COLAGATE-PALMOLIVE (I) LTD, MUMBAI V. ADDL CIT 10(3), MUMBAI

ITA 8428/MUM/2010

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 3431 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 08-09-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 03-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PERCI J PARDIWALA
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Question of law; Fair market value; Arm length price; Rule 8D
• Section: 92C; 143(3); 92D; 92B; 92F; 92E; 14A; 10B; 144C; 80IC; 64; 92

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL K BENCH, MUM BAI BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI PAWAN SINGH JUDICIAL MEMBER ITA NO. 8428/MUM/2010 (ASSESSMENT YEAR 2006-07 ) COLGATE PALMOLIVE (INDIA) LTD., COLGATE RESEARCH CENTRE, MAIN STREET, HIRANANDANI, GARDENS, PAWAI, MUMBAI-400076 PAN: AAACC4309B VS. ADDITIONAL COMMISSIONER OF INCOME TAX-10(3) APPELLANT RESPONDE NT APPELLANT BY : SH. PERCI J PARDIWALA, ADVOCATE RESPONDENT BY : SHRI ANAND MOHAN (CIT- DR) DATE OF HEARING : 17.06.2019 DATE OF PRONOUNCEMEN T : 11.09.2019 ORDER UNDER SECTION 254(1) OF INCOME-TAX ACT P ER PAWAN SINGH, JUDICIAL MEMBER ; 1. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ASS ESSMENT ORDER UNDER SECTION 143(3) RWS 144C (13) DATED 11.12.2009, PASS ED IN PURSUANCE OF DIRECTION OF DISPUTE RESOLUTION PANEL-I (DRP), MUMB AI DATED 04.10.2010 FOR ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS RAISE D FOLLOWING GROUNDS OF APPEAL: (1) THE ADDITIONAL COMMISSIONER OF INCOME TAX (AO)/ DISPUTE RESOLUTION PENAL (DRP) ERRED IN DISALLOWING RS.75,65,515/- UNDER SEC TION 14A OF THE INCOME TAX ACT (ACT) HAVING FAILED TO APPRECIATE THAT THE AP PELLANT COMPANY HAS NOT INCURRED ANY EXPENSES IN RELATION TO TAX FREE INCOM E. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE AO/DRP ERRED IN DISALLOWING RS. 75,65,515/- UNDER SECTION 14(2) AND (3) OF THE ACT READ WITH RULE 8 OF INCOME TAX RULES FOR AY 2006-07 ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 2 HAVING FAILED TO APPRECIATE THAT SECTION 14A(2) &(3 ) WAS INSERTED VIDE FINANCE ACT, 2006 W.E.F. 2007 I.E. AY 2007-08. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW , THE AO/DRP ERRED IN CONFIRMING THE ADJUSTMENT WITH RESPECT TO THE ARMS LENGTH PRICE FOR RESEARCH AND DEVELOPMENT SERVICES (R&D SERVICES) RENDERED. ACCORDINGLY, THE APPELLANT PRAYS THAT THE ADDITION OF RS.47,14,244/- MAY KINDLY BE DELETED. (3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE AO/DRP ERRED IN CONFIRMING THE DISALLOWANCE OF ADVERTISEMENT AND SA LES PROMOTION EXPENDITURE INCURRED BY THE APPELLANT. THE LEARNED AO/DRP FAILED TO APPRECIATE THAT THE AD VERTISING AND SALES PROMOTION EXPENDITURE WHICH IS INCURRED BY WAY OF P AYMENTS TO THIRD PARTIES IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE O F BUSINESS OF THE APPELLANT IN INDIA, AND DOES NOT CONSTITUTE AN INTERNATIONAL TRA NSACTION UNDER THE INDIAN TRANSFER PRICING REGULATION. 2. THE ASSESSEE VIDE APPLICATION DATED 19.04.2013 HAS RAISED FOLLOWING ADDITIONAL GROUNDS OF APPEAL: WITHOUT PREJUDICE TO GROUND NO.1 TO3 ABOVE AND IN A LTERNATIVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO /DRP HAS E RRED IN CONSEQUENTLY NOT REVISING THE PROFIT FROM THE BADDI UNIT ELIGIBLE FO R DEDUCTION UNDER SECTION 80IC OF THE ACT BY THE AMOUNT OF ADVERTISING AND MARKETI NG EXPENDITURE ALLEGED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OF T HE APPELLANTS UNDERTAKING. IT IS PRAYED THAT THE AO/DRP BE DIRECTED TO RECOMPU TE THE DEDUCTION UNDER SECTION 80IC OF THE ACT BY ADJUSTING THE ADVERTISIN G AND MARKETING EXPENDITURE CONSIDERED AS NOT HAVING BEEN INCURRED FOR THE PURP OSE OF THE APPELLANTS UNDERTAKING. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE COMPA NY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING, MARKETING AND D ISTRIBUTION OF DENTIFRICES, COSMETICS, TOILETRIES, SOAPS, SHAMPOO S AND LEATHER PRODUCTS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2006 - 07 ON 30 TH NOVEMBER ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 3 2006 DECLARING TOTAL INCOME OF 144,67,77,616/-. IN THE RETURN OF INCOME THE ASSESSEE REPORTED INTERNATIONAL TRANSACTION AND FURNISHED ITS REPORT UNDER FORM NO. 3CEB AS REQUIRED UNDER SECTION 92B IN RELA TION TO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (AE). T HE RETURN OF INCOME WAS SELECTED FOR SCRUTINY. THE ASSESSING OFFICER AFTER TAKING NECESSARY APPROVAL FROM THE COMMISSIONER OF INCOME TAX, MADE A REFEREN CE TO TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARM LENGTH PRICE (ALP) WITH REFERENCE TO TRANSACTION REPORTED IN FORM 3CEB RELATED TO RESEAR CH AND DEVELOPMENT (R&D) SERVICES PROVIDED BY ASSESSEE TO ITS AE. THE LEARNED TPO AFTER GRANTING OPPORTUNITY TO THE ASSESSEE SUGGESTED ADJU STMENT OF 47,14,224/- ON ACCOUNT OF R&D SERVICES AND ADJUSTMENT OF 3,95,93,000/- ON ACCOUNT OF COST ALLOCATION TO COLGATE-PALMOLIVE USA OF ADVE RTISEMENT AND MARKETING (AMP) EXPENSES. THUS, THE TPO SUGGESTED T OTAL ADJUSTMENT OF 4,43,07,000/-. ON RECEIPT OF ORDER OF TPO, THE ASSE SSING OFFICER MADE ADJUSTMENT/ADDITIONS SUGGESTED BY TPO IN DRAFT ASSE SSMENT ORDER. 4. DURING THE ASSESSMENT THE ASSESSING OFFICER ALSO N OTED THAT ASSESSEE HAS EARNED TAX-FREE INTEREST OF 6,89,35,430/-. THE INTEREST WAS FROM VARIOUS TAX-FREE BONDS LIKE KONKAN RAILWAY CORPORATION, IND IAN RAILWAY FINANCE CORPORATION, HUDCO, UNIT TRUST OF INDIA AND NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD). THE ASSESSING OFFIC ER ASKED THE ASSESSEE AS TO WHY THE PROVISION OF SECTION 14A WIT H RULE 8D BE NOT MADE APPLICABLE AGAINST THE ASSESSEE. THE ASSESSEE FILED ITS REPLY DATED 3 RD ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 4 NOVEMBER 2009 AND AGAIN ON 9 TH NOVEMBER 2009. IN THE REPLY THE ASSESSEE BESIDES OTHER CONTENTION STATED THAT THE SCOPE AND EFFECT OF INSERTION OF SECTION 14A HAS BEEN EXPLAINED IN CIRCULAR NO. 1 OF 2001 ISSUED BY CENTRAL BOARD OF DIRECT TAXES (CBDT), WHICH EXPLAINS THE UN DERLYING OBJECT OF INSERTION OF SECTION 14A, WHICH IS TO COMPUTE BOTH THE EXEMPT INCOME AND TAXABLE INCOME CORRECTLY, WHICH IS POSSIBLE ONLY AF TER THE EXPENDITURE INCURRED IN RELATION THERETO IS ALLOWED TO THEM. HE NCE, THE LEGISLATURE INTENT OF INTRODUCING SECTION 14A IS TO DISALLOW EXPENDITU RE INCURRED IN RELATION TO EARNING EXEMPT INCOME AND NO DISALLOWANCE IS WARRAN TED IN ABSENCE OF ANY SPECIFIC EXPENDITURE BEING INCURRED FOR EARNING TAX FREE INCOME. THE INVESTMENTS ARE MADE WITH A LONG-TERM PLANNING IN M IND HAVING MATURITY PERIOD OF 5 TO 10 YEARS THE ASSESSEE ALSO STATED TH AT ALL THE INVESTMENTS FROM WHICH THE TAX FREE INCOME IS EARNED BY THE ASSESSEE , WERE MADE FROM ITS OWN SURPLUS FUNDS AND ACCOMMODATED PROFITS AND NO I NTEREST OR OTHER EXPENSES HAS BEEN INCURRED FOR EARNING EXEMPT INCOM E. IT WAS ALSO STATED THAT IN THE YEAR IN WHICH THE TAX-FREE INVESTMENTS WERE PURCHASED BY THE ASSESSEE COMPANY, IT HAD NO BORROWED FUNDS. ENTIRE INVESTMENTS WERE INVESTED FROM THE AVAILABLE SURPLUS FUNDS OR ACCUMU LATED PROFITS. THUS, NO INTEREST EXPENSES CAN BE DISALLOWED (ALLOCATED) TOW ARDS EARNING EXEMPT INCOME. THE ASSESSEE ALSO RELIED ON VARIOUS CASE LA WS, WHICH ARE REFERRED BY ASSESSING OFFICER IN PARA 5 OF DRAFT ASSESSMENT ORD ER. THE EXPLANATION FURNISHED BY ASSESSEE WAS NOT ACCEPTED BY ASSESSING OFFICER. THE ASSESSING ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 5 OFFICER TOOK HIS VIEW THAT THE PROVISION SUBSECTION 14A (2) AND (3) ARE APPLICABLE TO THE YEAR UNDER CONSIDERATION AS THE P ROVISION ARE PROCEDURAL IN NATURE AND APPLICABLE TO THE YEAR UNDER CONSIDERATI ON. ACCORDINGLY, THE ASSESSING OFFICER MADE DISALLOWANCE UNDER RULE 8D(2 )(II) OF RS. 23,22,713/- ON ACCOUNT OF INTEREST EXPENDITURE AND UNDER RULE 8 D(2)(III) OF 52,42,802/- ON ACCOUNT OF ADMINISTRATIVE EXPENSES, THEREBY MADE A TOTAL DISALLOWANCE OF 75,65,515/- UNDER SECTION 14A READ WITH RULE 8D. T HE ASSESSING OFFICER PASSED THE DRAFT ASSESSMENT ORDER ON 11 TH DECEMBER 2009 UNDER SECTION 143(3) READ WITH SECTION 144C(1). THE COPY OF DRAFT ASSESSMENT ORDER WAS SERVED UPON THE ASSESSEE. THE ASSESSEE EXERCISED ITS OPTION TO FILE OBJECTIONS BEFORE THE LEARNED DRP. T HE LEARNED DRP VIDE ITS ORDER DATED 15 TH SEPTEMBER 2010 DISPOSED THE OBJECTION FILED BY ASS ESSEE AND CONFIRMED THE ADDITION MADE BY ASSESSING OFFICE R IN THE DRAFT ASSESSMENT ORDER. ON RECEIPT OF REPORT /ORDER OF LE ARNED DRP, THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER UNDER SEC TION 143(3) RWS 144C(13) DATED 11 TH DECEMBER 2009. AGGRIEVED BY THE ADDITIONS/DISALLOW ANCES MADE IN THE FINAL ASSESSMENT ORDER, THE ASSESSEE HAS FIL ED THIS APPEAL BEFORE THIS TRIBUNAL RAISING THE VARIOUS GROUNDS OF APPEAL AS T HE RECORDED ABOVE. 