M/S. MARICO LTD,MUMBAI vs. THE ACIT CEN CIR-35, MUMBAI

आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals), Central VI, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2003- 04.

P a g e | 2 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 3. The assessee company has raised multiple grounds of appeal against the appellate order which are being separately dealt with in the following paras of this order.

P a g e | 3 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. mutual agreement. It was claimed before the lower authorities that the assessee, being a distributor of Proctor and Gamble Hygiene Health care (PGHH) and Proctor and Gamble Home Products (PGHP), was engaged in the business of purchase and sale of their products on principal to principal basis and not being their agent. Its agreement was terminated for which it received the above sum which was treated by the AO as business income chargeable to tax u/s 28(ii) of the Act. It has been claimed that in any case, once held to be business income, the amount was liable to be restricted to Rs 4.56 cr. which was actually received by it or in the alternative, it should be taxed under the head “Long term capital gains”. 5. The assessee preferred appeal on this issue before the ld.CIT(A) stating that during the year under consideration, it had received an amount of Rs. 4,56,00,000/- on account of termination of agreement with M/s. Proctor & Gamble Hygiene Health care (PGHH) and M/s. Proctor & Gamble Home Products (PGHP). (collectively P & G). While filing the return of income assessee had offered the same as LTCG. The AO did not accept the contention of the assessee that the consideration received on termination of the distributorship constituted a transfer of a capital asset. He, on the other hand, held that the

P a g e | 4 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. consideration received was a Revenue receipt by relying on section 28(ii) (c) of the Act.

5.1 It was submitted that the assessee entered into an agreement with P & G for the purpose of distributing their products for a period of 10 years. Following relevant extract from the said agreement were reproduced: “PGHH and PGHP, severally, appoint MARICO as “Distributor” in India for the Products listed in Annexure 1 hereto. The parties are at liberty to add products to the Annexure 1 from time to time as may be mutually agreed. The products so added may be given the Special Status for the purposes of clause 13(ii) of this agreement.” “PGHH and/or PGHP agree to sell and MARICO agrees to buy and distribute the products through MDN on a Principal to Principal basis on the terms and conditions listed in the agreement.” 5.2 It was provided therein that the ownership of the product would be transferred from PGI and/or PGH to the assessee at the point when the goods were received by the Clearing and Forwarding agents of the assessee who shall be free to sell the products at a price lesser than the Maximum Retail Price (MRP).Pursuant to the above agreement, the assessee started purchasing the products of P & G and sold them to various distributors. As a result of the distributorship, the assessee had been able to earn substantial income over a period of time. Thus, the distributorship of P & G constituted a capital asset in the hands of the assessee. Consequent to the termination of the distributorship, the

P a g e | 5 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. capital asset i.e. right to earn income by distributing the products of P & G got extinguished and the assessee received consideration for such extinguishment. Termination of the distributorship agreement constitutes a transfer as defined under the Act. The Supreme Court in the case of Anarkali Sarabhai v Commissioner of Income Tax (Supreme Court) (224 ITR 422) has held that extinguishment of the capital asset also constitutes a transfer under the Act.

5.3 The AO relied upon the provisions of section 28(ii)(c)to hold that income was of revenue in nature. The section provides for any compensation or other payment due or received by any person by whatever name called holding an agency in India for any part of the activities relating to the business of any other person at or in connection with termination of the agency or modification of the terms and conditions relating thereto. In order to hold that the assessee was having the agency of P&G ,the AO observed as under after going through the terms of agreement:- a. “Margins”are allowed to the assessee. b. Assessee is to make demand forecast for the products c. Assessee is required to make products visible in India d. Parties will mutually decide on the price in respect of sales to Canteen Stores Department e. Right to terminate the agreement is only with P & G and the assessee can terminate the agreement in certain circumstances.

P a g e | 6 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. f. Liquidated damages are provided in the agreement.

5.4 In this regard, it was stated by the assessee before him that it was not an agent of P &G as would be evident from the following facts: a. In case of agency agreement ownership/risk of the goods lies with the principal even if the same are delivered to the agent’s place. Further, the agent is not at a liberty to decide the selling price of the products. He has to sell the products at the price determined by the principal. The agreement under consideration is devoid of any such restrictive covenants. b. Only principles for determination of the price at which products are sold by P & G to the assessee are determined. Thereafter assessee sells the products through its own distribution network along with its own products. Thus the assessee is not allowed any margin but the price at which P & G is to sell the products is determined with reference to the profit margin which should be available to the assessee. Thereafter assessee is free to sell the goods at whatever price it chooses. c. In case of an agency the title to the goods is retained by the Principal. Hence purchase of the goods from the principal and the sale thereof are not reflected in the books of the agent. The agent is only entitled to commission on the sales affected by him on behalf of the principal. Even if the agent receives any payment from the customers, it is on behalf of the Principal. d. The assessee has reflected the transaction with PGHH and PGHP as purchases in its books. The sale of the products purchased from these parties is reflected as sales in the books of the assessee. As already mentioned above the assessee was free to determine the price at which it eventually sold the product. Only the maximum price at which the product could be sold was determined by PGHH and PGHP.

5.5 It was submitted that all the above factors led to the conclusion that the arrangement between assessee and P&G was of distributorship of the goods on principal to principal basis. The assessee performed various functions which were the normal functions any distributors would do to promote the sales of the products for which

P a g e | 7 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. they were appointed as distributor. Further, these were the commercial issues agreed between two independent parties. Sample details of transactions of sale of products of P & G by the assessee were submitted to show that the assessee had charged different prices for the same product. Thus, assessee had not earned standard margin on the sale.

5.6 It was further submitted that the issue whether the amount received on termination of distributorship agreement where goods are sold on principal to principal basis is capital receipt or revenue receipt has been decided by number of courts. In the case of CIT v. T. I. M Sales Ltd. 259 ITR 116(Mad), it was held that the amount received on termination of distribution ship of certain companies on Principal to Principal basis and for entering into a restrictive covenant, being compensation for impairment of profit making apparatus of the assessee, was capital receipt. In CIT v Sehasayee Bros. P. Ltd. (239 ITR 471) (Mad), it was held that compensation received by assessee for termination of consultancy services contract was capital receipt, as termination of contract affected the profit making structure of assessee.

5.7 It was also pleaded further that the distribution agreement was in the nature of “right to carry on the business” as by virtue of the said agreement, the assessee had been granted right to carry on the

P a g e | 8 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. business of resale of P & G products. There is a specific provision in section 55(2) which provides that in respect of the capital asset being right to carry on any business, the cost of acquisition is Nil. Thus, legislature has consciously provided that termination of “right to carry on the business” is liable to capital gains tax with the cost of acquisition being Nil. Since the assessee was a distributor of the PGHH and RGHP on principal to principal basis, the compensation received on termination of the agreement is in lieu of extinguishment of a source of income, therefore, the same ought to be treated as capital gain as disclosed by the assessee in its return of income.

5.8 In so far as the quantum of compensation is concerned, it was pleaded that the amount of compensation was agreed upon between the assessee and P & G at Rs.4.56 cr. as provided in the agreement. The Assessing Officer had taxed a sum of Rs. 5 cr. on the ground that it was unilateral giveaway. The terms of termination were negotiated by the Managing Director of the assessee which was in no way related to P & G and the negotiations were conducted between two independent parties. There was no application of the income but commercial negotiations between the independent parties. The additional sum of Rs. 44 lakh not having accrued to the assessee, either by way of business income or as capital gains would not to be added to the income of the assessee.

P a g e | 9 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 6. The ld.CIT(A) taking into account the submissions of the assessee as also the findings of the AO observed that he had clearly brought out factors in establishing that the relationship between the assessee and PGHH and PGHP was, for all practical purposes, that of an 'agency' and not a principal to principal relationship. If the relationship was purely buying and selling, then the assessee would not be entitled to ‘Margins’ on the sales and there would be no restrictive covenants on the rates at which the products could be sold by it. The relationship between them, certainly had an element of agency referred to in Section 28(ii)(c) in as much as the assessee was also getting reimbursement of many statutory levies which were levied on products after delivery. Such levies included local /central sales tax, octroi, turnover tax and entry taxes etc. It was further noted that right to terminate the agreement without assigning any reasons was available to M/s. PGHH & PGHP and not to the assessee which could do so only on occurrence of certain events. The contention that this was not the case of agency on the ground that the assessee was at a liberty to decide the selling price was not exactly correct according to him. In fact, the agreement provided for a margin to which the assessee was entitled and hence, effectively the price

P a g e | 10 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. was determined by PGHH and PGHP since the margins were pre- determined as was clear from the agreement.

6.1 The ld.CIT(A)further noted that the assessee had also been assigned the responsibility under the agreement to ensure adequate visibility of the products in India. Besides, the agreement also provided for compensation in terms of liquidated damages, in case the agreement was terminated by PGHH and PHGP. The liquidated damages were to be determined by way of certain percentage of the turnover of the immediately preceding three financial years. Thus, the compensation itself was on account of revenue receipt and he did not find any infirmity in the order of the AO in taxing the amount received as compensation on termination of this agreement u/s.28(ii)(c). Also, once it is held, that the income is correctly chargeable u/s.28(ii)(c) of the Act, there was no question of its consideration as income under the head 'capital gains' as contended by the assessee.

6.2 He observed further that the facts of the cases quoted by the assessee were different from the case on hand and also the agreement specifically provided for the amount to be worked out as per the scheme provided for calculation of liquidated damages or Rs. 5 cr. whichever was higher. Thus, it was entitled to received the above sum on account of

P a g e | 11 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. the loss of agency under the agreement which had correctly been taxed by the AO.

7.1 In so far as the quantum of compensation is concerned, it was submitted that as per the Termination letter, the amount stated was Rs 4.56 cr. as mutually agreed on negotiation between the two parties

P a g e | 12 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. all the clauses needed to be considered and not in isolation to ascertain the exact nature of the receipt. In the rejoinder, the ld.AR contended that even the loss would be of the assessee. Besides, the assessee had freedom to fix up prices.

