HINDUSTAN UNILIVER LTD, MUMBAI V. ADDL CIT RG 1(1), MUMBAI

ITA 7868/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9511 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 18-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 15-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALA
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Earning of tax free income; Retrospective amendment; Additional evidence; Non-deduction of tax; Commercial expediency; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 244A; 234B; 80IB; 37(1); 80G; 10B; 54; 92

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7868/MUM./2010 ( &) * !+* / ASSESSMENT YEAR : 200607 ) HINDUSTAN UNILEVER LIMITED (FORMERLY KNOWN AS HINDUSTAN LEVER LTD) HINDUSTAN LEVER HOUSE 165/166, BACKBAY RECLAMATION MUMBAI 400 020 .. ,- / APPELLANT ) V/S ADDL. COMMISSIONER OF INCOME TAX RANGE1(1), MUMBAI .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACH1004N &) *1# 2 3 / ASSESSEE BY : MR. P.J. PARDIWALA 4! 2 3 / REVENUE BY : MR. AJIT KUMAR JAIN A/W MRS. SASMITA MISRA )! 2 # / DATE OF HEARING 18.10.2012 $ 5+ 2 # / DATE OF ORDER 10.12.2012 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH THIS APPEAL PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 7 TH OCTOBER 2010, PASSED BY THE ADDL. COMMISSIONER OF INCOME TAX, RANGE-I(1), MUMBAI, IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL (F OR SHORT DRP ), FOR THE HINDUSTAN UNILEVER LIMITED 2 QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) R /W 144C OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) FOR ASSESSMENT YEAR 200607. 2. IN GROUNDS NO.1 TO 15, WHICH ALSO INCLUDES VARIOUS SUB-GROUNDS, THE ASSESSEE HAS CHALLENGED THE TRANSFER PRICING ADJUST MENT OF ` 368,79,26,000, ON THE INTERNATIONAL TRANSACTION VAL UES. THE ASSESSEE, HINDUSTAN UNILIVER LTD., IN WHICH, 51.55% STAKE IS HELD BY UNILIVER PLC IS INDIAS LARGEST FAST MOVING CONSUMER GOODS COMPANY (FOR SHORT FMGC ). THE MAIN BUSINESS OF THE COMPANY IS EXPORT AND IMPO RT OF HOME AND PERSONAL CARE PRODUCTS, BEVERAGES, EXPORT OF RICE A ND MARINE PRODUCTS, EXPORT AND IMPORT OF SOAP AND TOILETRIES. THE ASSES SEE HAS ALSO BEEN PAYING ROYALTY TO UNILIVER PLC ON DOMESTIC AND EXPO RT SALES. DURING THE YEAR, THE ASSESSEE HAD MADE FOLLOWING INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATE ENTERPRISES (FOR SHORT A.ES ). S.NO. NAME OF TRANSACTION A.Y. 0607 ( ` ) METHOD USED 1. PURCHASE OF RAW MATERIALS 41,73,50,931 TNMM 2. IMPORT OF FINISHED GOODS 2,86,74,892 TNMM 3. SALE OF RAW MATERIAL 128,23,81,580 TNMM 4. EXPORT OF RICE & MARINE PRODUCTS 23,37,76,216 TNMM 5. EXPORT OF MANUFACTURED HOME AND PERSONAL CARE PRODUCTS 267,38,18,733 TNMM 6. EXPORT OF MANUFACTURED BEVERAGES 270,91,33,327 TNMM 7. IMPORT OF MACHINERIES 218,165 TNMM 8. EXPORT OF MACHINERIES 65,730 TNMM 9. ROYALTY PAID TO UNILEVER 66,72,53,896 TNMM 10. RECOVERY OF EXPENSES FOR COMMON CORPORATE RESOURCES (CORPORATE AUDIT) 67,20,96,855 TNMM 11. RECOVERY OF EXPENSES FOR COMMON CORPORATE RESOURCES (INTRA GROUP SERVICES) 2,92,68,445 TNMM 12. RECOVERY OF EXPENSES FOR COMMON CORPORATE RESOURCES (INTRA GROUP SERVICES) 38,87,91,905 TNMM 13. TRAINING COURSE FEES & REIMBURSE MENT OF OTHER EXPENSES MADE 3,69,21,201 CUP 14. TRAINING COURSE FEES & REIMBURSEMENT OF OTHER EXPENSES RECEIVED 14,72,14,089 CUP TOTAL 928,69,65,605 HINDUSTAN UNILEVER LIMITED 3 3. IN ORDER TO EXAMINE THE COMPUTATION OF ARMS LENGTH PRICE (FOR SHORT ALP ) IN RELATION TO THE INTERNATIONAL TRANSACTION, A R EFERENCE UNDER SECTION 92CA(1) WAS MADE BY THE ASSESSING OFFICER T O THE TRANSFER PRICING OFFICER (FOR SHORT TPO ) ON 8 TH OCTOBER 2007 AND COPY OF AUDIT REPORT IN FORM 3CEB WAS FORWARDED. FOR THE PURPOSE OF DETERMI NING THE AVERAGE OPERATING PROFIT TO THE SALES RATIO, THE ASSESSEE H AS TAKEN THE DATA OF 12 FMCG COMPANIES WHICH FORMED THE BSE FMGC INDEX AN D THE ARITHMETICAL MEAN OF PLI OF SUCH COMPANIES WORKED OUT AT 12.87% AS AGAINST THE ASSESSEES OPERATING PROFIT ON TOTAL SALES AT 12.28 %. IN THE T.P. STUDY REPORT, THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGINAL METHOD (FOR SHORT TNMM ) TO BENCH MARK THE INTERNATIONAL TRANSACTION FOR D ETERMINING THE ALP. THE ASSESSEE HAS TAKEN FOLLOWING 12 COMPAN IES AS COMPARABLES WITH ARITHMETIC MEAN OF OPERATING PROFIT MARGIN AT 12.87%. S.NO. COMPANYS NAME O.M (%) 1. I.T.C. LTD. 19.13 2. BATA INDIA LTD. 1.30 3. NESTLE INDIA LTD. 17.60 4. TATA TEA LTD. 13.73 5. COLGATEPALMOLIVE (I) LTD. 14.71 6. BRITANNIA INDUSTRIES LTD. 9.21 7. DABUR INDIA LTD. 17.27 8. GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD. 13.08 9. GODREJ CONSUMER PRODUCTS LTD. 18.35 10. RADICO KHAITAN LTD. 8.41 11. MC DOWELL & CO. LTD. 4.97 12. NIRMA LTD. 14.10 MEAN 12.87 4. BEFORE THE TPO, DETAIL OBJECTIONS / SUBMISSIONS WER E MADE TO JUSTIFY THE PROFIT MARGIN ON ACCOUNT OF INTERNATIONAL TRANS ACTIONS WITH THE A.ES. HINDUSTAN UNILEVER LIMITED 4 HOWEVER, THE TPO REJECTED THE ASSESSEES ENTIRE CON TENTIONS AND FINALLY SELECTED EIGHT COMPARABLES WHOSE AVERAGE PROFIT MA RGIN ON OPERATING PROFIT / TOTAL COST (FOR SHORT OP / TC ) WORKED OUT AT 17.48%. ACCORDINGLY, AN ADJUSTMENT OF ` 356.44 CRORES WAS MADE VIDE ORDER DATED 7 TH MARCH 2008. APART FROM THIS, ADJUSTMENT OF ` 5.85 CRORES ON ACCOUNT OF UNDERCHARGING OF COMMON CORPORATE AUDIT SERVICES AN D REIMBURSEMENT OF EXPENSES RECEIVED FROM INTRA GROUP SERVICES WAS ALS O MADE AND FINAL ADJUSTMENT OF ` 362,29,41,800, WAS MADE IN THE VALUE OF INTERNATIO NAL TRANSACTIONS. THE OTHER ADJUSTMENT WHICH WAS MADE O N ACCOUNT OF ROYALTY, R&D CESS, ADVERTISEMENT AND SALES PROMOTION EXPENSE S, ETC., THE TPO HELD THAT THE SAME WOULD GET SUBSUMED BY THE ADJUSTMENT OF ` 356.44 CRORES. AGAINST THE SAID ORDER OF THE TPO, THE ASSESSEE FIL ED A WRIT PETITION BEFORE THE JURISDICTIONAL HIGH COURT, BEING WP NO.2244 OF 2008, INTER-ALIA, ON THE GROUND THAT THE SAME HAS BEEN PASSED IN VIOLATION O F NATURAL JUSTICE AS PROPER OPPORTUNITY OF FILING THE DOCUMENT BEFORE TH E TPO WAS NOT GIVEN AND ADDITIONAL REPLY AND SUBMISSIONS WERE TO BE FIL ED. THE JURISDICTIONAL HIGH COURT SET ASIDE THE TPOS ORDER DATED 7 TH MARCH 2008, WITH A DIRECTION THAT OPPORTUNITY OF PLACING OF THE DOCUMENTS AND HE ARING BE GIVEN TO THE ASSESSEE AND THE FRESH ORDER SHOULD BE PASSED FOLLO WING THE CANNON OF NATURAL JUSTICE AFTER CONSIDERING THE ASSESSEES FR ESH STATEMENTS. 5. IN THE FRESH TRANSFER PRICING PROCEEDINGS, THE ASSE SSEE RAISED VARIOUS OBJECTIONS WHICH INCLUDED PRELIMINARY OBJECTION OF MAKING THE REFERENCE TO THE TPO WITHOUT SATISFYING THE CONDITIONS LAID DOWN UNDER SECTION 92CA. THE SUM AND SUBSTANCE OF THE ASSESSEES OBJECTION B EFORE THE TPO WERE (I) MULTIPLE YEAR DATA SHOULD BE ACCEPTED TO WORK O UT THE PLI, WHICH HAS BEEN DEALT IN PARA-7.2 OF THE IMPUGNED TP ORDER; (I I) ONLY SUCH DATA OF COMPARABLES AS WAS AVAILABLE IN THE PUBLIC DOMAIN D URING THE FINANCIAL YEAR OF TRANSACTIONS CAN BE USED FOR COMPARABILITY ANALYSIS; (III) THE TPO MAY DETERMINE THE ALP ON THE BASIS OF MATERIAL AND INFORMATION AVAILABLE TO HIM ONLY IF ANY OF THE FOUR CONDITIONS STIPULATE D IN SECTION 92C(3) ARE FULFILLED AND NOT OTHERWISE; (IV) THE ASSESSEE HAS GIVEN DETAIL REASON FOR HINDUSTAN UNILEVER LIMITED 5 USE OF OPERATING PROFIT UPON SALES AS PLI TO DETERM INE THE ARMS LENGTH PRICE, LOOKING TO THE NATURE OF INTERNATIONAL TRANS ACTIONS AND THAT THE COMPANYS BUSINESS IS DRIVEN MORE BY SALES VOLUME R ATHER THAN COST AND ACCORDINGLY, SALE SHOULD BE THE APPROPRIATE FACTOR TO EVALUATE THE PROFITABILITY OF THE RELEVANT SEGMENT; (V) BESIDES AFORESAID OBJECTIONS, THE MAIN OBJECTION OF THE ASSESSEE DURING THE COURSE OF FRESH TP PROCEEDINGS WAS THAT INSTEAD OF BENCH MARKING THE PROFITS WITH THE ENTITY LEVEL, SEGMENTAL PROFIT OF THE A.E. TRANSACTION FALLING IN VARIOUS SEGMENT SHOULD BE BENCH MARKED SEPARATELY TO JUSTIFY THE ALP AND, ACCORDINGLY, THE ASSESSEE PROVIDED DETAIL SEGMENTAL ANALYSIS OF VARI OUS SEGMENTS LIKE SOAP AND DETERGENTS, HOME AND PERSONAL CARE PRODUCTS, BE VERAGES, FOOD, EXPORTS, ETC., ALONG WITH THE OPERATING PROFIT OF E VERY SEGMENT VIS--VIS THE COMPARABLE COMPANIES IN THE RESPECTIVE FIELDS; AND (VI) LASTLY, THE ASSESSEE SUBMITTED THAT IN VIEW OF PROVISO TO SECTI ON 92C(2), THE OPERATING MARGIN OF THE COMPARABLES AND THE OPERATI NG PROFIT DISCLOSED BY THE ASSESSEE FALLS WITHIN THE SAFE HARBOUR OF +/- 5 %, THEREFORE, NO ADJUSTMENT IN ALP WAS REQUIRED. 6. THE TPO REJECTED ALL THE OBJECTIONS AND CONTENTIONS OF THE ASSESSEE IN A VERY DETAIL MANNER WHICH HAS BEEN DISCUSSED FR OM PARA-7.1 TO 9 I.E., PAGES-4 TO 24 OF HIS ORDER. THE SUM AND SUBSTANCE O F REJECTION OF ASSESSEES CONTENTION WERE THAT (I) MULTIPLE YEAR DATA CANNOT BE MADE APPLICABLE IN ASSESSEES CASE, AS FOR PROPER COMPAR ABILITY THE DATA OF COMPARABLES SHOULD BE TAKEN ON MULTIPLE YEAR BASIS AND THE COMPARABLE DATA OF THE ASSESSEE MUST ALSO BE TAKEN ON MULTIPLE YEAR BASIS. HOWEVER, THIS WILL NOT SERVE THE PURPOSE AS ONE HAS TO BENCH MARK THE TRANSACTIONS RELATING TO THE RELEVANT YEAR UNDER CONSIDERATION A ND THE DATA CAN ONLY BE MATCHING BY THE RELEVANT YEARS DATA OF THE INDUSTR Y. IN SUPPORT OF HIS CONCLUSION, HE RELIED UPON THE DECISION OF THE TRIB UNAL, DELHI BENCH, IN MENTOR GRAPHICS AND OTHER DECISIONS; (II) REGARDING THE ASSESSEES ARGUMENT THAT ONLY SUCH DATA OF COMPARABLES AS WAS AVAILABLE IN PUBLIC DOMAIN DURING THE FINANCIAL YEAR OF THE TRANSACTION CAN BE USED FOR HINDUSTAN UNILEVER LIMITED 6 COMPARABILITY ANALYSIS, HE HELD THAT THE ASSESSEE H AS NOWHERE TAKEN A STAND THAT TRANSFER PRICING WERE FIXED ON THE BASIS OF PROFITABILITY OF COMPARABLE CASES. FURTHER, INDIAN TRANSFER PRICING REGULATION NOWHERE REFERS TO THE REQUIREMENT OF AVAILABILITY OF DATA I N PUBLIC DOMAIN, THE ASSESSEE BEING IN PARTICULAR BUSINESS ACTIVITY IS E XPECTED TO KNOW PROFITABILITY OF THAT BUSINESS AT DIFFERENT POINT; (III) REGARDING COMPLIANCE OF CONDITIONS LAID DOWN UNDER SECTION 92C(3) OF THE ACT, HE HELD THAT THE ASSESSEE DOES NOT SATISFY THESE CONDITIONS LAID DOW N AS THE TRANSFER PRICING HAS NOT BEEN DETERMINED BY THE ASSESSEE IN ACCORDAN CE WITH THE TNMM; (IV) REGARDING BENCH MARKING AT SEGMENTAL LEVEL, HE HELD THAT THE ASSESSEE HAS NOT SUBSTANTIATED THE IDENTIFICATION A ND ALLOCATION OF HEAD OFFICE EXPENSES AND OVER HEADS AND HAS FAILED TO PR OVIDE CLASSIFICATION OF EXPORTS INTO A.E. AND NON-A.E. IT HAS ALSO FAILED T O SEGREGATE THE INCOME AND COST RELATING TO VARIOUS ACTIVITIES BEING UNDER TAKEN BY THE ASSESSEE WHICH HAVE BEEN AGGREGATED, OVER ALL MARGIN. HE FUR THER POINTED OUT ANOMALIES AND DISCREPANCIES IN THE FIGURES OF PROFI T & LOSS ACCOUNT AND THE SALES FIGURE OF A.E. AS WELL AS NON-A.E. SALES GIVE N IN THE SEGMENTAL DATA AND IN THE ENTITY LEVEL DATA. HE FURTHER NOTED THAT INDEPENDENT TRANSACTION-WISE BENCH MARKING BY TNNM WILL GIVE TH E CORRECT RESULT ONLY IF AUTHENTIC SEGMENT ACCOUNT FOR INDEPENDENT LINE OF B USINESS IS PREPARED BY THE ASSESSEE I.E., ACCURATE DATA IS AVAILABLE FOR E ACH SEGMENT OF THE BUSINESS. GROSSING UP OF THE DATA OR APPORTIONING T HE EXPENDITURE IN THE SEGMENTAL ANALYSIS WILL THROW UP ABSURD RESULTS AND WILL BE INACCURATE AND UNRELIABLE. IT WAS DUE TO VARIOUS ANOMALIES AND NON -AUTHENTIC SEGMENTAL ACCOUNT, THE ASSESSEE WAS COMPELLED TO USE THE ENTI TY LEVEL PROFIT FOR BENCH MARKING AND DETERMINING THE ALP BY WAY OF TNN M AT THE ENTITY LEVEL AND NOT AT THE INDEPENDENT TRANSACTION LEVEL DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE TPO. AFTER HAVING REJECTED THE SEGMENTAL ACCOUNTS, HE PROCEEDED TO ANALYSE THE SEG MENTAL DETAILS FILED BY THE ASSESSEE IN VIEW OF THE DIRECTIONS OF THE HI GH COURT. THESE ANALYSIS HAVE BEEN GIVEN FROM PAGES-11 TO 15 AND CAME TO THE FOLLOWING CONCLUSIONS:- HINDUSTAN UNILEVER LIMITED 7 THE ASSESSEES SEGMENTAL MARGINS ARE LOW WHEN COMP ARED TO COMPARABLE COMPANIES CONCLUSION: THEREFORE, IN VIEW OF THE EXTENSIVE DI SCUSSION ABOVE AND FAILURE OF THE ASSESSEE TO SUBMIT DULY AUDITED RELIABLE DATA ON SEGMENTAL LEVEL AND CATEGORICALLY ESTABLISHING THAT THE APPROACH O F THE ASSESSEE IN BENCHMARKING ON SEGMENTAL LEVEL IS FAULTY AND THAT IT CAN NEVER GIVE THE CORRECT FIGURE. IN ABSENCE OF ANY COGENT SEGMENTAL BENCHMARKING BY THE ASSESSEE, THIS OFFICE HAS TO PREFORCE GO BY THE ENTITY LEVEL BENCHMARKING FURNIS HED BY THE ASSESSEE CARRIED OUT VIDE ORDER DATED 7.3.2008 AT ` 356.44 CRORES TO ARRIVE AT THE ALP. 7. REGARDING DETERMINATION OF ARMS LENGTH OPERATING R ESULTS AT COMPANY LEVEL, THE ASSESSEE HAD SUBMITTED FOLLOWING COMPARA BLE COMPANIES AND THEIR OPERATIVE MARGINS. S.NO. COMPANYS NAME O.M (%) 1. I.T.C. LTD. 19.13 2. BATA INDIA LTD. 1.30 3. NESTLE INDIA LTD. 17.60 4. TATA TEA LTD. 13.73 5. COLGATEPALMOLIVE (I) LTD. 14.71 6. BRITANNIA INDUSTRIES LTD. 9.21 7. DABUR INDIA LTD. 17.27 8. GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD. 13.08 9. GODREJ CONSUMER PRODUCTS LTD. 18.35 10. MARICO LTD. 10.95 11. MC DOWELL & CO. LTD. 4.97 12. NIRMA LTD. 14.10 MEAN 12.87 IN COMPARISON TO THAT THE ASSESSEE COMPANYS OPERAT ING RESULTS WERE AS UNDER:- HINDUSTAN UNILEVER LIMITED 8 PARTICULARS AMOUNT ( ` IN LAKHS) FOR THE YEAR ENDED 31.3.2006 SALES 12,27,106 ADD: OTHER INCOME FROM SERVICES RENDERED 12,667 TOTAL OPERATING INCOME (A) 12,39,773 LESS: OPERATING EXPENSES (10,74,649) LESS: DEPRECIATION (12,882) OPERATING PROFIT (B) 152,242 ADD: OTHER INCOME 20,022 LESS: INTEREST (1,678) PROFIT FOR THE YEAR 1,70,586 OM (B/A) 12.28% 8. THE TPO NOTED THAT THE ASSESSEE HAS NOT CARRIED OUT PRODUCT COMPARABILITY AND FAR ANALYSIS. FOR EXAMPLE, THE AS SESSEE HAS INCLUDED COMPANIES LIKE BATA INDIA LTD., MC DOWEL & CO. LTD. , WHICH ARE PRIMA-FACIE ENGAGED IN MANUFACTURING OF ENTIRELY DIFFERENT PROD UCTS. THE TPO THEREAFTER ISSUED A SHOW CAUSE NOTICE AFTER POINTIN G OUT THE DISCREPANCIES IN THE COMPARABLES INCLUDED BY THE ASSESSEE AND ALS O THE WORKING OF THE PLI. THE CONTENTS OF THE SHOW CAUSE NOTICE HAS BEEN REPRODUCED IN PAGES- 17 AND 18 OF THE TPOS ORDER AND REQUIRED THE ASSES SEE TO SHOW CAUSE AS TO WHY THE ADJUSTMENT OF ` 343.95 CRORES MAY NOT BE DONE AFTER TAKING THE FOLLOWING COMPARABLES: NAME OF THE COMPANY ` (CRORES) ` (CRORES) ` (CRORES) MARCH 2006 MARCH 2006 MARCH 2006 SALES PBIT (NOI,NNRT) TC OP/TC (%) OP/SALES (%) BRITANNIA INDUSTRIES LTD. 1821.17 167.76 1653.41 10.15 9.21 COLGATE PAL MOLIVE (I) LTD. 1249.73 186.53 1063.20 17.54 14.93 HINDUSTAN UNILEVER LIMITED 9 DABUR INDIA LTD. 1372.39 217.66 1154.73 18.85 15.86 GLAXOMITHKLINE CONSUMER HEALTHCARE LTD. 1117.09 146.10 970.99 15.05 13.08 GODREJ CONSUMER PRODUCTS LTD. 692.26 127.00 565.26 22.47 18.35 ITC LTD. 15795.88 3021.70 12774.18 23.65 19.13 MARICO LTD. 1047.04 114.09 932.95 12.23 10.90 NESTLE INDIA LTD. 2643.96 465.24 2178.69 21.36 17.60 NIRMA LTD. 2244.18 313.65 1930.53 16.25 13.98 TATA TEA LTD. 970.89 134.44 836.45 16.07 13.85 AVERAGE 17.36 14.69 HINDUSTAN UNILEVER LTD. 12271.79 1522.42 10748.65 14.16 12.41 9. IN RESPONSE, THE ASSESSEE HAS GIVEN A DETAIL REPLY WHICH HAS BEEN INCORPORATED IN PAGES-19 TO 21 OF THE TPOS ORDER W HICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREIN BELOW:- 1) CHOICE OF COMPARABLE COMPANIES FOR THE PURPOSE O F BENCHMARK: AS YOUR GOODSELF IS AWARE, HINDUSTAN UNILEVER LIMI TED IS ONE OF THE LARGE FMCG COMPANIES OPERATING IN INDIA AND DEALS I N SEVERAL PRODUCTS WHICH FALL UNDER THE HOME AND PERSONAL CAR E CATEGORY AND THE FOODS CATEGORY. THESE INCLUDE SOAPS, DETERGENTS , ORAL CARE, HAIR CARE, SKIN CARE, HOUSEHOLD CARE, BEVERAGES, CULINAR Y PRODUCTS, ICE CREAMS AND OTHER PROCESSED FOODS. WE HAD VIDE OUR LETTER DATED 8.2 .2008 WE HAD PROVI DED YOUR GOODSELF WITH DATA IN RESPECT OF 12 FMCG COMPANIES, COPY OF WHICH IS ENCLOSED IN ANNEXURE 1, FOR THE PURPOSES OF DETE RMINING THE AVERAGE OPERATING PROFIT TO SALES RATIO. THESE CO MPANIES WERE CONSIDERED ON THE BASIS THAT THEY FORMED THE BSE-FM CG INDEX. AT THE OUTSET, WE WOULD LIKE TO STATE THAT OUT OF T HE 12 COMPANIES CONSIDERED BY US IN THE ABOVE SUBMISSION INADVERTEN TLY MARICO LIMITED WAS WRONGLY CONSIDERED AS FORMING A PART OF THE BSE FMCG INDEX AS ON 31.3.2006 INSTEAD OF RADICO KHAITAN LIM ITED. THE CORRECT COMPOSITION OF THE BSE FMCG INDEX AS ON 31. 