5. WE HAVE HEARD THE SUBMISSION OF LEARNED AUTHORISED REPRESENTATIVE (AR) FOR ASSESSEE AND THE LEARNED DEPARTMENTAL REPRESENTATIV E (DR) FOR REVENUE AND GONE THROUGH THE ORDERS OF LOWER AUTHORITIES. THE A SSESSEE HAS FILED AN APPLICATION FOR ADMISSION OF ADDITIONAL GROUND OF A PPEAL. WHEN THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 6 APPLICATION APPLICANT/ASSESSEE STATED THAT THE ADDI TIONAL GROUND OF APPEAL IS PURELY LEGAL AND WOULD NOT REQUIRE AN INVESTIGATION INTO FRANCE FACTS. THE LEARNED AR OF THE ASSESSEE SUBMITS THAT ALL THE FAC TS RELATED TO RAISING OF ADDITIONAL GROUND OF APPEAL ARE EMANATING FROM THE FACTS OF LOWER AUTHORITIES AND THAT NO NEW FACTS OR INVESTIGATION FOR ADJUDICATION OF ADDITIONAL GROUND OF APPEAL ARE REQUIRED. IN SUPPOR T OF HIS SUBMISSION THE LEARNED AR OF THE ASSESSEE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF CIT VERSUS S. NELLIAPPAN (66 ITR 7 22 SC), NATIONAL THERMAL POWER CORPORATION LTD VERSUS CIT (229 ITR 3 83 SC) AND JUTE CORPORATION OF INDIA LTD (187 ITR 688 SC). ON THE O THER HAND THE LEARNED CITDR SUBMITS THAT HE LEFT THE ADMISSION OF ADDITI ONAL GROUND OF APPEAL AT THE DISCRETION OF TRIBUNAL. 6. WE HAVE CONSIDERED THE SUBMISSION OF THE PARTIES AN D FIND THAT NO NEW FACTS ARE REQUIRED TO BE BROUGHT ON RECORD FOR ADJUDICATI ON OF ADDITIONAL GROUND OF APPEAL AND THAT ALL FACTS ARE EMANATING FROM THE OR DER OF LOWER AUTHORITIES. MOREOVER THE LEARNED CITDR HAS NOT DISPUTED THE FA CT THAT NO FRESH FACTS ARE NECESSARY TO BRING ON RECORD FOR ADJUDICATION O F ADDITIONAL GROUND OF APPEAL. THEREFORE, CONSIDERING THE DECISION OF SUPR EME COURT IN NATIONAL THERMAL POWER CORPORATION LIMITED (SUPRA) WHEREIN, THE HONBLE COURT HELD THAT THE TRIBUNAL WILL HAVE THE DISCRETION TO ALLOW, NOT TO ALLOW A NEW GROUND TO BE RAISED, BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER THE QUESTION OF LAW ARISING FROM FACTS WHICH ARE ON REC ORD IN THE ASSESSMENT ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 7 PROCEEDING, IT IS NECESSARY TO CONSIDER THE QUESTIO N IN ORDER TO CORRECT THE ASSESS THE TAX LIABILITY OF THE ASSESSEE. THE TRIBU NAL IN ITS DISCRETION MAY ALLOW THE ADDITIONAL GROUND OF APPEAL. THEREFORE, I N VIEW OF THE AFORESAID FACTUAL AND LEGAL DISCUSSION, WE ADMIT THE ADDITION AL GROUND OF APPEAL RAISED BY ASSESSEE. ACCORDINGLY, NOW WE SHALL PROCE ED TO CONSIDER THE VARIOUS GROUNDS OF APPEAL RAISED BY THE ASSESSEE. 7. GROUND NO. 1 RELATES TO DISALLOWANCE OF 75,65,515/-UNDER SECTION 14A. THE LEARNED AR FOR THE ASSESSEE SUBMITS THAT DURING THE RELEVANT PERIOD THE ASSESSEE AND TAX FREE INTEREST OF 6,89,35,430/- FROM VARIOUS TAX-FREE BONDS ISSUED BY VARIOUS PUBLIC SECTOR UNDERTAKING. THE LE ARNED AR FOR THE ASSESSEE SUBMITS THAT THE DETAILS OF TAX FREE INTER EST FOR THE YEAR ENDED ON 31 MARCH 2006 IS PROVIDED IN PARA 1 OF STATEMENT OF FA CT FURNISHED BY ASSESSEE TO THE LOWER AUTHORITIES. (FOR APPRECIATION THE STA TEMENT OF TAX FREE INTEREST RECEIVED FROM VARIOUS UNDERTAKINGS ARE REFERRED BEL OW):- 1 HUDCO 64,75,000/- 2 HUDCO 23,12,500/ - 3 KONKAN RAILWAY CORPORATION LTD 1,27,00,000/- 4 KONKAN RAILWAY CORPORATION LTD 26,72,945/- 5 NATIONAL BANK FOR AGRICULTURE AND R URAL DEVELOPMENT 76,50,000/ - 6 INDIAN RAILWAY FINANCE CORPORATION 1,17,00,000/- 7 NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT 26,25,000/- ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 8 8 NAT IONAL BANK FOR AGRICULTURE AND R URAL DEVELOPMENT 26,25,000/ - 9 INDIAN RAILWAY FINANCE CORPORATION 10,400,000/- 10 UNIT TRUST OF INDIA 69,90,327/ - 11 UNIT TRUST OF INDIA 27,84,658/- TOTAL 6,89,35,430/- 8. THE LEARNED AR OF THE ASSESSEE SUBMITS THAT ALL THE INVESTMENTS WERE MADE FROM SURPLUS FUNDS /APPLICANT PROFIT OF THE ASSESSE E COMPANY. THE ASSESSEE HAS NO BORROWING IN THE YEAR IN WHICH THESE INVESTM ENTS WERE MADE IN THE TAX FREE BONDS AND ALSO IN THE CURRENT FINANCIAL YE AR REST OF THE ASSESSEE COMPANY HAS NOT INCURRED ANY EXPENDITURE FOR EARNIN G THE TAX FOR THE INTEREST DURING THIS YEAR. THE INVESTMENTS WERE MAD E IN EARLIER YEARS AND THE ASSESSEE IS HOLDING THEM FOR A VERY LONG PERIOD OF TIME. ALL FIGURES ARE FROM EARLIER YEARS, WHICH ARE DULY REFLECTED AT PAGE NO. 34 PAPER BOOK (SCHEDULE- OF BALANCE SHEET AS ON 31.03.2016). THE INVESTMENTS ARE MADE WITH A LONG- TERM HORIZON IN MIND WITH MATURITY PERIOD RANGING F ROM 5 TO 10 YEARS. FURTHER, THERE IS NO REQUIREMENT TO MONITOR THESE I NVESTMENTS ON DAY TO DAY BASIS. THE INTEREST EXPENDITURE, WHICH THE ASSESSEE INCURRED, PERTAINS TO THE INTEREST PAYABLE ON HOUSING DEPOSITS IN RESPECT OF RENT-FREE ACCOMMODATIONS PROVIDED TO EMPLOYEE OF THE ASSESSEE COMPANY AND AC CORDINGLY NOT RELATED TO INVESTMENT IN TAX FREE BONDS. THE LEARNED AR FUR THER SUBMITS THAT RULE8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDE RATION, WHICH IS NOW ADMITTED POSITION UNDER THE LAW . THE RESERVE AND SURPLUS OF ASSESSEE ARE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 9 MORE THAN RS. 135 CRORE. THE ASSESSEE HAS SHOWN PRO FIT OF 137 CRORE. THE LEARNED AR FOR THE ASSESSEE FURTHER SUBMITS THA T SIMILAR DISALLOWANCE WAS MADE IN EARLIER YEAR, WHICH HAS BEEN SENT TO TH E ASSESSING OFFICER BY THE TRIBUNAL VIDE ORDER DATED 4 TH MAY 2018 IN ITA NO. 6073/MUM /2014. THE LEARNED AR OF THE ASSESSEE FURTHER SUBMITS THAT NEI THER THE DISALLOWANCE UNDER RULE8D(2)(II) NOR UNDER RULE8D(2)(III) ARE RE QUIRED FOR THE YEAR UNDER CONSIDERATION AS THE ASSESSEE HAS NEITHER MAD E ADMINISTRATIVE EXPENSES NOR INVESTED FROM INTEREST-BEARING FUND FO R EARNING EXEMPT INCOME. THE LEARNED AR FURTHER SUBMITS THAT CBDT IN CIRCULAR NO. 14 OF 2001 EXPLAINS THE UNDERLYING OBJECT OF INSERTION OF SECTION 14A, WHICH IS TO BE COMPUTE BOTH THE EXEMPT INCOME AND TAXABLE INCOM E CORRECTLY, WHICH IS POSSIBLE ONLY AFTER EXPENDITURE INCURRED IN RELATIO N THERETO IS ALLOCATED TO THEM. THE LEGISLATURE INTENT OF INTRODUCING SECTION 14A IS TO DISALLOW EXPENDITURE INCURRED IN RELATION TO EARNING EXEMPT INCOME AND NO DISALLOWANCE IS WARRANTED IN ABSENCE OF ANY SPECIFI C EXPENDITURE BEING INCURRED FOR EARNING EXEMPT INCOME. THE ASSESSEE HA S NOT INCURRED ANY EXPENSES FOR EARNING EXEMPT INCOME DURING THE PERIO D UNDER CONSIDERATION; THEREFORE, NO DISALLOWANCE UNDER SECTION 14A IS WAR RANTED AND THAT THE DISALLOWANCE MADE BY ASSESSING OFFICER, CONFIRMED B Y LEARNED DRP IS LIABLE TO BE DELETED. 9. ON THE OTHER HAND THE LEARNED CIT-DR FOR REVENUE SU BMITS THAT AN ASSESSEE OWN CASE FOR AY 2007-08, THE SIMILAR DISALLOWANCE WAS REMITTED BACK BY ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 10 THE TRIBUNAL TO THE ASSESSING OFFICER, THEREFORE, THIS GROUND OF APPEAL MAY BE RESTORED TO THE FILE OF ASSESSING OFFICER TO TAKE D ECISION AFRESH. 10. WE HAVE CONSIDERED THE RUBBLE SUBMISSION OF BOTH T HE PARTIES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. DURIN G THE ASSESSMENT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNE D EXEMPT INCOME OF RS.6.89 CRORE. THE ASSESSING OFFICER ISSUED SHOW CA USED NOTICE AS TO WHY THE DISALLOWANCE UNDER SECTION 14A BE NOT MADE. THE ASSESSEE FILED ITS DETAILED REPLY VIDE REPLY DATED 03.11.2019 AND 09.1 1.2009, WHICH WE HAVE NOTED IN THE BRIEF FACTS. THE REPLY FILED BY THE AS SESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER INVOKE D THE PROVISIONS OF RULE 8D AND MADE DISALLOWANCE OF RS. 75,65,515/- WHICH C ONSIST OF RS. 23,22,713/- UNDER RULE 8D(2)(II) AND OF RS. 52,42,8 02/- UNDER RULE 8D(2)(III). THE LD. DRP THOUGH ACCEPTED THAT THE PROVISIONS OF RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION AND DIRECTED THE ASSESSING OFFICER TO MAKE REASONABLE DISALLOWANCES FOR INTERE ST EXPENDITURE AND DIRECT EXPENSES ON REASONABLE BASIS. THERE IS NO DISPUTE T HAT THE ASSESSEE HAS NOT MADE FRESH INVESTMENT FOR EARNING EXEMPT INCOME. AL L THE INVESTMENT FROM WHICH, THE ASSESSEE AND INTEREST INCOME WHICH IS EX EMPT INCOME IS RECEIVED FROM INVESTMENT MADE IS IN EARLIER YEARS. FURTHER, WE ARE ALSO IN AGREEMENT WITH THE SUBMISSIONS OF THE LD. AR FOR THE PROVISIO NS OF RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. WE HA VE NOTED THAT ON SIMILAR SET OF FACT FOR ASSESSMENT YEAR 2007-08, THE ASSESS ING OFFICER MADE SIMILAR ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 11 DISALLOWANCE UNDER RULE 8D(2)(II) AND(III). ON APPE AL BEFORE LEARNED COMMISSIONER (APPEALS) THE DISALLOWANCE UNDER RULE 8D2 (II) WERE DELETED, HOWEVER, DISALLOWANCE UNDER RULE 8D2(III) WERE SUSTAINED. ON FURTHER APPEAL BEFORE THE TRIBUNAL THE ISSUE IS RES TORED BACK TO THE FILE OF ASSESSING OFFICER FOR EXAMINING THE FRESH COMPUTATI ON OF DISALLOWANCES UNDER RULE 8D(2)(III), FURNISH BY ASSESSEE. THE PAR T OF ORDER OF TRIBUNAL WITH REGARD TO GROUNDS OF APPEAL ON 14A IS EXTRACTED BEL