MONDELEZ INDIA FOODS P.LTD,MUMBAI vs. ASST CIT RG 5(1)(2), MUMBAI

1 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J”, MUMBAI BEFORE VIKAS AWASTHY (JUDICIAL MEMBER) AND MS. PADMAVATHY S. (ACCOUNTANT MEMBER) /Mum/2016 - A.Y. 2011- M/s Mondelez India Foods Private vs Asst.Commissioner of Income-tax, Ltd (formerly known as Cadbury Range-5(1)(2), Aayakar Bhavan, Limited),Unit No.2001, 20th Floor, M.K. Road, Mumbai-400 020 Tower-3 (Wing C), India Bulls Finance Centre Parel, Mumbai-400 013 PAN : AAACC0460H APPELLANT RESPONDENT Assessee represented by Shri J.D. Mistri, Shri Hiten Chande Department represented by Smt. Uodol Raj Singh Date of hearing 13-07-2023 Date of pronouncement 31-07-2023 O R D E R PER : MS PADMAVATHY S. (AM)

These appeals are against the final order of assessment passed by DCIT- 5(1)(2), Mumbai under section 143(3) read with section 144C(13) of the Income- tax (in short, ‘the Act’) dated 20/01/2016 for A.Ys. 2011-12 & 2012-13. The common issues contended by the assessee in both the assessment years through various grounds are as tabulated below:-

2 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International Issue AY 2011-12 AY 2012-13 Adjustment on account of Advertisement, Ground Nos. 2 to 18 Ground Nos. 2 to Marketing and Promotion (‘AMP’) 23 expenses Disallowance of payment of royalty on Ground Nos. 19 to 21 - technology paid to Cadbury Adams USA LLC Disallowance of payment of royalty on Ground Nos. 22 to 24 Ground Nos. 24 to technology paid to Cadbury Enterprises 27 Pte Ltd Disallowance of regional service fees paid Ground Nos. 25 to 28 Ground Nos. 28 to to Cadbury Enterprises Pte Ltd. Singapore 30 (Cadbury Schweppes Asia Pacific Pte Limited merged with Cadbury Enterprises Pte Ltd in 2010) Disallowance of global service fees paid Ground Nos. 29 to 32 Ground Nos. 31 to to Cadbury Holdings Limited 32 Disallowance under section 14A of the Ground No. 33 Ground No. 33 Act read with Rule 8D Treating foreign exchange loss on Ground No.34 Ground No.34 cancellation of contracts as speculative Allocation of expenditure at Baddi Unit-I Ground Nos.35 to 36 Ground Nos.35 to & II 36 Addition on account of Annual Ground No.37 Ground No.37 Information Report Non grant of MAT credit Ground No.38 Ground No.38 Levy of interest under section 234A of the Ground No.39 Ground No.39 Act Levy of interest under section 234C of the Ground No.40 Ground No.40 Act

3 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International for the admission of additional grounds. Accordingly the additional ground is not admitted for adjudication.

4 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International /Mum/2016 (A.Y. 2011-12)

3. For the assessment year 2011-12, the assessee filed the return of income on 30/11/2011 declaring a total income of Rs.218,37,50,890/- and later on revised the return on 11/10/2012 without any change in the amount of returned income. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions with its Associated Enterprises, a reference was made to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction of the assessee with its AEs. The TPO, vide order dated 27/01/2015 proposed a total adjustment of Rs.199,53,59,553/-. The Assessing Officer passed the draft assessment order incorporating the TP adjustment and also made the following additions/disallowances:- (1) Depreciation claimed on marketing know how Rs. 5,39,988/- (2) Disallowance under section 14A Rs. 23,24,430/- (3) Disallowance of forex loss Rs. 4,17,51,000/- (4)Denial of deduction under section 80IC Unit I Rs.6,25,43,786/- Unit II Rs,21,85,37,371/- Rs. 2,45,454/- (5) Addition on account of difference in AIR

4. The Assessing Officer passed a draft assessment order against which the assessee raised objections before the DRP. The DRP gave marginal relief to the assessee with respect of depreciation claimed on marketing know how and sustained the TP adjustment as well as the other additions / disallowance made by the Assessing Officer. The assessee is in appeal before the Tribunal against the final order of assessment passed pursuant to the directions of the DRP.

5 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International TRANSFER PRICING ADJUSTMENTS Adjustment on account of advertising, marketing & promotion expenses Ground No.2 to 18 5. The TPO noticed that the assessee is incurring huge expenses on advertisement, marketing and promotion on Cadbury brand in India. The TPO was of the view that since the assessee is not the legal owner of the brand in India, the AMP expenses incurred by the assessee translates into development of AEs brand and, therefore, the assessee needs to be compensated. The TPO selected the following list of comparables to arrive at the arithmetic mean of AMP expenses to sales at 5.01%: S.N Particulars AMP Sales (in Rs) AMP o. expenses expenses to (in Rs) Sales (%) 1 Anmol Biscuits Ltd 4,84,64,373 2,40,18,06,508 2.02% 2 Britannia Industries Ltd 3,04,14,61,000 42,13,71,16,000 7.22% 3 Haldiram Foods Intl. Ltd 36,60,70,012 6,78,29,09,448 5.40% 4 Nutrine Confectionery Co. Ltd 10,96,00,000 1,52,17,00,000 7.20% 5 Priya Food Products Ltd 2,4,93,943 6,66,67,039 5.21% 6 Surya Foods & Agro Ltd 36,87,89,359 4,73,68,11,191 7.79% 7 Veeramani Biscuits Industries Ltd 5,35,582 22,38,92,180 0.24% Arithmetic Mean 5.01% Based on the above, the TPO computed the adjustment in respect of the excessive AMP expenses incurred by the assessee as under:- Particulars Amount Net sales of the Assessee Rs.27,61,70,20,000 AMP Expenses incurred by the assessee Rs.3,00,36,49,311 AMP Expenses of the Assessee (in terms of Sales) 10.88% AMP expenses of comparable third parties (in terms of sales 5.01% Difference in the AMP expenses 5.87% Expenditure incurred for developing the intangibles Rs.1,62,01,97,731