3.2006 AND THE RESPECTIVE MARGINS OF THE COMPANIES COMPRISING BSE FMCG INDEX AS ON 31.3.2006 ARE AS UNDER: HINDUSTAN UNILEVER LIMITED 10 S.NO. COMPANYS NAME O.M (%) 13. I.T.C. LTD. 19.13 14. BATA INDIA LTD. 1.30 15. NESTLE INDIA LTD. 17.60 16. TATA TEA LTD. 13.73 17. COLGATEPALMOLIVE (I) LTD. 14.71 18. BRITANNIA INDUSTRIES LTD. 9.21 19. DABUR INDIA LTD. 17.27 20. GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD. 13.08 21. GODREJ CONSUMER PRODUCTS LTD. 18.35 22. RADICO KHAITAN LTD. 8.41 23. MC DOWELL & CO. LTD. 4.97 24. NIRMA LTD. 14.10 MEAN 12.87% WE REQUEST YOU TO CONSIDER THE ABOVE DATA FOR THE C OMPANY LEVEL BENCHMARKING. YOUR GOODSELF VIDE YOUR ABOVE LETTER PROPOSES TO EX CLUDE BATA INDIA AND MCDOWELL & CO. LTD. FROM THE SAID LIST ON THE B ASIS THAT THESE COMPANIES ARE ENGAGED IN PRODUCT CATEGORIES WHICH A RE DIFFERENT FROM THOSE DEALT WITH BY HINDUSTAN UNILEVER LIMITED . IN THE MATTER WE WOULD LIKE TO STATE THAT WE ARE UNABLE TO LOCATE ANY SINGLE FMCG COMPANY WHICH IS ENGAGED IN ALL THE ACTIVITIES IN W HICH WE ARE ENGAGED. HOWEVER, FOR THE PURPOSE OF A MEANINGFUL C OMPARISON OF THE OPERATING MARGIN AT COMPANY LEVEL, WE HAD SHORT LISTED 12 COMPANIES FORMING PART OF BOMBAY STOCK EXCHANGE (BS E) FMCG INDEX FOR THAT YEAR. WE ALSO ENCLOSE HEREWITH IN AN NEXURE 2 THE LIST OF COMPANIES WHICH HAVE BEEN INCLUDED/EXCLUDED FROM THE FMCG INDEX FROM THE YEAR 2005 TO 2007. YOUR GOODSEIF WIL L NOTICE THAT BATA INDIA LTD AND MCDOWELL & CO. LTD. WERE VERY MU CH A PART OF THE BSE FMCG INDEX AND THEREFORE THERE IS ABSOLUTEL Y NO REASON WHY THESE SHOULD BE EXCLUDED IN DETERMINING A COMPA RABLE BENCHMARK OF COMPANIES ENGAGED IN THE FMCG BUSINESS . THESE TWO COMPANIES ARE CONSIDERED AS FMCG COMPANIE S BECAUSE THEY ARE ENGAGED IN THE MANUFACTURE AND SALE OF PRO DUCTS WHICH ARE PURCHASED BY CONSUMERS ACROSS THE COUNTER FOR T HEIR DAILY CONSUMPTION / USE AND THEREFORE IN THAT SENSE, THEY ARE NO HINDUSTAN UNILEVER LIMITED 11 DIFFERENT FROM HINDUSTAN UNILEVER LIMITED WHICH IS ALSO ENGAGED IN MANUFACTURING PRODUCTS OF DAILY NEED. THE PURPOSE OF THE EXERCISE IS TO DETERMINE A FAIR RETURN EARNED BY FMCG COMPANIES. IF ONE WERE TO PICK AND CHOOSE COMP ANIES WHICH ARE REQUIRED TO BE INCLUDED, AND EXCLUDE COMPANIES, THOUGH CLASSIFIED AS FMCG COMPANIES BY THE BSE, AN EXTERNA L BODY, MERELY BECAUSE THESE HAVE A LOWER MARGIN PROFILE THEN THE RESULT WOULD BE VITIATED. IT IS THEREFORE SUBMITTED THAT THERE IS A BSOLUTELY NO JUSTIFICATION IN EXCLUDING BATA INDIA LTD. AND MCDO WELL & CO. LTD. FROM THE LIST OF COMPARABLES. WITHOUT PREJUDICE TO THE AFORESAID, IF YOU CHOOSE T O EXCLUDE BATA INDIA LTD. AND MCDOWELL & CO. LTD THEN WE WOULD LIK E TO SUBMIT THAT YOU MUST ALSO EXCLUDE ITC LTD, WHICH IS PREDOM INANTLY ENGAGED IN MANUFACTURE AND SALE OF TOBACCO BASED PR ODUCTS AND HOSPITALITY BUSINESS, WITH 70% OF THEIR TURNOVER CO MING FROM CIGARETTES AND 24% FROM NON-FMCG CATEGORIES LIKE HO TELS, AGRICULTURE AND PAPER IS, STRICTLY SPEAKING, NOT CO MPARABLE WITH THE PRODUCTS MANUFACTURED BY US AND INCLUDE CERTAIN OTH ER COMPANIES WHICH HAS COMMON PRODUCTS AS OURS LIKE PROCTER AND GAMBLE HOME PRODUCTS LTD., LOTTE INDIA CORPORATION LIMITED, PAR LE BISCUIT PVT. LIMITED AND AGRO TECH FOODS LIMITED. WE ENCLOSE HER EWITH IN ANNEXURE 3 A REVISED STATEMENT OF COMPARABLE COMPAN IES WITH THEIR OPERATING MARGINS. FURTHER WE WOULD LIKE TO POINT OUT THAT OUR MARGIN FOR THE CURRENT FINANCIAL YEAR WAS LOWER LARGELY BECAUSE THE COMPAN Y WAS ENGAGED IN AFIERCE BATTLE WITH ANOTHER COMPETITOR IN THE TO PEND DETERGENTS BUSINESS WHICH CONSTITUTES ABOUT 20% TO 25% OF THE COMPANYS TURNOVER AND AS A RESULT OF THE SAID BUSINESS WAS I NCURRING LOSSES. IT IS THEREFORE SUBMITTED THAT WE SHOULD ALSO BE AL LOWED TO MAKE SUITABLE ADJUSTMENTS TO THE OPERATING MARGIN TO REF LECT THE MARGIN IN RESPECT OF THE COMPANY BY EXCLUDING THE DETERGEN TS BUSINESS SINCE OUR INTERNATIONAL TRANSACTIONS IN RESPECT OF EXPORT OF GOODS DO NOT INCLUDE EXPORT OF DETERGENTS. THEREFORE, FOR THE ABOVE REASONS, WE URGE YOU TO AC CEPT THE LIST OF COMPARABLE COMPANIES USED BY US FOR THE PURPOSE OF DETERMINING THE BENCHMARK, AS CORRECT AND PROCEED ACCORDINGLY. 10. THE ASSESSEES SUBMISSIONS WERE REJECTED AND FINALL Y THE TPO MADE THE ADJUSTMENT IN THE FOLLOWING MANNER:- 9. THE OPERATING PROFIT MARGINS IN CASE OF 8 COMPA NIES (AFTER EXCLUDING THE COMPANY I.T.C. LTD. AND BRITANNIA IND USTRIES LTD., FOR THE REASONS GIVEN EARLIER) AS MENTIONED IN THE ANNE XURE WITH THE SHOW CAUSE NOTICE DATED 21.2.2008, REPRODUCED ON PA GES5 TO 6 OF THIS ORDER, WILL HAVE TO BE CONSIDERED. THE POSITIO N IS AS UNDER: HINDUSTAN UNILEVER LIMITED 12 NAME OF THE COMPANY ` (CRORES) ` (CRORES) ` (CRORES) MARCH 2006 MARCH 2006 MARCH 2006 SALES PBIT (NOI,NNRT) TC OP/TC (%) COLGATE PALMOLIVE (I) LTD. 1249.73 186.53 1063.20 17.54 DABUR INDIA LTD. 1372.39 217.66 1154.73 18.85 GLAXOMITHKLINE CONSUMER HEALTHCARE LTD. 1117.09 146.10 970.99 15.05 BRITANNIA INDUSTRIES LTD. 692.26 127.00 565.26 22.47 GODREJ CONSUMER PRODUCTS LTD. 1047.04 114.09 932.95 12.23 MARICO LTD. 2643.96 465.27 2178.69 21.36 NESTLE INDIA LTD. 2244.18 313.65 1930.53 16.25 NIRMA LTD. 970.89 134.44 83645 16.07 TATA TEA LTD. AVERAGE 17.48 HINDUSTAN UNILEVER LTD. 12271.79 1522.42 10748.65 14.16 AMOUNT OF T P ADJUSTMENT ( ` IN CRORES) TOTAL SALES OF THE ASSESSEE 12271.79 TOTAL COSTS OF ASSESSEE 10748.64 OPERATING PROFIT (I) 1522.42 OPERATING PROFIT / TOTAL COSTS 14.16% BENCHMARKING OP/TC 17.48% BENCHMARKED OPERATING PROFIT (II) 17.48% OF ` 10748.65 + 1878.86 DIFFERENCE BETWEEN II & I 356.44 (X) TOTAL SALES TO AES 689.89 (Y) (SR. NO.3 TO 6 OF PAGE1 OF THIS ORDER) ALP OF SALES TO AES = X + Y = 1046.33 95% OF ALP = 994.01 11. REGARDING ASSESSEES CONTENTION FOR THE SAFE HARBOU R BENEFIT OF +/- 5% IN RESPECT OF ADJUSTMENT IN TERMS OF PROVISO TO SECTION 92C, THE TPO CONCLUDED AS UNDER:- THE PROVISO TO SECTION 92C(4) HAS TWO LIMBS. I) ITS FIRST LIMB DEALS WITH THE SITUATION WHERE TH E MOST APPROPRIATE METHOD LEADS TO MORE THAN ONE ARMS LENGTH PRICE AN D IN THAT SITUATION THE ARMS LENGTH PRICE SHOULD BE THE ARIT HMETIC MEAN. HINDUSTAN UNILEVER LIMITED 13 II) SECOND LIMB OF THE PROVISION, PROVIDES THE FACI LITY OF OPTION TO THE TAXPAYER IF PRICE VARIES BY AN AMOUNT NOT EXCEE DING 5% OF SUCH MEAN. THUS, THE OPTION IS AVAILABLE TO THE TAXPAYER IN TH E CASE WHERE VARIATION IN PRICE IS ONLY UPTO 5% AS FOUND THROUGH ARITHMETIC MEAN. IF THE VARIATION IN PRICE IS MORE THAN 5%, TH E TAXPAYER HAS NO OPTION AND ARMS LENGTH PRICE SHALL BE DETERMINE D AS PER THE FIRST LIMB OF THE PROVISO. CIRCULAR NO. 12 OF CBDT DATED 23.8.01 ISSUED IN THE SHAPE OF PRESS NOTE BY THE MINISTRY OF FINANCE (DEPTH OF REVENUE), GOVERNMENT OF INDIA, MAKES ITS INTENTION CLEAR FOR NOT MAKING ANY ADJUSTMENT IF THE PRICE ADOPTED BY THE TAXPAYER WAS UPTO 5% LESS OR UPTO 5% MORE THAN THE ARMS LENGTH PRICE DETERMINED BY THE AO. IN EFFECT, TRANSFER PRICING SHOWN BY THE TAXPAYER WAS NOT DIST URBED IF SUCH PRICE FELL WITHIN THE RANGE OF 5% OF DETERMINED PR ICE. BUT IF THE VARIATION IN THE DISCLOSED PRICE AND THE DETERMINED ARMS LENGTH PRICE WAS MORE THAN THE ABOVE LIMIT, THEN THE CIRCU LAR PROVIDED THAT TRANSFER PRICE DECLARED BY THE TAXPAYER WAS NO T TO BE ACCEPTED AND ADJUSTMENT FOR THE VARIATION WAS REQUIRED TO BE MADE. THIS VIEW HAS NOW FURTHER BEEN CLARIFIED BY THE AME NDMENT TO THE PROVISO TO SECTION 92C(4), BY THE FINANCE ACT 2009 W.E.F. 1.10.2009. 12. EVEN AFTER MAKING THE ADJUSTMENT AT THE ENTITY LEVE L, HE MADE FURTHER ADJUSTMENT ON ACCOUNT OF RESEARCH INNOVATIO N DEVELOPMENT RELATED SERVICES. THE ASSESSEE HAS RENDERED RESEARCH INNOVA TION DEVELOPMENT RELATED SERVICES GROUP COMPANIES AND HAS SHOWN THE MARK UP OF 15.5% IN THE OPERATING COST AND THE ASSESSEE HAS SELECTED SE VEN COMPARABLE COMPANIES FOR WORKING OUT ARITHMETIC MEAN OF 18.47% IN THE FOLLOWING MANNER:- S.NO. COMPANYS NAME AVERAGE ADJUSTED OP/TC (%) 1. ALPHAGEO (I) LTD. 24.74 2. DOLPHIN MEDICAL SERVICES LTD. 11.46 3. N.G. INDUSTRIES LTD. 29.60 4. VIMTA LABS LTD. 69.49 5. NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. 0.89 6. A D S DIAGNOSTIC LTD. SEG. 9.20 7. PFIZER LTD. SERVICE SEG. 4.07 ARITHMETIC MEAN 18.47 HINDUSTAN UNILEVER LIMITED 14 13. THE TPO REJECTED THE COMPARABLES LIKE NEEMAN MANNER INTERNATIONAL ASIA LTD., ADS DIAGNOSTIC LTD. AND ALSO THE PFIZER LTD. HE INCLUDED CHOKSI LABORATORY LTD., TRANSGENE BIOTECH LTD. (SEGMENTAL) AND MEDONOVA DIAGNOSTIC SERVICES LTD. AND ANALYSED THE FOLLOWING COMPARABLES:- S.NO. COMPANYS NAME AVERAGE ADJUSTED OP/TC (%) 1. ALPHAGEO (I) LTD. 47.79 2. DOLPHIN MEDICAL SERVICES LTD. 14.52 3. N.G. INDUSTRIES LTD. 31.26 4. VIMTA LABS LTD. 57.68 5. CHOKSI LABORATORY LTD. 32.22 6. TRANSGENE BIOTECH LTD SEGMENTAL 8.16 7. MEDINOVA DIAGNOSTICS SER. LTD. 7.26 ARITHMETIC MEAN 28.41 HE ALSO REJECTED THE ASSESSEES CONTENTION FOR ADJU STMENT OF RISK AND MADE AN ADJUSTMENT IN THIS ACCOUNT IN THE FOLLOWING MANNER:- COST OF SERVICE RENDERED ` `` ` 5034.32 LACS MARK UP AS PER THE COMPARABLES (28.41) ` `` ` 6464.57 LACS ACTUAL AMOUNT RECEIVED ` `` ` 5814.72 ADJUSTMENT ` `` ` 649.85 LACS 14. THE TPO FURTHER SUGGESTED ADJUSTMENT ON ACCOUNT OF FOLLOWING PAYMENTS:- S.NO. PARTICULARS AMOUNT 1. ADJUSTMENT ON ACCOUNT OF ROYALTY PAYMENT MADE TO UNILIVER PLC ` 30,32,40,660 2. ADJUSTMENT ON ACCOUNT OF INCOME TAX PAID ON ROYALTY ` 10,00,14,000 3. ADJUSTMENT MADE OUT OF R&D CESS ` 1,73,79,000 4. ADJUSTMENT MADE ON ACCOUNT OF PAYMENT ON SERVICE TAX ` 398.72 LAKHS 5. ADJUSTMENT MADE ON ACCOUNT OF ROYALTY RECEIVABLE FROM NEPAL LIVER LTD. ` 20,29,222 HINDUSTAN UNILEVER LIMITED 15 6. ADJUSTMENT MADE ON ACCOUNT OF PAYMENT OF ROYALTY TO UNILIVER N.L. ` 1,63,649 7. ADJUSTMENT MADE ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES ` 27.09 LAKHS 8. ADVERTISEMENT AND SALES PROMOTION EXPENSES ` 27.09 LAKHS 15. HOWEVER, HE OBSERVED THAT THESE ADDITIONS ARE NOT T O BE SEPARATELY MADE AS THE SAME WILL GET SUBSUMED ON ACCOUNT OF AD JUSTMENT OF ` 356.44 CRORES. 16. LASTLY, HE MADE AN ADJUSTMENT OF UNDER-CHARGING FOR COMMON CORPORATE AUDIT SERVICE AND INTRA-GROUP SERVICE FOR A SUM OF ` 5,85,41,008. THUS, FINALLY, THE TOTAL ADJUSTMENT WA S MADE AT ` 3,68,79,26,000, COMPRISING OF THE FOLLOWING:- (I) TP ADJUSTMENT AT THE ENTITY LEVEL ` 356.44 CRORES; (II) RESEARCH INNOVATION AND DEVELOPMENT RELATED SERVICE S ` 6,49,85,000; (III) UNDERCHARGING OF COMMON CORPORATE AUDIT SERVICES AN D INTRA GROUP SERVICES ` 5,85,41,000 . 17. AGGRIEVED BY THE ADJUSTMENT MADE BY THE TPO, THE AS SESSEE FILED ITS OBJECTION BEFORE DRP WHEREIN DETAIL OBJECTION WITH REGARD TO EACH AND EVERY FINDING OF THE TPO AND THE ADJUSTMENT MADE WE RE SUBMITTED. THE DRP REJECTED THE ENTIRE CONTENTIONS OF THE ASSESSEE AND UPHELD THE ENTIRE FINDINGS OF THE TPO AS IT IS. THE ASSESSEE, BEING A GGRIEVED, IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 18. BEFORE US, THE LEARNED SR. ADVOCATE, MR. P.J. PARDI WALA, AFTER REFERRING TO THE ENTIRE FACTS AS DISCUSSED BY THE T PO VISAVIS THE CONTENTIONS AND OBJECTIONS RAISED BY THE ASSESSEE B EFORE THE TPO AS WELL AS BEFORE THE DRP WITH REFERENCE TO THE VOLUMINOUS PAPER BOOK FILED BEFORE US, RAISED A VERY PRELIMINARY OBJECTION / SU BMISSIONS, THAT THE TPO HINDUSTAN UNILEVER LIMITED 16 HAS ULTIMATELY CARRIED OUT THE BENCH MARKING AT THE ENTITY LEVEL AFTER TAKING THE ENTIRE SALES OF THE ASSESSEE COMPANY I.E ., A.E. TRANSACTIONS AS WELL AS NONA.E. TRANSACTIONS AND HAS MADE THE ADJU STMENT OF ` 356.44 CRORES, WHICH HAS BEEN WORKED OUT AFTER TAKING THE PERCENTAGE OF OPERATING PROFIT ON TOTAL COST AT 17.48% OF THE EIG HT COMPARABLE COMPANIES SHORT LISTED BY HIM, AS AGAINST THE 14.16 % OF THE OPERATING PROFIT UPON TOTAL COST OF THE ASSESSEE. EVEN IF SUC H AN ADJUSTMENT IS ACCEPTED AT THE ENTITY LEVEL, THEN THE SAME FALLS I N A SAFE HARBOUR RANGE OF +/ 5%. THIS WAS DEMONSTRATED IN THE FOLLOWING MANN ER: ( ` IN CRORES) COST BASE AS PER TPOS ORDER (PAGE-24) 10748.64 ADD: MARK-UP AS PER TPO 17.48% 1878.86 ARMS LENGTH PRICE FOR SALES (ALP) 12627.50 95% OF ALP AS PER PROVISO TO SECTION 92C(2) 11996.13 HULS SALES AS PER TPOS ORDER (PAGE 24 OF THE TP ORDER) 12271.79 THUS, THE ENTIRE ADJUSTMENT MADE BY THE TPO FALLS W ITHIN THE RANGE OF +/- 5%. AFTER REFERRING TO THE ABOVE, HE FURTHER SUBMITTED THAT THE TPO, IN FACT, WAS REQUIRED TO BENCH MARK ONLY THE TRANSA CTIONS WITH THE A.ES AND NOT THE ENTIRE SALES. IN SUPPORT OF THIS CONTEN TION THAT TP ADJUSTMENT SHOULD BE RESTRICTED TO VALUE OF INTERNATIONAL TRAN SACTIONS ONLY HE RELIED UPON VARIOUS DECISIONS OF THE TRIBUNAL IN IL JIN EL ECTRONICS INDIA PVT. LTD. V/S ACIT, 36 SOT 227 (DEL.), M/S. LIONBRIDGE TECHNO LOGIES PVT. LTD. V/S DCIT, 148 TTJ 265 (MUM.), PENZOIL QUAKER STATE INDI A LTD. V/S DCIT, ITA NO.8885/MUM./2010. HE SUBMITTED THAT IF MARK UP OF 17.48% IS APPLIED ON A.E. TRANSACTIONS, THEN ALSO IT FALLS WITHIN THE RANGE OF +/ 5%. THIS WAS ILLUSTRATED BY WAY OF FOLLOWING WORKING: HINDUSTAN UNILEVER LIMITED 17 ( ` IN CRORES) HUL TRANSACTIONS WITH A.E. 689.89 MARGIN OF HUL @ 12.28% (OP/SALES) 84.72 TOTAL COST OF HUL 605.17 ARMS LENGTH MARGIN BY TPO @ 17.48% (OP/COST) 105.78 ARMS LENGTH PRICE OF THE EXPORT TRANSACTION AS PER TPO 710.96 RANGE @ 95% 675.41 RANGE @ 105% 746.50 HUL TRANSACTIONS WITH AE AT 689.89 CRORES IS WITHIN THE RANGE OF 675.41 CRORES AND 746.50 CRORES. THEREFORE, THE TRANSACTIONS ARE AT ARM;S LENGTH. THUS, UNDER BOTH THE SCENARIO, HE SUBMITTED THAT AT THE VERY THRESH HOLD, THE ENTIRE ADJUSTMENT OF ` 356.44 CRORES GETS DELETED. IN SUPPORT OF THIS CONTENTION THAT ONLY A.E. TRANSACTIONS ARE TO BE LOOKED INTO FOR THE PURPOSE OF BENCH MARKING, HE RELIED UPON VARIOUS TR IBUNAL DECISIONS. 19. HE FURTHER SUBMITTED THAT IF A COMPARISON OF OPERAT ING MARGIN AT SEGMENTAL LEVEL IS TAKEN INTO CONSIDERATION VISAV IS A.E. AND NONA.E. TRANSACTIONS, THEN THE ASSESSEE HAS EARNED MORE OPE RATING PROFIT MARGIN IN RELATION TO A.E. TRANSACTION AS COMPARED TO NON A.E. TRANSACTION. IN SUPPORT OF THIS, HE SUBMITTED A DETAIL STATEMENT OF SEGMENTAL LEVEL ACCOUNTS ANALYSIS OF SALES / OPERATING COST, OPERAT ING MARGIN ON SALES AS WELL AS ON COST OF VARIOUS SEGMENTS LIKE HOME CARE PRODUCTS, BEVERAGES, RICE AND MARINE, CRABSTICKS, ETC., AND POINTED OUT THAT IN ALL THE SEGMENTS, THE PROFIT MARGIN ON SALES AS WELL AS ON COST IN A. E. TRANSACTIONS ARE MUCH HIGHER THAN NON-A.E. TRANSACTIONS AND, THEREFORE, I F ONE GOES BY INTERNAL COMPARABLES, THEN THE ASSESSEES PROFIT MARGIN ON A .E. TRANSACTIONS ARE AT ARMS LENGTH. THE SUMMARY OF SEGMENTAL OPERATING MA RGIN AS SUBMITTED BY THE LEARNED SR. COUNSEL ARE AS UNDER: HINDUSTAN UNILEVER LIMITED 18 H.P.C. PARTICULARS A.E. ` INR NONA.E. ` INR TOTAL ` INR SALES 3,138,252 727,673 3,865,925 ADD: DEPB / EXPORT LICENCES SALES 3,138,252 727,673 3,865,925 OPERATING COST 2,722,538 652,778 3,499,818 OPERATING MARGIN 415,714 74,895 366,107 OPERATING MARGIN (%) ON SALES OP/OS 13.25% 10.29% 9.47% OPERATING MARGIN (%) ON COST OP/OC 15.27% 11.47% 10.46% BEVERAGES PARTICULARS A.E. ` INR NONA.E. ` INR TOTAL ` INR SALES 33,804,065 1,076,219 4,880,284 ADD: DEPB / EXPORT LICENCES (31,234) 620 (30,614) SALES 3,772,831 1,076,839 4,849,670 OPERATING COST 3,587,559 1,084,452 4,672,011 OPERATING MARGIN 216,506 (8,233) 208,273 OPERATING MARGIN (%) ON SALES OP/OS 5.74% 0.76% 4.29% OPERATING MARGIN (%) ON COST OP/OF THE CASE 6.03% 076% 4.46% RICE & MARINE PARTICULARS A.E. ` INR NONA.E. ` INR TOTAL ` INR SALES 124,118 1,743,206 1,867,324 ADD: DEPB / EXPORT LICENCES SALES 124,118 1,743,206 1,867,324 OPERATING COST 116,500 1,691,732 1,808,232 OPERATING MARGIN OP/OS 7,618 51,474 59,092 OPERATING MARGIN (%) ON SALES OP/OC 6.14% 2.95% 3.16% OPERATING MARGIN (%) ON COST OP/OS 6.54% 3.04% 3.27% CRABSTICKS OTHERS PARTICULARS A.E. ` INR NONA.E. ` INR TOTAL ` INR OTHERS ` INR SALES 109,659 180,857 290,516 1,907,851 ADD: DEPB / EXPORT LICENCES SALES 109,659 180,857 290,516 1,907,851 OPERATING COST 112,638 192,074 304,712 2,006,543 OPERATING MARGIN (2,979) (11,217) (14,196) (98,692 ) OPERATING MARGIN (%) ON SALES OP/OC 2.72% 6.20% 4.89% 5.17% OPERATING MARGIN (%) ON COST OP/OS 2.64% 5.84% 4.66% 4.92% HINDUSTAN UNILEVER LIMITED 19 HUL PARTICULARS A.E. ` INR NONA.E. ` INR TOTAL ` INR 56.01% 43.99% SALES 7,176,094 5,635,806 12,811,900 ADD: DEPB / EXPORT LICENCES (31,234) 620 (30,614) SALES 7,144,860 5,636,426 10,873,435 OPERATING COST 6,539,235 5,627,579 12,29,316 OPERATING MARGIN 636,859 8,227 520,584 OPERATING MARGIN (%) ON SALES OP/OC 8.87% 0.15% 4.06% OPERATING MARGIN (%) ON COST OP/OS 9.74% 0.15% 4.24% 20. IN SUPPORT OF THIS CONTENTION THAT INTERNAL COMPARA BLES ARE PREFERABLE OVER EXTERNAL COMPARABLES EVEN UNDER THE TNMM, THE LEARNED SR. COUNSEL HEAVILY RELIED UPON THE THIRD MEMBER DE CISION OF THE TRIBUNAL IN TECHNIMONT ICB PVT. LTD. V/S ACIT, ITA NO.4608 & 50 85/MUM./2010, ORDER DATED 12 TH JULY 2012 , AND DREW OUR ATTENTION TO PARA10 OF THE SAID ORDER. HE SUBMITTED THAT WITHOUT GOING INTO THE MER ITS OF VARIOUS FINDINGS OF THE TPO AS WELL AS INCLUSION AND EXCLUSION OF CO MPARABLE COMPANIES, THE ENTIRE ADJUSTMENT MADE BY THE TPO GETS VITIATED . ONCE THE TPO HAS MADE THE ADJUSTMENT ON ENTIRE SALES AND AT ENTITY L EVEL, THE OTHER ADJUSTMENTS AUTOMATICALLY GETS SUBSUMED AND NO FURT HER ADJUSTMENTS EVEN ON ACCOUNT OF RESEARCH INNOVATION AND DEVELOPM ENT RELATED SERVICES AND UNDERCHARGING FOR COMMON CORPORATE AUDITED SER VICES AND INTRA GROUP SERVICES CAN BE MADE. 21. THE LEARNED SR. COUNSEL SUBMITTED THAT VARIOUS OBJE CTIONS AND THE CONCLUSIONS DRAWN BY THE TPO WITH REGARD TO THE AUT HENTICITY OF SEGMENTAL ACCOUNTS, HE SUBMITTED THAT THE ASSESSEE HAD SUBMIT TED AUDITED SEGMENTAL ACCOUNTS BEFORE THE DRP WHICH WAS CONFRON TED TO THE TPO AND NO ADVERSE REMARKS WERE GIVEN ON SUCH AUDITED ACCOU NTS. HE SUBMITTED THAT MOST OF THE DIRECT EXPENSES HAVE BEEN APPORTIO NED TO THE RESPECTIVE SEGMENTS BASED ON ACTUAL EXPENDITURE INCURRED AND O THER OVER HEADS EXPENSES WHICH WERE ALLOCATED IN PROPORTION TO SALE S. REGARDING THE DISCREPANCIES POINTED OUT BY THE TPO IN HIS ORDER, HE CLARIFIED EACH AND HINDUSTAN UNILEVER LIMITED 20 EVERY POINT AND ALSO THE SO CALLED DISCREPANCIES AN D DREW OUR ATTENTION TO ANNEXURE-N TO LETTER DATED 28 TH SEPTEMBER 2009, GIVEN BEFORE THE TPO GIVING THE SEGMENTAL DETAILS AND METHOD OF DETERMIN ING THE COST. THUS, THE ALLOCATION OF THE EXPENSES WERE PERFECTLY CORRE CT AND, THEREFORE, GOING BY THE RESULTS OF A.E. TRANSACTIONS AT THE SEGMENTA L LEVEL, NO ADJUSTMENT IS REQUIRED TO BE MADE IN THE ALP. ACCORDINGLY, THE EN TIRE ADJUSTMENT MADE BY THE TPO SHOULD BE DELETED AT THE VERY THRESH HOL D LEVEL WITHOUT GOING INTO THE MERITS OF INCLUSION AND EXCLUSION OF COMPA RABLE COMPANIES AND OTHER ADJUSTMENTS. 