COLAGATE-PALMOLIVE (I) LTD,MUMBAI vs. ADDL CIT 10(3), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the assessment order under

section 143(3) rws 144C (13) dated 11.12.2009, passed in pursuance of

direction of Dispute Resolution Panel-I (DRP), Mumbai dated 04.10.2010

for assessment year 2006-07. The assessee has raised following grounds of

appeal:

(1) The additional Commissioner of Income tax (“AO”)/ Dispute Resolution Penal (DRP) erred in disallowing Rs.75,65,515/- under section 14A of the Income tax Act (“Act”) having failed to appreciate that the appellant company has not incurred any expenses in relation to tax free income.

Without prejudice to the above, on the facts and in the circumstances of the case and in the law, the AO/DRP erred in disallowing Rs.75,65,515/- under section 14(2) and (3) of the Act read with Rule 8 of Income tax Rules for AY 2006-07

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd having failed to appreciate that section 14A(2) &(3) was inserted vide Finance Act, 2006 w.e.f. 2007 i.e. AY 2007-08. (2) On the facts and circumstances of the case and law, the AO/DRP erred in confirming the adjustment with respect to the arm’s length price for research and development services (R&D Services) rendered. Accordingly, the appellant prays that the addition of Rs.47,14,244/- may kindly be deleted. (3) On the facts and circumstances of the case and law, the AO/DRP erred in confirming the disallowance of advertisement and sales promotion expenditure incurred by the appellant. The learned AO/DRP failed to appreciate that the advertising and sales promotion expenditure which is incurred by way of payments to third parties is incurred ‘wholly and exclusively’ for the purpose of business of the appellant in India, and does not constitute an international transaction under the Indian transfer pricing regulation.

additional grounds of appeal:

Without prejudice to Ground No.1 to3 above and in alternative, on the facts and in the circumstances of the case, the AO /DRP has erred in consequently not revising the profit from the Baddi unit eligible for deduction under section 80IC of the Act by the amount of advertising and marketing expenditure alleged to have been incurred for the purpose of business of the appellant’s undertaking. It is prayed that the AO/DRP be directed to recompute the deduction under section 80IC of the Act by adjusting the advertising and marketing expenditure considered as not having been incurred for the purpose of the appellant’s undertaking. 3. The brief facts of the case are that assessee company is engaged in the

business of manufacturing, trading, marketing and distribution of

dentifrices, cosmetics, toiletries, soaps, shampoos and leather products filed its return of income for assessment year 2006- 07 on 30th November 2

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd 2006 declaring total income of ₹ 144,67,77,616/-. In the return of income

the assessee reported international transaction and furnished its report under

form No. 3CEB as required under section 92B in relation to international

transaction with its associated enterprises (AE). The return of income was

selected for scrutiny. The assessing officer after taking necessary approval

from the Commissioner of income tax, made a reference to transfer pricing

officer (TPO) for determination of arm length price (ALP) with reference to

transaction reported in form 3CEB related to research and development

(R&D) services provided by assessee to its AE. The learned TPO after granting opportunity to the assessee suggested adjustment of ₹ 47,14,224/- on account of R&D services and adjustment of ₹ 3,95,93,000/- on account

of cost allocation to Colgate-Palmolive USA of advertisement and marketing (AMP) expenses. Thus, the TPO suggested total adjustment of ₹

4,43,07,000/-. On receipt of order of TPO, the assessing officer made

adjustment/additions suggested by TPO in draft assessment order.

tax-free bonds like Konkan Railway Corporation, Indian Railway Finance

Corporation, HUDCO, Unit trust of India and National Bank for agriculture

and Rural Development (NABARD). The assessing officer asked the

assessee as to why the provision of section 14A with rule 8D be not made applicable against the assessee. The assessee filed its reply dated 3rd 3

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd November 2009 and again on 9th November 2009. In the reply the assessee

besides other contention stated that the scope and effect of insertion of

section 14A has been explained in Circular No. 1 of 2001 issued by Central

Board of Direct Taxes (CBDT), which explains the underlying object of

insertion of section 14A, which is to compute both the exempt income and

taxable income correctly, which is possible only after the expenditure

incurred in relation thereto is allowed to them. Hence, the legislature intent

of introducing section 14A is to disallow expenditure incurred in relation to

earning exempt income and no disallowance is warranted in absence of any

specific expenditure being incurred for earning tax free income. The

investments are made with a long-term planning in mind having maturity

period of 5 to 10 years The assessee also stated that all the investments from

which the tax free income is earned by the assessee, were made from its

own surplus funds and accommodated profits and no interest or other

expenses has been incurred for earning exempt income. It was also stated

that in the year in which the tax-free investments were purchased by the

assessee company, it had no borrowed funds. Entire investments were

invested from the available surplus funds or accumulated profits. Thus, no

interest expenses can be disallowed (allocated) towards earning exempt

income. The assessee also relied on various case laws, which are referred by

assessing officer in para 5 of draft assessment order. The explanation

furnished by assessee was not accepted by assessing officer. The assessing 4

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd officer took his view that the provision subsection 14A (2) and (3) are

applicable to the year under consideration as the provision are procedural in

nature and applicable to the year under consideration. Accordingly, the

assessing officer made disallowance under Rule 8D(2)(ii) of Rs. 23,22,713/- on account of interest expenditure and under Rule 8D(2)(iii) of ₹

52,42,802/- on account of administrative expenses, thereby made a total disallowance of ₹ 75,65,515/- under section 14A read with Rule 8D. The assessing officer passed the draft assessment order on 11th December 2009

under section 143(3) read with section 144C(1). The copy of draft

assessment order was served upon the assessee. The assessee exercised its

option to file objections before the learned DRP. The learned DRP vide its order dated 15th September 2010 disposed the objection filed by assessee

and confirmed the addition made by assessing officer in the draft

assessment order. On receipt of report /order of learned DRP, the assessing

officer passed the final assessment order under section 143(3) rws 144C(13) dated 11th December 2009. Aggrieved by the additions/disallowances made

in the final assessment order, the assessee has filed this appeal before this

tribunal raising the various grounds of appeal as the recorded above.

assessee and the learned departmental representative (DR) for revenue and

gone through the orders of lower authorities. The assessee has filed an

application for admission of additional ground of appeal. When the 5

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd application applicant/assessee stated that the additional ground of appeal is

purely legal and would not require an investigation into France facts. The

learned AR of the assessee submits that all the facts related to raising of

additional ground of appeal are emanating from the facts of lower

authorities and that no new facts or investigation for adjudication of

additional ground of appeal are required. In support of his submission the

learned AR of the assessee relied upon the decision of Hon’ble Supreme

Court in case of CIT versus S. Nelliappan (66 ITR 722 SC), National

Thermal Power Corporation Ltd versus CIT (229 ITR 383 SC) and Jute

Corporation of India Ltd (187 ITR 688 SC). On the other hand the learned

CIT–DR submits that he left the admission of additional ground of appeal at

the discretion of tribunal.

are required to be brought on record for adjudication of additional ground of

appeal and that all facts are emanating from the order of lower authorities.

Moreover the learned CIT–DR has not disputed the fact that no fresh facts

are necessary to bring on record for adjudication of additional ground of

appeal. Therefore, considering the decision of Supreme Court in National

Thermal Power Corporation Limited (supra) wherein, the Hon’ble Court

held that the tribunal will have the discretion to allow, not to allow a new

ground to be raised, but where the tribunal is only required to consider the

question of law arising from facts which are on record in the assessment 6

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd proceeding, it is necessary to consider the question in order to correct the

assess the tax liability of the assessee. The tribunal in its discretion may

allow the additional ground of appeal. Therefore, in view of the aforesaid

factual and legal discussion, we admit the additional ground of appeal

raised by assessee. Accordingly, now we shall proceed to consider the

various grounds of appeal raised by the assessee.

The learned AR for the assessee submits that during the relevant period the

assessee and tax free interest of ₹ 6,89,35,430/- from various tax-free bonds

issued by various public sector undertaking. The learned AR for the

assessee submits that the details of tax free interest for the year ended on 31

March 2006 is provided in para 1 of statement of fact furnished by assessee

to the lower authorities. (For appreciation the statement of tax free interest

received from various undertakings are referred below):-

1 HUDCO ₹ 64,75,000/-

₹ 23,12,500/- 2 HUDCO

Konkan Railway Corporation Ltd ₹ 1,27,00,000/- 3

4 Konkan Railway Corporation Ltd ₹ 26,72,945/-

₹ 76,50,000/- 5 National Bank for agriculture and Rural development ₹ 1,17,00,000/- 6 Indian Railway Finance Corporation

National bank for agricultural and Rural ₹ 26,25,000/- 7 development

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd National Bank for agriculture and Rural ₹ 26,25,000/- 8 development 9 Indian Railway Finance Corporation ₹ 10,400,000/-

₹ 69,90,327/- 10 Unit trust of India

Unit trust of India ₹ 27,84,658/- 11

TOTAL ₹ 6,89,35,430/- 8. The learned AR of the assessee submits that all the investments were made

from surplus funds /applicant profit of the assessee company. The assessee

has no borrowing in the year in which these investments were made in the

tax free bonds and also in the current financial year rest of the assessee

company has not incurred any expenditure for earning the tax for the

interest during this year. The investments were made in earlier years and the

assessee is holding them for a very long period of time. All figures are from

earlier years, which are duly reflected at page No. 34 Paper book (Schedule-

of balance sheet as on 31.03.2016). The investments are made with a long-

term horizon in mind with maturity period ranging from 5 to 10 years.

Further, there is no requirement to monitor these investments on day to day

basis. The interest expenditure, which the assessee incurred, pertains to the

interest payable on housing deposits in respect of rent-free accommodations

provided to employee of the assessee company and accordingly not related

to investment in tax free bonds. The learned AR further submits that

Rule8D is not applicable for the year under consideration, which is now

admitted position under the law. The reserve and surplus of assessee are

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd more than Rs. 135 Crore. The assessee has shown profit of ₹ 137 Crore.

The learned AR for the assessee further submits that similar disallowance

was made in earlier year, which has been sent to the assessing officer by the tribunal vide order dated 4th May 2018 in ITA No. 6073/Mum /2014. The

learned AR of the assessee further submits that neither the disallowance

under Rule8D(2)(ii) nor under Rule8D(2)(iii) are required for the year

under consideration as the assessee has neither made administrative

expenses nor invested from interest-bearing fund for earning exempt

income. The learned AR further submits that CBDT in Circular No. 14 of

2001 explains the underlying object of insertion of section 14A, which is to

be compute both the exempt income and taxable income correctly, which is

possible only after expenditure incurred in relation thereto is allocated to

them. The legislature intent of introducing section 14A is to disallow

expenditure incurred in relation to earning exempt income and no

disallowance is warranted in absence of any specific expenditure being

incurred for earning exempt income. The assessee has not incurred any

expenses for earning exempt income during the period under consideration;

therefore, no disallowance under section 14A is warranted and that the

disallowance made by assessing officer, confirmed by learned DRP is liable

to be deleted. 9. On the other hand the learned CIT-DR for revenue submits that an assessee

own case for AY 2007-08, the similar disallowance was remitted back by 9

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd the tribunal to the assessing officer, therefore, this ground of appeal may be

restored to the file of assessing officer to take decision afresh. 10. We have considered the rubble submission of both the parties and have

gone through the orders of authorities below. During the assessment the

assessing officer noted that the assessee has earned exempt income of

Rs.6.89 Crore. The assessing officer issued show caused notice as to why

the disallowance under section 14A be not made. The assessee filed its

detailed reply vide reply dated 03.11.2019 and 09.11.2009, which we have

noted in the brief facts. The reply filed by the assessee was not accepted by

the assessing officer. The assessing officer invoked the provisions of Rule

8D and made disallowance of Rs. 75,65,515/- which consist of Rs.

23,22,713/- under Rule 8D(2)(ii) and of Rs. 52,42,802/- under Rule

8D(2)(iii). The ld. DRP though accepted that the provisions of Rule 8D is

not applicable for the year under consideration and directed the assessing

officer to make reasonable disallowances for interest expenditure and direct

expenses on reasonable basis. There is no dispute that the assessee has not

made fresh investment for earning exempt income. All the investment from

which, the assessee and interest income which is exempt income is received

from investment made is in earlier years. Further, we are also in agreement

with the submissions of the ld. AR for the provisions of Rule 8D is not

applicable for the year under consideration. We have noted that on similar

set of fact for assessment year 2007-08, the assessing officer made similar 10

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd disallowance under Rule 8D(2)(ii) and(iii). On appeal before learned

Commissioner (Appeals) the disallowance under Rule 8D2 (ii) were

deleted, however, disallowance under Rule 8D2(iii) were sustained. On

further appeal before the tribunal the issue is restored back to the file of

assessing officer for examining the fresh computation of disallowances

under Rule 8D(2)(iii), furnish by assessee. The part of order of tribunal with

regard to grounds of appeal on 14A is extracted below :

“9.1 The sole ground raised in assessee's cross objection pertains to disallowance u/s 14A. During assessment proceedings, it was noted that the assessee earned tax free interest income aggregating to Rs.6.68 Crores which called for disallowance u/s 14A read with rule 8D. The assessee contested the same by putting forth various submissions as extracted by Ld. AO in the quantum assessment order, where it inter-alia contended that in the absence of specific expenditure to earn the exempt income, disallowance was not called for. The attention was drawn to the fact that the investment was made out of surplus funds generated by the assessee. However, not convinced, Ld. AO computed aggregate disallowance of Rs.83.54 Lacs u/r 8D(2) which comprised of interest disallowance u/r 8D(2)(ii) for Rs.34.39 Lacs and expense disallowance u/r 8D(2)(iii) for Rs.49.14 Lacs.

9.2 Upon further appeal, Ld. CIT(A) has allowed part relief against interest disallowance as stated in Para-4 of the impugned order but confirmed expenses disallowance u/r 8D(2)(iii). Aggrieved, the assessee is in further appeal before us.

9.3 The Ld. Sr. Counsel fairly submitted that the expenses disallowance u/s 14A may be restricted to Rs.5,37,840/- as per alternative computations submitted by the assessee before Ld. first appellate authority whereas interest disallowance was not called for in the circumstances. Both the representative pleaded that the

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd issue may be remitted back to the file of Ld. AO for re-adjudication on factual matrix.

9.4 Upon due consideration, we deem it fit to restore the matter back to the file of Ld. AO to reconsider the assessee's alternative submissions as raised before Ld. first appellate authority qua expense disallowance and also re-adjudicate the issue of interest disallowance in the light of assessee's submissions. The assessee, in turn, is directed to substantiate his stand in this regard. Needless to add that the provisions of Rule 8D, as per settled judicial pronouncements, could be applied only from AY 2008-09 and were not applicable in the impugned AY. The assessee's cross-objections stands allowed for statistical purposes.”

period for earning exempt income and that the interest free funds were in

far excess, when the investments were made. Moreover the similar

disallowance on account of interest expenses under Rule8D (2) (ii) was

deleted by learned Commissioner (Appeals) in appeal for assessment year

2007-08. We are further noted that this specific fact that no interest bearing

funds were invested for earning tax free income was brought to the notice

of lower authorities; however, no adverse finding was recorded by the lower

authorities. Moreover, the similar disallowance was deleted by learned

Commissioner (Appeals) in assessment year 2007-08, which has been

affirmed by tribunal. Therefore, the disallowance under Rule8D2 (ii) are

deleted, however so far as disallowances under rule 8D (2)(iii) are

concerned, we have noted that similar disallowance was restored back to the

file of assessing officer to consider afresh. Hence, keeping in view the

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd principal of consistency the issue of disallowance under rule 8D2 (iii) is

restored back to the file of assessing officer to decide afresh after

considering the submission of assessee, which we have recorded above and

in accordance with the direction of tribunal in assessee’s own case for assessment year 2007-08 in order dated 4th May 2018 in CO No.

243/Mum/2014 in ITA No. 6073/Mum/2014. In the result this ground of

appeal is partly allowed. 12. Ground No. 2 relates to confirming the adjustment with respect to arm’s

length price for research and development services. The ld AR for the

assessee submits that the assessee has established a research centre at

Powai, Mumbai with the technical assistance of Colgate’s Global

Technology Centre situated at Piscataway, New Jersey, USA. The centre

renders research services to assessee as well as its group entity in Asia

Pacific, Africa and Middle East the assessee performed the functions related

to research and development for launching of new products, the complaints

analyses, analytical support, assistance and profit improvement, assistant in

selecting new vendor and regulatory support. Besides that the assessee also

performs some product testing and clinical trial in respect of certain

products for Colgate-Palmolive USA. The research and development

services (R &D services) performed by assessee for its group entity are in

the nature of contract research and development as the assessee does not

own intellectual property rights arising from research conducted by it. The 13

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd assessee conducts research and development for its group entity within the

broad parameters laid down by the entity requesting for research. No risk is

assumed by assessee in relation with research activities. During the relevant

period assessee company rendered R&B services to its affiliate’s to the

extent of ₹2,46,14,398/-. In addition the assessee has received benefit under Served India Scheme of Central government to the extent of ₹ 24,61,440/-.

Thus resulting a total adjusted income from services of Rs. 2,70,75,837/-

against the operating expenses of ₹ 2,34,42,284/-. (i.e OP/TC of 15.50 %).

The assessee benchmarked its arm’s length price of international transaction

under transactional net margin method (TNMM) using external comparable.

The assessee identified 7 comparable as comparable company for R&B

activities for using comparable data for FY 2003-04 and 2004-05 is 18.82

% and after using the data for FY 2005-06 it is 14.70 %. The assessee’s

markup is at 15.50 %. Accordingly, the transaction pertaining to research

and development activities were at arm’s length. The assessing officer made

a reference to TPO for determination of arm’s length of assessee’s

international transaction. The TPO while computing the ALP excluded two

comparable from the list of compatible selected by assessee. The assessing

officer included 2 more comparable in the final set of comparable. The

comparable selected by TPO are Rites Ltd and Water and Power

Consultancy services Ltd. The TPO arithmetic mean at 25.11 %, whereas

the assessee has applied 5% on cost and the difference margin of 20.11 % 14

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd was applied on the original cost of ₹2,34,42,284/- and accordingly made adjustment/addition of ₹,47,14,243/-. The two comparable included by TPO

on the basis that both the comparable treated as comparable in preceding

years. The learned AR for the assessee submits that every assessment year

has to be treated separately. Merely because a company has been treated as

comparable in one year it does not necessarily mean that the same should be

treated as comparable in future assessment years. For exclusion of Rites

Limited the ld. AR for the assessee submits this comparable was excluded

in assessee’s case in appeal for AY 2002-03 in ITA No. 669/Mum/2009.

Rites Limited was excluded on account of turnover filter. For exclusion of

the Water & Power Consultancy Services (India) Ltd, (WPCSIL) the ld AR

for the assessee submits that this company is undertaking different function

as compared with assessee. WPCSIL is providing consultancy services in

the domestic and international water and power store sectors, whereas, the

assessee is in research related services. WPCSIL has total turnover of Rs.

806 Crore in FY 2005-06, whereas, the assessee received fees of Rs.2.46

Crore on its research related services. The ld AR further submits that Rites

Ltd and WPCSIL was included by TPO in AY 2005-06, on appeal before ld

CIT(A) both the comparable were deleted/excluded vide order dated

25.01.2011. And by following the order of ld. CIT(A) in AY 2005-06,

similar order was passed by ld. CIT(A) in AY 2007-08. On further appeal

before Tribunal, the action of ld CIT(A) for AY 2007-08 is affirmed. 15

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd Moreover, the Public Sector / Government Company cannot be considered

as comparable as Public Sector is not driven by any profit motive alone but

other consideration of social obligation. In support of his submissions the

ld. AR relied on the decision of Hon’ble Bombay High Court in CIT Vs Thyssen Krupp Industries India Pvt Ltd. (ITA No. 2218 of 2013 dated 28th

March 2016). The ld. AR for the assessee further submits that “Alphageo

(India) Ltd” should also be excluded from the set of comparable as the same

is not comparable with the assessee. Though, this comparable was selected

by the assessee in it TP study. The ld. AR for the assessee submits that the

revenue cannot press that this comparable was selected by the assessee and

now precluded from raising submission for exclusion of this comparable. In

support of his submission the ld AR for the assessee relied on the decisions

of Bombay High Court in CIT Vs Tata Power Solar System Ltd [2017] 77

taxmann.com 326 (Bombay). 13. The ld. AR for the assessee further submits that Alphageo (India) Ltd

should be exclude from the set of comparable. It was argued that there is no

bar in excluding the comparable selected by the assessee if the comparable

is not really comparable. In support of his submissions the ld. AR for the

assessee relied on the decision of Bombay High Court in CIT Vs Tata

Power Solar System Ltd 289 CTR 197 (Bombay). It was further argued that

Alphageo is not comparable as the same renders seismic services and does

not provide any pharmaceutical R&D services. In support the ld. AR for the 16

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd assessee relied on the decision of the tribunal in Apotax Research Private

Limited Vs DCIT (ITA No. 1286/Bang/2010 dated 22.02.2017.

authorities below. The ld. DR for the revenue submits that the exclusion of

the Alphaego’s exclusion is prayed for the first time before the Tribunal by

the assessee. The TPO accepted the contention of the assessee for treating it

as a good comparable.

through the orders of the lower authorities. We have noted that the TPO

while benchmarking the ALP with regard to international transaction of

assessee with its AE, the TPO included Rites Limited and WPCSIL as a

comparable. We have noted that Rites Ltd and WPCSIL was also included

by TPO in AY 2005-06, on appeal before ld CIT(A) both the comparable

were deleted/excluded vide order dated 25.01.2011. And by following the

order of ld. CIT(A) in AY 2005-06, similar order was passed by ld. CIT(A)

in AY 2007-08. On further appeal before Tribunal, the action of ld. CIT(A)

for AY 2007-08 is affirmed. For completeness of order, the finding of ld.

CIT(A) for AY 2005-06 is extracted below:

“3.10 Rites Limited The appellant had submitted that RITES Limited cannot be treated as a comparable company because of the following reasons: - Rites Ltd is a Government of India Enterprise and provides services to Central/State Government and other public sector undertakings and these transactions are akin to the transactions entered into between related parties; 17

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd - There were significant differences in the turnover of the two companies; - Rites Ltd is engaged in providing comprehensive engineering, consultancy and project management services in the transport infrastructure sector. Further, Rites clients mainly include Central Government enterprises, State Governments enterprises, Public Sector undertakings corporations and industrial establishments. 3.11 However, the learned TPO has treated RITES Limited as a comparable company on the following premise that the turnover of the appellant from R&D activity is not fixed and hence it can be zero or it can be in crores and that with respect to functions performed, the TPO was of the opinion that the functions performed are the same except for minor differences in the nature of business. 3.12 I have examined the facts of this company during AY 05-06 and have gone through the website details and I find that Rites is a Government of India enterprise and its transactions are akin to the transactions entered into between related parties and thus, the basis on which RITES Limited is treated as a comparable by the ld. TPO is incorrect. Accordingly, I agree with the view of the appellant that Rites being a Government of India enterprise cannot be treated as comparable. In view of all of the above, I agree with appellant's submissions that RITES Limited cannot be treated as comparable to that of the appellant.

3.13 WAPCOS The appellant had submitted that WAPCOS should not be taken as comparable company as WAPCOS is a Government of India enterprise and a "MINI RATNA" Public Sector Enterprise under the aegis of the Union Ministry of Water Resources and received grants from government for carrying specific schemes of the Government of India and also there is significant difference in the turnover of the two companies. Further, the functions performed by WAPCOS are also significantly different from that of the appellant. WAPCOS was engaged in the business of consultancy and not in R&D activities. 3.14 However, the learned TPO has treated WAPCOS as a comparable company on the following premise that the turnover of the appellant from R&D activity is not fixed and hence it can be zero or it can be in crores and that with respect to functions performed, the TPO was of the opinion that the functions performed are the same except for minor differences in the nature of business. 3.15 I agree with the submissions of the appellant that WAPCOS is a Government of India enterprise and hence it cannot be compared with that of the appellant. Hence, WAPCOS cannot be treated as a comparable. 3.16 The contention of the appellant has mentioned that Rites and WAPCOS are government enterprises and supported by Government of India is various facets of the business and therefore their profitability is affected by the intervention by Government of India in terms of subsidies, guaranteed business, reduced service cost from other Government of India enterprise etc and since these companies have provided their services to Central/State Government and other public sector undertakings, these transactions are akin to the transactions entered into between related parties. It has to be borne in mind that enterprises

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd (RITES/WAPCOS) carrying same function but in different economic sectors and markets (captive) can have different level of profitability)” 16. The Tribunal in appeal for AY 2007-08 (ITA No. 6073/M/2014 & C.O. No.

243/M/2014) while affirming the order of ld. CIT(A) passed the following

order:

“7.1 Facts qua Ground numbers 1 & 2 of revenue's appeal are that the assessee received an amount of Rs.5.20 Crores from its parent company for providing certain Research & Development Services [R & D services]. The said services were being charged at mark-up of 5%. The assessee was entitled for duty benefit of 100/c of export value of R & D services from Government of Indian under 'Served for India Scheme'. After considering the said duty benefit, the net margin (operating Profit/ Total Cost) of the assessee worked out to 15.87% as against mean margin of 15.60% of ten comparables as selected by the assessee. However, Ld. TPO opined that the benefit of said duty benefit could not be considered for the purpose of comparison. The another point of difference was inclusion of two comparables namely Rites & Water & Power Consultancy Services India Ltd. as selected by Ld. TRO by relying upon the order for AY 2006-07, which as per assessee's submissions were functionally not comparable. In the final analysis, Ld. TPO has worked out mean margin of seven comparables including these two comparable as 14.82% and accordingly, considering assessee's margin of 5%, worked out TP adjustment of Rs.5.69 crores against the same which was the subject matter of appeal before Ld first appellate authority. 7.2 Aggrieved, the assessee contested the same with success before Ld. CIT(A) vide impugned order dated 28/03/2014 where the aforesaid adjustment was deleted on the reasoning that the export benefit was directly related to provision of R & D services and secondly, DEPB benefit was part of operating income as per the judgment of Mumbai Trib unal rend e red in We/spun Zucc hi Tex tiles Ltd ITA No. 7371/Mum/2010. Aggrieved, the revenue is in further appeal before us. The Ld. DR has placed reliance on the stand of Ld. TPO whereas Ld. AR contended that the issue stood covered in assessee's favor by the decision of the Tribunal and 19

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd therefore, the decision of the Ld. CIT(A) was fair & reasonable in the circumstances. 7.3 Upon due consideration, we find that the export benefits were received by the assessee in connection with export of R & D services and had direct and intimate connection with the said receipts and therefore, there was no reason to exclude the same for the purpose of computation of margins from R & D activities. Further, the said benefit arose from usual activities carried by the assessee and part & parcel of the same transaction and therefore, formed part of operating income only. The revenue has not controverted the stated fact or brought on record any contrary judgment to refute the findings of Ld. first appellate authority. Therefore, on factual matrix, we find to reason to interfere with the stand of Ld. first appellate authority in this regard. The grounds stands dismissed.” 17. The Hon’ble Bombay High Court in CIT vs. Thyssen Krupp Industries

India Pvt. Ltd. (supra) while considering the question of law whether

Tribunal was justified in excluding Engineers India Ltd. from the list of

comparables held that Engineers India Ltd. is a Government Company and

the contracts of Government/Public Sector Undertaking are not driven by

profit motive alone but other consideration also weigh in such discharge of

social obligations. Therefore, not comparable. Further, we have further

noted that tribunal in assessee’s appeal for AY 2002-03 (ITA No.

669/Mum/2009 dated 29.06.2012) excluded Rites Limited and WPCSIL.

Considering the above factual and legal discussion, we are of the view that

inclusion of Rites Ltd. and WPCSIL are liable to be excluded. As we have

excluded Rites Ltd. and WPCSIL on the basis of decision of Tribunal in

assessee’s own case, hence, the adjudication on the other contention of ld.

AR of the assessee have become academic. 20

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd 18. So far as exclusion of Alphageo (India) Ltd. is concern. The ld. AR of the

assessee vehemently argued that the assessee is not barred under law from

withdrawing the comparable from the list on the ground of functional

difference as held by Hon’ble Bombay High Court in CIT vs. Tata Power

Solar Systems Ltd. (supra). We have noted that Hon’ble Bombay High

Court in CIT vs. Tata Power Solar Systems Ltd. (supra) held that when for

purpose of determining ALP, companies assessee, engaged in generation of

solar energy, had mistakenly included two companies engaged in area of

wind energy in its list of comparables, assessee would not barred in law

from withdrawing these two comparables from its list on ground of

functional difference.

seismic services and does not provide any Pharmaceutical R&D services.

The coordinate bench of Bangalore tribunal in case of Apotax Research

Private Limited Vs DCIT (supra) while considering the comparability of

Alphageo held as under :-

“6. With regard to Alpha Geo India Ltd., it was contended on behalf of the assessee that this comparable does not meet the basic comparability criterion of functional similarity which renders seismic services and does not provide any pharmaceutical R&D services. It also fails "atleast 25% earning from exports filter" applied by the TPO himself. The profile of Alpha Geo India Ltd. is available at page 386 of the compilation of the assessee, according to which the company provides the following services:-

- Designing and preplanning of 2D and 3D services 21

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd - Seismic data acquisition in 2D and 3D - Seismic data processing/reprocessing/special processing - Seismic data interpretation - Generation, evaluation and ranking of prospectus - Reservoir analysis - Topographic surveys with GPS/RTK - Tape transcription - Digitisation of hard copies of maps, seismic sections and well logs into CGM/SEGY/LAS formats - Third party QC for acquisition and processing

concur the fact that Alphageo (India) Ltd is working in the different field

not comparable with the assessee.

recompute the ALP on R&D Services by excluding Rites Ltd., WPCSIL

and Alphageo (India) Ltd. In the result, ground no.2 of the appeal is

allowed.

expenses. The learned AR for the assessee submits that advertisement and

sale promotion is not international transaction. The expenses on sale and

promotion was made to third party, accordingly it does not constitute

international transaction. The ld AR submits that on similar set of fact the

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd learned CIT(A) in appeal for AY 2005-06 deleted the similar disallowances,

thus, the issues concluded in earlier years. The learned AR prayed for

following the order of tribunal for AY 2005-06.

lower authorities. The ld. DR submits that in earlier year the order is in

favour of the assessee.

order of the lower authorities. We have noted the similar additions were

made by assessing officer in assessment year 2005-06 on the basis of

adjustment suggest in report of TPO. However, on appeal before ld CIT(A),

the additions were deleted holding that there is no direct benefit flowing

from the assessee’s A&M expenses to its associated enterprises, since, the

expenses are incurred solely for the promotion of the assessee’s product in

the Indian market. Incidental benefits flowing to the associated enterprises,

if any cannot change the character of the expenses incurred by the assessee.

No brand royalty payments are made to the associated enterprises during

the period. On further appeal to the tribunal the following order is passed

in ITA No. 6073/Mum/2014 & CO 243/Mum/2014 dated 04/05/2018;

5.1 We have carefully heard the rival contentions and perused relevant material on record. At the outset, some pertinent facts to be noted are that there exists no arrangement or agreement between the assessee and its AE which obliged the assessee to undertake any sort of brand building on behalf of its AE. Secondly, nothing has been brought on record to suggest that incurring of AMP

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

expenditure has, in any manner, resulted into brand building exercise or creating marketing intangibles for the AE or AE stood benefitted by stated expenditure in any manner. The only argument advanced by the revenue is that the brand value of the Assessee Group, as a whole, has reflected healthy growth during the period 2000 to 2006. However, no evidence to demonstrate that there was any co-relation between the aforesaid growth vis-à-vis quantum AMP expenditure incurred by the assessee has been placed on record. In our opinion, no addition could be made on mere assumption of certain facts.

5.2 So far as the reimbursement of AMP expenses as urged by the revenue is concerned, upon perusal of transactions as reported in Transfer Pricing [TP] study carried out by assessee, we find that these expenses are in mostly in the nature of meeting expenses, travelling expenses, hotel expenses which has been received as well as paid by the assessee on the same basis i.e. third party cost. The nature of these expenses, per-se, do not instill confidence in us to conclude that the incurring of said expenditure, has in any way, resulted into brand building or creating marketing intangibles for the assessee. 5.3 Proceeding further, the contention of the assessee that has incurred the said expenditure to promote its own products in the market has remained uncontroverted. It is also uncontroverted that the aforesaid payments were primarily made to independent third parties without rendering any services to its AE.

5.4 Further, we find that Ld. TPO has computed the said adjustment by applying Bright Line Test without carrying out any analysis of the impugned expenditure to corroborate his stand. The aforesaid methodology, as per settled legal position, is not a recognized methodology and not one of the prescribed methods as envisaged by Rule 10B.

5.4 Upon due consideration, we find that the facts of the above case are quite similar to facts in the decision of Mumbai Tribunal rendered in Johnson & Johnson Ltd. Vs. CIT [43 Taxmann.com 15] wherein it has held as under:-

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

and sales promotion has resulted into higher sales on which correspondingly higher royalty has been paid to the parent company J&J US. Therefore, the benefit of higher publicity and sales promotion expenses are accrued to the parent company J&J US but the cost thereof is not apportioned to the parent company. The TPO sought explanation from the assessee as to why the cost of arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2) of the Act. The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate. The assessee filed its reply stating inter- alia that assessee is engaged in the business of distributing the products in the Indian Market on its own account. It was also contended that the advertisement and marketing expenses are incurred in India only for promoting sales by assessee of its products in India and it is not in any way benefited to J&J US. That J&J US is not directly involved in the business of manufacturing or trading of said goods in India either of its own or through any of its subsidiary. Hence, the entire advertisement and marketing expenses incurred are purely for assessee's own benefit and there is no element of any service being rendered to J&J US. It was also stated that assessee-company is an independent risk bearing entity and any cost incurred towards advertisement and marketing would be for the sole benefit of assessee- company, as it enjoys the increased sales of products as a result of such marketing activities. The assessee also furnished details of publicity and sales promotion expenses before TPO. However, TPO did not accept the contention of the assessee and stated that the said growth in net sales so achieved through higher and higher publicity and sales promotion and expenses have resulted into higher payment of royalty which the assessee is paying at a fixed percentage of sales to its parent company. Thus, there is a co-relation between the royalty payment and sales on the one hand and publicity and sales promotion expenses on the other hand and it is not a matter of coincidence. The TPO after considering the submissions of assessee has stated that J&J US, the parent company of the assessee is reaping the benefit of higher royalty year after year as a result of higher sales realized by assessee through higher and higher expenses by way of publicity 25

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

and sales promotion undertaken by assessee without the overseas AE bearing any cost thereto He stated that it constitutes arrangement between the two entities wherein the entire cost is borne by assessee, whereas the parent company J&J US is getting its share of benefit from those increased sales. The TPO worked out the cost at the rate of 4.22% of the publicity and sales promotion expenses which comes to Rs.6.88 crores. However, the TPO stated that the cost is restricted to 200.82 lakhs (being 1.23% of Rs.163.27 crores) in view of disallowance/adjustment in income made on account of royalty on technical know-how, the income tax, R&D cess and service tax paid thereon aggregating to Rs.41.27 crores out of total payment of Rs.58.37 crores. Hence, TPO disallowed Rs.200.82 lakhs from the publicity and sales promotion expenses incurred towards cost allocable to parent company. DRP after considering the submissions of the assessee company confirmed the action of the TPO. Accordingly the AO disallowed a sum of Rs.200.82 lakhs while making assessment. Hence, assessee is in appeal before the Tribunal.

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

Upon further appeal by revenue [80 Taxmann.com 269], Hon'ble Bombay High Court has upheld the aforesaid view of the Tribunal by making the following observations:-

(ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA.

(iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act.

(iv) In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained.

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

5.5 Similar view has been taken by Hon'ble Delhi High Court in catena of subsequent decisions, few of which are as follows:-

(i) Maruti Suzuki India Ltd. v. CIT 2015 64 Taxmnn.com 150 (ii) CIT v. Whirlpool of India Ltd. 381 ITR 154 (iii) Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl.CIT 381 ITR 237 (iv) Yum Restaurants (India) (P.) Ltd. v. ITO 380 ITR 637

In the above-mentioned decisions, it has categorically been held that in the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. Another aspect of the issue is absence of machinery provisions as observed by Hon'ble Delhi High Court, in Bausch & Lomb Eyecare (India) (P.) Ltd. [381 ITR 237] where Hon'ble Court after considering various judgments has elaborately discussed the issue in the following manner:-

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

"Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 31

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC."

"The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons 32

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being."

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under:

"68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. .......

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

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.

......

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance."

5.6 So far as the decisions relied upon by revenue are concerned, we find that the decision of Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. was rendered in the context where the assessees 36

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd were distributors of products manufactured by the foreign AE. The said assessees themselves were not manufacturers. More over none of the said assesses appears to have questioned the very existence of international transaction with foreign AE. It was also not disputed that the said international transaction of incurring AMP expenditure could be subject matter of TP adjustments in terms of Sec.92 of the Act. Therefore, the same is distinguishable on facts. Similarly, the decisions rendered in BMW India Private Limited and Perfetti Van Melle India Pvt. Ltd. has been rendered in a situation where there existed an agreement between the assessee and its AE to undertake Advertisement and Sales promotion. The case law of Cushman & Wakefied is not related with determination of ALP of AMP expenditure and further in that case the benchmarking of reimbursement of expenses was not done by the assessee. Hence, the cited case laws could not help the revenue on factual matrix. The case law of Maruti Suzuki India Ltd., in fact, support the stand of the assessee which is evident from the fact that Ld. DRP, in AY 2011- 12, following the ratio of this decision deleted the impugned additions and allowed the appeal of the assessee.

5.7 To conclude, respectfully following the ratio of decision of Hon'ble Bombay High Court as cited above along with the cited decisions of Hon'ble Delhi High Court, we upheld the order of Ld. first appellate authority and dismiss this ground of revenue's appeal. The assessee's cross-objections become infructuous.

appeal for AY 2005-06, and respectfully following the same, we also hold

that the expenses incurred by the assessee on advertisement and sale

promotion to third party is wholly and exclusively for the purpose of

business of the assessee and does not constitute an international transaction.

Hence, this ground of appeal raised by the assessee is allowed.

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd 26. -Additional ground of appeal relates to not revising the profit from Baddi

Unit eligible for deduction under section 80IC by the amount of

advertisement and marketing expenditure. The learned AR of the assessee

submits that this ground of appeal is raised in alternative and without

prejudice to ground no.1 to 3. The ld. AR further submits that in case the

ground no. 1 to 3 is not decided in favour of assessee then suitable direction

for revising profit from the Baddi Unit eligible for deduction under section

80IC may be made.

authorities.

that we have allowed ground no. 1 to 3 in favour of assessee. Therefore, we

direct the Assessing Officer to recompute the eligible unit of assessee

(Baddi Unit) for deduction under section 80IC in accordance with law,

keeping in views of our aforesaid finding on ground no.1 to 3.

Order pronounced in the open court on 11/09/2019.

Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 11.09.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “K” Bench, ITAT, Mumbai 38

ITA No. 8428/Mum/2010(AY-2006-07) Colgate Palmolive (India) Ltd

BY ORDER,

Dy./Asst. Registrar ITAT, Mumbai