P a g e | 13 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. recorded the finding that the amount of Liquidated Damages was received on account of loss of business and was therefore, rightly treated as business receipt u/s 28 of the Act.

9.1 We find that similar issue was dealt with in the case of Piramal Healthcare Ltd., Mumbai in ITA No.3706/Mum/2010 dated 11 January, 2024 wherein the coordinate Bench of ITAT, Mumbai came to a conclusion that when the assessee and the concerned party had entered into agreement to do business and any settlement arrived at between them for termination of the business would be business income. It was further held that the issue was squarely covered in favour of the Revenue in view of the provision of section 28(ii)(c) read with section 28(va)(a) of the Act. Moreover, the business of assessee being unaffected by the loss of such business from the facts and figures of its profit making apparatus, there was no question of any loss of capital. Relevant parts of the order are extracted as under: “4. During the year under consideration as has been noticed from the computation of income assessee company is shown to have received an amount of Rs.92,76,62,688/- from Roche Diagnostics Gmbh (RDG) of Germany under a settlement agreement towards termination of agency, distribution and manufacturing rights granted to it by RDG vide agreement dated 30.06.1997 which has been offered by the assessee to tax under the head “capital gains” instead of showing the same as business income. However, declining the contentions raised by the assessee the Assessing Officer (AO) proceeded to hold that the proceeds received by the assessee company from RDG on account of termination of agency and distribution of products in India falls under the provisions of section 28(ii)(c) read with section 28(va)(a) of the Income Tax Act, 1961 (for short 'the Act'). Explanation filed by the assessee to the show cause

P a g e | 14 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. notice issued by the AO is summarized by the AO in para 6.5 of the order as under: “(i) The right lost by the assessee company vide agreement dated 20.10.2004 is a capital asset covered under the head 'Capital Gains' u/s 45(1) of the IT. Act (ii) The rights under the distribution and marketing agreement was an asset of enduring value and by its cancellation, the trading structure of the assessee is impaired and the assessee has lost its right to carry on a business. (iii) The assessee was not an agent of RGD and was carrying the distribution activity on its own behalf. (iv) The assessee has lost a source of income/income earning apparatus which is a capital asset and taxable under the head capital gains u/s 55(2) of the I.T. Act.” 5. Declining the contentions raised by the assessee the AO proceeded to hold that the entire receipt of Rs.92,76,62,688/- by the assessee from Roche Diagnostics Gmbh (RDG) of Germany under settlement agreement is a business income under section 28 of the Act and made addition thereof to the business income of the assessee. The Ld. CIT(A) upheld the addition made by the AO and the assessee is in appeal before the Tribunal. 6. The Ld. A.R. for the assessee challenging the impugned findings returned by the Ld. CIT(A) contended inter-alia that the amount in question received by the assessee from RDG is for transfer of business, which is a capital asset, as such chargeable to tax as capital gains; that the compensation has been received for transfer/extinguishment or termination of business rights under AMDA 1997 and therefore the same have been offered to tax as capital gain; that as per relevant clauses referred to during the course of argument of the settlement agreement the entire business has been transferred and the consideration which has been received is for the transfer of business as a whole and as such the amount received does not fall under section 28(ii)(c) as well as undersection 28(va)(a) of the Act as the compensation received is not merely for termination of agency nor the compensation is received for non- compete. 7. Without prejudice to the ground No.1 the assessee has also raised additional ground No.1(a) that “compensation received on termination of agreement to the tune of Rs.92,76,62,688/- is a capital receipt.” 8. Additional ground raised by the assessee is allowed being legal ground which does not require any investigation by the Revenue Authorities as the same can be raised at any stage of the proceedings. 9. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order

P a g e | 15 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. passed by the Ld. CIT(A) and contended that since the amount received by the assessee is an income from settlement made outside the court in United Kingdom (UK) the Revenue has rightly treated it as business income. It is further contended by the Ld. D.R. for the Revenue that when the assessee company and RDG have entered into an agreement to do business any settlement amount arisen out of it is the business income. 10. Before proceeding further we would like to bring on record some undisputed facts pertaining to the issue in question inter-alia that the assessee, earlier known as Nicholas Piramal India Ltd. (NPIL) had entered into an Agreement for Distribution, Manufacturing and Agency (ADMA 1997) with one Boehringer Mannheim Gmbh (BM Germany) in 1997; that by virtue of the agreement (supra) the assessee acquired right to carry on above business, earlier carried out by BM Germany and its subsidiaries namely BM India Ltd. (BMIL) and BML Laboratories Ltd. (BMK); that by virtue of agreement (supra) the assessee stepped into the shoes of BMIL and acquired its entire business by way of amalgamation of BMIL into NPIL as per article 2.1 of the (ADMA 1997); that in 2004 RDG had acquired BM group all over the world and in the same year RDG unilaterally terminated certain obligations under 1997 agreement, which was challenged by the assessee in UK court as per jurisdiction given by the agreement (supra); that thereafter assessee and RDG entered into agreement out of court settlement by entering into a settlement agreement available on record; that as per settlement agreement the assessee and RDG mutually agreed to terminate the (ADMA 1997) withdrawal of cases in court, thus agreement (supra) stood terminated w.e.f. 01.01.2005 and RDG paid compensation to NPIL amounting to US$20.7 million i.e. Rs.92,76,62,688/-. 11. In the backdrop of the aforesaid undisputed facts the sole question arises for determination in this case is: “As to whether compensation received by the assessee from RDG to the tune of Rs.92,76,62,688/- in out of court settlement for unilaterally terminating certain obligations under the agreement (supra) by RDG is an income assessed to capital gain or a business income”? 12. The Ld. A.R. for the assessee in order to support its case that the sum received by the assessee company by virtue of out of court settlement agreement is chargeable to capital gain and drew our attention towards the relevant clauses of settlement agreement which provides for transfer of entire business from NPIL to RDG as under: “- Article 3.1 - NPIL shall transfer its legal title in all instruments placed with its customers to RDG and RDG shall purchase such instruments and purchase price of such instruments shall not exceed 1.3 million USD. - Article 3.4 (c) - which states that the third tranche of payment of compensation amount shall only be transferred on successful transfer of

P a g e | 16 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. business. It may be noted that this clause speaks of transitional arrangement and cooperation from Assessee to ensure transfer of business under AMDA 1997 agreement to RDG or its subsidiary, associated or related company. Thus, clearly, reference it to transfer of business. - Article 3.5 NPIL shall sell its entire stock/inventory as on 01st January 2005 to RDG at landed cost. - Article 6.1 of the settlement agreement specifies that NPIL shall ensure a smooth transfer of entire business relating to the products of RDG. - Article 8 - Employees of NPIL to be transferred to RDG. - Article 6.8- RDG to help assist NPIL to collect outstanding payments due to NPIL from its customers and distributors indicates all future dealings with the customers and distributors would be with RDG.” 13. The Ld. A.R. for the assessee while referring to the aforesaid provisions of settlement agreement contended that since it has transferred entire business and its rights under the agreement (supra) has been terminated thus the amount received in consideration thereof is assessable as capital gain. It is further contended by the Ld. A.R. for the assessee that rights under the agreement are capital assets and relied upon the decision rendered by Hon'ble Bombay High Court in case of CIT vs. Tata Services Ltd. (1979) (1 Taxman 427) 14. However, on the other hand, the Ld. D.R. for the Revenue by relying upon the order passed by the AO as well as the Ld. CIT(A) stated that the assessee company has received the sum in question from RDG of Germany under a settlement agreement towards termination of agency and as such section 28(ii)(c) has been rightly invoked and further contended that the compensation has been paid to the assessee to compensate it for leaving all the prospective future profits from the agency business of products of RDG. In order to decide the issue as to whether the compensation received by the assessee is for termination of agency, we need to advert to the relevant recitals of Agreement for Distribution, Manufacturing and Agency (ADMA), 1997 and settlement agreement as under: (i) that the title of the ADMA, 1997 entered into between BM Company and assessee, which is a basic document reads as “agreement between BM Germany and Nicholas Piramal India Ltd. (assessee)” for “Agency, Distribution and Manufacturing License Agreement”. (ii) that as per class 4 of the ADMA, 1997 at page 78 BMIndia has been acting as commission agent in the territory for biochemical. By virtue of the agreement with BM India dated 24.10.1987 BM has taken over the relating rights and duties of Galenus Mannheim GmbH.

P a g e | 17 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. (iii) that the assessee has agreed to undertaken the entire business to BM India inter-alia agency for biochemical product. (iv) that perusal of article 10.28 at page 35 of ADMA agreement shows that the assessee is a commission agent of BM for biochemicals having limited rights and liabilities for this arrangement. (v) that article 11 at page No.36 of ADMA, 1997 further shows that the supply prices of all the products charged by BM to NPIL shall be agreed upon by both the parties in marketing committee with reference to the higher and lower limits established by MB in particular for its international pharmaceutical business and the price prevailing in the territory for similar and/or competing products. The local selling price shall be determined by the marketing committee under article 15.3. In determining the local selling price of each product the marketing committee shall in particular take into account the price situation in the territory or similar and/or competitive products. (vi) that article 11.1.1.3 assures the minimum margin to be earned by NPIL at 40%. (vii) that as per article 11.1.2.4 commission to be earned by the assessee on various bulk products of biochemical was agreed upon as under: (viii) that as per article 9.1 of the ADMA agreement (supra) ordering procedure has been laid down containing therein that in order to enable BM to arrange for purchasing, planning and order processing, NPIL shall provide BM with return estimates of the local sales, M/s. Piramal Enterprises Limited (Earlier known as Nicholas Piramal India Ltd.) the purchase requirements and firm orders of product in quantity and value according to BM forecast. 15. It is also agreed upon regarding order procedure for specific products if so requested by BM the parties agree upon specific ordering procedures for specific products with respect to raw materials, the parties agree that the order lead time shall be approximately three months. 16. In article 10.2 delivery of terms as to the delivery of products are agreed upon by stating therein that BM shall affect delivery of products ordered by NPIL in accordance with agreed upon ordering procedures as quickly as reasonably possible. 17. In the backdrop of the aforesaid terms and conditions the first question arises to be determined by the Bench is: “As to whether compensation received by the assessee from RDG on account of termination of agency and distribution of products of RDG in India and provisions contained under section 28(ii)(c) read with section 28(va) & (a) of the Act are attracted?”