22. THE LEARNED SR. COUNSEL, AFTER MAKING THESE PRELIMI NARY SUBMISSIONS ALSO MADE A VERY ELABORATE SUBMISSION NOT ONLY WITH REGARD TO EACH AND EVERY OBJECTIONS AND CONCLUSIONS DRAWN BY THE TPO B UT ALSO WITH REGARD TO VARIOUS ADJUSTMENTS MADE ON ACCOUNT OF VARIOUS ROYA LTY PAYMENTS, ROYALTIES RECEIVED, SALES PROMOTION AND ADVERTISEME NT EXPENSES, R&D CESS, ETC., AS DISCUSSED BY THE TPO, WITH REFERENCE TO THE MATERIAL PLACED ON RECORD BEFORE THE TPO AS WELL AS THE DRP. THESE SUBMISSIONS ARE, HOWEVER, NOT DISCUSSED BY US. 23. THE BENCH REQUIRED THE LEARNED DEPARTMENTAL REPRESE NTATIVE TO MAKE SUBMISSIONS ON THE PRELIMINARY SUBMISSIONS MAD E BY THE LEARNED SR. COUNSEL WHICH, IN OUR OPINION, GOES TO THE VERY ROO T OF THE ISSUE INVOLVED. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT IF THE NATURE OF INTERNATIONAL TRANSACTIONS TAKEN BY THE ASSESSEE CO MPANY IS TAKEN INTO CONSIDERATION THEN IT WOULD BE SEEN THAT THE SAME A RE ON INCOME AS WELL AS EXPENDITURE SIDE. THE ASSESSEE ITSELF HAS BENCH MARKED ITS INTERNATIONAL TRANSACTIONS AT THE ENTITY LEVEL WHICH SHOWS THAT O RIGINAL APPROACH OF THE ASSESSEE WAS TO BENCH MARK INTERNATIONAL TRANSACTIO NS AT THE ENTITY LEVEL BY AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE CAME OUT FOR THE FIRST TIME THE IDEA OF BENCH MARKING AT THE SEGMENTAL LEVEL BEFORE THE TPO IN THE SECOND INNINGS ONLY. THESE SEGMENTAL RESULTS FURNISHED BEFORE THE TPO WERE UNAUDITED AND THE ASSESSEE WAS UNABLE TO SUBSTANTIATE EVEN A SINGLE SEGMENT. FOR THIS, HE RE FERRED TO THE FINDINGS OF HINDUSTAN UNILEVER LIMITED 21 THE TPO GIVEN AT PAGE10. HE SUBMITTED THAT THE TPO HAS ANALYZED THE SEGMENTAL DATA AND HAS GIVEN A DETAIL REASONS FOR R EJECTING THE SAME. THE SO CALLED AUDITED SEGMENTAL DATA WHICH WAS PROVIDED TO THE DRP ON 16 TH SEPTEMBER 2010, THE DRP HAS REJECTED THE SAME AFTER CALLING THE COMMENTS OF THE TPO. REGARDLESS OF THAT, HE SUBMITT ED THAT THE AUDITED SEGMENTAL DATA CANNOT BE CONSIDERED BY THIS BENCH O N ACCOUNT OF FOLLOWING DISCREPANCIES. (I) THE ASSESSEE COULD NOT BROUGHT ON RECORD THAT THERE WAS ONLY THE APPROVAL OF THE BOARD OF DIRECTORS TO APPOINT M/S. M.L. PURI & CO., AS AUDITORS FOR AUDIT ING STATEMENT OF OPERATING MARGIN OF EACH SEGMENT; (II) THE REPORT OF M/S. M.L. PURI & CO. HAS TO BE SEEN I N THE LIGHT OF GUIDANCE NOTE OF ICAI ON AUDIT REPORT AND CERTIFICATE FOR SPECIAL PURPOSE; (III) NOWHERE THE REPORT STATES THAT EXPENDITURE IN DIFFE RENT SEGMENT IS ALLOCATED BASED ON SOME KEYS; (IV) THERE ARE SOME EXCEPTIONAL ADJUSTMENTS IN THE OPERATING MARGIN FOR HUMAN AND PERSONAL CARE SEGMENT; (V) THUS, THE REPORT PREPARED BY M/S. M.L. PURI & CO., CANNOT BE SAID TO BE RELIABLE; 24. INSOFAR AS RELIANCE OF THIRD MEMBER DECISION OF THE TRIBUNAL IN TECHNIMONT (SUPRA) IS CONCERNED, THE SAME CAN ONLY BE RELIED IF RELIABLE DATA IS AVAILABLE FOR THE INTERNAL COMPARABLE. 25. ON THE ISSUE OF BENCH MARKING AT THE ENTITY LEVEL A ND APPLICATION OF SAFE HARBOUR RANGE OF +/ 5%, THE LEARNED DEPARTMEN TAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS BENCH MARKED ITS MA RGIN AT THE ENTITY HINDUSTAN UNILEVER LIMITED 22 LEVEL AND HAS COMPUTED MARGIN ON OPERATING PROFIT U PON OPERATING REVENUE AT 12.28%, WHEREAS THE MEAN MARGIN OF 12 COMPARABLE COMPANIES TAKEN BY THE ASSESSEE WAS COMPUTED @ 12.87%. THUS, THE OR IGINAL APPROACH OF THE ASSESSEE WAS TO BENCH MARK THE INTERNATIONAL TR ANSACTION ON THE ENTITY LEVEL BY AGGREGATING ALL THE INTERNATIONAL TRANSACT IONS. THEREFORE, THE PLEA TAKEN BY THE LEARNED SR. COUNSEL THAT ONLY A.E. TRA NSACTION SHOULD BE TAKEN INTO ACCOUNT, NOW CANNOT BE ENTERTAINED. HE F URTHER SUBMITTED THAT THE ARMS LENGTH PRICE OF THE TRANSACTIONS WITH ASS OCIATED ENTERPRISES IS TO BE COMPUTED FOLLOWING THE PROVISIONS OF THE ACT AND THE LAW DOES NOT REQUIRE COMPUTING THE ARMS LENGTH PRICE OF THE TRA NSACTIONS WITH INDEPENDENT PARTIES. THERE IS AN INHERENT PRESUMPTI ON THAT THE TRANSACTIONS WITH THE INDEPENDENT PARTIES SHALL ALW AYS BE AT ARMS LENGTH. SO IF THE TRANSACTIONS WITH THE INDEPENDENT PARTIES ARE AT ARMS LENGTH THEN WHAT IS PULLING THE MARGIN OF THE ASSESSEE COM PANY DOWN? IT IS OBVIOUS THAT THE MARGIN OF THE ASSESSEE IS DOWN VIS -A-VIS THE ARMS LENGTH MARGIN ONLY BECAUSE OF THE TRANSACTIONS WITH THE AS SOCIATED ENTERPRISES. THUS, WHATEVER IS THE SHORTFALL THAT IS ATTRIBUTED TO THE TRANSACTIONS WITH THE ASSOCIATE ENTERPRISES. SINCE THE MARGIN FROM TH E INDEPENDENT TRANSACTIONS AND INTERNATIONAL TRANSACTIONS CANNOT BE COMPUTED SEPARATELY, UNLESS THE MARGIN IS APPLIED ON THE ENT ITY LEVEL, THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION CANNO T BE COMPUTED. IN VIEW OF THE ABOVE, HE SUBMITTED THAT THE ADJUSTMENT MADE BY THE TPO IS JUSTIFIED AND OUGHT TO BE CONFIRMED. 26. AFTER MAKING THE AFORESAID SUBMISSIONS, HE ALSO SUB MITTED THE STATEMENT FOR THE ALP DETERMINATION OF THE INTERNAT IONAL TRANSACTIONS TO COUNTER ASSESSEES SUBMISSIONS ON ACCOUNT OF SAFE H ARBOUR RANGE OF +/ 5%. HINDUSTAN UNILEVER LIMITED 23 TOTAL AE TRANSACTION NON AE TRANSACTION SALES OF THE ASSESSEE 12271.79 A 689.89 11581.9 SINCE NON AE TRANSACTIONS ARE AT ARMS LENGTH HENCE APPLY THE ARMS LENGTH MARGIN I.E., 17.48% TO ARRIVE AT THE COST 11581.90 / 117.48% COST 10748.65 B 890.03 9858.61 APPLY THE ARMS LENGTH MARGIN ON THE COST USED TO EARN THE AE SALES C 155.58 ARMS LENGTH PRICE OF SALES MADE TO THE AES D=B+C 1045.61 DIFFERENCE OF ARMS LENGTH PRICE AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE E=DA 355.72 95% OF ARMS LENGTH PRICE 993.33 27. IN THE REJOINDER, THE LEARNED SR. COUNSEL, MR. P.J. PARDIWALA, SUBMITTED THAT SO FAR AS THE LEARNED DEPARTMENTAL R EPRESENTATIVES CONTENTION THAT SEGMENTAL ACCOUNTS HAVE NOT BEEN AU DITED IN ACCORDANCE WITH THE ICAI GUIDELINES, IT IS NOBODYS CASE NEITH ER OF THE TPO NOR OF THE DRP, THAT THE SAME IS NOT IN ACCORDANCE WITH THE IC AI GUIDELINES. THE ASSESSEE HAS SUBMITTED THE AUDITED SEGMENTAL ACCOUN TS BEFORE THE DRP WHICH WAS ALSO CONFRONTED TO THE TPO AND NO SUCH AD VERSE REMARKS HAVE HINDUSTAN UNILEVER LIMITED 24 BEEN GIVEN BY ANY OF THE AUTHORITIES. EVEN BEFORE T HE TPO, THE ASSESSEE, VIDE LETTER DATED 5 TH MARCH 2009, A COPY OF WHICH IS PLACED AT PAPER BOO K AT PAGES433, HAS SUBMITTED THE BASIS OF ALLOCATION OF EXPENSES FOR SEGMENTAL ACCOUNTS IN THE FOLLOWING MANNER: IN RELATION TO THE KEYS OF ALLOCATION OF EXPENDITUR E BETWEEN THE SEGMENTS, PLEASE NOTE THE FOLLOWING: DIRECT EXPENDITURE LIKE RAW MATERIAL AND PACKING CO ST, POWER AND FUEL, ETC., INCURRED FOR MANUFACTURING ACTIVITIES ARE APPORTIONED TO THE RESPECTIVE SEGMEN T BASED ON ACTUAL EXPENDITURE INCURRED. OVER HEAD EXPENDITURES ARE ALLOCATED IN PROPORTION TO SALES . FROM THIS, HE SUBMITTED THAT THE BASIS FOR ALLOCATI ON OF EXPENDITURE WHICH WAS THE MAIN REASON FOR REJECTING THE REJECTI ON OF SEGMENTAL ACCOUNT BY THE TPO BECOMES BASELESS. MOREOVER, ONCE AN AUDITED SEGMENT ACCOUNTS HAVE BEEN FURNISHED AND NO FAULT H AS BEEN FOUND, THE SAME CANNOT BE REJECTED ON THE REASONING GIVEN BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE AND, HENCE, IT SHOULD B E ACCEPTED. REGARDING EXCEPTIONAL ADJUSTMENTS IN THE HUMAN CARE SEGMENT P RODUCTS, THE LEARNED SR. COUNSEL HAD PROVIDED THE RELEVANT DETAILS TO CL ARIFY THE SAID ADJUSTMENTS. HE ALSO REFERRED TO ANNEXUREN TO LETT ER DATED 28 TH SEPTEMBER 2009, GIVING SEGMENTAL DETAILS AND METHOD OF DETERMINING THE COST AND POINTED OUT, THAT MOST OF THE EXPENSES HAV E BEEN IDENTIFIED ON FACTORY ACTUALS BASED ON FACTORY PRODUCTS AND HEAD OFFICE BASED SALES VALUE AND BILL OF MATERIAL. THUS, THERE WAS NO BASI S FOR DOUBTING THE ALLOCATION OF PRORATA EXPENSES AND THE OPERATING M ARGIN OF THE VARIOUS SEGMENTS. REGARDING ENTITY LEVEL ADJUSTMENT, HE SUB MITTED THAT WHAT THE ASSESSEE HAS BEEN OBJECTING IS THAT THE ENTIRE TRAN SACTIONS SHOULD NOT BE TAKEN INTO ACCOUNT AND THEREBY APPLYING OPERATING M ARGIN OF 17.48%, OTHERWISE IT WILL LEAD TO ABSURD RESULTS. THE TPO S HOULD HAVE TAKEN ONLY THE A.E. TRANSACTIONS I.E., INTERNATIONAL TRANSACTI ONS FOR THE PURPOSE OF BENCH MARKING AND NOT THE ENTIRE TURNOVER. REGARDIN G THE WORKING OF +/ 5% GIVEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE , HE SUBMITTED THAT HINDUSTAN UNILEVER LIMITED 25 THERE IS INHERENT CONTRADICTION WHILE WORKING OUT T HE COST AS HE HAS WORKED OUT THE COST IN PROPORTION TO THE ENTIRE SALES OF T HE ASSESSEE. EVEN OTHERWISE ALSO, BY WHATEVER YARDSTICK, WHETHER BENC H MARKING THE OPERATING MARGIN AT THE ENTITY LEVEL FOR THE ENTIRE TRANSACTIONS (I.E., A.E. OR NONA.E) OR WHETHER GOING BY A.E. TRANSACTIONS, THE ASSESSEES CASE FALLS WITHIN THE RANGE OF +/ 5% AS STATED IN THE FOREGOI NG PARAGRAPHS AND NO FAULT HAS BEEN FOUND IN SUCH A WORKING EVEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. THUS, ON THE THRESH HOLD ITSELF, TH E ENTIRE ADJUSTMENT MADE BY THE TPO SHOULD BE DELETED. 28. BOTH THE PARTIES HAVE ALSO ADDRESSED US IN DETAIL W ITH REGARD TO THE ADJUSTMENT WHICH HAS BEEN ADDED SEPARATELY BY THE T PO AND ALSO THE VARIOUS OTHER ADJUSTMENTS RELATING TO ROYALTY, ETC. , WHICH HAS BEEN SUBSUMED BY THE TPO IN THE FIGURE OF ` 356.44 CRORES, WITH REFERENCE TO THE MATERIAL PLACED IN THE PAPER BOOK, HOWEVER, THE SAME ARE NOT DISCUSSED. 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS WITH REFERENCE TO THE MATERIAL PLACED ON RECORD AND ALSO THE ORDERS P ASSED BY THE TPO AS WELL AS BY THE DRP. THE ASSESSEE HAS SHOWN TOTAL TU RNOVER OF ` 12271.79 CRORES FROM ALL ITS SEGMENTS AND TOTAL OPERATING IN COME HAS BEEN SHOWN AT ` 12379.73 CRORES AFTER INCLUDING OTHER INCOME FROM SERVICES ON WHICH, THE OPERATING PROFIT MARGIN HAVE BEEN SHOWN AT 12.28%. IN THE T.P. STUDY REPORT, THE ASSESSEE HAS MAINLY FOLLOWED TNNM FOR I TS INTERNATIONAL TRANSACTIONS AND HAS TAKEN 12 COMPARABLE COMPANIES ON THE BASIS OF BSE FMCG INDEX. THE ARITHMETIC MEAN OF SUCH COMPARABLES WORKED OUT AT 12.87%, AS PER THE DETAILS GIVEN IN THE FOREGOING P ARAGRAPH NO.3. THUS, IT WAS CLAIMED THAT THE ASSESSEES INTERNATIONAL TRANS ACTIONS WERE AT ARMS LENGTH. THE TPO, IN HIS ORIGINAL ORDER DATED 7.3.20 08, PASSED U/S 92CA(3), MADE AN ADJUSTMENT OF ` 356.44 CRORES, AFTER TAKING ASSESSEES PROFIT MARGIN AT 14.16% (OP/TC) AND COMPARING THE SAME WIT H THE COMPARABLE SHORT LISTED BY HIM WHEREIN THE ARITHMETIC MEAN WOR KED OUT AT 17.48% (OP/TC). FURTHER, ADDITION OF ` 5.85 CRORES WAS ALSO MADE ON ACCOUNT OF HINDUSTAN UNILEVER LIMITED 26 UNDERCHARING OF CERTAIN SERVICES. THIS ORDER WAS SE T ASIDE BY THE HIGH COURT IN A WRIT PETITION FILED BY THE ASSESSEE, MAI NLY ON THE GROUND THAT NO PROPER OPPORTUNITY WAS GIVEN TO THE ASSESSEE TO COR ROBORATE THE FACTS AND VARIOUS OTHER ARGUMENTS SPECIFICALLY WITH REGARD TO SEGMENTAL ACCOUNTS WHICH HAVE NOT BEEN TAKEN INTO CONSIDERATION. IN CO MPLIANCE WITH THE DIRECTIONS OF THE HIGH COURT, THE TPO CARRIED OUT F RESH TRANSFER PRICING PROCEEDINGS AND REJECTED ALL THE ASSESSEES CONTENT IONS SPECIFICALLY WITH REGARD TO BENCH MARKING THE TRANSACTIONS ON SEGMENT AL BASIS, WHICH HAS BEEN DISCUSSED IN DETAIL IN THE FOREGOING PARAGRAPH S. THE TPO HAS VIRTUALLY REPEATED THE SAME ADJUSTMENT MADE BY THE EARLIER TP O IN HIS ORDER DATED 7 TH MARCH 2008, BY TAKING THE AVERAGE OPERATING PROFIT OF THE COMPARABLES AT 17.48% AS COMPARED TO THE ASSESSEES OPERATING P ROFIT / TOTAL COST AT 14.16%. THE TPO HAS BENCH MARKED THE TRANSACTIONS A T THE ENTITY LEVEL AFTER TAKING THE ENTIRE TURNOVER I.E., TRANSACTIONS WITH A.E. AS WELL AS NON A.E. THE MAIN CONTENTION OF THE LEARNED SR. COUNSEL BEFORE US IS THAT THE TPO WAS REQUIRED TO BENCH MARK THE A.E. TRANSACTION S ONLY, WHICH WERE AT ` 689.89 CRORES AND IF THE ARMS LENGTH MARGIN TAKEN BY THE TPO AT 17.48% IS APPLIED, THEN THE SAME FALLS WITHIN THE S AFE HARBOUR RANGE OF +/ 5%. EVEN OTHERWISE ALSO, IF THE SAID MARKUP OF 17.48% IS APPLIED AT THE ENTITY LEVEL, THEN ALSO, THE DIFFERENCE IS 3.32 % WHICH ALSO FALLS WITHIN THE SAFE HARBOUR RANGE OF +/ 5%. THE SAID WORKING SUBMITTED BY THE LEARNED SR. COUNSEL HAS ALREADY BEEN REPRODUCED IN THE FOREGOING PARAGRAPH NO.18. WE HAVE TO EXAMINE FIRSTLY, AS TO WHETHER THE BENCH MARKING SHOULD BE DONE AT A.E. TRANSACTIONS ONLY OR FOR THE ENTIRE TRANSACTIONS (INCLUDING A.E. AS WELL AS NONA.E.) A ND SECONDLY, WHETHER THE ADJUSTMENT IN ALP BY THE TPO FALLS WITHIN THE S AFE HARBOUR RANGE OF +/ 5%. 30. PROVISIONS OF SECTION 92 PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP . THUS, THE ALP HAS TO BE ON INTERNATIONAL TRANSACTIO N AND NOT IN RELATION TO ASSESSEES ENTIRE SALES OR TURNOVER. THE SECOND PROVISO TO SECTION 92C, HINDUSTAN UNILEVER LIMITED 27 THOUGH BROUGHT IN STATUTE BY THE FINANCE ACT, 2009, W.E.F. 1 ST OCTOBER 2009, PROVIDES THAT IF THE VARIATION BETWEEN ALP SO DETERMINED AND THE PRICE AT WHICH INTERNATIONAL TRANSACTION HAS ACTUAL LY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ALP , HOWEVER, THE SAME IS INDICATIVE OF THE PREPOSITION THAT THE ALP IS TO BE DETERMINED ONLY O N INTERNATIONAL TRANSACTION. THIS, INTERALIA, MEANS THAT THE STATU TE ITSELF PROVIDES THAT THE ADJUSTMENT ARISING OUT OF ALP SHOULD BE WITH REGARD TO INTERNATIONAL TRANSACTION AND NOT ON THE ENTIRE TURNOVER OF THE A SSESSEE. THE TRANSFER PRICING MECHANISM REVOLVES AROUND INTERNATIONAL TRA NSACTION WHERE IT HAS TO BE SEEN WHETHER SUCH TRANSACTIONS ARE AT ARMS L ENGTH PRICE OR NOT. THE PRESUMPTION IS THAT TRANSACTIONS WITH THE INDEPENDE NT PARTIES ARE ALWAYS AT ARMS LENGTH PRICE, HOWEVER, IT IS WITH REGARD T O RELATED PARTIES I.E., A.ES, ONLY ONE HAS TO SEE WHETHER SUCH A TRANSACTIO N IS AT ARMS LENGTH. THE PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTIO N WITH THE A.E. HAS TO BE SEEN IN RELATION TO THE UNCONTROLLED TRANSACTION WI TH THE INDEPENDENT PARTIES. WHAT IS TO BE COMPARED IS THE INTERNATIONA L TRANSACTIONS OF THE ASSESSEE WITH ITS RELATED PARTIES AND NOT FOR ITS E NTIRE TRANSACTION WITH NONRELATED PARTIES ALSO. THEREFORE, ALP HAS TO BE SEEN ONLY WITH REGARD TO INTERNATIONAL TRANSACTION WITH A.ES AND NOT ON THE ENTIRE TURNOVER / SALES. WE, THUS, AGREE WITH THE CONTENTIONS OF THE LEARNED SR. COUNSEL THAT BENCH MARKING SHOULD BE DONE ONLY ON A.E. TRANSACTIONS AN D NOT FOR THE ENTIRE TURNOVER. 31. NOW WE HAVE TO BASICALLY EXAMINE WHETHER THE ADJUST MENT IN ALP FALLS WITHIN SAFE HARBOUR OF +/ 5% OR NOT. SECTION 92C PROVIDES THAT THE ASSESSEES ALP ALONG WITH PRICE IN RELATION TO INTE RNATIONAL TRANSACTIONS SHALL BE DETERMINED BY FOLLOWING ANY OF THE METHODS , BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF T RANSACTION AND THE MOST APPROPRIATE METHOD SHOULD BE APPLIED FOR DETER MINING OF ALP. THE PROVISO TO SECTION 92C(2) PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ALP SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICE OR AT THE OPTIO N OF THE ASSESSEE A PRICE HINDUSTAN UNILEVER LIMITED 28 WHICH MAY VARY FROM ARITHMETIC MEAN BY AN AMOUNT NO T EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. THE BASIC PHILOSOPHY AND CO NCEPT BEHIND THE PROVISO IS THAT IN TRANSFER PRICING, THERE CANNOT BE EXACT DETERMINATION OF ALP AS THERE ARE LOT OF FACTORS AND VARIABLES IN CO MING TO A PROPER JUDGMENT. THE USE OF RANGE OF 5% IN THE RESULTS RED UCES THE EFFECT OF DIFFERENCE IN THE CONTROLLED AND UNCONTROLLED TRAN SACTIONS. THE CBDT, VIDE CIRCULAR NO.12/2001 DATED 23 RD AUGUST 2001, LAYING DOWN THE GUIDELINES FOR APPLYING THE NEWLY INTRODUCED TRANSFER PRICING REGIME STATED AS UNDER: HOWEVER, THIS IS A NEW LEGISLATION. IN THE INITIAL YEARS OF ITS IMPLEMENTATION, THERE MAY BE ROOM FOR DIFFERENT INT ERPRETATIONS LEADING TO UNCERTAINTIES WITH REGARD TO DETERMINATI ON OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. WHILE IT WOULD BE NECESSARY TO PROTECT OUR TAX BASE, THERE IS A NEED TO ENSURE THAT THE TAXPAYERS ARE NOT PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS. IN THE BACKGROUND, THE BOARD HAS DECIDED THE FOLLOW ING: (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJU STMENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER, IF S UCH PRICE IS UP TO 5% LESS OR UP TO 5% MORE THAN THE PRICE DETERMIN ED BY THE ASSESSING OFFICER. IN SUCH CASES THE PRICE DECLARED BY THE TAXPAYER MAY BE ACCEPTED. THIS CONCEPT WAS GIVEN STATUTORY FORM IN THE FINANC E ACT, 2002, BY PROVIDING THE PROVISO TO SECTION 92C(2). THUS, THE STATUTE ITSELF RECOGN ISES THAT IF THE VARIATION BETWEEN ALP SO DETERMINED AND THE PRICE AT WHICH INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN VARIA TION OF ARITHMETIC MEAN SHOULD BE WITHIN TOLERABLE RANGE OF +/ 5%. 