DCIT 10(3), MUMBAI vs. COLGATE PALMOLIVE (INDIA) LTD, MUMBAI

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 1 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K” MUMBAI BEFORE SHRI S.RIFAUR RAHMAN (ACCOUNTANT MEMBER) AND SHRI RAVISH SOOD (JUDICIAL MEMBER) ITA No.1431 /MUM/2014 (Assessment Year: 2009-10) Colgate Palmolive (India) Ltd. Addl. Commissioner of Income- Colgate Research Centre, Main Vs. tax-10(3) Street, Hiranandani Gardens, Powai, Mumbai – 400076

PAN No. AAACC4309B (Assessee) (Revenue) ITA No. 1925/MUM/2015 (Assessment Year: 2010-11) Colgate Palmolive (India) Ltd. Asst. Commissioner of Income- Colgate Research Centre, Main Vs. tax-15(1)(2) Street, Hiranandani Gardens, Powai, Mumbai – 400076

PAN No. AAACC4309B (Assessee) (Revenue) ITA No. 1350/MUM/2014 (Assessment Year: 2009-10) The Dy. Commissioner of Colgate Palmolive (India) Ltd. Income-tax-10(3), Vs. Colgate Research Centre, Main Room No. 451, 4th Floor, Street, Hiranandani Gardens, Aayakar Bhavan, M.K. Road, Powai, Mumbai – 400076 Mumbai – 400 020

PAN No. AAACC4309B (Assessee) (Revenue) ITA No. 1852/MUM/2015 (Assessment Year: 2010-11) The Asst. Commissioner of Colgate Palmolive (India) Ltd. Income-tax-15(1)(2), Vs. Colgate Research Centre, Main Room No. 403, 4th Floor, Street, Hiranandani Gardens, Aayakar Bhavan, M.K. Road, Powai, Mumbai – 400076 Mumbai – 400 020 PAN No. AAACC4309B (Assessee) (Revenue)

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 2 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Assessee by : Shri Percy Pardiwalla, Senior Advocate a/w Shri Madhur Agrawal, A.Rs Revenue by : Shri Sunil Deshpande, D.R Date of Hearing : 01/02/2021 Date of pronouncement : 08/02/2021

ORDER PER RAVISH SOOD, J.M:

The captioned cross-appeals are directed against the respective orders passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short ‗Act‘) for A.Y. 2009-10 and A.Y. 2010-11, dated 30.12.2013 and 30.01.2015, respectively. As certain common issues are involved in the aforesaid appeals, the same, thus, are being taken up and disposed off together by way of a consolidated order. We shall first advert to the cross- appeals for A.Y. 2009-10. The assessee has assailed the impugned order on the following grounds of appeal before us:

“Ground No.1: 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in disallowing a sum of Rs.26,92,193 under Section 14A of the Income Tax Act, 1961 ('the Act') having failed to appreciate that the Appellant company has not incurred any expense directly in relation to the earning of tax free income. The Appellant prays that the sum of Rs.26,92,193 be allowed as business expenditure and the disallowance may kindly be deleted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in computing the disallowance as per the method prescribed under Rule 8D(2)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. The Appellant prays that disallowance of proportionate interest expenditure under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules kindly be deleted. 3. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in not considering the alternative computation of disallowance under Section 14A of the Act submitted by the Appellant without providing justification for rejecting Appellant's claim. The Appellant prays that the alternative computation of disallowance under Section 14A of the Act provided by the Appellant to be considered for disallowance under Section 14A of the Act.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 3 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Ground No 2; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, has erred in disallowing expenditure of Rs.6,87,976 in relation to travel, hotel and food expenses of the Company stating it as unexplained expenditure. The Appellant prays that the sum of Rs.6,87,976 be allowed as business expense, and the disallowance may kindly be deleted. Ground No 3: 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, has erred in excluding 25% of the income from Scrap Sales from profit of the business of the industrial undertaking while computing deduction under Section 80IC of the Act. The Appellant prays that 25% of the income from Scrap Sales of Rs. 17,28,926 be treated as part of the profit of the business of the industrial undertaking and allowed while computing deduction under Section 8oIC of the Act. Ground No 4; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in making an adjustment towards advertisement, marketing, sales promotion ('AMP expenses') of Rs. 31,63,26,783 to the income of the Appellant under the presumption and without any basis that the Appellant has benefited the Associated Enterprise (‗AE‘) 1.1 On the facts and in the circumstances of the case and in law, the learned AO erred in: i. applying Indian transfer pricing regulations to the transaction between the Appellant and third parties as there was no reference made by the AO to the Transfer Pricing Officer in this regard; ii. disregarding that the issue of marketing intangibles is not relevant to entrepreneurial licensed manufacturers as is the case of the Appellant; iii. presuming that there existed an arrangement and consequently a transaction between the Appellant and its AE and thereby erred in contending that the AE ought to compensate the Appellant towards the alleged excessive AMP spend; iv. presuming without any direct or indirect evidence that the Appellant had incurred non-routine AMP expenses and that the AMP expenses incurred by the Appellant benefited the AE; and v. confirming the adjustment despite the fact that the advertisements were product specific and not brand specific and disregarding the fact that many of the products manufactured by the Appellant were India specific. The Appellant therefore prays that appropriate relief be granted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in considering third party market research expenses and manufacturing standard costs, being in the nature of selling & distribution expenses, for computing the alleged excessive AMP spend of the Appellant. The Appellant therefore prays that appropriate relief be granted.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 4 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 5 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Ground No 6: 1. Without prejudice to Ground No. 1 to 5 above and in the alternative, on the facts and in circumstances of the case, the learned AO, under the directions issued by the DRP, has erred in consequently not revising the profit from the Baddi unit eligible for deduction under Section 80IC of the Act by the amount of Advertising, Marketing and Promotion expenditure alleged to have not been incurred for the purpose of business of Appellant's undertaking. The Appellant prays that the learned AO be directed to recompute the deduction under Section 8oIC of the Act by adjusting the Advertising and Marketing expenditure considered as not having been incurred for the purpose of business of Appellant's undertaking. The Appellant craves leave to add to, omit or alter all or any of the above Grounds of appeal before or during the hearing of aforesaid matter.‖ On the other hand the revenue has challenged the impugned order on the following grounds:

―1. Whether on the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in holding that the distribution expenses including trade discounts and promotional activities do not lead to adding a brand value to the brand. 2. Whether on the facts and in the circumstances of the case and in law, the Dispute Resolution panel erred in holding that the distribution expenses including trade discount is merely normal distribution expenses and does not form part of the AMP expenses. The Disputed Resolution panel further, erred in direction the exclusion of distribution expenses amounting to Rs.89,30,41,693/- from the AMP expenses for arriving at the adjustment. 3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 4. The appellant prays that the direction of the DRP, Mumbai on the above ground be set aside and that of the assessing officer be restored.‖

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 6 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 3. During the course of the assessment proceedings the A.O taking cognizance of the fact that the assessee had entered into international transactions with its Associate Enterprise (for short ‗AE‘), made a reference under Sec. 92CA(1) of the Act to the Addl. CIT [Transfer Pricing -1(2)], Mumbai, (for short ‗TPO‘) for determining the Arm‘s Length Price (for short ‗ALP‘) of the said transactions. TPO vide his order passed under Sec. 92CA(3), dated 28.01.2013 made the following transfer pricing adjustments: -

Sr. No. Nature of IT adjustment Amount (Rs.) 1. Extra Ordinary AMP expenses to be Rs.156,55,14,780/- reimbursed by the AE 2. Research & Development Services segment` Rs.61,55,480/- Total Rs.157,165,70,260/- 4. After receiving the order passed by the TPO under Sec. 92CA(3), dated 28.01.2013, the A.O passed a draft assessment order under Sec. 143(3) r.w.s 144C(1), dated 25.02.2013 wherein he proposed to assess the income of the assessee company under the normal provisions at Rs.232,59,02,620/- and the ‗book profit‘ under Sec. 115JB at Rs.335,27,33,202/-.

Sr. No. Particulars Amount 1. Disallowance under Sec. 14A Rs. 26,92,193/- 2 Transfer Pricing Adjustment under Rs.31,63,26,783/- Sec.92CA(4) 3. Addition of unexplained expenses Rs. 6,87,976/- 4. Restriction of the assessee‘s claim for Rs.251,92,58,451/-

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 7 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT deduction under Sec. 80IC (as against deduction under Sec. 80IC of Rs.252,09,87,377/- claimed by the assessee in its return of income) After making the aforesaid additions/disallowances the assessee‘s income was determined under the normal provisions at Rs.332,69,74,610/-, and its ‗book profit‘ under Sec. 115JB was computed at Rs. 335,27,33,202/-.

As is discernible from the orders of the lower authorities, we find, that the assessee during the year under consideration had earned tax free interest income of Rs.1,32,67,882/- from various tax free bonds of Rs.1,32,67,882/-. Observing, that the assessee had not offered any disallowance w.r.t the aforesaid exempt income, the A.O proposed to disallow the same under Sec.14A r.w. Rule 8D, as under :

8D(2)(i) Nil 8D(2)(ii) Rs. 14,30,932/- 8D(2)(iii) Rs. 12,61,261/- Rs. 26,92,193/- Total Thereafter, the DRP finding no infirmity in the view taken by the A.O upheld the same.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 8 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT In order to buttress his aforesaid claim the ld. A.R took us through the ‗balance sheet‘ of the assessee company as on March 31, 2009, Page 22 of the assessee‘s paper book (for short ‗APB‘). It was submitted by the ld. A.R that as against the share capital and reserves and surplus of Rs.21,629.57 lacs, its investments amounted to Rs. 38,32.89 lacs. Apart from that, it was submitted by the ld. A.R that during the year in question it had made a fresh investment of only Rs.73.83 lacs. To sum up, it was the claim of the ld. A.R that as the assessee had substantial owned funds to justify the investments made in the exempt income yielding assets, thus, no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii) in its hands. Adverting to the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(iii), it was submitted by the ld. A.R that the A.O while computing the said disallowance had wrongly included the investments which though had not yielded any exempt income during the year under consideration. In support of his aforesaid contention the ld. A.R relied on the order of the ITAT special bench in the case of ACIT & Anr. Vs. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 (Del)(SB). In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that the A.O be directed to re-compute the disallowance under Rule 8D(2)(iii) after excluding the investments which had not yielded any exempt income during the year in question. 10. Per contra, the ld. Departmental Representative (for short ‗D.R‘) relied on the orders of the lower authorities. 11. We have deliberated at length on the aforesaid issue in the backdrop of the contentions advanced by the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. Admittedly, as can be deciphered from the financial results of the assessee for the year under consideration, it is a matter of fact borne from the records that the assessee had substantial self owned funds which would safely justify the

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 9 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT source of the investments made in the exempt income yielding bonds. In the backdrop of the aforesaid factual matrix, we are of the considered view that no part of the interest expenditure could have been attributed to the earning of the exempt income by the assessee during the year in question. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). Accordingly, in terms of our aforesaid observations, we herein vacate the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(ii) of Rs.14,30,932/-. As regards the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii) of Rs.12,61,261/-, we find substantial force in the claim of the ld. A.R that the investments which had not yielded any exempt income during the year under consideration were liable to be excluded for the purpose of computing the ‗average value of investments‘ within the meaning of Rule 8D(2)(iii). Our aforesaid view is supported by the order of the ‘Special bench’ of the ITAT, Delhi in the case of Vireet Investments (supra). As such, we herein restore the issue for the limited purpose of computing the disallowance under Sec.14A r.w Rule 8D(2)(iii) to the file of the A.O in terms of our aforesaid observations. The Ground of appeal No. 1 is partly allowed.

Sr. No. Name and address Transaction amount Transaction party 1. George Joseph Rs. 2,88,727 Citi Bank No. 79/8C Sunny Brooks NXT to Wipro Corporation, office Sajapur Road, Bangalore- 56 2. Colgate- Palmolive, Main St. Rs. 11,46,49,356 American Express Bank Hiranandani Grds, Powai, Mumbai 76 3. George Joseph Rs. 3,99,249 American Express Bank

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 10 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT No.79/8C Sunny Brooks NXT to Wipro Corporation, office Sajapur Road, Bangalore 56 On being queried as regards the expenditure stated to have been incurred by Mr. George Joseph, it was the claim of the assessee that the same pertained to travel, hotel and food expenses of the aforesaid person who was rendering his services as the sales manager of the assessee company. However, as the assessee failed to produce any details, data or supporting primary records, the A.O, thus, vide his draft assessment order proposed to disallow the aforesaid expenditure aggregating to Rs.6,87,976/-. Objections filed by the assessee to the proposed disallowance of the aforesaid expenses by the A.O with the DRP, however, did not find favour with the panel. Being of the view that not only the assessee had failed to substantiate the expenses of Rs.6.88 lacs (approx) in toto, but even otherwise the documentary evidence which was filed as ‗additional evidence‘ before it did not instil much of confidence, the DRP upheld the addition/disallowance of the aforesaid expenses and also declined to entertain the documents which were purportedly filed before it as ‗additional evidence‘.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 11 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 14. Per contra, the ld. D.R relied on the orders of the lower authorities. 15. We have heard the authorized representatives for both the parties in context of the aforesaid issue, and also perused the orders of the lower authorities and the material available on record. On a perusal of the orders of the lower authorities, we find that the aforesaid claim for deduction of the assessee was initially declined by the A.O, for the reason, that the assessee could not substantiate that the expenses in question were incurred by Mr. George Joseph, sales manager wholly and exclusively for the purpose of its business. Although, certain documentary evidence to support the aforesaid claim for deduction of expenses was thereafter furnished by the assessee before the DRP, the same, however, was not entertained by the panel, for the reason, that neither the assessee had requested for admission of the said ‗additional evidence‘ nor explained why it had failed to present the same before the A.O. Apart from that, we find that the DRP had also observed that the documents furnished by the assessee did not instil much of confidence. We have given a thoughtful consideration and are of the considered view that as the aforesaid expenses were incurred by an employee of the assessee company viz. Mr. George Joseph, sales manager, by purportedly using the credit cards of the assessee company, the same, thus, could not have been summarily discarded by the lower authorities. Although, we are not oblivious of the fact that the assessee could not substantiate that the expenses in question were incurred wholly and exclusively for the purpose of its business, but then, we also cannot shut our eyes to the fact that the documentary evidence produced by the assessee before the DRP were considered by the panel with a half hearted approach. On the one hand the panel had declined to admit the documents produced by the assessee as ‗additional evidence‘, while for at the same time it had given general observations as regards the same. Be that as it may, in our considered view the matter in all fairness requires to be restored to the file of the A.O for fresh adjudication. Needless to say, the A.O shall in the course of the ‗set aside‘ proceedings afford a

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 12 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh documentary evidence. The Ground of appeal No 2 is allowed for statistical purposes.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 13 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 17. Aggrieved, the assessee has assailed the order passed by the A.O/DRP wherein its entitlement towards deduction under Sec. 80IC had been restricted by both the lower authorities. It was averred by the ld. A.R that the restriction of the assessee‘s claim for deduction under Sec. 80IC by the A.O/DRP by attributing only 75% of the scrap sales to the manufacturing activity of the assessee‘s industrial undertaking was not as per the mandate of law. It was submitted by the ld. A.R that as per Sec. 80IC, the gross total income of an assessee including any profits and gains derived by an undertaking or an enterprise from an eligible business therein contemplated was to be allowed as a deduction while computing the total income of the assessee. It was averred by the ld. A.R that as the generation and the consequential sale of scrap pursuant to the manufacturing activity of the industrial undertaking was inextricably linked or in fact interwoven with the manufacturing activities of the assessee, the same, thus, was undeniably formed part of the profit and gains derived by the industrial undertaking from its eligible business. In order to buttress his aforesaid claim the ld. A.R had relied on the judgment of the Hon’ble High Court of Allahabad in the case of CIT & Anr. Vs. Modi Xerox Ltd. (2014) 365 ITR 200 (All).

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 14 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT to be arising from and forming a part and parcel of the manufacturing process of an eligible undertaking, thus, the income from sale of the same would safely fall within the realm of the profit and gains derived by the undertaking from its eligible business. Accordingly, we find no reason as to why the sale of scrap generated in the course of its manufacturing activity was not to be included in the amount of the eligible profits while quantifying the assessee‘s claim for deduction under Sec. 80IC of the Act. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Allahabad in the case CIT & Anr. Vs. Modi Xerox Ltd. (2014) 365 ITR 200 (All). In the aforesaid case the question of law that was inter alia raised before the Hon‘ble High Court in context of the pari materia provisions of Sec. 80HH of the Act, read as under :

“11. Whether on the facts and in the circumstances of the case, the Ld. ITAT was legally justified in holding that deduction under section 80 HH is to be allowed on total income including the profit from sale of scrap being part of income of the Industrial Undertaking?” Answering the aforesaid issue, the Hon‘ble High Court in the backdrop of the judgment of the Hon‘ble Supreme Court in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax reported in (2003) 262 ITR 278 (SC), had observed, that as the scrap generated in the course of the manufacturing process of the assessee‘s eligible business had a direct and immediate nexus with its industrial undertaking, the same, thus, was eligible for deduction u/s 80-HH of the Act. Observations of the Hon‘ble High Court for the sake of clarity are reproduced as under:

“Now we come to the Question No. 11 which relate to deduction under Section 80- HH before the Assessing Officer. Under Section 80- HH, the assessee was entitled to the deduction equal to 20% of the gross total income of the assessee, which includes any profit and gains derived from the industrial undertaking. The assessee's case is that income of Rs. 63,66,932/- was deducted treating to be income from other sources and deduction under Section 80-HH was not given on the aforesaid amount of Rs. 63,66,932/-. The assessee filed appeal against the said order and the Appellate Authority in Paragraph No. 6.2 directed the Assessing Officer to take the income from the sale of Scrap by xerographic equipment unit and Toner, Developer, Photocopier unit as profit of the said unit. The said order has been confirmed by the Tribunal. Learned counsel for the appellant submitted that the Assessing Officer has rightly not deducted the said income from the profits and gain from the industrial unit, since the said income from the Scrap could not be said to be income derived from

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 15 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT the industrial undertaking. He submits that the word 'derived from' in Section 80- HH has to be understood as something which has direct and immediate nexus with the assessee's industrial undertaking. Learned counsel for the assessee refuting the submission of the appellant submitted that the Scrap was generated from the manufacturing process itself by different units of the assessee's undertaking, hence, the CIT Appeal has rightly taken the said income which was from the sale of Scrap as income derived from industrial undertaking. Learned counsel for the assessee has placed reliance on three judgments reported in 336 ITR 444 (Del.) (CIT Vs. Sadhu Forging Ltd.), 141 ITR 745 (Mad) (CIT Vs. Wheels India Ltd.) and 258 ITR 785 (Guj.) (DCIT Vs. Harijivandas Juthabhai Zaveri). Section 80- HH contemplates deduction on profits and gains derived from the industrial undertaking. The issue is as to whether the income of Rs. 63,66,932/- can be said to be income derived from industrial undertaking or not? The assessee's submission in the above regard has been noted by CIT Appeal and CIT Appeal has directed the Assessing Officer to take income from the sale of Scrap by xerographic equipment unit and Toner, Developer, Photocopier unit as profit of the said unit. The submission of the assessee was that the said Scrap which is sold and income of Rs. 63 lakhs and odd was generated in the manufacturing process itself. It is useful to refer to Paragraph No. 6.2 which is to the following effect:- “6.2:- During this year only new issue involved is that the A.O. has while working out the deduction u/s 80HH reduced the income from other sources from the net reasonable income to the extent of Rs. 83,66,932 (so per order u/s 154). In the original order it was taken at Rs. 63,66,932.The statement of profitability of different units filed by the appellant shows the other income at Rs. 83,66,932 (Refer page 1 of the Paper Book). The A.O. has deducted this income while working out the relief allowable u/s 80HH. The learned counsel for the appellant has submitted that the sum of Rs. 83,66,932 represented sale of Scrap and sale of Scrap was business income of the different Units of the appellant. This was, therefore, to be taken as profit of the Industrial Under-taking and the same should not have been reduced from the net assessable income adopted by the A.O. for the purpose of section 80HH. Reliance was place on the decision of Madras High Court in the case of CIT, Tamilnadu-III Vs. Wheels India Ltd., 141-ITR-745 to the effect that the sale of Scrap was as income of the priority Industry and, hence, relief u/s 80-I was available in respect of these units. After considering the submissions of the appellant, I direct the A.O. to take the income from sale of Scrap by xerographic equipment Unit and Toner, Developer, Photocopier Unit as profit of the said Units (and not income from other sources) for purpose of deduction u/s 80HH. However, as I have held in the case of the appellant in previous asst. year that the income/profit derived by the appellant by service and trading Unit does not constitute income from Industrial Undertaking, other income of Rs. 29,28,427 (out of claim of Rs. 83,66,932) concerning this unit has to be reduced from the above said net assessable income taken by the A.O.” The Commissioner has clearly directed for including the income from the Scrap generated by specified units as noted above. The Scrap generated from the above units has to be treated as Scrap derived from the industrial undertaking and any income from the sale of the said Scrap has to be included for the purpose of

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 16 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT benefit of Section 80-HH. The Hon'ble Apex Court in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax reported in 262 ITR 278 (SC) have occasion to consider the word 'derived from' as used in Section 80-HH. The said case was of interest earned on the deposit made with the Electricity Board for supply of electricity. Following was laid down by the Hon'ble Apex Court in Paragaph Nos. 4, 5 & 6:- “4. Section 80HH of the Income-tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking. The contention of the appellant before us is that interest earned on the deposit made with the Electricity Board for the supply of electricity to the appellant's industrial undertaking should be treated as income derived from the industrial undertaking within the meaning of Section 80HH. It is submitted that without the supply of electricity the industrial undertaking could not run and since electricity was an essential requirement of the industrial undertaking, the industrial undertaking could not survive without it. It is further pointed out that for the purpose of getting this essential input, the statutory requirement was that the deposit must be made as a pre- condition for the supply of electricity. Consequently, according to the appellant, the interest on the deposit should be treated as income derived from the industrial undertaking within the meaning of Section 80HH. 5. The High Court rejected the submission of the appellant by relying upon the decision of this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT , where this court had clearly stated that the expression "derived from" had a narrower connotation than the expression "attributable to" (page 93) : "In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." 6. The word "derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said (page 328) : "The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." The proposition laid down by the Hon'ble Apex Court that the said case was to the effect that the word derived from under Section 80- HH has to be understood as something which has immediate nexus with the industrial undertaking. In the present case, the scrap generated from the aforesaid three units has direct and immediate nexus with the industrial undertaking since the said scrap has been generated from the manufacturing process itself. Thus, we are of the view that the Commissioner as well as the Tribunal has committed no error in allowing the

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 17 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT

benefit of Section 80-HH to the assessee on the aforesaid income of Rs. 63 lakhs and odd.”

Accordingly, in terms of our aforesaid observations we are unable to persuade ourselves to subscribe to the view taken by the lower authorities, and thus, direct the A.O to include the entire amount of scrap sales in the eligible profits of the assessee for the purpose of quantifying its claim for deduction under Sec. 80IC of the Act. The Ground of appeal No. 3 is allowed.

Sr. Name of the company Brands owned Net Sales for the AMP expenses AMP as a % of net No. (Major) FY 2008-09 (Rs. Cr) sales (Rs.Cr) 1. Dabur India Ltd. Dabur, Hajmola, 2396 284.92 11.89% Real and Anmol 2. Emami Limited Emami, Boro 740.87 109.31 14.75% Plus Navratna 3. Godrej Consumer Products Cinthol, 1087.41 93.34 8.58% Ltd. FairGlow, Ezee 4. Jyothi Laboratories Ltd. Ujala, Maxo 351.53 17.97 5.08% 5. Procter & Gamble Hygiene & Whisper, Vicks 772.81 89.56 11.58% Healthcare Ltd. 6. Nirma Ltd. Nirma 3030 47.93 1.58% 7. Hindustan Unilever Ltd. Pepsodent 10.55 ARITHMETICAL MEAN 9.14%

therein observed, that as the aforementioned comparables were either Indian companies which owned their brands developed by it or companies with significant foreign shareholding, therefore, the AMP expenses in the case of

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 18 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT the assessee could safely be taken at a lower figure i.e 8% of its net sales. Accordingly, the A.O considered 8% as the ―bright line‖ for AMP expenses, and thus, was of the view that expenditure over and above the aforesaid amount was required to be borne by the assessee‘s foreign AE, viz. Colgate- Palmolive, USA, that was the owner of the ‗Colgate‘ brand and the other brands in India. TPO observed that the ratio of AMP expenses incurred by the assessee worked out at 16.03% of its net sales, as under :

―A. Net Sales : Rs.1694,81,35,000/- B. Advertising & Sales Promotion : Rs. 271,71,68,000/- C. Advertisement, Marketing & Promotion (AMP) Expenses as a percentage of Sales (B/Ax 100%) : 16.03%‖

In the backdrop of his aforesaid deliberations, the TPO was of the view that the assessee was supposed to be reimbursed the aforesaid AMP expenses that were incurred by it on behalf of its AE, viz. Colgate-Palmolive, USA, along with a mark up of 15% on the said expenditure. Backed by his aforesaid deliberations, the TPO worked out the Arm‘s Length Price of the AMP expenditure at Rs.156,55,14,780/-, as under:

―Determination of arm‘s length price of re-imbursement, for brand promotion and marketing intangible of the AE in India. Net Sales of the taxpayer = Rs.1694,81,35,000/- Arm‘s length % of AMP Expenditure = 8% Arm‘s length AMP Expenditure = 8% of Rs.1694,81,35,000/- = Rs.135,58,50,800/- Expenditure incurred by the tax payer on AMP = Rs.271,71,68,000/- Expenditure incurred for developing the Intangibles = Rs.271,71,68,000/- - Rs. 135,58,50,800/- = 136,13,17,200/- Add Mark up @ 15% = 115% of Rs.136,13,17,200/- = Rs.156,55,14,780/- Arm‘s length value for AMP activity = Rs.156,55,14,780/- Value received by the taxpayer = Nil Difference = Rs.156,55,14,780/-― Accordingly, the TPO was of the view that the aforesaid amount of Rs.156,55,14,780/- was to be reimbursed by the assessee‘s AE viz. Colgate-

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 19 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Palmolive, USA in respect of the brand promotion expenditure that was incurred by the assessee for developing its intangible in India in the manufacturing segment. 22. On objections filed by the assessee before the DRP, the panel though principally upheld the adoption of ―bright line‖ approach that was adopted by the TPO for computing the AMP expenses that were required to be reimbursed by the assessee‘s AE, viz. Colgate-Palmolive, USA, however, following the view taken by its predecessor it directed the TPO to reduce the AMP expenses by the amount of distribution expenses of Rs.89.3 crores, and therein work out the corresponding adjustment after adding the mark up of 15% to the amount of expenditure incurred by the assessee on behalf of its AE. On the basis of the aforesaid direction of the DRP, the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 made a TP adjustment under Sec. 92CA(4) of Rs.31,63,26,783/-. 23. Aggrieved, the assessee had assailed the aforesaid TP adjustment made by the A.O/TPO towards AMP expenses. It was submitted by the ld. A.R that the issue herein involved was squarely covered by the order of the Tribunal in the assessee‘s own case for A.Y 2005-06 and A.Y. 2007-08 in ITA No. 6073/Mum/2014 and ITA No. 2778/Mum/2011, respectively. It was submitted by the ld. A.R that the Tribunal on the basis of exhaustive deliberations had struck down the TP adjustment that was made by the A.O/TPO w.r.t AMP expenses by relying on a host of judicial pronouncements. In order to buttress his aforesaid claim the ld. A.R took us through aforesaid order of the Tribunal passed in the assessee‘s own case for the aforesaid preceding years.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 20 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT pressed into service by them to drive home their respective contentions. On a perusal of the order passed by the Tribunal while disposing off the assessee‘s appeal for A.Y. 2005-06 and A.Y. 2007-08 in ITA No. 6073/Mum/2014 and ITA No. 2778/Mum/2011, respectively, we find, that the Tribunal had struck down the TP adjustment that was made w.r.t AMP expenditure, observing as under:

―5.1 We have carefully heard the rival contentions and perused relevant material on record. At the outset, some pertinent facts to be noted are that there exists no arrangement or agreement between the assessee and its AE which obliged the assessee to undertake any sort of brand building on behalf of its AE. Secondly, nothing has been brought on record to suggest that incurring of AMP expenditure has, in any manner, resulted into brand building exercise or creating marketing intangibles for the AE or AE stood benefitted by stated expenditure in any manner. The only argument advanced by the revenue is that the brand value of the Assessee Group, as a whole, has reflected healthy growth during the period 2000 to 2006. However, no evidence to demonstrate that there was any co-relation between the aforesaid growth vis-à-vis quantum of AMP expenditure incurred by the assessee has been placed on record. In our opinion, no addition could be made on mere assumption of certain facts. 5.2 So far as the reimbursement of AMP expenses as urged by the revenue is concerned, upon perusal of transactions as reported in Transfer Pricing [TP] study carried out by assessee, we find that these expenses are in mostly in the nature of meeting expenses, travelling expenses, hotel expenses which has been received as well as paid by the assessee on the same basis i.e. third party cost. The nature of these expenses, per-se, do not instill confidence in us to conclude that the incurring of said expenditure, has in any way, resulted into brand building or creating marketing intangibles for the assessee. 5.3 Proceeding further, the contention of the assessee that has incurred the said expenditure to promote its own products in the market has remained uncontroverted. It is also uncontroverted that the aforesaid payments were primarily made to independent third parties without rendering any services to its AE. 5.4 Further, we find that Ld. TPO has computed the said adjustment by applying Bright Line Test without carrying out any analysis of the impugned expenditure to corroborate his stand. The aforesaid methodology, as per settled legal position, is not a recognized methodology and not one of the prescribed methods as envisaged by Rule 10B. 5.4 Upon due consideration, we find that the facts of the above case are quite similar to facts in the decision of Mumbai Tribunal rendered in Johnson & Johnson Ltd. Vs. CIT [43 Taxmann.com 15] wherein it has held as under:- 37. Relevant facts are that the TPO has stated that the assessee incurred publicity and sales promotion expenses of Rs.163.27 crores during the

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 21 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT relevant financial year. The TPO has stated that said expenses on publicity and sales promotion has resulted into higher sales on which correspondingly higher royalty has been paid to the parent company J&J US. Therefore, the benefit of higher publicity and sales promotion expenses are accrued to the parent company J&J US but the cost thereof is not apportioned to the parent company. The TPO sought explanation from the assessee as to why the cost of arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2) of the Act. The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate. The assessee filed its reply stating inter-alia that assessee is engaged in the business of distributing the products in the Indian Market on its own account. It was also contended that the advertisement and marketing expenses are incurred in India only for promoting sales by assessee of its products in India and it is not in any way benefited to J&J US. That J&J US is not directly involved in the business of manufacturing or trading of said goods in India either of its own or through any of its subsidiary. Hence, the entire advertisement and marketing expenses incurred are purely for assessee's own benefit and there is no element of any service being rendered to J&J US. It was also stated that assessee-company is an independent risk bearing entity and any cost incurred towards advertisement and marketing would be for the sole benefit of assessee company, as it enjoys the increased sales of products as a result of such marketing activities. The assessee also furnished details of publicity and sales promotion expenses before TPO. However, TPO did not accept the contention of the assessee and stated that the said growth in net sales so achieved through higher and higher publicity and sales promotion and expenses have resulted into higher payment of royalty which the assessee is paying at a fixed percentage of sales to its parent company. Thus, there is a co-relation between the royalty payment and sales on the one hand and publicity and sales promotion expenses on the other hand and it is not a matter of coincidence. The TPO after considering the submissions of assessee has stated that J&J US, the parent company of the assessee is reaping the benefit of higher royalty year after year as a result of higher sales realized by assessee through higher and higher expenses by way of publicity and sales promotion undertaken by assessee without the overseas AE bearing any cost thereto He stated that it constitutes arrangement between the two entities wherein the entire cost is borne by assessee, whereas the parent company J&J US is getting its share of benefit from those increased sales. The TPO worked out the cost at the rate of 4.22% of the publicity and sales promotion expenses which comes to Rs.6.88 crores. However, the TPO stated that the cost is restricted to 200.82 lakhs (being 1.23% of Rs.163.27 crores) in view of disallowance/adjustment in income made on account of royalty on technical know-how, the income tax, R&D cess and service tax paid thereon aggregating to Rs.41.27 crores out of total payment of Rs.58.37 crores. Hence, TPO disallowed Rs.200.82 lakhs from the publicity and sales promotion expenses incurred towards cost allocable to parent company. DRP after considering the submissions of the assessee company confirmed the action of the TPO. Accordingly the AO disallowed a sum of Rs.200.82 lakhs while making assessment. Hence, assessee is in appeal before the Tribunal. 38. During the course of hearing, ld. AR submitted that it was an adhoc disallowance made by TPO and relied on the decision of Mumbai Bench of Tribunal in the case of Kodak India (P.) Ltd. v. Addl. CIT [2013] 37 taxmann.com 233 and submitted that the Tribunal deleted similar kind of

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 22 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT adjustment suggested by TPO on the ground that TPO cannot make a disallowance which is not within the precinct of specific method prescribed under section 92C(1) of the Act. He submitted that no adhoc disallowance can be made under the Transfer Pricing provisions. 39. On the other hand, ld. DR supported the order of AO/TPO and submitted that to consider marketing expenses the cost plus method could be applied. Since TPO has not followed any specific method as 2006-07 is the first year, the matter could be restored to TPO to decide it afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. v. Asstt. CIT [2013]140 ITD 41/29 taxmann.com 300. He submitted that the AE, parent company of the assessee should reimburse the expenses as assessee company has created brand in India which is owned by parent company by incurring the expenditure. 40. We have considered the order of the TPO/AO and the submissions of ld. Representatives of the parties. We observe that the TPO has suggested disallowance on the ground that the AE of the assessee viz J&J US is reaping the benefit of higher royalty amount as a result of higher sales realized by assessee by incurring higher expenses by way of publicity and sales promotion undertaken by assessee and therefore the parent company of the assessee-company should share some of the expenses. It is a fact that TPO while suggesting any disallowance/adjustment has to state that the transactions between the assessee company and its AE is not at Arm's Length. The TPO is to determine the Arm's length by following one of the method and /or most appropriate method as prescribed in section 92C(1) of the Act. The TPO cannot suggest adjustment/disallowance on the basis of his assumptions that the payment is excessive though it is at arm's length. Similar issue was also considered by ITAT Mumbai Bench in the case of Kodak India (P.) Ltd. (supra). Further, Rule 10B specifically provides the procedure to be followed for determining Arm's Length Price. We observe that the TPO while suggesting the disallowance of 200.82 Lakhs out of the expenses incurred by assessee on publicity and sales promotion has not followed any of the method and therefore the said adjustment/disallowance suggested by TPO is outside its jurisdiction. During the course of hearing, ld. DR submitted that the matter could be restored to TPO to decide afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. (supra). Since no specific submissions were made and considering the fact that the assessee justified the payment of technical know-how royalty at the rate of 4% of net sales which is lower than Arm's length rate of 4.84% and the said fact, we have also discussed herein above in para 33 of this order, that the payment of royalty by assessee to its parent company is at Arm's Length, we do not find any justification to make the said disallowance of Rs.200.82 lakhs as suggested by TPO towards the shares to be contributed by AE of the assessee company. Therefore, we delete the said disallowance made by AO by allowing ground No.18 of the appeal taken by assessee. Upon further appeal by revenue [80 Taxmann.com 269], Hon‘ble Bombay High Court has upheld the aforesaid view of the Tribunal by making the following observations:- 4. Re Question (l) :— (i) The impugned order of the Tribunal allowed the Respondent- Assessee's appeal before it by deleting the addition of Rs.200.82

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 23 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT lakhs being the transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the Respondent- Assessee' parent M/s. Johnson & Johnson, USA. This on the ground that the Transfer Pricing Officer (TPO) has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined the Arms Length Price (ALP) by following any of the methods prescribed under Section 92C(1) of the Act read with Rule 10B of the Income Tax Rules, 1962. (ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA. (iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act. (iv) In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained. 5.5 Similar view has been taken by Hon‘ble Delhi High Court in catena of subsequent decisions, few of which are as follows:- (i) Maruti Suzuki India Ltd. v. CIT 2015 64 Taxmnn.com 150 (ii) CIT v. Whirlpool of India Ltd. 381 ITR 154 (iii) Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl.CIT 381 ITR 237 (iv) Yum Restaurants (India) (P.) Ltd. v. ITO 380 ITR 637 In the above-mentioned decisions, it has categorically been held that in the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. Another aspect of the issue is absence of machinery provisions as observed by Hon‘ble Delhi High Court, in Bausch & Lomb Eyecare (India) (P.) Ltd. [381 ITR 237] where Hon‘ble Court after considering various judgments has elaborately discussed the issue in the following manner:- 51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 24 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non- resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 25 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 26 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ……. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 27 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. …… 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 28 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law".' Although we are conscious of the fact that Special Leave Petition against the same has been admitted by Hon‘ble Apex Court [77 Taxmann.com 54], however, we find that the operation of the said judgment has not been, in any manner, stayed by Hon‘ble Court and therefore valid in the present context. 5.6 So far as the decisions relied upon by revenue are concerned, we find that the decision of Hon‘ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. was rendered in the context where the assessees were distributors of products manufactured by the foreign AE. The said assessees themselves were not manufacturers. More over none of the said assesses appears to have questioned the very existence of international transaction with foreign AE. It was also not disputed that the said international transaction of incurring AMP expenditure could be subject matter of TP adjustments in terms of Sec.92 of the Act. Therefore, the same is distinguishable on facts. Similarly, the decisions rendered in BMW India Private Limited and Perfetti Van Melle India Pvt. Ltd. has been rendered in a situation where there existed an agreement between the assessee and its AE to undertake Advertisement and Sales promotion. The case law of Cushman & Wakefied is not related with determination of ALP of AMP expenditure and further in that case the benchmarking of reimbursement of expenses was not done by the assessee. Hence, the cited case laws could not help the revenue on factual matrix. The case law of Maruti Suzuki India Ltd., in fact, support the stand of the assessee which is evident from the fact that Ld. DRP, in AY 2011-12, following the ratio of this decision deleted the impugned additions and allowed the appeal of the assessee. 5.7 To conclude, respectfully following the ratio of decision of Hon‘ble Bombay High Court as cited above along with the cited decisions of Hon‘ble Delhi High Court, we upheld the order of Ld. first appellate authority and dismiss this ground of revenue‘s appeal. The assessee‘s cross-objections become infructuous.‖

As the facts and the issue involved in the present appeal before us remains the same as were there before the Tribunal in the aforementioned years in the assessee‘s own case, we, thus, finding no reason to take a different view and adopting a consistent approach therein respectfully follow the same. Accordingly, in terms of our aforesaid observations we herein vacate the TP

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 29 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT adjustment of Rs.31,63,26,783/- made by the A.O/TPO w.r.t the AMP expenditure. The Ground of appeal No. 4 is allowed in terms of our aforesaid observations. 26. We shall now take up the grievance of the assessee that the A.O had erred in making an adjustment of Rs.61,55,480/- in respect of provision of research and developing/testing services. It was, however, submitted by the ld. A.R that pursuant to the directions of the DRP as the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 had restricted the addition under Sec. 92CA(4) to an amount of Rs.31,63,26,783/-, and no addition in context of the aforesaid issue was therein made by him, thus, the said ground is rendered as infructuous. In the backdrop of the aforesaid concession of the ld. A.R the Ground of appeal No. 5 is dismissed as having been rendered as infructuous. 27. We shall now deal with the alternative claim of the assessee that in case the addition made by the A.O/TPO towards AMP expenditure is upheld, then, the deduction under Sec. 80IC would consequentially require to be revised. As the addition made by the A.O towards AMP expenditure had been struck down by us hereinabove, thus, the said alternative claim of the assessee is herein rendered as infructuous. The Ground of appeal No. 6 is dismissed as having been rendered as infructuous. 28. The appeal of the assessee is partly allowed in terms of our aforesaid observations.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 30 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT recorded hereinabove. The Grounds of appeal Nos. 1 to 4 raised by the revenue before us are accordingly dismissed.

A.Y: 2010-11 IT No. 1925/Mum/2015 (Assessee’s appeal) ITA No. 1852/Mum/2015 (Revenues appeal) 31. We shall now deal with the cross-appeals for A.Y 2010-11. The assessee has assailed the impugned order on the following grounds of appeal before us:

“Ground No 1; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in disallowing a sum of Rs. 14,39,636 under Section 14A of the Income Tax Act, 1961 ('the Act') having failed to appreciate that the Appellant company has not incurred any expense directly in relation to the earning of tax free income. The Appellant prays that the sum of Rs. 14,39,636 be allowed as business expenditure and the disallowance may kindly be deleted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in computing the disallowance as per the method prescribed under Rule 8D(a)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. The Appellant prays that disallowance of proportionate interest expenditure under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules kindly be deleted. 3. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in not considering the alternative computation of disallowance under Section 14A of the Act submitted by the Appellant without providing justification for rejecting Appellant's claim. The Appellant prays that the alternative computation of disallowance under Section 14A of the Act provided by the Appellant to be considered for disallowance under Section 14A of the Act. Ground No 2; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the issued by the DRP, has erred in excluding 25% of the income from Scrap Sales from profit of the business of the industrial undertaking while computing deduction under Section 80IC of the Act.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 31 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT The Appellant prays that 25% of the income from Scrap Sales of Rs. 16,45,891 be treated as part of the profit of the business of the industrial undertaking and allowed while computing deduction under Section 80IC of the Act. 2. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, has erred in excluding the foreign exchange gain on raw, and packing material from profit of the business of the industrial undertaking while computing deduction under Section 8oIC of the Act. The Appellant prays that foreign exchange gain on raw and packing material of Rs. 1,55,34,162 be treated as part of the profit of the business of the industrial undertaking and allowed while computing deduction under Section 8oIC of the Act. Ground No 3: 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in making an adjustment towards advertisement, marketing, sales promotion ('AMP expenses') of Rs. 108,00,22,597 to the income of the Appellant under the presumption and without any basis that the Appellant has benefited the Associated Enterprise ('AE'). 1.1 On the facts and in the circumstances of the case and in law, the learned AO erred in: i. disregarding that the issue of marketing intangibles is not relevant to entrepreneurial licensed manufacturers as is the case of the Appellant; ii. presuming that there existed an arrangement and consequently a transaction between the Appellant and its AE and thereby erred in contending that the AE ought to compensate the Appellant towards the alleged excessive AMP spend; iii. presuming without any direct or indirect evidence that the Appellant had incurred non-routine AMP expenses and that the AMP expenses incurred by the Appellant benefited the AE; and iv. confirming the adjustment despite the fact that the advertisements were product specific and not brand specific and disregarding the fact that many of the products manufactured by the Appellant were India specific. The Appellant therefore prays that appropriate relief be granted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in considering third party market research expenses, Vol/incentive, Instore support cost and manufacturing standard costs, being in the nature of selling & distribution expenses, for computing the alleged excessive AMP spend of the Appellant. The Appellant therefore prays that appropriate relief be granted. 3. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in i. applying bright line method to determine the alleged excessive AMP spend without appreciating that no such method has been prescribed under the Act and Rules;

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 32 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT ii. concluding that the AMP expenses of the Appellant, which is incurred by way of payment to the third parties, as an international transaction; iii. arbitrarily selecting comparables for bright line method without following a structured search process; iv. comparing the AMP expense ratio of the Appellant with AMP expense ratio of the comparable companies engaged in varied segments of FMCG sector i.e. not similar to the Appellant (oral care segment) and concluding that the excess is non-routine AMP spend; v. arbitrarily excluding a part of the AMP expenses of comparables based on the ratio of AMP to selling expenses as computed by the TPO in the case of taxpayer; vi. considering the company level AMP spend of the segmental level comparables for the purpose of applying the bright line test on the AMP expenses incurred by the Appellant; vii. arbitrarily applying a mark-up on the alleged excessive AMP spend;

The Appellant therefore prays that appropriate relief be granted. Ground No 4.; 1. On the facts and in the circumstance of the case and in law, the learned AO erred in making an adjustment of Rs 69,81,039 to the income of the Appellant, in respect of provision of research and development/ testing services, by: a) failing to appreciate that none of the conditions set out in section 920(3) were satisfied and that the Appellant had prepared the Transfer Pricing documentation bona fide/^ha in good faith in compliance with the Act and the Rules; b) using single year data (i.e. Financial Year 2009-10) as against the multiple year data used by the Appellant for the comparability analysis; c) rejecting comparable companies without appropriate reasons from the comparability analysis carried out by the Appellant; d) failing to provide any structured search process and arbitrarily selecting 2 additional companies as comparable without appreciating that the companies were functionally different from the assessee; e) not granting the economic adjustments to the Appellant on account of differences between risk profile, working capital cycle of the Appellant vis-a- vis the comparables; and Accordingly, the Appellant prays that the addition of Rs. 69,81,039 may kindly be deleted. Ground No 5; 1. Without prejudice to Ground No. i to 5 above and in the alternative on the facts and in circumstances of the case, the learned AO, under the directions issued by the DRP, has erred in consequently not revising the profit from the Baddi unit eligible for deduction under Section 8oIC of the Act by the amount of Advertising,

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 33 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Marketing and Promotion expenditure alleged to have not been incurred for the purpose of business of Appellant's undertaking. The Appellant prays that the learned AO be directed to recompute the deduction under Section 80IC of the Act by adjusting the Advertising and Marketing expenditure considered as not having been incurred for the purpose of business of Appellant's undertaking. The Appellant craves leave to add to, omit or alter all or any of the above Grounds of appeal before or during the hearing of aforesaid matter.‖ On the other hand the revenue has assailed the order of the CIT(A) on the basis of the following grounds raised before us:

―1. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing the TPO to verify the working given by the assessee which is erroneous, since the amounts quoted in the annual reports of the comparable companies under the head selling and distribution expenses are not necessarily representative of such expenses only, and may have an element of AMP expenses to it. 2. On the facts and in the circumstances of the cast and in law, the Hon'ble DRP erred by not upholding the TPO's ratio method to exclude the selling and distribution expenses while working out the AMP spend of the comparables which is more scientific and logical approach in the absence of actual selling and distribution expenses available before the TPO. 3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 4. The appellant prays that the order of DRP on the above ground be set aside and that of the Assessing Officer be restored.‖

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 34 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Sr. No. Nature of TP Adjustment Amount 1. Extra ordinary AMP expenses to be Rs.108,00,22,597 reimbursed by AE 2. Research and development/testing services Rs.95,88,825/- segment Total Rs.108,96,11,422/- After receiving the aforesaid order of the TPO, the A.O vide a draft assessment order passed under Sec.143(3) r.w.s 144C(1), dated 03.03.2014 inter alia proposed the following additions/disallowances to the returned income of the assessee:

Sr. No. Particulars Amount 1. TP adjustment under Sec. 92CA(4) Rs.108,96,11,422/- 2. Disallowance under Sec. 14A Rs. 14,39,636/- 3. Restriction of the deduction claimed by the Rs.321,50,73,750/- assessee under Sec. 80IC (as against the claim of deduction under Sec. 80IC of Rs.324,25,70,303/-) On the basis of his aforesaid deliberations, the A.O assessed the income under the normal provisions at Rs.285,39,76,643/- and determined the ―book profit‖ under Sec.115JB at Rs.487,58,27,806/-. Objecting to the additions/disallowances proposed by the A.O the assessee carried the matter before the DRP. After deliberating on the contentions advanced by the assessee the DRP passed its order under Sec. 144C(5), dated 08.12.2014.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 35 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 36. Disallowance under Sec. 14A : Rs.14,39,636/-:

As is discernible from the records, we find, that the assessee during the year had earned tax free interest income of Rs. 87,92,021/-. Observing that the assessee had not attributed any part of the expenditure for earning of the aforesaid exempt income, the A.O, therein worked out the same at an amount of Rs.14,39,636/-, as under:

Summary of total disallowances Relevant Rule Amount 8D(2)(i) -- 8D(2)(ii) Rs. 7,41,207 8D(2)(iii) Rs. 6,98,430 Total Rs. 14,39,636 37. At the time of hearing of the appeal before us, the ld. A.R reiterated his contentions as regards the aforesaid disallowance made by the A.O under Sec. 14A r.w. Rule 8D, as were advanced by him in context of the said issue in its appeal for the immediately preceding year i.e A.Y. 2009-10. To sum up, it was the claim of the ld. A.R that as the assessee had sufficient self owned funds to justify the investments in the exempt income yielding assets, thus, no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii). Also, it was submitted by the ld. A.R that the A.O while computing the ‗average value of investments‘ for the purpose of quantifying the disallowance of the administrative expenses attributable to earning of the exempt income as per Rule 8D(2)(iii), had erred, by including those investments which had not yielded any exempt income during the year under consideration. It was submitted by the ld. A.R that the matter may be restored to the file of the A.O with a direction to exclude such investments which had not yielded any exempt income for the purpose of quantifying the disallowance under Rule 8D(2)(iii).

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 36 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 39. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements pressed into service by the respective parties in context of the issue under consideration before us. As the facts and the issue herein involved remains the same as was there before us in the assessee‘s appeal for the immediately preceding year i.e A.Y. 2009-10 in ITA No. 1431/Mum/2014, therefore, our order therein passed shall apply mutatis mutandis for the purpose of disposing off the present issue. Accordingly, we herein vacate the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(ii). On a similar footing, we herein restore the issue as regards computing of the disallowance under Rule 8D(2)(iii) to the file of the A.O, with a direction to exclude the investments which had not yielded any exempt income during the year under consideration while computing the ‗average value of investments‘ for working out the disallowance therein contemplated. The Ground of appeal No. 1 is partly allowed in terms of our aforesaid observations. 40. We shall now deal with the two fold claim of the assessee as regards the quantification of its entitlement towards deduction u/s 80IC of the Act, viz. (i). that the A.O/DRP had erred in excluding 25% of the scrap sales from the eligible profits of the assessee for the purpose of computing its entitlement for deduction under Sec. 80IC of the Act; and (ii). that the A.O/DRP had erred in excluding the foreign exchange gain on raw/packing material (Rs.1,55,34,162/-) while quantifying the assessee‘s entitlement for deduction u/s 80IC. 41. As is discernible from the orders of the lower authorities, we find, that the A.O in the course of the assessment proceedings observed that the assessee while computing its claim for deduction u/s 80IC had inter alia included in its eligible profits viz. (i) sale of scrap: Rs.65,83,565/-; and (ii) foreign exchange gain on raw/packing material: Rs.1,55,34,162/-. Being of the view that the aforesaid sales/foreign exchange gain did not have first degree

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 37 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT nexus to the industrial activity of the assessee, the A.O was of the view that the same was wrongly included by the assessee while computing its eligible profits within the meaning of Sec. 80IC of the Act. Accordingly, the A.O after inter alia excluding the aforesaid amounts, viz. (i).scrap sales: Rs.65,83,565/-; and (ii). foreign exchange gain: Rs.1,55,34,162/-, therein reworked the assessee‘s claim for deduction under Sec. 80IC at Rs.321,50,73,750/-. 42. On objections filed by the assessee with the DRP, the panel directed the A.O to consider 75% of scrap sale for the purpose of deduction under Sec. 80IC. Insofar the foreign exchange gain on raw and packing material was concerned, it was observed by the DRP that as the said income had no nexus to the manufacturing activity, thus, the same not being an income derived from the industrial undertaking within the meaning of Sec.80IC was rightly excluded by the A.O for the purpose of computing the assessee‘s entitlement for deduction u/s 80IC of the Act. 43. The A.O after receiving the aforesaid order of the DRP under Sec. 144C(5), therein vide his order passed under Sec. 143(3) r.w.s. 144C(13), dated 30.01.2015 restricted the assessee‘s claim for deduction under Sec. 80IC to an amount of Rs.322,53,90,250/-. 44. Aggrieved, the assessee has assailed the scaling down/restriction of its claim of deduction under Sec. 80IC before us. Insofar, the restriction of the assessee‘s claim for deduction under Sec. 80IC w.r.t scrap sale is concerned, we find, that as the facts and the issue therein involved remains the same as were there before us in the assessee‘s appeal for the immediately preceding year for A.Y 2009-10, in ITA No. 1431/Mum/2014, thus, our order therein passed in context of the said issue shall apply mutatis mutandis for the purpose of disposal off the present issue for the year under consideration. As regards the assessee‘s claim that the foreign exchange gain on raw and packing material duly formed part of its eligible profits for the purpose of claim of deduction under Sec. 80IC of the Act, the ld. A.R had relied on an order of the Hon’ble High Court of Bombay in the case of CIT Vs. Rachna Udhyog

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 38 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT (2010) 230 CTR 72 (Bom). Although, the aforesaid order was passed in context of the pari materia provisions contemplated in Sec. 80IB of the Act, however, we find that the same seizes the issue under consideration before us. In its aforesaid order, it was observed by the Hon‘ble High Court that the deduction under Sec. 80IB was allowable in respect of the exchange rate difference as the exchange rate fluctuation arises out of and is directly related to the sale transaction involving the export of goods of the industrial undertaking. It was observed by the Hon‘ble High Court, as under:

―The exchange rate fluctuation arises out of and in directly related to the sale transaction involving the export of goods of the industrial undertaking. The exchange rate fluctuation between the rupee equivalent of the value of the goods exported and the actual receipts which are realized arises on account of the sale transaction. The difference arises purely as a result of a fluctuation in the rate of exchange between the date of export and the date of receipt of proceeds, since there is no variation in the sale price under the contract. The view which we have taken is also consistent with the view taken by and Division Bench of this Court on 15th Dec. 2009 in the case of Syntel Ltd. (IT Appeal Nos.1974, 1976 and 1978 of 2009). In the circumstances, w would affirm the judgment of the Tribunal insofar as the question of exchange rate fluctuation is concerned‖ We find, that as per Sec.80IB of the Act, the assessee alike the deduction contemplated under Sec.80IC is eligible for deduction of any profits and gains derived from any eligible business therein referred to in the said section. In its aforesaid order, it was observed by the Hon‘ble High Court that as the exchange rate fluctuation arises out of and is directly related to the sale transaction involving the export of goods of the industrial undertaking, the same, thus, was entitled for being allowed under Sec. 80IB of the Act. In the backdrop of the aforesaid view so taken by the Hon‘ble High Court, we are of the considered view that the foreign exchange gain on raw and packing material credited by the assessee before us in its profits and loss account can safely be held to be eligible for deduction under Sec.80IC of the Act. Accordingly, we concur with the claim of the assessee that the foreign exchange gain on raw and packing material was duly eligible for deduction u/s 80IC of the Act. We, thus, direct the A.O to allow the asessee‘s claim for deduction u/s 80IC w.r.t the foreign exchange gain on raw and packing

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 39 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT material of Rs.1,55,34,162/-. The Ground of appeal No. 2 is allowed in terms of our aforesaid observations.

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 40 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT the assessee company as per the TP study report was arrived at 10% on cost as against the average PLI of the comparables which worked out at 12.58% on single year update basis. It was submitted by the ld. A.R that as the arithmetical mean price was within the range of +/- 5% of the price charged in its international transactions, the same, thus, was treated as being at arm‘s length. It was submitted by the ld. A.R that the assessee had selected 12 companies as comparable out of which only 4 comparables were accepted by the TPO, who further selected two new comparables and arrived at an average PLI (OP/TC) of 22.80%, as under:

Sr. No. Name of the company OP/TC (%) 1. Aurigine Discovery Technologies Limited 20.09 2. Chokshi Laboratories Limited 20.82 3. Vimta Labs Limited 7.08 4. GVK Biosciences Pvt. Ltd. 23.5. 5. Alphageo (India) Ltd. 789231206 25.13 6. TCG Lifesciences Ltd. 40.14 Arithmetic Mean 22.80 The assessee is aggrieved with the inclusion of the two new comparables selected by the TPO viz. (i) Alphageo (India) Ltd; and (ii) TCG Life Sciences Ld. It was averred b the ld. A.R that as both of the aforesaid companies were functionally not comparable, the same, thus, had wrongly been selected by the TPO. On objections filed by the assessee the DRP had upheld the inclusion of the aforesaid two companies in the final list of comparables.

It was submitted by the ld. A.R that the aforesaid company viz. Alphageo (India) Ltd. was included by the TPO in the final list of comparables in the assessee‘s own case for A.Y. 2008-09, which, on appeal was however vacated by the Tribunal vide its order passed in ITA No. 6766/Mum/2012,

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 41 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT dated 31.07.2020 (copy placed on record). The ld. A.R took us through the aforesaid order of the Tribunal in the assessee‘s own case, and submitted, that the Tribunal after referring to the functional profile of the aforementioned company, had observed, that unlike the assessee which was in the business of providing testing related services to its AE, viz. Colgate-Palmolive, USA, the aforesaid company was engaged in the business of providing seismic survey and related services. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the Tribunal considering the functional disparity had excluded the aforesaid company from the final list of comparables by observing as under:

―22. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. A perusal of the annual report (2007-08) of Alphageo (India) Ltd. clearly indicates that they provide 2D and 3D seismic and related services like seismic data acquisition, processing and interpretation. The Company‘s comprehensive portfolio of services comprises : Seismic data acquisition  Designing and preplanning of 2D and 3D surveys  Seismic data acquisition in 2D and 3D Seismic data processing  Seismic data processing of 2D and 3D data  Reprocessing  Special processing including pre-stack imaging  AVO inversion and other services Seismic data interpretation  Structural and Stratigraphic interpretation  Generation, evaluation and ranking of prospects  Reservoir data acquisition  Reservoir analysis Also we observe that the profit and loss account of the company reflects that the whole operating income is from seismic survey and related service. The Company‘s business consists of one reportable and geographical segment of seismic data acquisition and its related service within India. In the case of the appellant before us, they provide testing related services to Colgate Palmolive USA. Therefore, we have no hesitation in excluding Alphageo (India) Ltd. from the set of comparables arrived at by the TPO/AO. Accordingly, we direct the AO to exclude Alphageo (India) Ltd. from the final set of comparables.‖

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 42 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 50. Per contra, the ld. D.R could not controvert the aforesaid contentions advanced by the counsel for the assessee.

The ld. A.R at the very outset took us through the director‘s report of the aforementioned company for the year under consideration. It was submitted by the ld. A.R that the aforementioned company was engaged in the business of providing contract research arising out of the contract predominantly outside India and was a single segment company. Our attention was drawn by the ld. A.R to the bifurcated details of the turnover of the aforesaid company, which revealed that 1/3rd of its income was from the sale of chemical compounds i.e 329961 grams valued at Rs.328,560,432/-. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that in the absence of any segment information the aforementioned company whose turnover comprised of substantial portion of sales could not have been adopted as a comparable for benchmarking the international transactions of the assessee for the year under consideration. In order to support its aforesaid claim the ld. A.R relied on the order of the ITAT ‘K’ bench in the case of Evonic Dequssa India Pvt. Ltd. Vs. DCIT (OSD), Mumbai, ITA No. 7767/Mum/2012, dated 11.11.2016. It was submitted by the ld. A.R that the Tribunal while disposing off the appeal of the aforesaid assessee before them which was providing services to its AE,

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 43 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT had after referring to the financial statements of the aforesaid company viz. M/s PCG Life Sciences Ltd. observed, that the same could not have been selected as a comparable for benchmarking the international transactions of the assessee before them.

―10. Having considered the rival stands, we find that the plea of assessee is quite potent and is also borne out of the material on record. In this context, our attention

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 44 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT was also invited to the Paper Book wherein is placed the relevant extracts from the Annual Financial Statements of M/s. TCG Lifesciences Ltd. which show that the total sales have been classified as ‗contract research operations‘ – Rs.86,68,09,176/-, which are stated to include sale of chemical compounds valued at Rs.31,93,33,202/-. The Annual Financial Statements clearly brings out that not only the sale of chemical compounds is substantial, but even the segmental data relating to the research operations is not available so as to facilitate comparison with assessee‘s activity of providing support services in connection with research and development to its associated enterprises. Thus, in view of the aforesaid fact-situation, the aforesaid concern is liable to be excluded from the final set of comparables. Thus, on this aspect, assessee succeeds.‖ Accordingly, in the backdrop of our aforesaid observations, we are of a strong conviction that the lower authorities had erred in including the aforesaid company as a comparable for benchmarking the international transactions of the assessee for the year under consideration. We, thus, direct the A.O/TPO to exclude the aforesaid company from the final list of comparables for the purpose of determining the ALP of the international transactions of the assessee.

The ld. A.R took us through the financial statements of the aforementioned company. Taking us through the functional profile of the aforementioned company, it was submitted by the ld. A.R that its services included project management, regulatory consultancy data management and bio-statistical support. It was, thus, submitted by the ld. A.R that there was no justification on

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 45 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT the part of the TPO/DRP to have rejected the aforementioned company from the final list of comparables. In order to buttress its claim for inclusion of the aforesaid company in the final list of comparables, the ld. A.R took us through its profit and loss account, which revealed that the same was mainly comprised of the contract clinical research and service fees. 57. Per contra, the ld. D.R. could not controvert the aforesaid claim of the counsel for the assessee that the lower authorities had whimsically excluded the aforementioned company from the final list of comparables. 58. We have given a thoughtful consideration to the aforesaid issue and are persuaded to subscribe to the claim of the ld. A.R that the TPO/DRP had without giving any cogent reason excluded the aforesaid comparable of the assessee from the final list of comparables. We are unable to concur with such non-speaking observation of the lower authorities, and in all fairness and in the interest of justice restore the matter to the file of the A.O/TPO for deciding the aforesaid issue afresh. Needless to say, the A.O/TPO while re- adjudicating the aforesaid issue shall pass a speaking order after affording an opportunity of being heard to the assessee. (B) Fortis Clinical Research Limited:

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 46 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT 61. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. Admittedly, it is a matter of fact borne from the record that the TPO/DRP had not given any cogent reason for excluding the aforementioned company selected by the assessee as a comparable from the final list of comparables. In our considered view, the matter in all fairness requires to be revisited by the TPO, who is thus directed to re-adjudicate the same after affording a reasonable opportunity of being heard to the assessee. The Ground of appeal No 4 is partly allowed in terms of our aforesaid observations.

Order pronounced in the open court on 08.02.2021

Sd/- Sd/- S. Rifaur Rahman Ravish Sood (ACCOUNTANT MEMBER) (JUDICIAL MEMBER)

ITA Nos.1431 &1350/Mum/2014 & ITA Nos.1925 & 1852/Mum/2015 47 A.Ys. 2009-10 and 2010-11 Colgate Palmolive (India) Ltd. Vs. Addl. CIT-10(3)/ACIT Mumbai, Date: 08.02.2021 PS: Rohit

Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR ―K‖ Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy./Asst. Registrar ITAT, Mumbai