P a g e | 18 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 18. The Ld. A.R. for the assessee challenging the findings returned by the AO contended that the compensation received by the assessee is not merely for termination of agency in order to invoke section 28(ii)(c) of the Act because the termination is not just termination of agency rights but also termination of distribution and manufacturing rights. 19. We have perused the impugned order passed by the Ld. CIT(A). In the light of the relevant clauses of Agency, Distribution and Manufacturing, Licence Agreement (ADMLA) between BM and NPIL particularly clause no.3.1, 3.2.1, 3.2.2, 3.2.2.1, 3.2.3, 3.3.1, 3.3.1.1, 3.6, 7.3, 8.1.2, 11.1.2.2, 11.1.2.2.1, 11.1.2.3.1, 11.1.2.3.2, 11.1.2.4. 20. Conjoint reading of the various clauses as extracted above goes to prove that primarily parties to the agreement have agreed upon with each other for the purpose of distribution, marketing and sales of product for sales, sales and manufacturing of products by the assessee in India on the basis of a non transferable, non assignable, exclusive license in the territory under the patent, if any, information and know-how of BM to market distribute and sell in the territory under the trademarks. It is also clear from the agreement at the discretion of BM an information transferable, non assignable exclusive license to manufacture in the territory certain BM products which are pharmaceutical specialities. To manufacture laboratory diagnostic test kits were also subject of the agreement. 21. Clause 3.3.1.1 categorically suggests that the assessee is appointed as BM's exclusive commission agent in the territory for biochemical. 22. Furthermore, when we examine clause 3.6 it is also very categoric that the assessee would have no right to use or otherwise deal with BM's patent, trademark, denomination, products, knowhow and information for the purposes other than those of developing, manufacturing, marketing and selling and distributing the products under trademark and denomination. Not only this, even any further trademarks if developed by the assessee in coordination with BM shall also be owned by BM. 23. For laboratory diagnostics parties to the agreement have also agreed that the assessee shall as a general rule receive a weighted average margin of 40% on the net sales of laboratory diagnostics. Similarly in case of Patient Care Diagnostics parties to the agreement agreed that the assessee shall as a general rule receive a weighted overall margin of 40% on the net sales such diagnostics and BM shall have a weighted average contribution of level (ii) of 40%. 24. It is also agreed upon between the parties as per clause 11.1.2.3.2 as a general rule the assessee shall receive a margin of 25% on instruments of the net sales and the BM shall have a level

P a g e | 19 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. (ii) contribution of 40%. Terms for bio-chemicals as per clause 11.1.2.4 have also been settled between the parties for making payment of commissions on various bulk products viz. Fine Chemicals, Biocatalyst, Bulk Diagnostics. 25. So in view of the matter, we are of the considered view that when the assessee company by virtue of the agreement (supra) got non transferable, non assignable license to manufacture, market, distribute and sell products otherwise owned by the BM for a satisfied commission as agent of the assessee in the face of the fact that the entire intellectual property qua distribution and manufacturing of the product will remain with BM and the assessee shall not be entitled for any such ownership or title to the same. 26. Furthermore, the Ld. CIT(A) has also referred to the joint press release by the assessee and RDG Germany as per schedule of the agreement dated 20.10.2004 wherein it is mutually agreed to discontinue the agreement vide which the assessee was exclusively distributing diagnostics and Patient Care products of RDG. The assessee has agreed to cease to act as RDG's distributor w.e.f. 1st January 2005 when Roche Diagnostics takeover the distribution. 27. The Ld. D.R. for the Revenue contended that the assessee being the second largest pharmaceutical sales in India and is ranked in 4th in domestic formulation earned consolidated sales of Rs.13.9 billion and recorded his sales of Rs.726.1 million from the diagnostics and Patient Care product of Roche in India, which is 43.05% only of the total turnover of the assessee. The Ld. D.R. for the Revenue further contended that when the agreement (supra) was discontinued vide settlement agreement dated 20.10.2004 neither capital structure of NPIL has been affected nor it has affected the trading structure of NPIL business rather after settlement agreement the assessee's sales have been enhanced which is apparent from the sales data of the assessee for A.Y. 2005- 06, 2006-07 & 2007-08 which is as under: …………………………. 28. So we are inclined to disagree with the contentions raised by the Ld. A.R. for the assessee that compensation received by the assessee was not for mere termination of agency rather it was for the sacrifice of all prospective future profits from the agency business of product of RDG. From the financials of the assessee for the year under consideration and the subsequent years go to prove that there was no loss of business and at the same time terms and conditions of the agreement (supra) and settlement agreement apparently shows that the assessee by virtue of the agreement (supra) has worked as an agent for all intent purposes and as such received a compensation for loss of agency business, which is taxable as business income under section 28(ii)(c) read with section 28(va)(a) of the Act.

P a g e | 20 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 29. Consequently Revenue Authorities have rightly assessed the compensation received by the assessee under the head “profit and gains” from business and profession instead of long term capital gain as offered by the assessee. 30. So the contention raised by the Ld. A.R. for the assessee is that the compensation received by it from RDG is for transfer of business which is a capital asset and thus chargeable as capital gains is not sustainable. 31. The Ld. CIT(A) at page 12 has thrashed the facts in the light of the decision rendered by the Hon'ble Supreme Court in case of Kettlewell Bullen and Co. Ltd. vs. CIT [53 ITR 261 (SC)], CIT vs. Rai Bahadur Jairam Valji 35 ITR 148 (SC), CIT vs. Chari and Chari Ltd. 57 ITR 400 (SC) & Oberoi Hotel Pvt. Ltd. vs. CIT 236 ITR 903 and the decision rendered by Hon'ble Madras High Court in case of Indo Foreign Traders (P) Ltd. vs. CIT (1987) 166 ITR 308 (Mad.) and Chemplant Engineers (P) Ltd. vs. CIT (234 ITR23). 32. Hon'ble Supreme Court in case of Kettlewell Bullen and Co. Ltd. (supra) held that where payment is made to compensate a person from cancellation of contract, as in the instant case qua agency distribution agreement dated 03.06.1997 terminated vide settlement agreement dated 20.10.2004 and such cancellation has left the assessee free to carry on his trade the receipt is revenue receipt. 33. Similarly, Hon'ble Supreme Court in case of CIT vs. Chari and Chari Ltd. (supra) has also held that when the termination of an agency did not impair the profit-making structure of the assessee, but was within the framework of the business, the receipt for termination of agency would be a revenue receipt. Hon'ble Madras High Court in case of Indo Foreign Traders (P) Ltd. vs. CIT (supra) held that when an assessee was appointed as a sales organizer of a drug company on commission basis and on termination of the said agreement compensation for termination of the agreement was income assessable to tax under section 10(va) of the Income Tax Act, 1922, which is akin to section 28(ii) of the Act. Ratio of the case law discussed by the Ld. CIT(A) is : any compensation received by a party on termination of the earlier agency agreement is a revenue receipt to be assessed as business income. 34. The contention raised by the Ld. A.R. for the assessee that agreement between the parties is to be read as intended by the parties and it is not open to AO to give another interpretation is also not sustainable because agreement in ADMA (supra) is categoric in all respects which has been further clarified by the settlement agreement (supra) and as such reliance placed on the decision rendered by Hon'ble Calcutta High Court in case of CIT vs. Arun Dua (1989) 45 Taxman 246 is misplaced. 35. Furthermore, the provisions contained under section 28(ii)(c) are very categoric in giving the treatment of compensation

P a g e | 21 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. received from the termination of any agency business which has been further clarified from the new provisions contained under section 28(va)(a) w.e.f. 01.04.2003, wherein it is specifically included within the purview of profit and gains of business “any sum whatever received or receivable in cash or kind under any agreement for guarantee any activity in relation to any business”. 36. The contentions raised by the Ld. A.R. for the assessee inter- alia qua the provisions contained under section 28(va) that the existing provisions of clause (ii) of section 28(a) is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation received in connection with business and employment is within the purview of taxation, is not sustainable because it is nowhere case of the assessee before the AO or the Ld. CIT(A) that because of settlement agreement qua the termination of agency and distribution business the compensation is in respect of business loss and employment. Rather in the preceding para it is discussed that after termination of the agency and distribution assessee's business has been increased considerably. 37. Moreover, when the assessee and the RDG were entered into agreement to do business and any settlement arrived at between them for termination of the business would be business income. The assessee has also raised one additional ground to supplement ground No.1 to the effect that compensation received on termination of agreement is a capital receipt. When it is nowhere case of the assessee that it has lost its livelihood on account of termination of the business agreement compensation received by it by virtue of the termination agreement is business income. 38. So in view of what has been discussed above, we are of the considered view that answer to questions framed in para 11 & 17 of the order is “compensation received by the assessee from RDG to the tune of Rs.92,76,62,688/- in out of court settlement is a business income and not an income assessed to capital gains as claimed by the assessee” and as such provisions contained under section 28(ii)(c) read with section 28(va)(a) of the Act are attracted. Hence, the Ld. CIT(A) has rightly confirmed the addition of Rs.92,76,62,688/- as business income. Consequently ground No.1 is determined against the assessee.” 9.2 In the instant case, the ld.AR has failed to rebut the findings and the observation of the lower authorities as already discussed in the preceding paras. The Clauses of the agreement providing for margin, control over pricing, payment of statutory taxes, lack of freedom for

P a g e | 22 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. termination of the agreement etc. indicate that the agreement was akin to agency business though the fact remains that the assessee did not enter into agreement for earning merely commission. Thus, we endorse the findings and the decisions of the authorities below that the assessee is basically engaged in agency business on behalf of the principal which controls all its activities including the pricing of the products.