32. NOW, WE COME TO THE APPLICATION OF SAFE HARBOUR RAN GE OF +/ 5% IN THIS CASE. THE APPLICATION OF +/ 5% TO THE ALP IN THIS CASE CAN BE DEMONSTRATED BY WAY OF THE FOLLOWING ILLUSTRATION: HINDUSTAN UNILEVER LIMITED 29 FIGURES IN CRORES 1. OPERATING EXPENDITURE ATTRIBUTABLE TO A.E. SALES ` 100 2. NET PROFIT OF THE ASSESSEE FROM A.E. SALES (OC / TC) ` 14.16 3. OPERATING PROFIT % OF THE ASSESSEE 14.16% 4. A.E. SALES ` 114.16 5. IF THE PROFIT MARGIN, AS DETERMINED BY THE TPO, IS TAKEN AT 17.48%, THEN THE ARMS LENGTH SALES WOULD COME TO ` 117.48 6. THUS, THE DIFFERENCE IN TRANSACTIONS PRICE AND ALP WOULD BE ` 117.48 ( ) ` 114.16 ` 3.32 7. RANGE OF A.E. SALES CONSIDERING 5% VARIATION FROM ALP +5% OF ` 117.48 5% OF ` 117.48 ` 123.35 ` 111.61 THUS, +/ 5% RANGE FALLS BETWEEN ` 111.61 CRORES AND ` 123.35 CRORES. HENCE, THE ASSESSEES PROFIT AT 114.16% IS WITHIN THE RANGE. NOW, LET US EXAMINE THE ASSESSEES A.E. TRANSACTIONS. FIGURES IN CRORES 1. ACTUAL TRANSACTION WITH A.E. ` 689.89 2. MARGIN OF ACTUAL @ 14.16% AND OP/OC COST TAKEN BY THE TPO ` 97.69 3. TOTAL COST OF ACTUAL ` 592.20 4. ARMS LENGTH MARGIN BY THE TPO @ 17.48% ` 105.78 5. ALP OF THE A.E. TRANSACTIONS AS PER TPO WILL WORK OUT TO ` 710.96 6. RANGE @ 95% ` 675.41 7. RANGE @ 105% ` 746.50 HINDUSTAN UNILEVER LIMITED 30 THUS, THE ASSESSEES TRANSACTIONS WITH A.E. AT ` 689.89 CRORES IS WITHIN THE RANGE OF ` 675.41 CRORES AND ` 746.50 CRORES. THEREFORE, THE TRANSACTIONS OF THE ASSESSEE WITH THE A.ES ARE AT A RMS LENGTH, EVEN AS PER THE ALP TAKEN BY THE TPO AT ` 710.96. 33. IN THE PRESENT CASE, THE TPO HAS APPLIED MARKUP OF 17.48% AT THE ENTITY LEVEL AFTER TAKING INTO ENTIRE TRANSACTIONS. IF THE MARKUP OF 17.48% IS APPLIED, ON THE ENTIRE TRANSACTIONS, THEN, FOLLO WING RESULTS WILL EMERGE: FIGURES IN CRORES 1. COST BASED AS PER TPO ` 10748.64 2. AT MARKUP OF 17.48% ` 1878.86 3. ALP FOR THE SALES [ ` 10748.64 (+) 1878.86] 12627.50 4. 95% ` 12627.50 ` 11996.13 5. ASSESSEES SALES AS PER THE TPO ` 12271.79 34. THUS, FROM THIS WORKING ALSO, AT THE ENTITY LEVEL, THE ASSESSEES TRANSACTIONS FALLS WITHIN THE RANGE OF +/ 5%. THER EFORE, IN OUR CONCLUSION, BY WHATEVER APPROACH, BENCH MARKING IS DONE, THE EN TIRE ADJUSTMENT MADE BY THE TPO FALLS WITHIN THE SAFE HARBOUR OF +/ 5%. INSOFAR AS THE CALCULATION FURNISHED BY THE LEARNED DEPARTMENTAL R EPRESENTATIVE IS CONCERNED, WE DO NOT FIND ANY MERIT IN THE SAID CAL CULATION IN VIEW OF OUR ANALYSIS GIVEN ABOVE. THUS, AT THE VERY THRESH HOLD LEVEL ITSELF, THE ENTIRE ADJUSTMENT MADE BY THE TPO STANDS DELETED. 35. IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT IF BE NCH MARKING IS BEING DONE AT THE ENTITY LEVEL EITHER FOR THE A.E. TRANSACTION OR FOR THE ENTIRE TRANSACTIONS, THEN THERE IS NO REQUIREMENT O F ANY FURTHER ADJUSTMENTS AS ALL THE ADJUSTMENTS MADE BY THE TPO / ASSESSING OFFICER INCLUDING THAT OF RESEARCH INNOVATION AND DEVELOPME NT RELATED SERVICES AND UNDERCHARGING FOR COMMON CORPORATE AUDIT AND IN TRA GROUP SERVICES HINDUSTAN UNILEVER LIMITED 31 WILL GET AUTOMATICALLY SUBSUMED INCLUDING THOSE ADJ USTMENTS ALSO RELATING TO ROYALTY, ETC. AS DONE BY THE TPO. 36. IN VIEW OF THE ABOVE FINDINGS, THE OTHER ARGUMENTS WITH REGARD TO THE SEGMENTAL ACCOUNTS VISAVIS INTERNAL COMPARABL ES AND THAT THE ASSESSEES PROFIT MARGIN ON A.E. TRANSACTIONS ARE F AR MORE THAN THE NON A.E. TRANSACTIONS AND VARIOUS OTHER ADJUSTMENTS LIK E PAYMENT OF ROYALTY, RECEIVING OF ROYALTY, ADVERTISEMENT AND SALES PROMO TION AND ADVERTISEMENT, ADJUSTMENT OUT OF R&D CESS, PAYMENT OF SERVICE TAX, RESEARCH AND INNOVATION DEVELOPMENT RELATED SERVICE S AND UNDERCHARGING FOR CENTRAL SERVICES, HAVE BECOME PURELY ACADEMIC A ND, HENCE, THE SAME ARE NOT ADJUDICATED UPON EVEN THOUGH BOTH THE PARTI ES HAVE ARGUED AT LENGTH. THUS, ON THIS PRELIMINARY GROUND ITSELF, TH E ENTIRE TRANSFER PRICING ADJUSTMENT OF ` 368,79,26,000 STANDS DELETED AND, ACCORDINGLY, GRO UNDS NO.1 TO 15, TECHNICALLY SPEAKING, STANDS ALLOWED. OTHER ISSUES: 37. GROUND NOS. 16 TO 19 ARE ON THE ISSUE OF CLAIM OF D EDUCTION UNDER SECTION 80IB & 80IC AS CLAIMED BY ASSESSEE. ASSESSE E CLAIMED DEDUCTION OF ` 336,81,40,961 UNDER SECTION 80-IB AND ` 748,56,22,895 UNDER SECTION 80-IC. AO WAS OF THE VIEW THAT FOR THE PURP OSE OF SECTIONS 80-IB & 80-IC, THE PROFITS DERIVED FROM THE INDUSTRIAL UNDE RTAKING ARE TO BE WORKED OUT BY REDUCING CERTAIN COMMON EXPENSES INCURRED AT THE HEAD OFFICE AND THE CENTRAL DEPARTMENTS SUCH AS AUDIT, LEGAL, SECRE TARIAL, SHARES DEPARTMENT, SELECTION AND TRAINING, ACCOUNTING, TRE ASURY WHICH CANNOT BE IDENTIFIED WITH ANY OF THE INDUSTRIAL UNDERTAKINGS OF ASSESSEE. ACCORDINGLY, HE IDENTIFIED ADDITIONAL ALLOCATION OF EXPENSES TO THE TUNE OF ` 107,75,44,354 WHICH WERE ALLOTTED TO VARIOUS UNITS. IT WAS THE CONTENTION THAT ASSESSEE HAS ALREADY ALLOCATED INDIRECT EXPENS ES AT ` 1077,77,45,837 TO VARIUS UNITS CLAIMED DEDUCTION UNDER SECTION 80- IB &80-IC AND ALSO TO TWO UNITS ELIGIBLE FOR SECTION 10A AND SECTION 10B IN ADDITION TO DIRECT EXPENSES OF ` 3070,36,18,599. IT WAS THE SUBMISSION THAT ASSESSE E HAD HINDUSTAN UNILEVER LIMITED 32 ALREADY CONSIDERED THE DIRECT EXPENSES AND INDIRECT EXPENSES RELEVANT FOR THE PARTICULAR UNIT TO AN EXTENT OF ` 1077.77 CRORES, THEREFORE, ALLOCATION OF ADDITIONAL EXPENSES TO THE EXTENT OF ` 107.75 CRORES WAS NOT WARRANTED. IT WAS FURTHER SUBMITTED THAT THE ALLOCATION OF RESEAR CH EXPENSES TO THE TUNE OF ` 51.59 CRORES AND INTEREST EXPENSES TO THE TUNE OF ` 16.77 CRORES WERE NOT MADE IN EARLIER YEARS AND ALLOCATED FOR THE FIR ST TIME IN THIS YEAR. 38. THE LEARNED COUNSEL SUBMITTED THAT ASSESSEE HAS ALL OCATED ALL THE EXPENSES INCLUDING THOSE OF COMMON EXPENSES WHICH A RE RELEVANT TO COMPUTE THE PROFITS DERRIVED FROM THE CONCERNED IND USTRIAL UNDERTAKING SUCH AS MARKETING AS WELL AS DISTRIBUTION, PURCHASE , EXPORT DEPARTMENT ETC. WITH REFERENCE TO THE HEAD OFFICE EXPENSES IT WAS SUBMITTED THAT THE EXPENSES THAT WERE NOT ALLOCATED ARE THOSE WHICH IN ANY CASE HAVE TO BE INCURRED BY ASSESSEE IRRESPECTIVE OF THE EXISTENCE OF NEW UNDERTAKING ELIGIBLE FOR DEDUCTION. WITHOUT PREJUDICE TO THE AB OVE CONTENTION, IT WAS ALSO REITERATED THE CONTENTION BEFORE AO AND THE DR P THAT IF THE COMMON HEAD OFFICE EXPENSES ARE TO BE ALLOCATED FOR COMPUT ING THE PROFITS, THEN ON THE SAME BASIS THE COMMON INCOME CREDITED TO THE PR OFIT & LOSS A/C BUT NOT ALLOCATED BY ASSESSEE TO INDUSTRIAL UNITS BE AL LOCATED ACCORDINGLY. WITH REFERENCE TO THE ALLOCATION OF RESEARCH EXPENSES TH E LEARNED COUNSEL RELIED ON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ZANDU PHARMACEUTICALS WORKS LTD VS. CIT IN ITA NO.8/MUM/2 007 DATED 12.9.2012. HE ALSO REFERRED TO THE ORDERS OF THE CO ORDINATE BENCH OF THE ITAT IN ASSESSMENT YEARS 1985-86 AND 1986-87,1988-8 9 WHEREIN IN SOME OREDES ONE OF US ACCOUNTANT MEMBER IS A PARTY, TO S UBMIT THAT THERE IS NO NEED FOR ALLOCATING THE EXPENSES. IN REPLY THE LEAR NED DR INFORMED THE FACTS OF THE ALLOCATION AND RELIED ON THE ORDERS OF AO. IT WAS HIS SUBMISSION THAT THE ITAT IN THE CASE OF NITCO TILES VS. DCIT I N ITA NO.5701/ MUM./2007 DATED 9.4.2009 UPHELD THE CONTENTION THAT THE EXPENSES OF THE BUSINESS, WHETHER DIRECT OR INDIRECT, PROJECT SPECI FIC OR COMMON EXPENSES HAVE TO BE CONSIDERED FOR COMPUTATION FOR THE PROFI TS AND GAINS OF AN HINDUSTAN UNILEVER LIMITED 33 ELIGIBLE BUSINESS. THEREFORE, IT WAS SUBMITTED THAT ALL THE INDIRECT EXPENSES AND COMMON EXPENSES HAVE TO BE CONSIDERED FOR THE S AID COMPUTATION. 39. WE HAVE CONSIDERED THE RIVAL ARGUMENTS AND THE FACT S ON RECORD AND ORDERS OF THE ITAT IN EARLIER YEARS. THE ITAT IN IT A NOS 539 & 820/MUM/1992 FOR THE ASSESSMENT YEAR 1988-89 DATED 16.07.2010 HAS EXAMINED SIMILAR ISSUE IN THE CONTEXT OF DEDUCTION CLAIMED UNDER SECTION 80HH AND 80I IN RESPECT OF COMMON EXPENSES INCURRED AT THE HEAD OFFICE. THE FINDINGS OF THE ITAT ARE AS UNDER: 12.4 WE HAVE HEARD THE RIVAL CONTENTIONS AND ALSO P ERUSED THE RECORD. WE FIND THAT THERE IS CONSIDERABLE STRENGT H IN THE SUBMISSION OF THE ASSESSEE THAT TERM DERIVED FROM USED IN SECTION 80HH AND 80I WERE NOT AS WIDE AS ATTRIBUTABLE TO. THIS VIEW IS ALREADY UPHELD BY THE HONBLE APEX COURT VIDE ITS D ECISION IN CIT VS. STERLING FOODS LTD (237 ITR 579) AND THERE IS NO DE BATABLE POINT HERE. NOW THE QUESTION IS WHETHER FOR ALLOCATION TH E EXPENSES OF A HEAD OFFICE THE SAME STRICT YARDSTICK AS APPLICABLE FOR ASCERTAINING THE PROFITS DERIVED FROM AN UNDERTAKING IS TO BE AP PLIED. IN OUR OPINION, SINCE THE BENEFITS UNDER SECTION 80HH AND 80-I ARE LIMITED TO PROFITS DERIVED FROM AN INDUSTRIAL UNDERTAKING, THEN THE EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO SUCH UNITS ALONE COULD BE DEDUCTED WHILE COMPUTING SUCH PROFIT. IT WILL NOT BE FAIR TO APPLY TWO DIFFERENT PRINCIPLES ONE FOR WORKING OUT THE PR OFIT AND ANOTHER FOR ALLOCATION OF EXPENSES. LAW AS LAID DOWN BY TH E APEX COURT ON THIS POINT HAS TO BE APPLIED FAIRLY AND SQUARELY, S O THAT RATIONAL RESULTS CAN FOLLOW. THEREFORE, IN OUR OPINION, EXP ENSES OF THE HEAD OFFICE WHICH HAD A DIRECT BEARING ON THE ACTIVITIES OF THE UNITS FROM WHICH DEDUCTION UNDER SECTION 80HH AND 80-I WERE CL AIMED ALONE COULD BE CONSIDERED FOR ALLOCATION. AT THE SAME TI ME, WE FIND THAT FOR THE IMPUGNED ASSESSMENT YEAR AS WELL AS FOR PR ECEDING YEAR, LEARNED CIT(A) HAD GIVEN CERTAIN DIRECTIONS TO THE ASSESSING OFFICER WITH REGARD TO THE METHOD OF ALLOCATION OF EXPENSES OF THE HEAD OFFICE TO SUCH UNITS, WHERE CLAIM FOR DEDUCTION UND ER SECTION 80HH AND 80-I WERE MADE FOR THE ASSESSEE. LEARNED COUNS EL WAS UNABLE TO PINPOINT WHAT WAS WRONG IN SUCH DIRECTION AND HO W SUCH DIRECTIONS WENT AGAINST THE AFORESAID PRINCIPLE REG ARDING ALLOCATION OF EXPENSES. IT IS FOR THIS REASON THAT FOR THE AS SESSMENT YEAR 1985-86 IN MISC. APPLICATION FILED BY THE ASSESSEE NUMBERED AS MA NO. 670/MUM/2006 ARISING OUT OF ITA NO. 4997/BOM/19 90, THIS TRIBUNAL IN ITS ORDER DATED 15 TH JUNE 2007 HELD AS UNDER: AS REGARDS THE ALLOCATION OF COMMON EXPENSES INCUR RED BY THE ASSESSEE AT HEAD OFFICE, THE ASSESSEE HAS FURNISHED ALL THE DETAILS. HAVING REGARD TO THIS, IT CANNOT BE SAID THAT ALL C OMMON EXPENSES NOT RELATING TO SPECIFIC UNITS NEED SUCH A BLANKET ALLOCATION AS IS DONE BY THE DEPARTMENTAL AUTHORITIES. BUT AT THE SA ME TIME WE HINDUSTAN UNILEVER LIMITED 34 CANNOT ACCEPT THE ASSESSEES CONTENTION THAT ALL TH E COMMON EXPENSES AT THE HEAD OFFICE HAVE NOT CONTRIBUTED TO THE EARNING OF INCOME OF THE UNITS, WHICH ARE ENTITLED FOR RELIEF U/S.80HH AND 80-I OF THE ACT. IF SUCH EXPENSES ARE NOT ALLOCATED IN S OME REASONABLE MANNER, IT WILL ONLY DISTORT AND RESULT IN ARRIVING AT HIGHER INCOME OF IN THE HANDS OF ELIGIBLE UNITS. WE, THEREFORE, DIRE CT THE ASSESSING OFFICER NOT TO ALLOCATE THE EXPENSES OF CHAIRMAN, C OMPANY SECRETARIES AND PUBLIC RELATION DEPARTMENT, WHICH F OR A.Y. 1985-86 HAS BEEN QUANTIFIED AT RS. 1,26,03,000/- ON DAY TO DAY RUNNING OF THE INDIVIDUAL UNITS OF THE GROUP. ON THE SAME REA SONING SALARY, WAGES AND STAFF WELFARE EXPENSES RELATING TO FINANC IAL CONTROLLER, CHIEF MEDICAL OFFICER CANNOT BE ALLOCATED. IN OUR O PINION, THESE FOUR OPERATIONS AT THE HEAD OFFICE ARE IN NO WAY CONNECT ED TO THE RUNNING OF THE UNITS. IT MUST BE APPRECIATED THAT EACH OF THE UNITS HAS THEIR OWN DEPARTMENTAL HEAD INCLUDING FINANCIAL CONTROLLER AND MEDICAL OFFICER. THESE FOUR OPERATION CENTRES AT T HE HEAD OFFICE ARE MORE CONCERNED WITH THE MANAGERIAL ISSUES, THEY ARE NOT CONNECTED EITHER WITH PRODUCTION OR SALE OF THESE UNITS. THE ALLOCATION OF OTHER COMMON EXPENSES AS DIRECTED TO BE DONE BY THE CIT(A ) IS APPROVED. THE ORDER OF THE CIT(A) ON THIS ISSUE IS MODIFIED TO THE EXTENT STATED HEREIN. IT IS CLEAR FROM THE ABOVE THAT THE ASPECT RELATING TO THE EXPENDITURE WHICH NEEDED TO BE ALLOCATED WAS CONSIDERED BY THIS TRIBUNAL. HENCE, WE FIND NO FORCE IN THE CONTENTION OF THE AS SESSEE THAT THE ISSUE REGARDING WHICH ITEMS OF EXPENDITURE COULD BE CONSIDERED AS ALLOCABLE IN VIEW OF THE TERMINOLOGY USED IN SECTIO N 80HH AND 80I OF THE ACT WAS NOT CONSIDERED. AS AFORESAID, THE LEAR NED COUNSEL FOR THE ASSESSEE WAS ALSO UNABLE TO POINT OUT HOW THE D IRECTIONS OF THE CIT(A) WERE NOT IN ACCORDANCE WITH LAW ON THE MATTE R. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSMENT YEAR 1985-86, WE DIRECT THAT FOR THE IMPUGNED YEAR ALSO, THE EXPENSES AS MENTIONED IN AFOREMENTIONED PARA HAS TO BE EXCLU DED WHILE MAKING THE ALLOCATION FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 80HH AND 80-I OF THE ACT. EXCEPT FOR THIS, DIRECTIONS OF THE CIT(A) AS IN THE PRECEDING YEAR HAS TO BE FO LLOWED. ORDERED ACCORDINGLY. GROUND NO. 9.1 OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES . 40. THEREFORE, IN THE INTEREST OF JUSTICE WE RESTORE TH E ISSUE TO THE AO WHO IS DIRECTED TO WORKOUT THE COMMON EXPENSES ACCO RDINGLY. WE WERE INFORMED THAT ORDERS OF THE ITAT IN EARLIER YEARS A RE YET TO BE GIVEN EFFECT BY AO AND THE INTERVENING YEARS APPEALS ARE PENDING AT VARIOUS STAGES INCLUDING BEFORE THE ITAT. IN ASSESSMENT YEAR 1989- 90 SIMILARLY THE MATTER WAS RESTORED TO AO VIDE THE ORDER DATED 21/0 9/2011. IN VIEW OF THE STAY GRANTED IN THIS APPEAL THE ISSUES HAVE COM E UP FOR CONSIDERATION. HINDUSTAN UNILEVER LIMITED 35 KEEPING IN MIND THE DIRECTIONS IN EARLIER YEARS, AO IS DIRECTED TO REWORKOUT THE COMMON EXPENSES ACCORDINGLY. 41. WITH REFERENCE TO THE RESEARCH EXPENSES AND THE INT EREST EXPENSES WHICH WERE ALLOCATED FOR THE FIRST TIME, ALLOCATION OF THE RESEARCH EXPENSES IS COVERED BY THE DECISION OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF ZANDU PHARMACEUTICALS WORKS LIMITED IN INCOME TAX A PPEAL NO.8 OF 2007 DATED 12.09.2012 WHEREINTHE HON'BLE HIGH COURT HAS CONSIDERED THE ISSUE AS UNDER: 8. THERE IS NO DISPUTE THAT THE ASSESSEE IS ENTITL ED TO THE BENEFITS OF THE PROVISIONS OF SECTIONS 80-HH, 80-I AND 80-IA . SECTION 80-I PROVIDES THAT WHERE THE GROSS TOTAL INCOME O F AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FROM AN INDU STRIAL UNDERTAKING, THERE SHALL BE ALLOWED, IN COMPUT ING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PRO FITS AND GAINS AN AMOUNT EQUAL TO TWENTY PER CENT THEREOF. SECTION 80 -IA PROVIDES THAT WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE IN CLUDES ANY PROFITS AND GAINS DERIVED FROM ANY BUSINESS OF AN I NDUSTRIAL UNDERTAKING, THERE SHALL BE ALLOWED, IN COMPUTING T HE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT SPECIFIED THEREIN. SECTION 80-HH PROVIDES T HAT WHETHER THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROF ITS AND GAINS DERIVED FROM AN INDUSTRIAL UNDERTAKING, THERE SHALL BE IN ACCORDANCE WITH LAW AND SUBJECT TO THE PROVISIONS OF THE SECT ION BE ALLOWED IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO 20% THEREOF. 9. WHILE COMPUTING THE PROFITS AND GAINS OF THE CON CERNED UNDERTAKING, ONLY EXPENSES RELATING THERETO CA N BE DEDUCTED. IN OTHER WORDS, THE EXPENSES MUST BE INCURRED, FOR AND ON BEHALF OF THE CONCERNED UNDERTAKING. THE EXPENSES ATTRIBUTABL E TO ANY OTHER UNIT OR THE HEAD OFFICE EXPENSES WHICH HAVE NO RELE VANCE TO THE INDUSTRIAL UNDERTAKING, CANNOT BE DEDUCTED IN RESPE CT OF THE SAID UNDERTAKING WHILE COMPUTING THE PROFITS AND GAINS O F THE UNDERTAKING. 10. IN CIT VS. STERLING FOODS, (1999) 4 SCC 98 = (1 999) 237 ITR 579, THE FOLLOWING QUESTION WAS CONSIDERED BY THE SUPREME COURT:- WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN LAW IN HOLDING THAT THE RECEIPT FROM THE SALE OF IMPORT ENTITLEMENTS COULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE PURP OSE OF COMPUTING THE RELIEF UNDER SECTION 80-HH OF THE INC OME TAX ACT, 1961? HINDUSTAN UNILEVER LIMITED 36 THE QUESTION THEREFORE, WAS CONVERSE TO THE ONE BEF ORE US. THE SUPREME COURT HELD AS UNDER :- 12. CRUDE PETROLEUM IS REFINED TO PRODUCE RAW NAPH THA. RAW NAPHTHA IS FURTHER REFINED, OR CRACKED TO PRODU CE THE SAID PRODUCTS. THIS IS NOT CONTROVERTED. IT SEE MS TO US TO MAKE NO DIFFERENCE THAT THE APPELLANTS BUY TH E RAW NAPHTHA FROM OTHERS. THE QUESTION IS TO BE JUDGED REGARDLESS OF THIS, AND THE QUESTION IS WHETH ER THE INTERVENTION OF THE RAW NAPHTHA WOULD JUSTIFY THE FINDING THAT THE SAID PRODUCTS ARE NOT DERIV ED FROM REFINING OF CRUDE PETROLEUM. THE REFINING OF CRUD E PETROLEUM PRODUCES VARIOUS PRODUCTS AT DIFFEREN T STAGES. RAW NAPHTHA IS ONE SUCH STAGE. THE FURTHER REFINING OR CRACKING, OF RAW NAPHTHA RESULTS IN THE SAID PRODUCTS. THE SOURCE OF THE SAID PRODUCTS IS BE HEL D TO HAVE BEEN DERIVED FROM CRUDE PETROLEUM. 