DCIT, NEW DELHI vs. M/S DABUR INDIA LTD,, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Sh. N. K. Saini, AM and Sh. Sudhanshu Srivastava, JM ITA No. 3257/Del/2013 : Asstt. Year : 2006-07 Dabur India Ltd., Vs Asstt. Commissioner of Income 8/3, Asaf Ali Road, Tax, Central Circle-22, New Delhi New Delhi (APPELLANT) (RESPONDENT) PAN No. AAACD0474C ITA No. 3492/Del/2013 : Asstt. Year : 2006-07 Dy. Commissioner of Income Vs Dabur India Ltd., Tax, Circle-10(1), 8/3, Asaf Ali Road, New Delhi New Delhi (APPELLANT) (RESPONDENT) PAN No. AAACD0474C Assessee by : Sh. M. P. Rastogi, Adv. & Sh. Chandan Aggarwal, CA Revenue by : Sh. Amrendra Kumar, CIT DR Sh. Subhakant Sahu, Sr. DR Date of Hearing : 22.01.2017 Date of Pronouncement : 12.04.2017 ORDER Per N. K. Saini, AM:

These cross appeals by the assessee and the department are directed against the order dated 28.03.2013 of ld. CIT(A)-XXIX, New Delhi

ITA Nos. 3257 & 3492/Del/2013 2 Dabur India Ltd. being disposed off by this consolidated order for the sake of convenience and brevity.

ITA Nos. 3257 & 3492/Del/2013 3 Dabur India Ltd. Dabur International UAE and Dabur Nepal, having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption about the chargeability of royalty by invoking the provision of Section 92 of the Act from Dabur International UAE and Dabur Nepal is arbitrary, unjust and without any basis. 5) That the CIT (Appeals) and TPO have failed to consider that in the absence of any expenditure incurred by the assessee for the establishment of brand in the geographical area of working of Dabur International UAE and Dabur Nepal, no royalty can be said to have accrued to the assessee when Dabur International UAE and Dabur Nepal have incurred expenses on advertisement and sales promotion in their respective area for promotion of the brand which amounts to the services provided by both AEs to the assessee for completing the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International UAE and Dabur Nepal is arbitrary, unjust and at any rate very excessive. 6) That the TPO and CIT (Appeals) failed to appreciate the relevant clause of the agreement as existed in earlier years wherein as per the agreement Dabur India failed to incur the expenses for the promotion of the brand and marketing expenses in Dabur Nepal, which ultimately and actually were incurred by Dabur Nepal, which resulted into termination of the royalty chargeable under the then contract and consequently the CIT (Appeals) has erred on facts and under the law in

ITA Nos. 3257 & 3492/Del/2013 4 Dabur India Ltd. upholding the changeability of the royalty from Dabur Nepal. 7) That in absence of any comparable transaction necessary for the determination of Arm length Price, the alleged royalty sustained by CIT (Appeal) @ 2% on eligible sales in case of Dabur International and Dabur Nepal Pvt. Ltd is arbitrary, unjust and at any rate very excessive. 8) That in the absence of any method prescribed for valuation of shares, the TPO and the CIT (Appeals) ought to have accepted the valuation of shares as determined by the independent valuers based on the guidelines issued by RBI and acceptable to the FEMA authorities and consequently the "arms length price" as partly sustained by CIT (Appeals) in respect of shares of Dabur Egypt is arbitrary, unjust and at any rate very excessive. 9) That the CIT (Appeals) and the TPO having accepted that none of the method prescribed u/s 92(1) of the Act is appropriate and then having accepted that the "discounted cash flow" method as used by independent valuer for valuation of shares is proper, then no upward adjustment ought to have been sustained by CIT (Appeals) and consequently an upward adjustment by adopting 25% projected growth rate instead of 19% growth rate as adopted by the assessee in respect of Dabur Egypt is arbitrary, unjust and at any rate very excessive. 10) That the above grounds of appeal are independent and without prejudice to one another.

ITA Nos. 3257 & 3492/Del/2013 5 Dabur India Ltd. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.” 4. In the departmental appeal grounds raised are as under:

“1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in reducing the royalty from Dabur Nepal (P) Ltd chargeable @ 2% of FOB sale value as against the royalty chargeable @ 7.5% as worked out by the TPO/AO? 2. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in reducing the royalty from Dabur International Ltd chargeable @ 2% of FOB sale value as against the royalty chargeable @ 4% as worked out by the TPO/AO? 3. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the upward adjustment of Rs. 11.64 crores in respect of sale of shares of Dabur Nepal assuming the growth rate -5% as against the +5% as worked out by the TPO/AO? 4. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 2,10,674/- made by the AO u/s 43B and 36(1)(va) of the Act? 5. Whether the CIT(A) under the facts and circumstances of the case and in law was justified