9.3 As regard, the nature of compensations or liquidated damages are concerned as to whether it could be treated as a capital or revenue receipt, it is undisputed fact on record that the impugned sum is directly attributable to loss of business by the assessee due to termination of agreement. It did not affect in any manner its capital structure. Therefore, it could be safely treated as Revenue receipt. In this connection, we may refer to the observations of hon’ble Apex Court in the case of Kettlewell Bullen and Co.Ltd 53 ITR 161(SC)wherein it inter alia held that where …payment is made to compensate for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of contract being a normal incident of the business and such cancellation leaves him free to carry on his trade(freed from contract terminated),the receipt is revenue. Seen in this context, we

P a g e | 23 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. observe that nothing has been brought on record to demonstrate that the assessee’s business structure suffered immensely on account of loss of the impugned business or for that matter the matter, the turnover and other business parameters got adversely affected in the subsequent years.CIT vs. Chari and Chari Ltd. (supra) has also held that when the termination of an agency did not impair the profit-making structure of the assessee, but was within the framework of the business, the receipt for termination of agency would be a revenue receipt.

9.4 We further note that the factual findings of the lower authorities regarding lack of freedom in price determination of products, provision for payment of margin, reimbursement of statutory taxes, conditions laid down to visibility of the products in India, lack of freedom to cancel the agreement unilaterally by the assessee etc. remained to be effectively countered by the assessee. Mere nomenclature of Principal to Principal agreement would not negate such factors which are equally determinative of the actual nature of the business arrangement. Moreover, there being no loss to any capital structure of the assessee in the instant case, the question of amount being capital in nature does not inspire any confidence. The ld.AR has relied on the case of Spectra Shares and Scrip Ltd(2025) 180

P a g e | 24 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. taxmann.com182(Tel) w.r.t. applicability of section 28(ii)(c) of the Act does not apply to the facts of the case as in that case, the assesee sold the entire business as going concern on lump sum basis. Other case laws relied upon are distinguishable as they pertain to cases of Distributorship which in the present case is not established by the assessee.

9.5 Considering the above stated discussion, we hold that the lower authorities were justified in treating the impugned sum as business receipt in terms of section 28 of the Act. Therefore, we find no infirmity in the appellate order which is affirmed.

9.6 However, in so far as the quantum of the addition is concerned, the assessee has claimed that though the terms of agreement provided for compensation of Rs 5 cr. the actual amount paid was Rs 4.56 cr. which was the final outcome of mutual discussion between the two parties. Supporting details were also placed on record and no deficiency therein has been pointed out by the authorities below. We find merits in the contentions of the assessee as no contrary evidence has been brought on record that it actually received Rs 5 cr. Business decisions could not be dictated by the Revenue as the impugned amount was received after negotiations. Therefore, we allow the ground to such

P a g e | 25 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. extent and direct the AO to delete the balance amount and restrict the addition to Rs 4.56 cr. only.

P a g e | 26 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. the trademark would get diluted.At the time of assignment of the trademark by Plastomech to the assessee, Plastomech had terminated the usership agreement with Sonic.

11.1 It was submitted that simultaneous with the acquisition of trademark, the assessee had entered into an agreement with Sonic whereby it had been agreed that Sonic will undertake not to compete with assessee directly or indirectly in the business of manufacturing, marketing, selling, storing, storing, exhibiting for sale, marketing the products or deal with the products under the Trademark or any other intellectual property right which is deceptively same or similar either visually or phonetically to the trademarks in the territory for a period of 20 years. Both the transactions of acquisition of the trademark, termination of registered user agreement and undertaking of non compete covenant were part of the same composite transaction.

11.2 The assessee had paid Rs. 26 lakhs for acquisition of the trademark to Plastochem and Rs. 1.56 cr. to Sonic towards non-compete fees and capitalised the same as intangible asset in the books. The Assessing officer allowed depreciation on the cost of acquisition of the trademark but disallowed the depreciation of Rs. 19,45,781/- on the non compete fees paid to Sonic by observing that the said sum of Rs. 1.56 cr.

P a g e | 27 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. was towards non compete fees and from depreciation of the tangible assets given in section 32(1)(ii) as said fees did not qualify for depreciation.

11.3 In this connection, it was submitted acquisition of the trademark to the owner and payment of non compete fees to the registered user is part of the same composite transaction. The acquisition of trademark had no value to the assessee unless the previous user i.e. Sonic was restrained from using the product for its business. Sonic had acquired technical knowledge of manufacturing Products sold under the name “Meal Maker” and as also had considerable experience of the market, prices, costing, trends and customers relations. In order to effectively use the trademark, it was essential to bind Sonic not to compete with the assessee. Further, since the non compete fees paid was in connection with the acquisition of brand 'Meal Maker' only, as per provisions of section 32 of the Act assessee had treated the same as part of payment in connection with the acquisition of Trademark only and claimed the depreciation accordingly. In any event, such payment constitute cost of improvement as by making the payment, the value of the intangible asset viz. trademark has increased. Thus, depreciation ought to be allowed and disallowance made ought to be deleted.

P a g e | 28 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 12. The ld.CIT(A) observed that there was no infirmity in the order of the AO since the payment was admitted to be of capital nature and there being no explicit provision for allowing depreciation in respect of this expenditure, no depreciation could be allowed under law. The assessee had contended that the acquisition of trade mark and payment of non-compete fee to the registered user was a part of the same composite transaction. This contention of the appellant did not entitle it to claim depreciation on the payment for non compete fee. This situation could be compared with a case where land and building was acquired together and depreciation is allowed in respect of building and not in respect of land, since there is no provision for allowing the depreciation onland. Similarly, there being no specific provision for allowing of depreciation on the payment made for non compete fee, depreciation being a statutory allowance, the same has rightly been disallowed by the A.Ο.

P a g e | 29 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 15. We have carefully considered all relevant facts of the case. We find that the issue was adjudicated in favour of the assessee by the Tribunal in appeals for AYs 2004-05 and 2005-06 in ITA No/3533/3152 and 7044/Mum/2008 dated 11.04.2025 with following observations and findings:

“Depreciation on Non-compete Fees 10. The assessee has acquired Trademark 'Meal Maker' from Plastomech during the Financial Year relevant to AY 2003-04. Along with the purchase of Trademark the assessee has entered into a non-compete agreement with M/s Sonic Biochem Extractions Pvt. Ltd. (Sonic Biochem) for a period of 20 years since the Trade Mark was earlier assigned by Plastomech to Sonic Biochem. The assessee in this regard made a payment of Rs. 1,55,66,250/- to Sonic Biochem towards non-compete fee. The assessee in the books of accounts capitalized the said amount as intangible asset and claimed deprecation on the same @ 25%. The AO while completing the assessment for AY 2003-04 held that the amount paid towards non-compete fees cannot be treated as intangible asset and therefore depreciation cannot be allowed under section 32(1)(ii) of the Act. However, the AO allowed 5% of the expenses to be claimed as a deduction considering the fact that the agreement is entered for a period of 20 years. For the year under consideration the AO followed its own order M/s Marico Ltd to make a disallowance of Rs. 26,26,804/-. On further appeal, the CIT(A) confirmed the disallowance made by the AO. 11. The ld. AR submitted that Sonic Biochem was using the Trademark 'Meal Maker' as per the agreement entered into with Plastomech who is the owner of the Trademark. Therefore, when the assessee bought the Trademark it was essential for the proper use of the Trademark to enter into a non-compete agreement with Sonic Biochem in order to restrain the company from the competing with the assessee. The ld. AR also submitted that Plastomech while assigning the Trademark has terminated the usership agreement with Sonic Biochem. The ld. AR argued that the payment of non-compete fee is part of the composite transaction of acquiring the Trademark and therefore, the assessee has capitalized the non-compete fee along with the consideration paid towards acquisition of Trademark. The ld. AR further argued that the acquisition of Trademark will not be of any use to the assessee unless Sonic Biochem was restrained from using the Trademark since Sonic Biochem has acquired the technical knowledge of manufacturing product sold under the name 'Meal Maker'. Accordingly the ld. AR submitted that the assessee has rightly capitalized the non-compete fees and has claimed depreciation. The ld.