OW : 9.1 THE SOLE GROUND RAISED IN ASSESSEE'S CROSS OBJ ECTION PERTAINS TO DISALLOWANCE U/S 14A. DURING ASSESSMENT PROCEEDINGS , IT WAS NOTED THAT THE ASSESSEE EARNED TAX FREE INTEREST INCOME AGGREGATIN G TO RS.6.68 CRORES WHICH CALLED FOR DISALLOWANCE U/S 14A READ WITH RULE 8D. THE ASSESSEE CONTESTED THE SAME BY PUTTING FORTH VARIOUS SUBMISSIONS AS EXTRAC TED BY LD. AO IN THE QUANTUM ASSESSMENT ORDER, WHERE IT INTER-ALIA CONTE NDED THAT IN THE ABSENCE OF SPECIFIC EXPENDITURE TO EARN THE EXEMPT INCOME, DIS ALLOWANCE WAS NOT CALLED FOR. THE ATTENTION WAS DRAWN TO THE FACT THAT THE I NVESTMENT WAS MADE OUT OF SURPLUS FUNDS GENERATED BY THE ASSESSEE. HOWEVER, N OT CONVINCED, LD. AO COMPUTED AGGREGATE DISALLOWANCE OF RS.83.54 LACS U /R 8D(2) WHICH COMPRISED OF INTEREST DISALLOWANCE U/R 8D(2)(II) FOR RS.34.39 LACS AND EXPENSE DISALLOWANCE U/R 8D(2)(III) FOR RS.49.14 LACS. 9.2 UPON FURTHER APPEAL, LD. CIT(A) HAS ALLOWED PAR T RELIEF AGAINST INTEREST DISALLOWANCE AS STATED IN PARA-4 OF THE IMPUGNED OR DER BUT CONFIRMED EXPENSES DISALLOWANCE U/R 8D(2)(III). AGGRIEVED, THE ASSESSE E IS IN FURTHER APPEAL BEFORE US. 9.3 THE LD. SR. COUNSEL FAIRLY SUBMITTED THAT THE E XPENSES DISALLOWANCE U/S 14A MAY BE RESTRICTED TO RS.5,37,840/- AS PER ALTERNATI VE COMPUTATIONS SUBMITTED BY THE ASSESSEE BEFORE LD. FIRST APPELLATE AUTHORITY W HEREAS INTEREST DISALLOWANCE WAS NOT CALLED FOR IN THE CIRCUMSTANCES. BOTH THE R EPRESENTATIVE PLEADED THAT THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 12 ISSUE MAY BE REMITTED BACK TO THE FILE OF LD. AO FO R RE-ADJUDICATION ON FACTUAL MATRIX. 9.4 UPON DUE CONSIDERATION, WE DEEM IT FIT TO RESTO RE THE MATTER BACK TO THE FILE OF LD. AO TO RECONSIDER THE ASSESSEE'S ALTERNATIVE SUBMISSIONS AS RAISED BEFORE LD. FIRST APPELLATE AUTHORITY QUA EXPENSE DISALLOWA NCE AND ALSO RE-ADJUDICATE THE ISSUE OF INTEREST DISALLOWANCE IN THE LIGHT OF ASSE SSEE'S SUBMISSIONS. THE ASSESSEE, IN TURN, IS DIRECTED TO SUBSTANTIATE HIS STAND IN THIS REGARD. NEEDLESS TO ADD THAT THE PROVISIONS OF RULE 8D, AS PER SETTLED JUDICIAL PRONOUNCEMENTS, COULD BE APPLIED ONLY FROM AY 2008-09 AND WERE NOT APPLICABLE IN THE IMPUGNED AY. THE ASSESSEE'S CROSS-OBJECTIONS STANDS ALLOWED FOR STATISTICAL PURPOSES. 11. CONSIDERING THE FACT THAT NO FRESH INVESTMENT MADE DURING THE RELEVANT PERIOD FOR EARNING EXEMPT INCOME AND THAT THE INTER EST FREE FUNDS WERE IN FAR EXCESS, WHEN THE INVESTMENTS WERE MADE. MOREOVE R THE SIMILAR DISALLOWANCE ON ACCOUNT OF INTEREST EXPENSES UNDER RULE8D (2) (II) WAS DELETED BY LEARNED COMMISSIONER (APPEALS) IN APPEAL FOR ASSESSMENT YEAR 2007-08. WE ARE FURTHER NOTED THAT THIS SPECIFIC FA CT THAT NO INTEREST BEARING FUNDS WERE INVESTED FOR EARNING TAX FREE INCOME WAS BROUGHT TO THE NOTICE OF LOWER AUTHORITIES; HOWEVER, NO ADVERSE FINDING W AS RECORDED BY THE LOWER AUTHORITIES. MOREOVER, THE SIMILAR DISALLOWANCE WAS DELETED BY LEARNED COMMISSIONER (APPEALS) IN ASSESSMENT YEAR 2007-08, WHICH HAS BEEN AFFIRMED BY TRIBUNAL. THEREFORE, THE DISALLOWANCE U NDER RULE8D2 (II) ARE DELETED, HOWEVER SO FAR AS DISALLOWANCES UNDER RULE 8D (2)(III) ARE CONCERNED, WE HAVE NOTED THAT SIMILAR DISALLOWANCE WAS RESTORED BACK TO THE FILE OF ASSESSING OFFICER TO CONSIDER AFRESH. HENCE , KEEPING IN VIEW THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 13 PRINCIPAL OF CONSISTENCY THE ISSUE OF DISALLOWANCE UNDER RULE 8D2 (III) IS RESTORED BACK TO THE FILE OF ASSESSING OFFICER TO D ECIDE AFRESH AFTER CONSIDERING THE SUBMISSION OF ASSESSEE, WHICH WE HA VE RECORDED ABOVE AND IN ACCORDANCE WITH THE DIRECTION OF TRIBUNAL IN ASS ESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 IN ORDER DATED 4 TH MAY 2018 IN CO NO. 243/MUM/2014 IN ITA NO. 6073/MUM/2014. IN THE RESUL T THIS GROUND OF APPEAL IS PARTLY ALLOWED. 12. GROUND NO. 2 RELATES TO CONFIRMING THE ADJUSTMENT W ITH RESPECT TO ARMS LENGTH PRICE FOR RESEARCH AND DEVELOPMENT SERVICES. THE LD AR FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE HAS ESTABLISHED A RESEARCH CENTRE AT POWAI, MUMBAI WITH THE TECHNICAL ASSISTANCE OF COLG ATES GLOBAL TECHNOLOGY CENTRE SITUATED AT PISCATAWAY, NEW JERSE Y, USA. THE CENTRE RENDERS RESEARCH SERVICES TO ASSESSEE AS WELL AS IT S GROUP ENTITY IN ASIA PACIFIC, AFRICA AND MIDDLE EAST THE ASSESSEE PERFOR MED THE FUNCTIONS RELATED TO RESEARCH AND DEVELOPMENT FOR LAUNCHING OF NEW PR ODUCTS, THE COMPLAINTS ANALYSES, ANALYTICAL SUPPORT, ASSISTANCE AND PROFIT IMPROVEMENT, ASSISTANT IN SELECTING NEW VENDOR AND REGULATORY SUPPORT. BESIDE S THAT THE ASSESSEE ALSO PERFORMS SOME PRODUCT TESTING AND CLINICAL TRIAL IN RESPECT OF CERTAIN PRODUCTS FOR COLGATE-PALMOLIVE USA. THE RESEARCH AN D DEVELOPMENT SERVICES (R &D SERVICES) PERFORMED BY ASSESSEE FOR ITS GROUP ENTITY ARE IN THE NATURE OF CONTRACT RESEARCH AND DEVELOPMENT AS THE ASSESSEE DOES NOT OWN INTELLECTUAL PROPERTY RIGHTS ARISING FROM RESE ARCH CONDUCTED BY IT. THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 14 ASSESSEE CONDUCTS RESEARCH AND DEVELOPMENT FOR ITS GROUP ENTITY WITHIN THE BROAD PARAMETERS LAID DOWN BY THE ENTITY REQUESTING FOR RESEARCH. NO RISK IS ASSUMED BY ASSESSEE IN RELATION WITH RESEARCH ACTIV ITIES. DURING THE RELEVANT PERIOD ASSESSEE COMPANY RENDERED R&B SERVICES TO IT S AFFILIATES TO THE EXTENT OF 2,46,14,398/-. IN ADDITION THE ASSESSEE HAS RECEIVE D BENEFIT UNDER SERVED INDIA SCHEME OF CENTRAL GOVERNMENT TO THE EX TENT OF 24,61,440/-. THUS RESULTING A TOTAL ADJUSTED INCOME FROM SERVICE S OF RS. 2,70,75,837/- AGAINST THE OPERATING EXPENSES OF 2,34,42,284/-. (I.E OP/TC OF 15.50 %). THE ASSESSEE BENCHMARKED ITS ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) USING EXTERNAL COMPARABLE. THE ASSESSEE IDENTIFIED 7 COMPARABLE AS COMPARABLE COMPANY FOR R&B ACTIVITIES FOR USING COMPARABLE DATA FOR FY 2003-04 AND 2004-05 IS 18.82 % AND AFTER USING THE DATA FOR FY 2005-06 IT IS 14. 70 %. THE ASSESSEES MARKUP IS AT 15.50 %. ACCORDINGLY, THE TRANSACTION PERTAINING TO RESEARCH AND DEVELOPMENT ACTIVITIES WERE AT ARMS LENGTH. TH E ASSESSING OFFICER MADE A REFERENCE TO TPO FOR DETERMINATION OF ARMS LENGT H OF ASSESSEES INTERNATIONAL TRANSACTION. THE TPO WHILE COMPUTING THE ALP EXCLUDED TWO COMPARABLE FROM THE LIST OF COMPATIBLE SELECTED BY ASSESSEE. THE ASSESSING OFFICER INCLUDED 2 MORE COMPARABLE IN THE FINAL SET OF COMPARABLE. THE COMPARABLE SELECTED BY TPO ARE RITES LTD AND WATER AND POWER CONSULTANCY SERVICES LTD. THE TPO ARITHMETIC MEAN A T 25.11 %, WHEREAS THE ASSESSEE HAS APPLIED 5% ON COST AND THE DIFFERE NCE MARGIN OF 20.11 % ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 15 WAS APPLIED ON THE ORIGINAL COST OF 2,34,42,284/- AND ACCORDINGLY MADE ADJUSTMENT/ADDITION OF ,47,14,243/-. THE TWO COMPARABLE INCLUDED BY TPO ON THE BASIS THAT BOTH THE COMPARABLE TREATED AS CO MPARABLE IN PRECEDING YEARS. THE LEARNED AR FOR THE ASSESSEE SUBMITS THAT EVERY ASSESSMENT YEAR HAS TO BE TREATED SEPARATELY. MERELY BECAUSE A COMP ANY HAS BEEN TREATED AS COMPARABLE IN ONE YEAR IT DOES NOT NECESSARILY MEAN THAT THE SAME SHOULD BE TREATED AS COMPARABLE IN FUTURE ASSESSMENT YEARS. FOR EXCLUSION OF RITES LIMITED THE LD. AR FOR THE ASSESSEE SUBMITS THIS CO MPARABLE WAS EXCLUDED IN ASSESSEES CASE IN APPEAL FOR AY 2002-03 IN ITA NO. 669/MUM/2009. RITES LIMITED WAS EXCLUDED ON ACCOUNT OF TURNOVER F ILTER. FOR EXCLUSION OF THE WATER & POWER CONSULTANCY SERVICES (INDIA) LTD, (WPCSIL) THE LD AR FOR THE ASSESSEE SUBMITS THAT THIS COMPANY IS UNDER TAKING DIFFERENT FUNCTION AS COMPARED WITH ASSESSEE. WPCSIL IS PROVIDING CONS ULTANCY SERVICES IN THE DOMESTIC AND INTERNATIONAL WATER AND POWER STOR E SECTORS, WHEREAS, THE ASSESSEE IS IN RESEARCH RELATED SERVICES. WPCSIL H AS TOTAL TURNOVER OF RS. 806 CRORE IN FY 2005-06, WHEREAS, THE ASSESSEE RECE IVED FEES OF RS.2.46 CRORE ON ITS RESEARCH RELATED SERVICES. THE LD AR F URTHER SUBMITS THAT RITES LTD AND WPCSIL WAS INCLUDED BY TPO IN AY 2005-06, O N APPEAL BEFORE LD CIT(A) BOTH THE COMPARABLE WERE DELETED/EXCLUDED VI DE ORDER DATED 25.01.2011. AND BY FOLLOWING THE ORDER OF LD. CIT(A ) IN AY 2005-06, SIMILAR ORDER WAS PASSED BY LD. CIT(A) IN AY 2007-0 8. ON FURTHER APPEAL BEFORE TRIBUNAL, THE ACTION OF LD CIT(A) FOR AY 200 7-08 IS AFFIRMED. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 16 MOREOVER, THE PUBLIC SECTOR / GOVERNMENT COMPANY CA NNOT BE CONSIDERED AS COMPARABLE AS PUBLIC SECTOR IS NOT DRIVEN BY ANY PROFIT MOTIVE ALONE BUT OTHER CONSIDERATION OF SOCIAL OBLIGATION. IN SUPPOR T OF HIS SUBMISSIONS THE LD. AR RELIED ON THE DECISION OF HONBLE BOMBAY HIG H COURT IN CIT VS THYSSEN KRUPP INDUSTRIES INDIA PVT LTD. (ITA NO. 2218 OF 2013 DATED 28 TH MARCH 2016). THE LD. AR FOR THE ASSESSEE FURTHER SU BMITS THAT ALPHAGEO (INDIA) LTD SHOULD ALSO BE EXCLUDED FROM THE SET O F COMPARABLE AS THE SAME IS NOT COMPARABLE WITH THE ASSESSEE. THOUGH, THIS C OMPARABLE WAS SELECTED BY THE ASSESSEE IN IT TP STUDY. THE LD. AR FOR THE ASSESSEE SUBMITS THAT THE REVENUE CANNOT PRESS THAT THIS COMPARABLE WAS SELEC TED BY THE ASSESSEE AND NOW PRECLUDED FROM RAISING SUBMISSION FOR EXCLUSION OF THIS COMPARABLE. IN SUPPORT OF HIS SUBMISSION THE LD AR FOR THE ASSESSE E RELIED ON THE DECISIONS OF BOMBAY HIGH COURT IN CIT VS TATA POWER SOLAR SYSTEM LTD [2017] 77 TAXMANN.COM 326 (BOMBAY). 13. THE LD. AR FOR THE ASSESSEE FURTHER SUBMITS THAT AL PHAGEO (INDIA) LTD SHOULD BE EXCLUDE FROM THE SET OF COMPARABLE. IT WA S ARGUED THAT THERE IS NO BAR IN EXCLUDING THE COMPARABLE SELECTED BY THE ASS ESSEE IF THE COMPARABLE IS NOT REALLY COMPARABLE. IN SUPPORT OF HIS SUBMISS IONS THE LD. AR FOR THE ASSESSEE RELIED ON THE DECISION OF BOMBAY HIGH COUR T IN CIT VS TATA POWER SOLAR SYSTEM LTD 289 CTR 197 (BOMBAY). IT WAS FURTHER ARGUED THAT ALPHAGEO IS NOT COMPARABLE AS THE SAME RENDERS SEIS MIC SERVICES AND DOES NOT PROVIDE ANY PHARMACEUTICAL R&D SERVICES. IN SUP PORT THE LD. AR FOR THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 17 ASSESSEE RELIED ON THE DECISION OF THE TRIBUNAL IN APOTAX RESEARCH PRIVATE LIMITED VS DCIT (ITA NO. 1286/BANG/2010 DATED 22.02 .2017. 14. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDERS OF THE AUTHORITIES BELOW. THE LD. DR FOR THE REVENUE SUBMI TS THAT THE EXCLUSION OF THE ALPHAEGOS EXCLUSION IS PRAYED FOR THE FIRST TI ME BEFORE THE TRIBUNAL BY THE ASSESSEE. THE TPO ACCEPTED THE CONTENTION OF TH E ASSESSEE FOR TREATING IT AS A GOOD COMPARABLE. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PAR TIES AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. WE HAV E NOTED THAT THE TPO WHILE BENCHMARKING THE ALP WITH REGARD TO INTERNATI ONAL TRANSACTION OF ASSESSEE WITH ITS AE, THE TPO INCLUDED RITES LIMITE D AND WPCSIL AS A COMPARABLE. WE HAVE NOTED THAT RITES LTD AND WPCSIL WAS ALSO INCLUDED BY TPO IN AY 2005-06, ON APPEAL BEFORE LD CIT(A) BO TH THE COMPARABLE WERE DELETED/EXCLUDED VIDE ORDER DATED 25.01.2011. AND BY FOLLOWING THE ORDER OF LD. CIT(A) IN AY 2005-06, SIMILAR ORDER WA S PASSED BY LD. CIT(A) IN AY 2007-08. ON FURTHER APPEAL BEFORE TRIBUNAL, T HE ACTION OF LD. CIT(A) FOR AY 2007-08 IS AFFIRMED. FOR COMPLETENESS OF ORD ER, THE FINDING OF LD. CIT(A) FOR AY 2005-06 IS EXTRACTED BELOW: 3.10 RITES LIMITED THE APPELLANT HAD SUBMITTED THAT RITES LIMITED CANN OT BE TREATED AS A COMPARABLE COMPANY BECAUSE OF THE FOLLOWING REASONS : - RITES LTD IS A GOVERNMENT OF INDIA ENTERPRISE AND P ROVIDES SERVICES TO CENTRAL/STATE GOVERNMENT AND OTHER PUBLIC SECTOR UNDERTAKINGS AND THESE TRANSACTIONS ARE AKIN TO THE TRANSACTIONS ENTERED INTO BETWEEN RELATED PARTIES; ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 18 - THERE WERE SIGNIFICANT DIFFERENCES IN THE TURNOVER OF THE TWO COMPANIES; - RITES LTD IS ENGAGED IN PROVIDING COMPREHENSIVE ENG INEERING, CONSULTANCY AND PROJECT MANAGEMENT SERVICES IN THE TRANSPORT INFRASTRUCTURE SECTOR. FURTHER, RITES CLIENTS MAINL Y INCLUDE CENTRAL GOVERNMENT ENTERPRISES, STATE GOVERNMENTS ENTERPRIS ES, PUBLIC SECTOR UNDERTAKINGS CORPORATIONS AND INDUSTRIAL EST ABLISHMENTS. 3.11 HOWEVER, THE LEARNED TPO HAS TREATED RITES LI MITED AS A COMPARABLE COMPANY ON THE FOLLOWING PREMISE THAT TH E TURNOVER OF THE APPELLANT FROM R&D ACTIVITY IS NOT FIXED AND HENCE IT CAN BE ZERO OR IT CAN BE IN CRORES AND THAT WITH RESPECT TO FUNCTIONS PERFORMED , THE TPO WAS OF THE OPINION THAT THE FUNCTIONS PERFORMED ARE THE SAME EXCEPT FO R MINOR DIFFERENCES IN THE NATURE OF BUSINESS. 3.12 I HAVE EXAMINED THE FACTS OF THIS COMPANY DURI NG AY 05-06 AND HAVE GONE THROUGH THE WEBSITE DETAILS AND I FIND THAT RITES I S A GOVERNMENT OF INDIA ENTERPRISE AND ITS TRANSACTIONS ARE AKIN TO THE TRA NSACTIONS ENTERED INTO BETWEEN RELATED PARTIES AND THUS, THE BASIS ON WHICH RITES LIMITED IS TREATED AS A COMPARABLE BY THE LD. TPO IS INCORRECT. ACCORDINGLY , I AGREE WITH THE VIEW OF THE APPELLANT THAT RITES BEING A GOVERNMENT OF INDI A ENTERPRISE CANNOT BE TREATED AS COMPARABLE. IN VIEW OF ALL OF THE ABOVE, I AGREE WITH APPELLANT'S SUBMISSIONS THAT RITES LIMITED CANNOT BE TREATED AS COMPARABLE TO THAT OF THE APPELLANT. 3.13 WAPCOS THE APPELLANT HAD SUBMITTED THAT WAPCOS SHOULD NOT BE TAKEN AS COMPARABLE COMPANY AS WAPCOS IS A GOVERNMENT OF INDIA ENTERPRI SE AND A 'MINI RATNA' PUBLIC SECTOR ENTERPRISE UNDER THE AEGIS OF THE UNION MINISTRY OF WATER RESOURCES AND RECEIVED GRANTS FROM GOVERNMENT FOR CARRYING SPECIFIC SCHEMES OF THE GOVERNMENT OF INDIA AND ALSO THERE I S SIGNIFICANT DIFFERENCE IN THE TURNOVER OF THE TWO COMPANIES. FURTHER, THE FUN CTIONS PERFORMED BY WAPCOS ARE ALSO SIGNIFICANTLY DIFFERENT FROM THAT O F THE APPELLANT. WAPCOS WAS ENGAGED IN THE BUSINESS OF CONSULTANCY AND NOT IN R&D ACTIVITIES. 3.14 HOWEVER, THE LEARNED TPO HAS TREATED WAPCOS AS A COMPARABLE COMPANY ON THE FOLLOWING PREMISE THAT THE TURNOVER OF THE APPELLANT FROM R&D ACTIVITY IS NOT FIXED AND HENCE IT CAN BE ZERO OR I T CAN BE IN CRORES AND THAT WITH RESPECT TO FUNCTIONS PERFORMED, THE TPO WAS OF THE OPINION THAT THE FUNCTIONS PERFORMED ARE THE SAME EXCEPT FOR MINOR DIFFERENCES IN THE NATURE OF BUSINESS. 3.15 I AGREE WITH THE SUBMISSIONS OF THE APPELLANT THAT WAPCOS IS A GOVERNMENT OF INDIA ENTERPRISE AND HENCE IT CANNOT BE COMPARED WITH THAT OF THE APPELLANT. HENCE, WAPCOS CANNOT BE TREATED AS A COMPARABLE. 3.16 THE CONTENTION OF THE APPELLANT HAS MENTION ED THAT RITES AND WAPCOS ARE GOVERNMENT ENTERPRISES AND SUPPORTED BY GOVERNM ENT OF INDIA IS VARIOUS FACETS OF THE BUSINESS AND THEREFORE THEIR PROFITAB ILITY IS AFFECTED BY THE INTERVENTION BY GOVERNMENT OF INDIA IN TERMS OF SUB SIDIES, GUARANTEED BUSINESS, REDUCED SERVICE COST FROM OTHER GOVERNMENT OF INDIA ENTERPRISE ETC AND SINCE THESE COMPANIES HAVE PROVIDED THEIR SERVICES TO CEN TRAL/STATE GOVERNMENT AND OTHER PUBLIC SECTOR UNDERTAKINGS, THESE TRANSACTION S ARE AKIN TO THE TRANSACTIONS ENTERED INTO BETWEEN RELATED PARTIES. IT HAS TO BE BORNE IN MIND THAT ENTERPRISES ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 19 (RITES/WAPCOS) CARRYING SAME FUNCTION BUT IN DIFFER ENT ECONOMIC SECTORS AND MARKETS (CAPTIVE) CAN HAVE DIFFERENT LEVEL OF P ROFITABILITY) 16. THE TRIBUNAL IN APPEAL FOR AY 2007-08 (ITA NO. 6073 /M/2014 & C.O. NO. 243/M/2014) WHILE AFFIRMING THE ORDER OF LD. CIT(A) PASSED THE FOLLOWING ORDER: 7.1 FACTS QUA GROUND NUMBERS 1 & 2 OF REVENUE'S APPEAL ARE THAT T HE ASSESSEE RECEIVED AN AMOUNT OF RS.5.20 CRORES FROM ITS PAREN T COMPANY FOR PROVIDING CERTAIN RESEARCH & DEVELOPMENT SERVICES [ R & D SERVICES]. THE SAID SERVICES WERE BEING CHARGED AT MARK-UP OF 5%. THE ASSESSEE WAS ENTITLED FOR DUTY BENEFIT OF 100/C OF EXPORT VALUE OF R & D SERVICES FROM GOVERNMENT O F INDIAN UNDER 'SERVED FOR INDIA SCHEME'. AFTER CONSIDERING THE SAID DUTY BENEFIT, THE NET MARGIN (OPERATING PROFIT/ TOTAL COST) OF THE ASSESSEE WORKED OUT TO 15.87% AS AGAINST MEAN MARGIN OF 15.60% OF TEN C OMPARABLES AS SELECTED BY THE ASSESSEE. HOWEVER, LD. TPO OPINED T HAT THE BENEFIT OF SAID DUTY BENEFIT COULD NOT BE CONSIDERED FOR THE PURPOS E OF COMPARISON. THE ANOTHER POINT OF DIFFERENCE WAS INCLUSION OF TWO CO MPARABLES NAMELY RITES & WATER & POWER CONSULTANCY SERVICES INDIA LTD. AS SELECTED BY LD. TRO BY RELYING UPON THE ORDER FOR AY 2006-07, WHICH AS PER ASSESSEE'S SUBMISSIONS WERE FUNCTIONALLY NOT COMPAR ABLE. IN THE FINAL ANALYSIS, LD. TPO HAS WORKED OUT MEAN MARGIN OF SEV EN COMPARABLES INCLUDING THESE TWO COMPARABLE AS 14.82% AND ACCORDINGLY, CON SIDERING ASSESSEE'S MARGIN OF 5%, WORKED OUT TP ADJUSTMENT OF RS.5.69 C RORES AGAINST THE SAME WHICH WAS THE SUBJECT MATTER OF APPEAL BEFORE LD FI RST APPELLATE AUTHORITY. 7.2 AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITH SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 28/03/2014 WHERE T HE AFORESAID ADJUSTMENT WAS DELETED ON THE REASONING THAT THE EXPORT BENEFIT WAS DIRECTLY RELATED TO PROVISION OF R & D SERVICES AND SECONDLY, DEPB BENEFIT WAS PART OF OPERATING INCOME AS PER THE JUDGMENT OF MUMBAI TRIBUNAL RENDERED IN WE/SPUN ZUCCHI TEXTILES LTD ITA NO. 7371/MUM/2010. AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US. THE LD. DR HAS PLACED RELIANCE ON THE STAND OF LD. TPO WHEREAS LD. AR CON TENDED THAT THE ISSUE STOOD COVERED IN ASSESSEE'S FAVOR BY THE DECISION O F THE TRIBUNAL AND ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 20 THEREFORE, THE DECISION OF THE LD. CIT(A) WAS FAIR & REASONABLE IN THE CIRCUMSTANCES. 