M/S. DABUR INDIA LTD.,NEW DELHI vs. ADDL.CIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I-2 : NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA Nos.3241 & 6525/Del/2014 Assessment Years: 2007-08 & 2008-09 Dabur India Ltd., Vs Addl. CIT, Punjabi Bhawan, 4th Floor, Range-10, 10, Rouse Avenue, New Delhi. New Delhi. PAN : AAACD0474C ITA Nos.3114 & 6256/Del/2014 Assessment Years: 2007-08 & 2008-09

Addl. CIT, Vs. Dabur India Ltd., Punjabi Bhawan, 4th Floor, Range-10, New Delhi. 10, Rouse Avenue, New Delhi. PAN : AAACD0474C (Appellant) (Respondent) Assessee by : Shri Ajay Vohra, Sr. Advocate, Shri Rohit Jain, Advocate, Ms Deepashree Rao, CA & Shri M.P. Rastogi, Advocate Revenue by : Shri Anupam Kant Garg, CIT-DR Date of Hearing : 20.11.2020 Date of Pronouncement : 18.02.2021 ORDER PER R.K. PANDA, AM: ITA No.3241/Del/2014 filed by the assessee and ITA No.3114/Del/2014 filed by the Revenue are cross appeals and are directed against the order dated 28th March, 2014 of the CIT(A)-29, New Delhi, relating to assessment year 2007-08.

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ITA No.3241/Del/2014 (by the Assessee) & ITA No.3114/Del/2014 (by the Revenue) (A.Y. 2007-08)

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course of assessment proceedings, after adjusting the brought forward loss and unabsorbed depreciation of Rs. 24,29,02,607/- in respect of the Assessment Year 2006-07 out of the total Income Rs. 288,01,87,309/-, the assessee computed the total income at Rs. 263,72,84,702/- and the assessee company declared Nil income after claiming total deduction of Rs. 263,72,84,702/- u/s 80IB & 80IC including the deduction of Rs. 2,05,67,500/- u/s 80G. Total deduction of Rs. 272,09,75,417/- has been worked out u/s 80IB & 801C as per Audit Reports in Form No. 10CCB filed along with the details of profit and loss accounts in respect of units eligible for deductions u/s 80IB and 80IC of the I.T. Act, 1961. The adjusted book profit of Rs. 280 57,67,940/- and tax payable thereon Rs. 31,48,07,162/- has been computed u/s 115JB as per Annexure A to Report u/s 115JB of the I.T. Act, 1961 for computing the book profits of the company in Form No. 29B and computation of taxable income.

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c) Adjustment on account of royalty - Rs.2,66,67,000/-

ITA No.3241/Del/2014 (by assessee) (A.Y. 2007-08) “1) That the TPO has no jurisdiction to determine arms length price in respect of the transactions not referred u/s 92CA of the Income-tax Act, 1961 (the Act). 2) That the CIT (Appeals) has erred in sustaining the addition to the extent of 0.50% alleged to have been charged as service fee for the corporate guarantee given by the appellant to Dabur Egypt on various factual and legal grounds. 3) That without prejudice to Ground No. 2 above, giving of corporate guarantee is not the international transaction by which the concerned AE has been benefited and accordingly the addition to the extent of 0.50% in respect of the service fee alleged to have been charged on the corporate guarantee given to Dabur Egypt is arbitrary and bad in law. 4) That in the absence of any contract as existing during the year between the assessee and three AEs, neither any royalty accrued during the" year nor can it be presumed to be receivable and consequently the order of the TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law. 5) That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption 4

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about the chargeability of royalty by invoking the provision of Section 92 of the Act from Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh is arbitrary, unjust and without any basis. 6) That the CIT (Appeals) and TPO have failed to consider that in the absence of any expenditure incurred by the assessee for the establishment of brand in the geographical area of working of Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh, no royalty can be said to have accrued to the assessee when Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh have incurred expenses on advertisement and sales promotion in their respective area for promotion of the brand which amounts to the services provided by AEs to the assessee for building the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International UAE , Dabur Nepal and Asian Consumer Care Ltd., Bangladesh is arbitrary, unjust and at any rate very excessive. 7) That in absence of any comparable transaction necessary for the determination of Arm length Price, the alleged royalty sustained by CIT (Appeal) @ 2% on eligible sales in case of Dabur International, Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., Bangladesh is arbitrary, unjust and any rate very excessive 8) That the above grounds of appeal are independent and without prejudice to one another. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.” ITA No.3114/Del/2014 (by the Revenue) (A.Y. 2007-08) “1. On the fact and in the circumstances of the case the CIT (A) has erred in holding that no service fee towards corporate guarantee can be charged in respect of guarantee for Rs. 312.50 lacs on behalf of Dabur Nepal (Pvt. Ltd.). 2. On the fact and in the circumstances of the case the CIT (A) has erred in admitting additional evidences without allowing any opportunity to the AO/TPO. While deciding the issue regarding service fee towards corporate guarantee in respect of Dabur Nepal (Pvt. Ltd.) and that the finding given by him is at variance with the observations/ findings as given in para 6.1 of the order. 3. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 96,67,520/- on account of interest of loan advanced to Dabur International Ltd., UAE, an Associated Enterprises and has

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also erred in holding that in case of loan given in International currency, the interest rate to be applied should be LIBOR plus margin. 4. On the fact and in the circumstances of the case the CIT (A) has erred in /restricting the addition for royalty receivable by the assessee from Dabur International .Ltd., UAE to 2% on total FOB sales in place of royalty @ 3% of FOB sales as determined by the TPO. 5. On the fact and in the circumstances of the case the CIT (A) has erred in restricting the addition for royalty receivable, by the assessee from Dabur Nepal Pvt. Ltd., to 2% on total FOB sales in place of royalty @ 7.5% of FOB sales as determined by the TPO. 6. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 70,49,000/- and directing the AO to re-compute the deduction u/s 801B and 80IC of the Act without further allocation of the head office & other expenses to various units eligible for such deduction. 7. On the fact and .in the circumstances of the ease the C1T (A) has erred in the addition of Rs. 4,09,871/- in respect of belated payment of employees contribution to ESI which was treated as income u/s 36(l)(va) of the Act read with section 2(24)(x) of the Act. 8. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the disallowance of Rs. 1,57,45,700/- made u/s 14A of the Act read with rule 8D of the Rules. 9. On the fact and in the circumstances of the case the CIT (A) has erred in directing the AO to allow depreciation @ 25% of the goodwill which was not shown by the assessee as its assets. 10. The appellant craves leave, to add. alter or amend any ground of appeal raised above at the time of the hearing.”

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rate of 2% is further enhanced by 200 basis points being the adjustment for the risk that the assessee is bearing. Detailed discussion in this regard has been done in the preceding paragraph. The working of the Corporate Guarantee charges is made as below: Value of Bank Guarantee Rs. 802.40 Lacks Charges @4.00% as discussed above Rs. 3,209,600 I therefore determine the arm’s length price of providing the services by the assessee in the shape of bank guarantee to AE at Rs. 3,209,600/-. An upward adjustment of Rs. 3,209,600/- is made on this account. Since the assessee has not charged any amount on account of providing the guarantee, the amount of Rs. 3,209,600/- is more than 5% of the value of international transaction.”

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would have availed at varying terms had the corporate guarantee was not provided by the appellant. Even otherwise, the Appellant would not have provided corporate guarantee to an unrelated person without charging service fee. Thus, the point that the foreign AE had implicitly received benefit by parent company’s corporate guarantee cannot be denied. Moreover, in case of Bharti Airtel Ltd., the corporate guarantee was not activated which essentially means that corporate guarantee was non-existent. Thus, proposition laid down in Bharti Airtel case is not applicable to present case as essential facts are distinguishable. Now, the definition of international transaction given in section 92B r.w. explanation (i) (c) categorically includes ‘guarantee’ as one of means of capital financing. Therefore, guarantee in context of international transaction means providing of non funding support tc the other person whether there is a cost or not to be incurred by the guarantor. The feet that the guarantor took a risk in proving such a guarantee cannot be totally overlooked. Given the risk, there is possibility of impact on profit, losses, assets or liabilities of guarantor. No person will assume this risk without being adequately secured and demanding some form of return. Accordingly, I hold that issuance of corporate guarantee is an international transaction and ALP is required to be computed u/s 92. 6.2 It now clearly emerges that providing guarantee is an international transaction and it needs to be benchmarked as per provisions of section 92(1). The Appellant had charged NIL rate for providing the corporate guarantee and in its TP study report, has justified arm’s length compliance by following TNMM. The appellant has taken a position that provision of corporate guarantee is integral part of sale transactions and hence it need not be separately benchmarked However, the appellant has not explained how this transaction of providing corporate guarantee is part and parcel of sales transactions, I therefore, do not agree with such approach of the appellant because provision of corporate guarantee is not at all linked with sales transactions and it being an independent transaction, can not be clubbed with sale transactions and need to be benchmarked separately. The TPO has rejected approach of the appellant and has applied CUP as most appropriate method. The TPO has gathered information from bank (SBI) regarding bank guarantee commission charged by the bank. The TPO has taken mean of rate of bank guarantee charged by SBI (2.75%) as per information obtained u/s 133(6) and rate of bank guarantee actually charged by HSBC (1.25%) from the appellant. To the average rate of 2%, TPO further added 200 basis points to account for risks assumed by the appellant. Accordingly, TPO worked out ALP of corporate guarantee @ 4%. Even the approach followed by TPO does not appear to be quite reasonable. Strictest comparability norms as required for applying CUP have not been satisfied. In present case, the appellant has given corporate guarantee to a foreign bank for providing loan to its foreign AE in foreign currency. The situation adopted by the TPO in CUP method is of Indian bank giving guarantee in India for amount in INR. Bank guarantee and corporate guarantee are also not identical instruments. In corporate guarantee,

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primary liability is of borrower and liability of guarantor arises only in case of default on part of borrower. In case of bank guarantee, liability is only of the person who has obtained bank guarantee. Moreover, in present case, concerned banks HSBC Bank Egypt and NABIL bank Nepal whereas TPO has used data obtained from SBI and HSBC India and it is very likely that rates charged by the banks are quite different. 6.3 To support its contention for lower charge of corporate guarantee fees, the Appellant has submitted information obtained from foreign banks. The Appellant submitted that letters from the banks (HSBC Egypt and NABIL, NEPAL) reveal as to what tangible benefit was derived by the Overseas AEs out of corporate guarantee provided by the appellant. As per the letter from NABIL Nepal, there was no interest saving in case of Dabur Nepal and hence there cannot be allegation of service fees towards corporate guarantee. As regards, Dabur Egypt a savings of 0.60% is obtained from EGP Loan of 3550000/- and a miniscule interest savings for UDS loan of 473000. The appellant contended that the entire interest savings cannot be solely attributed as service fee due from its overseas AEs because oversee AEs do have their own credit rating and negotiating power with the banks. 6.4 I have carefully examined the submission of the Appellant and other evidences placed on record. As regards Dabur Nepal, NABIL Bank stated that it would not have charged any extra interest with or without corporate guarantee. This is evidence directly from the bank concerned and hence cannot be ignored. Further, it has been noted that corporate guarantee has been released on 27th July 2006. This means that corporate guarantee provided by the appellant remained in operation only for four months period comprised in FY under consideration. Hence, with respect to Dabur Nepal, I hold that no service fees towards corporate guarantee can be charged. Hence, I direct the AO to delete the additions made on account of corporate guarantee in case of Dabur Nepal. 6.5 In case of Dabur Egypt, the letter from HSBC Bank states the loan facility was available to Dabur Egypt at a rate of 11.90% for Egyptian loan with corporate guarantee versus 12.50% without corporate guarantee. However, it is noted that rates as mentioned by the bank pertain to the period of December 2011 when Dabur Egypt requested for release of corporate guarantee The bank has itself mentioned that rates have undergone change several times during the prevalent period. This means that differential of 0.6% interest rate cannot be as such applied to, the period under consideration. In the absence of exact information for the relevant period, it would be reasonable to consider differential of 1.0% which could be attributed to provision of corporate guarantee by the appellant Further, as contended by the Appellant, the difference of 1.0% cannot be solely attributed as service fee due to Appellant. This is because some degree of bargaining between parties always remains in the trade and accordingly a split of 50:50 seems more

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appropriate. In light of the same, I hold that 0.50% should have been charged as service fee for the corporate guarantee given by the Appellant to Dabur Egypt and this shall be in line with various judicial decisions referred supra on the issue. I, accordingly direct the AO to recompute the ALP for corporate guarantee fee as per directions given above. The grounds of appeal are partly allowed.”

(a) The loans obtained by the foreign associated enterprises of the assessee were secured loans having a charge against the assets of AEs and other collateral offered by AEs. (b) The assessee had given corporate guarantee on behalf of AEs only to provide an additional cover against the loans obtained (c) Given the strong financial position of AEs and future projections, on the basis of which loans were sanctioned by foreign bank, there was not even a minimal chance of default on part of AEs, even in the absence of corporate guarantee. (d) No cost was incurred by the assessee for providing corporate guarantee to foreign banks and accordingly, no service fee was charged from the AEs. (e) To avoid any risk involved, the corporate guarantee provided by the assessee was further secured by way of back to back guarantee in case of default in loan repayment by foreign AEs to the foreign banks. Besides, the back to back

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guarantee, the assessee also reserved the right to receive interest for period of default in excess of 2% of prevailing bank interest. (f) Loan advanced by the bank to AEs was not on the basis of corporate guarantee given by the assessee to the bank. Further, the AE got no significant advantage of lower rate of interest from bank if assumption of benefit of corporate guarantee is considered. The loan given by bank was on pure financial consideration of the AE concerned. The bank has secured the loan by way of charge of assets of the borrower. He accordingly submitted that no service fee was charged by the assessee from its AEs on account of issue of corporate guarantee.

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guarantee and the incremental risk that the guarantor incurs in providing the guarantee. However, the entire savings may not be passed on to the guarantor since, the borrower in such a case will not have any incentive to ask for a guarantee if it does not receive any benefit. He submitted that during the financial year 2006- 07, the assessee had provided corporate guarantee on behalf of its AEs. To evaluate whether a guarantee fee is chargeable by the assessee to its associated enterprises, one may apply the yield approach.

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attributed to corporate guarantee issued by the assessee on behalf of Dabur Nepal Pvt. Ltd.

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CIT(A) in charging service fee at an ad hoc rate of 0.5% should be reversed and may be restricted to 0.30%.

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21.1. So far as the guarantee issued on behalf of Dabur Egypt Ltd., Egypt is concerned, although the ld.CIT(A) appreciated that interest savings on account of corporate guarantee was restricted to 0.60% only, but, proceeded to consider an ad

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hoc rate of 1% towards corporate guarantee out of which 50% was attributed towards service fee. Accordingly, he determined the service fee on account of corporate guarantee at 0.50% as against 4% adopted by the TPO and deleted the balance addition made by the AO. It is the submission of the ld. Counsel that no cost or expenses have been incurred by the assessee for issue of corporate guarantee in favour of its AEs. It is also his submission that the loans obtained for the foreign AEs of the assessee were secured loans having a charge against the assets of the AEs and other collaterals offered by AEs. The assessee had given corporate guarantee on behalf of AEs only to provide an additional cover against the loans obtained and, therefore, no addition is called for.

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Under these circumstances, we find no infirmity in the order of the ld.CIT(A) that in absence of any savings/benefit no service fee could be attributed to corporate guarantee issued by the assessee on behalf of Dabur Nepal Pvt. Ltd.

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0.30% in respect of corporate guarantee issued to Dabur Egypt Ltd., as against 0.5% held by the CIT(A). Thus, the ground raised by the Revenue on this issue is dismissed and the ground raised by the assessee is partly allowed.

25.1 The TPO referred to the agreement entered into by the assessee with its AEs for receipt of royalty. On being confronted by the AO regarding non-charging of any royalty from its AEs, the assessee submitted its objections which the TPO has summarized and which are as under:-

• The assessee does not have any contractual obligation to receive the royalty.

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• The agreement with Dabur Nepal has been terminated in May, 2005 and hence Dabur Nepal is under no obligation to pay the royalty. • The agreement with Dabur International, UAE has expired in April, 2005 and hence Dabur International is under no obligation to pay the royalty. • Since there is no contractual obligation, no royalty can be received from the AEs. The assessee has placed reliance on the decision of High Court of Delhi in the case of Maruti Suzuki India Limited. • The AEs are developing marketing intangible by way of extensive advertisement By virtue of spending huge money on advertisement and publicity the AEs are directly or indirectly promoting the brand name of the assessee. The assessee has placed reliance on the decision of High Court of Delhi in the case of Maruti Suzuki India Limited. • It has been argued that the foreign AEs are not directly benefited by the use of Dabur brand and hence there is no justification of as to payment of royalty by the AEs. • Had the AEs not been promoting the brand name of Dabur, the assessee company would have incurred substantial amount on advertisement as compared to the notional royalty receivable from the AEs.

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assessee without any compensation. He, therefore, computed the arm’s length price of the royalty for use of the brand name on the basis of the data available. From the details furnished by the assessee regarding the value of sales made to the AEs, the TPO computed the arm’s length price of the royalty at Rs.266.67 lakhs the details of which are as under:- Company FOB Sales Royalty Royalty shown Difference Rs. in Lakhs Rs. in Lakhs in the books of Rs. in Lakhs accounts Dabur Nepal (P) Ltd Nepal 2148 161.10 NIL 161.10 Dabur International UAE 1129 33.87 NIL 33.87 . Asian Consumer Care Limited 1195 71.70 NIL 71.70 266.67 266.67

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the purposes of transfer pricing. It was argued that the AO/TPO, without going into the merits of this year’s case, proceeded to make adjustment on the basis of previous year. It was brought to the notice of the ld. CIT(A) that his predecessor has decided the issue partly in favour of the assessee and allowed relief the details of which are as follows:

S. Name of AE Rate levied by TPO in Rate as per CIT(A) order No. order of AY 2007-08 of AY 2006-07 1. Dabur Nepal P Ltd 7.50% 2% 2. Dabur International Ltd 3% 2% 3. Asian Consumer Care 6% Not Applicable Limited, Bangladesh

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and in some cases, even the raw material is different. Further, most of the products manufactured in UAE are manufactured without technical support from India. Accordingly, he reduced the rate of royalty (i.e., 3%) charged by the TPO to 2% and restricted the arm’s length price adjustment at Rs.22.58 lakhs. So far as Dabur Nepal Pvt. Ltd., Nepal is concerned, he observed that (a) Rate of 3% is mentioned in the amended agreement; and (b) the assessee could not meet its obligation to bear entire marketing expenses and therefore, Dabur Nepal Pvt. Ltd, Nepal did not pay any royalty. He accordingly applied the same rate of royalty of 2% as in case of Dabur International Ltd, UAE and restricted the arm’s length price from Dabur Nepal Pvt. Ltd. at Rs.42.96 lakhs. So far as Asian Consumer Care Pvt. Ltd., Bangladesh is concerned, the CIT(A) observed that (a) no evidence has been furnished by the assessee to demonstrate that no technology was provided to Asian Consumer Care Pvt. Ltd.; and (b) the associated enterprise has continued to use the brand name of Dabur. He accordingly applied the same rate of royalty of 2% as applied in case of Dabur Nepal Pvt. Ltd. and Dabur International Ltd, UAE and restricted the arm’s length price from Asian Consumer Care Pvt. Ltd. at Rs.23.90 lakhs.

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of brand ‘Dabur’ and other sub-category brands like 'Vatika’, ‘Hajmola’ etc. Overseas AE’s of the appellant had been using Dabur India’s trademarks and trade names. Upto FY 2004-05, the appellant was getting royalty payments from its AE’s, whereas during FY 2006-07, appellant did not receive any royalty. 12.2 The case of the appellant is that the agreements under which royalty was received in earlier period were no longer in existence. Moreover, the overseas AE’s are incurring substantial expenses for brand promotion in their respective territories and therefore there is no payment of royalty. In order u/s 92CA(3), the TPO computed arm’s length price of royalty as under: Rs.in lakhs Name of AE FOB Rate of Royalty Royalty Difference Sales Royalty shown in books Dabur Nepal (P) Ltd. 2148 7.5% NIL 161.10 161.10 Nepal 1129 3.0% 33.87 NIL 33.87 Dabur International Ltd UAE Asian Consumer Care 1195 6% 71.70 NIL 71.70 Limited Adjustment 266.67

12.3 The TPO computed arm’s length royalty by applying rate of royalty as mentioned in agreement dated 05.11.1992 with Dabur Nepal (P) Ltd., Nepal and dated 01.04.2003 with Dabur International Ltd., UAE and dated 01.02.1993 with Asian Consumer Care (P) Limited Bangladesh. 12.4 The contentions of the appellant have been duly considered. The simple fact is that the appellant has allowed it AE in Nepal, UAE and Bangladesh to use its brand name but no royalty has been charged from them. This cannot be the situation in case of transaction between independent parties. This is an international transaction the price of which is to be determined u per transfer pricing regulation u/s 92 of the Act. In present case, the appellant has taken price of the said international transaction at Nil. But according to section 92(1), income arising from such international transaction has to be computed having regards to arm’s length price. Whether there is any contractual basis of receipt of royalty income or nor is not relevant for computing income arising from such international transaction having regards to arm’s length price. As in the present case, if there no agreement to get any royalty income in return for permitting the use of brand name, it does not mean that transfer pricing regulation shall not apply. Therefore, quantum of income arising from an international transaction has to be computed having regards to arm’s length price and it does not depend upon existence or otherwise of agreement to get royalty income. Hence contention of the appellant that in absence of an 24

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operative agreement for getting royalty income, a notional royalty cannot be assessed under TP regulations is not legally tenable. 12.5 Undisputedly, Dabur India is legal owner of brand name ‘Dabur’ and other sub-brands and Dabur Nepal, Dabur UAE and Dabur Bangladesh which are AEs of Dabur India have been permitted by Dabur India to use its brand names. The appellant has contended that Dabur Nepal, Dabur UAE and Dabur Bangladesh have spent significant AMP expenses (advertisement, marketing and promotional expenses) and therefore ‘Dabur’ brand is being built up in foreign territories by the efforts of AEs of the appellant and hence in fact AEs are providing service to the appellant for which AEs need to be remunerated. However, no remuneration for such services is being given to AEs and accordingly no royalty is being charged from them because if such remuneration is taken into account, it will exceed the royalty chargeable and hence income of the appellant shall further go down. The appellant has further argued that even otherwise, the value of brand ‘Dabur’ is not very significant as no state of art technology is involved in manufacturing process of products involved. These contentions of the appellant have been duly considered. Firstly, it cannot be said that value of brand ‘Dabur’ is Nil as no royalty has been accounted for by the appellant. There must be some value of the brand for which royalty income has to be determined having regards to arm’s length price. Secondly, the appellant has not established that AE in Nepal, UAE and Bangladesh are incurring abnormal AMP expenses which exceed ‘Bright Line Test’. The appellant has not established its view by giving figures of AMP in case of comparables operating in respective geographical locations. The appellant has not established that tax authorities of Nepal, UAE and Bangladesh have held such AMP expenses as exceeding bright line. Upto AY 2005-06, the appellant has been receiving royalty income from its AEs. The appellant could not establish that after AY 2005-06, its AMP expenses have decreased and AMP expenses of its AEs have increased substantially which may point towards appellant’s case that its AEs are doing brand building efforts and hence providing service to it. Therefore, appellant’s contention that ratio of recent decision of Hon’ble Delhi ITAT in case of LG Electronics India Pvt. Ltd. (ITA No. 5140/Del/2011) is applicable in its case is not factually and legally tenable. The appellant has further argued that foreign AEs did not derive any benefit by use its trade mark/trade name. This contention of the appellant is superfluous as AEs could be the best judge to decide whether they need support of Dabur Logo or not. If they are not befitted by the arrangement, nobody is forcing them to continue with it. 12.6 Now the question arises what should be the quantum of royalty having regards to arm’s length price. The appellant has not provided any comparables so as to justify its nil royalty income. The TPO has relied upon royalty agreements entered into by the appellant with its AEs to arrive at arm length price. The reasoning given by TPO is two fold. Firstly, royalty agreements under which the appellant had been received royalty income upto AY 2005-06

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are operative during the year under consideration as there is no evidence that these agreements have been terminated. Secondly, without prejudice, even if it is assumed that these agreements are not operative during period under consideration, royalty chargeable as per these agreements represents arm’s length price as per TP regulations. In view of various contentions of the appellant and reasoning given-by TPO, royalty issue in respect of both AEs involved is being discussed in following paragraphs. 12.7 Dabur International Ltd., UAE The appellant has entered into an agreement dated 01.04.2003 with Redrock Ltd (presently Dabur International Ltd.) which inter-alia provided for technical and R&D support, know-how, information, operational improvements and skills in area of cost management, manufacturing, production procurement, sale marketing and distribution of products. It also permitted Redrock to use Dabur logo on both products manufactured by using Dabur’s technology and know-how and also products manufactured by its without Dabur’s know-how. As per clause 4 of the agreement, Dabur India Ltd. is entitled to royalty of 3% of FOB sales of Redrock of Dabur branded products which are manufactured using Dabur’s know how and 1% of FOB sales of Dabur branded products manufactured without using technical and R&D support from Dabur. Based on this, the TPO has computed royalty chargeable from Dabur International Ltd. @ 3% of sales while the appellant has not declared any royalty income, The appellant has contended that w.e.f. 01,04,2005, this agreement has been terminated and has furnished letters dated 07.04.2005 and 01.02.2013. the appellant has further contended that Dabur International was not sourcing any technical knowhow from Dabur India for its products manufactured in UAE and has furnished letters dated 18.07,2011 and 20.07.2011 which state that products manufactured by Dabur International Ltd in UAE are different from those manufactured in India and no technical support from Dabur India is being taken for the purpose. 12.7.1 The applicant has argued that agreement with Dabur International has become inoperative w.e.f. 01.04.2005 and hence there was no obligation on part of Dabur International to pay royalty. As discussed supra, since income arising from international transaction has to be determined having regards to arm’s length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur International Ltd, has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto AY 2005-06. The TPO has adopted said agreement dated 01.04.2003 as basis for arm’s length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct is adopting 3% rate of royalty chargeable

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from Dabur International Limited. Clause 4 of said agreement is reproduced as under:- “ In consideration for due discharge by Dabur of its obligations hereunder and use of its trademark/trade name, Dabur is entitled during terms of agreement to a royalty of: (a) 3% of FOB sales ( net of taxes and sales return ) of Redrock of Dabur branded products which are developed and marketed by Redrock through technical and R& D support from Dabur and which are manufactured in accordance with technical specifications detailed by Dabur (b) 1% of FOB sales (net of taxes and sales return) of Redrock of Dabur branded products which are developed by Redrock from any other party without any technical and R & D support from Dabur.” 12.7.2 The appellant has argued that since Dabur International Ltd. had not sourced any technical support from Dabur India, clause (a) above shall not apply. This contention of the appellant can not be brushed aside completely in view of letters furnished by the appellant mentioned supra. The Ld TPO has also mentioned this fact in para 15.7 and 15.8 of TPO’s order. However, the Ld TPO worked out the royalty @ 3% of FOB sales assuming that technology was also provided. However, considering the evidence furnished by the appellant, it is seen that products manufactured by Dabur International in UAE are different from those manufactured in India and in case of same name of products, it has been shown that oil base (raw material) is different from those products manufactured in India. Therefore, it can be safely inferred that most of the products if not all, manufactured in UAE are being manufacture without technical support from Dabur India. In view of this, there shall be a portion of FOB sale on which royalty become payable @3 % and another substantial portion of FOB sales on which royalty' shall become payable @ 1%. In view of these facts, it shall be more realistic and reasonable if royalty payable is worked out @ 2% on total FOB sales ie. Average rate. Accordingly, I hold that arm’s length price of royalty from Dabur International is Rs.22.58 lakhs. The AO is directed to give relief to the appellant on this account accordingly. 12.8 Dabur Nepal Pvt. Ltd., Nepal 12.8.1 The appellant has entered into an agreement dated 05.11.1992 with Dabur Nepal Pvt Ltd., clause 3 of which is reproduced as below: “That as Dabur is allowing DNPL to use its trademarks for sale of products in Nepal, India and other third countries and also entire marketing expenses including salaries and allowances of sales personnel would be borne by Dabur, DNPL will pay to Dabur inform of royalty @7.5% of net sales. ”

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Based on this, the TPO has computed royalty chargeable from Dabur Nepal @ 7.5% of sales while the appellant has declared royally income of Rs. NIL. The appellant has contended that w.e.f. 01.04.2005, this agreement has ceased to be operative and has furnished letters dated May, 2005 and 05.02.2013 in support. The appellant has contended that TPO has wrongly applied rate of 7.5% as mentioned in agreement dated 05.11.1992 while that agreement was amended and rate of royalty was changed to 3% w.e.f. 01.04.2004. The appellant has furnished copy of amended agreement in which only rate of royalty has been changed to 3% while rest of the terms remained the same. 12.8.2 As discussed supra, since income arising from international transaction has to be determined having regards to arm’s length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur Nepal has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto AY 2005-06. The TPO has treated said agreement dated 05.11.1992 as basis for arm’s length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct in adopting 7.5% rate of royalty chargeable from Dabur Nepal. The approach of TPO in relying upon agreement dated 05.11.1992 and not considering amended agreement dated 01.04.2004 is fallacious as contemporaneous material/document should have been considered instead of document which is remote in time. Accordingly, TPO is not correct in applying rate of 7.5% and ignoring rate of 3% as mentioned in amended agreement. 12.8.3 Further, appellant has argued that as per clause 3 of the agreement, Dabur India was under obligation to bear entire marketing expenses including salaries and allowances of sales personnel. However, Dabur India could not meet with its obligations and hence Dabur Nepal did not pay any royalty. This contention of the appellant carries some weight as rate of royalty might have been fixed after considering reimbursement of marketing expenses by Dabur India. The TPO has not established that this contention of the appellant is factually incorrect 12.8.4 Considering the contentions of the appellant that it had not met with obligations cast upon it under clause 3 of the agreement, it would not prudent to apply rate of 3% as mentioned in amended agreement to work out royalty chargeable. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur Nepal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm’s length price in respect of Dabur

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International. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm’s length price in respect of Dabur Nepal also and this would take care of non¬discharge of obligations on part of the appellant. In this manner, royalty chargeable from Dabur Nepal comes out to be Rs.42.96 lakhs. The AO is therefore, directed to give relief on this account accordingly. 12.9 Asian Consumer Care Pvt Ltd, Bangladesh 12.9.1 The Appellant contends that in case of Dabur Bangladesh, the agreement was valid for 2 years and expired in 2005. From 01-04-20005, the appellant did not renew the agreement but an amendment was made with a condition that royalty will be revised to 2% for composite usage of Trademark and technical know-how provided by the Appellant to Bangladesh. Further Bangladesh will pay 1% technical know-how royalty to the Appellant and no trade mark royalty will be payable if Bangladesh was to incur 8% of AMP spent on sales. However, it seems from the contention of the Appellant that even this was not acted upon from 01-04-2005. However, composite royalty rates were brought down to 2% from 6% w.e.f. 01-04-2005. The Appellant contends that even if royalty rate is to be used, the rate should be zero has Bangladesh was spending significant AMP exceeding 8% of sales and finding difficult to survive in the completive environment. As per the TPO, the Appellant has not shown any evidence that the agreement is not in force or any amendment thereafter. In fact till last year, royalty was being received from the AE. This year also there were transactions with the AE. It has not been the claim of the assessee that the AE has stopped the use of trade marks which are owned by the assessee. 12.9.2 Based on this, the TPO has computed royalty chargeable from Dabur Bangladesh @ 6% of sales while the appellant has declared royalty income of Rs. NIL. Before me the the appellant has contended that w.e.f. 01.04.2005, the agreement was not renewed and that the amended agreement of 01-04-2005 was not acted upon as the original agreement was not renewed. 12.9.3 As discussed supra, since income arising from international transaction has to be determined having regards to arm’s length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur Bangladesh has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto AY 2006-07. The TPO has treated said agreement dated December 2003 as basis for arm’s length price in the absence of any comparable provided by the appellant Now the issue is whether TPO is correct in adopting 6% rate of royalty chargeable from Dabur Bangladesh. The approach of TPO in relying upon agreement dated December 2003 and not considering amended agreement dated 01.04.2005 is fallacious as

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contemporaneous material/document should have been considered instead of document which is remote in time. Accordingly, TPO is not correct in applying rate of 6% and ignoring rate of 2% as mentioned in amended agreement. 12.9.4 Further, appellant has argued that as per amended agreement, there should not be any charge of trademark royalty as Dabur Bangladesh has incurred more than 8% of AMP on sales as a pre requisite. Besides this the Appellant contends that no technology has been provided by them to Bangladesh. However, no cogent evidence has been produced by the Appellant that no technology was provided by them after 01-04-2005. The contentions of the Appellant that agreement was not in force after 01-04-2005 and hence no technology could have been provided has not been clearly established. However, a fact remains that Dabur logo was continued to be used by Dabur Bangladesh even after termination of agreement post 2005. 12.9.5 In view even if Dabur Bangladesh was incurring AMP in excess of 8% of sales, a bright line test need to be demonstrated to show the benefit availed by the appellant. Hence the contention that no royalty should be charged in not tenable. With regards to technology, no concrete evidence has been furnished to show the claim that no technology is received by Bangladesh. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur Nepal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm’s length price in respect of Dabur International and Dabur Nepal. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm’s length price in respect of Dabur Bangladesh. In this manner, royalty chargeable from Dabur Bangladesh comes out to be Rs.23.90 iakhs. The AO is therefore, directed to give relief on this account accordingly.”

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from its associated enterprises in the relevant assessment year and the transfer pricing adjustment has been made merely on notional basis.

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b) That the assessee will assist in recruitment of specialized personnel to train and impart information on technical know-how and marketing of produce to personnel at its production works in India and for which Dabur shall not charge any fee; c) That the entire marketing expenses including salaries and allowances of sales personnel would be borne by the assessee. In consideration of such expenses being borne by the assessee, Dabur Nepal agreed to pay royalty @ 7.5% of its net sale.

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Nepal to use logo of ‘Dabur’ upon condition that the company will promote ‘Dabur’ trademark on its own cost and as per the standard norms of the assessee relating to quality of product and other specified conditions. He accordingly submitted that during the assessment year 2007-08, the marketing agreements on the basis of which royalty was payable, was not in existence and thus, the assessee had not incurred any expenditure on account of the same in year under consideration.

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e) The assessee along with Dabur Foods Ltd, India was purchasing 72% of the products manufactured by M/s Dabur Nepal Pvt. Ltd., the details of which are tabulated as under: Particulars Amount (in Nepal Rs. Lakhs) Sales to Dabur India Ltd. 11,004.83 Sales to Dabur Foods Ltd., India (Related party) 14,224.82 Total sales to group companies in India 25,229.65 Total sales of Dabur Nepal 35,181.11 % of sales to Indian group companies 72%

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of the assessee wherein the Tribunal held that no royalty was payable to the assessee by M/s Dabur Nepal (P) Ltd. and deleted the addition made by the TPO/CIT(A) the relevant part of which is as per para 36 of the order. He accordingly submitted that in view of the decision of the Tribunal in assessee’s own case, the action of the CIT(A) holding that the royalty @2% has to be charged from Dabur Nepal (P) Ltd., is not sustainable and addition sustained by CIT(A) is liable to be deleted.

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b) Dabur International will be entitled to use the trade mark of ‘Dabur’ in relation to products which are manufactured through technical and R&D support from the assessee. c) In consideration, the assessee would be entitled to royalty as follows: a. 3% of FOB Sales of Dabur branded products which are developed and marketed by Dabur International through technical and R&D support from the assessee and which are manufactured in accordance with technical specifications detailed by the assessee; b. 1% of FOB Sales of Dabur branded products which are developed by Dabur International from any other party without any technical and R&D support from the assessee.

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‘Dabur’ trademark on its own cost and as per the standard norms of the assessee relating to quality of product and other specified conditions.

a) The assessee was having 100% ownership in Dabur International, directly/indirectly and thus, it could not have received any royalty from itself. b) The agreement was not renewed by Dabur International in the year 2005 and the same was defunct in the financial year 2006-07. Thus, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from Dabur Dubai. c) Products manufactured by Dabur Dubai were totally different from the products manufactured in India by the assessee and so much so even in the case of some of the products having identical name, the raw material and medium used in the manufacture were totally different from the raw material and medium used in India. Thus, merely on the basis of trade name of ‘Dabur', the products manufactured by Dabur International were not accepted in UAE and that it had to manufacture the products as per the local needs and taste of the public residing in the public area of UAE. 37

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d) In order to penetrate UAE market, Dabur International adopted its own market strategy and had made all the efforts for the establishment of "Dabur" name in the UAE which was very little known in that geographical area and incurred lot of expenses on advertisement and market establishment and had borne all the risks of market, manufacture and finance which is evident from letters dated 18.07.2011 and 20.07.2011 issued by Dabur International. e) The assessee had neither made any efforts in establishing the trade name in UAE nor had made any contribution to Dabur International. Thus, Dabur International had not renewed the royalty agreement because the assessee was not willing to undertake any risk/obligation/responsibility. f) On application of FAR analysis and considering substantial marketing expenses incurred by Dabur International, there was no ground for recovery of royalty which has been appreciated by the ld. CIT(A) at page 33 and 33 of his order.

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with their own technology as per the requirement and considering the taste of local public. Thus, no technical know-how of the assessee was utilized by Dabur International.

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royalty that would have been received by the assessee. For the above proposition he drew the attention of the Bench to the analysis of AMP spent by Dabur Dubai which is as under:- S. No. Financial AMP % of AMP to year Sales (in (in Sales lakhs) lakhs) 2004-05 5427 631 11.62% 1. 2. 2005-06 7643 1416 18% 3. 2006-07 11425 2298 20% 4. 2007-08 14926 2241 15% 5. 2008-09 21728 2918 13.5% 2009-10 27474 5740 21% 6. 7. 2010-11 34540 10524 30% 8. 2011-12 49823 14284 29%

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but simply made the adjustment in respect of royalty based on the earlier agreement which had already expired. He submitted that no notional royalty ought to be imputed in the income of the assessee merely on the basis of the defunct royalty agreement dated 01.04.2003 and in the absence of any evidence of provision of any services technical or otherwise, by the assessee to its associated enterprise. He accordingly submitted that addition on account royalty sustained by CIT(A) is liable to be deleted in toto.

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d) Dabur Dubai had not manufactured any products with the technical know-how and R&D support of the assessee but had manufactured on its own, in accordance with the requirement and local taste of the local public; e) Income arising from an international transaction shall be computed having regard to the arm's length price which shall be determined as per provisions of Section 92 and section 92C of the Act; f) As per the provisions of section 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, for the purpose of making transfer pricing adjustments, the ami’s length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities; g) The lower authorities have not applied any transfer pricing method as prescribed under the Act and simply made the adjustment in respect of royalty based on the earlier agreements which had already expired and there was no new agreement between the assessee and its AEs.”

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by Dabur International; and (d) no expenses incurred by Dabur International for brand building were reimbursed/borne by the assessee, but proceeded to impute ad- hoc royalty rate of 0.75%, without giving any basis or calculation for applying such rate. Further, the Tribunal failed to appreciate that “Dabur” was not used as a brand name for the products, but it merely represented ownership title and nothing more.

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international transaction by applying one of the prescribed methods and on the basis of Rules provided for each of the methods.

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(xv) Ericsson India Private Ltd. (ITA No.5141/Del./2011) (xvi) SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2010)

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overseas entity without any charge. He submitted that “Dabur” was mentioned by the subsidiary only as a recognition of ownership of the company and not as a brand outside India. Secondly, huge advertisement expenditure was incurred by the subsidiary outside India and therefore, there was no warrant to justify charging of any further fee.

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International has gained/acquired economic ownership of the brand ‘Dabur’ in UAE.

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and healthcare products in Bangladesh. The salient features of the agreement are as follows: • The agreement was entered into to provide trademark of ‘Dabur’ for use to ACCPL. • The agreement was for a period of 2 years [Refer clause 3 of the agreement], • ACCPL have to pay royalty to the assessee at the rate of 6% of FOB sales (net of taxes and sales return) which were developed and marketed by ACCPL using technical know-how and R&D support of the assessee. Referring to page 39 of the paper book, he submitted that the aforesaid agreement was amended with effect from 01.04.2005 wherein it was provided that no trademark royalty will be payable to the assessee where ACCPL incurs cost of advertisement, marketing and promotion (AMP Expenses) in excess of 8 percent on sales every year. He submitted that till December, 2005, ACCPL was using the technical knowhow of the assesse to manufacture its products. However, the said products so manufactured did not meet the expectations of Bangladesh market. Accordingly, after 2006, ACCPL started using technical know-how of Dabur International, which was able to cater to the needs of people of Dubai. Accordingly, during the assessment year 2007-08, there was no agreement in existence with ACCPL and the said company was, in fact, using the technical know of Dabur International. He accordingly submitted that no royalty was received by the assesse during the year under consideration due to the following reasons:

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a) The assessee was having 100% ownership in ACCPL, directly/indirectly and thus, it could not have received any royalty from itself. b) The agreement with ACCPL became defunct in December, 2005 and the same was not renewed thereafter. Thus, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from ACCPL. c) Products manufactured by ACCPL using technical knowhow of the assessee did not meet the requirements of customers in Bangladesh. Accordingly, after 2006, ACCPL entered into an agreement with Dabur Dubai to provide technical know. d) Merely on the basis of trade name of “Dabur” the products manufactured by ACCPL were not accepted in Bangladesh and that it had to manufacture the products as per the local needs and taste of the public residing in the public area. e) In order to penetrate Bangladesh market, ACCPL adopted its own market strategy and had made all the efforts for the establishment of "Dabur" name in Bangladesh which was very little known in that geographical area and incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. f) The assessee had neither made any efforts in establishing the trade name in Bangladesh nor had made any contribution towards the same to ACCPL.

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and making efforts had become the economic owner of the mark in commercial sense for that area. Further, the TPO/AO had not applied any Transfer Pricing method as prescribed under the Act, but simply made the adjustment in respect of royalty based on the earlier agreement which had already expired. He accordingly submitted that no notional royalty ought to be imputed in the income of the assessee merely on the basis of the defunct royalty agreement dated 01.12.2003 and in the absence of any evidence of provision of any services technical or otherwise, by the assessee to its associated enterprise.

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S. No. Financial Sales (in % of AMP to Sales year lakhs) AMP (in lakhs) 2004-05 998.81 118.63 11.88% 1. 2005-06 1438.89 164.92 11.46% 2. 3. 2006-07 1335.93 195.13 14.60% 4. 2007-08 988.32 182.63 18.42% 5. 2008-09 1548.18 269.82 17.37%

S.No . FAR Points Dabur India Dabur Dubai Who is the legal owner of 1. brand Yes No Who incurs the cost of Yes No 2. registration and renewal cost 3. Who decides what products No Yes to be launched in overseas 53

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market 4. Who forms marketing No Yes strategy for brand promotion in overseas market 5. Who decides on sales No Yes strategy

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c) Asian Consumer Care Pvt. Ltd., Bangladesh.

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has to be assessed under section 92 of the Act. However, the CIT(A) reduced such calculation of royalty.

81.1. So far as Asian Consumer Care Pvt. Ltd., Bangladesh is concerned, the ld. CIT(A) observed that no evidence has been furnished by the assessee to demonstrate that no technology was provided to Asian Consumer Care Pvt. Ltd.; and the associated enterprises have continued to use the brand name of ‘Dabur.’ Accordingly, he applied the same rate of royalty of 2% as applied in case of Dabur

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Nepal Pvt. Ltd. and Dabur International Ltd, UAE and restricted the arm’s length price from Asian Consumer Care Pvt. Ltd. at Rs.23.90 lakhs.

81.2. It is the submission of the ld. Counsel that the order of CIT(A) restricting the royalty charged at the rate of 2% is not sustainable since notional income cannot be computed under section 92 of the IT Act. It is his submission that so far as agreement with Dabur Nepal Pvt. Ltd., Nepal is concerned, the assessee is having 97.5% of shareholding in Dabur Nepal Pvt. Ltd., Nepal directly/indirectly and, thus, it could not have received any royalty from itself. It is his submission that the marketing agreement dated 05.11.1992 which was valid for a period of ten years had expired and the Nepal Government had not renewed the said agreement later on. Thus, in the absence of any legally enforceable agreement no royalty was payable by Dabur Nepal Pvt. Ltd., Nepal to the assessee. It is also his submission that since the assessee had failed to discharge its obligation to bear the marketing costs which included the advertisement and remuneration to sales personnel, the assessee does not have any right to charge any royalty from Dabur Nepal Pvt. Ltd. It is also his submission that the assessee along with Dabur Foods Ltd, India was purchasing 72% of the products manufactured by M/s Dabur Nepal Pvt. Ltd., and, therefore, no royalty could have been charged by the assessee in respect of those goods which were sold to the assessee and its group company.

81.3. So far as Dabur International Ltd., UAE is concerned, it is the submission of the ld. Counsel that no royalty could be charged from Dabur International Ltd., 57

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UAE during the year, since the assessee is having 100% ownership in Dabur International, directly/indirectly and thus, it could not have received any royalty from itself. It is the submission of the ld. Counsel that the agreement which was entered into by the assessee with M/s Redrock Ltd., Isle of Man, UK on 01.04.2003 for a period of two years had expired on 31.03.2005. The assessee in the year 2003 itself had acquired M/s Redrock Ltd. and the said company became 100% subsidiary of the assessee and name was changed to “Dabur International Ltd.” and the agreement was not renewed by Dabur International in the year 2005 and the same was defunct in the financial year 2006-07 and, therefore, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from Dabur Dubai. Further, the products manufactured by Dabur Dubai were totally different from the products manufactured in India by the assessee. In order to penetrate UAE market, Dabur International had made all the efforts for the establishment of "Dabur" name in the UAE which was very little known in that geographical area and it has incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. The assessee had neither made any efforts in establishing the trade name in UAE nor had made any contribution to Dabur International. Further, Dabur International had not renewed the royalty agreement because the assessee was not willing to undertake any risk/obligation/responsibility.

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81.4. So far as Asian Consumer Care Pvt. Ltd., Bangladesh is concerned, it is his submission that the assessee was having 100% ownership in ACCPL, directly/indirectly and thus, it could not have received any royalty from itself. The agreement with ACCPL entered on 01.12.2003 which was for a period of two years became defunct in December, 2005 as the same was not renewed thereafter. Therefore, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from ACCPL. It is his submission that products manufactured by ACCPL using technical knowhow of the assessee did not meet the requirements of customers in Bangladesh. Accordingly, after 2006, ACCPL entered into an agreement with Dabur Dubai to provide technical know. It is also his submission that merely on the basis of trade name of ‘Dabur’, the products manufactured by ACCPL were not accepted in Bangladesh and that it had to manufacture the products as per the local needs and taste of the public residing in the public area. It is also his submission that in order to penetrate the Bangladesh market, ACCPL adopted its own market strategy and had made all the efforts for the establishment of ‘Dabur’ name in the Bangladesh which was very little known in that geographical area and incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. Accordingly, the assessee had neither made any efforts in establishing the trade name in Bangladesh nor had made any contribution towards the same.

81.5 It is the submission of the ld. Counsel for the assessee that although the Tribunal in the assessment year 2006-07 has deleted the royalty from Dabur Nepal, 59

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however, had restricted such royalty from Dabur Dubai to 0.75%. According to him, such royalty at 0.75% from Dabur, Dubai is incorrect since none of the prescribed method to calculate the ALP of Royalty has been applied. Therefore, no addition on account of royalty from Dabur Dubai and Asian Consumer Care, Bangladesh can be made.

81.6 We find identical issue had come up before the Tribunal in assessee’s own case in the immediately preceding assessment year, i.e., 2006-07. We find, the Tribunal vide ITA No.3257/Del/2003 and ITA No.3492/Del/2013, order dated 12.04.2017 has thoroughly discussed the issue and has deleted the royalty receivable by the assessee from Dabur Nepal and had restricted the Royalty receivable from Dabur International Ltd., UAE at 0.75% by observing as under:-

“33. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee had not shown any receipt on account of royalty from M/s Dabur International Ltd., UAE and had shown royalty of Rs.5.34 lacs from M/s Dabur Nepal Pvt. Ltd. on the FOB sales of Rs.7526.84 lacs and Rs.3319.50 lacs respectively. The TPO worked out the royalty @ 4% of the sales in the case of Dabur International Ltd. and @ 7.5% of the sale in the case of Dabur Nepal Pvt. Ltd. The ld. CIT(A) reduced the royalty @ 2% of FOB sales. In the instant case, it is noticed that the assessee earlier entered into an agreement with M/s Redrock Ltd. who was registered in the Channel Island, U.K with its principal office at 54-58, Althol Street, Doughlas, Isle of Man, U.K. and had been manufacturing and producing various products for sale after utilizing technical information provided to it by the assessee in terms of agreements executed from time to time and lastly on 2nd day of April 2001 which had expired on 31st day of March 2003. Thereafter, another agreement was entered on 1st April 2003 which is placed at page nos. 115 to 121 of the assessee’s paper book. The said agreement was effective upto 31st March 2005 and was not renewed thereafter. The assessee entered into agreement with M/s Rodrock Ltd., UAE for providing technical information and R&D support, knowhow, information, operational improvements and skills in the areas of cost management, manufacturing, production etc. in the Territory of 60

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UAE vide agreement dated 1st April 2003 and as per the said agreement, the products were manufactured with the R&D support. However, later on the assessee acquired the controlling stake of M/s Redrock Ltd. and name changed to M/s Dabur International Ltd. UAE. In the present case, on completion of the agreement, the said company informed the assessee vide letter dated 07.04.2005 that heavy advertisement expenditure were to be incurred by them and the assessee had not agreed to reimburse such expenditure incurred, therefore, the royalty payment agreement ceased to exist w.e.f. Financial Year 2005-06. For the said proposition, both the parties agreed (copy of the said letter is placed at page no. 122 of the assessee’s paper book). So, there was no agreement for the year under consideration to make the payment of royalty as agreed in between M/s Redrock Ltd. UAE and the assessee. In the instant case, when the agreement was in existence, the assessee provided technical know- how and R&D support in respect of the products which were mainly Aurvedic medicines and Herbal products. But later on, the assessee entered into business of FMCG products and acquired M/s Redrock Ltd., UAE and also changed its name to M/s Dabur International Ltd., UAE. In the earlier year, M/s Dabur International Ltd., UAE formerly known as M/s Redrock Ltd. had paid the royalty @ 1% because no product had been manufactured with the help and support of the assessee and the agreement was only upto 31st March 2005, the payment of royalty was paid in accordance with the agreement which was in existence with the said preceding year. However, for the year under consideration, there was no such agreement and the product manufactured by M/s Dabur International Ltd., UAE were totally different from the products manufactured in India and even the raw material used in those products manufactured in UAE was different from the raw material used in India. In the present case, nothing is brought on record to substantiate that the products manufactured in UAE were with the help of technical know-how and R&D support of the assessee. On perusal of the provisions contained in Section 92 of the Act it would be clear that the income arising from an international transaction shall be computed having regard to the arm’s length price which shall be determined by any of the 5 methods prescribed in Sub-Section (1) of Section 92 of the Act which are following: “(a) Comparable and controlled price method; (b) Resale price method; (c) Cost plus method; (d) Profit split method; (e) Transactional net margin method; or such other method as may be prescribed by the Board.” 34. It is also not in dispute that for determination of the arm’s length price, the provisions contained in Sub-Section (2) of Section 92C of the Act shall be applied. The various methods has been prescribed under Rule 10B of the Income Tax Rules, 1962 to determine the arm’s length price u/s 92C of the Act and Rule 10C of Income Tax Rules, 1962 further states that in selecting

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the most appropriate method, following factors shall be taken into consideration: “(a) The specific characteristic of the property transferred or services provided in either transactions. (b) The function performed, taking into account the assets employed and the risk assumption by the respective parties to the transactions. (c) The contractual terms of the transactions which lay down explicitly or implicitly how the responses, risk and benefits are to be divided between the respective parties to the transactions. (d) Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the market, the lodge and Government orders in force, costs of labour and capital in the market, overall economic development and level of competition and whether the markets are wholesale or retail.” 35. From the co-joint reading as contemplated u/s 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, it would be clear that for the purpose of making transfer pricing adjustments, the arm’s length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities. But in the present case, no comparable case has been brought on record by the TPO or the ld. CIT(A) while making adjustment on account of royalty. Moreover, no agreement was in force to charge royalty from the AEs and that the FMCG products are new to the assessee who is known for its Herbal and Aurvedic products. In the instant case, it is not brought on record that the assessee had incurred any expenses for marketing the products manufactured by M/s Dabur International Ltd. (AE) in UAE and that the assessee either made any efforts or contributed any money for the establishment of its name in geographical area of UAE and the products manufactured by the UAE were not different from the products manufactured in India by the assessee. Moreover, the claim of the assessee that the raw material and medium used in the manufacturing at UAE was totally different from the raw material and medium used in India has not been rebutted. The products manufactured by the assessee were as per the local needs and taste of the public residing in UAE. Furthermore, the ld. CIT(A) himself admitted that M/s Dabur International Ltd., UAE had not manufactured any products with the technical know-how and R&D support of the assessee but had manufactured on its own, in accordance with the requirement and local taste of the local public, however, he directed the AO to calculate the royalty @ 2% but without any basis. In the present case, it is an admitted fact that the TPO/AO had not applied any transfer pricing method as prescribed under the Act and simply made the adjustment in respect of royalty based on the earlier agreements which had already expired and there was no new agreement between the assessee and its AEs. The earlier agreement was entered by M/s Redrock Ltd. on 1st April 2003, at that point of time, the said company was manufacturing the products with the technical know-how and R&D support of the assessee in respect of Aurvedic/Herbal products. But later

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on, when the said company found that the Aurvedic products were not acceptable in UAE as in the said country Unani system of medicines was acceptable as per the local trend and custom. The said AE in UAE had abandoned the manufacturing of the Ayurvedic/herbal products and then entered into the business of FMCG products which were earlier manufactured by the Redrock Ltd. with its own technology as per the requirement and taste of a local public of UAE by keeping into consideration the geographical and market situation. The said company was acquired by the assessee and now for the manufacturing of its products, the assessee did not provide any market strategies, nothing is brought on record that the assessee had borne the expenses, provided the funds or compensated for market failure and the quality etc. It, therefore, appears that the assessee had not made any effort for establishing the trade name nor had made any other contribution. Therefore, the assessee did not receive any royalty for the year under consideration and in the preceding year, the royalty @ 1% was paid to the assessee for the reason that Ayurvedic products were made with the technical know-how and R&D support of the assessee. However, for the year under consideration, the FMCG products were manufactured which were different from the Indian products having different raw material and medium used in the manufacture. At the same time, the brand name of the assessee was used by the AE and in the earlier years the assessee provided the R&D support, know-how technologies etc. which helped the AE for the year under consideration also to some extent. It is also noticed that the assessee received the royalty @ 1% in the preceding year. The TPO also while working out the royalty rate for the year under consideration was of the view that the royalty @ 1% was chargeable on the products manufactured without the aid and support of assessee company but marketed by using “Dabur” name, however, no basis has been given for the same. In our opinion the estimate made by the TPO for the rate of royalty was highly excessive. We, therefore, after considering the totality of the facts are of the view that the ld. CIT(A) was not justified in directing the AO to charge the royalty from Dabur International UAE @ 2%. Particularly when, the assessee was not using the technical know-how or R&D support from the assessee, in our opinion it will be fair and reasonable to charge the royalty @ 0.75% by considering this fact that in the year under consideration the assessee had incurred huge expenses on marketing, advertisement & brand building etc. and that in the preceding year the royalty was although charged @ 1% on the products manufactured without R&D support and technical know-how from the assessee but the aforesaid expenses were comparability less. 36. As regards to the royalty charged from M/s Dabur Nepal Ltd. is concerned, it is not in dispute that earlier the royalty received was @ 7.5% as the assessee was bearing the cost of marketing expenses but later on M/s Dabur Nepal Pvt. Ltd. incurred lot of expenditure in order to penetrate the market and the agreement was amended w.e.f. 1st April, 2004 vide which the royalty had been reduced from 7.5% to 3% (copy of the same is placed at page no. 113 of

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the assessee’s paper book). In the preceding year, on the basis of the said amended agreement, the royalty was charged @ 3%. Therefore, the TPO was not justified in working out the royalty @ 7.5% as provided in the original agreement dated 05.11.1992 (copy of which is placed at page nos. 111 & 112 of the assessee’s paper book). For the year under consideration, M/s Dabur Nepal Pvt. Ltd. has not paid any royalty to the assessee for the reasons that it had to incur the expenses to penetrate the market. In this regard, vide letter written in May 2005, it was informed to the assessee that no royalty will be payable from Financial Year 2005-06. It was also claimed that as per the Clause 7 of the original agreement dated 05.11.1992, the agreement shall become effective only after the approval by HMG Nepal and shall remain valid for a period of 10 years from the said date, unless renewed by mutual consent in writing and with prior approval of HMG Nepal. In the present case, it is not brought on record that the original agreement dated 05.11.1992 valid for 10 years, was renewed for further period and approval of HMG Nepal was taken. In the present case, the contention of the assessee that 80% of the products manufactured by M/s Dabur Nepal Pvt. Ltd. were purchased by the assessee has not been rebutted. It is also not in dispute that the royalty was payable earlier on the sales, therefore, it is unbelievable that the assessee charged the royalty on the purchases made by it from M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. Even if it is presumed that the royalty was to be charged by the assessee then same amount was to be added in the purchases thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by the same amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee. In the present case, it is an admitted fact that there was no agreement in existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed here in above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, therefore, the addition made on the said basis is deleted.”

[81.7 Since the facts of the present appeal are identical to the facts decided by the Tribunal in assessee’s own case in the preceding assessment year, therefore, in absence of any distinguishable features brought before us by either side, we, respectfully following the same, hold that no royalty is receivable by the assessee from Dabur Nepal and, therefore, the order of the CIT(A) sustaining the addition

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on account of Royalty receivable from Dabur Nepal (P) Ltd., at 2% is directed to be deleted. So far as royalty receivable from Dabur International, UAE is concerned, the same is directed to be restricted to 0.75% as held by the Tribunal.

81.8. So far as the argument of the ld. Counsel that the order of the Tribunal cannot be accepted because the same is not based on correct appreciation of facts is concerned, we do not find any merit in the argument of the ld. Counsel since as fairly conceded by the ld. Counsel at the time of hearing before us, the Hon’ble High Court has already dismissed the appeal filed by the assessee on this very issue.

81.9 So far as the royalty from Asian Consumer Care Pvt. Ltd., Bandladesh is concerned, we find, the facts and salient features of the agreement are identical to that of the facts and agreement with Dabur International Ltd., UAE. Since the Tribunal has already restricted such royalty to 0.75% in case of Dabur International Ltd., UAE, therefore, respectfully following the ratio of the decision of the Tribunal in assessee’s own case for the immediately preceding assessment year while restricting such royalty to 0.75% in case of Dabur International Ltd., UAE, we restrict the royalty from Asian Consumer Care Pvt. Ltd., Bangladesh to 0.75%.

81.10 In view of the above discussions, the grounds relating to the issue of Royalty by the Revenue are dismissed and the grounds raised by the assessee are partly allowed.

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82.1 Facts of the case, in brief, are that during the course of TP assessment proceedings, the TPO noted that the assessee had given loans to its AE to the tune of Rs.27 crores and has charged interest @ 6.75% on Rs.7 crores and interest @7% on Rs.20 crores. Further, an amount of Rs.17 crores has been repaid and an amount of Rs.10 crores was outstanding. He noted that the assessee in the TP study report has applied internal CUP method where the interest rate charged by Bank of Baroda for commercial papers was 5.675%. The TPO disagreed with the approach of the assessee and issued a show cause notice asking the assessee as to why rate of 14% should not be applied instead of 7% and 6.75%. The assessee objected to the TPO’s proposition and made elaborate argument.

82.2 It was submitted that it has advanced short-term loan (less than a year) to its foreign AE and the interest charged by the assessee is more than what it took from the bank and, therefore, the interest charged from the AE was considered to meet the arm’s length principle. It was argued that it is not the case of the Revenue that the assessee has taken loan from the bank and gave to its AE at nil rate of interest or lower rate of interest than what it was paying to the bank. The action of the assessee in the instant case suits to total arm’s length behavior. So far as the financial health of the AE is concerned, it was submitted that it is only the parent 66

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company which knows it. It was submitted that the loan extended to AE was not for very long period of time and was for a short period of one year or less. Therefore, there was no big risk in offering the loan to the AE at a rate which is higher than prevailing bank rate.

82.3 However, the TPO was not satisfied with the arguments advanced by the assessee and made upward adjustment of Rs.96,67,520/- by adopting the rate of 14% to be reasonable for benchmarking the arm’s length rate.

82.4 In appeal, the ld.CIT(A), relying on various decisions, deleted the addition made by the AO/TPO by observing as under:- “9.0 Findings 9.1 I have carefully considered the submissions of the Appellant. The facts are that Appellant has given loan to Dabur International Ltd, UAE and charged an interest rate of 7% and 6.75%. The loan/interest transaction was benchmarked by the Appellant in the TP Study of AY 2007-08 by application of internal GUP where rate charged by Bank of Baroda for Commercial Papers was 5.675%. However, the Ld TPO did not agree with the approach of the Appellant and applied the rate of 14%. As per the TPO, the benchmarking done the by Appellant is faulty as the Appellant himself taken its as tested party in the TP Report. Once the Appellant becomes the tested party, then it becomes imperative to see what the tested party would have earned in the similar situation i.e. in the Indian Market. Then the Ld TPO proceeded to arrive the LIBOR rates as per details mentioned in the TP Order at Page 4 and 5 of the TP Order AY 2007-08. However, TPO has not done comparability analysis of loan transaction of the appellant. As per Rule 10(B)(2), the comparability of controlled transaction with uncontrolled transaction requires comparison on following factors: “For the purposes of sub-rule (1), the comparability of [an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction;

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(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail ’’ 9.2 Thus, for loan transaction what is crucial is whether terms and conditions of loan offered in a controlled transaction can be compared with uncontrolled situation. What it means here is that whether loan advanced to foreign subsidiary was with borrowed money, or advanced from internal sources is totally irrelevant for the determination of ALP u/s 92(1) of the IT Act. Holding this position, in case of VVF v DCIT ITA No. 673/Mum/06, the Hon’ble Mumbai ITAT held as follows: “On a conceptual note, the purpose of making arms length adjustments, in prices at which which transactions have been entered into with associated enterprises is to nullify the impact of interrelationship between the associated enterprises. Unless the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these hypothetical prices have nothing to do with the actual costs. CUP method seeks to ascertain arms length price by taking into account prices at which similar transactions have been entered into by the assessee with unrelated parties (Internal CUP) or at which other unrelated parties have entered into similar transactions inter se (External CUP). None of these inputs have anything to do with the costs: they only refer to prevailing prices in similar unrelated transactions instead of adopting the prices at which the transactions have been actually entered in such cases, the hypothetical arms length prices, at which these associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account. Whether the funds are advanced out of interest bearing funds or out of funds on 14% interest is being paid, or whether such interest free advances are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction in the present case is of lending money, in foreign currencies, to its foreign subsidiaries. The comparable transaction therefore is of foreign currency lending by unrelated parties.” 9.3 Now, what is required to be seen is whether the controlled transaction can be compared with uncontrolled ones. As the Appellant, the Ld-TPO failed to apply the test of Rule 10B(2) while recommending an ALP of 14% on interest. At once place, the TPO arrived interest rate by investment theory in bonds and on other, he tried to used LIBOR. However, the manner in which the interest

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rates were arrived both under investment theory or LIBOR theory cannot be said to meet the standards of TP comparability. 9.4 In the course of submission, the Appellant submitted the prevalent LIBOR rates during the FY 2006-07 as follows: 1-Month 3 - Month 6-Month 12- Month LIBOR RATES- 5.3195% 5.3479% 5.312% 5.2009% March 2007

The LIBOR rates mentioned above average outs to 5,30%. These LIBOR rates are used for transaction in international trade. Very recently, in case of Cotton Naturals (I) Pvt Ltd (supra), Hon Delhi ITAT held as follows: 14. We note that CUP Method is the most appropriate method in order to ascertain arms length price of the international transaction as that of the appellant. We agree with the assesee’s contention that where the transaction was lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for the international transaction ” “17. We further note that the appellant gas arrangement for loan from Citibank for less than 4%. However, for loan provided to its AEs it has charged 4% pa interest. Hence, adjustment suggested by the TPO is not warranted ” In the above ruling of Cotton Naturals (supra) and other rulings as relied upon the appellant suggest that to benchmark loan transaction in case of international trade, LIBOR is best measure to compute the ALP u/s 92. 9.5 I find force in the arguments of the Appellant that in case of international loan given in international currency (USD in case of appellant), the interest rates to be applied should be LIBOR plus margin. The avg LIBOR rate for FY 2006-07 is determined at 5.20%. The appellant had charged 7% and 6.75% for the two loans given to Dabur International Ltd UAE, which seems to be compliant with the requirement for comparability of ALP rates for interest. Thus, I hold that, interest rate of 14% charged by the Ld. TPO is in contravention of the Rule 10B(2) and that interest charged by the Appellant at 7% and 6.75% satisfies arm’s length principle. Accordingly, this ground is allowed in favour of the Appellant.”

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82.5 Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.

82.6 The ld. DR heavily relied on the orders of the AO/TPO.

82.7 The ld. Counsel for the assessee, on the other hand, submitted that in the TP document, the transaction of loan advanced to the AE is benchmarked by applying CUP method wherein the interest charged by the Bank of Baroda for commercial papers @ 5.675% has been treated as appropriate internal uncontrolled transaction. The ld. Counsel drew the attention of the Bench to clause (a) of Rule 10B(1) of the IT Rules, 1962 and submitted that the said provision provides for application of CUP method. He submitted that there are two types of comparable uncontrolled transactions. The first is known as internal comparable and is a transaction between one of the parties to the controlled transaction and unrelated third party. The second, known as external comparable is a transaction between two unrelated third parties. He submitted that generally specific details regarding internal comparables are more readily available to the parties engaged in the controlled transaction than details regarding external comparables. In the light of the above external CUP should be used with utmost caution and if internal CUP is available, it is perfect over external CUP.

82.8 Referring to the following decisions, he submitted that internal comparables available in case of a tax payer ought to be perfect over external comparables available for benchmarking of international transactions:- 70

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(i) Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (374 ITR 118) (ii) ACIT vs. Birlasoft Limited: ITA No. 44/2015 (Del) (iii) Inslico Ltd vs. DCIT (ITA No. 4880/Del/2013) (iv) M/s e4e Business Solutions India Pvt. Ltd. vs. DCIT (ITA No. 324/Bang/2015) (v) M/s. Agila Specialties Pvt. Ltd. vs. DCIT (ITA No. 214/Bang/2015) (vi) Valtech India Systems P. Ltd. vs. DCIT (ITA No. 22/Bang/2014) (vii) UCB India (P) Ltd. v ACIT 30 SOT 95 (viii) Easton Fluid Power Limited vs. ACIT (ITA No. 1623/PN/2011) (ix) Cybertech Systems & Software Ltd. vs. ACIT (ITA No. 7307/Mum/2012) (x) Gharda Chemicals Limited Vs DCIT, 130 TTJ 556 (xi) Destination of the World vs. DCIT [ITA No 5534/Del/2010] (xii) Interra Information Technologies India (P) Ltd. Vs. DCIT (ITA No. 5568&5680/Del/2011) (xiii) Honeywell Electrical Devices & Systems India Pvt. Ltd. vs. ACIT (ITA No. 2152/Mds/2011) (xiv) Lummus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/2012)

82.9 He accordingly submitted that since the assessee has charged interest on the loan @ 6.75%/7% from Dabur International, UAE being higher than the internal 71

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CUP where the interest rate charged by Bank of Baroda for commercial papers @ 5.675% has been treated as appropriate internal uncontrolled transaction, international transaction of interest received should be considered as being at arm’s length applying the CUP method.

82.10 Without prejudice to the above, he submitted that the interest rate charged by the assessee is also much higher than the average LIBOR rate of 5.20% and, thus, such transaction of interest received has to be considered as being at arm’s length. He submitted that in the present case, transaction of lending loan to the AE is in foreign currencies given to foreign AEs. Accordingly, the comparable transaction for the purpose of applying of CUP should be considered to be foreign currency lending by unrelated parties with the LIBOR. Referring to the decision of the Hon’ble Delhi High Court in the case of DCIT vs. Cotton Naturals (I) Pvt. Ltd., 276 CTR 445, he submitted that the Hon’ble High Court, while upholding the order of the Tribunal has held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Referring to the decision of the Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT, 161 TTJ 428, he submitted that in this case also the Tribunal has held that in a case where loans are advanced in foreign currency, the interest rate on foreign currency loans being qualitatively different and accordingly, even if one has to see the interest that the assessee would have earned, one has to see the interest that the assessee would have earned on foreign

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currency loans and not rupee denominated loans. He also relied on the following decisions and submitted that the order of the CIT(A) is fully justified under the facts and circumstances of the present case:-

(i) Siva Industries and Holdings Ltd. vs. ACIT [ITA No. 2148/Mds/2148]; (ii) Tata Autocomp Systems Ltd. vs. ACIT [ITA No. 7354/Mum/2011], (iii) Four Soft Ltd. vs. DC1T: 142 TTJ 358 (Hyd.); (iv) DCIT vs. Tech Mahindra Ltd. : 46 SOT 141 (Mum); (v) Tricom India Ltd. vs. 1TO [ITA No. 322/Mum/2014]; (vi) Parle Biscuits (P.) Ltd. Vs. DCIT (ITA No. 9010/Mum/2010); (vii) PMP Auto Components (P.) Ltd. Vs. DCIT : 66 SOT 42; (viii) Hinduja Global Solutions Ltd. Vs. ACIT (ITA No. 254/Mum/2013); (ix) Bhansali & Co. vs. ACIT (ITA No. 825/Mu/2014)

82.11 The ld. Counsel for the assesseedrew the attention of the Bench to the provisions of LIBOR relevant for F.Y. 2006-07 which is as under:- 1-Month 3-Month 6-Month 12-Month LIBOR RATES - March 2007 5.3195% 5.3479% 5.312% 5.2009%

82.12 Referring to the above, he submitted that the LIBOR rates mentioned above averages out to 5.20% which is much lower than the rate of interest charged by the assessee on foreign currency loans advanced to its associated enterprises. He accordingly submitted that since the assessee has charged interest much higher than the LIBOR rates, no further adjustment is required.

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82.13 We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the assessee in the instant case has disbursed two loans to Dabur International, UAE at the interest rate of 6.5/7% the details of which are given below:- Particulars Amount (in Rs. crores) Loan given @ 6.75% Rs.7 crores Loan given at 7% Rs.20 crores Less: Repayment of loan during the year (Rs.17 crores) Loan outstanding as on 31.03.2007 10 crores

82.14 During the impugned assessment year, the assessee has earned interest of Rs.1,05,27,000/- on the aforesaid loans. In the TP study report the assessee applied internal CUP method where the interest rate charged by the Bank of Baroda for Commercial Papers was 5.675%. Considering that the international transaction of receipt of interest from Dabur International ltd., Dubai at 6.75%/7% was higher than the bank’s rate of interest, the international transaction of interest received was considered to be at arm’s length applying the CUP method. We find, the TPO disregarded the benchmark analysis undertaken by the assessee for determining the ALP of interest on loan applying internal CUP method. According to him, for loans given the rate charged by Indian banks on foreign currency loans is to be taken as benchmark. Applying the rate of interest of 14% on the basis of data collected from CRISIL where rate of interest for BBB Bonds for F.Y. 2006-07 was 15.13%, the TPO proposed an addition of Rs.96,67,520 which was added by the AO to the total income of the assessee on account of interest charged on loan 74

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from AEs. We find, the ld.CIT(A) deleted the addition made by the AO/TPO on the ground that interest rate to be applied in case of international loan given in international currency (USD) should be LIBOR + margin. He noted that in the instant case, the average LIBOR rate for A.Y. 2006-07 was 5.20% whereas the assessee has charged interest @ 6.75/7% which is much higher than the comparable ALP rates. He further noted that the TPO while adopting the rate of 14% has contravened the provisions of Rule 10B(2) which prescribes the factors for comparability of controlled transactions of uncontrolled transactions.

82.15 We do not find any infirmity in the order of the CIT(A) deleting the addition made by the AO/TPO. The provisions of Rule 10B(1)(a) read as under:-

“10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction ;”

82.16 We find identical issue had come up before the Chennai Bench of the Tribunal in the case of VVF Ltd. vs. DCIT, vide ITA No.673/Mum/2006 where the

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Tribunal in a case involving transaction of loan advanced to the associated enterprise, has held as under:- “We have noted that as was also noted by the Transfer Pricing Officer himself at page 3 of his order the appellant has borrowed foreign currency loans in US Dollars and for the purposes of investing in subsidiaries abroad, from ICICI Bank at the rate of LIBOR + 3% The appellant has also filed a letter from Bank of India stating that "during March 2002, we have been charging spreads of 150 bps to 300 bps over LIBOR in respect of foreign currency loans based on financial position and credit rating of the borrower". As for the LIBOR rate, as per the information provided by appellant, it ranged from 1.85000 (2 weeks) to 3.00250 (I year). On the given facts, in our considered view, it would be appropriate to accept internal CUP, i.e. the rate at which the appellant has resorted to foreign exchange borrowings from the ICICI, as arms length price under CUP method. The fact, as painstaking brought on record by the authorities below that this loan from ICICI bank was not used for the purposes of remittance to subsidiaries as interest free loans has no bearing for the purposes of computing ALP of interest free loan. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company, and, therefore, the precise rate at which the ICICI Bank has advanced the foreign currency loans to the appellant company can be adopted at arm ’s length price of interest free loans advanced by the appellant company to its foreign subsidiaries."

82.17 Since the assessee in the instant case has charged interest on loan @ 6.75%/7% from Dabur International, UAE, which is higher than the internal CUP wherein interest rate charged by Bank of Baroda for Commercial Papers was 5.675%, therefore, the international transaction of interest received, in our opinion, is considered to be at arm’s length applying the CUP method.

82.18 We find, the Hon’ble Delhi High Court in the case of DCIT vs. Cotton Naturals India (P) Ltd. (supra) while upholding the finding of the Tribunal with respect to appropriate comparable rate of interest on foreign currency denominated loan, has held as under:-

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"39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. H e have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency o r legal tender of the place or the country of residence of either party. Interest rates applicable, to loans and deposits in the none currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate if the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e., the rate of interest.”

82.19 We find, the coordinate Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT: 161 TTJ 428, too, has held that in a case where loans are advanced in foreign currency, the interest rate on foreign currency loans being qualitatively different, and accordingly, even if one has to see the interest that the assessee would have earned, one has to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans.

82.20 We further find merit in the argument of the ld. Counsel that the Revenue / TPO himself in the case of Perot Systems TSI (India) Ltd. Vs. DCIT (2010-TIOL- 51- ITAT-Del.) and in the case of DDIT vs. Development Bank of Singapore: 144 ITD 265 (Mum), has applied LIBOR rate for benchmarking of international transaction of loans undertaken with the AE. It is the settled law that the Revenue has to be consistent in its approach and it is not open to the Revenue to take an inconsistent stand in the case of different assessee. [Ref. Kaumudini Narayan

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Dalai: 249 ITR 219 (SC) and Berger Paints India Ltd. vs. CIT: 266 ITR 99 (SC)]. Therefore, consistent with the stand taken by the Revenue in the case of different assesses, the said filter, in our opinion, is to be uniformly applied in all cases.

82.21 In view of the above discussion and in view of the detailed reasoning given by the CIT(A) while deleting the addition, we do not find any infirmity in his order. Accordingly, the order of the CIT(A) deleting the addition of Rs.96,67,520/- is upheld and the ground raised by the Revenue on this issue is dismissed.

83.1 Facts of the case, in brief, are that the AO, during the course of assessment proceedings noted that the assessee has 18 industrial units undertaking manufacturing of products out of which ten units were eligible for deduction u/s 80IB/80IC of the Act which are as follows:- 1) Jammu Unit-1 2) Jammu Unit-2 3) Uttranchal Unit 4) Chawyanprash- Baddi Unit

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5) Amla-Honey Baddi Unit 6) Glucose- Baddi Unit 7) Shampoo- Baddi Unit 8) Toothpaste- Baddi Unit 9) Honitus- Baddi Unit 10) Oral care- Baddi Unit

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for deduction u/s 80IB and 801C whereas the assessee company has declared net profit of Rs. 28422.30 lakh on the total sales of Rs. 179453.60 lakh as per consolidated profit & loss account of all the units resulting in net profit ratio of 15.83% to the total sales of all the units, therefore, deduction U/s 80IB and 80IC be computed accordingly.

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similarly, it has taken deduction of Rs.2903.30 lakhs from the income as depreciation allowable under the Income-tax Act. The AO has taken the difference of Rs.704.49 lakhs and allocated to all the units. It was argued that while working out the deduction available u/s 80IB/80IC in respect of various units, depreciation as per Companies Act was added back and depreciation as per IT Act was claimed. Therefore, there is no situation for further allocation of Rs.70.50 lakhs. Similarly, the assessee had added certain expenses which were allowable under the provisions of Income-tax Act and, hence, these expenses were never claimed by the assessee. However, the AO has allocated these expenses to all units in the ratio of sales percentage thereby reducing the profits of units. The disallowance as per computation of income was brought to the notice of the CIT(A) which is as under:- “Disallowance as per Computation of Income Particulars Amount ( Rs Lacs) Amount (Rs Lacs) Misc. Exp Written off ESOP Exp 1035.37 Technical Know How 18.75 1054.12 Other Disallowances Donation 414.05 Provision for Bad Debts 94.85 Scientific research exp 651.00 1159.90 Total 2214.02.” 88. It was further submitted that ESOP expenses, technical know-how expenses, donation and provision for bad debts have been added back in the computation of taxable income by the assessee itself as these were not allowable expenses under the provisions of the Act. Therefore, these expenses have not been claimed by the assessee. However, the AO has erroneously allocated these expenses to all the

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units in the ratio of sales percentage and accordingly has worked out reduced profits in respect of tax holiday units. So far as the scientific research expenses is concerned, it was submitted that the assessee has claimed weighted deduction @ 125% u/s 35(1)(ii) of the Act in respect of contribution made to an association for scientific research. The payment is voluntary in nature and is not for any specific purpose. Further, these expenditure cannot be allocated to tax holiday units as it is not connected with such units. Relying on various decisions and the word used in section 80IC ‘derived from’ and ‘not attributable to’ it was argued that R&D expenses cannot be allocated to units claiming deduction unless it has a nexus.

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deduction u/s 80IB/IC. The AO has not proved any nexus between these expenses and eligible units. Deduction u/s 80IB/IC is available in respect of profit derived from eligible business. The term ‘derived from’ requires existence of direct nexus both with respect to items of income and expenditure. I have carefully gone through the case law relied upon by the appellant wherein Hon’ble ITAT has laid down the same principle. 15.4 In view of above, I direct the AO to recompute the deduction available u/s 80IB/IC without further allocation of HO expenses to various units as done by him in the impugned assessment order. The grounds of appeal are allowed.”

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available under the I.T. Act which was allocated to various units, therefore, there was no reason on the part of the AO to allocate the difference between the depreciation charged in the P&L Account and depreciation claimed in the return of income.

91.1 So far as the allocation of head office expenses is concerned, the ld. Counsel drew the attention of the Bench to the following table:- S. No. Particulars Amount (in Rs. lakhs) 1. Miscellaneous expenses written off 1054.12 (a) ESOP expenses 1035.37 (b) Technical know-how 18.75 2. Donation 414.05 3. Provision for Bad Debts 94.85 4. Scientific research 651.00 Total 2214.02

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eligible units. So far as the head office expenses aggregating to Rs.2,214.02 lakhs is concerned, he noted that expenses aggregating to Rs.1,563.02 lakhs were suo motu disallowed by the assessee and added back in the computation of income. Therefore, once these expenses were not claimed by the assessee, the same cannot be allocated to the eligible units for computation of deduction u/s 80IB/80IC of the Act. The ld.CIT(A) also further noted that scientific research expenses of Rs.651 lakhs, which was included in the head office expenses allocated by the AO are not connected with the units eligible for deduction u/s 80IB/80IC of the Act and, therefore, cannot be allocated to the eligible units. } 93.1 We do not find any infirmity in the order of the CIT(A) reversing the action of the AO in allocating the head office expenses and depreciation to various eligible units for the purpose of recomputing the deducting u/s 80IB/80IC. The factual finding of the ld.CIT(A) that the assessee has added back the depreciation as per Companies Act, 1956 and claimed depreciation as per the Income-tax and, therefore, the AO was wrong in allocating the difference of depreciation available under the Companies Act and the Income-tax Act to the eligible units could not be controverted by the ld. DR. Similarly, the ld. DR also could not controvert the factual finding given by the CIT(A) that expenses aggregating to Rs.1,563.02 lakhs being head office expenses were suo motu disallowed by the assessee and added back in the computation of income and once these expenses were claimed by the assessee, the same cannot be allocated to the eligible units for computation of deduction u/s 80IB/80IC and, therefore, cannot be allocated to the eligible units. 86

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93.2 A perusal of page 67 of the paper book Volume I shows that during the financial year under consideration, depreciation amounting to Rs.2,197.81 lakhs was debited to the P&L Account. A perusal of the computation of income, copy of which is placed at page 425 of the paper book Volume II, shows that the assessee has added back the aforesaid depreciation under Companies Act and claimed depreciation of Rs.2,902.3 lakhs in accordance with the provisions of section 32 of the Act. The depreciation as claimed in the return of income was duly allocated among all the units including the eligible units. We, therefore, find no infirmity in the order of the CIT(A) in reversing the action of the AO in allocating the difference of depreciation available under the Companies Act and Income-tax Act to the eligible units.

93.3 So far as the Head office expenses are concerned, we find the AO has allocated the head office expenses of Rs.2,214.02 lakhs the details of which are as under:- S. No. Particulars Amount (in Rs. lakhs) 1. Miscellaneous expenses written off 1054.12 (a) ESOP expenses 1035.37 (b) Technical know-how 18.75 2. Donation 414.05 3. Provision for Bad Debts 94.85 4. Scientific research 651.00 Total 2214.02

93.4 A perusal of page 425 of paper book, Volume-II shows that Miscellaneous expenses written off, donation and provision for bad debts were suo motu disallowed by the assessee in its return of income. Therefore, once the aforesaid 87

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expenses were not claimed as a deduction by the assessee, the same, in our opinion, cannot be allocated to the eligible units and be considered for computing the deduction u/s 80IB/80IC of the Act. 93.5 So far as scientific research expenses of Rs.651 lakhs is concerned, the finding of the ld. CIT(A) that such expenses have no nexus with the units eligible for deduction has not been controverted by the Revenue. We find, the Hon’ble Bombay High Court in the case of Zandu Pharmaceuticals Works Ltd. vs. CIT, 350 ITR 366 (Bom) has held that once the expenses have no nexus with the units eligible for deduction, such expenses cannot be allocated to units for the purpose of computing deduction u/s 80IB/80IC of the Act. Since the scientific research expenses of Rs.651 lakhs which were included in the head office expenses allocated by the AO are not connected with the units eligible for deduction u/s 80IB/80IC, the same, in our opinion, cannot be allocated to the eligible units. In this view of the matter, the order of the CIT(A) is upheld and the ground raised by the Revenue on this issue is dismissed.

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assessee company has deposited the employees contribution to ESIC after the due date as per the respective Act the correct amount of which comes to Rs.4,09,871/-. Applying the provisions of section 2(24)(x) r.w. section 36 (1)(va), the AO added the same to the total income of the assessee.

95.1 In appeal, the ld.CIT(A), following the decision of the Hon’ble Delhi High Court in the case of CIT vs. AIMIL Ltd., reported in 321 ITR 508, deleted the addition on the ground that the assessee has deposited the above amount well before the due date of filing the tax return.

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issue by following the decision of the Hon’ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd., reported in 2009 TIOL-125-SC-IT. Referring to the decision of the Hon’ble Rajasthan High Court in the case of DCIT vs. Rajasthan State Beverages Corporation Ltd., reported in 250 Taxman 32, he submitted that when PF and ESI was paid before the due date of filing of returns, the same could not be disallowed under section 43B or under section 36(1)(va). He submitted that the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court reported in 84 taxmann.com 285. Referring to copy of letter dated 10.09.2018 addressed by Pr. Director of Income-tax (Legal and Research), New Delhi regarding filing of appeal in cases involving issue of allowability of deduction of employees’ contribution to PF and ESIC copy of which is placed at page 442 and 443 of the paper book, he submitted that the Department should not have filed appeal on this issue.

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date of filing of the return u/s 139(1). We find, the Hon’ble Delhi High Court in the case of CIT vs. Bharat Hotels Ltd., reported in (2019) 410 ITR 417 has held that Employees’ State Insurance Corporation and Provident Fund dues paid beyond prescribed period is not an allowable deduction. Since the Hon’ble Delhi High Court has decided the identical issue against the assessee which is after the date of SLP dismissed by the Hon’ble Apex Court in the case of Rajasthan State Beverages Corporation Ltd. (supra) and since the decision of the jurisdictional High Court is binding on us, therefore, the various other decisions relied on by the ld. Counsel for the assessee cannot be followed. In this view of the matter, the order of the ld.CIT(A) is reversed and the ground raised by the Revenue is allowed.

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provision of Rule 14A r.w. Rule 8D, the AO made disallowance of Rs.1,57,45,700/- and added the same to the total income of the assessee.

Description FY FY Remark 2006-07 2005-06 Mutual Fund 7,962 6,266 These MFs represent Short term Mutual funds and are fully taxable u/s 45. Dabur International 4,466 2287.5 This is investment in foreign Limited, subsidiary and foreign UAE dividends are taxable Commerce Centre 0.02 0.02 Cooperative Housing Society Limited Capexil (Agencies) Limited 0.01 0.01 Dabur Employees 0.03 0.03 Consumers Co-op Stores Limited There can be no earnings

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Dabur Employees 0.07 0.07 from investment in these Cooperative Credit Society instrument Ltd Co-operative Stores 0.05 0.05 Limited, Super Bazar Saraswat Co-op Bank Ltd 0.1 0 National Saving Certificates 1.07 0 Income earned on this Investment is taxable as per income Tax Act 1961 Kisan Vikas Patra 0.07 0 Dabur Foods Ltd 2,000 2,000 Both are consistently loss Sanat Products Ltd 105 105 making companies. No dividend received. Further, these long term investments are taxable on sales/ transfer u/s 45 of the Act. Balsara Hygeine product 11,650 Subsidiary of Balasara Ltd Home Ltd, merged with Dabur During F.Y 2006-07 Income earned on investments are taxable on sales/ transfer U/s 45 of the Act. Basara Home Product Ltd 3,405 Besta Cosmetic Ltd 1,790 Dabur Pharma Ltd 1 5 Dividend income, Tax free u/s 10 Total investment as Per 14535 27508 Balance Sheet-SchG

24.3 The AO has computed disallowance u/s 14A r.w. rule 8D in para 8.5 of assessment order which is reproduced as below:

Expenses directly relatable to exempt Clause (i) income NIL Clause (ii) Disallowance of interest expenses 52.350 Clause (iii) 0.5% of Average investments 105.107 TOTAL 157.457

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24.4 I have considered the submissions of the Appellant and the computation of disallowance u/s 14A done by the AO. It is quite apparent that AO has not gone into specifics of each investment before invoking section 14A. From above chart, it is seen that most of the investments could not have yielded any income which is tax exempt 24.5 It is pertinent to mention that the appellant has not disallowed any sum u/s 14A on its own. The AO is empowered under subsection 2 of section 14A to compute such disallowance as per prescribed method (Rule 8D) but only after recording his satisfaction that the claim of the appellant is not correct. In present case, the AO has not stated any reason for not agreeing with . claim of the appellant and thus requisite satisfaction on part of the AO is not discernible from the assessment order. Resorting to provisions of sub-section 2 of section 14A by the AO is subject to pre-condition of his satisfaction about incorrectness of claim of the appellant and therefore without satisfying this pre-condition, the AO can not compute disallowance as per section 14A(2). This principle has been laid down by jurisdictional Hon’ble Delhi High Court in case of MAXOPP INVESTMENT LTD v CIT [201l-TIOL-753-HC-DEL- IT]. 24.6 Further, no disallowance can be made u/s 14A of interest on borrowed funds where in case of mixed funds, it is not possible to ascertain whether there exists an nexus between borrowed funds and tax free investment. This principle has been laid down in following cases: • Hero Cycles 323 ITR 518 (P&H) • DCIT v Maharashtra Seamless Ltd. (2011) 16 Taxman.com 97 (Del) 24.7 The AO has made a disallowance of Rs, 1.57 crores u/s 14A as expenses incurred in relation to tax free dividend income of Rs. 30^000 only. This is nothing but travesty of justice Obviously, intention of the legislature was not to compute disallowance under sub-sect on 2 c f section 14A mechanically in a case where no expenses have been actually incurred in relation to tax free income. 24.8 In view of above, the AO is directed to deletethe addition made on this count The ground of appeal is accordingly allowed.”

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not applicable to the year under consideration. It is also his submission that only investment yielding dividend income has to be considered for the purpose of making disallowance u/s 14A and interest expenditure, if any, eligible relatable to dividend yielding investment has to be considered. The alternate argument of the ld. Counsel for the assessee is that disallowance, if any, cannot exceed the exempt income as held by various decisions.

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Rule 8D as against the actual dividend income of Rs.30,000/-. It has been held in various decisions that the disallowance cannot exceed the exempt income. Since the assessee in the instant case has earned dividend income of only Rs.30,000/- during the impugned assessment year, therefore, following the decision of the Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT, 372 ITR 694 where it has been held that disallowance u/s 14A cannot exceed exempt income and the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court, we accept the alternate contention of the assessee that the disallowance cannot exceed the actual dividend income. We accordingly hold that the disallowance u/s 14A has to be restricted to Rs.30,000/-. The ground raised by the Revenue is accordingly partly allowed.

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allowable. He further noted that the assessee has not claimed the same in the return of income. The AO, therefore, rejected the claim of depreciation on goodwill.

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Explanation 5.- For the removal of doubts, it is hereby declared that the provisions of this sub¬section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; 27.3 I have gone through the contentions made by the Appellant. I agree with contention of the appellant that manner of making entry in books of accounts cannot determine the statutory liability under Income Tax Act, Accordingly, the point of AO that the Appellant had not booked excess payment in its books of a/c as goodwill is not tenable. 27.4 The issue to be adjudicated here is whether the excess payment over and above net assets made as cost of merger is in nature of goodwill. The Appellant contended that even if the amount of excess paid over net assets is knocked off against general reserves and share premium, the fact remains that the excess was paid to acquire the complete business of the Balsara and that valuation of intangibles (such as marketing, brand, customer list, supply chain network, vendors, human resources etc) was inbuilt in the price paid to Balsara. The fact that Balsara had built its business over a period of time, it has definitely acquired goodwill not stated in the books. The Appellant had not to start , the business from scratch relating to Balsara products and with its ready market for products, sales and profit could have accrued to the Appellant from the very beginning. Now to acquire a running business with an established turnover and brand, there had to be some premium paid over the net assets. The Appellant contended that the premium paid is nothing but goodwill within the meaning of explanation 3(b) of section 32(1). 27.5 In my view, there is a force in the arguments of the Appellant. The excess amount paid over net assets of Rs 158.75 crores is in nature of goodwill as the same was paid to acquire complete business of Balsara including marketing intangible, brands, human resources, supply chain network, customers, vendors etc. Goodwill here is in fact, sum total of all commercial and business rights of Balsara group which the appellant acquired after merger with Balsara group companies. I have carefully gone through scheme of amalgamation / merger as approved by Bombay / Delhi High Court As per this scheme, assets and liabilities of amalgamating companies were to be carried / recorded in books of the appellant company at book value and cost of merger was to be set off against general reserve and share premium accounts of the appellant company. Therefore, as per scheme of merger approved by Hon’ble High Courts, excess payment / cost of merger was not to be booked as goodwill a/c. This accounting practice is also as per AS-14 prescribed by ICAI for accounting procedure of amalgamation. Facts of the case of CIT v SMIFS Securities Ltd. (supra) are essentially similar to facts of the present case. Accordingly, I hold that the excess paid over net assets amounting to Rs 158.75 crores is in nature of goodwill within the meaning of section 32(1) of the Act r.w. explanation 3(b).

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27.6 It’s trite law that the AO is bound to complete assessment as per the provisions of the Act The Appellant pointed out to the AO in course of assessment proceedings that depreciation of goodwill should be allowed to it in view of explanation 5 of section 32(1) of the Act which was ignored by the AO. Once it is held that excess payment is in nature of goodwill, in view provisions of explanation 5 of section 32,(1), the allowance of depreciation is mandatory even if not claimed by the appellant in its return of income. Accordingly, I direct the AO to allow depreciation @ 25% on the goodwill. With this, the ground of appeal is allowed.”

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of the Bench to the salient features of the scheme of amalgamation which are as follows:

(i) The scheme was sanctioned by the High Court of Delhi on 12.09.2006 with effect from April 1, 2006, being the appointed date of the merger; (ii) All the assets and liabilities of Balsara companies shall stand transferred to the assessee at their respective book value as appearing in the books of the transferee companies [Clause 6.1(c)]; (iii) The difference between the value of shares issued by the assessee and book value of net assets taken over shall be debited to Share Premium Account, Capital Redemption Account and General Reserve Account and the balance if any shall be adjusted against accumulated credit balance in the profit & loss account [Clause 6.1(e)];

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b) Adjusted against general reserve account- Rs. 100.40 crores

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d) Research and product development- Research and Product Development is a major strength and competitive advantage of the Balsara Group. Balsara's state-of-the-art Research Center, located in Thane, has been recognized by the Government of India. e) Manufacturing and supply chain- Balsara's manufacturing hubs are located at Silvassa, Kanpur and Baddi. Balsara's manufacturing facilities are approved by the FDA, Pollution Control Board and other authorities. f) Human Resources and marketins- Balsara Group's corporate, manufacturing, sales, distribution and administrative operations are professionally managed. g) Balsara Group produces branded products of world-class standard as well as Private Label products and markets them in both the Indian and international markets at relatively competitive rates. The Balsara group is also engaged in manufacturing herbal extracts and complexes under some leading worldwide brands of natural cosmetics namely The Body Shop etc. The Balsara Group has manufactured Private Label products for some large-scale companies such as Colgate Palmolive, Beecham Group, Henkel Cosmetics and Reckitt & Coleman. h) Balsara has a wide national sales and distribution system that makes products available in 700,000 retail outlets. The system is supported by a distribution network of 4 Zonal Offices, 10 Branches, 23 Regional Warehouses, and 1700 Distributors in 1500 towns.”

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114.1 The ld. Counsel for the assessee submitted that brand is a special intangible that in many businesses it is the most important asset. This is because of the economic impact that brands have. They influence the choices of customers, employees, investors and the government authorities. In a world of abundant choices, such influence is crucial for the commercial success and creation of shareholder value especially in case of companies engaged in FMCG products, brand plays a very important role contributing towards the overall business value. The major sales of such companies depend upon their brand name. He submitted that in the FMCG sector, one needs to be fast in translating the ideas into new products. There is a requirement to create the products that people trust, enjoy and use in their daily lives. Advertising and marketing have a vital role to play in this. People now are getting more & more health conscious and are getting concerned about what they are using. They buy only those products which are of a good quality and are of a reliable brand.

114.2 He submitted that the products offered by Balsara companies are of a good standard quality and reliable which is the main factor contributing to the why people prefer buying its products. He submitted that Balsara brand was well established. To build such a brand, it takes a lot of effort, time and energy. A lot of time goes into building up a good brand name. There are very few branded products like Procter and Gamble, Colgate, Godrej, etc. Brand creates entry barriers and is created over the years. A new player, who enters a market, also

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needs to spend time, energy and effort to build its name in the market. Thus a new player can break a market only over a period of time. The assessee, thus, acquired substantial intangibles/ commercial rights in the form of a well-established brand, i.e., “Balsara” along with its marketing strength, technological strength, distribution network, the human workforce, etc., elaborately discussed supra. He accordingly submitted that there can be no dispute, whatsoever, that the excess consideration of Rs. 158.76 cr., being excess of consideration over the net assets, was on account of various intangibles/ commercial rights, being referred to as goodwill of the Balsara companies.

114.3 The ld. Counsel for the assessee submitted that goodwill fundamentally represents the intrinsic worth of the business of the Transferor Companies inasmuch as the valuation of existing business is much more than the fair value of the existing tangible assets and the difference, in fact, fundamentally reflects the value of intangible assets (like, business and commercial rights, goodwill, licences, trade mark, etc.) not reflected in the books of the amalgamating companies.

114.4 He drew the attention of the Bench to provisions of Section 32 of the Act which deals with depreciation allowance on tangible and intangible assets used for the purposes of business. He submitted that clause (ii) of the aforesaid section provides for depreciation on intangible assets acquired on or after 1.4.1998. The aforesaid clause provides for depreciation on intangible assets in the nature of, inter alia, “know-how”, “patent”, “copy rights”, “trade mark”, “license” and 105

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“franchise”. The aforesaid category of intangible asset is succeeded by the residual category, viz., intangible assets being “business or commercial rights of similar nature”. He submitted that the amount representing the excess of consideration paid over the fair value net assets of Transferor Company(ies), recognised as goodwill, fall within the ambit of the expression “business or commercial rights of similar nature”, so as to qualify for depreciation under section 32 of the Act. Referring to the following decisions, he submitted that depreciation is allowable on goodwill:- 1) CIT vs. Smifs Securities Ltd.: (2012) 348 ITR 302 (SC); 2) Areva T and D India Ltd. v. DCIT: 345 ITR 421 (Del); 3) Triune Energy Services Private Limited vs. DCIT: 237 Taxman 230 (Del); 4) Zydus Wellness Ltd: [2017] 87 taxmann.com 82 (Guj); 5) CIT v. Hindustan Coca-Cola Beverages (P) Ltd.: 331 ITR 192 (Del.) - SLP filed by revenue has been dismissed by the Supreme Court in SLP No. 26151/2011; 6) PCIT vs. Ricoh India Ltd: ITA No. 1127 of 2017 (Bom HC); 7) B. Raveendran Pillai: 332 ITR 531 (Ker.); 8) CIT v. Manipal Universal Learning (P.) Ltd : 215 Taxman 151 (Kar.); 9) Pr. CIT v. Swastik Industries: 240 Taxman 510 (Guj); 10) ACIT vs. M/s Birla Global Asset Finance Co. Ltd.: ITA No. 4898- 4900/Mum/2008 -affirmed by the Bombay High Court: (2014) 221 Taxman 176; 11) CIT vs. RFCL Ltd.: (2015) 277 CTR 272 (HP.);

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12) Decision of Special Bench of the Delhi Tribunal in the case of M/s. CLC & Sons Pvt Ltd. Vs. ACIT: 171 ITD 139, 13) DCIT vs. Toyo Engineering India Ltd: ITA No. 3279/M/ 2008; 14) Aricent Technologies (Holdings) Ltd. vs. DCIT: 109 taxmann.com 47 (Delhi ITAT), 15) Sartorious Mechatronics India (P.) Ltd. vs. ACIT: 982/Bang/2013 (Bang.); 16) DCIT vs. Bosch Ltd: ITA No. 329/Bang/2009 (Bang.); 17) Samsung R&D Institute India Bangalore Pvt. Ltd. vs. ACIT: ITA No. 672/Bang/2014 (Bang. Trib.); 18) ThyssenKrupp Elevator (India) (P.) Ltd. v. ACIT: 167 TTJ 131 (Del. Trib.); 19) Cyber India Online Ltd.: 64 SOT 1/ 42 taxmann.com 108 (Del. Trib.); 20) Guruji Entertainment Network Ltd. v. ACIT: 108 TTJ 180 (Del. Trib.) 21) Taj Sats Air Catering Ltd. vs. ACIT: 146 ITD 231 (Mum Trib.); 22) Skyline Caterers (P) Ltd. v. ITO: 116 ITD 348 (Mum. Trib); 23) Just Dial Ltd. vs. ACIT: 289/Mum/2013 (Mum. Trib.); 24) The AP Paper Mills Ltd. vs. ACIT: 128 TTJ 596 (Hyd. Trib.); 25) SKS Micro Finance Ltd. vs. DCIT: 160 ITD 364 (Hyd. Trib.); 26) Shamrao Vithal Coop Bank Ltd. vs DCIT : ITA Nos. 4092/Mum/2011; and 27) DCIT vs. Ricoh India Limited : ITA No. 4700/MUM/2015

114.5 Referring to the following decisions, he submitted that the entries made in the books of account are not determinative of the ambit of taxation. If an item of

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income/expenditure is taxable/deductible, the same has to be taken into account as per the provisions of the Act and not as per books of account:-

i) Kedarnath Jute Manufacturing Company vs. CIT, 82 ITR 363 (SC); ii) Sutlej Cotton Mills Ltd. vs. CIT, 116 ITR 1 (SC); iii) Bharat Carbon and Ribbon Mfg. Co. (P) Ltd. vs. CIT, 239 ITR 505 (SC); iv) CIT vs. UP Electronics Corporation Ltd., 282 ITR 470 (All)

114.6 We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, disallowed the claim of depreciation on goodwill on the ground that the assessee has not shown the payment of goodwill in its intangible assets and has adjusted it against the reserves and share premium and the assessee has also not claimed depreciation on goodwill in the return of income and, therefore, the same is not allowable. We find, the ld.CIT(A) allowed the claim of depreciation on goodwill as claimed by the assessee the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the ld. DR that when the assessee has not claimed such depreciation in the return of income and has not shown the payment of goodwill in its intangible assets and has adjusted it against the reserves and share premiums, therefore, the ld.CIT(A) is not justified in allowing the claim of depreciation on goodwill. It is the submission of the ld. Counsel for the assessee that the difference between the consideration paid 108

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by the assessee to acquire the business and net worth of the companies acquired by it represents the intangibles and other factors in the form of goodwill which were in accordance with the scheme of amalgamation. It is his submission that the amount representing the excess of consideration of Rs.158.75 crores paid over the fair value of net assets of transferor companies recognized as goodwill fall within the ambit of the expression ‘business or commercial rights of similar nature’ so as to qualify for depreciation u/s 32 of the IT Act.

114.7 We find, force in the above argument of the ld. Counsel for the assessee. We find, the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. (supra) while discussing an identical issue has observed as under:-

“1. None appears for the respondent, though served. Heard learned counsel for the Department. Leave granted. This civil appeal concerns the Assessment Year 2003-2004. Three questions arise for determination by this Court. They are as follows: Question No.[a]: "Whether Stock Exchange Membership Cards are assets eligible for depreciation under Section 32 of the Income Tax Act, 1961? Whether, on the facts and in the circumstances of the case, deletion of Rs.53,84,766/- has been made correctly?" Answer: Learned Additional Solicitor General fairly concedes that the said question is covered by the decision of this Court in the case of Techno Shares and Stocks Limited vs. Commissioner of Income Tax, reported in [2010] 327 I.T.R. 323, in favour of the assessee. Question No.[b]: "Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on `goodwill' is allowable under the said Section?" Answer: In the present case, the assessee had claimed deduction of Rs.54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:

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"In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company." 2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [`Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.-- For the purposes of this sub-section, the expressions `assets' and `block of assets' shall mean-- [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the

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assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assesseeCompany in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee. Question No.[c]:”

114.8 We find, the Hon’ble Delhi High Court in the case of Areva T&D India Ltd. vs. DCIT, reported in 345 ITR 421 (Del) has held that specified intangible assets, viz, business claims, business information, business records, contracts, employees and know-how acquired by assessee under slump sale agreement are in nature of “business or commercial rights of similar nature” specified in section 32(1(ii) and are accordingly eligible for depreciation under that section. The various other decisions relied on by the ld. Counsel for the assessee also supports his case that depreciation is allowable on goodwill.

114.9 So far as the case of the Revenue that goodwill was not shown by the assessee as its assets is concerned, it is the settled proposition of law that the entries made in the books of account are not determinative of the ambit of taxation. If an item of income/expenditure is taxable/deductible, the same has to be taken into account as per the provisions of the Act and not as per the book entries. We 111

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also find merit in the argument of the ld. Counsel for the assessee that in terms of Explanation 5 to section 32 of the Act, it is now mandatory to claim/allow depreciation, whether or not the assessee has claimed the same. Therefore, we are of the considered opinion that the AO should not have refused to consider the claim of depreciation despite the fact that the assessee raised such claim vide its letter dated 13.12.2010 addressed to the AO. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue, we find no infirmity in his order allowing claim of depreciation on goodwill. The order of the ld.CIT(A) on this issue is accordingly upheld and the ground raised by the Revenue on this issue is accordingly dismissed.

“That the ESOP expenses of Rs. 10,35,36,606/- debited in the Profit & Loss Account ought to have been allowed as deduction in computing the income under the head ‘Profit and Gains of Business.” 115.1 The Id. Counsel for the assessee, referring to the above additional ground, submitted that this ground deserves to be admitted in order to correctly assess the tax liability of the assessee in accordance with the provisions of law. He submitted that the above ground does not require any new fact or other than the facts already on record. Referring to the decision of the Hon’ble Supreme Court in the case of NTPC vs. CIT, 229 ITR 383, he submitted that the Tribunal has wide powers to admit an additional ground which is necessary to determine the tax liability of an

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assessee in accordance with law if the related facts are already on record. Referring to the following decisions, he submitted that this ground is purely a legal ground placed on the following decisions:-

i) Biocon Ltd. Vs DCIT reported at 155 TTJ 649 (Bang. SB) ii) Lemon Tree Hotels Ltd. Vs Addl. CIT in ITA No. 4588/Del/2013 order dated 23.06.2014 (Del. IT AT) iii) CIT Vs Lemon Tree Hotels Ltd. in I TA No. 107/2015 order dated 18.08.2015 (Del. H.C.) iv) CIT Vs PVP Ventures Ltd. 90 DTR 340 (Mad.)

115.2 He accordingly submitted that since the additional ground is purely legal in nature and all facts are available on record, therefore, the additional ground should be admitted. Referring to the decision of the Tribunal in assessee’s own case for the immediately preceding assessment year, he submitted that identical additional ground was raised by the assessee before the Tribunal and the Tribunal after considering the arguments made by both the sides, has admitted the said additional ground and restored the issue to the file of the AO/TPO to decide the issue in accordance with the law, after providing due opportunity of being heard to the assessee.

115.3 The Id. DR, on the other hand, strongly objected to the admission of the additional ground.

115.4 We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the

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assessee. We have also considered the various decisions cited before us. We find, the assessee in the instant case, has raised the additional ground before the Tribunal relating to the ESOP expenses which were debited in the Profit & Loss Account, but, added back while computing the income under some misconception of facts and law. However, the issue, in our opinion, is legal in nature. We find, identical issue had come up before the Tribunal in ITA No.3257/Del/2013 (by the Assessee) and ITA No.3492/Del/2013 (by the Revenue) and the Tribunal vide order dated 12.04.2017 for A.Y. 2006-07 has admitted the additional ground and has restored the issue to the file of the AO for deciding the issue in accordance with law, after giving due opportunity of being heard to the assessee. The relevant observations of the Tribunal read as under:- “87. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the additional ground has been raised by the assessee relating to the ESOP expenses which were debited in the profit and loss account but added back while computing the income allegedly under some misconception of facts and law. The issue raised by the assessee is a legal issue. 88. As regard to the admission of the legal ground, the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT (1998) 229 ITR 383 (supra) held as under: “The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non- taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commission of Income-tax (Appeals). Both the assessee as well as the

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Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal.” It has further been held that: “Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.” 89. We, therefore, by keeping in view the ratio laid down by the Hon’ble Supreme Court in the aforesaid referred to case admit the additional ground raised by the assessee. However, it is an admitted fact that this issue has been raised by the assessee first time and the authorities below had no occasion to deal with this issue. We, therefore, deem it appropriate to remand this issue to the file of the AO/TPO to be decided in accordance with law after providing due and reasonable opportunity of being heard to the assessee.”

115.5 Since the facts of the impugned assessment year are identical to the facts of the case decided by the Tribunal in assessee’s own case in the immediately preceding assessment year, therefore, respectfully following the decision of the Tribunal in assessee’s own case we admit the additional ground and restore the issue to the file of the AO with a direction to adjudicate the issue in accordance with the law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The additional ground raised by the assessee is accordingly allowed for statistical purposes. ITA No.6256/Del/2014 (By the Revenue - A.Y. 2008-09) 116. The grounds raised by the Revenue are as under:-

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“On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and directing to deleted addition of Rs. 1,64,36,480/- made by the Assessing Officer on account of corporate guarantee given to the associated enterprises. 1. On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 2,80,55,365/- made by the Assessing Officer on account of interest on loan to the associated enterprises. 2. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 1,91,30,000/- made by the assessing officer on account of royalty adjustment. 3. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and directing the Assessing Officer to recompute the deduction u/s 80IB and 80IC without further allocation the Head Office expenses to various units and allowed the appeal of the assessee. 4. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and deleted disallowance of Rs. 2,85,39,000/- made by the Assessing Officer u/s 14A r.w.r. 8D of the I.T.Rules, 1962. 5. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. 6. The order of the Ld CIT(A), being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing Officer be restored.”

ITA No.6525/Del/2014 ( by the Assessee - A.Y. 2008-09) 117. The grounds of appeal read as under:- “1. That there is no international transaction is contemplated u/s 92CA of the Income-tax Act, 1961 (the Act) in respect of the alleged royalty chargeable from three Associated Enterprises (AEs) as contemplated u/s 92CA of the Act and consequently the order of the CIT (Appeals) upholding the chargeability of royalty from three AEs, as alleged by TPO, is arbitrary, unjust and bad in law. 2. That in the absence of any contract as existing during the year between the assessee and three AEs, neither any royalty accrued during the year nor can it be presumed to be receivable and consequently the order of the

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TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law. 3. That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption about the chargeability of royalty by invoking the provision of Section 92CA of the Act from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust and without any basis. 4. That the CIT (Appeals) and TPO have failed to consider that in the absence of any expenditure incurred by the assessee for the establishment of brand in the geographical area of working of Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., no royalty can be said to have accrued to the assessee when Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. have incurred expenses on advertisement and sale promotion in their respective area for promotion of the brand which amounts to the services provided by the AEs to the asses see for completing the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust and at any rate very excessive. 5. That the TPO and CIT (Appeals) failed to appreciate the relevant clause of the agreement as existed in earlier years wherein as per the agreement, Dabur India Ltd. failed to incur the expenses for the promotion of the brand and marketing expenses in Dabur Nepal Pvt. Ltd., which ultimately and actually were incurred by Dabur Nepal Pvt. Ltd., which resulted into termination of the royalty chargeable under the then contract and consequently the CIT (Appeals) has erred on facts and under the law in upholding the chargeability of the royalty from Dabur Nepal Pvt. Ltd. 6. That the TPO and CIT (Appeals) failed to consider that most of the manufactured products by Dabur Nepal Pvt. Ltd. had been sold to Dabur India Ltd. which cannot be the basis for charging royalty having no connection with the brand used by Dabur Nepal Pvt. Ltd. in Nepal. 7. That in the absence of any loan availed by Dabur Egypt on the basis of corporate guarantee, the CIT (Appeals) has erred in sustaining the alleged service fee in the form of corporate guarantee from Dabur Egypt @ 0.50% in respect of loan from HSBC and NSGB Bank is arbitrary, unjust, without any basis and at any rate very excessive. 8. That the CIT (Appeals) has erred in sustaining the alleged service fee on account of the corporate guarantee in the case of Naturelle LLC on the

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loans availed from Royal Bank of Scotland, in the absence of any benefit accrued to Naterelle LLC, is arbitrary, unjust, without any basis and at any rate very excessive. 9. That the above grounds of appeal are independent and without prejudice to one another. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”

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Particulars Rate (in %) Average rate of bank rate of 2.68 commission charged Add:- Risk Adjustment 2 4.68 Rate

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125.Aggrieved with such part relief granted by CIT(A), the assessee is in appeal before the Tribunal.

126.We have heard the rival arguments and perused the record. So far as the guarantee issued on behalf of Dabur Egypt Ltd., Egypt is concerned, we have already dealt with this issue while deciding ground of appeal No. 2and 3 for A.Y. 2007-08 and the same has been determined at 0.30%. Following similar reasonings, we modify the order of the CIT(A) and direct the AO to adopt the 120

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service fee on account of corporate guarantee at 0.30% in respect of guarantee issued on behalf of Dabur Egypt Ltd., Egypt.

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

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“That the amount of Rs.5,85,61,165/- (Rupees Five Crore Eighty Five Lakhs Sixty One Thousand One Hundred Sixty Five only) being the exempted excise duty embedded in sales of Glucose Unit, Baddi (HP), allowed incentive for industrialization and setting up of new unit by Notification No. 1(10)/2001 - NER dated 701/2003, read with Notification No. 49/2003 and Notification No. 50 of 2003 of Central Excise dated 10/06/2003, is a capital receipt not liable to Tax and accordingly the amount of Rs.5,85,61,165/- (Rupees (Rupees Five Crore Eighty Five Lakhs Sixty One Thousand One Hundred Sixty Five only) be excluded from the income assessed. ”

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Subject: New Industrial Policy and other concessions for the state of Uttaranchal and the state of Himachal Pradesh. The Hon ’ble Prime Minister, during the visit to Uttranchal from 29th to 31st March, 2002, had, inter-alia made an announcement that ’Tax and Central Excise concessions to attract investments in the industrial sector will be worked out for the Special Category States including Uttranchal. The industries eligible for such incentives will be environment friendly with potential for local employment generation and use of local resources. 2. In pursuance of the above announcement, discussion on Strategy and Action Plan for Development of Industries and generation of employment in the states of Uttranchal and Himachal Pradesh were held with the various related Ministries/agencies on the issue, inter-alia, infrastructure, development, financial concessions and to provide easy market access. The new initiatives would provide the required incentives as well as an enabling environment for industrial development, improve availability of capital and increase market access to provide a fillip to the private investment in the state. 3. Accordingly, it has been decided to provide the following package of incentives for the states of Uttranchal and Himachal Pradesh. 3.1 Fiscal Incentives to new Industrial Units and to existing units on their substantial expansion: (I). New industrial units and existing industrial units on their substantial expansion as defined, set up in Growth Centres, Industrial Infrastructure Development Centres (IIDCs), Industrial Estates, Export Processing Zones, Theme Parks (Food Processing Parks, Software Technology Parks, etc.) as stated in Annexure-I and other areas as notified from time to time by the Central Government, are entitled to : (a) 100% (hundred percent) outright excise duty exemption for a period of 10 years from the date of commencement of commercial production. (b) 100% income tax exemption for initial period of five years and thereafter 30% for companies and 25% for other than companies for a further period of five years for the entire states of Uttaranchal and Himachal Pradesh from the date of commencement of commercial production.

(II) All New industries in the notified location would be eligible for capital investment subsidy @ 15% of their investment in plant & machinery, subject to a ceiling ofRs.30 lakh. The existing units will also be entitled to this subsidy on their substantial expansion, as defined.

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(III). Thrust Sector Industries as mentioned in Annexure-II are entitled to similar concessions as mentioned in para 3(1) & (II) above in the entire state of Uttranchal and Himachal Pradesh without any area restrictions. ” (emphasis supplied)

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G.S.R (E) .- In exercise of the powers conferred by sub-section (I) of section 5A of the Central Excise Act, 1944 (1 of 1944) read with sub-section (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) and sub-section (3) of section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of1978), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of1986), other than the goods specified in Annexure-I appended hereto, and cleared from a unit located in the Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area, as the case may be, specified in Annexure-II appended hereto, from the whole of the duty of excise or additional duty of excise, as the case may be, leviable thereon under any of the said Acts. 2. The exemption contained in this notification shall apply only to the following kinds of units, namely (a) new industrial units which have commenced their commercial production on or after the 7th day of January, 2003; (b) industrial units existing before the 7th day of January, 2003, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent, on or after the 7th day of January, 2003. 3. The exemption contained in this notification shall apply to any of the said units for a period not exceeding ten years from the date of publication of this notification in the Official Gazette or from the date of commencement of commercial production, whichever is later. ”

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is always imbibed/ embedded/ included in the sale value. However, the Excise Duty in respect of non-eligible unit is deposited with the Excise authorities. In the return of income for the assessment year 2008-09, the excise duty relating to the products cleared from Baddi unit has been offered to tax forming part of taxable income. He submitted that such excise duty exemption available to Baddi unit under the scheme is in the nature of fiscal incentive provided for to attract investment for the purpose of industrialization of Himachal Pradesh which was a backward industrial state. He submitted that the taxability of incentive provided to boost industrialization in various states by the Central Government/State Government is no more res integra and the courts are consistently holding that such fiscal incentive/subsidy are basically capital in nature not liable to tax. He submitted that in order to work out the nature of fiscal incentive it has been held by various courts that it has to be determined with reference to the purpose for which such incentive has been provided. If the incentive has been provided to assist the operation of business, then, it is revenue, but, if the benefits have been provided for industrialization and setting up of new industry, then, it is capital in nature. In other words, the character of fiscal incentive subsidy has to be determined having regard to the purpose for which subsidy was given. For the above proposition, the ld. Counsel relied on the decisions of the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugar and Chemicals Limited: 306 ITR 392, Sahney Steel and Press Works vs. CIT: 228 ITR 253; and V.S.S.V. Meenakshi Achi: 60 ITR 253 and various other decisions. 128

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the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words. in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. ”

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

High Court, applying the purpose test, held that entertainment tax subsidy was in the nature of capital receipt not liable to tax.

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were "before completion of five years " 36. As held by the Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The "purpose test", referred to in Ponni Sugars & Chemicals Ltd. (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations. ……………….. 39. For the foregoing reasons, we find that ITAT in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital. The question of law raised in these appeals is, thus, answered in the negative against the revenue/appellant. ”

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

ii) CIT v. Bharat General Re-Insurance Co. Ltd.: 81 ITR 303 (Del.); iii) HCL Technologies vs ACIT : 377 ITR 483 (Del); iv) CTI vs C. Parakh & Co (India) Ltd: 29 ITR 661 (SC); v) CIT vs VMRP Firm: 56 ITR 67 (SC); vi) Pullangode Rubber Produce Co. Ltd. v. State of Kerala: 91, ITR 18 (SC); vii) Pt. Sheo Nath Prasad Sharma v. CIT : 66 ITR 647 (All.); viii) Abdul Qayume vs CIT: I 84 ITR 404 (All); ix) Nirmala L Mehta vs CIT: 269 ITR 1 (Bom); x) CIT vs Berger Paints: 254 ITR 503 (Cal); xi) R. B. Jessa Ram Fateh Chand vs CIT: 81 ITR 409 (All); xii) CIT vs Enron Expat Services Inc : 327 ITR 626 (Uttkhd); xiii) Smt. Snehlata Jain v. CIT: 192 CTR 50 (J&K); xiv) S.R. Koshti v. CIT: 276 ITR 165 (Guj.); xv) DCIT v. Sanmukhdas Wadhwani: 85 ITD 734 (Nag); xvi) Indo Java & Co. v. IAC: 30 ITD 161 (Delhi SB); and xvii) ITO v. GE Hawn : 2l ITD 553 (All.)

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

ii) Indo Java & Co. vs. IAC: 30 ITID 161 (Del ITAT)(SB); iii) Crystal Crop Protection Pvt Ltd. vs. DCIT : ITA No. 1539 of 20l6 (Del ITAT); iv) Tripti Manthol Inds vs. ITO: ITA No, 58 of 2011 (Asr ITAT). 149. He submitted that the appeal against the decision of J&K High Court in the case of Shree Balaji Alloys vs. CIT, 333 ITR 355 has been dismissed by the Hon’ble Supreme Court in the order dated 19th April, 2016 in Civil Appeal No.10061 of 2011.

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

Referring to the decision of the Tribunal in assessee’s own case for the immediately preceding assessment year, he submitted that the additional ground in respect of ESOP was raised by the assessee before the Tribunal for the first time and the Tribunal after considering the arguments made by both the sides, has admitted the said additional ground and restored the issue to the file of the AO/TPO to decide the issue in accordance with the law, after providing due opportunity of being heard to the assessee.

151.1 The ld. DR, on the other hand, strongly objected to the admission of the additional ground. He submitted that this ground should not be admitted at all as it is for the first time the assessee has come up before the Tribunal with a new plea.

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

“The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commission of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal.” 153.1 It has further been held that: “Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.”

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

“29. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254. 30. A Division Bench of the Delhi High Court dealt with a similar submission in Commissioner of Income‐tax v. Jai Parabolic Springs Limited, (2008) 306 ITR 42. The Division Bench, in paragraph 17 of the judgment held that the Supreme Court dismissed the appeal making it clear that the decision was limited to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the powers of the Tribunal. In paragraph 19, the Division Bench held that there was no prohibition on the powers of the Tribunal to entertain an additional ground which, according to the Tribunal, arises in the matter and for the just decision of the case. 31. In the circumstances, it is not necessary to decide the other questions raised by Mr. Mistri. 32. The appeal is, therefore, dismissed.”

ITA Nos.3241, 3114, 6525 & 6256/Del/2014

being heard to the assessee. The second additional ground raised by the assessee is accordingly allowed for statistical purposes.