P a g e | 30 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. AR relied on the decision of the Hon'ble Bombay High Court in the case of PCIT vs. Piramal Glass Limited (ITA No. 556 of 2017 dated 11.06.2019), ACIT vs. M/s India Medtronic Pvt. Ltd. (ITA No. 1453 of 2017 dated 30.09.2021) and PCIT vs. Music Broadcast Pvt. Ltd. [2023] 155 taxmann.com 277 (Bom). 13. We heard the parties and perused the material on record. During the financial year relevant to AY 2003-04 under consideration the assessee acquired the Trademark of 'Meal Maker' which owned by Plastomech for a consideration of Rs.26,11,250/- and has capitalized the same in the books of account claiming depreciation at 25%. Since the Trademark was earlier used by Sonic Biochem vide a registered agreement entered into with Plastomech, the assessee had to enter into a non-compete agreement with Sonic Biochemto restrict Sonic Biochem from using the Trademark. As part of the agreement the assessee has paid a sum of Rs. 1,55,66,250/-. The assessee in AY 2003-04 capitalized the said amount and claimed depreciation at 25%. The AO disallowed the depreciation in AY 2003-04 for the reason that non-compete fee does not fall within the meaning of intangible asset as given in section 32(1)(ii) of the Act and that the assessee cannot claim depreciation on the same. The AO however allowed 5% of the amount capitalized as a deduction. Therefore, the issue for our consideration is whether the non-compete fee will fall within the definition of intangible asset qualified for depreciation under section 32 of the Act. In this regard we notice that the Hon'ble Bombay High Court in the case of Piramal Glass Ltd. (supra) has considered a similar question of law where it has been held that, “3. Question No. (a) noted above pertains to the decision of the Tribunal to grant depreciation on the Assessee's payment of non- compete fees. According to the Revenue, this being an intangible asset, no depreciation under Section 32 of the Income Tax Act, 1961 ('the Act' for short) was available. 4. We however notice that similar issue has been considered by the different High Courts and held in favour of the Assessee. A reference can be made to the decision of the Division Bench of the Gujarat High Court in the case of Principal Commissioner of Income Tax v. Ferromatice Milacron India (P.) Limited. It was also the case where the Assessee had incurred expenditure pursuant to the non- compete agreement and claimed depreciation on such asset. While dismissing the Revenue's Appeal against the Judgment of the Tribunal, following observations were made: “We may recall the Assessing Officer does not dispute that the expenditure was capital in nature since by making such expenditure, the assessee had acquired certain enduring benefits. He was, however, of the opinion that to claim depreciation, the assessee must satisfy the requirement of Section M/s Marico Ltd 32(1)(ii) of the Act, in which Explanation 3 provides that for the purpose of the said sub-section the

P a g e | 31 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. expression “assets” would mean (as per clause (b)) intangible assets, being known-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. In the opinion of the Assessing Officer, the description on- compete fee would not satisfy this discrimination. Going by his opinion, no matter what the rights acquired by the assessee through such non-compete agreement, the same would never qualify for depreciation in section 32(1)(ii) of the Act as being depreciable intangible asset. This view was plainly opposed to the well settled principles. In case of Techno Shares & Stocks Limited (supra) the Supreme Court held that payment for acquiring membership card of Bombay Stock Exchange was intangible assets on which the depreciation can be claimed. It was observed that the right of such membership included right of nomination as a license which was one of the items which would fall under Section 32(1)(ii). The right to participate in the market had an economic and money value. The expenses incurred by the assessee which satisfied the test of being a license or any other business or commercial right of similar nature In case of Areva T & D India Limited (supra) Division Bench of Delhi High Court had an occasion to interpret the meaning of intangible assets in context of section 32(1)(ii) of the Act. It was observed that on perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term “business or commercial rights of similar nature” it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. It was concluded that the assessee who had acquired commercial rights to sell products under the trade name and through the network created by the seller for sale in India were entitled to deprecation. In the present case, Mr.Patel was erstwhile partner of the assessee. The assessee had made payments to him to ward off competence and to protect its existing business. Mr.Patel, in turn, had agreed not to solicit contract or seek business from or to a person whose business relationship is with the assessee. Mr. Patel would not solicit directly or indirectly any employee of the assessee. He would not disclose any confidential information which would include the past and current plan, operation of the existing business, trade secretes lists etc. M/s Marico Ltd It can thus be seen that the rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression “or any other business or commercial rights of similar nature” used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation.”

P a g e | 32 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 5. No question of law in this respect therefore arises.” 14. We notice that the a similar view has been held in the case of India MetronicPvt. Ltd. (supra) and M/s Music Broadcast Pvt. Ltd. (supra). We also notice that the Co-ordinate Bench in the case of M/s Abbott Healthcare Pvt. Ltd. vs. DCIT (ITA No. 570/Mum/2018 dated 06.01.2020) and in the case of WNS Global Services Pvt. Ltd. vs. ACIT (ITA No. 2450 & 2451/Mum/2022 dated 26.07.2023) have held that a similar view. The facts in assessee's case being identical respectfully following the above judicial precedents, we hold that the non-compete fee would fall within the definition of intangible asset as per Explanation to section 32(1)(ii) and therefore the assessee is eligible for depreciation @ 25% on the amount paid towards non- compete fee. The AO is directed to allow depreciation as per directions in this order.” 16. Respectfully following the above decision, we allow the ground in this regard and direct the AO to, allow the claimed depreciation.

P a g e | 33 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 19. Before the ld.CIT(A), the AR submitted that full details of the expenses in question were filed before the Assessing Officer and the nature of expenses was explained to him vide letter dated 02.02.2006. It was pointed out that in the earlier years similar disallowances made out of the said expenses was deleted by the CIT(A) in appeal for A.Y. 1999- 00, Α.Υ. 2000-01 and A.Y. 2001-02. However in AY 2002-03 the CIT(A) had restricted the disallowance to 10% of the expenses.

P a g e | 34 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 22. On careful consideration of the above facts and also the findings of the ld.CIT(A) that the assessee conceded that the facts were similar to those in A.Y.2002-03. It was also admitted by the AR during the course of appellate proceedings that except giving broad categorical of expenses, no sub details were filed by the assessee and no vouchers for test checking were produced before the A.O in respect of the expenses. Thus, we hold that the decision rendered by him is reasonable in the light of facts of the case which is therefore upheld dismissing the ground of appeal.

“Learned CIT (A) has erred in confirming the disallowance of Rs.2,48,594/- being 1/10th of the other Miscellaneous expenses of Rs.24,85,940/- on the ground that the same are not wholly and exclusively incurred for the purpose of the business. On the basis of the facts and in the circumstances of the case, disallowance made ought to be deleted.”

P a g e | 35 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 2001-02. Further, the assessee had submitted that the auditors of the company had also not observed anything adverse in the audit report. However in AY 2002-03 the CIT(A) had restricted the disallowance to 10% of the expenses. The A.R. of the appellant drew the attention of the ld.CIT(A) to attention to the following observation of his predecessor in appeal order for A.Y. 2002-03.Following the decision of the my predecessor CIT(A) and after considering the facts mentioned by the AR of the appellant, he directed the A.O. to disallow the expenses @1/10th instead of 1/5th as had been made by him.

P a g e | 36 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. respective units to the total turnover while working out the profits of the Goa and Kanjikode undertaking for claiming deduction u/s. 80IB. On the facts and in the circumstances of the case, he ought to have held that the aforesaid expenses are not to be allocated while working out the profits of Goa and Kanjikode undertakings for the purpose of deduction u/s. 80IB of the Act. Without prejudice to the above, Learned CIT (A) has erred in not accepting the alternative contention of the Appellant that the corporate office expenses and depreciation on assets installed at the corporate office, if allocable, ought to be allocated on an incremental basis. The Learned CIT(A) ought to have allocated the corporate office expenses and depreciation on assets installed at the corporate office on the basis of the ratio laid down by the Income tax Appellate Tribunal in the case of Food Specialities Ltd (54 ITD 352).” 28. Before the ld.CIT(A),it was contended by the assessee that no part of the corporate office expenses and depreciation on assets installed at corporate office ought to have been allocated to the Goa and Kanjikode undertakings while computing deductions u/s 80IB of the Act. Alternatively, it was contended that only incremental corporate office expenses and depreciation on assets installed at corporate office ought to have been allocated. In all fairness, it was pointed out that an identical issue in its own case in earlier years had been decided against the appellant. It is submitted before him that this matter had been raised in the instant appeal to keep the issue alive.

P a g e | 37 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. detailed reasons were given and it was held that corporate office expenses and depreciation on assets to Goa & Kanjikode units for the purpose of computing deduction u/s.80IB had to be allocated. Since the assessee had conceded the issue on this ground and had stated to keep the matter alive appeal is preferred, therefore following the said reasons of my predecessor CIT(A), he confirmed the action of the AO on this issue.

P a g e | 38 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. submitted stand alone revised profit and loss account to demonstrate that the eligible unit has already absorbed all the relevant expenses like manufacturing, marketing and relevant finance cost. The AO tries to allocate the general corporate expenses which has no direct nexus to the operation of the eligible units. Therefore, we direct the Assessing Officer to delete the allocation of corporate office expenses and depreciation. Accordingly, the ground raised by the assessee is allowed.” 31. Respectfully following the above decision of the Co-ordinate Bench, we direct the AO to delete the allocation made towards corporate office expenses and head office depreciation, thus allowing the ground of appeal in this regard.

While granting the deduction u/s 80IB/80IC, Learned CIT (A) has erred in a) confirming the action of assessing officer in allocating the interest on dealership deposit of Rs. 13,34,886/- and interest on others (i.e. fixed loans, cash credit and lease rental) of Rs. 16,12,450/- in the ratio of the turnover of undertakings to the total turnover of the assessee. No part of the aforesaid expenses/ charges should be allocated to the above Undertakings. b) confirming the action of assessing officer in allocating of Research & Development expenses of Rs. 96,36,940/- to following undertaking in the ratio of their turnover to the total turnover of the appellant.

Undertakings Amount allocated (Rs.) Kanjikode 28,66,111 Goa 31,31,287 Pondicherry 34,82,646 Daman 1,56,896 Total 96,36,940 No part of the aforesaid expenses/ charges should be allocated to the above Undertakings.

P a g e | 39 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. c) confirming the action of assessing officer in allocating Head office expenses at Rs. 805.68 lakhs in the ratio of total sales of the undertakings to enterprises sales as against Rs. 747.40 lakhs allocated by the assessee. The additional Head Office expenses of Rs. 58,28,336/- allocated by the Assessing Officer to the Goa Undertaking ought to be deleted. d) directing the assessing officer to allocate common export sales promotion expenses of Rs. 162.77 lakhs to the Goa Undertaking. CIT (A) ought to have directed that no additional amount of export expenses ought to be allocated to the Goa Undertaking. e) confirming the action of assessing officer in allocating Rs. 36,66,382/- out of total overseas travel expenses of Rs. 76,24,001/- to the Goa Undertaking as against Rs. 11,83,055/- allocated by the assessee. On the facts and circumstances of the case, the additional allocation of Rs.24,83,327/- ought to be deleted.

33.1 It is noticed that sub-ground (a)is against the allocation of interest on dealership deposits of 13,34,886/- and other interest of Rs. 16,12,450/- to the Goa and Kanjikode undertakings in the ratio of the turnover of the respective units. The AO allocated these amounts while computing deduction u/s 80IB of the Act stating that the dealers were handling the products manufactured by the Goa and Kanjikode Undertakings. The ld.CIT(A) observed that the issue was recurrent in

P a g e | 40 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. nature and had been considered and adjudicated by the predecessor CIT(A) in appeals for in A.Y.99-00, 2000-01, 2001-02 and 2002-03 against the assessee and the order passed by the AO was confirmed. Accordingly, he upheld the action of the AO and ground of appeal was therefore, dismissed.

33.2 Similarly, the next sub-ground(b) is against the allocation of Research & Development Expenses of Rs. 96,36,940/-. The AO had allocated these amounts while computing deduction u/s 80IB stating that the benefit of R&D goes to all units of the assessee including the Goa and Kanjikode. Before the ld.CIT(A),it was contended by the assessee that it had not allocated any expense on the ground that research was primarily for new products, which were not manufactured in the New Undertakings as it manufactured only Parachute coconut oil in the new undertakings which was a very old product being manufactured from year to wear. During the year, the assessee had introduced new products such as Mediker Anti Lice oils, Shanti Thanda Tel. This had been recorded in the annual accounts of the assessee filed before the AO. Since no parts of the new products were manufactured at New Undertakings, no allocation of research and development expenses ought to have been made.

P a g e | 41 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 33.3 The ld.CIT(A),however, following his predecessors in appellate orders in AY 1999-00, 2000-01, 2001-02 and 2002-03, upheld the action of the AO in this regard dismissing the appeal.

33.4 The next sub-ground(e)is against the allocation of overseas travel expenses allocating Rs. 36,66,382/- out of total overseas travel expenses of Rs. 76,24,001/- to the Goa Undertaking as against Rs. 11,83,055/- allocated by the assessee.

33.5 Before the ld.CIT(A),it was contended that the assessee had allocated the foreign traveling expenses of Rs. 76.24 lakh amongst various divisions on the basis of specific purpose for which travel is undertaken. The foreign traveling expenses relating to exports amounting to Rs. 45.18 lakhwas in the first instance allocated to export common. Out of Export common, a sum of Rs. 12.58 lakh had been allocated to Goa undertaking on the basis of turnover. The Assessing Officer had allocated the entire expenses on the basis of turnover ignoring the specific allocation made by the assessee. The basis of allocation was same as in the past which had been accepted after due scrutiny in all the years. This issue came up specifically in appeal for A.Y. 1999-00, where ld. CIT(A) discussed the method of allocation in para 9.5.3 and upheld the basis of allocation by the assessee. In view of the

P a g e | 42 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. above, additional allocation of foreign travel expenses of Rs. 36.66 lakh be deleted.

33.6 The ld.CIT(A) observed that the assessee had not given any basis for allocating the foreign travel expenses to the different units either before the AO or at the appellate stage. The AO had very fairly allocated theforeign travel expenses on the basis of turnover. He did not see any reason to interfere in the order of the AO and the same was, therefore confirmed.

“Allocation of finance cost to undertakings eligible for deduction under section 80IB 18. During the year under consideration the assessee has incurred total finance charges of Rs. 2,29,74,317/- out of which an amount of Rs. 1,89,64,156/- is allocated to the undertakings in Dehradun, Goa, Pondicherry and Daman. The AO noticed that the balance amount of Rs. 40,10,151/- is not allocated and in this regard called on the assessee to provide reasons as to why the same should not be allocated in proportion to their turnover. The assessee submitted that out of the unallocated amount of Rs. 4,71,995/- pertains to interest paid on dealership deposits and that the dealership deposits are not utilized by these undertakings and therefore the interest M/s Marico Ltd paid thereon is not claimed as a deduction. The assessee further submitted that the undertakings eligible for 80IB are having cash surplus and therefore no finance cost is attributable to these undertakings. The AO did not accept the submissions of the assessee and proceeded to allocate the balance fiancé cost in the ratio of the undertaking turnover to the total turnover of the assessee.

P a g e | 43 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 19. We heard the parties and perused the material on record. The ld. AR submitted that the issue stands covered by the decision of the Co-ordinate Bench in assessee's own case in earlier years and that the Co-ordinate Bench for AY 1999- 2000 (ITA No. 1521/Mum/2004 dated 05.09.2024) has remitted the issue back to the AO for verification of the claim of the assessee that the undertakings eligible for 80IB deductions are having surplus cash and delete the allocation of finance cost accordingly. The ld. AR prayed for a similar direction for the year under consideration also. In this regard our attention is drawn to the Profit & Loss A/c of undertakings eligible for 80IB deduction to submit that the undertakings are having surplus cash (page 26 to 77 of PB). We notice that the Co-ordinate Bench has made the following observations while considering the similar issue for AY 1999-2000 where it has been held that “6.1) The Ld. AO is of the opinion that a portion of interest on dealership deposits and bank guarantee commission should be allocated to the Goa and Kanjikode Units while computing profits eligible for deduction u/s. 801A of the Act. Accordingly he has allocated a portion of interest while computing interest u/s. 801A of the Act. The Ld. CIT(A) agreed with the argument of the Ld. AO and confirmed the addition. Aggrieved by the orders of the Ld. AO and the Ld. CIT(A), the appellant company came on appeal before the Bench on this issue. 6.2) Ld. AR of the appellant company has argued that these two undertakings were generating cash surplus month after month and they have not utilised any part of the dealership deposits, in fact, these two undertakings are providing funds to the head office and not seeking funds from the head office and hence deduction u/s. 801A should not be restricted as mentioned by the M/s Marico Ltd Ld. AO in the assessment order. The Ld. AR of the appellant has mentioned that this issue is covered in its favour by the order of Hon'ble ITAT in earlier year vide paragraph 28 to 32 at pages 22 to 26. Hence, it was pleaded that the addition made by the Ld. AO should be deleted. 6.3) The Ld. DR has supported the orders of the Ld. AO and the Ld. CIT(A). 6.4) After hearing both sides, it is decided to respectfully follow the order of the ITAT of the earlier year in principle in this year also. But, the Ld. AO is directed to verify these units are generating surplus in this year also and if so, the order of Hon'ble ITAT of earlier year had to be followed by him. Accordingly, Ld. AO may take a decision based on facts.” 20. Respectfully following the above decision of the Co-ordinate Bench, we direct the AO to examine the claim that these units are generation cash surplus and delete the allocation of finance cost accordingly.” Allocation of Research & Development Expenses (R&D) to eligible for deduction under section 80IB

P a g e | 44 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 21. The AO during the course of hearing noticed that the assessee has incurred R & D Expenses to the tune of Rs. 68,74,015/- and that the said expenses have not allocated to eligible undertakings. The assessee submitted that no part of the R&D Expenses are related to the products manufactured in the eligible units and that the expenses entirely relates to new products. The assessee accordingly submitted that the R&D Expenses do not pertain to the eligible undertakings and therefore not allocated to them. However, the AO did not accept the submissions of the assessee and allocated the expenses to all the eligible undertakings in proportion to their turnover. 22. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee's own case for AY 1999-2000 (supra) has considered a similar issue where it has been held that M/s Marico Ltd “5.2) At the time of hearing, Ld. AR of the appellant brought to the notice of the Bench that research and development expenses were not related to the products which are being manufactured at the Goa and Kanjikode units and hence restriction u/s. 801A cannot be made by the Ld. AO. In Goa and Kanjikode Units, only parachute coconut oil was being manufactured whereas research and development expenses related to other products like saffola, sweekar, hair and care etc. The Ld. CIT(A) has confirmed the addition made by the Ld. AO for the reasons mentioned in his order. Ld. AR of the appellant brought to the notice of the Bench that this issue was covered in his favour for A.Y. 1995-96 by the Hon'ble ITAT, Mumbai order dated 28.2.2007, where it was held that the research and development cost is to be allocated eligible units, where research and development is carried out with respect to the product manufactured at that unit. Ld. AR of the appellant contended that this issue was covered by Hon'ble Bombay High Court in the case of Zandu Pharmaceuticals Works Pvt. and in the case of Hindustan Unilever Ltd. also. In view of the same, it was pleaded that the addition made by the Ld. AO, confirmed by the Ld. CIT(A) should be deleted. 5.3) Ld. DR relied on the orders of the lower authorities. 5.4) After hearing both sides, it was decided to follow decision of Hon'ble ITAT in appellant's own case for A.Y. 1995-96 in principle, but the Ld. AO is directed to see whether in these two units, only parachute oil is manufactured and if the R&D expenditure claimed by the appellant does not relate to Parachute oil manufacturing then appellant would succeed in his argument. After verifying the factual position, Ld. AO is directed to take decision accordingly.” 23. The facts for the year under consideration being identical we remit the issue back to the AO respectfully following the above decision of the coordinate bench with similar directions. It is ordered accordingly. Allocation of Foreign Travelling Expenses

P a g e | 45 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 24. The AO during the course of hearing allocated the Foreign Travel Expenses to the tune of Rs. 12,57,998/- to the Goa Unit for the reason that the Goa Unit has made exports for an amount of Rs. 7,30,53,572/-. The ld. AR in this regard submitted that a similar addition was made by the AO during the AY 1999- 2000 and M/s Marico Ltd that the CIT(A) has deleted the said addition. The ld AR drew our attention to the relevant observations of CIT(A) in the appellate order for AY 1999-2000 which is extracted below - “In my considered opinion, the assessing officer is not justified in ignoring the allocation of expenses under the above stated heads on actual basis as incurred by the two eligible units. As the appellant company is maintaining accounts for each and every item of expense separately for all its businesses and service divisions, allocation made on the basis of actuals cannot be rejected without pointing out any manipulation and defect in the accounts of the two eligible undertakings. So far as the expenses of Health Care Division are concerned, in my opinion, there is no need to allocate the same to the two eligible undertakings for the simple reason that division-wise accounts are maintained and, therefore, only those expenses should be allocated to the two eligible undertakir.gs which are common to all the businesses and service divisions of the appellant company. As discussed above, every eligible undertakings has to be considered on stand alone basis while working out the profits and gains of the industrial undertaking for the purpose of determining quantum of deduction u/s 80-IA. Similarly, for the Nature Care Division also, there is no justification to allocate expenses to the two eligible units for the reason that the expenses incurred under the above stated heads on account of PCO stand allocated to the two units by the appellant. The other products of Nature Care Division are Hair & Care, Amla, Herbal, Lite, Nutrisheen Liquid, Nutrisheen Cream, Jasmine, Revive Starch, Revive Spray, Revive Colour Fix, Active Herbs and Active Plants do not have any connection with the production of PCO which is the business of the two eligible industrial undertakings. In view of the above discussion, in my opinion, the assessing officer is not justified in making the allocation in the impugned fashion. Grounds of appeal No.7(a)(iii), 7(a)(v), 7(a)(vi) & 7(a)(vii) are allowed.” 25. The ld. AR further submitted that the revenue has not preferred further appeal against the order of the CIT(A). Accordingly, the ld. AR prayed that the decision of the revenue not to allocate the foreign travel expenses based on the export turnover has reached finality and therefore the allocation made by the AO for the year under consideration cannot be sustained. 26. We heard the parties and perused the material on record. From the observations of the CIT(A) for AY 1999-2000 as extracted hereinabove, we notice that the revenue has accepted the claim of the assessee that every item of expenses is tracked business and service division-wise and that allocation is made on actual amount spent. For the year under consideration we notice that the assessee has already allocated a sum of Rs. 19,95,421/- incurred on foreign

P a g e | 46 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. travel expenses to the eligible unit. The AO has made further allocation for the reason that the ratio of export turnover made by the eligible unit as compared to the total export turnover is much more than the amount allocated and accordingly made the additional allocation of Rs. 12,57,998/-. In our considered view making allocation of foreign expenses merely for the reason that eligible unit has made exports cannot be accepted more so when the foreign travel expenses actually incurred by the undertaking is already allocated to the eligible unit. The AO other than taking the proportion of export turnover of the undertaking to the total export turnover of the assessee did not bring any other factual finding with regard to the allocation. In view of this discussion, we are of the view that the additional allocation of foreign travel expenses made by the AO cannot be sustained and we direct the AO to delete the same.” 34.1 We find all the above grounds have been dealt with the ITAT in the above stated order either by deleting the disallowance or setting aside the issues to the AO. Since the basis issue and the facts remain the same, respectfully we direct the AO examine the issue in the light of the said ITAT order making necessary compliance, thus allowing the grounds for statistical purposes.

P a g e | 47 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. to be done in the ratio of the total sales turnover of the eligible undertaking (i.e. local & export) to the total sales of the enterprise. There was no distinction between local sales and export sales for the purposes of Section 80IB of the Act. The overheads were expended only for local sales was a fallacy. Common expenses are to be spread over the total enterprise and allocation therefore has to be over the full sales turnover of the eligible undertaking and not only in the ratio of the domestic sale of the undertaking. The total sales turnover of the enterprises was Rs.739.2 cr. The total sales of the eligible undertaking are Rs.347.26 cr. The ratio of total sales of undertakings to enterprise sales is 0.4698 or 47%. From the details of the allocation submitted by the assessee it was seen that the expenses allocated to eligible undertaking was only 43.6% of the total head office expenses which was not correct. The expenses to be allocated have to be in the ratio of total sales and not just domestic sales. It was indicated that total export sales from the eligible undertakings were from Goa Unit and therefore, the difference between allocable and allocated expenses amounting to Rs.3.4% of head office expenses or Rs.5,82,8336/- (3.4% of Rs.17,41,21,635/-), being total corporate over head) was allocated to Goa unit over and above the expenses allocated by the assessee which claimed that no such allocation was warranted. However, the ld.CIT(A) observed that there

P a g e | 48 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. was no reason to interfere with the order of the A.O. which was upheld dismissing the ground in this regard.

35.1 Before us, it is reiterated that the allocation was not correctly done by the AO as the allocation was required to be done in the ratio of the total sales turnover of the eligible undertaking (ie. local & export) to the total sales of the enterprise. There was no distinction between local sales and export sales for the purposes of Section 80IB of the Act.

P a g e | 49 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 37.1 The AO observed that assessee had incurred advertisement and sales promotion expenses of Rs. 1266.07 lakh in respect to parachute coconut oil which had been allocated by the assessee and Rs. 706.54 lakh in respect of export which had not been allocated. The total export turnover of the assessee was Rs. 24,28,78,473/- out of which Parachute coconut oil exported from Goa unit was Rs. 11,68,06,308/- which was 48.09% of the total export turnover. Hence, the allocation of ASP in respect of export was made in proportion to the export turnover of Goa undertaking to total export turnover at Rs. 339.78 lakh (706.54 lacs 48.09%).

P a g e | 50 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. common expenses of Rs 162.77 lakh, the same had not been allocated since it was not specifically incurred for the Goa Undertaking.

P a g e | 51 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. aforesaid income is not derived from the export business of the assessee. Aforesaid receipts being received in the ordinary course of business, and not being in the nature of brokerage, commission, interest or other receipts as specified in explanation (baa) to section 80HHC, ought not to have been reduced from the profits of the business while computing deduction under section 80HHC of the Act. b) Rs. 5 cr. received on termination of the distribution agreement. 90% of the aforesaid said sum of Rs. 5,00,00,000 ought not to have been reduced from the profit of the business.

42.1 This ground has been modified by the assessee during the instant proceedings as under: “7.a) Learned CIT(A) has erred in confirming the action of AO in reducing 90% of the Misc. Income of Rs. 6,08,539/- from the profit of the business for the purpose of computing deduction u/s.80HHC on the ground that aforesaid income is not derived from the export business of the assessee. b) Without prejudice to additional ground and in the event said additional ground is decided against the appellant, the learned CIT(A) has erred in reducing 90% of the discount on deferred sales tax liability of Rs. 3,16,61,102/- from the profit of the business for the purpose of computing deduction u/s.80HHC on the ground that the aforesaid income is not derived from the export business of the assessee. c) Without prejudice to renumbered ground 1 and in the event it is held that said amount is chargeable to tax as business income, the learned CIT(A) has erred in reducing 90% of the compensation of Rs. 5,00,00,000/- received on termination of the distribution agreement from the profit of the business for the purpose of computing deduction u/s 80HHC. Aforesaid receipts being received in the ordinary course of business, and not being in the nature of brokerage, commission, interest or other receipts as specified in explanation (baa) to section 80HHC, ought not to have been reduced from the profits of the business while computing deduction under section 80HHC of the Act.”

P a g e | 52 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 43. In this regard, it was submitted that the AO erred in allowing deduction u/s.80HHC at Rs.9,94,985/-against Rs.55,70,175/- claimed by the assessee. While granting the deduction u/s.80HHC, he erred in reducing 90% of the following from the profits of the business: S.No. Particulars Amount (in Rs.) 1 Misc. Income 6,08,539 2 Discount on deferred sales tax liability 3,16,61,101

The aforesaid receipts being amounts received in the ordinary course of the business of the appellant and not being in the nature of brokerage, commission, interest or other receipts as specified in explanation (baa) to section 80HHC, ought not to have been reduced from the profits of the business while computing deduction u/s.80HHC of the Act.

44.1 Likewise, it is stated that the AO erred in reducing 90% of the amount of Rs.5,00,00,000/- (wrongly mentioned as Rs.5,08,00,000/- in the computation) included by the AO as amount receivable on termination of the distribution agreement. Without prejudice to the claim of the assessee that the said amount was not taxable or in the alternative that the said amount is taxable as long term capital gains, 90% of the said sum of Rs.5,00,00,000/- ought not to have been reduced.

P a g e | 53 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 45. Before the ld.CIT(A),it was submitted that aforesaid amounts were received in the ordinary course of the business of the assessee and were part of the income from the business. Hence, these were not to be reduced from the profits of the business to arrive at the profits for the computation of the deduction u/s 80HHC.It was also stated that the discount on Deferred sales tax liability was received in the ordinary course of the business and is part of the income from the business. The Assessing officer in his order assessed the said income under the head “Income from Business or Profession”. On assessing the income under the head Income from Business and Profession” it should not be reduced from the profit of the business for the purpose of calculating the deduction u/s 80HHC, assessee relies on the decision of Alfa Laval India Ltd Vs. DCIT (2003) 186 CTR 390 (Bom).In view of above, the Assessing Officer may be directed to include 90% of discount on deferred sales tax liability in the profit of the business while computing deduction u/s 80HHC of the Act.

45.1 With regard to the amount received on termination of distribution agreement, it was submitted as follows:

“We may also mention that aforesaid receipt is not in the nature of brokerage, commission, interest or other receipts as specified in explanation (baa) to Section 80HHC. The expression “other receipts” follows the words brokerage, commission, etc. which

P a g e | 54 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. means that only those receipts which are akin to brokerage, commission, etc are to be reduced under explanation (baa). In view of the above, the Assessing Officer may kindly be directed not to exclude aforesaid receipts while computing the profits of the business.”

P a g e | 55 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 46.1 He further observed that the exemption provisions have to be construed strictly as held in IPCA Laboratories Ltd Vs. DCIT 266 ITR 521 (SC) and in State of Jharkhand& Others Vs. Ambey Cements & Others, 2004-3-PC (Supreme Court Revenue Cases) -581 after referring to Bajaj Tempo Ltd 196 ITR 188 SC. It has been held by the Supreme Court in Goodyear India Ltd Vs. State of Haryana 188 ITR 402 (SC) that the liberal interpretation should be avoided in the case of taxing statutes. Therefore, even as per the principles of interpretation with reference to Exemption provision/Deduction provision, the benefit of section 80HHC could not be allowed in respect of miscellaneous income, deferred sales tax liability and the income derived from termination of distribution agreement. Accordingly, the grounds were dismissed.

P a g e | 56 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. export-oriented units (EOUs).he Supreme Court highlighted two critical expressions in the section: (a) being engaged in the business of export, and (b) deduction to the extent of profits derived from the export of such goods/merchandise. The court emphasized the importance of the expression ‘derived from’ in interpreting Section 80HHC. It asserted that for a deduction to be claimed as profits of a business, the income or profit must be directly derived from the export of goods or merchandise. The section allows deductions only for profits directly linked to the export business of the assessee. The court underscored that the legislative intent behind Section 80HHC is to encourage and incentivize export trade. Any interpretation that broadens the scope of eligible deductions beyond profits from the export of goods and merchandise would be counter-productive to the section’s purpose and objectives. In the specific case, the Supreme Court held that profits earned by the assessee due to foreign exchange fluctuations, in this instance from the EEFC account, cannot be considered as derived from the business of exporting garments. The court reasoned that such gains were independent of export earnings and, therefore, did not fall within the meaning of ‘derived from’ as intended by Section 80HHC. Accordingly, we are inclined to uphold the appellate order and dismiss the ground in this regard.

P a g e | 57 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 49. Ground no.8 reads as under: The learned CIT(A) has erred in confirming the action of assessing officer in reducing the amount of deduction of Rs. 36,78,68,997/- being deduction allowed u/s. 80IB in respect of Goa, Kanjikode, Pondichery and Daman units from the Profits of the Business while giving effect to the provisions of section 80IA(9) of the Act. No part of the deduction allowed u/s 80IB ought to be reduced while computing “Profits of the Business” for the purpose of granting deduction u/s 80 HHC of the Act.

P a g e | 58 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. deduction u/s 80IB was also not in accordance with the provisions of section 80IA(9).The turnover of the Goa unit was Rs. 116 cr. and the exports of Goa unit was Rs. 8.14 cr. Thus, export turnover of Goa unit was 7% of the turnover of the Goa unit. The profits of the Goa unit was assessed at Rs. 4,70,31,126/-. 7% of such profits works out to Rs. 32,92,179/, which could only be reduced while applying provisions of section 801A(9).

51.1 In this connection attention of the ld.CIT(A) was drawn to the case of Toshica Creation v. Income Tax Officer (96 TTJ page 651) in which it has been held that 80AB has an overriding effect over all other sections given in Chapter VI-A and deduction under Chapter VI-A should be given on the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A.

“Therefore, we set aside both the orders of the lower authorities and direct the AO to allow the deduction under s 80HHC at Rs. 20,92,136 on the income included in gross total income before making any deduction under Chapter VI-A, however, the total deduction under S. 80-IB and 80HHC should be restricted upto gross total income.In view of the above deduction u/s. 80HHC of the Act ought to be allowed on the gross profit without reducing the profits on which deduction u/s. 801B of the Act is claimed.”

P a g e | 59 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 801A shall, so far as may be applied to the eligible business under this section. This meant that the provisions of Section 80IA(9) will also be applicable to the provisions of Section 80IB. A very important case law on this issue is decided by the Special Bench ITAT, Chennai in the case of ACIT Vs. Rogini Garments (2007) 294 ITR (80)15 (Chennai) (SB). In this case, the Hon'ble ITAT held as follows:

“We have gone through the circular relied on by learned counsel for the assessee. It nowhere suggests that more than 100 percent deduction on the same profit can be granted to the assessee under various sections enumerated in Chapter VIA. Section 80HHC is part of Chapter VIA. The Hon'ble Jurisdictional High Court in the case of CIT Vs. Sharon Vaneers Put Ltd (2007) 294 ITR 18 (Mad.) (T.C.(a) No.62 of 2004 dated February 26, 2007), has madeit clear that it is not correct to say that section 80HHC of the Act is a self contained provision. The deduction cannot be allowed ignoring the restrictive clause contained in section 801A(9). The restrictive clause in Section 801A makes it abundantly clear that wherever deduction under any other sections of Chapter VIA (C) is claimed, the computation will be subject to the restrictions laid down in section 801A(9). It precludes pro tanto, all the deductions of such profits and gains claimed under chapter VI A (C). Section 80HHC is a part of Chapter VI A(C). it is not a self contained provision. There is absolutely no ambiguity on this aspect. We are therefore of the opinion that relief u/s.80IA should be deducted from the profits and gains of the business before computing relief u/s.80HHC of the Act.”

“54. We have 8) Ground No. 6 : The appellant has submitted that the Ld. CIT(A) is not correct in holding that the quantum of deduction u/s. 80HHC is to be reduced in view of the provisions of section 80IA(9A) of the Act. The

P a g e | 60 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. appellant company claims that it is entitled to deduction u/s. 80IA of the Act in respect of profits derived from Goa and Kanjikode Units and independent of this deduction, the appellant company is entitled to deduction u/s. 80HHC also of the Act in respect of profits derived from export of goods outside India. The Ld. AR of the appellant company had argued that without any discussion in the assessment order, the Ld. AO has simply reduced profits eligible for deduction u/s. 80HHC of the Act. 8.1) The Ld. CIT(A) relied on the provisions of section 80IA(9A) of the Act to uphold the position taken by the Ld. AO. Aggrieved by this reduction of deduction claimed by the appellant company, Ld. AR of the appellant has placed reliance on the Judgment of Hon'ble Bombay High Court in the case of Associated Capsules (P) Ltd. Vs. DCIT 332 ITR 42. 8.2) During the course of hearing before the ITAT, Ld. AR of the appellant relied on this decision. Hon'ble Bombay High Court has held in this case that section 80IA(9A) of the Act will not have any application at the stage of computation and it will come into application only at the stage of allowing deduction. In other words, Hon'ble Bombay High Court has held that combined deduction u/s. 80IA & 80HHC cannot exceed gross total income. 8.3) Ld. DR relied on the order of the Ld. CIT(A). 8.4) After hearing both sides, it is seen that the Ld. AO has not given any reasoning for reducing deduction claimed u/s. 80HHC of the Act. Here, the facts are not very clear. The Ld. AO is directed to see facts and figures submitted by the appellant company in this connection and follow the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P) Ltd. (supra) as mentioned above.” 54. Respectfully following the above decision of the Co-ordinate Bench we remit the issue back to the AO with a similar direction. It is ordered accordingly.

55.Additional ground of appeal

The assessee filed an additional ground of appeal as below with a request to admit the same which being a legal ground not requiring any further investigation of facts:

P a g e | 61 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. “That the amount of Rs. 3,16,61,102/-, being the difference between the payment of Net Present Value of Rs. 1,77,44,376/- against the future sales tax liability of Rs. 4,94,05,478/-is not chargeable to tax under Section 41 of the Income Tax Act.On the facts and circumstances of the case and in law, the said amount of Rs. 3,16,61,102/-neither any amount obtained by the appellant from the sales tax authorities nor being in the nature of benefit by way of remission or cessation of a trading liability owed to the sales tax authorities, as required under section 41 of the Act, should not be included in the business of income of the appellant.

56.1 During the year under consideration, the Government of Maharashtra notified a scheme under which the appellant could prepay the entire liability on a discounted basis. Consequently, the appellant availed this scheme and prepaid sales tax liability of Rs. 4,94,05,478/- at

P a g e | 62 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. the present value of Rs. 1,77,44,376/-.Accordingly, the pre-payment resulted in a one-time saving of Rs. 3,16,61,102/-, which was credited by the assessee to its profit and loss account. While computing its business income, it did not make any adjustment for the above amount. Further, during the course of assessment, the Assessing Officer also did not make any adjustments in respect of the above amount. Accordingly, the said amount stands assessed to tax as business income of the assessee.

56.2 It is submitted that as per the provisions of section 41 of the Act, where assessee has claimed a deduction for any loss, expenditure or trading liability and;

i. in respect of such loss or expenditure, the assessee has obtained any amount or, ii. in respect of such trading liability, the assessee has received any benefit, by way of remission or cessation thereof, the amount obtained or the value of the benefit shall be taxable as business income of the assessee. 56.3 In the instant case, the difference between the present value of sales tax liability paid by the assessee and the book value of sales tax liability, which comes to Rs. 3,16,61,102/- represents the time value of money in preponing the future liability of sales tax. It neither represents any amount obtained by the Appellant nor represents any

P a g e | 63 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. benefit towards remission or cessation of sales tax liability.Accordingly, it is submitted that the impugned amount of Rs. 3,16,61,102/- is not chargeable to tax as business income of the assessee.

56.5 In this regard, it is further submitted that whilst preparing for the present appeal, the appellant came across the following decisions of the Hon’ble Jurisdictional High Court and the Hon’ble Supreme Court wherein, gains earned on account of such prepayment have been held as not liable to tax as business income under section 41 of the Act i.e.CIT vs. Balkrishna Industries Ltd. [2017] 88 taxmann.com 273 (SC),CIT vs. Sulzer India Ltd [2014] 369 ITR 717 (Bombay) and PCIT vs. Mangalore Refinery & Petrochemicals Ltd [2020] 426 ITR 266 (Bombay).The

P a g e | 64 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. the claim is very much part of the records and in the light of landmark decision of hon’ble Apex Court in the case of NTPC Ltd.(1998) 229 ITR 383(SC), we admit the same.

P a g e | 65 ITA No. 2806/Mum/2008 A.Y. 2003-04 M/s Marico Ltd. 61. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 08/09/2026.

Sd/- Sd/- (SAKTIJIT DEY) (PRABHASH SHANKAR) ( VICE PRESIDENT ACCOUNTANT MEMBER

Place: म ुंबई/Mumbai ददनाुंक /Date 08.09.2026 Lubhna Shaikh / Steno

आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER,

उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीलीय अतिकरण/ ITAT, Bench, Mumbai.