7.3 UPON DUE CONSIDERATION, WE FIND THAT THE EXPORT BENEFITS WERE RECEIVED BY THE ASSESSEE IN CONNECTION WITH EXPORT OF R & D SERVICES AND HAD DIRECT AND INTIMATE CONNECTION WITH THE SAID RECEIP TS AND THEREFORE, THERE WAS NO REASON TO EXCLUDE THE SAME FOR THE PUR POSE OF COMPUTATION OF MARGINS FROM R & D ACTIVITIES. FURTHER, THE SAID BE NEFIT AROSE FROM USUAL ACTIVITIES CARRIED BY THE ASSESSEE AND PART & PARCE L OF THE SAME TRANSACTION AND THEREFORE, FORMED PART OF OPERATING INCOME ONLY . THE REVENUE HAS NOT CONTROVERTED THE STATED FACT OR BROUGHT ON RECORD A NY CONTRARY JUDGMENT TO REFUTE THE FINDINGS OF LD. FIRST APPELLATE AUTHORIT Y. THEREFORE, ON FACTUAL MATRIX, WE FIND TO REASON TO INTERFERE WITH THE STAND OF LD . FIRST APPELLATE AUTHORITY IN THIS REGARD. THE GROUNDS STANDS DISMISSED. 17. THE HONBLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KR UPP INDUSTRIES INDIA PVT. LTD. (SUPRA) WHILE CONSIDERING THE QUEST ION OF LAW WHETHER TRIBUNAL WAS JUSTIFIED IN EXCLUDING ENGINEERS INDIA LTD. FROM THE LIST OF COMPARABLES HELD THAT ENGINEERS INDIA LTD. IS A GOV ERNMENT COMPANY AND THE CONTRACTS OF GOVERNMENT/PUBLIC SECTOR UNDERTAKI NG ARE NOT DRIVEN BY PROFIT MOTIVE ALONE BUT OTHER CONSIDERATION ALSO WE IGH IN SUCH DISCHARGE OF SOCIAL OBLIGATIONS. THEREFORE, NOT COMPARABLE. FURT HER, WE HAVE FURTHER NOTED THAT TRIBUNAL IN ASSESSEES APPEAL FOR AY 200 2-03 (ITA NO. 669/MUM/2009 DATED 29.06.2012) EXCLUDED RITES LIMIT ED AND WPCSIL. CONSIDERING THE ABOVE FACTUAL AND LEGAL DISCUSSION, WE ARE OF THE VIEW THAT INCLUSION OF RITES LTD. AND WPCSIL ARE LIABLE TO BE EXCLUDED. AS WE HAVE EXCLUDED RITES LTD. AND WPCSIL ON THE BASIS OF DECI SION OF TRIBUNAL IN ASSESSEES OWN CASE, HENCE, THE ADJUDICATION ON THE OTHER CONTENTION OF LD. AR OF THE ASSESSEE HAVE BECOME ACADEMIC. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 21 18. SO FAR AS EXCLUSION OF ALPHAGEO (INDIA) LTD. IS CON CERN. THE LD. AR OF THE ASSESSEE VEHEMENTLY ARGUED THAT THE ASSESSEE IS NOT BARRED UNDER LAW FROM WITHDRAWING THE COMPARABLE FROM THE LIST ON THE GRO UND OF FUNCTIONAL DIFFERENCE AS HELD BY HONBLE BOMBAY HIGH COURT IN CIT VS. TATA POWER SOLAR SYSTEMS LTD. (SUPRA). WE HAVE NOTED THAT HON BLE BOMBAY HIGH COURT IN CIT VS. TATA POWER SOLAR SYSTEMS LTD. (SUP RA) HELD THAT WHEN FOR PURPOSE OF DETERMINING ALP, COMPANIES ASSESSEE, ENG AGED IN GENERATION OF SOLAR ENERGY, HAD MISTAKENLY INCLUDED TWO COMPANIES ENGAGED IN AREA OF WIND ENERGY IN ITS LIST OF COMPARABLES, ASSESSEE WO ULD NOT BARRED IN LAW FROM WITHDRAWING THESE TWO COMPARABLES FROM ITS LIS T ON GROUND OF FUNCTIONAL DIFFERENCE. 19. WE HAVE NOTED THAT ALPHAGEO IS NOT COMPARABLE AS T HE SAME RENDERS SEISMIC SERVICES AND DOES NOT PROVIDE ANY PHARMACEU TICAL R&D SERVICES. THE COORDINATE BENCH OF BANGALORE TRIBUNAL IN CASE OF APOTAX RESEARCH PRIVATE LIMITED VS DCIT (SUPRA) WHILE CONSIDERING T HE COMPARABILITY OF ALPHAGEO HELD AS UNDER :- 6. WITH REGARD TO ALPHA GEO INDIA LTD., IT WAS CON TENDED ON BEHALF OF THE ASSESSEE THAT THIS COMPARABLE DOES NOT MEET THE BAS IC COMPARABILITY CRITERION OF FUNCTIONAL SIMILARITY WHICH RENDERS SEISMIC SERVICE S AND DOES NOT PROVIDE ANY PHARMACEUTICAL R&D SERVICES. IT ALSO FAILS 'ATLEAST 25% EARNING FROM EXPORTS FILTER' APPLIED BY THE TPO HIMSELF. THE PROFILE OF ALPHA GEO INDIA LTD. IS AVAILABLE AT PAGE 386 OF THE COMPILATION OF THE ASS ESSEE, ACCORDING TO WHICH THE COMPANY PROVIDES THE FOLLOWING SERVICES:- - DESIGNING AND PREPLANNING OF 2D AND 3D SERVICES ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 22 - SEISMIC DATA ACQUISITION IN 2D AND 3D - SEISMIC DATA PROCESSING/REPROCESSING/SPECIAL PROC ESSING - SEISMIC DATA INTERPRETATION - GENERATION, EVALUATION AND RANKING OF PROSPECTUS - RESERVOIR ANALYSIS - TOPOGRAPHIC SURVEYS WITH GPS/RTK - TAPE TRANSCRIPTION - DIGITISATION OF HARD COPIES OF MAPS, SEISMIC SECT IONS AND WELL LOGS INTO CGM/SEGY/LAS FORMATS - THIRD PARTY QC FOR ACQUISITION AND PROCESSING 7. SINCE THE PROFILE OF THIS COMPANY IS NOT SIMILAR TO THE ASSESSEE'S PROFILE, THIS COMPANY CANNOT BE CALLED A GOOD COMPARABLE FOR DETE RMINING THE ALP. THEREFORE, WE ARE OF THE VIEW THAT THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DIFFERENCE. 20. THEREFORE, IN OUR VIEW THE AFORESAID VIEW TAKEN BY THE COORDINATE BENCH, WE CONCUR THE FACT THAT ALPHAGEO (INDIA) LTD IS WORKIN G IN THE DIFFERENT FIELD NOT COMPARABLE WITH THE ASSESSEE. 21. IN VIEW OF THE ABOVE DISCUSSION, WE DIRECT THE ASSE SSING OFFICER/TPO TO RECOMPUTE THE ALP ON R&D SERVICES BY EXCLUDING RITE S LTD., WPCSIL AND ALPHAGEO (INDIA) LTD. IN THE RESULT, GROUND NO. 2 OF THE APPEAL IS ALLOWED. 22. GROUND NO. 3 RELATES TO DISALLOWANCE OF ADVERTISEME NT AND SALES PROMOTION EXPENSES. THE LEARNED AR FOR THE ASSESSEE SUBMITS T HAT ADVERTISEMENT AND SALE PROMOTION IS NOT INTERNATIONAL TRANSACTION. TH E EXPENSES ON SALE AND PROMOTION WAS MADE TO THIRD PARTY, ACCORDINGLY IT D OES NOT CONSTITUTE INTERNATIONAL TRANSACTION. THE LD AR SUBMITS THAT O N SIMILAR SET OF FACT THE ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 23 LEARNED CIT(A) IN APPEAL FOR AY 2005-06 DELETED THE SIMILAR DISALLOWANCES, THUS, THE ISSUES CONCLUDED IN EARLIER YEARS. THE LE ARNED AR PRAYED FOR FOLLOWING THE ORDER OF TRIBUNAL FOR AY 2005-06. 23. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF THE LOWER AUTHORITIES. THE LD. DR SUBMITS THAT IN EARL IER YEAR THE ORDER IS IN FAVOUR OF THE ASSESSEE. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PAR TIES AND PERUSED THE ORDER OF THE LOWER AUTHORITIES. WE HAVE NOTED THE S IMILAR ADDITIONS WERE MADE BY ASSESSING OFFICER IN ASSESSMENT YEAR 2005-0 6 ON THE BASIS OF ADJUSTMENT SUGGEST IN REPORT OF TPO. HOWEVER, ON AP PEAL BEFORE LD CIT(A), THE ADDITIONS WERE DELETED HOLDING THAT THERE IS NO DIRECT BENEFIT FLOWING FROM THE ASSESSEES A&M EXPENSES TO ITS ASSOCIATED ENTERPRISES, SINCE, THE EXPENSES ARE INCURRED SOLELY FOR THE PROMOTION OF T HE ASSESSEES PRODUCT IN THE INDIAN MARKET. INCIDENTAL BENEFITS FLOWING TO T HE ASSOCIATED ENTERPRISES, IF ANY CANNOT CHANGE THE CHARACTER OF THE EXPENSES INCURRED BY THE ASSESSEE. NO BRAND ROYALTY PAYMENTS ARE MADE TO THE ASSOCIATE D ENTERPRISES DURING THE PERIOD. ON FURTHER APPEAL TO THE TRIBUNAL THE FOLLOWING ORDER IS PASSED IN ITA NO. 6073/MUM/2014 & CO 243/MUM/2014 DATED 04 /05/2018; 5.1 WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS A ND PERUSED RELEVANT MATERIAL ON RECORD. AT THE OUTSET, SOME PERTINENT FACTS TO B E NOTED ARE THAT THERE EXISTS NO ARRANGEMENT OR AGREEMENT BETWEEN THE ASSESSEE AND I TS AE WHICH OBLIGED THE ASSESSEE TO UNDERTAKE ANY SORT OF BRAND BUILDING ON BEHALF OF ITS AE. SECONDLY, NOTHING HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT INCURRING OF AMP ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 24 EXPENDITURE HAS, IN ANY MANNER, RESULTED INTO BRAND BUILDING EXERCISE OR CREATING MARKETING INTANGIBLES FOR THE AE OR AE STO OD BENEFITTED BY STATED EXPENDITURE IN ANY MANNER. THE ONLY ARGUMENT ADVANC ED BY THE REVENUE IS THAT THE BRAND VALUE OF THE ASSESSEE GROUP, AS A WHOLE, HAS REFLECTED HEALTHY GROWTH DURING THE PERIOD 2000 TO 2006. HOWEVER, NO EVIDENC E TO DEMONSTRATE THAT THERE WAS ANY CO-RELATION BETWEEN THE AFORESAID GROWTH VI S--VIS QUANTUM AMP EXPENDITURE INCURRED BY THE ASSESSEE HAS BEEN PLACE D ON RECORD. IN OUR OPINION, NO ADDITION COULD BE MADE ON MERE ASSUMPTION OF CER TAIN FACTS. 5.2 SO FAR AS THE REIMBURSEMENT OF AMP EXPENSES AS URGED BY THE REVENUE IS CONCERNED, UPON PERUSAL OF TRANSACTIONS AS REPORTED IN TRANSFER PRICING [TP] STUDY CARRIED OUT BY ASSESSEE, WE FIND THAT THESE E XPENSES ARE IN MOSTLY IN THE NATURE OF MEETING EXPENSES, TRAVELLING EXPENSES, HO TEL EXPENSES WHICH HAS BEEN RECEIVED AS WELL AS PAID BY THE ASSESSEE ON THE SAM E BASIS I.E. THIRD PARTY COST. THE NATURE OF THESE EXPENSES, PER-SE, DO NOT INSTIL L CONFIDENCE IN US TO CONCLUDE THAT THE INCURRING OF SAID EXPENDITURE, HAS IN ANY WAY, RESULTED INTO BRAND BUILDING OR CREATING MARKETING INTANGIBLES FOR THE ASSESSEE. 