13. WE DO NOT THINK THAT THE SOURCE OF THE IMPORT ENTITLEMENTS CAN BE SAID TO BE THE INDUSTRIAL UNDER TAKING OF THE ASSESSEE. THE SOURCE OF THE IMPORT ENTITLEME NTS CAN, IN THE CIRCUMSTANCES, ONLY BE SAID TO BE THE EXPORT PROMOTION SCHEME OF THE CENTRAL GOVERNMENT WHEREUNDER THE EXPORT ENTITLEMENTS BECOME AVAILA BLE. THERE MUST BE, FOR THE APPLICATION OF THE WORDS DE RIVED FROM, A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTRIAL UNDERTAKING. IN THE INSTANT CASE THE NEXUS IS NOT DIRECT BUT ONLY INCIDENTAL. THE INDUSTRIAL UNDERTAKING EXPORTS PROCESSED SEAFOOD . BY REASON OF SUCH EXPORT, THE EXPORT PROMOTION S CHEME APPLIES. THEREUNDER, THE ASSESSEE IS ENTITLED TO IMPORT ENTITLEMENTS, WHICH IT CAN SELL. THE SALE CONSIDERA TION THEREFROM CANNOT, IN OUR VIEW, BE HELD TO CONS TITUTE A PROFIT AND GAIN DERIVED FROM THE ASSESSEE'S IN DUSTRIAL UNDERTAKING. THE SUPREME COURT HELD THAT THERE MUST BE F OR THE APPLICATION OF THE WORDS DERIVED FROM A DIRECT NE XUS BETWEEN THE PROFITS AND GAINS AND AN INDUSTRIAL UNDERTAKING. SE CTIONS 80-I AND 80-IA ALSO USE THE EXPRESSION DERIVED FROM. IF TH ERE MUST BE A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND AN I NDUSTRRIAL UNDERTAKING, IT MUST FOLLOW EQUALLY THAT THERE MUST BE A DIRECT NEXUS BETWEEN AN INDUSTRIAL UNDERTAKING AND THE EXP ENSES WHICH ARE SOUGHT TO BEAPPORTIONED/ ATTRIBUTABLE TO IT. EX PENSES WHICH DO NOT RELATE TO AN INDUSTRIAL UNDERTAKING/UNIT UNDER CONSIDERATION AND THEY RELATE TO OTHER UNITS OR TO THE HEAD OFFICE OF THE ASSESSEE, CANNOT BE TAKEN INTO CONSIDERATION WHILE COMPUTIN G THE DEDUCTION UNDER THE SAID PROVISIONS . 42. ON THE ARGUMENT THAT THE RESEARCH & DEVELOPMENT ACT IVITIES CARRIED OUT BY THE HEAD OFFICE HAS ENDURING BENEFIT TO THE UNITS/INDUSTRIAL HINDUSTAN UNILEVER LIMITED 37 UNDERTAKING, THE HON'BLE HIGH COURT ALSO CONSIDERED THIS ARGUMENT AND HELD AS UNDER: 14. THE SUBMISSIONS PROCEEDS ON AN ERRONEOUS BASIS AND DOES NOT TAKE INTO CONSIDERATION THE FACTS OF THE CASE AT AL L. AS WE NOTED EARLIER, IN THE PRESENT CASE, THE SAID R & D ACTIVI TIES WERE IN RELATION TO THE NEW DRUGS. THERE IS NOTHING TO INDICATE THAT IN THE EVENT OF THE ASSESSEE DECIDING TO COMMERCIALLY EXPLOIT THE BENEF ITS OF THE R & D WORK, THE PRODUCTS WOULD BE MANUFACTURED BY THE SAI D UNITS. THE FALLACY IN THE SUBMISSIONS PROCEEDS ON THE HYPOTHET ICAL BASIS THAT THE SAID PRODUCTS WOULD BE MANUFACTURED BY EACH OF THE UNITS OR ANY ONE OF THEM. 15. THE FALLACY ALSO ARISES ON ACCOUNT OF AN ERRONEOUS PRESUMPTION THAT THE BENEFIT OF ANY R & D ACTIVITY CAN ONLY BE EXPLOITED BY AN ENTERPRISE UTILIZING THE SAME I N ITS MANUFACTURING ACTIVITIES. THAT IS NOT SO. AN ENTERPRISE CAN ALWAY S ASSIGN THE BENEFIT THEREOF TO A THIRD PARTY. IT CAN ALWAYS GRANT A LIC ENCE IN RESPECT OF ANY PATENT OR DESIGN TO A THIRD PARTY. IN THAT EVEN T, THE OTHER UNITS WOULD NOT DERIVE ANY BENEFIT IN RESPECT THEREOF. TH E PRESUMPTION OF A NEXUS BETWEEN THE R & D ACTIVITIES AND THE UNITS IS NOT WELL FOUNDED . RESPECTFULLY FOLLOWING THE SAME, WE ARE OF THE OPIN ION THAT THE RESEARCH EXPENDITURE CANNOT BE ALLOCATED TO THE UNI TS CLAIMING DEDUCTION UNLESS IT HAS A NEXUS. THEREFORE, AO IS DIRECTED TO EXCLUDE THE SAME. 43. WITH REFERENCE TO THE INTEREST EXPENSES ALLOCATED T HE SAME ALSO STANDS ON THE SAME FOOTING. ASSESSEE HAS NOT CLAIME D ANY INTEREST EXPENDITURE FOR THE INVESTMENT IN THE UNIT AS ASSES SEE HAD SUBSTANTIAL FUNDS OF ITS OWN. THE INTEREST EXPENDITURE CLAIMED IN THE PROFIT & LOSS A/C PERTAINS TO THE EXPORT ACTIVITIES BEING EXPORT CRED IT FACILITY AS SUBMITTED BY ASSESSEE IN THE DETAILS. THEREFORE, IN THE ABSENCE OF ANY DIRECT NEXUS OF THE INTEREST CLAIM TO THE UNITS, IT IS VERY DIFFICU LT TO ALLOCATE THE EXPENDITURE ON COMMON EXPENSE BASIS, AS THE CLAIM OF SAID EXPEN DITURE HAS NO RELEVANCE TO THE MANUFACTURING ACTIVITY OF THE UNIT . AS RIGHTLY HELD BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF ZA NDU PHARMACEUTICALS WORKS LTD (SUPRA), THE EXPENSES ATTRIBUTABLE TO ANY OTHER UNIT OR THE HEAD OFFICE EXPENSES WHICH HAVE NO RELEVANCE TO THE INDU STRIAL UNDERTAKING CANNOT BE DEDUCTED IN RESPECT OF THE SAID UNDERTAKI NG WHILE COMPUTING THE HINDUSTAN UNILEVER LIMITED 38 PROFITS AND GAINS OF THE UNDERTAKING. ACCORDINGLY, WE HAVE NO HESITATION IN DIRECTING AO TO DELETE THE INTEREST EXPENSES SO ALL OCATED TO THE UNIT. THE GROUNDS ARE PARTLY ALLOWED TO THE ABOVE EXTENT. GROUND NOS. 20 TO 23 . 44. THESE GROUNDS ARE AGAINST THE CLAIM OF DEDUCTION OF ` 17,09,27,843 UNDER SECTION 10A AND ` 7,69,86,126 UNDER SECTION 10B ON PUNE TEA EXPORT UNIT AND KHANDLA UNIT. THE FACTS AR E SIMILAR TO THE GROUNDS RAISED ABOVE FROM GROUND NOS. 16 TO 19 ON S ECTION 80-IB AND SECTION 80-IC. AO IN LINE WITH THE STAND TAKEN FOR ARRIVING AT THE UNIT PROFITS HAS ALLOCATED THE SAME COMMON EXPENSES, RES EARCH EXPENDITURE AND INTEREST EXPENDITURE ON THE BASIS OF THE TURNOV ER TO THESE UNITS. SINCE THE FACTS ARE SIMILAR AND WORKING IS SIMILAR, THE D IRECTIONS GIVEN IN THE ABOVE GROUNDS WILL EQUALLY APPLY TO THESE GROUNDS A S WELL. ACCORDINGLY, AO IS DIRECTED TO EXCLUDE CERTAIN COMMON EXPENSES AS D IRECTED ABOVE AND TOTALLY EXCLUDE THE RESEARCH EXPENDITURE AND INTERE ST EXPENDITURE WHICH CANNOT BE DIRECTLY ATTRIBUTABLE TO THE UNIT CLAIMIN G DEDUCTIONS UNDER THE ABOVE SECTIONS. THESE GROUNDS ARE ALSO CONSIDERED A S PARTLY ALLOWED. GROUND NO.24 : 45. GROUND NO.24 RELATES TO ALLOWABILITY OF THE PROVISI ON FOR RETIREMENT PENSION PAYABLE TO THE EMPLOYEES. THE LE ARNED COUNSEL FAIRLY MENTIONED THAT THE ISSUE CAME UP FOR ADJUDICATION B EFORE THE TRIBUNAL AND THE SAME WAS SET ASIDE TO THE FILE OF THE AO. HE RE FERRED TO PARAS FROM 43 TO 45 OF THE ORDER OF THE TRIBUNAL FOR AY 1991-92 I N ITA NO 4628/MUM/2003 DT.08.02.12. HE FAIRLY MENTIONED THAT IN THE AY 1991-92, THERE WAS A CLAIM NOT ONLY OF THE CURRENT YEAR BUT ALSO OF THE LIABILITIES RELATABLE TO EARLIER ASSESSMENT YEARS, BEING FIRST YEAR OF CLAIM. HE RELIED ON VARIOUS JUDGMENTS TO ADVANCE HIS CASE. A) THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. VS. CIT (245 ITR 428) ( SC); HINDUSTAN UNILEVER LIMITED 39 B) HON'BLE SUPREME COURT IN THE CASE OF METAL BOX COMPANY OF INDIA LTD. VS. THEIR WORKMEN (73 ITR 53) ; C) ORDER OF HYDERABAD ITAT IN THE CASE OF DCIT VS. PARK DEVIS INDIA LTD. IN ITA NO.652/HYD/97 AND CO NO.4/HYD/97; D) ORDERS OF MUMBAI ITAT IN M/S. SIEMENS INDIA LTD. VS. ITO IN ITA NO.1835 (BOM), M/S. SIEMENS INDIA LTD VS . ITO IN ITA NO.1632 (BOM) & CIT VS. SIEMENS INDIA LT D IN ITA NO.1325 (BOM) AND E) THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. RANBAXY LABORATORY LTD. 334 ITR 341 . FURTHER HE MENTIONED THAT THERE IS NO DISPUTE ABOUT THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND T HE ACTUARIAL METHOD OF ESTIMATION OF THE LIABILITIES. HE HEAVILY RELIED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF RANBAXY LABORATORY LTD (SUPRA). HE ALSO MENTIONED THAT WHILE THE ISSUE WAS SET ASIDE TO THE FILE OF THE AO FOR AY 1991-92, AND 1992-93 THE AO HIMSELF ALLOWED THE CLA IM OF THE ASSESSEE FOR AY 1993-94 AND 1994-95. THEREFORE, THIS ISSUE I S NO LONGER A DISPUTED ONE FOR THE ASSESSMENT YEARS 1993-94 AND 1994-95. 46. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES. IT IS NOTICED FROM PARAGRAPHS 43 TO 45 OF THE ORDER OF THE TRIBUNAL FOR AY 1991-92 (SUPRA) ISSUE WAS DISCUSSE D AS UNDER: ' 43. GROUND NO.11 REGARDING PROVISION FOR RETIREMENT PENSION PAYABLE TO THE EMPLOYEES. 43.1 THE ASSESSING OFFICER NOTED THAT DURING THE YE AR, THE ASSESSEE COMPANY HAS MADE PROVISION OF RS. 7,77,60,972/- WHI CH INCLUDED RS. 6.77 CRORES RELATING TO THE EARLIER YEARS, AS L IABILITY ON ACCOUNT OF RETIREMENT PENSION PLAN. THE EXPENDITURE HAD BEEN C LAIMED AS DEDUCTION DURING THE PREVIOUS YEAR. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE LIABILITY IS TOWARDS THE D ISCRETIONARY RETIREMENT PENSION PAYMENT TO ITS EMPLOYEES AS SUPP LEMENTING AMOUNT OTHERWISE PAYABLE BY LIC UNDER THE APPROVED SUPERANNUATION FUND. SINCE THERE IS A DEPARTURE FRO M THE PENSION PAYABLE BY THE LIC, THE ASSESSEE HAS FOUND THAT THE AMOUNT OF HINDUSTAN UNILEVER LIMITED 40 PENSION PAYABLE BY THE LIC WAS TO BE INADEQUATE AND ACCORDINGLY, THE ASSESSEE MADE THE PAYMENT TO ITS RETIRED EMPLOY EES UNDER THIS PLAN BY SUPPLEMENTING THE AMOUNT OTHERWISE PAYABLE BY THE LIC. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE FA ILED TO FURNISH THE ORIGINAL RETIREMENT PENSION PLAN, THE RETIREMEN T PENSION WAS NOT APPROVED OR RECOGNIZED UNDER THE PROVISIONS OF THE I T ACT AND THEREFORE, THE EXPENDITURE WAS NOT COVERED UNDER TH E PROVISIONS OF SEC. 36(1)(IV). ACCORDING TO THE ASSESSING OFFICER THIS PROVISION IS SPECIFICALLY MADE AND INADMISSIBLE U/S 40A(9) AND W AS MERELY A PROVISION AND NOT AN ASCERTAINED LIABILITY. IT WAS ALSO NOT ADMISSIBLE UNDER SEC. 43B. 43.2 ON APPEAL, THE CIT(A) NOTED TH AT SUPPLEMENTARY RETIREMENT PENSION PLAN WAS NOT APPRO VED OR RECOGNISED FUND UNDER THE PROVISIONS OF IT ACT; THE REFORE, THIS EXPENDITURE WAS NOT COVERED UNDER THE SPECIFIC PROV ISIONS OF SEC. 36(I)(IV). THE CIT(A) HAS FURTHER OBSERVED THAT IT IS NECESSARY TO REFER TO AN APPROVED SUPERANNUATION FUND U/S 2(6) O F THE ACT, WHICH IS APPROVED BY THE COMMISSIONER IN ACCORDANCE WITH THE RULES CONTAINED IN PART B OF THE 4TH SCHEDULE OF TH E ACT. ACCORDINGLY, HE HAS CONFIRMED THE ACTION OF THE ASS ESSING OFFICER. 44 BEFORE US THE LD SR COUNSEL HAS NARRATED THE REL EVANT FACTS AS UNDER: 'THE ASSESSEE MADE A PROVISION FOR `7,77,60, 872 FOR PENSION PAYABLE BY IT UNDER THE RETIREMENT PENSION PLAN, WH ICH PROVIDE FOR SUPPLEMENTARY/ADDITIONAL PENSION BASED ON SALARY AN D NUMBER OF YEARS SERVICE BY INDIVIDUAL EMPLOYEES. THIS AMOUNT WAS CLAIMED AS DEDUCTIBLE U/S 37(1). THIS PROVISION WHICH WAS BASE D ON ACTUARIAL VALUATION OF THE APPELLANT'S LIABILITY AS ON 31.12. 90 INCLUDED RS. 6.77 CRORES IN RESPECT OF EARLIER YEARS. THE AMOUNTS PAY ABLE BY THE ASSESSEE UNDER THIS SUPPLEMENTARY PENSION SCHEME WE RE IN ADDITION TO THE PENSION RECEIVABLE BY THE EMPLOYEES FROM APP ROVED SUPERANNUATION FUND. THE SUPPLEMENTARY RETIREMENT P ENSION PAYMENTS HITHERTO WERE AT THE DISCRETION OF THE EMP LOYER. THIS LIABILITY UNDER THE PENSION PLANT WAS FORMALLY COMM ITTED BY THE ASSESSEE DURING PREVIOUS YEAR AS RECORDED IN ASSESS EE'S BOARD RESOLUTION DATED 22.3.91.' 44.1 HE HAS SUBMITTED THAT THE CLAIM OF THE ASSESSE E FOR PROVISION OF RETIREMENT PENSION PAYABLE TO THE EMPLOYEES IS C OVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE DELH I HIGH COURT IN THE CASE COMMISSIONER OF INCOME- TAX V. RANBAXY LAB ORATORIES LTD. REPORTED IN 334 ITR 341. HE HAS ALSO RELIED UPON TH E DECISION OF THE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS V. COMMISSIONER OF INCOME-TAX BHARAT REPORTED IN 245 ITR 428. THE LD SR COUNSEL ALSO FILED A COPY OF THE RULE OF PENSION SCHEME. 44.2 THE LD DR HAS RELIED UPON THE ORDERS OF THE LO WER AUTHORITIES AND SUBMITTED THAT THE ASSESSEE COULD NOT FURNISH T HE COPY OF THE APPROVED PENSION SCHEME BEFORE THE ASSESSING OFFICE R. 45. WE HAVE CONSIDERED THE RIVAL SUBMISSION AS WELL THE RELEVANT MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT T HE PENSION SCHEME OF THE ASSESSEE IS NOT APPROVED AS PER PROVISION OF I T ACT. AND AS HINDUSTAN UNILEVER LIMITED 41 OBSERVED BY THE ASSESSING OFFICER AND THE CIT(A) TH E PENSION SCHEME AS FORMULATED BY THE ASSESSEE FOR MEETING TH E EXTRA PAYMENT OVER AND ABOVE THE AMOUNT PAYABLE UNDER LIC SCHEME. THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EAR TH MOVERS (SUPRA) HAS TAKEN INTO CONSIDERATION THE PRINCIPLE LAID DOWN IN THE CASE OF METAL BOX COMPANY OF INDIA LTD. V. THEIR WO RKMEN REPORTED IN 73 ITR 53 AND HELD THAT FOR MAKING LIABILITY INC URRED BY THE ASSESSEE UNDER LEAVE ENCASHMENT SCHEME PROPORTIONAT E WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF THE COMPANY, WAS ENTITLED TO DEDUCTION OUT OF THE GROSS RECEIPTS OF THE ACCOU NTING YEAR DURING WHICH THE PROVISION IS MADE FOR THE LIABILITY. THE LIABILITY WAS NOT A CONTINGENT LIABILITY. IT WAS OBSERVED THAT WHAT SHO ULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE C APABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTU AL QUANTIFICATION MAY NOT BE POSSIBLE. 45.1 THUS, AS HELD BY THE HON'BLE SUPREME COURT (SU PRA) THAT IF THE LIABILITY ON ACCOUNT OF PENSION SCHEME IS CAPITAL O F BEING ESTIMATED WITH REASONABLE CERTAINTY, THEN IT IS ALLOWABLE. HO WEVER, IN THE CASE IN HAND, THE DISPUTE IS REGARDING THE PROVISIONS OF PENSION LIABILITY OF EARLIER YEARS AND THAT TOO WITH RESPECT TO THE EMPL OYEES WHO HAVE ALREADY RETIRED. IN OUR OPINION, THE LIABILITY ON A CCOUNT OF PENSION TO THE EMPLOYEES ALREADY RETIRED IN THE EARLIER YEARS IS A DEFINITE LIABILITY OF THE RELEVANT YEAR IN WHICH THE EMPLOYE ES GOT RETIRED. 45.2 SINCE THE PENSION SCHEME WAS NOT PRODUCED BEFO RE THE ASSESSING OFFICER AND THE COPY OF THE SAME HAS BEEN PRODUCED BEFORE US WITH THE REQUEST TO ALLOW THE ADDITIONAL EVIDENCE VIDE LETTER DATED 14.11.2011 OF THE ASSESSEE; THEREFORE, IT REQUIRES EXAMINATION AND VERIFICATION OF THE FACT AS TO WHET HER THE PROVISION MADE BY THE ASSESSEE IS AS PER THE PENSION SCHEME A ND THE SAME IS ALSO APPLICABLE TO THE EMPLOYEES ALREADY RETIRED. A CCORDINGLY, IN THE INTEREST OF JUSTICE, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER TO DECIDE THE SAME AFRESH AFTER C ONSIDERING THE PENSION SCHEME AND AS PER LAW .' 47. FROM THE ABOVE, WE FIND THAT PROVISION PERTAINING T O EARLIER YEARS AS WELL AS THE PROVISION FOR CURRENT YEAR LIABILITIES WAS REFERRED TO THE FILE OF THE AO BY THE TRIBUNAL IN AY 1991-92. FOR UNIFORM A PPROACH BY THE AO, WE ARE OF THE OPINION THAT THIS ISSUE SHOULD ALSO BE R EMANDED WITH IDENTICAL DIRECTIONS. ACCORDINGLY, GROUND NO 24 IS ALLOWED FO R STATISTICAL PURPOSE. 48. IN CASE AO HAS ALLOWED THE ACTUAL PENSION PAID DURI NG THE YEAR WHILE DISALLOWING THE PROVISION SO MADE, HE IS FREE TO WI THDRAW THE AMOUNT AS IT MAY RESULT IN DOUBLE DEDUCTION, AFTER RECONCILING T HE ACTUAL PROVISION MADE HINDUSTAN UNILEVER LIMITED 42 AND THE ACTUAL AMOUNTS PAID AND THE CLAIM TO BE ALL OWED. WITH THESE DIRECTIONS THE GROUND IS CONSIDERED ALLOWED FOR STA TISTICAL PURPOSES. GROUND NO.25 49. GROUND NO.25 PERTAINS TO THE DISALLOWANCE OF AMOUNT UNDER SECTION 14A. ASSESSEE HAD CLAIMED EXEMPT INCOME OF ` 63,55,91,552 AS EXEMPT ON ACCOUNT OF TAX FREE BONDS, DIVIDENDS ETC. AO APP LIED RULE 8D AND WORKED OUT THE DISALLOWANCE AT ` 9,81,98,817. ASSESSEE CONTENDED BEFORE THE DRP THAT RULE 8D IS NOT APPLICABLE FOR THE IMPU GNED ASSESSMENT YEAR AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CAS E OF GODREJ BOYCE MFG.CO LTD. VS. DCIT (332 ITR 81 (BOM.). NOW DRP WH ILE ACCEPTING ASSESSEES OBJECTION THAT RULE 8D CANNOT BE APPLIED RETROSPECTIVELY, DIRECTED THE AO TO RECALCULATE THE DISALLOWANCES IN A PROPER AND RATIONALE MANNER. HOWEVER THE DIRECTION IS SUCH THAT RULE 8D IS APPLIED INDIRECTLY. THEREFORE, AO WORKED OUT THE DISALLOWANCES OF THE S AME AMOUNT OF ` 9,81,98,817 WHILE COMPLETING THE ASSESSMENT IN PURS UANCE OF THE DRP DIRECTIONS. THE LEARNED COUNSEL REFERRED TO THE SUB MISSIONS MADE BEFORE AO AND THE DRP PLACED IN THE PAPER BOOK TO SUBMIT T HAT ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN EARNING THE EXEMPT INCO ME. AFTER CONSIDERING THE RIVAL ARGUMENTS, WE ARE OF THE OPINION THAT LAR GE AMOUNT OF INVESTMENT COULD NOT BE MADE WITHOUT ANY SECRETARIAL ASSISTANC E. WE ARE OF THE OPINION THAT AN ADHOC AMOUNT OF 0.5% ON THE INCOME CLAIMED AS EXEMPT WOULD BE REASONABLE TO CONSIDER AS EXPENDITURE INCU RRED FOR EARNING EXEMPT INCOME UNDER SECTION 14A. THEREFORE, AO IS D IRECTED TO WORK OUT THE DISALLOWANCES AT 0.5% OF THE INCOME CLAIMED EXE MPT. WITH THESE DIRECTIONS, THE GROUND 25 IS CONSIDERED PARTLY ALLO WED. GROUND NOS. 26 & 27 50. THESE TWO GROUNDS PERTAIN TO PAYMENT OF AN AMOUNT O F ` 4.6 CRORES MADE TO THE SUPPLIERS FOR TERMINATION OF ARRANGEMEN T FOR SUPPLY OF SUGAR CANDIES AND AN AMOUNT OF ` 14.25 CRORES MADE TO SUPPLIERS FOR HINDUSTAN UNILEVER LIMITED 43 TERMINATION OF THE ARRANGEMENT FOR MANUFACTURE OF T OOTHPASTE AND SHAMPOOS. ASSESSEE CLAIMED THE FIRST AMOUNT TO THE EXTENT OF ` 4.6 CRORES OUT OF ` 8 CRORES PROVIDED IN AN EARLIER YEAR AS AN EXPENDI TURE OF THIS YEAR WHILE THE BALANCE AMOUNT WAS WRITTEN BACK. THIS WRI TTEN BACK AMOUNT WAS REDUCED IN THE COMPUTATION AS THE SAME WAS NOT CLAI MED AS EXPENDITURE IN THE EARLIER YEAR. THE AMOUNT OF ` 14.25 CRORES WAS MADE FOR DISCONTINUATION OF PURCHASE AGREEMENT WITH REFERENC E TO TWO COMPANIES FOR THE MANUFACTURE OF TOOTH PASTE AND SHAMPOOS ON CONTRACT BASIS ARRANGEMENT OF WHICH WAS CANCELLED BY THE AGREEMENT DATED 31.12.2005. AO WAS OF THE OPINION THAT THE EXPENDITURE WAS CAPI TAL IN NATURE. ASSESSEE MADE OBJECTIONS BEFORE THE DRP WHICH CONSIDERED THI S VIDE PARA 12 OF THE ORDER. SUBMISSIONS MADE WITH REFERENCE TO THE CLAIM S ARE AS UNDER: MOVEMENT IN PROVISION CREATED AT THE TIME OF DISCONTINUATION OF MAX' SUGAR CANDIES: THE COMPANY'S FOOD BUSINESS INCLUDED THE BUSINESS OF MARKETING OF SUGAR CANDIES UNDER THE BRAND NAME 'MAX'. DURING TH E FINANCIAL YEAR 2004-05, THE COMPANY DECIDED TO DISCONTINUE THE ACT IVITY OF MARKETING OF SUGAR CANDIES UNDER THE BRAND NAME 'MAX'. THE COMPANY HAD INCURRED SIGNIFICANT EXPENDITURE IN SUP PORTING THIS PRODUCT. HOWEVER, GIVEN THE PRICE SENSITIVE NATURE OF CANDIES WHEREBY THE INDIVIDUAL CANDY IS REQUIRED TO BE PRIC ED AT CERTAIN PRICE POINTS, FOR E.G. 50 PAISE AND DUE TO THE INCREASE IN INPUT COST, THE COMPANY INCURRED LOSSES ON THE PRODUCT. CONSEQUENTL Y, DURING THE FINANCIAL YEAR 2004-05, THE COMPANY HAD TO INCUR ON E-TIME LOSSES AGGREGATING RS.30.44 CRS. THE PARTICULARS OF THE EXPENDITURE INCURRED ARE ENCLOSED IN ANNEXURE -1. IT MAY BE RELEVANT TO NOTE THAT THE FOODS BUSINESS OF THE COMPANY HAS NOT BEEN DISCONTINUED. FURTHER, HAD THE COMPANY CONTINUED MARKETING OF SUGAR CANDIE S, IT WOULD HAVE MADE HUGE LOSSES. YOUR HONOUR WILL NOTICE THAT OUT OF THE TOTAL EXPEN DITURE OF RS.30.44 CRS. A SUM OF RS.22.44 CRS. RELATES TO STOCKS WHICH WERE W RITTEN OFF IN FINANCIAL YEAR 2004-05 AND THE SAME WAS ALLOWED TO US AS A GENUINE BUSINESS EXPENSE. THE BALANCE AMOUNT I.E. R S. 8 CRORES REPRESENTED A PROVISION MADE BY THE COMPANY IN RESPECT OF ADDITIONAL EXPENDITURE IN THE FORM OF COMPENSATION, ETC PAYABLE TO SUPPLIERS. HOWEVER, SINCE THE TERMS OF SETTLEMENT W ITH THE SUPPLIERS WERE NOT FINALIZED, THE COMPANY HAD NOT CLAIMED THE PROVISION OF ` 8 CRS. AS A TAX DEDUCTIBLE EXPENDITURE IN FINANCIAL YEAR 2004-0 5. IN FINANCIAL YEAR 2005-06, OUT OF THE PROVISION OF RS. 8 CRORES MENTIONED ABOVE, THE COMPANY HAS PAID AN AMOUNT OF RS.4.6 CRORES TO MAKSON NUTRITION FOOD PRIVATE LTD. (MNFPL) TOWAR DS FINAL SETTLEMENT TO CANCEL RESCIND THE SOURCING ARRANGEME NT THAT THE COMPANY HAD WITH THEM FOR CONVERSION OF SUGAR CONFE CTIONARY PRODUCTS. A COPY OF THE TERMINATION AGREEMENT BETWE EN THE COMPANY AND MNFPL IS ENCLOSED IN ANNEXURE-2. THE REMAINING PROVISION OF RS. HINDUSTAN UNILEVER LIMITED 44 3.4 CRORES WAS WRITTEN BACK SINCE THE SAME WAS NO LONGE R REQUIRED. IT IS SUBMITTED THAT THE AMOUNT OF RS.4.6 CRORES PAID TO MAKSON NUTRITION FOOD PRIVATE LIMITED(MNFPL) TOWARDS FINAL SETTLEMENT TO CANCEL/RESCIND THE SOURCING ARRANGE-MENT IS A GENUINE BUSINESS EXPENSE JUSTIFIED BY COMMERCIAL EXPEDIENCY AND THAT THE SAME IS FULLY ALLOWABLE UNDER SEC. 37(1) OF THE ACT. AS REGARDS THE WRITE BACK OF RS.3.4 CRORES THE SAME IS NOT TAXABLE IN FINANCI AL YEAR 2005-06 AS THE SAME WAS NOT CLAIMED AS A DEDUCTIBLE EXPENSE AND ADDED BACK IN THE STATEMENT OF TOTAL INCOME IN THE YEAR IN WHICH PROVISION WAS MADE. ACTUAL EXPENSES INCURRED AGAINST PROVISIONS INCLUDE D UNDER EXCEPTIONAL ITEMS OF EARLIER YEARS DISALLOWED IN TH E COMPUTATION OF THOSE YEARS. THE COMPANY HAD MADE PROVISION OF RS.16,51,18,000 I N THE EARLIER YEARS BASED ON PRUDENT ACCOUNTING POLICY WHEN THE C LAIMS WERE RECEIVED FROM BUSINESS ASSOCIATES. THESE PROVISIONS WERE OFFERED FOR TAX IN THE RESPECTIVE YEARS. ON SETTLEMENT OF THE C LAIMS, AN AMOUNT OF RS. 15,26,43,057 HAS BEEN CLAIMED AS A DEDUCTION IN THE CURRENT YEAR. THE DETAILS OF SETTLEMENT OF CLAIMS AS UNDER: I) PAYMENT TO PRIME HEALTHCARE PRODUCTS - RS. 9.5 CRORE & MUL DENTPRO PVT. LTD. - RS.4. 75 CRORE THE COMPANY HAD BEEN SOURCING LARGE QUANTITIES OF T OOTHPASTE AND SHAMPOOS FROM PRIME HEALTHCARE PRODUCTS (PHP) AND M UL DENTPRO PVT.LTD.(MDPL) TILL THE TIME WHEN TOOTHPASTE WAS RESERVED FOR SMALL SCALE INDUSTRIES IN INDIA. PHP AND MDPL HAD S ETUP FACILITIES AT THE BEHEST OF THE COMPANY AT DAMAN FOR SUPPLY OF TOOTHPASTE AND SHAMPOOS TO THE COMPANY. POST DE-RESERVATION OF TOO THPASTE BY GOVERNMENT OF INDIA IN 2002, IT WAS DECIDED TO SET UP OUR OWN MANUFACTURING FACILITIES IN ASSAM AND UTTARANCHAL. CONSEQUENT TO THE CREATION OF THESE MANUFACTURING FACILITIES AT A SSAM AND UTTARANCHAL THE SOURCING OF TOOTHPASTE AND SHAMPOOS FROM PHP AND MOPL SUBSTANTIALLY REDUCED. DUE TO REDUCTION IN DEMAND FROM THE COMPANY PHP AND MOPL HAD TO RESTRUCTURE THEIR O PERATIONS AND INCURRED COSTS, LOSSES AND DAMAGES ON REDUCTION OF ITS SURPLUS WORKERS/EMPLOYEES AT THE FACTORY. THE COMPANY AGREE D TO COMPENSATE RS.9.5 CRORE TO PRIME HEALTHCARE PRODUCT S AND RS.4.75 CRORE TO MUL DENTPRO PVT. LTD. A COPY OF THE AGREEM ENT BETWEEN THE COMPANY AND PRIME HEALTHCARE PRODUCTS FOR COMPE NSATION OF RS.9.5 CRORE IS ENCLOSED AS ANNEXURE-3 AND AGREEMENT BETWEEN THE COMPANY AND MUL DENTPRO PVT.LTD. FOR COMPENSATI ON OF RS. 4.75 CRORE IS ENCLOSED AS ANNEXURE-4. IT IS SUBMITTED THAT THE AMOUNT OF RS.9.5 CRORES PA ID TO PRIME HEALTHCARE PRODUCTS AND RS.4.75 CRORE TO MUL DENTPR O PVT.LTD. TOWARDS RESTRUCTURING IS A GENUINE BUSINESS EXPENSE JUSTIFIED BY COMMERCIAL EXPEDIENCY AND THAT THE SAME IS FULLY AL LOWABLE UNDER SEC. 37(1) OF THE ACT. 51. THE DRP CONSIDERED THE ABOVE ISSUE VIDE OBJECTION N OS. 18 & 19 AND DECIDED AS UNDER: HINDUSTAN UNILEVER LIMITED 45 OBJECTION NO.L8 & 19 THE ASSESSEE HAS OBJECTED TO TREATMENT OF RSA.60 CR ORES AS CAPITAL EXPENDITURE WHICH WAS PAID BY THE ASSESSEE FOR TERM INATION OF ARRANGEMENTS FOR CONVERSION OF SUGAR CANDIES. THE A SSESSEE CONTENDED THAT THE BUSINESS OF SUGAR CANDY WAS RESU LTING INTO HEAVY LOSSES, AND HENCE, THE ARRANGEMENT WITH M/S. MAX SUGAR CANDIES WAS CANCELLED AND A COMPENSATION OF RSA.60 CRORES WAS PAID TO M/S. MAX SUGAR CANDIES ON ACCOUNT OF SETTLE MENT FOR THE LOSS OF BUSINESS TO M/S. MAX SUGAR AND THAT THE SAM E WAS ALLOWABLE U] S.30(7)(I) OF THE INCOME-TAX ACT. SIMI LARLY, CLAIM IS MADE BY THE ASSESSEE IN OBJECTION NO.19 RELATING TO PAYMENT OF RS.14.25 CRORES FOR TERMINATION OF MANUFACTURING OF TOOTHPASTE AND SHAMPOO. THE ASSESSING OFFICER HAS DISCUSSED THE IS SUE IN PARA 12 OF THE ASSESSMENT ORDER AND HAS RECORDED A FINDING THAT THE PAYMENTS MADE BY THE ASSESSEE ARE IN THE NATURE OF CAPITAL EXPENDITURE BECAUSE THE ENDURING BENEFIT TO THE ASS ESSEE WOULD BE IN THE FORM OF AVOIDING FUTURE LOSSES ON ACCOUNT OF CONTINUATION OF SUCH ARRANGEMENTS. THE DRP HAS CAREFULLY CONSIDERED THE ISSUE AND AGREES WITH THE ASSESSEE THAT NO NEW ASSETS OR ANY ENDURING BENEFIT HAS BEEN CREATED. THE ASSESSING OF FICER HAS NOT DOUBTED THE GENUINENESS OF THE AMOUNT SETTLED AND T HE ACTUAL PAYMENT OF EXPENDITURE IS A CAPITAL EXPENDITURE AS IT HAS BEEN PAID IN RESPECT OF TERMINATION OF A CONTRACT WHICH WAS O THERWISE SPREAD OVER A NUMBER OF FUTURE YEARS. THE RECIPIENT HAVE F ORGONE THEIR RIGHT TO PRODUCE THESE PRODUCTS FOR FUTURE YEARS AN D THUS THE RIGHT HAS BEEN ACQUIRED BY THE ASSESSEE TO ENFORCE THE SA ME IN THE COURT OF LAW, IF SO REQUIRED ON THE BASIS OF AGREEMENT EN TERED INTO WITH THE RECIPIENT. THEREFORE, A RIGHT HAS BEEN ACQUIRED WHICH IS OF AN ENDURING NATURE, ACCORDINGLY, ACTION OF ASSESSING O FFICER IN TREATING IT AS A CAPITAL EXPENDITURE IS UPHELD 52. THE LEARNED COUNSEL REFERRING TO THE SUBMISSIONS MA DE BEFORE THE DRP PLACED IN PAGE NO.1269 ONWARDS AND THE AGREEMEN T PLACED AT PAGE NOS. 1273, 1283 AND 1290 SUBMITTED THAT AFTER HAVIN G GIVEN A FINDING THAT NO NEW ASSET OR ANY ENDURING BENEFIT HAS BEEN CREAT ED AND FURTHER NOTING THAT AO HAS NOT DOUBTED THE GENUINENESS OF THE AMOU NT SETTLED AND THE ACTUAL PAYMENT OF EXPENDITURE, THE DRP HAS COME TO A WRONG CONCLUSION THAT ASSESSEE HAS ACQUIRED A RIGHT. THIS FINDING OF THE DRP WAS CONTRADICTORY TO THE FACTS OF THE CASE. IT WAS SUBM ITTED THAT ASSESSEE HAS NOT ACQUIRED ANY RIGHT BUT ONLY PAID THE COMPENSATI ON FOR TERMINATION OF THE BUSINESS ARRANGEMENT FOR CONVERSION OF SUGAR CA NDIES ON BEHALF OF ASSESSEE FOR DISTRIBUTING UNDER MAX BRAND AND FUR THER TERMINATION OF PURCHASE AGREEMENT WITH THE TWO COMPANIES. THEREFOR E, THESE HINDUSTAN UNILEVER LIMITED 46 EXPENDITURES ARE BUSINESS EXPENDITURES AND RELIED O N THE FOLLOWING CASES FOR THE PRINCIPLES THEREIN: 1) EMPIRE JUTE CO. LTD. V. COMMISSIONER OF INCOME-TAX. 124 ITR 1 (SC) 2) CIT VS. RAJARAM BANDEKAR (1994) 121 CTR 233 (BOM) 3) COMMISSIONER OF INCOME-TAX. V. MADRAS AUTO SERVICE (P.) LTD 233 ITR 468 (SC) 4) BIKANER GYPSUMS V. CIT [1991] 187 ITR 39 IT WAS HIS SUBMISSION THAT SINCE NO ENDURING BENEFI T HAS COME TO THE ASSESSEE, THE EXPENDITURE HAS TO BE ALLOWED AS REVE NUE EXPENDITURE. 53. WE HAVE CONSIDERED THE ISSUE AND RIVAL SUBMISSION A ND EXAMINED THE RECORD. AS FAR AS THE PAYMENT TO MAX SUGAR CAND IES IS CONCERNED, ASSESSEE HAD AN AGREEMENT DATED 10.01.2003 AND SUPP LEMENTARY AGREEMENT DATED 02.02.2004 FOR CONVERSION OF FINISH ED PRODUCTS OF CANDIES. THE SAID MAKSON NUTRITIONAL FOOD (P) LTD ( MNFPL) HAD CARRIED OUT CONVERSION OF ABOUT 5780 TONNES OF FINISHED PRODUCT S DURING THE PERIOD JUNE 2002 TO SEPTEMBER, 2004. ASSESSEE ON FINDING T HAT THE SAID ACTIVITY WAS INCURRING LOSSES DISCONTINUED THE BUSINESS OF M AX W.E.F. SEPTEMBER, 2004. THE SAID COMPANY RAISED INVOICES IN THE NEXT 5 MONTHS FROM OCTOBER 2004 TO FEB 2005 DEMANDING AN AMOUNT OF ` 29 CRORES. SUBSEQUENTLY VIDE AGREEMENT DATED 10.05.2005 A TERM INATION AGREEMENT WAS MADE BY WHICH ASSESSEE AGREED TO PAY ` 46 CRORES FOR CANCELLATION OF ALL ARRANGEMENTS W.E.F. 10.05.2005. ASSESSEE HAS PR OVIDED AN AMOUNT OF ` 30.44 CRORES IN THE BOOKS OF ACCOUNT IN THE ASSESSM ENT YEAR 2005-06 OUT OF WHICH AO ALLOWED AN AMOUNT OF ` 22.44 CRORES IN THAT YEAR. THE PROVISION MADE OF ` 8 CRORES WAS NOT CLAIMED IN THAT YEAR WITH A NOTE THAT THE COMPENSATION WILL BE CLAIMED IN THE YEAR OF PAY MENT. SINCE THE FINAL AGREEMENT WAS ENTERED IN THIS YEAR ASSESSEE CLAIMED AMOUNT OF ` 4.6 CRORES AS AN EXPENDITURE WHILE ADDING BACK THE BALA NCE PROVISION IN THE BOOKS OF ACCOUNT. AS SEEN FROM THE ABOVE FACTS, WE ARE OF THE OPINION THAT HINDUSTAN UNILEVER LIMITED 47 ASSESSEE HAS CLAIMED THE AMOUNT OF ` 4.60 CRORES AS REVENUE EXPENDITURE AS NO RIGHT HAS BEEN ACQUIRED BY TERMINATING THE CO NVERSION AGREEMENT ENTERED WITH THE SAID COMPANY. IT IS A BUSINESS DEC ISION AND SINCE ASSESSEE IS STILL IN THE BUSINESS OF FOOD AND BEVER AGES THE EXPENDITURE IS RIGHTLY CLAIMED AS REVENUE EXPENDITURE. THE PRINCIP LES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE ABOVE REFERRED FOUR JU DGMENTS EQUALLY APPLY TO THE FACTS OF THE CASE. THEREFORE, AO IS DIRECTED TO ALLOW THE AMOUNT OF ` 4.6 CRORES CLAIMED. 54. NOW COMING TO THE OTHER ISSUE OF PAYMENT CLAIMED UN DER THE SAME WAY BY WAY OF GROUND NO.27 THIS IS WITH REFERENCE TO THE PAYMENT MADE TO PRIME HEALTHCARE PRODUCTS OF ` . 9.75 CRORES AND TO M/S MUL DENTPRO (P) LTD OF ` 4.75 CRORES ON TERMINATION OF PURCHASE AGREEMENTS. BEFORE AO AS WELL AS BEFORE THE DRP IT WAS SUBMITTED THAT THESE AMOUNTS ARE ALSO PAID FOR TERMINATION OF THE AGREEMENTS AND ON THE SIMILA R FACTS TO THE ABOVE ISSUE BOTH AO AND THE DRP TREATED THEM ON SIMILAR M ANNER AS CAPITAL EXPENDITURE. THE AGREEMENT PLACED BEFORE US IN THE PAPER BOOK AT PAGE NO.1283 PERTAIN TO THE PRIME HEALTHCARE PRODUCTS WH ICH INDICATED THAT VIDE CLAUSE 1 ASSESSEE HAD TO COMPENSATE THE SAID C OMPANY A SUM OF ` 4.50 CRORES AS ONE TIME LUMP SUM AND INCLUDES COMPE NSATION PAYMENT TOWARDS SHARING THE COST BURDEN TO BE INCURRED BY T HE SAID COMPANY. THIS AMOUNT IS AKIN TO THE PAYMENT MADE TO M/S MNFPL DIS CUSSED ABOVE AND COMES IN THE NATURE OF REVENUE EXPENDITURE. TO THAT EXTENT ASSESSEES CLAIM CAN BE ALLOWED. HOWEVER, THE AMOUNT OF ` 5 CRORES WAS FURTHER AGREED TO BE PAID AS COMPENSATION TO THE SAID COMPA NY TOWARDS COVENANTS OF NON-COMPETING. THE SAID COMPANY HAS AG REED TO ABIDE BY FOR A PERIOD OF TWO YEARS SO THAT THE INTEREST OF THE C OMPANY ARE DULY SAFEGUARDED DURING THE NON- COMPETE COVENANT PERIOD FOR WHICH BOTH PARTIES ACCEPTED AS REASONABLE AND FAIR PERIOD. THE REFORE, AN AMOUNT OF ` 5 CRORES OUT OF ` 9.50 CRORES INVOLVED PERTAIN TO NON-COMPETE FEE. T HIS NON COMPETE FEE CANNOT BE CONSIDERED AS REVENUE EXP ENDITURE AS IT IS PAID IN THE SAME AGREEMENT BY WHICH THE CONTRACT WAS TER MINATED AND THE HINDUSTAN UNILEVER LIMITED 48 PRINCIPLES LAID DOWN BY THE SPECIAL BENCH OF ITAT IN THE CASE OF TECUMSEH INDIA PRIVATE LIMITED VS. ADDITIONAL CIT IN ITA NO. 3759/DEL/2003 WILL APPLY. SPECIAL BENCH OF THE TRIBUNAL (SUPRA) HELD T HAT NON-COMPETE FEES IS TO BE CONSIDERED AS CAPITAL IN NATURE. HOWEVER, SIN CE AO AND THE DRP DID NOT EXAMINE THE AGREEMENT AND DID NOT CONSIDER THE NATURE OF THE PAYMENT IN ITS CORRECT PERSPECTIVE, WE ARE OF THE O PINION THAT THE CLAIM OF ` 5 CRORES HAS TO BE REEXAMINED BY AO BY GIVING AN O PPORTUNITY TO ASSESSEE. EVEN BEFORE US, EVEN THOUGH THE AGREEMENT S ARE PLACED IN THE PAPER BOOK, THE CONTENTION THAT WAS MADE WAS THAT T HE PAYMENT WAS SAME AS THAT OF ` 4.6 CRORES MADE COMPANY MFNL LTD DISCUSSED IN THE ABOVE PARA. SINCE, WE NOTICED THAT THERE IS A NON-C OMPETE FEE INVOLVED IN THE PAYMENT, IN THE INTEREST OF JUSTICE, WE RESTORE THIS PART OF THE CLAIM TO THE FILE OF AO. 55. COMING TO THE NEXT PAYMENT OF ` 4.75 CRORES PAID TO M/S MUL DENTPRO (P) LTD, HERE ALSO CLAUSE-1 STATES THAT AN AMOUNT OF ` 0.25 CRORES WAS FOR COMPENSATION TOWARDS SHARING THE COST PERTA INS TO THE SAID COMPANY. THIS AMOUNT IS SIMILAR TO THE PAYMENT MADE TO M/S MNFPL DISCUSSED ABOVE AND FOR THE REASONS STATED THEREIN THIS HAS TO BE ALLOWED AS A REVENUE EXPENDITURE. HOWEVER, VIDE CLAUSE-2 OF THIS AGREEMENT PLACED AT PAGE NO.1287 OF THE PAPER BOOK, THE ASSES SEE COMPANY AGREED TO COMPENSATE A SUM OF ` 4.5 CRORES TO THE SAID COMPANY TOWARDS COVENANT OF NON COMPETE FEES FOR A PERIOD OF 2 YEAR S ON THE SAME TERMS AND CONDITIONS AS SPECIFIED IN THE EARLIER AGREEMEN T WITH M/S. PRIME HEALTHCARE PRODUCTS (INCIDENTALLY BOTH THE AGREEMEN T ARE SIGNED BY THE SAME PERSON MR. MANEK SHAH, MAY BE ASSOCIATED COMPA NIES AS THE TERMS OF THE AGREEMENT ARE SAME). SINCE THE ISSUE OF NON- COMPETE FEES IS RESTORED TO THE FILE OF AO AS IT WAS NOT EXAMINED I N THE INTEREST OF JUSTICE, WE REFER THIS PAYMENT OF ` 4.5 CRORES TO THE FILE OF AO. ASSESSEE IS FREE TO MAKE ITS SUBMISSIONS ABOUT THE CLAIM BEFORE AO AND AO IS DIRECTED TO CONSIDER IN THE LIGHT OF THE FACTS AND LAW ON THE I SSUE. ACCORDINGLY AN AMOUNT OF ` 9 CRORES COVERED IN THIS GROUND IS RESTORED TO THE FILE OF AO FOR HINDUSTAN UNILEVER LIMITED 49 FRESH ADJUDICATION, WHEREAS THE BALANCE AMOUNTS ARE CONSIDERED AS REVENUE EXPENDITURE. GROUND NO.26 IS FULLY ALLOWED, WHILE GROUND NO.27 IS PARTLY ALLOWED. GROUND NO.28 56. GROUND NO.28 PERTAINS TO THE PAYMENT TOWARDS CLUB S ERVICES ( ` 4,16,590). IN THE ASSESSMENT AO DISALLOWED THE ENTI RE CLUB MEMBERSHIP FEES AND ENTRANCE FEES AND 50% OF THE COST OF THE C LUB SERVICES AND FACILITIES, BEING PERSONAL IN NATURE. AS FAR AS THE ENTRANCE FEES AND MEMBERSHIP FEES ARE CONCERNED THE DRP ALLOWED THE C LAIM FOLLOWING THE JUDICIAL PRINCIPLES LAID DOWN BY VARIOUS COURTS INC LUDING THE JURISDICTIONAL HIGH COURT. THE DRP HOWEVER, CONFIRMED THE DISALLOW ANCE OF 50% COST OF THE CLUB SERVICES. 57. IT WAS THE SUBMISSION THAT IN EARLIER YEARS THE ISS UE WAS WITH REFERENCE TO THE DISALLOWANCE OF ENTRANCE FEES ONLY . FOR THE FIRST TIME THE CLUB SERVICES AND FACILITIES WERE ALSO DISALLOWED B Y AO. THIS ISSUE IS COVERED BY THE JURISDICTIONAL HIGH COURT IN THE CAS E OF SAYAJI IRON & ENGG. CO. VS. COMMISSIONER OF INCOME-TAX, 253 ITR 749. IN VIEW OF THIS, AO IS DIRECTED TO ALLOW THE EXPENDITURE AS CLAIMED. FURTH ER WHEN ASSESSEE IS A COMPANY, THERE CANNOT BE ANY EXPENDITURE FOR PERSON AL USE. THE EXPENDITURE CAN ONLY BE DISALLOWED AS NON BUSINESS EXPENDITURE, IF ANY. ON THIS REASON ALSO THE DISALLOWANCE CANNOT BE SUPP ORTED. GROUND 28 IS CONSIDERED ALLOWED. GROUND NO.29 58. GROUND NO.29 PERTAINS TO THE ADDITION OF ` 2,15,45,233 (WRONGLY STATED AS ` 24,02,27,143 IN GROUND). AO MADE THIS ADJUSTMENT S TATED TO BE UNDER SECTION 145A ON THE MODVAT CREDIT AVAILABL E UNUTILISED. IT WAS THE SUBMISSION BY ASSESSEE THAT NO SUCH ADJUSTMENT IS REQUIRED UNDER THE PROVISIONS OF SEC.145A. DRP VIDE OBJECTION NO.12 DE CIDED AS UNDER: HINDUSTAN UNILEVER LIMITED 50 ASSESSEE HAS OBJECTED TO THE ADJUSTMENT OF CLOSING STOCK ON ACCOUNT OF CENVAT. KEEPING IN VIEW THE RATIO OF DEC ISION OF VARIOUS COURTS, THE DRP DIRECTS AO TO ADJUST THE OPENING ST OCK, PURCHASES AND THE CLOSING STOCK BY CONSIDERING ALL TAXES/DUTI ES AND SHARES AND IN CASE THERE IS ANY DIFFERENCE, THE ADDITION S HOULD BE MADE UNDER SECTION 145A . 59. INSPITE OF CLEAR DIRECTIONS FROM THE DRP, AO ON THE PRETEXT THAT ASSESSEE HAS NOT FURNISHED ANY DETAILS EXCEPT MAKIN G GENERAL SUBMISSIONS REPEATED THE ADDITION IN THE ASSESSMENT ORDER WITHO UT COMPLYING WITH THE DIRECTIONS OF DRP. BEFORE US A DETAILED NOTE WAS SU BMITTED HOW THE ADJUSTMENT NEED NOT BE MADE UNDER THE PROVISIONS, W HICH IS AS UNDER: WE GIVE BELOW AN ILLUSTRATION EXPLAINING WHY THE VA LUATION OF CLOSING STOCK FOLLOWED BY THE APPELLANTS SHOULD NOT BE DIST URBED: TAKE A CASE WHERE THERE IS AN OPENING STOCK OF TEN UNITS PURCHASED AT RS. 10/- PER UNIT THE EXCISE DUTY PAID ON THESE UNITS WAS RS.2/- PER UNI T. DURING THE PREVIOUS YEAR 100 UNITS OF RAW MATERIALS ARE PURCHASED FOR AN AGGREGATE PRICE OF RS.12/- PER UNI T WHICH INCLUDES A SUM OF RS. 2/- PER UNIT REPRESENTING THE EXCISE D UTY PAYABLE BY THE MANUFACTURER. SEVENTY UNITS OF RAW MATERIALS AR E CONSUMED IN THE MANUFACTURING PROCESS AND ALL SUCH FINISHED GOO DS ARE SOLD PRIOR TO THE END OF THE YEAR. ACCORDINGLY, THERE WOULD BE A CLOSING INVENTORY OF 40 UNITS OF RAW MATERIALS. ON THE GOOD S MANUFACTURED ASSESSEE IS LIABLE TO PAY EXCISE DUTY AT RS.3/- PER UNIT AND ULTIMATELY IT SELLS THE FINISHED GOODS FOR A PRICE OF RS. 20/- PER UNIT. THE MODVAT CREDIT WOULD BE AVAILABLE IN RESPECT OF THE RS. 2/- PER UNIT PAID BY THE ASSESSEE AT THE TIME OF PURCHASE O F THE GOODS. IN ACCORDANCE WITH THE 'NET METHOD' OF ACCOUNTING FOLL OWED BY THE ASSESSEE THE ACCOUNTING TREATMENT IN THE PROFIT AND LOSS ACCOUNT WOULD APPEAR THUS: PROFIT AND LOSS ACCOUNT UNIT RS. UNIT RS. OPENING 10 100 SALES 70 1400 STOCK PURCHASE 100 1000 CLOSING 40 400 STOCK EXCISE 70 210 DUTY PROFIT 490 1800 1800 HINDUSTAN UNILEVER LIMITED 51 EVEN IF THE ADJUSTMENT AS CONTEMPLATED BY SECTION 1 45A(B) WERE TO BE MADE THE PROFIT WOULD ACTUALLY REDUCE AS ILLUSTR ATED BELOW: NET PROFIT 490 LESS: ADJUSTMENT TO OPENING STOCK 20 ADJUSTMENT TO PURCHASE 200 220 270 ADD: ADJUSTMENT TO CLOSING STOCK 80 350 HOWEVER, IN ORDER TO ASCERTAIN THE CORRECT PROFITS ONE WOULD HAVE TO PASS AN ENTRY TO MAKE SUITABLE ADJUSTMENT FOR. THE MODVAT UTILIZED. ACCORDING TO THE INSTITUTE OF CHARTERED ACCOUNTANTS 'OF INDIA THE ENTRY THAT IS TO BE PASSED IS IN A SUM OF RS. 1401- WHICH REPRESENT THE MOD VAT CREDIT THAT IS UTILIZED ON THE UNITS WH ICH ARC CONSUMED. IN THE AFORESAID EXAMPLE 70 UNITS ARE CONSUMED AND AS THE MODVAT CREDIT IS RS. 2/- PER UNIT A CREDIT OF RS. 1401- IS TAKEN. THIS WOULD RESULT IN THE PROFITS BEING DETERMINED AT RS.490 WH ICH IS THE SAME AS PER THE NET METHOD. THE CASE OF THE REVENUE THAT TH E ENTRY THAT SHOULD BE PASSED IS IN A SUM OF RS. 200/- BECAUSE A CCORDING TO THE REVENUE THE ENTIRE 100 UNITS WHICH THE ASSESSEE PUR CHASES ARE ELIGIBLE FOR A MODVAT CREDIT OF RS.2/- PER UNIT I.E . RS. 2001- IN THE AGGREGATE AND THE ASSESSEE'S EXCISE DUTY LIABILITY OF RS. 210/- IS DISCHARGED PARTLY BY AVAILING OF THE CREDIT OF RS. 200/-. IT IS THIS ENTRY THAT REPRESENTS THE AREA OF DIFFERENCE. ACCOR DING TO THE REVENUE AS THE ASSESSEE HAS UTILIZED THE MODVAT CRE DIT THAT IS AVAILABLE TO IT ON ITS PURCHASES IN ITS ENTIRETY A CREDIT FOR THE ENTIRE AMOUNT HAS TO BE TAKEN WHILST ACCORDING TO THE ASSE SSEE CREDIT CAN ONLY BE TAKEN FOR THE UNITS ACTUALLY CONSUMED. THE CORRECTNESS OF THIS ASPECT OF THE MATTER IS NOT THE SUBJECT MATTER OF AN ADJUSTMENT AS CONTEMPLATED UNDER SECTION 145A BUT IS IN FACT A N ADJUSTMENT WHICH WAS CONSIDERED BY THE SUPREME COURT IN THE CA SE OF INDO NIPPON CHEMICALS LTD (261 ITR 275) AND THE SUPREME COURT SPECIFICALLY HELD THAT MERELY BECAUSE THE MOD VAT C REDIT IS AN IRREVERSIBLE CREDIT AVAILABLE TO THE MANUFACTURERS UPON PURCHASE OF DUTY PAID RAW MATERIALS IT WOULD NOT THE AMOUNT TO INCOME WHICH IS LIABLE TO TAX UNDER THE ACT . 60. ASSESSEE ALSO RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF INDO NIPPON CHEMICALS LTD (261 ITR 275) TO SUBMIT THAT THE FOLLOWING THE ABOVE PRINCIPLES, NO ADJUSTMENT IS RE QUIRED. CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THE M ATTER HAS TO BE RESTORED TO THE FILE OF AO TO DECIDE THE ISSUE IN THE LIGHT OF THE LEGAL PRINCIPLES AND TO PARTICULARLY IMPLEMENT THE DIRECTIONS GIVEN BY T HE DRP. ASSESSEE IS ALSO DIRECTED TO SUBMIT THE RELEVANT DATA TO AO. WITH TH ESE DIRECTIONS THE GROUND 29 IS ALLOWED FOR STATISTICAL PURPOSES. HINDUSTAN UNILEVER LIMITED 52 61. GROUND NO.30 PERTAINS TO THE ISSUE OF ADJUSTMENT MADE ON THE CAPITAL SUBSIDY RECEIVED OF ` 5.00 LAKHS WHICH AO ADJUSTED IN THE WDV FOR THE PURPOSE OF COMPUTATION OF DEPRECIATION. IT WAS FAIRLY ADMITTED THAT THIS ISSUE IS AGAINST ASSESSEE. THEREFORE, THE GROUND IS REJECTED. GROUND NO.31 62. GROUND NO.31 PERTAINS TO THE SHORT DEDUCTION OF TAX AT SOURCE AND THE CONSEQUENT DISALLOWANCE MADE UNDER SECTION 40(A )(IA). AO DISALLOWED THE AMOUNT OF ` 60,97,100/- ON THE REASON THAT ASSESSEE HAS SHORT DEDUCTED THE TAX. IT WAS THE SUBMISSION THAT THE PR OVISIONS OF SECTION 40(A)(IA) DOES NOT APPLY IN RESPECT OF SHORT DEDUCT ION BUT WILL ONLY APPLY WHERE THE TAX HAS NOT BEEN DEDUCTED AND AFTER DEDUC TING HAS NOT BEEN PAID. THE LEARNED COUNSEL RELIED UPON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF CHANDABHOY & JASSOBHOY VS. DCIT IN I TA NO.20/MUM/2010 AND ALSO IN THE CASE OF S.K. TEKRIWAL VS. DCIT IN I TA NO.1135/KOL/2010. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THE PROVISIONS OF SECTION 40(A)(IA) DOES NOT APPLY TO S HORT DEDUCTION OF TAX. THIS ISSUE WAS CONSIDERED AND DECIDED IN THE CASE O F CHANDABHOY & JASSOBHOY (SUPRA) WHEREIN ONE OF US ACCOUNTANT MEMB ER IS A PARTY TO THE DECISION, AS UNDER: 3.3. WE HAVE HEARD THE RIVAL ARGUMENTS AND EXAMINED THE RECORD. ASSESSEE HAS EMPLOYED ABOUT 18 CONSULTANTS WITH WHO M IT ENTERED INTO AGREEMENTS FOR A PERIOD OF TWO YEARS RENEWABLE FURTHER AT THE OPTION OF EITHER PARTIES AND THEY WERE PAID FIXED A MOUNTS WITHOUT ANY SHARE IN THE PROFIT. THESE CONSULTANTS ARE PROH IBITED FROM TAKING ANY PRIVATE ASSIGNMENTS AND WORKED FULL TIME WITH THE ASSESSEE FIRM. THERE IS NO DISPUTE WITH REFERENCE T O THE DEDUCTION OF TAX UNDER SECTION 192 AND ALSO THE FACT THAT IN THEIR INDIVIDUAL ASSESSMENTS THESE PAYMENTS WERE ACCEPTED AS SALARY PAYMENTS. IT IS ALSO NOT DISPUTED THAT THE ENTIRE AMOUNT PAID FO R 18 CONSULTANTS IS ONLY AN AMOUNT OF `26,75,535, WHICH INDICATES TH AT THEY ARE IN EMPLOYMENT AND NOT PROFESSIONAL CONSULTANTS. IT IS ALSO NOT THE CASE THAT ASSESSEE HAS NOT DEDUCTED ANY AMOUNT. ASS ESSEE HAS INDEED DEDUCTED TAX UNDER SECTION 192 AND SO WE ARE OF THE OPINION THAT PROVISIONS OF SECTION 40(A)(IA) ALSO D O NOT APPLY AS THE SAID PROVISION CAN BE INVOKED ONLY IN THE EVENT OF NON DEDUCTION OF TAX BUT NOT FOR LESSER DEDUCTION OF TAX. IN VIEW OF THIS, WE ARE OF HINDUSTAN UNILEVER LIMITED 53 THE OPINION THAT THERE IS NO MERIT IN REVENUES CON TENTION THAT THE AMOUNT PAID TO THE EMPLOYEES SHOULD BE DISALLOWED A S PROVISIONS OF SECTION 194J WOULD ATTRACT. ON THE FACTS OF THE CAS E, THERE IS NO MERIT IN REVENUES APPEAL. ACCORDINGLY THE ORDER OF THE CIT(A) IS CONFIRMED. 63. IN THE CASE OF M/S S.K. TEKRIWAL IN ITA NO.1135/KOL /2010 THE COORDINATE BENCH AT KOLKATA HAS EXAMINED THIS ISSUE AND DECIDED AS UNDER: 6. IN THE PRESENT CASE BEFORE US THE ASSESSEE HAS D EDUCTED TAX U/S. 194C(2) OF THE ACT BEING PAYMENTS MADE TO SUB- CONTRACTORS AND IT IS NOT A CASE OF NON-DEDUCTION OF TAX OR NO DEDUCTION OF TAX AS IS THE IMPORT OF SECTION 40A(IA) OF THE ACT. BUT THE REVENUES CONTENTION IS THAT THE PAYMENTS ARE IN THE NATURE O F MACHINERY HIRE CHARGES FALLING UNDER THE HEAD RENT AND THE PREVI OUS PROVISIONS OF SECTION 194I OF THE ACT ARE APPLICABLE. ACCORDING T O REVENUE, THE ASSESSEE HAS DEDUCTED TAX @ 1% UNDER SECTION 194C(2 ) OF THE ACT AS AGAINST THE ACTUAL DEDUCTION TO BE MADE AT 10% U NDER SECTION 194I OF THE ACT, THEREBY LESSER DEDUCTION OF TAX. T HE REVENUE HAS MADE OUT A CASE OF LESSER DEDUCTION OF TAX AND THAT ALSO UNDER DIFFERENT HEAD AND ACCORDINGLY DISALLOWED THE PAYME NTS PROPORTIONATELY BY INVOKING THE PROVISIONS OF SECTI ON 40(A)(IA) OF THE ACT. THE LD. CIT, DR ALSO ARGUED THAT THERE IS NO WORD LIKE FAILURE USED IN SECTION 40(A)(IA) OF THE ACT AND IT REFERRED TO ONLY NON-DEDUCTION OF TAX AND DISALLOWANCE OF SUCH PAYME NTS. ACCORDING TO HIM, IT DOES NOT REFER TO GENUINENESS OF THE PAY MENT OR OTHERWISE BUT ADDITION U/S. 40(A)(IA) CAN BE MADE E VEN THOUGH PAYMENTS ARE GENUINE BUT TAX IS NOT DEDUCTED AS REQ UIRED U/S. 40(A)(IA) OF THE ACT. WE ARE OF THE VIEW THAT THE C ONDITIONS LAID DOWN U/S. 40(A)(IA) OF THE ACT FOR MAKING ADDITION IS THAT TAX IS DEDUCTIBLE AT SOURCE AND SUCH TAX HAS NOT BEEN DEDU CTED. IF BOTH THE CONDITIONS ARE SATISFIED THEN SUCH PAYMENT CAN BE DISALLOWED U/S. 40(A)(IA) OF THE ACT BUT WHERE TAX IS DEDUCTED BY THE ASSESSEE, EVEN UNDER BONAFIDE WRONG IMPRESSION, UNDER WRONG P ROVISIONS OF TDS, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT CANNOT BE INVOKED. HERE IN THE PRESENT CASE BEFORE US, THE AS SESSEE HAS DEDUCTED TAX U/S. 194C(2) OF THE ACT AND NOT U/S. 1 94I OF THE ACT AND THERE IS NO ALLEGATION THAT THIS TDS IS NOT DEP OSITED WITH THE GOVERNMENT ACCOUNT. WE ARE OF THE VIEW THAT THE PRO VISIONS OF SECTION 40(A)(IA) OF THE ACT HAS TWO LIMBS, ONE IS WHERE, INTER ALIA, ASSESSEE HAS TO DEDUCT TAX AND THE SECOND WHERE AFT ER DEDUCTING TAX, INTER ALIA, THE ASSESSEE HAS TO PAY INTO GOVER NMENT ACCOUNT. THERE IS NOTHING IN THE SAID SECTION TO TREAT, INTE R ALIA, THE ASSESSEE AS DEFAULTER WHERE THERE IS A SHORTFALL IN DEDUCTIO N. WITH REGARD TO THE SHORTFALL, IT CANNOT BE ASSUMED THAT THERE IS A DEFAULT AS THE DEDUCTION IS NOT AS REQUIRED BY OR UNDER THE ACT, B UT THE FACTS IS THAT THIS EXPRESSION, ON WHICH TAX IS DEDUCTIBLE A T SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED O R, AFTER DEDUCTION HAS NOT BEEN PAID ON OR BEFORE THE DUE DA TE SPECIFIED IN HINDUSTAN UNILEVER LIMITED 54 SUB-SECTION (1) OF SECTION 139. THIS SECTION 40(A) (IA) OF THE ACT REFERS ONLY TO THE DUTY TO DEDUCT TAX AND PAY TO GO VERNMENT ACCOUNT. IF THERE IS ANY SHORTFALL DUE TO ANY DIFFE RENCE OF OPINION AS TO THE TAXABILITY OF ANY ITEM OR THE NATURE OF PAYM ENTS FALLING UNDER VARIOUS TDS PROVISIONS, THE ASSESSEE CAN BE DECLARE D TO BE AN ASSESSEE IN DEFAULT U/S. 201 OF THE ACT AND NO DISA LLOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA ) OF THE ACT. ACCORDINGLY, WE CONFIRM THE ORDER OF CIT(A) ALLOWIN G THE CLAIM OF ASSESSEE AND THIS ISSUE OF REVENUES APPEAL IS DISM ISSED. 64. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE SA ME, WE DIRECT AO TO DELETE THE SAID ADDITION MADE, BY INVOKING THE P ROVISIONS OF SECTION 40(A)(IA). GROUND31 IS ALLOWED. GROUND NO.32 65. GROUND NO.32 PERTAINS TO TAXING OF INTEREST GRANTED UNDER SECTION 244A OF THE ACT VIDE INTIMATION UNDER SECTION 143(1 ) FOR THE ASSESSMENT YEAR 2005-06. GROUND NOS. 32 TO 32.3 IS AS UNDER: 32. THE LEARNED AO ERRED IN HOLDING THAT THE AMOUNT OF INTEREST RECEIVED BY ASSESSEE UNDER SECTION 244A OF THE ACT VIDE INTIMATION UNDER SECTION 143(1) FOR ASSESSMENT YEAR 2005-06 IN APRIL 2006 WAS LIABLE TO BE TAXED AS ASSESSEES INCOME IN ASSE SSMENT YEAR 2006-07. 32.1 THE LEARNED AO FAILED TO APPRECIATE THAT THE O RDER UNDER SECTION 143(1) FOR A.Y 2005-06 WAS RECEIVED BY ASSE SSEE ONLY IN APRIL 2006 AND HENCE THE INTEREST RECEIVED WITH THE ORDER UNDER SECTION 14391) COULD NOT BE TAXED IN A.Y 2006-07. 32.2 WITHOUT PREJUDICE, THE APPELLANT SUBMITS THAT THE LEARNED AO FAILED TO APPRECIATE THAT, ALONG WITH THE RECEIPT O F INTIMATION UNDER SECTION 143(1) FOR A.Y 2005-06 THE APPELLANT HAD AL SO RECEIVED NOTICE UNDER SECTION 143(2) INDICATING THAT THE APP ELLANTS CASE WAS SELECTED FOR SCRUTINY WHICH COULD ONLY BE ON THE BA SIS THAT THE APPELLANT HAS CLAIMED AN EXEMPTION, DEDUCTION, ALLO WANCE OR RELIEF WHICH WAS INADMISSIBLE. 32.3 THE LEARNED AO OUGHT TO HAVE HELD THAT THE INT EREST RECEIVED BY THE APPELLANT HAD NOT ATTAINED FINALITY SO AS TO CONSTITUTE INCOME IN THE HANDS OF THE APPELLANT . HINDUSTAN UNILEVER LIMITED 55 66. BRIEFLY STATED, AO GRANTED INTEREST ON ` 589,81,740 UNDER SECTION 244A ON PROCESSING OF RETURN FOR ASSESSMENT YEAR 20 05-06 ON 31.3.2006. AS ASSESSEE RECEIVED THE AMOUNT IN APRIL 2006 THIS AMOUNT WAS TAKEN AS INCOME IN THAT YEAR. AO WAS OF THE OPINION THAT ASS ESSEE SHOULD HAVE OFFERED THE AMOUNT FOR TAXATION IN ASSESSMENT YEAR 2006-07 AS HAVING BEEN GRANTED ON 31.03.06. ACCORDINGLY, HE BROUGHT T O TAX AN AMOUNT OF ` 589,81,740 IN ADDITION TO THE INTEREST ON INCOME TA X REFUNDS ALREADY OFFERED BY ASSESSEE OF ` 6.03 CRORES. SINCE THE SAME WAS CONFIRMED BY THE DRP, ASSESSEE IS AGGRIEVED. 67. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THIS ISSUE HAS CRYSTALLIZED BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF AVADA TRADING CO. (P) LTD VS. ACIT, 100 ITD 131 (MU M)SB, WHEREIN IN WAS HELD AS UNDER: ACCORDING TO THE CHARGING PROVISIONS OF SECTIONS 4 AND 5, THE INCOME IS CHARGEABLE IN THE YEAR IN WHICH IT EITHER ACCRUES OR IS RECEIVED AS THE CASE MAY BE. THE ISSUE REGARDING AC CRUAL OF INCOME IS CONCLUDED BY THE JUDGMENT OF THE SUPREME COURT R ENDERED IN THE CASE OF E.D. SASSOON & CO. LTD. V. CIT [1954] 26 ITR 27 , WHEREIN IT HAS BEEN HELD THAT INCOME ACCRUES WHEN RIGHT TO REC EIVE IS ACQUIRED AND SUCH RIGHT CAN BE SAID TO HAVE BEEN ACQUIRED WH EN AN ENFORCEABLE DEBT IS CREATED IN FAVOUR OF THE ASSESS EE. A BARE LOOK AT THE PROVISIONS OF SUB-SECTION (1) OF SECTION 244A REVEALS THAT AS SOON AS ANY REFUND BECOMES DUE UNDE R ANY PROVISIONS OF THE ACT, THE ASSESSEE BECOMES ENTITLE D TO RECEIVE THE INTEREST IN RESPECT OF SUCH REFUND CALCULATED IN TH E MANNER PROVIDED IN CLAUSES ( A ) AND ( B ) OF SUCH PROVISIONS. THEREFORE, THE MOMENT THE REFUND IS GRANTED, AN ENFORCEABLE DEBT IS CREAT ED IN FAVOUR OF THE ASSESSEE IN RESPECT OF INTEREST DUE ON SUCH REF UND. CONSEQUENTLY, INCOME CAN BE SAID TO ACCRUE ON THE D ATE OF REFUND ITSELF. THEREFORE, WHEN SUCH INTEREST IS ACTUALLY G RANTED ALONG WITH THE REFUND, THEN THE REQUIREMENTS OF SECTIONS 4 AND 5 ARE FULLY SATISFIED AND THE SAME CAN BE TAXED IN THE YEAR OF RECEIPT. THERE WAS NO MERIT IN THE CONTENTION OF THE ASSESSE E THAT SUCH RIGHT WAS CONTINGENT AS THE INTEREST SO RECEIVED CO ULD BE VARIED OR WITHDRAWN AFTER THE ASSESSMENT UNDER SECTION 143(3) . ACCORDING TO THE DICTIONARY MEANING, A RIGHT OR AN OBLIGATION CA N BE SAID TO BE CONTINGENT WHEN SUCH RIGHT OR OBLIGATION IS DEPENDE NT ON SOMETHING NOT YET CERTAIN. ACCORDING TO SECTION 244A, THE ONL Y CONDITION FOR GRANT OF INTEREST IS THAT THERE MUST BE A REFUND DU E TO THE ASSESSEE UNDER ANY PROVISION OF THE ACT. THERE IS NO OTHER C ONDITION IN THE HINDUSTAN UNILEVER LIMITED 56 SAID PROVISION AFFECTING SUCH RIGHT. THEREFORE, THE MOMENT A REFUND BECOMES DUE TO THE ASSESSEE, AN ENFORCEABLE DEBT IS CREATED IN FAVOUR OF THE ASSESSEE AND THE ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE INTEREST. SUB-SECTION (3) OF SECTION 244A ONLY AFFECTS ITS QUANTIFICATION UNDER CERTAIN CIRCUMSTANCES AND NOT THE RIGHT OF INTEREST. THE SUPREME COURT IN THE CASE OF CIT V. SHRI GOVERDHAN LTD. [1968] 69 ITR 675 HAS OBSERVED THAT ONCE A DEBT IS CREATED, THEN THE LIABILITY CANNOT BE SAID TO BE CONTINGENT MERELY BECAUSE IT IS TO BE QUANTIFIED AT LATER DATE. UNDER SECTION 24 4A, EVEN THE INTEREST IS QUANTIFIED IMMEDIATELY WHENEVER A REFUN D IS ISSUED. HENCE, THE RIGHT TO GRANT INTEREST IS ABSOLUTE SINC E EXISTENCE OF SUCH RIGHT IS NOT DEPENDENT ON ANY EVENT. IT IS WELL SETTLED FROM THE JUDGMENT OF THE SUPREME COURT RENDERED IN THE CASE OF KEDARNATH JUTE MFG. LTD. V. CIT [1971] 82 ITR 363 THAT IF AN ENFORCEABLE DEBT IS CREATED UNDER A STAT UTE, THEN ANY SUBSEQUENT EVENT WOULD NOT AFFECT THE EXISTENCE OF SUCH RIGHT/OBLIGATION DESPITE THE FACT THAT SUCH DEBT IS SUBJECT-MATTER OF APPEAL. THE RIGHT TO INTEREST UNDER SECTION 244A IS NOT DEPENDENT UPON ANY ASSESSMENT INASMUCH AS THERE IS NO COMPULS ION OR OBLIGATION UPON THE ASSESSING OFFICER TO MAKE AN AS SESSMENT UNDER SECTION 143(3). THE MOMENT THE RETURN IS PROCESSED UNDER SECTION 143(1)( A ) AND REFUND IS ISSUED ON THE BASIS OF INTIMATION U NDER SECTION 143(1)( A ), AN ENFORCEABLE LEGAL RIGHT IS CREATED IN FAVOUR OF THE ASSESSEE UNDER SECTION 244A AND SIMULTANEOUSLY THE ASSESSING OFFICER IS UNDER LEGAL OBLIGATION TO GRANT THE INTE REST. MERELY BECAUSE QUANTUM OF SUCH INTEREST MAY VARY ON ASSESS MENT MADE UNDER SECTION 143(3), IT CANNOT BE SAID THAT LEGAL RIGHT WAS NOT ACQUIRED ON THE DATE OF REFUND. THE EFFECT OF ASSES SMENT UNDER SECTION 143(3) WOULD BE THAT INTEREST ON REFUND UND ER SECTION 244A WOULD GET SUBSTITUTED IN TERMS OF SUB-SECTION (3) O F SECTION 244A WITHOUT AFFECTING RIGHT ALREADY ACCRUED. FURTHER, THE JUDGMENT OF THE SUPREME COURT RENDERED IN THE CASE OF CIT V. CHUNILAL V. MEHTA & SONS (P.) LTD. [1971] 82 ITR 54 CLEARLY SHOWS THAT ONCE A RIGHT ACCRUES UNDER AN AG REEMENT, THEN SUCH ACCRUAL IS NOT AFFECTED BY DISPUTE BETWEE N THE PARTIES. FURTHER, IN CASE OF DISPUTE, THE FINAL OUTCOME WOUL D ULTIMATELY RELATE BACK TO THE YEAR OF ACCRUAL. IT WAS ALSO CONTENDED BY THE ASSESSEE THAT IT WOULD BE WITHOUT REMEDY IF THE INTEREST WAS REDUCED BY VIRTUE OF ASS ESSMENT UNDER SECTION 143(3). THAT APPREHENSION WAS UNFOUNDED. IF INTEREST IS REDUCED BY VIRTUE OF SUB-SECTION (3) OF SECTION 244 A ON ACCOUNT OF ASSESSMENT UNDER SECTION 143(3), THE INTEREST GRANT ED IN EARLIER YEAR GETS SUBSTITUTED AND IT IS THE REDUCED AMOUNT OF INTEREST THAT WOULD FORM PART OF INCOME OF THAT YEAR. THUS, IT WO ULD AMOUNT TO MISTAKE RECTIFIABLE UNDER SECTION 154. IF THE BASIS ON WHICH INCOME WAS ASSESSED IS VARIED OR CEASES TO EXIST, THEN SUC H ASSESSMENT WOULD BECOME ERRONEOUS AND CAN BE RECTIFIED. SIMILA RLY, ANY INCOME ASSESSED MAY BECOME NON-TAXABLE BY VIRTUE OF RETROSPECTIVE AMENDMENT AND, CONSEQUENTLY, ERRONEOU S ASSESS HINDUSTAN UNILEVER LIMITED 57 MENT CAN BE RECTIFIED. THEREFORE, IF THE INTEREST G RANTED UNDER SECTION 244A(1) IS VARIED UNDER SUB-SECTION (3) OF SUCH SECTION, THEN THE INTEREST ORIGINALLY GRANTED WOULD BE SUBST ITUTED BY THE REDUCED/INCREASED AMOUNT, AS THE CASE MAY BE. THUS, INCOME ON ACCOUNT OF INTEREST IF ASSESSED CAN BE RECTIFIED UN DER SECTION 154. THEREFORE, INTEREST ON REFUND UNDER SECTION 244A(1) GRANTED TO THE ASSESSEE IN THE PROCEEDINGS UNDER SECTION 143(1)( A ) WOULD BE ASSESSABLE IN THE YEAR IN WHICH IT IS GRANTED AND N OT IN THE YEAR IN WHICH PROCEEDINGS UNDER SECTION 143(1)( A ) ATTAIN FINALITY. 68. THEREFORE, WHILE UPHOLDING IN PRINCIPLE THAT THE AM OUNT IS TO BE TAXED IN THE YEAR OF GRANTING THE REFUND, AO IS FUR THER DIRECTED TO EXAMINE WHETHER ASSESSEE WAS ENTITLED FOR ANY INTEREST UNDE R THE SAME PROVISIONS AFTER AN ORDER UNDER SECTION 143(3) WAS PASSED AND IF SO MODIFY THE ORDER TO THE EXTENT ASSESSEES QUANTUM OF INTEREST TO BE BROUGHT TO TAX. IN CASE THE ENTIRE INTEREST GRANTED WAS WITHDRAWN BY ANY OR DER SUBSEQUENTLY, THE RELIEF TO THE EXTENT HAS TO BE PROVIDED TO ASSESSEE . WITH THESE DIRECTIONS, THE GROUND 32 IS PARTLY ALLOWED. GROUND NO.33 69. GROUND NO.33 PERTAINS TO THE DISALLOWING AN AMOUNT OF ` 4,43,057 AS UNEXPLAINED INCOME. IN THE COURSE OF THE ASSESSM ENT WHILE CONSIDERING THE WRITE BACK OF THE PROVISIONS AND MAKING DISALLO WANCE OF THE CLAIM MADE FOR THE EXPENDITURE DURING THE YEAR OUT OF THE PROVISIONS SO MADE AND AFTER TAKING RECONCILIATIONS FROM ASSESSEE, AO HAS COME TO THE CONCLUSION THAT AN AMOUNT OF ` 15,26,43,057 WAS SOUGHT TO BE EXPLAINED TOWARDS VARIOUS PROVISIONS OUT OF WHICH AN AMOUNT O F ` 15.22 CRORES I.E. ` 9.5 CRORES + ` 4.75 CRORES + ` 0.95 CRORES WAS EXPLAINED. THE DIFFERENCE AMOUNT OF ` 4,43,057 REMAIN UNEXPLAINED. ACCORDINGLY THE SAME WAS ADDED BACK TO THE TOTAL INCOME OF ASSESSEE. ASSESSE ES SUBMISSIONS BEFORE THE DRP THAT PROVISIONS FOR THIS AMOUNT MADE EARLIE R WAS ALSO NOT ACCEPTED. THE LEARNED COUNSEL REFERRING TO PAGE NO .301 OF THE DOCUMENTS PLACED I.E. OBJECTIONS FILED BEFORE THE DRP SUBMITT ED THAT ASSESSEE MADE PROVISION OF ` 14,29,43,057 IN EARLIER YEARS BASED ON PRUDENT ACC OUNTING HINDUSTAN UNILEVER LIMITED 58 POLICY WHEN THE CLAIMS WERE RECEIVED FROM M/S PRIME HEALTHCARE PRODUCTS AND M/S MUL DENTPRO (P) LTD. THIS PROVISION AMOUNT WAS DISALLOWED AND NOT CLAIMED IN THE RESPECTIVE YEARS. OUT OF THE ABO VE PROVISIONS, ASSESSEE PAID ` 9.50 CRORES TO PRIME HEALTHCARE PRODUCTS AND ` 4.75 CRORES TO MUL DENTPRO (P) LTD (DISCUSSED IN GROUND NOS. 26 & 27 A BOVE). THE BALANCE AMOUNT OF ` 4,43,057 WAS WRITTEN BACK TO THE PROFIT & LOSS A/C AS THE SAID PROVISIONS WAS NOT REQUIRED. SINCE THE AMOUNT WAS O FFERED TO TAX IN THE RESPECTIVE YEARS WHEN THE PROVISIONS WAS MADE THE W RITE BACK OF THE SAME SHOULD NOT BE TAXED IN THE YEAR OF WRITE BACK. 70. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT ASSESSEES CONTENTION IS CORRECT ON FACTS. SINCE TH E PROVISION WAS NOT ALLOWED AS DEDUCTION IN THE YEAR OF CREATION, THE W RITE BACK OF THE AMOUNT CANNOT BE BROUGHT TO TAX IN THE YEAR OF WRITE BACK. EVEN THOUGH ASSESSEE HAD EXPLAINED HOW THIS BALANCE PROVISION WAS WRITTE N BACK, WE ARE OF THE OPINION THAT BOTH AO AND THE DRP DID NOT EXAMINE TH E FACTS CORRECTLY. WE ARE OF THE OPINION THAT THERE IS NO NEED TO BRING T O TAX THIS AMOUNT. HOWEVER, SINCE AO DID NOT GIVE PROPER OPPORTUNITY T O ASSESSEE TO MAKE SUBMISSIONS ON THIS AMOUNT, THE OBJECTION OF WHICH WAS THERE BEFORE THE DRP, WE REMIT THE ISSUE TO THE FILE OF AO TO EXAMIN E THE FACTS AND DELETE THE ADDITIONS SO MADE AFTER SATISFYING WITH THE REC ONCILIATION OF AMOUNTS INVOLVED. GROUND IS CONSIDERED ALLOWED FOR STATISTI CAL PURPOSES. GROUND NO.34 71. GROUND NO.34 PERTAINS TO THE ISSUE OF BROUGHT FORWA RD DEPRECIATION OF AMALGAMATING COMPANY BEING SET OFF. BRIEFLY STAT ED AS PER THE DETAILS FURNISHED IN SCHEDULE 7 OF THE TAX AUDIT REPORT IN RELATION TO CLAUSE 25 OF THE REPORT, ASSESSEE CLAIMED SET OFF OF UNABSORBED DEPRECIATION OF AMALGAMATING COMPANY VASHISTI DETERGENTS LTD (VDL) FOR THE ASSESSMENT YEAR 1996-97 AND ASSESSMENT YEAR 1997-98 OF ` 5,63,66,551 AND ` 8,97,30,340 RESPECTIVELY (ALTHOUGH THE UNABSORBED D EPRECIATION AS PER ASSESSMENT ORDER UNDER SECTION 143(3) DT 29.01.99 F OR THE ASSESSMENT HINDUSTAN UNILEVER LIMITED 59 YEAR 1996-97 WAS MENTIONED AS ` 5,33,10,169). THE AO WAS OF THE OPINION THAT AS PER PROVISIONS OF SECTION 32(2) REL ATING TO CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION HAD BEEN AME NDED BY FINANCE (NO.2) ACT, 1996 W.E.F. ASSESSMENT YEAR 1997-98 AND REMAINED ON THE STATUTE TILL ASSESSMENT YEAR 2001-02 AND AS PER TH E AMENDED PROVISIONS THE UNABSORBED DEPRECIATION WAS ALLOWED TO BE CARRI ED FORWARD ONLY FOR A PERIOD OF EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEE DING THE ASSESSMENT YEAR FOR WHICH THE AFORESAID ALLOWANCE WAS FIRST CO MPUTED. THUS, THE UNABSORBED DEPRECIATION FOR THE ASSESSMENT YEAR 199 6-97 WHICH WAS DEEMED TO BE PART OF THE DEPRECIATION ALLOWANCE FOR ASSESSMENT YEAR 1997-98 AS PER THE UNAMENDED PROVISION OF SECTION 3 2(2) AND THE DEPRECIATION FOR ASSESSMENT YEAR 1997-98 COULD BE C ARRIED FORWARD ONLY UPTO ASSESSMENT YEAR 2005-06. ASSESSEE VIDE QUESTIO NNAIRE DATED 05.10.2009 AND DURING THE ASSESSMENT PROCEEDINGS WA S REQUIRED TO JUSTIFY THE CLAIM FOR SET OFF OF BROUGHT FORWARD LOSSES/DEP RECIATION. 72. IT WAS THE CLAIM THAT THE UNABSORBED DEPRECIATION O F VASHISTI DETERGENTS LTD (VDL) WAS TO BE SET OFF WHEN THE COM PANY GOT AMALGAMATED WITH THE ASSESSEE COMPANY. AO DID NOT A CCEPT ON THE REASON THAT THE DEPRECIATION FOR 1996-97 GOT MERGED INTO D EPRECIATION FOR ASSESSMENT YEAR 1997-98 AND THEREFORE AS PER THE AM ENDED PROVISIONS OF SECTION 32 (2) THE SET OFF CANNOT BE ALLOWED BY THE ASSESSMENT YEAR 2005- 06. THEREFORE, THE CLAIM WAS NOT ALLOWED IN THE ASS ESSMENT YEAR 2006-07 WHICH WAS BEYOND THE PERIOD OF SUCCEEDING EIGHT ASS ESSMENT YEARS. THE SAME OPINION WAS HELD BY THE DRP. 73. BEFORE US THE LEARNED COUNSEL RELIED ON THE DECISIO N OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS IN DIA (P) LTD VS. DCIT IN SPECIAL CIVIL APPLICATION NO.1773 OF 2012 DATED 23. 08.2012, WHEREAS THE LEARNED DR RELIED ON THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DCIT VS. TIMES GUARANTY LTD, 40 SOT 14 (SB) (MUM). HINDUSTAN UNILEVER LIMITED 60 74. WE HAVE CONSIDERED THE ISSUE. IT IS TRUE THAT THIS ISSUE WAS HELD AGAINST ASSESSEE AND IN FAVOUR OF THE REVENUE BY TH E ITAT SPECIAL BENCH IN THE CASE OF DCIT VS. TIMES GUARANTY LTD (SUPRA) WHEREIN IT HAS CONSIDERED VIDE PARA 38 AS UNDER: 38. THE LEGAL POSITION OF CURRENT AND BROUGHT FORW ARD UNADJUSTED/UNABSORBED DEPRECIATION ALLOWANCE IN THE THREE PERIODS, IS SUMMARIZED AS UNDER: A. IN THE FIRST PERIOD (I.E. UP TO ASSESSMENT YEAR 1996-97) (I)CURRENT DEPRECIATION, THAT IS THE AMOUNT OF ALLO WANCE FOR THE YEAR UNDER SECTION 32(1), CAN BE SET OFF AGAINST INCOME UNDER ANY HEAD WITHIN THE SAME YEAR. (II)AMOUNT OF SUCH CURRENT DEPRECIATION WHICH CANNO T BE SO SET OFF WITHIN THE SAME YEAR AS PER (I) ABOVE SHALL BE DEEM ED AS DEPRECIATION UNDER SECTION 32(1), THAT IS DEPRECIATION FOR THE C URRENT YEAR IN THE FOLLOWING YEAR(S) TO BE SET OFF AGAINST INCOME UNDE R ANY HEAD, LIKE CURRENT DEPRECIATION. B. IN THE SECOND PERIOD (I.E., ASSESSMENT YEARS 199 7-98 TO 2001-02) (I)BROUGHT FORWARD UNADJUSTED DEPRECIATION ALLOWANC E FOR AND UP TO ASSESSMENT YEAR 1996-97 (HEREINAFTER CALLED THE FI RST UNADJUSTED DEPRECIATION ALLOWANCE), WHICH COULD NOT BE SET OF F UP TO ASSESSMENT YEAR 1996-97, SHALL BE CARRIED FORWARD FOR SET OFF AGAINST INCOME UNDER ANY HEAD FOR A MAXIMUM PERIOD OF EIGHT ASSESSMENT Y EARS STARTING FROM ASSESSMENT YEAR 1997-98. (II)CURRENT DEPRECIATION FOR THE YEAR UNDER SECTION 32(1) ( FOR EACH YEAR SEPARATELY STARTING FROM ASSESSMENT YEAR 1997- 98 UP TO 2001- 02) CAN BE SET OFF FIRSTLY AGAINST BUSINESS INCOME AND THEN AGAINST INCOME UNDER ANY OTHER HEAD. (III)AMOUNT OF CURRENT DEPRECIATION FOR ASSESSMENT YEARS 1997-98 TO 2001-02 WHICH CANNOT BE SO SET OFF AS PER (II) ABOV E, HEREINAFTER CALLED THE SECOND UNABSORBED DEPRECIATION ALLOWANCE SHAL L BE CARRIED FORWARD FOR A MAXIMUM PERIOD OF EIGHT ASSESSMENT YE ARS FROM THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE ASSESSME NT YEAR FOR WHICH IT WAS FIRST COMPUTED, TO BE SET OFF ONLY AGA INST THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. C. IN THE THIRD PERIOD (I.E., ASSESSMENT YEAR 2002- 03 ONWARDS) (I)FIRST UNADJUSTED DEPRECIATION ALLOWANCE CAN BE SET OFF UP TO ASSESSMENT YEAR 2004-05, THAT IS, THE REMAINING PER IOD OUT OF MAXIMUM PERIOD OF EIGHT ASSESSMENT YEARS [AS PER B( I) ABOVE] AGAINST INCOME UNDER ANY HEAD. (II)SECOND UNABSORBED DEPRECIATION ALLOWANCE CAN BE SET OFF ONLY AGAINST THE INCOME UNDER THE HEAD PROFITS AND GAIN S OF BUSINESS OR HINDUSTAN UNILEVER LIMITED 61 PROFESSION WITHIN A PERIOD OF EIGHT ASSESSMENT YEA RS SUCCEEDING THE ASSESSMENT YEAR FOR WHICH IT WAS FIRST COMPUTED. (III)CURRENT DEPRECIATION FOR THE YEAR UNDER SECTIO N 32(1), FOR EACH YEAR SEPARATELY, STARTING FROM ASSESSMENT YEAR 2002 -03 CAN BE SET OFF AGAINST INCOME UNDER ANY HEAD. AMOUNT OF DEPRECIATI ON ALLOWANCE NOT SO SET OFF (HEREINAFTER CALLED THE THIRD UNADJUSTE D DEPRECIATION ALLOWANCE) SHALL BE CARRIED FORWARD TO THE FOLLOWI NG YEAR. (IV)THE THIRD UNADJUSTED DEPRECIATION ALLOWANCE S HALL BE DEEMED AS DEPRECIATION UNDER SECTION 32(1), THAT IS DEPRECIAT ION FOR THE CURRENT YEAR IN THE FOLLOWING YEAR(S) TO BE SET OFF AGAINST INCOME UNDER ANY HEAD, LIKE CURRENT DEPRECIATION, IN PERPETUITY. 75. HOWEVER, THE SAME ISSUE WAS CONSIDERED BY THE HON'B LE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA PVT. LTD (SUPRA) AHMEDABAD AS UNDER: 37. THE CBDT CIRCULAR CLARIFIES THE INTENT OF THE A MENDMENT THAT IT IS FOR ENABLING THE INDUSTRY TO CONSERVE SUFFICIENT FUNDS TO REPLACE PLANT AND MACHINERY AND ACCORDINGLY THE AMENDMENT D ISPENSES WITH THE RESTRICTION OF 8 YEARS FOR CARRY FORWARD AND SE T OFF OF UNABSORBED DEPRECIATION. THE AMENDMENT IS APPLICABLE FROM ASSE SSMENT YEAR 2002-03 AND SUBSEQUENT YEARS. THIS MEANS THAT ANY U NABSORBED DEPRECIATION AVAILABLE TO AN ASSESSEE ON 1ST DAY OF APRIL, 2002 (A.Y. 2002-03) WILL BE DEALT WITH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001 AND N OT BY THE PROVISIONS OF SECTION 32(2) AS IT STOOD BEFORE THE SAID AMENDMENT. HAD THE INTENTION OF THE LEGISLATURE BEEN TO ALLOW THE UNABSORBED DEPRECIATION ALLOWANCE WORKED OUT IN A.Y. 1997-98 O NLY FOR EIGHT SUBSEQUENT ASSESSMENT YEARS EVEN AFTER THE AMENDMEN T OF SECTION 32(2) BY FINANCE ACT, 2001 IT WOULD HAVE INCORPORAT ED A PROVISION TO THAT EFFECT. HOWEVER, IT DOES NOT CONTAIN ANY SUCH PROVISION. HENCE KEEPING IN VIEW THE PURPOSE OF AMENDMENT OF SECTION 32(2) OF THE ACT, A PURPOSIVE AND HARMONIOUS INTERPRETATION HAS TO BE TAKEN. WHILE CONSTRUING TAXING STATUTES, RULE OF STRICT IN TERPRETATION HAS TO BE APPLIED, GIVING FAIR AND REASONABLE CONSTRUCTION TO THE LANGUAGE OF THE SECTION WITHOUT LEANING TO THE SIDE OF ASSES SEE OR THE REVENUE. BUT IF THE LEGISLATURE FAILS TO EXPRESS CL EARLY AND THE ASSESSEE BECOMES ENTITLED FOR A BENEFIT WITHIN THE AMBIT OF THE SECTION BY THE CLEAR WORDS USED IN THE SECTION, THE BENEFIT ACCRUING TO ASSESSEE CANNOT BE DENIED. HOWEVER, CIRCULAR NO. 14 OF 2001 HAD CLARIFIED THAT UNDER SECTION 32(2), IN COMPUTING TH E PROFITS AND GAINS OF BUSINESS OR PROFESSION FOR ANY PREVIOUS YE AR, DEDUCTION OF DEPRECIATION UNDER SECTION 32 SHALL BE MANDATORY. T HEREFORE, THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE A CT, 2001 WOULD ALLOW THE UNABSORBED DEPRECIATION ALLOWANCE AVAILAB LE IN THE A.Y. 1997-98, 1999-2000, 2000-01 AND 2001-02 TO BE CARRI ED FORWARD TO THE SUCCEEDING YEARS, AND IF ANY UNABSORBED DEPRECI ATION OR PART THEREOF COULD NOT BE SET OFF TILL THE A.Y. 2002-03 THEN IT WOULD BE HINDUSTAN UNILEVER LIMITED 62 CARRIED FORWARD TILL THE TIME IT IS SET OFF AGAINST THE PROFITS AND GAINS OF SUBSEQUENT YEARS. 38. THEREFORE, IT CAN BE SAID THAT, CURRENT DEPRECI ATION IS DEDUCTIBLE IN THE FIRST PLACE FROM THE INCOME OF THE BUSINESS TO WHICH IT RELATES. IF SUCH DEPRECIATION AMOUNT IS LARGER THAN THE AMOU NT OF THE PROFITS OF THAT BUSINESS, THEN SUCH EXCESS COMES FOR ABSORP TION FROM THE PROFITS AND GAINS FROM ANY OTHER BUSINESS OR BUSINE SS, IF ANY, CARRIED ON BY THE ASSESSEE. IF A BALANCE IS LEFT EVEN THERE AFTER, THAT BECOMES DEDUCTIBLE FROM OUT OF INCOME FROM ANY SOUR CE UNDER ANY OF THE OTHER HEADS OF INCOME DURING THAT YEAR. IN C ASE THERE IS A STILL BALANCE LEFT OVER, IT IS TO BE TREATED AS UNABSORBE D DEPRECIATION AND IT IS TAKEN TO THE NEXT SUCCEEDING YEAR. WHERE THER E IS CURRENT DEPRECIATION FOR SUCH SUCCEEDING YEAR THE UNABSORBE D DEPRECIATION IS ADDED TO THE CURRENT DEPRECIATION FOR SUCH SUCCE EDING YEAR AND IS DEEMED AS PART THEREOF. IF, HOWEVER, THERE IS NO CU RRENT DEPRECIATION FOR SUCH SUCCEEDING YEAR, THE UNABSORB ED DEPRECIATION BECOMES THE DEPRECIATION ALLOWANCE FOR SUCH SUCCEED ING YEAR. WE ARE OF THE CONSIDERED OPINION THAT ANY UNABSORBED D EPRECIATION AVAILABLE TO AN ASSESSEE ON 1ST DAY OF APRIL 2002 ( A.Y. 2002-03) WILL BE DEALT WITH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001. AND ONCE THE CIRCULAR NO.14 OF 2001 CLARIFIED THAT THE RESTRICTION OF 8 YEARS FOR CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION HAD BEEN DISPENSED WITH, THE UNABSORBED DEPRECIATION FROM A.Y.1997-98 UPTO THE A .Y.2001-02 GOT CARRIED FORWARD TO THE ASSESSMENT YEAR 2002-03 AND BECAME PART THEREOF, IT CAME TO BE GOVERNED BY THE PROVISI ONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001 AND WERE AVAI LABLE FOR CARRY FORWARD AND SET OFF AGAINST THE PROFITS AND GAINS O F SUBSEQUENT YEARS, WITHOUT ANY LIMIT WHATSOEVER . 76. SINCE THIS DECISION IS IN FAVOUR OF ASSESSEE AND FR OM HIGHER JUDICIAL AUTHORITY, WE ARE BOUND BY THE DECISION OF THE GUJA RAT HIGH COURT IN PREFERENCE TO THE SPECIAL BENCH DECISION OF THE ITA T. THERE IS NO CONTRARY JUDGMENT TO THE ABOVE. THEREFORE, RESPECTFULLY FOLL OWING THE DECISION OF HONBLE GUJARAT HIGH COURT ON THE ISSUE, WE DIRECT AO TO ALLOW THE SET OFF OF UNABSORBED DEPRECIATION PERTAINING TO ASSESSMENT YEAR 1996-97 AND 1997-98 AS PER THE RECORDS. THIS GROUND IS ALLOWED. GROUND NO. 35 77. THE ISSUE IN GROUND NO.35 IS WITH REFERENCE TO DISA LLOWANCE OF AN AMOUNT OF ` 5,000 PAID TO FORT CONVENT PARENT TEACHERS ASSOCIA TION, MUMBAI ON 28.10.2005 BY WAY OF CHEQUE NO.041624 DAT ED 24.08.2005 HINDUSTAN UNILEVER LIMITED 63 DRAWN ON DUETSCH BANK, HS MARG, MUMBAI BY ASSESSEE. THE DEDUCTION AT 50% WAS DISALLOWED ON THE REASON THAT INSTEAD OF AS SESSEES NAME THE RECEIPT CONTAINS NAME AS RIN ADVANCE. IT WAS THE SUBMISSION OF ASSESSEE THAT THE SAID PARENT TEACHERS ASSOCIATION INSTEAD O F GIVING RECEIPT IN THE NAME OF ASSESSEE COMPANY, HOWEVER, ISSUED THE RECEI PT ON THE PRODUCT NAME AS THEY HAVE GIVEN ADVERTISEMENT IN THE COVER PAGE OF THE SOUVENIR BRING BROUGHT OUT, AT ` 10,000. AO AND THE DRP DID NOT ACCEPT THE CONTENTIONS OF ASSESSEE. 78. AFTER CONSIDERING THE SUBMISSIONS AND EXAMINING THE DETAILS, WE ARE OF THE OPINION THAT THERE IS NO NEED FOR DISALLOWIN G THE CLAIM UNDER SECTION 80G MADE BY ASSESSEE. THERE IS EVIDENCE ON RECORD T HAT ASSESSEE PAID BY WAY OF CHEQUE AN AMOUNT OF ` 10,000 TO THE SAID PARENT TEACHERS ASSOCIATION FOR COVER PAGE IN THE SOUVENIR AND THE MATERIAL FOR ADVERTISEMENT WAS GIVEN IN THE NAME OF RIN ADVANCE WITH MR AMITABH BACHAN AND CHILD STAR BEING THE PERSONS REPRESENTIN G THE PRODUCTS. THIS ADVERTISEMENT MATERIAL WAS GIVEN TO THE PARENT TEAC HERS ASSOCIATION AND THEY GAVE RECEIPT ALONG WITH THE CERTIFICATE FOR CL AIM U/S 80G IN THE NAME OF RIN ADVANCE, A PRODUCT OF ASSESSEE. THIS COULD BE A MISTAKE BUT ONE CANNOT DENY THAT THE SAID PAYMENT WAS MADE BY ASSES SEE. IN FACT, THE WHOLE AMOUNT OF ` 10,000 COULD HAVE BEEN CLAIMED AS DEDUCTION AS AN ADVERTISEMENT UNDER SECTION 37(1). HOWEVER, ASSESSE E RESTRICTED THE SAME TO AN AMOUNT OF ` 5,000 BEING THE DONATION UNDER SECTION 80G. WE DO NOT SEE ANY REASON TO DISALLOW THE AMOUNT AS THE AMOUNT HAS BEEN PAID BY THE ASSESSEE COMPANY BY WAY OF CHEQUE AND THERE IS NO DISPUTE WITH REFERENCE TO THE ELIGIBILITY UNDER SECTION 80G. ACC ORDINGLY, AO IS DIRECTED TO ALLOW THE AMOUNT OF ` 5,000 AS CLAIMED. GROUND NO.36 79. GROUND NO.36 PERTAINS TO LEVY OF INTEREST UNDER SEC TION 234C. THERE IS NO DISCUSSION BY AO IN THE DRAFT ASSESSMENT ORDE R. THEREFORE, ASSESSEE COULD NOT RAISE ANY OBJECTION BEFORE THE DRP. HOWEV ER, AT THE TIME OF HINDUSTAN UNILEVER LIMITED 64 FINALIZING THE ASSESSMENT AS THERE IS NO DIRECTION TO LEVY INTEREST, NOR THE WORKING HAS BEEN PROVIDED TO ASSESSEE, ASSESSEE RAI SED THE OBJECTION BEFORE US IN THIS GROUND. AFTER CONSIDERING THE RIV AL SUBMISSIONS, WE RESTORE THE ISSUE TO THE FILE OF AO TO EXAMINE THE FACTS AS IT IS A CONTENTION THAT ASSESSEE HAS PAID MORE ADVANCE TAX AND NO INTE REST UNDER SECTION 234C IS WARRANTED. MOREOVER THOUGH THERE IS DIRECTI ON TO LEVY INTEREST U/S 234B AND 234D, THERE IS NO SUCH DIRECTION IN ASSESS MENT ORDER FOR LEVY OF INTEREST U/S 234C. SINCE THE FACTS ARE NOT AVAILABL E ON RECORD EITHER OF THE ADVANCE TAX PAID BY ASSESSEE OR HOW THE INTEREST HA VE BEEN WORKED OUT, AO IS DIRECTED TO EXAMINE AND AFTER GIVING DUE OPPO RTUNITY TO ASSESSEE TO EXPLAIN, CONSIDER LEVY OF INTEREST U/S 234C, IF REQ UIRED UNDER THE PROVISIONS OF THE ACT. WITH THESE DIRECTIONS, THE ISSUE IN GRO UND NO.36 IS ALSO RESTORED TO THE FILE OF AO FOR FRESH EXAMINATION AN D ADJUDICATION. 80. 1 #: &) *1# 2 '$ !# ; 2 4# <= > 80. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. $ 2 + ? @): 10 TH DECEMBER 2012 2 A > ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DECEMBER 2012 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, @) @) @) @) DATED: 10 TH DECEMBER 2012 HINDUSTAN UNILEVER LIMITED 65 $ 2 .&#'B CB+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4! / THE REVENUE; (3) D () / THE CIT(A); (4) D / THE CIT, MUMBAI CITY CONCERNED; (5) B!GA .&#&) , , / THE DR, ITAT, MUMBAI; (6) AH* I / GUARD FILE. /B# .&# / TRUE COPY $) / BY ORDER . 4. JK / PRADEEP J. CHOWDHURY !1L &)4 J! / SR. PRIVATE SECRETARY M / < 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI