DCIT, CIR-12(1), KOLKATA, KOLKATA vs. M/S RECKITT BENCKISER (INDIA) LTD., KOLKATA

आदेश / O R D E R

Per Dr. A.L. Saini, AM:

These are the cross appeals filed by the revenue and assessee pertaining to assessment year 2010-11 and 2011-12, and are directed against the separate fair assessment orders passed by the A.O./ TPO, which incorporates the findings of the Dispute Resolution Panel (in short ‘DRP’).

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 background, we summarize and concise the grounds raised by the revenue as well as assessee as follows:

Grounds relating to Transfer Pricing

1.Transfer Pricing adjustment in relation to payment of royalty to the tune of Rs. 787,096,934/-

This ground covers ground no. 5 to 7 of revenue’s appeal in ITA No. 529/Kol/2015, for A.Y. 2010-11, Ground no. 6 of revenue’s appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12,Ground No.4a to4b of assessee`s appeal in ITA No.625/Kol/2016 for A.Y.2011-12 and additional grounds raised by the assessee in A.Y. 2011-12 wherein the assessee stated that payment of royalty was subsumed in the entity level Transactional Net Margin Method (TNMM), analysis conducted by the assessee using combined transaction approach.

2.Transfer pricing adjustment in relation to advertisement, marketing and promotion expenses (AMP).

This ground covers ground no. 5a to 5b of assessee’s appeal in ITA No. 404/Kol/2015, for A.Y. 2011-12, Ground no. 1 to 4 of revenue’s appeal in ITA No. 529/Kol/2015, for A.Y. 2010-11, Ground no. 3a to 3b of assessee’s appeal in ITA No. 625/Kol/2016, for A.Y. 2011-12, Ground no. 4 to 5 of revenue’s appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12.

3.Comparable companies arbitrarily chosen by the TPO for computation of mark up percentage of 22.34% over the alleged ‘Agency Cost’ incurred by the assessee.

This ground covers ground no.5 of assessee`s appeal in ITA No. 625/Kol/2016 for A.Y.2011-12 and ground No.7 of revenue`s appeal in ITA No. 518/Kol/2016 for A.Y.2011-12.

4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of Rs. 21,842,032/- made to transaction of “Export of raw materials and finished products”. (This covers ground No.6 of assessee`s appeal in ITA No.625/Kol/2016, for A.Y. 2011-12)

Grounds relating to Corporate Tax issue

1.Apportionment of expenses between fiscal units, non-fiscal units and head office of Rs. 261,160,962/-. Page | 3

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 This ground covers ground No.8 of revenue`s appeal in ITA No.529/Kol/2015 for A.Y. 2010-11 and ground nos. 1 and 2 of revenue`s appeal in ITA No.518/Kol/2016 for A.Y.2011-12.

2.Eligibility of income from sale of scraps whilst calculating deduction u/s 80IC of the Act of Rs. 20,723,924/-. This ground covers ground no. 9 raised by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A.Y. 2011-12.

3.Excess disallowance of interest income allocated to eligible units Rs. 23,400,187/-.

This ground covers ground no. 4 of assessee’s appeal in ITA No. 404/Kol/2015 for A.Y. 2010-11

Additional Grounds raised by the assessee

1.Refund of dividend distribution tax (DDT) paid in respect of non-residence share holders. This ground relates to A.Y. 2011-12

2.Deduction of education cess on income tax paid by the assessee is allowable expenditure.

This ground relates to A.Y 2011-12.

5.Now, we shall take these grounds one by one.

Grounds relating to Transfer Pricing

1.Transfer Pricing adjustment in relation to payment of royalty to the tune of Rs. 787,096,934/-

This ground covers ground no. 5 to 7 of revenue’s appeal in ITA No. 529/Kol/2015, for A.Y. 2010-11, Ground no. 6 of revenue’s appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12,Ground No.4a to4b of assessee`s appeal in ITA No.625/Kol/2016 for A.Y.2011-12 and additional grounds raised by the assessee in A.Y. 2011-12 wherein the assessee stated that payment of royalty was subsumed in the entity level Transactional Net Margin Method (TNMM), analysis conducted by the assessee using combined transaction approach.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12

9.1 You are requested to provide the details of such patents etc. received by you in are requested to provide the details of such patents etc. received by you in are requested to provide the details of such patents etc. received by you in case of products under these brand names which are of recent development so as case of products under these brand names which are of recent development so as case of products under these brand names which are of recent development so as to provide you with continuing benefit. In case this is not provided and with continuing benefit. In case this is not provided and with continuing benefit. In case this is not provided and established, then you are r established, then you are requested to show cause as to why the royalty for the equested to show cause as to why the royalty for the same should not be taken as Rs. Nil as no benefit has been received and no patent same should not be taken as Rs. Nil as no benefit has been received and no patent same should not be taken as Rs. Nil as no benefit has been received and no patent or know-how has been transferred. Further, please specify which patents are how has been transferred. Further, please specify which patents are how has been transferred. Further, please specify which patents are registered for “Dettol Antiseptic Liquid” as registered for “Dettol Antiseptic Liquid” as the details given by you do not the details given by you do not pertain to Dettol Antiseptic Liquid. In case you are not able to provide the same pertain to Dettol Antiseptic Liquid. In case you are not able to provide the same pertain to Dettol Antiseptic Liquid. In case you are not able to provide the same which has a recent origin/development and which can be considered to provide which has a recent origin/development and which can be considered to provide which has a recent origin/development and which can be considered to provide you with continuing benefits, then please show cause as to why the royalty should you with continuing benefits, then please show cause as to why the royalty should you with continuing benefits, then please show cause as to why the royalty should not be considered as Rs. Nil in case of this product. not be considered as Rs. Nil in case of this product.

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12 RBIL. The approach adopted by the taxpayer to benchmark the transaction of RBIL. The approach adopted by the taxpayer to benchmark the transaction of RBIL. The approach adopted by the taxpayer to benchmark the transaction of Royalty which is different in scope, risk and return has to be benchmarked Royalty which is different in scope, risk and return has to be benchmarked Royalty which is different in scope, risk and return has to be benchmarked appropriately and the most appropriate method appropriately and the most appropriate method is CUP as the data for different is CUP as the data for different types of royalty is available. This office has conducted a search for the similar types of royalty is available. This office has conducted a search for the similar types of royalty is available. This office has conducted a search for the similar agreements as that of the taxpayer from the publically available database. From agreements as that of the taxpayer from the publically available database. From agreements as that of the taxpayer from the publically available database. From perusal of those agreements, it was found that there is one perusal of those agreements, it was found that there is one agreements which can agreements which can be considered as a comparable to the assessee which is as given below: be considered as a comparable to the assessee which is as given below: be considered as a comparable to the assessee which is as given below:

Hence you are to show cause as to why not the payment for royalty be restricted Hence you are to show cause as to why not the payment for royalty be restricted Hence you are to show cause as to why not the payment for royalty be restricted to 1.5% of net sales. to 1.5% of net sales.

“(a)It would be erroneous on your part and highly prejudicial and unnecessarily t would be erroneous on your part and highly prejudicial and unnecessarily t would be erroneous on your part and highly prejudicial and unnecessarily harsh on us, if you adopt the ‘benefit test’ and indulge into the question of benefits harsh on us, if you adopt the ‘benefit test’ and indulge into the question of benefits harsh on us, if you adopt the ‘benefit test’ and indulge into the question of benefits derived by the assessee from the use of brands specified in the notice. However, derived by the assessee from the use of brands specified in the notice. However, derived by the assessee from the use of brands specified in the notice. However, we appreciate that your goodself has expressed no doubt that your goodself has expressed no doubt about the benefits about the benefits derived by RBIL, it would be even more unreasonable to deny the otherwise derived by RBIL, it would be even more unreasonable to deny the otherwise derived by RBIL, it would be even more unreasonable to deny the otherwise accepted benefits only on accepted benefits only on the basis of non-availability of information with respect availability of information with respect to details of patents. It must be carefully noted that, the ‘benefits’ derived by RBIL to details of patents. It must be carefully noted that, the ‘benefits’ derived by RBIL to details of patents. It must be carefully noted that, the ‘benefits’ derived by RBIL have been derived by use of the bunch of intangibles and not solely because of have been derived by use of the bunch of intangibles and not solely because of have been derived by use of the bunch of intangibles and not solely because of patents, which also has been agr patents, which also has been agreed by your goodself in the subject notice. eed by your goodself in the subject notice.

In facts and circumstances of the present case, the application of ‘benefit test’ is In facts and circumstances of the present case, the application of ‘benefit test’ is In facts and circumstances of the present case, the application of ‘benefit test’ is unwarranted, because unwarranted, because payment of royalty has not been made by us on a payment of royalty has not been made by us on a standalone basis, it depends on the sales and thus application of ‘benefit test’ to standalone basis, it depends on the sales and thus application of ‘benefit test’ to standalone basis, it depends on the sales and thus application of ‘benefit test’ to royalty payment is irrational and erroneous. It is not correct to judge payment of royalty payment is irrational and erroneous. It is not correct to judge payment of royalty payment is irrational and erroneous. It is not correct to judge payment of royalty on the yardstick of ‘benefit tes royalty on the yardstick of ‘benefit test’. Such a test to benchmark a transaction t’. Such a test to benchmark a transaction and arrive at the arm’s length price is not based on any of the methods prescribed and arrive at the arm’s length price is not based on any of the methods prescribed and arrive at the arm’s length price is not based on any of the methods prescribed under section 92C of the Act. under section 92C of the Act.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 (b) Our submissions regarding applicability of CUP in the way suggested by your goodself as against TNMM adopted by the company for the transaction of payment of royalty In this regard, at para 10 of the show cause notice dated 06 January 2014, your goodself has sought to rejected TNMM, as adopted by the assessee, to benchmark the payment of royalty transaction and instead suggested to adopt CUP on the grounds that the assessee's transaction on royalty is different in scope, risk and return.

We would like to submit that the assessee has benchmarked the transaction oj payment of royalty by applying TNMM at entity level. We would like to submit that without the payment of royalty for the products it would not be possible for the assessee to carry on its business, hence the royalty transaction is nothing but an important & integral part of all other international transactions, and thus the assessee qualifies for application of TNMM for benchmarking its royalty transaction.

We would invite the attention of your goodself to para 5.02.3 at page 48 of the Transfer Pricing Study Report submitted via submission dated 07 July 2014, wherein the assessee has categorically explained why CUP cannot be considered as the most appropriate method for benchmarking the transaction of payment of royalty. The relevant portion has been reproduced below for your ready reference:

"CUP Method The CUP method cannot be applied to transaction involving the payment oj royalty by RBIL for the following reasons:

RBIL does not pay royalty to third parties. RBIL pays royalty only to associated enterprises; RB group companies do not receive royalty from third parties in India; and

There is no publicly available information on prices charged in independent transactions of similar or identical nature that reflects the characteristics of the royalty paid by RBIL.

Therefore, there are no comparable prices available in order to apply CUP method.

TNMM

The applicability of TNMM depends on a related party’s functions performed, resources employed, and risks assumed. This method evaluated whether the amount charged in a controlled transaction is arm’s length based on objective measures of profitability derived from uncontrolled parties that engage in similar business activities under similar circumstances. Since comparable information was available and comparison at an operating margin level is a reasonable comparison, TNMM was selected as the most appropriate method. The TNMM examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction.

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12 It is a well accepted principle that net margins are less affected by transactional It is a well accepted principle that net margins are less affected by transactional It is a well accepted principle that net margins are less affected by transactional difference than are prices (as in the case of CUP) and gross margins (as in the difference than are prices (as in the case of CUP) and gross margins (as in the difference than are prices (as in the case of CUP) and gross margins (as in the case of RPM / CPM). In this case, since the functions performed by comparables case of RPM / CPM). In this case, since the functions performed by comparables case of RPM / CPM). In this case, since the functions performed by comparables identified by us were broadly similar to the functions performed by RBIL, the by us were broadly similar to the functions performed by RBIL, the by us were broadly similar to the functions performed by RBIL, the TNMM, which involves net margin comparison, was considered as the most TNMM, which involves net margin comparison, was considered as the most TNMM, which involves net margin comparison, was considered as the most appropriate method for testing the margin of RBIL”. appropriate method for testing the margin of RBIL”.

“36. Thus on conjoint reading of the agreement entered into by the asseseee 36. Thus on conjoint reading of the agreement entered into by the asseseee 36. Thus on conjoint reading of the agreement entered into by the asseseee with its A.E and above facts it well established that the A.E also provide the with its A.E and above facts it well established that the A.E also provide the with its A.E and above facts it well established that the A.E also provide the formula and trade name formula and trade name to the assesse to fracture the products the products to the assesse to fracture the products the products which has application in Skincare etc. which has application in Skincare etc.

Hence, the contention of the assesse is rejected and the royalty is restricted to Hence, the contention of the assesse is rejected and the royalty is restricted to Hence, the contention of the assesse is rejected and the royalty is restricted to 1.5% of the net sales. The calculation of Royalty is as under 1.5% of the net sales. The calculation of Royalty is as under

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12

“As defined by Treas. Reg. [section]1.482-5(a), the Comparable Profit Method (CPM) evaluates an arm's length price by reference to the profitability of unrelated companies that engage in similar activities under similar circumstances. The earnings of the entity using the intellectual property (the so- called tested party) is compared to the earnings of companies engaged in similar activities but not owning such intellectual property. The excess earnings of the tested party is assumed to be the contribution of the intellectual property. The following example illustrates the application of the CPM.

Uspharm, a U.S. product company is the developer of a drug, Nograine, that is useful in treating migraine headaches with minimal side effects. Uspharm is negotiating with a leading Japanese pharmaceutical company, Jpharm for the exclusive Japanese distribution rights to Nograine. What royalty rate should Jpharm pay?

To answer this question, four companies were identified that are engaged in the manufacture and marketing of generic drugs. Their median return on sales (ROS) was 14 percent. Uspharm has been realizing a 34 percent ROS on Nograine. This suggests that the patented status of Nograine has allowed it to generate profits that are 20 percent above the generic level. Therefore, the total intellectual contribution (TIC) of Nograine is estimated at 20 percent. The transfer pricing regulations provide no guidance on how to allocate the TIC. The only example in the regulations [Treas. Reg. [section] 1.482-5(e), Example 4] allocates the entire TIC to the developer. It is, however, unrealistic to allocate the entire TIC to the developer of the intangible asset. Because the licensee assumes the risks and challenges of commercialization, the licensee will expect to capture some of the benefits produced by the technology.The simplest way to split the TIC between the licensor and licensee is to use a rule of thumb.

Caves, who did a study of technology licenses, writes that "in an imperfect license market, the monopolist of a technology cannot fully approximate maximum rent...the bargaining appears to yield between one-third to one-half to the licensor with a mean of about 40 percent.

Various court cases (all of which dealt with CUTS, not CPM) confirm Cave's position as a reasonable rule of thumb. In Bausch & Lomb, the Court favored a 50-50 split between the licensor and licensee. In Eli Lilly v. Commissioner, 84 T.C. 996 (1985), the court provided a 45-55 split.lt is also possible to use a bargaining model to evaluate how the TIC will be split. To implement a bargaining model, it is necessary to determine the threat points. The threat point is the point at whichthe party will walk rather than deal. To determine the threat points it is necessary to identify the specific alternatives available to each party. For example, if Uspharm already has an 10 percent royalty offer from another company for the distribution rights, then 10 percent is the threat point. Uspharm will walk rather than accept a royalty lower than 10 percent The actual deal will occur somewhere between the two threat points. The distance between the two threat points is the bargaining space.(11) Game theory tells us that the party with the higher risk preference will be able to push the deal closer to the other party's threat point. So, for example, if the licensor is more willing to take the risk of the negotiations collapsing, then it is the licensor who will benefit. Page | 10

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 In practice, determining risk-preference is a highly subjective process, so the pragmatic option is to split the bargaining space, in the example below, the bargaining space is split 50-50." This paper identifies that for the operation of TNNM method, the normal remuneration pertaining to routine activities, other than "intangible "related returns are required to be determined and then on the basis of the relative contribution to the FAR of the "intangible" related transaction, the benefit of the "intangible" related profit is to be shared. From perusal of the TNMM analysis carried out by the assessee, it can be seen that no such identification of remuneration related to routine functions was identified. As a matter of fact it was not even analyzed whether the comparables which have been selected are paving any intangible related royalty payments are not. Consequently, even if on a without prejudice basis it is considered that TNMM is the most appropriate method for benchmarking royalty payments, the analysis carried out bv the assessee is absolutely incorrect, faulty and is not an indicator of the arms length nature of royalty payments. 38. Further on the basis of submissions made and details filed by the assessee, it is seen that the assessee has not been able to show any evidence of receipt of any technical know-how etc for the products pertaining to 'Mincream' and 'Robinson Barley' - two brands continuing from 1940s up to the limitation period. Accordingly, based on the documents submitted to date, it is held that the assessee has not received any support/ know-how w.r.t. these two brands/products to support any payment of royalty and the arm's length price of the royalty paid in case of these two items is determined to be Rs.Nil under the CUP Method. Thus, the total income of the assessee is required to be adjusted upwardly by Rs.39,55,843/- on this account. Total Adjustment in respect of Royalty is 78,70,96,934/- (78,31,41,091 + 39,55,843/-)”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 benefit test, determined the arm`s length price of royalty paid on “Mincream” and “Robinson Barley” at nil. This way, ld TPO made ALP adjustment of Rs. 35,05,809/- in A.Y.2010-11 and ALP adjustment of Rs.78,70,96,934/-.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 • SC Enviro Agro India Ltd vs. DCIT (2013) 143 ITD 195 (Mum-ITAT) We would like to humbly submit that it is beyond the scope of the powers of TPO to disallow the otherwise bona fide expenditure incurred by the assessee, only on the grounds that no detailed information has been filed with regard to technical aspects of the patent whose rights have been transferred to the assessee. We submit that RBIL has received benefits/ substantial benefits from the use of intangible property licensed by the AEs and rights associated with such intangible property under the LicensingAgreement(s). It is submitted that the assessee gets its products manufactured on the basis of the technical know-how and technology specifications provided by the Licensors. The assessee derives significant benefit in the form of growing revenue and profitability from the use of the patented technology which is owned & developed by the AEs. Hence, we submit that RBIL have made the payment of royalty solely in connection with and in the course of its business. The expenditure of royalty has a direct nexus with the business of RBIL. It is not the case that such expenses are incurred in isolation or are not connected with RBIL's business. The expenditure incurred on payment of royalties are completely bona fide and have been in connection with the business of the assessee. We wish to place reliance on the judicial pronouncement of Delhi Tribunal in the case of Reebok India Co. vs. AddlCIT (ITA No.5857/Del/2012) wherein the following have been held – • As per the terms of License Agreement between assessee and the AE, the Licensor has agreed to grant exclusive right to utilize the technology in manufacturing and distribution of products and the assessee in fact has got the goods manufactured on the basis of technology. • That the assessee does not undertakes any significant research and development activity on its own and totally depends upon the associate enterprise for provision of technology and thus agreed that the entire business of the assessee depends upon the technology provided by the AE and without the license to use such technology, the assesses would not be able to continue its business. • Premium value of products allows the assessee to increase the sales and charge higher price which leads to higher profitability and that growth in the revenue of the assessee clearly demonstrates the benefit derived by the assessee from the use of technology. • On the basis of the same licensing agreement the royalty was paid in earlier years. In earlier years the payment of the royalty has not been held to be non-bona fide expenditure by TPO. • …………the TPO’s conclusion that there is no benefit to the assessee from the payments of royalty is unsustainable. In view of the foregoing discussion we hold that payment of royalty satisfies the benefit test.

In view of the above, we submit before your Honors that in the interest of equity and justice it would be highly prejudicial if the bona fide payments made by RBIL in form of royalty with respect to subjected brands are treated to be NIL. In this regard, we also submit that the TPO also erred in not following the principle of consistency to the extent applicable to the income tax proceedings. The TPO also erred in not considering the fact that during FY 2009-10, there has been no change in the facts and circumstances in the case of the assessee as compared to earlier years and accordingly no transfer pricing adjustment was called for in respect of the payment of Royalty by the assessee to its AEs. In light of the principle of legitimate expectations and natural justice it would be unfairly prejudicial to RBIL, if the Hon'ble Panel considers the royalty payment made for use of the IPRs inappropriate. The facts in current assessment proceedings are exactly similar to facts in previous assessment years and that there has been no change in the business model of RBIL or in the nature, terms & conditions, functions performed, risk assumed and asset employed by RBIL in Page | 13

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 relation to its international transactions during FY 2009-10 as compared to preceding years, hence the assessee humbly submits that the action proposed by the TPO in taking a different stand is highly perverse and against established legal and equitable principles. In view of the above, we request the Honorable Panel to delete the disallowance of Royalty payment with respect to Min Cream and Robinson Barley." We have considered facts of the case. The assessee is a manufacturer and distributor of a large number of products/brands for which are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. Even in the year under consideration also, the TPO has allowed royalty in respect of all but two products manufactured and sold by the assessee. However, in respect of two products viz. Mincream and Robinson Burley, the TPO has held that no benefit was derived by the assessee from its AE. It is not denied that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm’s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be proper. The same is, accordingly, directed to be deleted.”

Note: For assessment year 2011-12, the ld DRP did not pass a detailed order but it relied on its directions for A.Y.2010-11.

12.Aggrieved by the order of the DRP/AO, the Revenue as well as assessee is in appeal before us.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 to the year in question restricted the percentage of royalty paid to 1.5% ( vide pg. 273 to 281 of PB-1). Besides, the TPO as done in assessment year 2010-11, whilst applying the benefit test, determined the arm`s length price of royalty paid on “Mincream” and “Robinson Barley” at nil. (vide pg.281 of Pb-1).

14.Aggrieved by the order of the Ld TPO, the assessee filed objections before the ld DRP. The ld DRP relying on its own directions for assessment year 2010-11, had directed the TPO to delete the arm`s length price adjustment.

"We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken." Page | 15

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12

We are of the view that the above cited precedent on principle of consistency is squarely applicable to the assessee under consideration. In the facts of the assessee's case, the Ld. TPO has not pointed out the change in facts or any provision of law which led him to take a view contrary to the view taken by his predecessors in previous years. We note that the assessee has been paying royalty to its Associate Enterprises(AEs) for a number of years which has been allowed in the assessment of earlier years. Therefore, the TPO cannot take a contrary view and disturb the settled facts unless there is a change in law or facts. Therefore, the arm`s length price adjustment made by TPO is not sustainable in law.

“15. It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as “comparable uncontrolled price” method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) Page | 16

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: -

“(a) comparable uncontrolled price method, by which,

(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;

(iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction;”

“1.36 A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties’ characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm’s length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the Page | 17

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 Inbothsetsofcircumstancesdescribedabove,the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm’s length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm’s length.”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 Zealand, (1938) 6 ITR 636 that “expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense”. The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: -

“We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.”

It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.

(ii) Frigoglass India Pvt Ltd V DCIT [2016] 180 TTJ 401(Del-trib)

“9. On the issue of royalty, the Ld. AR submitted that the assessee has entered into royalty agreement with its AE - Frigoglass SAIC (Head Office) on account of receipt of ICM Technology and for use of trademark. It was submitted that CUP method could not be applied in the case as neither the AE nor the assessee have entered into similar royalty arrangements with third parties and the data for external comparable transactions between independent parties in India was not available. It was submitted that the only method which could be correctly applied was TNMM (which has been applied by the assessee). It was further submitted that the benchmarking approach adopted by the assessee has been wrongly rejected and that the application of CUP method was erroneous.It was submitted that FIPL’s principal activity being manufacturing of glass door refrigerators, the international transactions form an integral part of FIPL’s business of manufacture and sale of glass door refrigerators. Accordingly, for the purpose of economic analysis, the assessee combined the international transaction pertaining to payment of royalty as in this case; the transaction was so closely linked or continuous that it could not have been evaluated adequately on an individual basis. Therefore, the transactions pertaining to payment of royalty were considered as closely linked to the manufacture of glass door refrigerators and a combined transactions approach was used. The Ld. AR submitted that since the operating margin of the assessee was higher than the arithmetic mean of the operating margins of the comparable companies and the cost pertaining to the payment of royalty had already been benchmarked, the international transaction pertaining to the payment of royalty by FIPL to Frigoglass SAIC should be considered to be at arm’s length from the assessee’s perspective. The Ld. AR further submitted that Frigoglass SAIC had hired an independent external consultant for reviewing the arm’s length nature of 4% royalty applied by the Head Office for the licensing of the ICM technology and trademarks to related group entities and based on the terms and conditions of the License Agreement between Frigoglass SAIC and its affiliates and in view of the broadly comparable licensing agreements identified from the search of publicly available license agreements, it was concluded that a royalty rate of 4% on sale of products for the use of trademarks and ICM technology was considered to be an arm’s length rate. It was also submitted that no independent third party will let any other entity use its Intellectual Property Rights (IPR) and allow to enjoy the benefits from the usage of such IPR without charging a fee. It was submitted that FIPL enjoys a lot of benefits in manufacturing and marketing from the use of the IPRs owned by Frigoglass SAIC. It was submitted that FIPL had started enjoying the benefits from the usage of the trademarks and ICM technology from very inception although a formal agreement was entered into in September 2007 and had started making payment for such services from Assessment Year 2009-10 only. It was further submitted that the activities performed by the AE in terms of the royalty agreement were ICM sales, customer service, marketing services, product development and future technologies. It was submitted that most of the clients of the FIPL were global clients Page | 20

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 and the use of the trademark had a positive impact on the sales of FIPL in India. The Ld. AR made a reference to the comparative profitability chart from FY 2005-06 to FY 2009-10 and submitted that the profitability has been increasing on an year to year basis because of availing of the services of Frigoglass SAIC and, therefore, since the benefits received from FIPL from receipt of such services outweigh the payment for such services, the assessee was justified in making payments for royalty.

"16. The Organization for Economic Cooperation and Development (“OECD”, for short) has laid down transfer pricing guidelines” for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm’s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm’s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for recognition of the actual transactions undertaken” in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: -

“1.36 A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure Page | 21

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties’ characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest -bearing debt when, at arm’s length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm’s length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm’s length.”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that “there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act”. It was further held in this case that “it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned”. In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that “expenditure in the course of the trade which is unremunerative is nonetheless a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody , (1978) 115 ITR 519, and it was observed as under: -

“We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. ” It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.

“33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A (d) defines 'transaction’ as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered, and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 20. Hence, following the ratio of the Hon'ble Delhi High Court in CIT vs EKL Appliances (supra), we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is liable to be deleted. Hence, ground nos. 4.1 and 4.2 are allowed.”

18.Taking into account the facts narrated and the case law cited above, we note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm’s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. The ld DRP was right in deleting the disallowance of royalty. Therefore, the arm`s length price adjustment for payment of royalty of Rs. 35,05,809/- for A.Y. 2010-11 and Rs.78,70,96,934/-for A.Y. 2011-12 are directed to be deleted.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 pharmaceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein insecticide, Colin, etc. The RBIL is registered in India under the Companies Act, 1956.TheRBIL has entered into a License Agreement with Reckitt Benckiser N.V. and Reckitt & Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser “products” domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how', and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory.

The assessee company incurred Advertisement, Marketing and promotion (AMP) expenses. The TPO issued the notice to the assessee company stating that why not an adjustment on account of Advertisement, Marketing and promotion (AMP) expensesin excess of‘bright line test' laid down by the Special Bench in M/s LG Electronics India Pvt. Ltd vs. ACIT (1TA NO. 5140/Del/2011) should be made?

In response, the assessee submitted that RBIL is engaged in the business of manufacturing and trading of Fast Moving Consumer Goods (‘FMCG’)/ products. The RBIL manufactures and distributes various brands of household products, and over-the-counter pharmaceutical products. Some of the key products are Dettol Soap, Disprin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortem insecticide, Collin etc. The RBIL manufactures products at its own facilities and also engages third party contract manufacturers for manufacturing some products. The detailed list of products and the their brands have been submitted before TPO. It is to be noted that, the name of all products sold by Reckitt Benckiser, in India bear the name of the brand (e. g. the products of brand ‘Airwick’, Airwick spray, Airwick aerosol, Airwick Freshmatic, Airwick-Car Air Freshner etc.). The assessee has incurred certain expenses on advertisement, amounting to Rs. 302.43 crores (which includes sales promotion expenses, rebates and discount etc.) during Financial Year (FY) 2009-10, details of which are tabulated as under: Page | 26

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12

All activities, of advertisement performed were targeted for consumers in India All activities, of advertisement performed were targeted for consumers in India All activities, of advertisement performed were targeted for consumers in India and were related to its domestic sales only. No part of advertisement activity and were related to its domestic sales only. No part of advertisement activity and were related to its domestic sales only. No part of advertisement activity was performed for consumers consumers outside India or was related to exports.

The expenditure incurred by the assessee on advertisement pertained to only those The expenditure incurred by the assessee on advertisement pertained to only those The expenditure incurred by the assessee on advertisement pertained to only those products that it was dealing in (i.e. existing products and certain new products products that it was dealing in (i.e. existing products and certain new products products that it was dealing in (i.e. existing products and certain new products launched by it in India), launched by it in India), it did not include any expenditure on so-called ‘corporate called ‘corporate advertisement’.The money spent on advertisement was to publicize the ‘product’ The money spent on advertisement was to publicize the ‘product’ The money spent on advertisement was to publicize the ‘product’ and the same was not a ‘brand’ publicity exercise. and the same was not a ‘brand’ publicity exercise. Special Bench Special Bench decision in M/s LG Electronics India P LG Electronics India Pvt. Ltd (supra) does not apply to the assessee under oes not apply to the assessee under consideration. Therefore, there is no any transfer pricing adjustment is required. Therefore, there is no any transfer pricing adjustment is required. Therefore, there is no any transfer pricing adjustment is required.

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12

Thus, as per the table above, comparable companies have an AMP to sales ratio of Thus, as per the table above, comparable companies have an AMP to sales ratio of Thus, as per the table above, comparable companies have an AMP to sales ratio of 6.09% while the assessee has a ratio of 11.03%. Hence an excess amount of Rs. 6.09% while the assessee has a ratio of 11.03%. Hence an excess amount of Rs. 6.09% while the assessee has a ratio of 11.03%. Hence an excess amount of Rs. 93,02,03,439/- [representing 4.94% representing 4.94%=11.03%-6.09%] is considered as cost part of is considered as cost part of the arm’s length price of international transaction pertaining to brand promotion. the arm’s length price of international transaction pertaining to brand promotion. the arm’s length price of international transaction pertaining to brand promotion. To arrive at the margin on such cost, search for entities carrying out normal To arrive at the margin on such cost, search for entities carrying out normal To arrive at the margin on such cost, search for entities carrying out normal marketing and advertising resulted in two companies namely M/s Marketing vertising resulted in two companies namely M/s Marketing vertising resulted in two companies namely M/s Marketing Consultants & Agency Limited and M/s Quadrants Communications Ltd. The Consultants & Agency Limited and M/s Quadrants Communications Ltd. The Consultants & Agency Limited and M/s Quadrants Communications Ltd. The mark-up on cost earned by these two entities is as follows: up on cost earned by these two entities is as follows:

Thus, a mark up of 12.27% is to be added to the cost of the bran Thus, a mark up of 12.27% is to be added to the cost of the bran Thus, a mark up of 12.27% is to be added to the cost of the brand promotion activity of the assessee. Accordingly, the margin activity of the assessee. Accordingly, the margin on cost is computed at Rs. on cost is computed at Rs. 11,41,35,962/- (93,02,03,439 * 12.27%) which the assessee should have earned (93,02,03,439 * 12.27%) which the assessee should have earned (93,02,03,439 * 12.27%) which the assessee should have earned over its cost incurred for brand promotion activities. Thus, the arm’s length price over its cost incurred for brand promotion activities. Thus, the arm’s length price over its cost incurred for brand promotion activities. Thus, the arm’s length price of the international transaction pertaining to AMP expenses international transaction pertaining to AMP expenses was computed by TPO was computed by TPO at Rs. 104,43,39,401/- (93,02,03,439 + 11,41,35,962). (93,02,03,439 + 11,41,35,962).

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 23. Aggrieved by the order of the ld TPO, the assessee filed objections before the ld DRP. The ld DRP had confirmed the arm`s length price adjustment done by the TPO observing the following:

“We have considered the rival contentions. The definition of the term ‘international transaction’ defined in Section 92B is quite wide and includes an arrangement, understanding or concerted action, which may be informal or in writing. It has been held by the special bench of Hon’ble Tribunal in the case of LG Electronics India Ltd. (supra), that if an assessee has simultaneously or independently advertised the brand or logo of the foreign AE the same is to be treated as international transaction within the meaning of section 92F. The TPO has reproduced several relevant extract in his order. While all the facts in the assessee’s case may not be identical to the facts of LG Electronics (supra), here also, the assessee was advertising the products, prominently displaying the brands were owned by foreign AE. In our opinion, ratio of the decision in the case of LG Electronics (supra) is applicable on the assessee’s case. This ground is accordingly rejected.”

25.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP and other materials brought on record. Learned Counsel for the assessee submitted before us that the facts of the case of the Special Bench ruling in LG Electronics (supra) is different from the facts of the present case of the assessee. Assessee Company is engaged in only product promotion and not brand promotion and hence benefit of AMP accrues to the assessee and not to its AE(s).The Bright Line Test (‘BLT’) is not one of the prescribed methods under the Act and hence cannot be applied in the assessee`s case under consideration. The various expenses in the nature of sales promotion expenses, business promotion expenses (including free gifts/freebie/bonus packs etc.) market research expenses has to be excluded from the computation of AMP expenditure. Ld Counsel also pointed out that addition of any profit mark-up over the costs of AMP is unwarranted from the facts of the assessee`s case.

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the TPO/Assessing Officer, which we have already noted in our earlier Page | 29

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 para and is not being repeated for the sake of brevity. We note that issue before us relates to TPO’s action in applying provision of Section 92of the Act in respect of advertisement marketing and promotion (AMP) expenses treating them as international transaction covered under the purview of section 92of the Act. The assessee had entered into license agreement with its AE Reckitt Benckiser NV and Reckitt Colman Ltd for transfer and intellectual property right for provision of sale, distribution and marketing of Reckitt Benckiser products. It was manufacturing and distributing various brands of such products and had incurred substantial marketing and promotion expenses in respect of same amounting to Rs. 3,02,43,43,377/-.Such expenses were related to the promotion of the brand owned by the AE of the assessee which were prominently displayed in the advertisement. The TPO further observed that AMP expenses were substantially higher than the comparables selected by the assessee. The excess of such expenses was considered by him to be for brand promotion done for the AE. The TPO, placing reliance upon the decision of Special Bench of ITAT, Delhi in the case of LG Electronics India Pvt .Ltd Vs ACIT, Cir-3, Noida ITA No.5140/Del/2011,held that such brand promotion was to be treated as international transaction u/s 92B of the Act. The TPO applied Bright Line test (BLT) and after applying mark up of 12.27%, based on margin of entities carrying out marketing and advertising activities, made ALP adjustment of Rs.104,43,39,401/-.We note that in the case of LG Electronics (supra), the Indian company was acting on behalf of/for the benefit of Korean company and had ‘no autonomy' in decisions Relating to expenditure incurred on marketing and promotion. In the assessee`s case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. The activities of brand promotion were a global marketing and sales promotion strategy of the parent called “Blue Ocean Strategy", which is not the fact in the case of RBIL. There is no transaction/undertaking/agreement between RBIL and its AE, as different from that which was existed in LG Electronics case(supra). Therefore, assessee company`s case cannot be compared with LG Electronics case(supra).

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 26. We note that incurrence of the AMP expenses, being a domestic transaction cannot be touted as an instance of profit-sharing exercise. We note that the TPO failed to appreciate that, though a 'transaction' under section 92F(v) includes arrangement or understanding; it per se involves a bilateral arrangement or contract between the parties. A unilateral action by one party in absence of any understanding or contract or binding obligation could not be termed as ‘transaction’. In the assessee`s case, RBIL has incurred AMP expenditure in respect of its business operations in India and in order to boost its sales in India. Thus, no ‘transaction ’ could be said to exist in respect of such AMP expenditure incurred by the assessee.

At the cost of repetition we state that there is no term or condition or provision in either of the Licensing Agreements to the effect which create any sort of obligation on RBIL to carry out marketing and promotional activities in order to promote the brands and related IPRs. Neither there is an undertaking between RBIL and any of its Associated Enterprise) [’AE(s)] including the brand owners to incur such expenses for brand promotion as per any global or nation specific strategy, unlike in LG Electronics (supra) case. The RBIL has complete autonomy to incur expenses relating to marketing and promotion of its products for enhancing better sales and marketing and is under no obligation from any of its AE(s). In the light of above facts we note that arm`s length price adjustment (ALP) made by TPO and confirmed by DRP is not justified for that we rely on the judgment of Hon`ble Delhi High Court in the case of Maruti Suzuki India Ltd V.CIT [2016] 381 ITR 117 (Del-HC), wherein it was held as follows:

“66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, "the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same." It is asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same."

Absence of a machinery provision

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 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.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 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. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise”

“11. We have heard the rival submissions. At the outset, we find that the ld TPO, ld AO and the ld DRP had categorically accepted the basic fact that the assessee is a manufacturer and also engaged in distribution of products. While this is so, we are not able to comprehend the argument advanced by the ld DR that assessee is only a distributor and thereby the decision of Sony Ericsson would apply to the case. We find that since the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki supra would be applicable to the assessee’s case, since the contention of the ld DR that assessee is only distributor, is not emanating from the records of the lower authorities. We find that the issue under dispute before us is squarely addressed by this tribunal in assessee’s own case for the Asst Year 2011-12 supra wherein it was held :- “43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE’s therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under: “51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses.” In view of we note that the facts of the above cases are identical to the present issue, thus, the principle laid down by the Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue.” Page | 34

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12

28.We note that the AMP transaction does not represent the international transaction between the assessee and its AE’s as the revenue failed to bring on record any contract or arrangement between assessee and its AE for making AMP expenses for promotion of brand of its AE.In the assessee`s case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. These are routine advertisement expenses. Therefore, in assessee`s case the AMP cannot be regarded as international transaction as held by the Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 (supra). Therefore, we allow the appeal of the assessee and dismiss the appeal of the revenue and delete the ALP adjustment made by TPO Rs.104,43,39,401/- for A.Y.2010-11 and Rs.331,09,56,767/- for A.Y. 2011-12.

“3.Comparable companies arbitrarily chosen by the TPO for computation of mark up percentage of 22.34% over the alleged ‘Agency Cost’ incurred by the assessee. This ground covers ground no.5 of assessee`s appeal in ITA No. 625/Kol/2016 for A.Y.2011-12 and ground No.7 of revenue`s appeal in ITA No. 518/Kol/2016 for A.Y.2011-12.”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 31. In response to that the assessee in its letter dated 16.01.2015 submitted before TPO as follows:

"5.07 Chargeback of expenses by RBIL to AEs

During the financial year 2010-11, RBIL has incurred certain expenses on behalf of RB group companies. The same has been cross-charged to RB group companies. We understand that these expenses have been charged-back based on actual cost incurred by RBIL on behalf of AEs. We further, understand that the expenses incurred by RBIL on behalf of RB group companies, the function performed by RBIL relates to mere facilitation of payment on behalf of group entities. In this regard, RBIL is a facilitator and it provides no additional service.

Accordingly, the 'cost only' reimbursement by RB group companies to RBIL could be regarded as the arm's length price for the above expenses."

In view of the above, we submit that the 'cost only' reimbursement by AEs to the Company could be regarded as the arm's length price for the above expenses.

Project Bedrock

We submit that Project Bedrock is a project implemented for global transition of the network services provider from infonet NL to AT&T for overall cost reduction on network undertaken at the behest of RBCSL. The cost incurred in relation to such change in service provider (such as change in server for enhancement of the connectivity between RBIL and RB Global offices including expenses on network lines, etc) was incurred by RBIL during the year. However, as a matter of financial support to the assessee, these costs incurred by RBIL have been reimbursed by the AE. It may be appreciated that no services have been rendered by the assessee to the AE, on the contrary the assessee has received services from third parties and is the sole beneficiary of the services received by it. The expenses recovered from the assessee are purely on account of financial support extended by the AE. Hence, a question of charging a mark-up on costs reimbursed by the AE does not arise.”

“40. The submission of the assesse is not tenable as the recovery from A.E is not one off or infrequent transaction. From the perusal of the bill etc. submitted during the proceedings the assesse was regularly procuring materials from different Independent parties in India which were then send to the A.E for use in the project of the A.E. This regular transaction is akin to Support services provided by the Assessee to its A.E. An independent entity under similar circumstances would not give such services to third party since this involves monetary expenditure as well as efforts and any independent enterprise would ask Page | 36

Reckitt Benckiser (I) Pvt. Ltd. Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529 404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 625 & 518/Kol/2016 Assessment Years:2010 2010-11 to 2011-12 for remuneration for such efforts. To arrive at the on such effort, search for for remuneration for such efforts. To arrive at the on such effort, search for for remuneration for such efforts. To arrive at the on such effort, search for entities carrying out normal market support services resulted in the following ities carrying out normal market support services resulted in the following ities carrying out normal market support services resulted in the following companies. The mark companies. The mark-up on cost earned by these entities is as follows: up on cost earned by these entities is as follows:

In view the above the assesse would have 22.34% on such recoveries. The value is In view the above the assesse would have 22.34% on such recoveries. The value is In view the above the assesse would have 22.34% on such recoveries. The value is calculated as under 22.34% calculated as under 22.34% on transaction purported to be recoveries ie. 22.34% on transaction purported to be recoveries ie. 22.34% of Rs 19,30,38,246/- of Rs 19,30,38,246/- =4,31,24,744/-

Thus the income of the assesse is to be upwardly adjusted by Rs 4,31,24,744/ Thus the income of the assesse is to be upwardly adjusted by Rs 4,31,24,744/ Thus the income of the assesse is to be upwardly adjusted by Rs 4,31,24,744/- on this count.”

“DRP Directions: The assessee has rendered services to its AE. The assessee was procuring material from The assessee has rendered services to its AE. The assessee was procuring material from The assessee has rendered services to its AE. The assessee was procuring material from the third parties for its AE for its usage and consumption. T the third parties for its AE for its usage and consumption. The assessee has recovered he assessee has recovered costs from the AE for such services. The contention in respect of the recovery of only costs from the AE for such services. The contention in respect of the recovery of only costs from the AE for such services. The contention in respect of the recovery of only costs as third parties were involved is not tenable if the assessee was the channel for such costs as third parties were involved is not tenable if the assessee was the channel for such costs as third parties were involved is not tenable if the assessee was the channel for such procurement services so as to ensure proper delive procurement services so as to ensure proper delivery of such services. This being a ry of such services. This being a critical function and involving costs for the assessee should definitely entail a cost plus critical function and involving costs for the assessee should definitely entail a cost plus critical function and involving costs for the assessee should definitely entail a cost plus markup model to ensure arm’s length compensation for the assessee for the services markup model to ensure arm’s length compensation for the assessee for the services markup model to ensure arm’s length compensation for the assessee for the services rendered. Based on nature of services rendered, rendered. Based on nature of services rendered, it is also appropriate to restrict such it is also appropriate to restrict such markup on the agency costs of the assessee and not on the costs of material procured. markup on the agency costs of the assessee and not on the costs of material procured. markup on the agency costs of the assessee and not on the costs of material procured. The mark up shall hence be only on the services component. The assessee has only The mark up shall hence be only on the services component. The assessee has only The mark up shall hence be only on the services component. The assessee has only generally objected to the choice of comparables generally objected to the choice of comparables and not substantively challenged the and not substantively challenged the item wise choice of comparables so chosen by the TPO, hence no specific directions are item wise choice of comparables so chosen by the TPO, hence no specific directions are item wise choice of comparables so chosen by the TPO, hence no specific directions are issued. The objection is accordingly disposed of as above. issued. The objection is accordingly disposed of as above.”

35.We heard both the parties and carefully gone through the submission put forth We heard both the parties and carefully gone through the submission put forth We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws on behalf of the assessee along with the documents furnished and the case laws on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld relied upon, and perused the fact of the case including the findings of the ld relied upon, and perused the fact of the case including the findings of the ld DRP Page | 37

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 and other materials brought on record. Learned Counsel for the assessee submitted before us that TPO has erred in proposing an addition in relation to expenses recovered by RBIL from its AE, without appreciating that there is no element of service provided by RBIL in respect of the impugned international transactions. The ld TPO also did not appreciate that recovery of expenses was only on cost basis. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the TPO, which we have already noted in our earlier para and is not being repeated for the sake of brevity. We note that the TPO without appreciating the true nature of expenses, held the same to be in the nature of Support Services of “procuring material” being provided by the Assessee to its AE eligible for a markup. (Pg. 281 to 282 and 288 of PB-1).Accordingly, the TPO selected the comparables engaged in marketing support services / technical support services and applied a mark-up of 22.34% on the said expense.

We note that the DRP upheld the action of the TPO whilst observing that the Assessee was indeed providing services to the AE. [Pg. 15 of DRP Directions]. However, the DRP directed the TPO to restrict the adjustment to agency cost and to not include cost of material whilst applying the markup. [Pg. 15 to 16 of DRP Directions ]. Accordingly, the TPO vide order dated 21.01.2016 restricted the cost to the agency cost and hence the adjustment was reduced from INR 4.31 crores to INR 2.71 crores. The assessee is in appeal before us to adjudicate the agency cost.

We have gone through the order of TPO/DRP and noticed that there is no adjudication by the TPO or DRP as to what serviceswere rendered. As per ld Counsel, the expenses in question were in respect of system upgrade of the Assessee which costs were reimbursed to the Assessee by the AE. Hence, there was no element of any service that the Assessee rendered to the AE. The assessee submitted, 3 volumes of documents before the TPO and DRP to establish that these were cost to cost reimbursements and therehas been no adjudication on the same. Therefore, in the interest of justice and fair play we think it fit and appropriate to remit this issue back to the file of the TPO to adjudicate the issue

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 taking into account 3 volumes of documents already submitted by assessee. For statistical purposes, the ground raised by the assessee and revenue are allowed.

36.Summarized ground No. 4 reads as follows: “4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of Rs. 21,842,032/- made to transaction of “Export of raw materials and finished products”. (This covers ground No.6 of assessee`s appeal in ITA No.625/Kol/2016, for A.Y. 2011- 12)”

37.At the outset itself, ld Counsel for the assessee submitted that the TPO rejected the external TNMM as applied by RBIPL for benchmarking the transaction and instead applied the internal TNMM. (Pg. 288 to 291 and 294 of PB-1). Aggrieved by the order of the TPO, the assessee carried the matter before the ld DRP. The ld DRP inadvertently did not give any directions vis-a-vis the said issue. However, vide rectified directions dated 18.02.2016 rejected the approach of the TPO of using external TNMM. The TPO is yet to give effect to the rectified DRP Directions. Therefore, Ld Counsel prayed the bench that ld TPO may be directed to give effect to the rectified DRP Directions. In the interest of justice and fair play, we direct the TPO to give effect to the rectified DRP Directions. For statistical purposes, the ground raised by the assessee are allowed.

Grounds relating to Corporate Tax issue

“1.Apportionment of expenses between fiscal units, non-fiscal units and head office of Rs. 261,160,962/-. This ground covers ground No.8 of revenue`s appeal in ITA No.529/Kol/2015 for A.Y. 2010-11 and ground nos. 1 and 2 of revenue`s appeal in ITA No.518/Kol/2016 for A.Y.2011-12.”

39.When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 20.04.2018, passed by the Tribunal in

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 assessee’s own case in I.T.A. Nos. 2138/Kol/2009, for assessment year 2005-06, whereby the issue of apportionment of expenses between fiscal units have been discussed and adjudicated in favour of the assessee. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the Tribunal, a copy of which is also placed before the Bench.

The deduction claimed by the assessee was in respect of Unit 1,2,3 & 4. The Unit 1 commercial operation commenced only on 02.02.2004 which is evidenced by the audit report in Form 10CCB which is placed at Page 90 of the assessee’s Paper Book. The Unit No.2 commenced commercial operation only w.e.f. 03.04.2004 which is evidenced by Form No.10CCB, placed at Page 79 of the assessee’s Paper Book. The Unit No.3 commenced commercial operation only on 08.12.2004 as it is evidenced by the Form No.10CCB, copy of the Page 101 of the assessee’s Paper Book. The Unit No.4 commenced commercial operation w.e.f, 02.02.2005 which is evidence by Form No.10CCB from placed at Paper Book page 68. It can thus perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financial Years. The Page | 40

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 units for which deduction u/s 80-IB and 80-IC were claimed by the assessee, came into existence only in F.Y. 2004-05. Thus, it is clear that the bad debts written off which was claimed as deduction did not pertain to any of the units for which the assessee claimed deduction u/s 80-IB and 80-IC of the Act. Therefore, apportionment of bad debt written off to the eligible units and registering profit of those eligible units for the purpose of allowing deduction u/s 80-IB and 80-IC, as done by the revenue authorities is unsustainable. The apportionment is directed to be deleted. Ground No.3 raised by the assessee is allowed.

5.As far as Ground No.2 raised by the revenue is concerned, this issue again pertains to apportionment of residual cost of Rs.40.43 crores. The total cost as per the Profit & Loss A/c of the assessee is a sum of Rs.717.26 crores. The details of the other expenses isgiven in Schedule 16 to the Profit & Loss A/c. As far as residual cost is concerned, the assessee allocated residual cost amount tothe eligible and non-eligible units in the ratio of number of employees at the corporate office who are directly involved in the management of these eligible units like production, procurement, quality, logistics etc. to the total number of employees at the corporate office. According to the assessee these expenses primarily relates to the corporate office of the company. The benefit of which is derived by the whole organization including the eligible units, the allocation of cost incurred on account of residual cost among eligible and non-eligible units should have to be done in the ratio of eligible workers of eligible undertakings to the total number of workers across all the manufacturing units. The Assessing Officer, however, was of the following views:

“Regarding the issue of bifurcation of residual cost as has been discussed in detail in the earlier part of the order, the assessee has not applied the provisions of section 80IB of the Act properly especially sub-section (5) thereof which dearly states that the profit of the eligible unit has to be determined as if this is the only source of income of the assessee. The profit of the eligible unit has to be calculated in such a way as if this is the only source of income of the assessee. The relevant portion of the Section is reproduced as under- "(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (emphasis supplied)".

As per Section 80IA(5) r/w Section 80IB(13) and 80IC(7), for the purposes of computing the quantum of allowable deduction u/s 80IB, the profits and gains of the eligible unit of the assessee has to be computed as if such eligible business were the only source of income of the assessee during the year.

The above expenses, even though booked centrally in the head office books, have been incurred for all the units of the assessee company. Hence; in order to arrive at the true and correct value of the profits & gains derived from the eligible units, Page | 41

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 these expenses are required to be allocated to all the units in the proper manner. The best way to divide these expenses would be to allocate among eligible and non-eligible units in the ratio of workers of eligible undertakings to the total number of workers across all the manufacturing locations from where the assessee has sourced its requirements, instead of in the ratio of number of executives at the corporate office who are directly involved in the management of these eligible units to the total number of executives at the corporate office as has been done by the assessee company. This is because the expenditure incurred by the assessee company on the residual functions have also been used and benefited the whole company including the eligible units hence it has to be bifurcated in the ratio of total workforce of the eligible units with total number of workers of the company to arrive at the correct and true profit. This is also supported by the fact that on an average all the expenditures which has either been bifurcated in the ratio of sales or on the basis of actuals are in the percentage of almost average of 22% whereas the percentage of these particular expenditures are around 5.69%. This itself proves beyond doubt that this expenditure has not been bifurcated properly by the assessee company.

Moreover, the assessee's arguments that the accounts of the company are audited does not have a bearing on the deduction being claimed u/s 80IB/IC of the Act. The income-tax Act specifically provides that the profits of these undertakings is required to be computed in the manner as if these are independent and only source of income of the assessee company. This effect has probably not been given by the auditor who has filed the accountants report along with claim of deduction. This is also proved by the fact that this has not been mentioned by the auditor who has submitted the accountants report as per the provisions of section 80IB/IC as to the procedure for bifurcating the expenditure for the eligible units. In view of this, there is no force in the assessee’s arguments and the same are rejected.

The assessee was asked to furnish the revised working after allocating the residual cost in the manner as detailed above which was submitted by the a vide letter dated April 11, 2008 and made part of this order as Annexure A of this order.”

“7.3.3. With regard to change in the basis of allocation of residual cost by the AO. I find merit in the appellant’s argument that the residual costs pertain to those cost which could not be allocated or identified with single function or unit due to the general utility to all the functions and units of the company. The basis of allocation of this cost is the number of executive. These costs include the residuary costs of all the support functions which have not been allocated to the Cost of Goods Sold. As per the appellant, at corporate office level there were 101 persons during the FY 2004-05 out of which, persons were working in supply function which is directly linked to factory operation. This worked out to 21.78%. The ratio of sale of fiscal units to overall sales was 26.10%. The effective percentage of residual cost thus worked out to 5.68% (21.78% * 26.10%), which the appellant applied for allocating the residual cost to the eligible units. For allocation expenses, the appellant has taken into consideration number of person Page | 42

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 as well as sales of the eligible units. The AO has allocated the residual costs of the corporate office on the basis of the number of workers. Hence, I find more logic on the basis of allocation of expenses adopted by the appellant as the appellant has also taken turnover of the eligible units into consideration.”

7.We have heard the rival submissions, the ld. DR reiterated the stand of the Assessing Officer as reflected in the order of the assessment. The ld. Counsel for the assessee relied on the order of the ld. CIT(A). We have given a careful consideration to the rival submissions, we note that the basis of allocation of residual cost to the eligible units has been done by the Assessing Officer is as follows:

It can be seen from the above Chart that the allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office level to be eligible. That can be done only by allocation on the basis of number of employees linked to factory operation divided by total number of employees into corporate office into sales of the eligible units divided by total sales. This allocation of residual cost done by the assessee was logical and we find no infirmity in the action of the CIT(A) in accepting this basis of allocation. We, therefore, do not find any merit in Ground No.2 raised by the revenue and the same is dismissed. In the result, the Ground No.3 raised by the assessee is allowed and the Ground No.2 raised by the revenue is dismissed.”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 42. As the issue is squarely covered in favour of the assessee by the decision of Co-ordinate Bench in assessee’s own case (supra) in I.T.A. No. 2138/Kol/2009 for A.Y 2005-06, and there is no change in facts and law and the Revenue is unable to produce any material to controvert the above said findings of the Co-ordinate Bench(supra). Therefore, respectfully following the decision of Co-ordinate Bench we dismiss the appeals of Revenue for A.Y. 2010-11 and A.Y. 2011-12.

44.When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 23.12.2014, passed by the Hon’ble Calcutta High Court in assessee’s own case in GA No. 1420 of 2014, ITAT No. 41 of 2014, whereby the issue of eligibility of income from sale of scraps have been discussed and adjudicated in favour of the assessee. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the, Hon’ble Calcutta High Court, a copy of which is also placed before the Bench.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 cannot be at all be expected or commend acceptance, especially, on the facts and in the circumstances of the case. For the sake of emphasis, we may say that the scrap materials come within the manufacturing process of the industrial undertaking in the manufacture- of certain products such as V-Belts, oil seals, 0-Rings: and certain rubber moulded products- etc. In this view of the matter, we are of the view that profits andgainsfrom the sale of scrap materials is eligible to deduction in an amount equal to twenty per cent under section 80IC, inasmuch as such gains or profits’ are derived from the industrial undertaking and includible in, the gross total income of the assesseeand the question relatable to the profit on the sale of scrap is thus answered in favour of the assessee" We are persuaded by the reasoning of the said Court and answer the question accordingly. The question in the revenue's appeal is answered in the negative, in favour, of the assesses and against the revenue.Accordingly, both the applications being GA No.1420 of 2014 and GA No.1735 of 2014 are disposed of and the appeals being ITAT No.,41 of 2014 and ITAT No, 59 of 2014 are dismissed.”

48.Summarized ground No. 3 of corporate tax issue reads as follows: “3.Excess disallowance of interest income allocated to eligible units Rs. 23,400,187/-. This ground covers ground no. 4 of assessee’s appeal in ITA No. 404/Kol/2015 for A.Y. 2010-11”

49.When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 14.09.2018, passed by the Tribunal in assessee’s own case in ITA No.2113,2150,2114&2151/Kol/2013 & ITA No. 760&762/Kol/2014 for A.Y. 2006-07, 2008-09, 2009-10, whereby the issue of excess disallowance of interest income allocated to eligible unitshave been discussed and remanded the matter back to the AO for factual verification. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the Tribunal, a copy of which is also placed before the Bench.

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 50. The ld. DR relied upon the orders of the authorities below.

53.Additional Grounds raised by the assessee

1.Refund of dividend distribution tax (DDT) paid in respect of non-residence share holders. This ground relates to A.Y. 2011-12

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 54.The assessee has raised this additional ground stating that the Assessing Officer (“AO") erred in not extending the benefit of applicable Double Taxation Avoidance Agreements between India - UK and India - Spain (“DTAA") respectively qua the rate of tax towards payment of dividend to the shareholders namely Reckitt Benckiser Pic., UK and Lancaster Square Holdings, Spain. The AO also failed to appreciate that in terms of section 90(2), dividends being the income in the hands of the non-resident could not be subjected to tax by applying DDT at a rate in excess of the rate prescribed under the DTAA and hence, erred in subjecting the Appellant to additional income tax in terms of section 115-0 of the Act and the AO also erred in not granting refund of the excess Dividend Distribution Tax paid by the Appellant. We are of the view that this issue should be remitted back to the file of the ld AO for factual verification. The assessee is directed to file before AO, the amount of dividend paid, copy of agreement and other relevant documents, as required by AO.Therefore we direct the AO to examine relevant Double Taxation Avoidance Agreements between India – UK with reference to payment of dividend to the shareholders and adjudicate the issue in accordance to law. For statistical purposes, the additional ground raised by the assessee is allowed.

“2.Deduction of education cess on income tax paid by the assessee is allowable expenditure. This ground relates to A.Y 2011-12.” 56. We note that issue raised by the assessee in this additional ground is no longer res-integra.Ld. Counsel of the assessee submitted that education cess is not tax and hence not disallowable u/s 40(a)(ii) of the Act. We note that the CBDT Circular No. 91/58/66 - ITJ(19) dated 18-05-1967, wherein it has been clarified that the effect of omission of the word ‘cess’ from Sec. 40(a)(ii) of the Act is that only taxes paid are to be disallowed and not cess. Relevant extract of circular is as under:-

“Recently a case has come to the notice of the Board where the ITO has disallowed the ‘cess'paid by the assessee on the ground that there has been no material change in the provisions of s. 10(4) of the old Act and s. 40(a)(ii) of the new Act.The view of the ITO is not correct. Clause 40(a) (ii) of the IT Bill, 1961 as introduced in the Parliament stood as under: "(ii) any sum paid on account Page | 47

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains". When the matter came up before the Select Committee, it was decided to omit the word ‘cess' from the clause. The effect of the omission of the word ‘cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided ” 57. We also rely on the judgment of Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT (ITA No. 52/2018) which after taking into account aforementioned CBDT circular held that Sec. 40(a)(ii) applies only to taxes and not to education cess. Relevant extract of the decision is reproduced for ease of reference:-

“13. On the third issue in appeal no. 52/2018, in view of the circular of CBDT where word "Cess" is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee.” 58. We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below:

(i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) – “The assessee’s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317 u/s 37 of the Act. We note that hon’ble Rajasthan high court’s decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue’s contentions supporting the impugned disallowance. The assessee’s instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee’s appeal I.T.A. No. 685/Ko/2014 is partly accepted in above terms. (ii).Peerless General Finance & Investment Co. Ltd. -vs. - DCIT (ITA No. 937/Kol/2018) – “37. Additional ground raised by the assessee in ITA No.937/Kol/2018 for A.Y.201011 reads as under:“That on the facts and in the circumstances of the case, the authorities below erred in not allowing deduction U/s 37(1) of the Income Tax Act,1961, on account of Education Cesses paid by the assessee while arriving at the assessed income for the year under appeal. ”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 38. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present ground of appeal is no longer res integra. The education cess being not ‘income tax’ is allowable as deduction under section 37 (1) of the Act. For this, we rely on the judgment of the coordinate Bench of IT AT Kolkata in the case of ITC Limited, ITA No.685/Kol/2014, order dated 27.11.2018, wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the assessing officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. ” (iii)Tega Industries -vs.- ACIT (ITA no. 404/Kol/2017)- “We further to notice that assessee has raised an identical additional ground in both cases seeking to claim education cess on provision for Income-tax amount of Rs. 71,65,049/- and Rs. 77,76,699 (assessment year wise); respectively as allowable in computing total income other than MAT u/s. 115JB of the Act. Hon’ble Apex Court’s land mark decision National Thermal Power Corporation Ltd (NTPC) V/s. CIT (1998) 229 ITR 383 (SC) as considered by this tribunal’s Special Bench order M/s. All Cargo Global Logistics Ltd V/s. DCIT (12) 137 1TD 26 (Mum.) settles the law that we an very well entertain such a legal question in order to determine the correct tax liability when all the relevant facts form part of records. We thus allow assessee’s additional ground to be raised. 12. Coming to merits of the hon’ble Rajasthan high court’s decision in Chambal Fertilisers& Chemicals Limited V/s. JCIT(D.B Income Tax Appeal No. 52/2018, dated 31-07-2018 taking note of CBDT’s Circular No. 91/58/66 dated 18-05-1965 as well as co-ordinate bench’s order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 11- 2018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act.”

Reckitt Benckiser (I) Pvt. Ltd. ITA Nos.404 & 529/Kol/2015 ITA Nos. 625 & 518/Kol/2016 Assessment Years:2010-11 to 2011-12 61.Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited in ITA No. 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.

Order pronounced in the Court on 17 .06.2020

Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक/ Date: 17/06/2020 (SB, Sr.PS)

Copy of the order forwarded to: 1. Reckitt Benckiser (I) Pvt. Ltd. 2. DCIT, Circle-12(1), Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.