6 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 6. The TPO arrived at a mark up of 11.35% based on the earlier years’ comparables chosen as below:- Sr No Name of the company Operating margin on Operating cost 1 Marketing Consultants and Agencies Pvt Ltd 9.80% 2 Best Mulyakan Consultants Ltd 8.82% 3 Cyber Media Research Ltd (Formerly I D C 10.33% (India) Ltd) 4 HCCA Business Services Pvt Ltd NA 5 Hindustan Housing Co. Ltd NC-Significant RPT 6 Crystal Hues Ltd 11.27% 7 Quadrant Communication Ltd 15.84% 8 Indus Technical and Financial Consultants Ltd 12.05% Average 11.35%

7 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 10. We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee’s own case for A.Y.2009-10 (ITA No.2214/Mum/2014) has considered the similar issue and held that –

―23. Considered the rival submission and material placed on record. We notice from the records that the identical ground has already been decided by the Coordinate Bench of ITAT in for AY 2006-07 in assessee’s own case on merits. For the sake of clarity, which is reproduced below:- 14. We have considered rival submissions and perused materials on record. Undisputedly, as could be seen from the material on record, in response to the show cause notice issued by the Transfer Pricing Officer the assessee had specifically submitted that there is no arrangement or agreement with the overseas A.E. for incurring AMP expenditure. It is also apparent the expenditure was wholly and exclusively incurred for marketing assessee‟s own products and the payment was made to third parties in India. Therefore, it is outside the purview of international transaction as defined under section 92B of the ACT. As could be seen, the Transfer Pricing Officer ignoring the submissions made by the assessee had assumed that a benefit has accrued to the overseas A.E. on account of AMP expenditure incurred by the assessee. The learned Commissioner (Appeals) has upheld the adjustment / addition proposed by the Transfer Pricing Officer simply relying upon his order passed in assessee‟s own case for assessment year 2005–06. Notably, while deciding assessee‟s appeal for assessment year 2005–06 the Tribunal vide order passed in ITA no. 5470/Mum./2012, dated 18th May 2016, has decided the issue in favour of the assessee holding as under:– ―3.4.We have heard the rival submissions and perused the material before us. Before proceeding further, it would be useful to understand the philosophy and to consider the historical background of the TP provisions. It is said that the purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transferring income yielding assets to non-residents even while retaining the power to enjoy the fruits of such transactions i.e. the income so generated. As a concept, it is not totally a new idea. A reference to the provisions of section 42(2)to the Indian Income Tax Act,1922,could be made in this regard-as it was a somewhat similar section and dealt with the trans-border transactions. The provisions of the said section broadly provided that where a nonresident carried out business with the person resident in the taxable territory and it appeared to the AO that on account of a close connection between such 8 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International persons the business was so arranged that the business conducted by the resident with the nonresident either yielded no profit or, less than ordinary profit, which may be expected to arise in that business then, the AO was empowered to tax profits which were derived or which may reasonably be deemed to be derived from the business in the hands of a person resident in the taxable territory. Thus, it can safely be concluded that TP provisions were part of tax administration even during the 1922 Act days though at infancy stage. The present provisions were been incorporated vide Finance Act,2001.Same were further amended vide Finance Act,2002 and are being amended from time to time to meet the new challenges thrown up by the dynamism of the current commercial and business realities. Having regard to the object for which provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transaction. So, intra-group transaction is the first pre-condition for invoking the TP provisions. Calculation of ALP is the next and logical step. But, if the first step itself is missing, the AO cannot go to the second stage. In other words, the AOs cannot climb the second storey of a building without reaching to the first storey if the existence of an IT and calculation of ALP can be compared with a double storeyed building. 3.4.1.We find that the assessee is the market leader of the chocolate market in India, that it was commanding 70% of the market share in the year under appeal, that it had debited AMP expenses, amounting to Rs.85.15crores to its P& L a/c,that the net turnover of the assessee was of Rs.766.21crores,that it was 11.11% of the sales recorded by the assessee during the year, that it had also paid royalty amounting to Rs.13.56 crores for the same period, that the TPO computed Rs.1.52 crores(1.78%) as the cost apportioned/allocable out of the A&M cost incurred by the assessee for the benefit accruing to the AE, that he restricted the cost to Rs.71 lakhs(being0.87% of Rs.85.15crores)in view of the disallowance/ adjustment in income made on account of royalty for trade mark, that the average AMP expenditure by the leading FMCG companies for the period 2001-05 was 10.28%,that the AMP expenditure incurred by the assessee during the same period was 10.45%,that the assessee had contended that its profitability(PBT to sales ratio) @10.85%was much higher compared to the average profitability of the comparables at the rate of 3.57%,that the FAA had held that higher rate profitability could not be a justification of this proportionate expenditure, that in the appellate proceedings the FAA had proposed further addition, that finally he upheld the order of the TPO and confirmed the addition of Rs.71 lakhs, that there was no contractual obligation to recover money from the AE, that it was separately paying royalty

9 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International for use of brand and trademark. There is no reason for not holding that the increased AMP expenditure led to enhanced sales and profitability, that for the purpose of analysing the AMP expenditure incurred by and the comparables it is necessary to consider various factors. If factors like growth rate, nature of business ,number of products launched, territories serviced and turnover/profits achieved have necessarily to be considered for determining the AMP expenses. The entire expenditure was focused on the Indian consumer and it is evident from the local flavour/ language/concepts. It is also an undeniable fact that new players were entering India after liberalisation- era started. If the expenditure incurred by the assessee is considered in the back ground of the growth achieved by it one has to agree with the argument of the assessee that it made rapid progress in the Indian market post liberalisation period and AMP played an important role in it. Here, we would also like to mention that there exists a fundamental and basic distinction between the provisions of section 37 and section 92 of the Act-as the first is expense oriented and the second is pricing oriented. The FAA tried to incorporate the ingredients of Section 37 while dealing with the TP adjustments, when he talked of the„higher expenditure ‟and„ justification‟ of such expenditure. In our opinion, the approach of the FAA was not in accordance with the basic philosophy of TP provisions. In our opinion, it is the assessee who has to decide how much to spend for earning his income. The tax authorities are prevented from entering into the proverbial shoes of the assessee to decide the justification of the expenditure. The Act stipulates that in certain conditions only the so called higher expenditure can be questioned. The FAA had not proved that the expenditure incurred by the assessee for advertisement etc. was covered by those sections. If it was the case then the transaction would not fall under section 92 of the Act. Therefore, in our opinion he had adopted a totally incorrect approach, while dealing the allowability of AMP expenditure. 3.4.2.We further hold that the claim of the assessee is factually correct that it had incurred the AMP expenditure for creating product awareness and to recall the value of existing products and that it had a local marketing strategy of making advertisement/slogans in the local language. In our opinion, KUCH MEETHA HO JAY campaign proves the claim made by the assessee. The TPO had ignored the fact that films/TV advertisements of the assessee had the local messaging concept. Such local advertisement campaigns can never be held to be driven towards serving the interests of the AE. It is also a fact that new multinational players in the industry had entered the Indian market. The commercial wisdom of any assessee, in such a situation, would compel it to be innovative and to spent reasonable expenditure for maintaining its position in 10 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International the market. The TPO/FAA had not controverted the fact that the AE was the owner of intellectual property of the „Cadbury‟ brand and that it was responsible for promoting the brand all over the globe and that the brand related exercise at the cost of the AE for the overall brand positioning and management benefited the assessee also in an indirect manner. Nothing has been brought on record to prove that the assessee was directly or indirectly promoting the global brand rather than promoting its own products. In our opinion, there exists a fine but very important distinction between products promoted and nurtured by an assessee and the brand owned and supported by its AE. In the modern world both exist and play different and specified roles. Therefore, until and unless some -thing positive is brought on record about sharing/incurring AMP expenditure under the head by an assessee on behalf of its AE, it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE. In the case under consideration, the assessee was incurring expenditure for its products whereas the AE was looking after the ground at global level. If the AMP expenditure incurred by them benefited indirectly in the local/ international market it would not mean that it was an IT. The basic purpose of introducing the various provisions of chapter X, as stated earlier, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. 3.4.3.We find that in the cases of Maruti Suzuki(supra),Whirlpool India(supra), Bausch & Lomb Eyecare(India)Pvt.Ltd(ITA 643 of 2014 of Hon‟ble Delhi HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare. We would like to reproduce relevant portion of the judgment of Bausch & Lomb Eyecare(India) Pvt.Ltd.(supra) and same reads as under: ―53.A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes 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 international transaction with a certain disclosed price. The transfer 11 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International pricing adjustment envisages the substitution of the price of such international transaction with the ALP.

is allowed.

24. Therefore, respectfully following the above decision of Coordinate Bench in assessee’s own case in turn relying on the decision of Assessment Year 2006-07. These issues are settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR. Accordingly, these grounds raised by the assessee are allowed.‖

24. Therefore, respectfully following the above decision of Coordinate Bench in assessee’s own case in turn relying on the decision of Assessment Year 2006-07. These issues are settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR. Accordingly, these grounds raised by the assessee are allowed.‖

10. Respectfully following the above decision of the co-ordinate bench, we hold that the decisions made by the TPO / AO towards transfer pricing adjustment on account of AMP expenditure be deleted. Accordingly, these grounds raised by the assessee are allowed.

Disallowance o payment of royalty on technology paid to Cadbury Adams USA LLC, to Cadbury Enterprises Pte Ltd and Cadbury Schweppes Asia Pacific Pte Limited (now merged with Cadbury Enterprises Pte Ltd) – Ground Nos.19 to 24

19 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 13. We heard the parties and perused the material on record. The co-ordinate bench in assessee’s own case for A.Y. 2009-10 (supra) has considered the issue of payment of royalty on technology to Cadbury Adams USA LLC, to Cadbury Enterprises Pte Ltd and Cadbury Schweppes Asia Pacific Pte Limited (now merged with Cadbury Enterprises Pte Ltd) and held that – ―10. Considered the rival submission and material placed on record. We notice from the records that the identical ground has already been decided by the Coordinate Bench of ITAT in for AY 2008-09 in assessee’s own case on merits. For the sake of clarity, the same is reproduced below:- With regard to disallowance of payment of royalty on trademarks paid to Cadbury Schweppes Overseas Ltd 3.3.2 It is admitted position that the issue stood squarely covered in assessee‟s favor by the decision of this very bench in assessee‟s own case for AY 2006-07 wherein the matter has been concluded in the following manner: - 7. We have considered rival submissions and perused materials on record. As could be seen from the order of the Transfer Pricing Officer, he has determined the arm's length price of royalty payment on trademark to SCOL at zero. In other words, he has disallowed royalty payment on trademark at 1% while allowing royalty payment on technical knowhow at 1.25% of net sales. The reasoning on which the Assessing Officer has denied royalty payment on trademark are basically that as per the terms of earlier agreement approved by the Government, the assessee can pay royalty for technical knowhow at the maximum rate of 2%, whereas, the assessee has paid royalty both for technical knowhow and trademark aggregating to 2.25%. He has also referred to the Press Note issued by the Government clarifying that royalty payment cannot exceed 2% and further the royalty payment for technical knowhow subsumes royalty payment for trademark. In this context, the Transfer Pricing Officer has also referred to similar dispute arising in the preceding assessment years. It is evident that the learned Commissioner (Appeals) has upheld the disallowance of royalty payment of trademark simply relying upon the order passed by him in assessee‟s own case for assessment year 2005–06. As could be seen from the material available on record, the assessee has entered into agreement

20 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International with its current company in the year 1993, for availing technical knowhow for which it was required to pay royalty @ 2%. Subsequently, the assessee has entered into fresh agreements with the parent company for transfer of technical knowhow as well as use of trade mark for which assessee is required to pay royalty @ 1.25% and 1% of the net sales respectively. As could be seen from the materials placed on record, the payment of royalty for technical knowhow @ 1.25% has been approved by the Ministry of Commerce and Industry, Government of India, vide letter dated 14th September 2000 (copy is placed at Page–85 of the paper book). Similarly, payment of royalty for trademark @ 1% has been approved by the Reserve Bank of India, vide letter dated 25th June 2001, copy at Page–119 of the paper book. Thus, as could be seen, payment of royalty for trademark at 1% over and above the royalty paid at 1.25% for technical knowhow has been approved by the Reserve Bank of India. Though, the Transfer Pricing Officer has relied upon Press Note dated 3rd January 2002, to observe that in case of technology transfer payment of royalty subsumes the payment for royalty for use of trademark, however, in a subsequent Press Note issued by the Ministry of Commerce and Industry, Government of India, vide no.5(5)/2003–FC, dated 24th June 2003, has permitted royalty payment up to 8% on export sales and 5% on domestic sales. It is also relevant to note, the fact that the royalty paid by the assessee @ 2.25% both for technical knowhow and trademark is lesser than the royalty paid by other comparables and even group companies has not been disputed either by the Transfer Pricing Officer or by the learned Commissioner (Appeals). It is also relevant to note, identical dispute relating to payment of royalty for trademark at 1% over and above royalty paid for technical knowhow at 1.25% and its allowability came up for consideration before the Tribunal in assessee‟s own case for assessment year 2002–03 to 2005–06. While deciding the issue in the aforesaid assessment years, the Tribunal held that the payment of royalty on trademark to CSOL at 1% of sales is allowable and at arm's length. In fact, decision of the Tribunal has also been accepted by the Revenue. In this context, we may refer to the relevant observations of the Tribunal while deciding identical issue in assessee‟s own case for assessment year 2005–06, in dated 18th May 2016, which is as under: – ―2.3. We have heard the rival submissions and perused the material before us. We find that while deciding the appeal for AY 2002-03(supra) the Tribunal has decided the issue as under:-

21 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International ―37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38.From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know-how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions. 39.On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe. It has been accepted by the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm‟s length. 40.Coming to the issue of royalty payment on trademark usage, we find that the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee‟s payment is coming to a lesser figure, as discussed in detail by the CIT(A). 41.We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the table supplied by the assessee and taken note of by the TPO and the CIT(A).

22 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 42.We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance. 43.On the basis of the above observations, we are of the opinion that the royalty payment on trademark usage is within the arms‟ length and does not call for any adjustment.‖ Respectfully, following the above order, and the order for subsequent AY.s we decide the Ground of Appeal

No.1 in favour of the assessee.‖

8. There being no difference in factual position in the impugned assessment year, respectfully following the consistent view of the Tribunal on identical issue in assessee‟s own case as referred to above, we hold that the royalty payment on trade mark to SCOL @ 1% of net sales is at arm's length, hence, no further adjustment is required. Accordingly, we delete the disallowance made by the Assessing Officer. Ground raised is allowed. Respectfully following the aforesaid view of Tribunal in assessee‟s own case, we delete the impugned adjustment of Rs.1300.22 Lacs as made by Ld. AO in the final assessment order. Nothing has been shown to us that the aforesaid ruling is not applicable to the year under consideration. Ground No.3 stand allowed. With regard to disallowance of payment of royalty on on technology paid to Cadbury Adams USA LLC 3.4.2 We find that this issue is covered by the decision of this Tribunal for AY 2006-07 wherein it has been held as under: -

22. We have considered rival submissions and perused materials on record. Undisputedly, the assessee has paid royalty to CAUSA @ 2.7% of net sales as per the agreement executed on 1st June 2006. It is the claim of the assessee that the payment of royalty is for use of trademark as well as technical knowhow. However, the Transfer Pricing Officer after examining the agreement between the assessee and CAUSA has opined that the agreement only provided for use of trademark and it does not provide for use of technical knowhow. It is the say of the Transfer Pricing Officer that since as per the Government guidelines, payment of royalty on trade mark under the automatic route is fixed at the maximum rate of 1%. Royalty paid for trademark at 2.7% is not at arm's length. Accordingly, he has allowed payment of royalty for trademark at 1%. While doing so, the Transfer Pricing Officer has also observed that the agreement executed in December 2007, amending the terms of the original agreement having come in to existence after expiry of relevant financial year would not be applicable for a transaction undertaken in the relevant financial year. The learned Commissioner (Appeals) has also endorsed the aforesaid view of 23 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International the Transfer Pricing Officer. No doubt, on a perusal of the agreement dated 1st June 2006 between the assessee and CAUSA it appears that the said agreement has been termed as trademark license agreement. However, reading the agreement as a whole and more particularly, Clause–7(b) of the said agreement, it becomes clear the licensee (the assessee) shall manufacture licensed product using any technology of the licensor provided to the licensee in accordance with all specifications and instructions provided by the licensor from time to time. It is not the case of the Revenue that in the relevant previous year assessee has neither manufactured nor sold „Halls‟ brand products in India. Thus, it is necessary to ponder whether in absence of necessary technical knowhow/knowledge it would have been possible for the assessee to manufacture the aforesaid products? In our view, the answer would be– No. Further, the assessee and CAUSA have entered into one more agreement on 24th December 2007, amending the terms of the original agreement. As per the aforesaid agreement, certain terms of the original agreement was amended to include licensing / sub–licensing of technology. It is the contention of the learned Sr. Counsel for the assessee that the amendment agreement executed on 24th December 2007, shall operate retrospectively from 1st January 2006, to emphasize this fact, the learned Sr. Counsel for the assessee has sought to produce letter dated 26th April 2016, issued by Mondelez International as additional evidence. From a perusal of the aforesaid letter, it appears that it has been issued to clarify that as per the original agreement executed on 1st June 2006, effective from 1st January 2006, the parties to the agreement intended to transfer and avail technical knowhow / knowledge relating to the licensed product along with trademark. Considering the submissions of the learned Sr. Counsel for the assessee that in subsequent assessment years royalty paid by the assessee @ 2.7% of sales was accepted by the Transfer Pricing Officer, the letter dated 26th April 2016, sought to be produced by the assessee as additional evidence, in our view, is of much significance since it will have a crucial bearing in determining whether CAUSA has authorised the assessee to use technical knowhow along with trademark, hence, is admitted as additional evidence. Even, without taking cognizance of the aforesaid additional evidence, the original as well as amended agreement make it abundantly clear that assessee has also availed technical knowhow from CAUSA. Further, the Departmental Authorities don dispute the genuineness or authenticity of the amended agreement. What they are disputing is the date from which the amended agreement is effective. If the departmental authorities in the subsequent assessment years have allowed payment of royalty both for trademark and 24 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International technical knowhow, there is no reason why it should not be allowed in the impugned assessment year, since, it cannot be said that the assessee was manufacturing „Halls‟ brand products without obtaining the required technical knowhow. Accordingly, we hold that payment of royalty to CAUSA is at arm‟s length. The ground is allowed. Respectfully following the same, we delete the impugned addition of Rs.87.61 Lacs. Ground No.4 stand allowed. With regard to disallowance of payment of royalty on on technology paid to Cadbury Enterprises Pvt. Ltd. 3.5.1 It was noted that the assessee entered into Technical collaboration Agreement dated 28/06/2007 with CEPT to avail the benefits of Technical Know-how, trade secrets etc. for mixed fruit flavored and strawberry flavored sugar noncoated center filled bubble gums / chewing gums. Another agreement was entered into with the same entity for Trademarks and copyright licenses in respect of products Bubbaloo, Bubba the Cat & Adams. As per agreement, the assessee paid Technical royalty @4% and Trademark Royalty @1%. Applying the same reasoning, it was held that CEPT was authorized to sub-license the rights of the Trademark only and there was no reference to presume that the same included the right to sub- license the Technology and know-how related to the products, an adjustment of Rs.142.51 Lacs was proposed by Ld. TPO. The Ld. DRP, finding the adjustment quite similar to as made for royalty payment to CAUSA, endorsed Ld. TPO‟s action. 3.5.2 Since facts as well as reasoning of lower authorities are quite similar as in the case of royalty payment made by assessee to CAUSA, applying the same analogy, we delete the impugned addition. One more reason to delete the adjustment is that the assessee has entered into two separate agreement for payment of Trademark Royalty & Technical royalty and therefore, the matter would stand on a better footing. Hence, Ground No. 5 stand allowed. ― 11. Therefore, respectfully following the above decision of Coordinate Bench in assessee’s own case in turn relying on the decision of Assessment Year 2008-09. These issues are settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR. Accordingly, these grounds raised by the assessee are allowed.‖

25 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 14. It is noticed that the payment of royalty towards trademark for the year under consideration is based on the same agreement, which is considered by the co-ordinate bench for the assessment year 2009-10. Therefore we are of the view that the issue is covered by the above decision for the year under consideration also. Accordingly, we delete the TP adjustment made by the TPO towards payment of royalty on technology paid to Cadbury Adams USA LLC, and Cadbury Enterprises Pte Ltd. These grounds are allowed in favour of the assessee.

Disallowance of regional service fees paid to Cadbury Enterprises Pte Ltd. Singapore (Cadbury Schweppes Asia Pacific Pte Limited merged with Cadbury Enterprises Pte Ltd) (Ground No.25 to 28) 15. The TPO during the transfer pricing proceedings noticed that the assessee has entered into service agreement dated 21/10/2005 with Cadbury Enterprises Pte Ltd for availing certain services such as business strategy, financial planning and accounting supply chain, co-ordination and planning human resources legally and marketing, etc. The assessee during the year under consideration, had made a payment of Rs.2,89,05,785 towards availing these services where the AE has charged cost plus 5% for providing the services. The TPO was of the view that the nature of services of rendered by AE are not in the nature of on-call services and that the assessee could neither furnish any evidence to show the actual rendering of services nor could show the actual cost incurred by the AE. The TPO applied CUP method and worked out the man-hour rate of the employee on the estimated salary cost of Rs.11,00,000 per month. This estimate of the salary cost by the TPO was based on the increments that may have occurred in foreign

26 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International exchange rate, the inflation rate between FY 2009-10 and FY 2010-11. The TPO took the average working days per month at 22 and 8 hour per day. The TPO accordingly determined ALP to be at Rs.6,250 per man-hour. The TPO considered the man hours applied in AY 2010-11 for determination of ALP and since there was a reduction in the cost paid by 57.15% the TPO applied the reduction percentage on the man hours to arrive at 2,035 hours (45.35% of 3700 hours of last year). Thus the ALP was computed for an amount of Rs.1,27,18,750/-. Based on the same the TPO made an adjustment towards the differential amount of Rs.1,61,87,035/- (Rs.2,89,05,785 (-) Rs.1,27,18,750). The DRP confirmed the said TP adjustment.

27 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International pricing -Meaning of international transaction - Assessment year 2008-09 - Assessee, an Indian company sold its medical imaging business to 'C' Ltd. another Indian company for USD 13.543 million - Being domestic transaction, assessee returned its income, disclosing sale transaction as a normal domestic transaction - Assessing Officer found that sale transaction of imaging business by assessee to 'C' Ltd. was pursuant to a larger sale transaction, on global basis, wherein holding company of assessee sold its imaging business to 'C' Inc. i.e., holding company of 'C' Ltd. on global basis - Thus, on suo moto assumption of jurisdiction over impugned transaction, TPO, proceeded to determine ALP -TPO determined ALP, based on worldwide revenue break up amongst countries and concluded that India accounted for 1.4 per cent thereof, which came to USD 32.9 million as against USD 13.54 million shown by assessee - Accordingly, an adjustment of Rs. 79.96 crore was made - Whether since transactions entered into by holding foreign companies and subsidiary Indian companies were independent of each other and there was no international element involved in sale of imaging segment by assessee of its business to 'C' Ltd., authorities below were not justified in invoking transfer pricing provisions in respect of assessee's transaction - Held, yes - Whether, therefore, impugned adjustment made by revenue authorities was to be set aside - Held, yes [paras 49 and 63] [In favour of assessee] Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price [Others] - Assessment year 2008-09 - Whether while determining ALP of international transactions entered into by assessee, TPO cannot adopt any other method except methods prescribed in section 92C(1) - Held, yes [Para 66] II. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price [Safe harbour rules] - Assessment year 2008-09 - Assessee had incurred certain expenses on behalf of its AE - As said expenses were to be reimbursed to assesee receipts on account of reimbursement was recovered on cost plus 10 per cent mark up TPO proposed mark up at the rate 12.5 per cent and made an adjustment accordingly- Whether since adjustment sought by TPO and sustained by DRP was falling within margin of +/- 5 per cent as provided by proviso to section 92C(2), same was not sustainable - Held, yes [Para .84] [In favour of assessee] 16. Therefore, respectfully following the above decision of Coordinate Bench which are similar to the facts of present case, we are inclined to accept the submission of Ld. AR. Accordingly, these grounds raised by the assessee are allowed.‖

28 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International (emphasis supplied)

Therefore, respectfully following the above decisions of the co-ordinate bench, we delete the TP adjustment.

Disallowance of Global Service Fee paid to Cadbury Holdings Ltd – Ground Nos. 29 to 31 18. The assessee has entered into service agreement dated 30/12/2008 (with effect from 01/01/2008) for availing services from its AE Cadbury Holding Ltd (CHL) where the services rendered are in the nature of business and commercial strategy and support, executive development, programme development and delivery , internal management, etc. The assessee submitted before the TPO the documents with respect to the said services which are maintained for CHL at global level. The assessee also submitted that the said amounts are being offered to tax by CHL in India and, therefore, there has been no tax based erosion. The assessee further submitted that as per the benchmarking done, the comparable companies earn an average margin of 9.22% on operating cost whereas CHL has charged cost plus 5% for the services provided and accordingly, it was submitted that the transaction is within arm’s length price. The TPO rejected the submissions of the assessee and applied CUP method where he has applied the amount / rate of Rs.6,250 to be the arm’s length compensation for the services rendered. The TPO

31 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International made the TP adjustment based on the man-hours of services rendered by the AE at 3913 hours to arrive at the ALP of Rs.2,44,56,250/- and made the TP adjustment for the difference of Rs.14,56,22,330/-.

32 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International Since, facts and issues in relation to services availed from CSAPL (i.e. ground no. 8 to 10) and facts and issues in relation to services availed from CHL (i.e. ground 11 to 13) are identical and as both the transactions have been benchmarked by MIFPL using TNMM, findings of ITAT for ground no. 8 to 10 are to be applied for ground no. 11 to 13 as well. The Tribunal has erroneously relied on the order for A.Y. 2008-09, this being a mistake apparent from record may be rectified and the findings given in Para 14 to 16 may be adopted for Ground No. 11 to 13 also.

Disallowance under section 14A – Ground No.33 20. In the statement of income, the assessee has claimed income of Rs.4,99,80,342. The assessee computed a suo motu disallowance of Rs.42,29,990/- in the computation and before the DRP revised the disallowance to Rs.3,44,215/- under section 14A of the Act. The Assessing Officer issued a show cause notice requiring the assessee to explain as to why disallowance under section 14A read with rule 8D should not be made. The assessee submitted before the Assessing Officer that the investments are made out of surplus funds available with the assessee and that the assessee did not borrow any funds in order to make investments. Accordingly, the assessee submitted that no borrowings cost is incurred by the assessee. The Assessing Officer did not accept the submissions of the assessee and proceeded to compute the disallowance as below:- ―(Amount in Rs.) 1 Amount of expenditure directly 3,44,215/- relating to exempted income 2 A X B ------ C A= Interest 3,38,94,979/- B= Average Value of Investment 84,659,97,500/- C=Average Value of Total Assets 14,48,07,70,000/-

34 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International Interest not directly relating to any 19,80,217/- particular income or receipt 3 Amount equal to half percentage of 42,29,988/- Average value of investments income of which does not form part of total income [As per rule 8D(2)(iii)] Aggregate of 1+2+3 65,54,420/- As mentioned earlier, the assessee has suo-moto disallowed Rs.42,29,990/- in the computation of income. In view of the above, additional sum of Rs.23,24,430/- (65,54,420 – 42,29,990) was added u/s 14A r.w Rule 8D of I.T. Rules, 1962.‖

―31. Considered the rival submission and material placed on record. We notice from the records that the identical ground has already been decided by the Coordinate Bench of ITAT in for AY 2008- 09 in assessee’s own case on merits. For the sake of clarity, which is reproduced below:- 5.1 During assessment proceedings, it transpired that the assessee earned exempt income of Rs.16.18 Crores which mainly comprised- off of dividend on mutual funds. The assessee, inter-alia, submitted that Rule 8D was not applicable to year under consideration. It was also submitted that assessee‟s surplus funds were invested in Liquid Mutual Fund and the same were withdrawn as per business requirements. The attention was also drawn to the fact there were two persons in the Treasury department to manage mutual funds investment on regular basis and the total salary paid to them was Rs.9.20 Lacs therefore, a part of the same could be disallowed. The arguments were also raised to submit that investments were made out of reserves and surplus. However, not satisfied, Ld. AO, applying Rule 8D, worked out aggregate disallowance of Rs.233.04 Lacs which comprised-off of direct disallowance u/r 8D(2)(i) for Rs.9.20 Lacs, interest disallowance u/r 8D(2)(ii) for Rs.80.56 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.143.28 Lacs. The direct expense disallowance u/r 8D(2)(i) for Rs.9.20 Lacs is the same disallowance which has been offered by the assessee against Treasury department expenses. The disallowance, upon confirmation by learned DRP, is under appeal before us. 5.2 The arguments of Ld. Sr. Counsel are two-fold viz. (i) Ld. AO has not recorded requisite satisfaction before proceeding to compute disallowance as per Rule 8D; (ii) The assessee had surplus funds to make the investments and therefore, the 36 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International presumption that the investments were out of surplus funds stood in assessee‟s favor by the judgments of Hon‟ble Bombay High Court rendered in in HDFC Bank Ltd. V/s CIT (2016 95 CCH 61) & CIT V/s HDFC Bank Ltd. (2014 366 ITR 505). 5.3 We have considered the same. Upon perusal of financial statements, we find that own funds in the shape of share capital & free reserves at yearend stood at Rs.46266.97 Lacs as against investment of Rs.31228.98 Lacs. Nothing has been brought on record by Ld. AO to establish the nexus of investments with borrowed funds. In fact, opening investments stood at Rs.26663.91 Lacs and the assessee earned profit after tax for Rs.15094.68 Lacs during the year under consideration which is more than incremental investments. Therefore, applying the ratio of cited decisions, we hold that no interest disallowance would be justified on the facts and circumstances. We order so. So far as the disallowance of direct / indirect expenses is concerned, we are of the view that since Rule 8D was applicable to this AY, the findings given in earlier orders of Tribunal would not apply to this year and the disallowance has to be worked out in terms of the Rule 8D. The Ld. AO, in draft assessment order, at para 6.4, has noted that the submissions made by assessee in defense of suo-moto disallowance could not be accepted as against the submissions of the Ld. Sr. Counsel that the requisite satisfaction was not recorded by Ld. AO before proceeding to apply Rule 8D. We are of the considered opinion that there was no particular method of recording satisfaction in the quantum assessment order and therefore, unable to accept this specific plea of Ld. Sr. Counsel. However, keeping in view the factual matrix as well as submissions made before us, we deem it fit to restore the matter of direct / indirect expense disallowance to the file of Ld. AO for re-adjudication in the light of suo-moto disallowance offered by the assessee. As held earlier, no interest disallowance would be justified, keeping in view the assessee‟s financial parameters. Ground No. 14 stand partly allowed.

37 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 23. Respectfully following the above decision, we hold that no disallowance towards interest is warranted under section 14A r.w.r.8D of the Act. With regard to the contention that the suo motu disallowance we notice that the Assessing Officer in the OGE passed for AY 2009-10 has deleted the disallowance made under section 14A and therefore we see merit in the submission of the ld AR that the suo moto disallowance based on the salary of employees in treasury department is being accepted by the revenue. We therefore remit the issue of verification of direct / indirect expense disallowance to the file of Ld. AO for re-adjudication in the light of suo-moto disallowance offered by the assessee i.e. of Rs.3,44,215/- keeping in mind the fact that for AY 2009-10 the suo motu disallowance based on salary of employees in treasury department has been accepted by the Assessing Officer. Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly.

Treatment of forex loss on cancellation of contracts as speculative– Ground No.34

38 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International cancellation charges, i.e. the difference between the forward contract rate and the spot rate as on the date of cancellation of the contract. In cases where the spot rate is lower than the forward contract rate on the date of cancellation, there arises a foreign exchange fluctuation loss on cancellation of forward contracts and vice versa. The assessee submitted that out of the total loss claimed as above, a net loss of Rs.417.51 lakhs is arising out of cancellation of forward contracts during the financial year relevant to assessment year 2011-12 and the same is recognised in the P&L Account. The assessee also submitted that the loss on cancellation of forward contract is arising out of the normal course of business activity and not out of intention to earn more profits and accordingly the same should be allowed as business expenditure. The Assessing Officer did not accept the submissions of the assessee and proceeded to treat the loss as a speculative loss. The Assessing Officer held that foreign exchange derivative transactions are speculative transaction unless it is proved by the assessee that it was covered by any Provisos (a) to (d) to section 43(5). The Assessing Officer further held that the assessee was not able to substantiate that the loss is arising on account of forex derivative transaction and not hedging. The Assessing Officer further held that the assessee did not settled the future contracts but chose to terminate it and, therefore, the loss arising should be a speculation loss. The DRP upheld the disallowance made by the Assessing Officer.

39 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International 26. We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee’s own case has considered a similar issue for A.Y. 2009-10 and held that – ―33. Before us, Ld. AR brought to our notice para 7.1 to 7.11 of AO order and para 12 of DRP order and submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in the case of London Star Diamond Co. (I) Pvt. Ltd. vrs. DCIT (2013) 38 taxmann.com 338 (Mum- Trib) on merits in favour of the assessee.

Allocation of expenditure at Baddi Unit-I & II – Ground No.35 to 36

41 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International accordingly. The assessee submitted before the Assessing Officer that all direct expenses which can be identified have been allocated unit-wise. With regard to the allocation of indirect expenses, the assessee submitted a detailed note on the basis of allocation and also the reason for variations of profits with respect to Buddy units. The Assessing Officer, after considering the submissions of the assessee, was of the view that there was a huge difference in the profitability ratio of 80IC units and non 80IC units, i.e. the profit ratio of Baddi Unit I is 19.40% and Buddy Unit II comes to 15.82% whereas the profit ratio of non 80IC units is only 6.29%. The Assessing Officer did not accept the basis of allocation as done by the assessee and proceeded to re-compute the profitability based on revised allocation of expenses and accordingly, the Assessing Officer arrived at a difference of Rs.6,25,43,786/- with respect to Buddy Unit I and a disallowance of Rs. 21,85,37,371/- with respect to Buddy Unit II. The DRP confirmed the addition mad by the Assessing Officer.

43 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International Addition on account of Annual Information Report – Ground No.37 32. The Assessing Officer noticed that an aggregate income of Rs.7,87,612/- was appearing in AIR information which had not been reconciled by the assessee with respect to books of account. Accordingly, the Assessing Officer made an addition of the said amount and also allowed to claim credit of TDS on the same. On objections raised before the DRP, the DRP deleted the addition to the extent of Rs.5,42,939/- and confirmed the balance amount of Rs.2,45,454/-.

34. The Ld.DR submitted that the onus is on the assessee to reconcile the income as per AIR and the books of account which the assessee failed to do so in the given case.

Non grant of MAT 36. The Ld.AR submitted that the MAT credit is carried forward from A.Y. 2010-11 and the credit was modified due to additions made in the assessment order

44 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International for A.Y. 2010-11. The Ld.AR further submitted that the Tribunal vide order dated 14th Novermber, 2022 has quashed the assessment for A.Y. 2010-11 as being barred by limitation. It is therefore, prayed that the assessee allowed the MAT credit as per the original return of income filed as has been carried forward from A.Y. 2010-11. After hearing the parties, we are of the view that this issue needs to be factually examined for the purpose of allowing the credit towards carried for MAT credit from AY 2010-11. Therefore, we remit the issue back to the Assessing Officer to examine the status of the assessment order passed for .Y. 2010-11 and accordingly give credit for the carried forward MAT for the year under consideration.

Levy of interest under section 234A The Ld.AR submitted that the assessee has filed the return of income on 30th 37. Novermber, 2011 which fact has been admitted by the Assessing Officer in the assessment order. The ld AR further submitted that accordingly the assessee has filed the return of income before the due date for filing the return of income for A.Y. 2011-12. Considering this fact that there is no delay in filing the return of income, the Ld.AR submitted that no interest can be charged under section 234A.

Levy of Interest under section 234C

45 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International

46 ITAs 1240/Mum/2016 ITA 1518/Mum/2017 Mondelez International