5.3 PROCEEDING FURTHER, THE CONTENTION OF THE ASSESSEE THAT HAS IN CURRED THE SAID EXPENDITURE TO PROMOTE ITS OWN PRODUCTS IN THE MARKET HAS REMAINED UNCONTROVERTED. IT IS ALSO UNCONTROVERTED THAT THE AFORESAID PAYMENTS WERE PRI MARILY MADE TO INDEPENDENT THIRD PARTIES WITHOUT RENDERING ANY SERVICES TO ITS AE. 5.4 FURTHER, WE FIND THAT LD. TPO HAS COMPUTED THE SAID ADJUSTMENT BY APPLYING BRIGHT LINE TEST WITHOUT CARRYING OUT ANY ANALYSIS OF THE IMPUGNED EXPENDITURE TO CORROBORATE HIS STAND. THE AFORESAID METHODOLOGY, AS PER SETTLED LEGAL POSITION, IS NOT A RECOGNIZED METHODOLOGY AND NOT ONE OF THE PRESCRIBED METHODS AS ENVISAGED BY RULE 10B. 5.4 UPON DUE CONSIDERATION, WE FIND THAT THE FACTS OF THE ABOVE CASE ARE QUITE SIMILAR TO FACTS IN THE DECISION OF MUMBAI TRIBUNAL RENDERED IN JOHNSON & JOHNSON LTD. VS. CIT [43 TAXMANN.COM 15] WHEREIN IT HAS HELD AS UNDER:- 37. RELEVANT FACTS ARE THAT THE TPO HAS STATED THAT THE ASSESSEE INCURRED PUBLICITY AND SALES PROMOTION EXPENSES OF RS.163.27 CRORES DURING THE RELEVANT FINANCIAL YEAR. THE TPO HAS STATED THAT SA ID EXPENSES ON PUBLICITY ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 25 AND SALES PROMOTION HAS RESULTED INTO HIGHER SALES ON WHICH CORRESPONDINGLY HIGHER ROYALTY HAS BEEN PAID TO THE PARENT COMPANY J&J US. THEREFORE, THE BENEFIT OF HIGHER PUBLICITY AND SALES PROMOTION EXP ENSES ARE ACCRUED TO THE PARENT COMPANY J&J US BUT THE COST THEREOF IS NOT A PPORTIONED TO THE PARENT COMPANY. THE TPO SOUGHT EXPLANATION FROM THE ASSESS EE AS TO WHY THE COST OF ARRANGEMENT AS EMANATING FROM THE RECORDS, IS RE SULTING INTO THE BENEFIT TO THE PARENT AE, BUT NOT APPORTIONED AS PER SECTION 9 2(2) OF THE ACT. THE TPO STATED THAT THE ASSESSEE AND THE PARENT COMPANY J&J US SHOULD HAVE SHARED SALES PROMOTION EXPENSES IN THE RATIO OF ROYALTY TO SALES OR WOULD HAVE RENEGOTIATED A LOWER ROYALTY RATE. THE ASSESSEE FIL ED ITS REPLY STATING INTER- ALIA THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF DI STRIBUTING THE PRODUCTS IN THE INDIAN MARKET ON ITS OWN ACCOUNT. IT WAS ALSO C ONTENDED THAT THE ADVERTISEMENT AND MARKETING EXPENSES ARE INCURRED I N INDIA ONLY FOR PROMOTING SALES BY ASSESSEE OF ITS PRODUCTS IN INDI A AND IT IS NOT IN ANY WAY BENEFITED TO J&J US. THAT J&J US IS NOT DIRECTLY IN VOLVED IN THE BUSINESS OF MANUFACTURING OR TRADING OF SAID GOODS IN INDIA EIT HER OF ITS OWN OR THROUGH ANY OF ITS SUBSIDIARY. HENCE, THE ENTIRE ADVERTISEM ENT AND MARKETING EXPENSES INCURRED ARE PURELY FOR ASSESSEE'S OWN BEN EFIT AND THERE IS NO ELEMENT OF ANY SERVICE BEING RENDERED TO J&J US. IT WAS ALSO STATED THAT ASSESSEE-COMPANY IS AN INDEPENDENT RISK BEARING ENT ITY AND ANY COST INCURRED TOWARDS ADVERTISEMENT AND MARKETING WOULD BE FOR TH E SOLE BENEFIT OF ASSESSEE- COMPANY, AS IT ENJOYS THE INCREASED SALES OF PRODUCTS AS A RESULT OF SUCH MARKETING ACTIVITIES. THE ASSESSEE ALSO FURNIS HED DETAILS OF PUBLICITY AND SALES PROMOTION EXPENSES BEFORE TPO. HOWEVER, T PO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND STATED THAT THE SAID GROWTH IN NET SALES SO ACHIEVED THROUGH HIGHER AND HIGHER PUBLICITY AND SA LES PROMOTION AND EXPENSES HAVE RESULTED INTO HIGHER PAYMENT OF ROYAL TY WHICH THE ASSESSEE IS PAYING AT A FIXED PERCENTAGE OF SALES TO ITS PARENT COMPANY. THUS, THERE IS A CO-RELATION BETWEEN THE ROYALTY PAYMENT AND SALES O N THE ONE HAND AND PUBLICITY AND SALES PROMOTION EXPENSES ON THE OTHER HAND AND IT IS NOT A MATTER OF COINCIDENCE. THE TPO AFTER CONSIDERING TH E SUBMISSIONS OF ASSESSEE HAS STATED THAT J&J US, THE PARENT COMPANY OF THE ASSESSEE IS REAPING THE BENEFIT OF HIGHER ROYALTY YEAR AFTER YE AR AS A RESULT OF HIGHER SALES REALIZED BY ASSESSEE THROUGH HIGHER AND HIGHER EXPE NSES BY WAY OF PUBLICITY ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 26 AND SALES PROMOTION UNDERTAKEN BY ASSESSEE WITHOUT THE OVERSEAS AE BEARING ANY COST THERETO HE STATED THAT IT CONSTITUTES ARRA NGEMENT BETWEEN THE TWO ENTITIES WHEREIN THE ENTIRE COST IS BORNE BY ASSESS EE, WHEREAS THE PARENT COMPANY J&J US IS GETTING ITS SHARE OF BENEFIT FROM THOSE INCREASED SALES. THE TPO WORKED OUT THE COST AT THE RATE OF 4.22% OF THE PUBLICITY AND SALES PROMOTION EXPENSES WHICH COMES TO RS.6.88 CRORES. H OWEVER, THE TPO STATED THAT THE COST IS RESTRICTED TO 200.82 LAKHS (BEING 1.23% OF RS.163.27 CRORES) IN VIEW OF DISALLOWANCE/ADJUSTMENT IN INCOM E MADE ON ACCOUNT OF ROYALTY ON TECHNICAL KNOW-HOW, THE INCOME TAX, R&D CESS AND SERVICE TAX PAID THEREON AGGREGATING TO RS.41.27 CRORES OUT OF TOTAL PAYMENT OF RS.58.37 CRORES. HENCE, TPO DISALLOWED RS.200.82 LAKHS FROM THE PUBLICITY AND SALES PROMOTION EXPENSES INCURRED TOWARDS COST ALLOCABLE TO PARENT COMPANY. DRP AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE C OMPANY CONFIRMED THE ACTION OF THE TPO. ACCORDINGLY THE AO DISALLOWED A SUM OF RS.200.82 LAKHS WHILE MAKING ASSESSMENT. HENCE, ASSESSEE IS IN APPE AL BEFORE THE TRIBUNAL. 38. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT IT WAS AN ADHOC DISALLOWANCE MADE BY TPO AND RELIED ON THE DECISION OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF KODAK INDIA (P.) LTD. V. ADDL . CIT [2013] 37 TAXMANN.COM 233 AND SUBMITTED THAT THE TRIBUNAL DEL ETED SIMILAR KIND OF ADJUSTMENT SUGGESTED BY TPO ON THE GROUND THAT TPO CANNOT MAKE A DISALLOWANCE WHICH IS NOT WITHIN THE PRECINCT OF SP ECIFIC METHOD PRESCRIBED UNDER SECTION 92C(1) OF THE ACT. HE SUBMITTED THAT NO ADHOC DISALLOWANC E CAN BE MADE UNDER THE TRANSFER PRICING PROVISIONS. 39. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER O F AO/TPO AND SUBMITTED THAT TO CONSIDER MARKETING EXPENSES THE COST PLUS M ETHOD COULD BE APPLIED. SINCE TPO HAS NOT FOLLOWED ANY SPECIFIC METHOD AS 2 006-07 IS THE FIRST YEAR, THE MATTER COULD BE RESTORED TO TPO TO DECIDE IT AF RESH AFTER CONSIDERING THE GUIDELINES LAID DOWN BY SPECIAL BENCH (DELHI) IN TH E CASE OF L.G. ELECTRONICS INDIA (P.) LTD. V. ASSTT . CIT [2013]140 ITD 41/29 TAXMANN.COM 300. HE SUBMITTED THAT THE AE, PARENT COMPANY OF TH E ASSESSEE SHOULD REIMBURSE THE EXPENSES AS ASSESSEE COMPANY HAS CREA TED BRAND IN INDIA WHICH IS OWNED BY PARENT COMPANY BY INCURRING THE E XPENDITURE. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 27 40. WE HAVE CONSIDERED THE ORDER OF THE TPO/AO AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE OBSERVE THAT THE TPO HAS SUGGESTED DISALLOWANCE ON THE GROUND THAT THE AE OF THE ASSES SEE VIZ J&J US IS REAPING THE BENEFIT OF HIGHER ROYALTY AMOUNT AS A RESULT OF HIGHER SALES REALIZED BY ASSESSEE BY INCURRING HIGHER EXPENSES BY WAY OF PUB LICITY AND SALES PROMOTION UNDERTAKEN BY ASSESSEE AND THEREFORE THE PARENT COMPANY OF THE ASSESSEE-COMPANY SHOULD SHARE SOME OF THE EXPENSES. IT IS A FACT THAT TPO WHILE SUGGESTING ANY DISALLOWANCE/ADJUSTMENT HAS TO STATE THAT THE TRANSACTIONS BETWEEN THE ASSESSEE- COMPANY AND ITS AE IS NOT AT ARM'S LENGTH. THE TPO IS TO DETERMINE THE ARM'S LENGTH BY FOLLOWING ONE OF THE METHOD AND /OR MOST APPROPRIATE METHOD AS PRESCRIBE D IN SECTION 92C(1) OF THE ACT. THE TPO CANNOT SUGGEST ADJUSTMENT/DISALLOW ANCE ON THE BASIS OF HIS ASSUMPTIONS THAT THE PAYMENT IS EXCESSIVE THOUGH IT IS AT ARM'S LENGTH. SIMILAR ISSUE WAS ALSO CONSIDERED BY ITAT MUMBAI BE NCH IN THE CASE OF KODAK INDIA (P.) LTD. (SUPRA). FURTHER, RULE 10B SP ECIFICALLY PROVIDES THE PROCEDURE TO BE FOLLOWED FOR DETERMINING ARM'S LENG TH PRICE. WE OBSERVE THAT THE TPO WHILE SUGGESTING THE DISALLOWANCE OF 2 00.82 LAKHS OUT OF THE EXPENSES INCURRED BY ASSESSEE ON PUBLICITY AND SALE S PROMOTION HAS NOT FOLLOWED ANY OF THE METHOD AND THEREFORE THE SAID A DJUSTMENT/DISALLOWANCE SUGGESTED BY TPO IS OUTSIDE ITS JURISDICTION. DURIN G THE COURSE OF HEARING, LD. DR SUBMITTED THAT THE MATTER COULD BE RESTORED TO T PO TO DECIDE AFRESH AFTER CONSIDERING THE GUIDELINES LAID DOWN BY SPECIAL BEN CH (DELHI) IN THE CASE OF L.G. ELECTRONICS INDIA (P.) LTD. (SUPRA). SINCE NO SPECIFIC SUBMISSIONS WERE MADE AND CONSIDERING THE FACT THAT THE ASSESSEE JUS TIFIED THE PAYMENT OF TECHNICAL KNOW-HOW ROYALTY AT THE RATE OF 4% OF NET SALES WHICH IS LOWER THAN ARM'S LENGTH RATE OF 4.84% AND THE SAID FACT, WE HA VE ALSO DISCUSSED HEREIN ABOVE IN PARA 33 OF THIS ORDER, THAT THE PAYMENT OF ROYALTY BY ASSESSEE TO ITS PARENT COMPANY IS AT ARM'S LENGTH, WE DO NOT FIND A NY JUSTIFICATION TO MAKE THE SAID DISALLOWANCE OF RS.200.82 LAKHS AS SUGGES TED BY TPO TOWARDS THE SHARES TO BE CONTRIBUTED BY AE OF THE ASSESSEE- COM PANY. THEREFORE, WE DELETE THE SAID DISALLOWANCE MADE BY AO BY ALLOWING GROUND NO.18 OF THE APPEAL TAKEN BY ASSESSEE. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 28 UPON FURTHER APPEAL BY REVENUE [80 TAXMANN.COM 269] , HON'BLE BOMBAY HIGH COURT HAS UPHELD THE AFORESAID VIEW OF THE TRIBUNAL BY MAKING THE FOLLOWING OBSERVATIONS:- 4. RE QUESTION (L) :-- (I) THE IMPUGNED ORDER OF THE TRIBUNAL ALLOWED THE RESPONDENT- ASSESSEE'S APPEAL BEFORE IT BY DELETING THE ADDITION OF RS.200 .82 LAKHS BEING THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF SALES PROMOTION AN D PUBLICITY EXPENSES BEING PAYABLE BY THE RESPONDENT- ASSESSEE' PARENT M /S. JOHNSON & JOHNSON, USA. THIS ON THE GROUND THAT THE TRANSFER PRICING O FFICER (TPO) HAS, WHILE HOLDING THAT THE PARENT COMPANY SHOULD SHARE THIS E XPENDITURE ON PUBLICITY AND SALES PROMOTION AS IT BENEFITS THEREFROM, AS HI GHER SALES RESULT IN HIGHER ROYALTY, HAS NOT DETERMINED THE ARMS LENGTH PRICE ( ALP) BY FOLLOWING ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C(1) OF T HE ACT READ WITH RULE 10B OF THE INCOME TAX RULES, 1962. (II) THE TPO IS OBLIGED UNDER THE LAW TO DETERMINE THE ALP BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS OF DETERMINING TH E ALP AS DETAILED IN SECTION 92C(1) OF THE ACT. IN THIS CASE, THERE IS NOTHING ON RECO RD TO INDICATE THAT THE TPO HAD APPLIED ANY ONE OF THE PR ESCRIBED METHODS IN SECTION 92C(1) OF THE ACT TO DETERMINE THE ALP BEFORE DISALLOWING THE PAYMENT OF RS.200.82 LAKHS INCURRED BY THE RESPONDE NT ON ACCOUNT OF PUBLICITY AND SALES MANAGEMENT AS BEING EXCESSIVE A ND/OR PAYABLE BY ITS PARENT, M/S. JOHNSON & JOHNSON, USA. (III) THE IMPUGNED ORDER HOLDS THAT TRANSFER PRICIN G ADJUSTMENT DONE BY DISALLOWING THE PAYMENT, ON THE BASIS OF AN ASSUMPT ION THAT IT IS EXCESSIVE, IS AN ACTION COMPLETELY DEHORS THE PROVISIONS OF TRANS FER PRICING ADJUSTMENT FOUND IN CHAPTER X OF THE ACT. THE DETERMINATION OF THE ALP HAS TO BE DONE ONLY BY FOLLOWING ONE OF THE METHODS PRESCRIBED UND ER THE ACT. (IV) IN VIEW OF THE ABOVE, AS THE REVENUE HAS NOT A CTED IN ACCORDANCE WITH THE CLEAR MANDATE OF LAW, THE QUESTIONS AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTERTAINED. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 29 5.5 SIMILAR VIEW HAS BEEN TAKEN BY HON'BLE DELHI HI GH COURT IN CATENA OF SUBSEQUENT DECISIONS, FEW OF WHICH ARE AS FOLLOWS:- (I) MARUTI SUZUKI INDIA LTD. V. CIT 2015 64 TAXMNN.COM 150 (II) CIT V. WHIRLPOOL OF INDIA LTD . 381 ITR 154 (III) BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. V. ADDL.CIT 381 ITR 237 (IV) YUM RESTAURANTS (INDIA) (P.) LTD. V. ITO 380 ITR 637 IN THE ABOVE-MENTIONED DECISIONS, IT HAS CATEGORIC ALLY BEEN HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN THE ASSESSEE AND ITS A E OBLIGING THE ASSESSEE TO INCUR AMP EXPENDITURE ON BEHALF OF ITS AE, NO IN TERNATIONAL TRANSACTION CAN BE PRESUMED. EVEN IF SOME INDIRECT BENEFIT HAS ACCRUED TO THE AE BY AFORESAID EXPENDITURE, IT COULD NOT BE HELD THAT TH E SAME WAS INCURRED TO PROMOTE THE BRAND OF FOREIGN AE. ANOTHER ASPECT OF THE ISSUE IS ABSENCE OF MACHINERY PROVISIONS AS OBSERVED BY HON'BLE DELHI H IGH COURT, IN BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. [381 ITR 237] WHERE HON'BLE COURT AFTER CONSIDERING VARIOUS JUDGMENTS HAS ELABORATELY DISCU SSED THE ISSUE IN THE FOLLOWING MANNER:- 51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF A N INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES REQUIRES THE INTERPRETATION OF PROVISIONS OF CHAPTER X OF THE ACT, AND TO DETERMINE WHETHER THE REVENUE HAS BEEN ABLE TO SHOW PRIMA FACIE THE EXISTENCE OF INTERNATIONAL TRANSACT ION INVOLVING AMP BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THES E CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALRE ADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11 TH DECEMBER 2015 IN ITA NO. 110/2014 ( MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX ) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 ( THE COMMISSIONER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD .) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE AP PEALS HAVE BEEN CONSIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTA TION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S L ENGTH PRICE'] AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN I NTERNATIONAL TRANSACTION ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 30 SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ALP, M AKES IT CLEAR THAT THE TRANSFER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN I NTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRANSFER PRICIN G ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRA NSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F , THE PRE-REQUISITE FOR COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATION AL TRANSACTION. THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C . THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. 55. SECTION 92B DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEA NING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92 , 92C , 92D AND 92E , 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, O R LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INC LUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE O R FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2 ) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN A SSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB- SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE E XISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH O THER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSO CIATED ENTERPRISE.' ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 31 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TRANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM ARE NON- RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PU RCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SER VICE OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A B EARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHAL L INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FO R ALLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EX PENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUN CTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' THERE HAS TO BE TWO PA RTIES. THEREFORE FOR THE PURPOSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREE MENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN BLI AND B&L, USA WHEREBY BL I IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BR AND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS S EEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS M IGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY IT DOES NOT LIST AMP SPENDI NG AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BEN EFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUT E A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY CO MPENSATION FOR THE SERVICE OR BENEFIT.' THIS WAS NEGATIVED BY THE COUR T BY POINTING OUT: 'EVEN IF THE WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMEN T AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTAND ING' OR 'ACTION IN CONCERT', ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 32 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMB ENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEM ENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS' PART AND THE 'INC LUDES' PART OF SECTION 92B (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENC E OF TRANSACTION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEV EL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT I NTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT REFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V. JAYARAM CHIGURUPATI 2010(6) MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF AC QUISITION OF SHARES OF ZENOTECH LABORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPEL LANT, I.E., DAIICHI SANKYO COMPANY AND RANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHA NGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) R EGULATIONS, 1997. IN PARA 44, IT WAS OBSERVED AS UNDER: 'THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPO SE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMP ANY. THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARE D COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. FOR, DE HORS THE ELEMEN T OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGRE EMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CO NCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY AC CIDENT OR CHANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED C OMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION O F SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER MATTER THAT THE COMMON OBJEC TIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT OR AN UNDERSTANDING , FORMAL OR INFORMAL THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR IND IRECT OR THE PERSONS ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 33 ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITI ON OF SHARES ETC. OR THEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHE LESS, THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING.' 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXP ENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE EN TITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDIN G TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE O F SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVENT, AFTER THE DECISI ON IN SONY ERICSSON (SUPRA), THE QUESTION OF APPLYING THE BLT TO DETERM INE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TR ANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FURTHER, THE REVENUE'S ATTEMPT AT RE -CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTION BY ITSELF WHE N IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL ITA NOS .6073/MUM/2014 & 2778/MUM/2011 CO.NOS.243/MUM/2014 & 126/MUM/2011 COLGATE PALMOLIV E (INDIA) LIMITED ASSESSMENT YEARS : 2005-06 & 2007-08 APPLIA NCES LTD. (SUPRA) WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPE NDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGAR D, WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY, THAT EVE N IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO THE AE IS ITSELF SUFFICIENT TO INFER THE E XISTENCE OF AN INTERNATIONAL ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 34 TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARU TI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AU THORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED A S A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE I S ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTER NATIONAL TRANSACTION INVOLVING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRE D TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS , IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAI D OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISIO N PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIO NAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. ....... 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF A N INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AN D THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE M ADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATI ONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGAT IVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUS TMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MA Y SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT.' 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 35 AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFOR E, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT T O A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE A SSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EX ISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETE RMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CAS E. ...... 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS T O USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIO NAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANATION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STOP HERE. EVEN IF A TRANSACTION INVOLVING AN AMP S PEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE ) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SU CH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. (SUPRA) TH E COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPEN SES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY, AND FOR NO OTHER PURPO SE, IN THE CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TY PES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NO T DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSI VE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN S UCH EVENT, 'SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN I NSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT H E CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'M ACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHO ULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED T O IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRA CTICAL TERMS, ABSENT A CLEAR ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 36 STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFF ICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPA CTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDU STRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL A ND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPL ATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITS ELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGA INST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRIN GING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS I N CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 ( SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WIT H AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXER CISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS A N INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPE NSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FO REIGN AE. AS MENTIONED IN SASSOON J DAVID (SUPRA) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT CO ME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UND ER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT , 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW'.' ALTHOUGH WE ARE CONSCIOUS OF THE FACT THAT SPECIAL LEAVE PETITION AGAINST THE SAME HAS BEEN ADMITTED B Y HON'BLE APEX COURT [77 TAXMANN.COM 54], HOWEVER, WE FIND THAT THE OPER ATION OF THE SAID JUDGMENT HAS NOT BEEN, IN ANY MANNER, STAYED BY HON 'BLE COURT AND THEREFORE VALID IN THE PRESENT CONTEXT. 5.6 SO FAR AS THE DECISIONS RELIED UPON BY REVENUE ARE CONCERNED, WE FIND THAT THE DECISION OF HON'BLE DELHI HIGH COURT IN SONY ER ICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. WAS RENDERED IN THE CONTEXT WHERE THE ASSESSEES ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 37 WERE DISTRIBUTORS OF PRODUCTS MANUFACTURED BY THE F OREIGN AE. THE SAID ASSESSEES THEMSELVES WERE NOT MANUFACTURERS. MORE O VER NONE OF THE SAID ASSESSES APPEARS TO HAVE QUESTIONED THE VERY EXISTE NCE OF INTERNATIONAL TRANSACTION WITH FOREIGN AE. IT WAS ALSO NOT DISPUT ED THAT THE SAID INTERNATIONAL TRANSACTION OF INCURRING AMP EXPENDITURE COULD BE S UBJECT MATTER OF TP ADJUSTMENTS IN TERMS OF SEC.92 OF THE ACT. THEREFOR E, THE SAME IS DISTINGUISHABLE ON FACTS. SIMILARLY, THE DECISIONS RENDERED IN BMW INDIA PRIVATE LIMITED AND PERFETTI VAN MELLE INDIA PVT. L TD. HAS BEEN RENDERED IN A SITUATION WHERE THERE EXISTED AN AGREEMENT BETWEEN THE ASSESSEE AND ITS AE TO UNDERTAKE ADVERTISEMENT AND SALES PROMOTION. THE CA SE LAW OF CUSHMAN & WAKEFIED IS NOT RELATED WITH DETERMINATION OF ALP O F AMP EXPENDITURE AND FURTHER IN THAT CASE THE BENCHMARKING OF REIMBURSEM ENT OF EXPENSES WAS NOT DONE BY THE ASSESSEE. HENCE, THE CITED CASE LAWS CO ULD NOT HELP THE REVENUE ON FACTUAL MATRIX. THE CASE LAW OF MARUTI SUZUKI INDIA LTD., IN FACT, SUPPORT THE STAND OF THE ASSESSEE WHICH IS EVIDENT FROM THE FAC T THAT LD. DRP, IN AY 2011- 12, FOLLOWING THE RATIO OF THIS DECISION DELETED T HE IMPUGNED ADDITIONS AND ALLOWED THE APPEAL OF THE ASSESSEE. 5.7 TO CONCLUDE, RESPECTFULLY FOLLOWING THE RATIO O F DECISION OF HON'BLE BOMBAY HIGH COURT AS CITED ABOVE ALONG WITH THE CIT ED DECISIONS OF HON'BLE DELHI HIGH COURT, WE UPHELD THE ORDER OF LD. FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND OF REVENUE'S APPEAL. THE ASSESS EE'S CROSS-OBJECTIONS BECOME INFRUCTUOUS . 25. CONSIDERING THE EXHAUSTIVE ORDER OF THE TRIBUNAL O N IDENTICAL GROUND OF APPEAL FOR AY 2005-06, AND RESPECTFULLY FOLLOWING T HE SAME, WE ALSO HOLD THAT THE EXPENSES INCURRED BY THE ASSESSEE ON ADVER TISEMENT AND SALE PROMOTION TO THIRD PARTY IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. HENCE, THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED. ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 38 26. -ADDITIONAL GROUND OF APPEAL RELATES TO NOT REVISIN G THE PROFIT FROM BADDI UNIT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IC BY T HE AMOUNT OF ADVERTISEMENT AND MARKETING EXPENDITURE. THE LEARNE D AR OF THE ASSESSEE SUBMITS THAT THIS GROUND OF APPEAL IS RAISED IN ALT ERNATIVE AND WITHOUT PREJUDICE TO GROUND NO.1 TO 3. THE LD. AR FURTHER S UBMITS THAT IN CASE THE GROUND NO. 1 TO 3 IS NOT DECIDED IN FAVOUR OF ASSES SEE THEN SUITABLE DIRECTION FOR REVISING PROFIT FROM THE BADDI UNIT ELIGIBLE FO R DEDUCTION UNDER SECTION 80IC MAY BE MADE. 27. ON THE OTHER HAND LEARNED AR FOR THE REVENUE SUPPOR TED THE ORDER OF LOWER AUTHORITIES. 28. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTI ES. CONSIDERING THE FACT THAT WE HAVE ALLOWED GROUND NO. 1 TO 3 IN FAVOUR OF ASSESSEE. THEREFORE, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE ELIGI BLE UNIT OF ASSESSEE (BADDI UNIT) FOR DEDUCTION UNDER SECTION 80IC IN AC CORDANCE WITH LAW, KEEPING IN VIEWS OF OUR AFORESAID FINDING ON GROUND NO.1 TO 3. 29. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11/09/2019. SD/- S D/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICI AL MEMBER MUMBAI, DATE: 11.09.2019 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR K BENCH, ITAT, MUMBAI ITA NO. 8428/MUM/2010(AY-2006-07) COLGATE PALMOLIVE (INDIA) LTD 39 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI