO OECD GUIDELINES. ON THIS POINT THE ASSESSEES PAYMENT IS COMING TO A LESSER FIGURE, AS DISCUSSED IN DETA IL BY THE CIT(A). 41. WE ARE NOT GOING INTO THE ARGUMENTS ADVANCED BY TH E DR/TPO ON GEOGRAPHICAL DIFFERENCES, AND PAYMENTS MADE TO HARSHE Y, AS THESE ARGUMENTS GETS MERGED IN THE INTERPRETATION AND DETAILS 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 SUZUK I LTD. AS WE FIND THAT IN SO FAR AS THE INSTANT CASE IS CONCERNED, THER E IS REALLY NO RELEVANCE. 43. ON THE BASIS OF THE ABOVE OBSERVATIONS, WE ARE OF THE OPINION THAT THE ROYALTY PAYMENT ON TRADEMARK USAGE IS WITHIN T HE ARMS LENGTH AND DOES NOT CALL FOR ANY ADJUSTMENT. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 17 44. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) AND REJE CT THE GROUNDS AS CLAIMED BY THE DEPARTMENT. 45. GROUND NO. 1 AS RAISED BY THE DEPARTMENT IS REJECTED. 46. GROUND NO. 2 PERTAINS TO DOMESTIC ISSUE, WHEREIN THE C IT(A) ALLOWED THE 50% OF EXPENSES INCURRED ON RENOVATION OF OFFICE COMPLEX AND OTHER EXPENSES PERTAINING TO ELECTRIC INSTALLATION, TREA TING THE SAME TO BE REVENUE. 47. THE FACTS ARE THAT THE ASSESSEE UNDERTOOK REFURBISH ING OF THE CADBURY HOUSE AND CLAIMED AN AGGREGATE EXPENSE OF RS. 2,39,38,000/-, WHICH IS AS UNDER: PARTY NAME DESCRIPTION AMOUNT (RS.) DALAL CONSULTANTS UPGRADATION OF CADBURY HOUSE 21,73, 793 DALAL CONSULTANTS UPGRADATION OF CADBURY HOUSE 5,73,9 24 NITIN PARULEKAR ARCHITECTS ARCHITECTS, INTERIOR DESIGN WOR K 88,860 HITESH SHAH & ASSOCIATES PLUMBING/REMOVING WINDOW FRAMS/D EBRIS, ETC. 30,160 HITESH SHAH & ASSOCIATES PLUMBING/REMOVING WINDOW FRAMS/D EBRIS, ETC. 30,160 HITESH SHAH & ASSOCIATES FIXING MS STEEL SUPPORT/BAMBOO SCAFFOLDING 29,040 ROSHAN ELECTRICAL CONTRACTOR SUPPLY & INSTALLATION OF ELE CTRICAL ITEMS 14,44,694 INTERSCAPE CIVIL, EXTERIOR AND PLUMBING WORKS 1,60,63,652 S.R. NETWORK UTP CAT 5 CABLE/CONNECTORS/CORDS/CABLING WORK 10,45,103 GEETA NETWORK REPAIRING WITH UPHOLSTERY WORK BOARD ROO MS CHAIRS 34,240 GEETA NETWORK REPAIRING WITH UPHOLSTERY WORK /DIR CHAIRS/MEETING ROOM CHAIRS/STAFF CHAIRS 99,720 NEUTRON ELECTRONICS REINSTALLATION CHARGES NEC-M-100 50,0 00 TOTAL 2,39,38,000 48. THE ASSESSEE IN ITS SUBMISSIONS BEFORE THE AO CLAIMED THAT IN FACT THE REPAIRS, RENOVATION, REFURBISHING, PLUMBING EXPENSES AND ARCHITECTS FEE WAS MUCH HIGHER AND MUCH MORE. THE ASSES SEE HAD SUO MOTO CAPITALIZED ALL THE EXPENSES, WHICH WERE IN THE NATURE OF CAPITAL. 49. THE AO DISALLOWED THE ENTIRE EXPENDITURE, CLAIMED AS REV ENUE BY THE ASSESSEE. THE AO OBSERVED IN THE ASSESSMENT ORDER THAT THE WHOLE EXERCISE HAS RESULTED INTO THE ADDITIONAL UTILIZABLE SPACE AND LONG TERM INCREASE IN THE VALUE AND STRENGTH OF THE BUILDING. TH E ITEMS CLAIMED AS REVENUE EXPENDITURE ARE PART AND PARCEL OF THE TOTA L EXPENSES INCURRED ON RENOVATION AND THEREFORE, ONLY A PART CANNOT BE SA ID AS CAPITAL M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 18 EXPENSES AND REMAINING AS REVENUE EXPENDITURE, THEREF ORE, THE ENTIRE EXPENDITURE IS DISALLOWED AS CAPITAL EXPENDITURE AND 1 0% DEPRECIATION IS ALLOWED . HE, THEREFORE, ADDED BACK RS. 2,15,44,200/- (RS. 2,39,38,000 0 RS. 23,93,800/-). 50. THE ASSESSEE APPROACHED THE CIT(A), BEFORE WHOM THE ASSESSEE REITERATED ITS SUBMISSIONS. THE CIT(A) TAKING INTO CONSIDERA TION THE SUBMISSIONS PLACED BEFORE HIM, ALONG WITH THE EVIDENCE AND DETAILS, PERTAINING TO THE ISSUES OF VARIOUS RENOVATION JOBS, ALLOWE D BENEFIT TO THE EXTENT OF 50% ON THE INTERIOR DESIGNS WORK AT RS. 2 1,94,800/- AND SUPPLY AND INSTALLATION OF ELECTRICAL ITEMS AT RS. 14,44,694/-. 51. AGAINST THESE ALLOWANCES, THE DEPARTMENT IS IN APPEAL B EFORE THE ITAT. 52. BEFORE US, THE DR SUBMITTED THAT THE VIEW TAKEN BY T HE AO WAS CORRECT BECAUSE THE NATURE OF RENOVATION WORK IS OF END URING BENEFIT AND FALLS SQUARELY WITHIN THE CAPITAL FIELD. ON THE BASIS OF TH ESE ARGUMENTS, THE DR SUBMITTED THAT EVEN THE ALLOWANCE OF 5 0% BY THE CIT(A) WAS UNJUSTIFIED. 53. THE AR ON THE OTHER HAND PLEADED THAT THE EXPENSE S INCURRED BY THE ASSESSEE ARE PURELY IN THE NATURE OF REPAIRS AND MAINTENANCE AND ARE ALLOWABLE AS REVENUE. 54. WE HAVE HEARD THE ARGUMENTS OF THE PARTIES BEFORE U S AND AREA OF DISPUTE FOR OUR CONSIDERATION IS VERY LIMITED, I.E. 50% ALLOWA NCE ON THE PAYMENT MADE TO NITIN PARULEKAR ARCHITECTS FOR INTERIO R DESIGN WORKS AT RS. 21,984,800/- AND PAYMENT MADE TO ROSHAN E LECTRIC CONTRACTORS AT RS. 14,44,694/-. 55. THE CIT(A) HAS ALLOWED ONLY 50%, THOUGH, ON ADHOC BASIS , THE IMPUGNED EXPENSE, WHICH ACCORDING TO US ARE QUITE REASONABLE. M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 19 56. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) AND REJE CT THE GROUND OF APPEAL, AS FILED BY THE DEPARTMENT. 57. GROUND NO. 2 IS THEREFORE, REJECTED. 58. IN THE RESULT, APPEAL FILED BY THE DEPARTMENT IS DISMISSED. ITA NO. 7408/MUM/2010 : (ASSESSEE APPEAL) : 59. THE FOLLOWING GROUNDS HAVE BEEN RAISED: GROUND NO. 1- EXPENDITURE INCURRED ON RURAL DEVELOPMEN T RS. 1,07,891/- . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ADDITIONAL COMMISSIONER OF IN COME TAX, RANGE 5(1), MUMBAI (THE AO) OF DISALLOWING RS. 1,07,891/-, BEING EXPE NDITURE INCURRED ON RURAL DEVELOPMENT IN VILLAGES NEAR THE APPELLANTS FACTORY, ON THE ALLEGED GROUND THAT THE SAID EXPENDITURE HAS NO NEXUS WITH THE BUSINE SS CARRIED OUT BY THE APPELLANT WITHOUT CONSIDERING THE FACT THAT SUCH EXPEN DITURE INCURRED OUT OF COMMERCIAL EXPEDIENCY, IT ENHANCES THE CORPORATE IMAGE OF THE APPELLANT COMPANY AND ALSO PROMOTE ITS BUSINESS. GROUND NO. 2: 8OHHC - MISCELLANEOUS INCOME AND TRADE DIS COUNT RS. 9944,920/- AND RS. 5,13,72,467/- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO OF TREATING MISCELLANEOU S INCOME AND TRADE DISCOUNT AS PART OF THE TOTAL TURNOVER FOR THE PURPOS E OF COMPUTING DEDUCTION U/S. 8OHHC OF THE ACT. GROND NO. 3 : 8OHHC INTEREST RS. 6,47,94,044/- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO OF REDUCING 90% OF THE GROSS INTEREST RECEIVED WHILE COMPUTING DEDUCTION U/S. 8OHHC OF THE ACT ON THE ALLEGED GROUND THAT THERE IS NO NEXUS BETWEEN THE TWO WITHOUT NETTING OFF THE SAME AGAINST INTEREST PAID. GROUND NO. 4: PAYMENT TO THIRD PARTY MANUFACTURER RS . 22,64,396/- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN NOT CONSIDERING AND DIRECTING THE AO TO ALLOW THE DEDU CTION OF RS 22,64,396/- BEING ACTUAL PAYMENT MADE TO THE THIRD PARTY MANUFACTU RER ON ACCOUNT OF CONTRACTUAL OBLIGATION GROUND NO.5: GENERAL THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER AND/OR AME ND ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL. 60. GROUND NO. 1 PERTAINS TO DISALLOWANCE OF RS. 1,07,891/- O N ACCOUNT OF RURAL DEVELOPMENT. 61. THE CIT(A) SUSTAINED THE DISALLOWANCE, FOLLOWING THE ORDER OF HIS PREDECESSOR IN THE PRECEDING YEAR(S). WE ALSO FIND THAT THE ADDITION HAS BEEN SUSTAINED BY THE COORDINATE BENCH IN THE ASSESSEE S OWN CASE IN ASSESSMENT YEAR 2001-02 IN ITA NO. 975/MUM/2005. 62. IN THE IMPUGNED ORDER, WE FIND THAT THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF CIT VS MADRAS REFINERIES LTD., R EPORTED IN M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 20 266 ITR 170 (MAD). THIS CASE HAS NOT BEEN CONSIDERED BY THE CIT(A), RATHER, THE CIT(A) FOLLOWED HIS PREDECESSORS ORDER. AS A CORRECT JUDICIAL PROPRIETY, THE ISSUE SHOULD BE HELD AGAINST THE ASSESSEE , FOLLOWING THE ORDER OF THE COORDINATE BENCH IN THE PRECEDING YEAR, BUT THE FACT THAT THE ASSESSEE FACTORY IS LOCATED IN THE VILLAGE BELTS AT IND URI, NEAR MUMBAI AND MALANA, IN MADHYA PRADESH. THE UPLIFTMENT OF TH ESE AREAS, THOUGH NOT DIRECTLY RELATABLE TO THE BUSINESS OF THE ASSESSEE BUT IS CERTAINLY A MATTER OF GOOD CORPORATE GOVERNANCE THR OUGH CORPORATE CITIZEN, WHICH IS ENCOURAGED BY THE GOVERNMENT. THIS IS WHA T HAS BEEN HELD IN THE CASE OF MADRAS REFINERIES LTD. ( SUPRA ). IT MAY NOT BE OUT OF PLACE TO MENTION, THAT IN THE CASE OF INDIAN RAYON & IND USTRIES LTD. (NOW KNOWN AS ADITYA BIRLA NUVO LTD.), (WHERE ONE OF US WA S A PARTY TO THE DECISION), IN ITA NO. 5421/MUM/2005 HAVE ALLOWED A SIMILA R EXPENSE. 63. IN THESE CIRCUMSTANCES, IN THE INTEREST OF JUST ICE AND THE CURRENT NEED FOR BEING A BETTER CORPORATE CITIZEN, THE ISSUE IS RESTORED TO THE FILE OF THE AO, WHO SHALL REEXAMINE THE NATURE OF EXPENSE IN THE LI GHT OF MADRAS REFINERIES LTD. ( SUPRA ) AND ADITYA BIRLA NUVO LTD. ITA NO. 5421/MUM/2005 ( SUPRA ) AND ALLOW THE EXPENSE, IF THE ASSESSEE HAS INCURRED EXPENDITURE FOR UPLIFTMENT OF LOCAL VILLAGE COMMUNITY, AS A GOOD CO RPORATE CITIZEN. 64. ISSUES RAISED IN GROUNDS NO. 2 TO 4 ARE DEALT W ITH AND ARE COVERED BY THE VARIOUS ORDERS OF THE COORDINATE BENCHES OF THE ITAT, IN THE CASE OF THE ASSESSEE. SINCE THE GROUNDS ARE COVERED ON IDENTICA L ISSUES, WE FOR THE SAKE OF BREVITY ARE NOT DEVIATING FROM THE INFERENCES DR AWN BY THE COORDINATE BENCHES. 65. GROUND NO. 2 PERTAINS TO MISCELLANEOUS INCOME A ND TRADE DISCOUNTS AMOUNTING TO RS. 99,44,920/- AND RS. 5,13,72,467/-. 66. AT THE TIME OF HEARING, THE AR POINTED OUT THAT THE IS SUE IS COVERED BY THE ORDER OF THE COORDINATE BENCH IN ITA NO . M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 21 957/MUM/2005 IN ASSESSMENT YEAR 2001-02 IN ASSESSEES OWN CASE, WHEREIN IN PARA 6.1, IT HAS BEEN HELD, 6.1 AFTER HEARING BOTH PARTIES, WE FIND THAT THIS ISSU E IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 1 995-96 IN ITA NO.1641/M/2003 DATED 8.10.2010. THE TRIBUNAL IN THE SA ID YEAR NOTED THAT THE MISCELLANEOUS INCOME WHICH INCLUDED TRADE DISCOUNTS, MISCELLA NEOUS SALES, SALES TAX, EXCISE DUTY ETC. HAD TO BE INCLUDED IN THE T OTAL TURNOVER EXCEPT THE SALES TAX AND EXCISE DUTY WHICH DID NOT CONTAIN AN ELEMEN T OF TURNOVER IN VIEW OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE C ASE OF CIT VS. LAKSHMI MACHINE WORKS (290 ITR 667). THE FACTS THIS YEAR ARE IDENTICAL. THEREFORE, WE CONFIRM THE ORDER OF CIT(A) EXCEPT IN RELATION TO SALES TAX AND EXCISE DUTY WHICH WILL BE EXCLUDED FROM THE TOTAL TURNOVER. 7. THE SIXTH DISPUTE IS REGARDING REDUCTION OF 90% OF INTEREST FROM PROFIT OF BUSINESS AS PER EXPLANATION (BAA) WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC. ASSESSEE HAD RECEIVED INTEREST ON FDRS, ICDS AND OTHERS AGGREGATING TO RS.5,21,04,545/-. THE AO EXCLUDED 90% OF THE SAME FRO M THE PROFIT OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC W HICH IN APPEAL WAS CONFIRMED BY CIT(A). ASSESSEE HAS DISPUTED THE DEC ISION OF AUTHORITIES BELOW TO EXCLUDE 90% OF THE GROSS INTEREST AND NOT NET INTEREST INCOME. 7.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. EARLIER THE HON'BLE HIGH COURT OF BOMBAY IN CA SE OF CIT VS. ASIAN STAR CO. LTD. (326 ITR 56) HAD HELD THAT 90% OF GROSS INTER EST HAS TO BE REDUCED FROM THE PROFIT OF BUSINESS AS PER EXPLANATION (BAA). HOWEVE R THE SAID DECISION OF THE HON'BLE HIGH COURT HAS NOT BEEN UP HELD BY THE HON'BLE SUPREME COURT WHO IN THE CASE OF ACG ASSOCIATED CAPSULES LTD. (343 ITR 89), HAVE RECENTLY HELD THAT 90% OF NET RECEIPTS HAVE TO BE REDUCED AS PER EXPLAN ATION (BAA). WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND HOLD THAT 90% OF NET INTEREST INCOME IS REQUIRED TO BE REDUCED AFTER DEDUCTING EXPENSES INCURRED HAVIN G NEXUS WITH EARNING OF INTEREST INCOME. THE ISSUE IS THUS RESTORED TO AO FOR W ORKING OUT 90% OF NET INTEREST INCOME AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 67. THE DR PLACED RELIANCE ON THE ORDERS OF THE REV ENUE AUTHORITIES. 68. WE HAVE GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES AND HAVE ALSO PERUSED THE ORDER IN ITA NO. 975/MUM/2005 ( SUPRA ). WE FIND THE ISSUE IS COVERED AND WE DO NOT FIND ANY REASON TO DEVIATE FROM THE ORDER IN THE ASSESSEES OWN CASE. WE HOLD ACCORDINGLY. 69. GROUND NO. 2 IS THEREFORE ALLOWED. 70. GROUND NO. 3 PERTAINS TO REDUCTION OF GROSS INT EREST FROM THE COMPUTATION OF DEDUCTION U/S 80HHC. 71. AT THE TIME OF HEARING, THE AR POINTED OUT THAT THE ISSUE IS COVERED BY THE ORDER IN ITA NO. 975/MUM/2005 IN PARAS NO. 7 AN D 7.1, WHICH READS AS UNDER 7. THE SIXTH DISPUTE IS REGARDING REDUCTION OF 90% OF INTEREST FROM PROFIT OF BUSINESS AS PER EXPLANATION (BAA) WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC. ASSESSEE HAD RECEIVED INTEREST ON FDRS, ICDS AND OTHERS AGGREGATING TO RS.5,21,04,545/-. THE AO EXCLUDED 90% OF THE SAME FRO M THE PROFIT OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC W HICH IN APPEAL M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 22 WAS CONFIRMED BY CIT(A). ASSESSEE HAS DISPUTED THE DEC ISION OF AUTHORITIES BELOW TO EXCLUDE 90% OF THE GROSS INTEREST AND NOT NET INTEREST INCOME. 7.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. EARLIER THE HON'BLE HIGH COURT OF BOMBAY IN CA SE OF CIT VS. ASIAN STAR CO. LTD. (326 ITR 56) HAD HELD THAT 90% OF GROSS INTER EST HAS TO BE REDUCED FROM THE PROFIT OF BUSINESS AS PER EXPLANATION (BAA). HOWEVE R THE SAID DECISION OF THE HON'BLE HIGH COURT HAS NOT BEEN UP HELD BY THE HON'BLE SUPREME COURT WHO IN THE CASE OF ACG ASSOCIATED CAPSULES LTD. (343 ITR 89), HAVE RECENTLY HELD THAT 90% OF NET RECEIPTS HAVE TO BE REDUCED AS PER EXPLAN ATION (BAA). WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND HOLD THAT 90% OF NET INTEREST INCOME IS REQUIRED TO BE REDUCED AFTER DEDUCTING EXPENSES INCURRED HAVIN G NEXUS WITH EARNING OF INTEREST INCOME. THE ISSUE IS THUS RESTORED TO AO FOR W ORKING OUT 90% OF NET INTEREST INCOME AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 72. ON GOING THROUGH THE ORDER OF THE REVENUE AUTHO RITIES AND THE ORDER OF THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ASSE SSMENT YEAR 2001-02, WE ARE OF THE OPINION THAT FOR THE SAKE OF CONTINUI TY AND CONSISTENCY THE ISSUE BE RESTORED TO THE FILE OF THE AO. 73. GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSE S. 74. GROUND NO. 4 PERTAINS TO PAYMENTS OF RS. 22,64, 396/- MADE TO THIRD PARTY MANUFACTURERS. 75. THE CIT(A) HAS FOLLOWED THE DECISION TAKEN BY H IS PREDECESSOR. IN THE ORDER OF THE ITAT IN ITA NO. 975/MUM/2005, IN THE P RECEDING YEAR, THE ADDITION HAS BEEN SUSTAINED, WHEREIN IT HAS BEEN HE LD IN PARAS NO. 3 AND 3.1, 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF PRO VISION FOR CONTRACTUAL LIABILITY TOWARDS 3RD PARTY MANUFACTURERS/ CONVERTORS IN RELATION TO EXCISE DUTY PAYABLE AMOUNTING TO RS.61,44,62 8/-. THE ASSESSEE WAS IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND SALE OF MALTED FOODS, COCOA BASED PRODUCTS INCLUDING CONFECTIO NARY WHICH WERE BEING MANUFACTURED AT ITS OWN FACTORY AS WELL AS UNDER AGREEMENT WITH THIRD PARTY MANUFACTURERS/CONVERTERS AT THEIR FACTORIE S. IN RESPECT OF PRODUCTS MANUFACTURED AT COMPANY'S OWN FACTORY, EXC ISE DUTY IS PAID ON THE BASIS OF COMPANY'S WHOLESALE TRADE PRICE LESS PER MISSIBLE DEDUCTIONS IN THE NATURE OF POST MANUFACTURING EXPENSE S (PME) INCURRED BY THE COMPANY ON FREIGHT, OCTROI, ADDITIONAL S ALES TAX ETC. THE THIRD PARTY MANUFACTURERS CONVERTERS WERE INITIALLY PAY ING EXCISE DUTY ON THE PRODUCTS MANUFACTURED FOR CADBURY ON THE BAS IS OF COST OF RAW MATERIAL, PACKING MATERIAL AND CONVERSION CHARGES WHICH INCLUDED THIRD PARTY MANUFACTURERS/CONVERTERS MARGIN OF PROFIT. HOWE VER, THE EXCISE AUTHORITIES DISPUTED THE SAID BASIS OF VALUATION AND CLA IMED THAT EXCISE DUTY ON PRODUCTS MANUFACTURED BY THIRD PARTY MANUFACTURERS/CONVERTERS IS PAYABLE ON THE BASIS OF CA DBURY'S WHOLE SALE TRADE PRICE LESS PME. ACCORDINGLY, THE EXCISE DEPAR TMENT ISSUED A SHOW CAUSE CUM DEMAND NOTICE AND DIRECTED THE MANUFACTURERS/CONVERTERS TO PAY EXCISE DUTY ON THE B ASIS OF NORMAL PRICE WORKED OUT FROM THE PRICES CHARGED BY THE ASSES SEE COMPANY TO THEIR WHOLESALE DEALERS. THE SAID THIRD PARTY MANUFACTURE RS/CONVERTERS DISPUTED THE BASIS ADOPTED BY THE EXCISE AUTHORITIES FO R LEVY OF EXCISE DUTY AND THE SAID DISPUTE BECAME THE SUBJECT MATTER O F APPEAL BEFORE THE EXCISE DUTY APPELLATE AUTHORITIES. ALTHOUGH THE PRIMA RY LIABILITY TO PAY THE EXCISE DUTY WAS THAT OF THE THIRD PARTY M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 23 MANUFACTURERS/CONVERTERS, THE SAID EXCISE DUTY LIABILITY WAS TO BE PAID BY THE ASSESSEE COMPANY AS PER THE AGREEMENTS AS AN D WHEN WAS PAYABLE. SINCE THE SAID DISPUTE WAS NOT SETTLED IN THE Y EAR UNDER CONSIDERATION, THE ASSESSEE COMPANY RETAINED THE LIABILITY IN RESPECT OF THE DISPUTED AMOUNT TO THE EXTENT OF RS.61,44,628/- IN VIEW OF ITS CONTRACTUAL OBLIGATIONS TOWARDS THE THIRD PARTY MANUFACT URERS/ CONVERTERS BY REDUCING ITS SALES TO THAT EXTENT AND CR EDITING THE ACCOUNTS OF THE THIRD PARTY MANUFACTURERS/CONVERTERS . IN THE RESULT, THE SALES WERE SHOWN LESS TO THAT EXTENT IN THE PROFIT & LO SS ACCOUNT AND IN EFFECT, DEDUCTION WAS CLAIMED ON ACCOUNT OF PROVISION FOR LIABILITY TOWARDS CONTRACTUAL OBLIGATION TO THE THIRD PARTY MANUFA CTURERS/ CONVERTERS IN COMPUTING THE TOTAL INCOME WHICH WAS DISA LLOWED BY THE AO FOLLOWING DECISION IN EARLIER YEAR. IN APPEAL THE CIT(A ) HAS CONFIRMED THE DISALLOWANCE FOLLOWING THE APPELLATE ORDER IN THE EARLIER YEAR, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFO RE THE TRIBUNAL. 3.1 AFTER HEARING BOTH THE PARTIES, WE FIND THAT THI S ISSUE HAD BEEN ADJUDICATED BY THE TRIBUNAL IN ASSESSMENT YEAR 1994-95 IN ITA NO.282/M/00. IN THE SAID YEAR, THE TRIBUNAL NOTED THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AS PER WHICH CONTRACTUAL LIABILITY ACCRUED ON THE DATE OF ITS ASCERTAINMENT AND WA S ALLOWABLE IN THE YEAR OF ASCERTAINMENT. IN THIS CASE, THE LIABILITY W AS PENDING IN DISPUTE AND THEREFORE, THE SAME HAD NOT BEEN INCURRED DURING THE YEAR. FACTS THIS YEAR ARE IDENTICAL AND, THEREFORE, RESPECTF ULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE YEAR 1994-95 (SUPRA), WE CONFIRM THE ORDER OF CIT(A)DISALLOWING THE CLAIM. 76. AS THE FACTS ARE IDENTICAL AND THE REASONING GIVEN B Y THE ITAT IS ONE THE SIMILAR BASIS, WE, THEREFORE, FOLLOWING THE ORDER OF TH E COORDINATE BENCH IN THE PRECEDING ASSESSMENT YEAR, CONFIR M THE DISALLOWANCE. 77. GROUND NO. 4 IS REJECTED. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. TO SUM UP: ASSESSEES APPEAL IN ITA 7408 OF 2010 STANDS PARTLY ALLOWED REVENUES APPEAL IN ITA 7641 OF 2010 STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH NOVEMBER, 2013. SD/- SD/- ( . ) ( % & ) !'# !'# (D. KARUNAKARA RAO) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER &&' MUMBAI, () DATE: 13 TH NOVEMBER, 2013 M/S. CADBURY IN DIA LTD ITA NO. 7408/MUM/2010 ITA NO. 7641/MUM/2010 24 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) * * + ( ) - 15, MUMBAI / THE CIT (A)-15, MUMBAI. 4) THE CIT-5,/CONCERNED _____, MUMBAI, 5) -./ 0 , * 0 , &' / THE D.R. K BENCH, MUMBAI. 6) /1 2 COPY TO GUARD FILE. *)3 / BY ORDER / / TRUE COPY / / [ 4 / 5 6 * 0 , &' DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *895 . . * CHAVAN, SR. PS