ITA Nos. 3257 & 3492/Del/2013 6 Dabur India Ltd. in deleting the addition of Rs. 3,05,088/- made by the AO on account of expenditure incurred at club? 6. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in allowing the deduction u/s 801B & 801C on disallowance u/s 40(a)(ia) which comprises off sale of scrap, rental income, misc income as the same were not considered by the AO while computing the deduction on the section 801B & 801C of the Act, 1961? 7. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.” 5. Ground Nos. 1 to 7 of the assessee’s appeal which are co-related and Ground Nos. 1 & 2 of the departmental appeal relate to the chargeability of the royalty from two Associated Enterprises (AEs) of the assessee namely M/s Dabur International Ltd. UAE and M/s Dabur Nepal Pvt. Ltd.

ITA Nos. 3257 & 3492/Del/2013 7 Dabur India Ltd. Act had been declared at Rs.211,42,99,386/-. The said return was processed u/s 143(1) of the Act at the returned book profit u/s 115JB of the Act. Later on, the case was selected for scrutiny. The AO made the reference to the TPO u/s 92CA of the Act for computation of arm’s length price being the international transactions with the AE’s of the assessee. The TPO passed an order u/s 92CA(3) of the Act dated 26.10.2009. The TPO noticed that the assessee had received a sum of Rs.26.79 lacs as royalty which comprised of Rs.5.34 lacs from Dabur Nepal Ltd. and Rs.21.02 lacs from Asian Consumer Care Pvt. Ltd., Bangladesh. He also noticed that in the immediately preceding year, the assessee apart from the above two concerns received royalty from Dabur International UAE. He asked the assessee to furnish the reasons for receipt of low/no royalty from the AEs. It was explained by the assessee that the royalty had been accounted for on the basis of agreements in force. The TPO referred to the agreements with Dabur International Ltd. in para 7.3 of the order passed u/s 92CA(3) of the Act dated 26.10.2009, for the cost of repetition, the same is not reproduced herein. On the basis of the said agreement, the TPO noted the following important facts: “(a) The assessee has provided technical and R&D support, know-how, information operational

ITA Nos. 3257 & 3492/Del/2013 8 Dabur India Ltd. improvement and skills in the areas of the cost management, manufacturing, production procurement, sale, marketing and distribution of products in the Territory to M/s Dabur International Ltd. and has charged licence fees @ 3% of FOB sale (net of taxes and sales return). (b) the assessee has allowed use of its trade mark/trade name “Dabur” to the M/s Dabur International Ltd. in lieu of royalty payment of 1% of the FOB sale (net of taxes and sale return). (c) the royalty agreement is effective with effect from 01.04.2003 for a period of 24 months and shall continue thereafter without limit of time subject to termination of the agreement. (d) It is not a plea of the assessee that the above agreement is terminated in the year under consideration as per clause 5(a) of the agreement.” 7. On the basis of the aforesaid notings, the TPO observed that the royalty agreement between the assessee and the Dabur International Ltd. was in operation in the year under consideration. He, therefore, asked the assessee to explain the reason for not charging royalty from the AE as per the agreement. In response, the assessee submitted that right to receive the royalty by the assessee was absent during the year, accordingly, no royalty was charged from the AE. It was further explained that the AE has refused the payment of royalty on the ground that it had incurred huge expenditure

ITA Nos. 3257 & 3492/Del/2013 9 Dabur India Ltd. on promotion of Dabur Brands in overseas market. The submissions of the assessee were as under: “a) Royalty from Dabur International Ltd During the year under consideration the assessee company has not received any royalty while in the immediately preceding year a sum of Rs.16441000/- was received. The right to receive the royalty by the assessee company is absent during the year under consideration. Similarly Dabur international Limited is also under no obligation to pay us the royalty. This is mainly on account of the reasoning that heavy advertisement expenditure is to be incurred for promoting the Dabur's brands in the overseas market. Dabur international Ltd. has refused to bear the additional advertisement expenditure incurred by them in this respect. Since the advertisement expenditure incurred being in relation to the brand owned by Dabur India Ltd, and the value of Dabur brand will increase post heavy brand building exercise undertaken by Dabur international Ltd. the assessee had given up its right to receive the royalty. Thus accordingly no royalty was payable during the year under reference by Dabur international Ltd. to the assessee company A letter to the effect dated 7lh April, 2005 that no royalty is payable to the assessee company, as confirmed by Dabur international Ltd. is enclosed herewith.” 8. The above submissions were not accepted by the TPO for the following reasons:

“(a) the assessee did not furnish any evidence in the form of agreement of the termination of above

ITA Nos. 3257 & 3492/Del/2013 10 Dabur India Ltd. royalty agreement as stipulated in clause 5(a) of the royalty agreement. No other corroborative evidence like nonuse of "Dabur" trade mark or non use of technical know-how by the AE was filed during the course of proceeding before me. In absence of any credible evidence, the self serving claim of the assessee of absence of right to receive royalty from AE to justify non charging of royalty cannot be accepted. (b) Another claim of the assessee that AE had incurred huge expenditure on development of brand of the assessee in overseas market is not supported by any credible evidence like quantum of expenditure and the evidence that the expenditure was actually incurred by the AE for brand development. (c) It is a matter of record as mentioned in above paragraph 7.1 of this order that the assessee has charged royalty of Rs. 164.41 Lakh from the AE in immediately preceding A.Y. 2005-06. However, the assessee has failed to explain any credible reason or evidence of changed circumstances under which the assessee has not charged royalty from the AE in this year. In view of the above finding that self serving claim of the assessee of not charging the royalty from the AE is not corroborated with any credible evidence, I reject the above referred to claims of the assessee.” 9. The TPO also discussed the agreement with Dabur Nepal Ltd. in para 7.6 of his order, for the cost of repetition,

ITA Nos. 3257 & 3492/Del/2013 11 Dabur India Ltd. the same is not reproduced herein. The TPO noted that the conditions of the aforesaid agreement revealed following important facts: “(a) as per agreement the AE i.e., M/s Dabur Nepal Pvt. Ltd. was allowed to use technical know- how, marketing, financial and managerial support of the assessee. (b) as per agreement the assessee was required to assist the AE in recruitment of specialized personnel to train and impart information and technical know-how. (c) as per agreement Dabur has allowed the AE to use its trade mark "Dabur" on the product manufactured by the AE. It was clarified in clause 3 of the agreement that entire marketing expense including salary and allowance of sales personnel would be borne by the assessee and the AE shall pay the assessee royalty @ 7.5% of net sales for both allowing use of trade mark and bearing cost of marketing expenditure by the assessee. (d) the above referred to the agreement was effective for a period of 10 year from date of approval of the agreement by HMG/Nepal and not from the date of signing the agreement.” 10. The TPO pointed out that the assessee had not received full amount royalty from Dabur Nepal Ltd. in this year despite the agreement. He accordingly asked the assessee to

ITA Nos. 3257 & 3492/Del/2013 12 Dabur India Ltd. explain the reasons for the same. In response the assessee submitted as under: “b) "Royalty from Dabur Nepal Pvt, Ltd. The aforesaid reasonings as mentioned above in the case of Dabur international Ltd. is applicable in the case of Dabur Nepal Pvt. Ltd. also. Moreover, overall cost of operation and profitability had gone down during the year under consideration. Moreover, Dabur Nepal Pvt. Ltd. had no obligation to pay any royalty. The intimation of Dabur Nepal Pvt. Ltd. to the assessee company to this effect that no royalty is payable as per letter is enclosed. The same was accepted by the assessee company". 11. The TPO did not find merit in the submissions of the assessee for the following reasons:

“(a) the claim of the assessee that AE was under no obligation to pay royalty is based on Xerox copy of an undated letter of May, 2005 alledgly issued by the AE. In the letter the AE has claimed that due to increase in expenditure no royalty is payable to the assessee. It is pertinent to mention here that above extracted terms and conditions of the agreement between AE and the assessee do not stipulate non- payment of the royalty on the ground of increase in operating cost. In fact as per terms and condition of the agreement the assessee had borne the marketing cost of the AE. Since, the one sided communication by the AE is in contravention to the terms and condition of a legally enforcement agreement, it is held that the assessee has right to charge the royalty from the AE.

ITA Nos. 3257 & 3492/Del/2013 13 Dabur India Ltd. (b) Without prejudice to above finding I have examined the claim of the AE of increase in operating cost in this year in the above referred to letter, A careful scrutiny of annual audited accounts of the AE (which were filed vide letter dated 07.09.2009) has revealed that ratio of total operating expenditure to total income of the AE was 94.20% in immediately preceding A.Y. 2005-06 as compared to 94.08% in the year under consideration i.e., there was marginal fall in operating cost of the assessee in the year under consideration as compared to immediately preceding year. This credible fact which is based on audited accounts of the AE proves that an incorrect facts have been noted in the above referred to letter of the AE that due to increase in operating expenditure it has not paid royalty to the assessee. (c) It is a matter of record that AE has paid royalty of Rs. 43.34 Lakh in preceding A.Y. and has paid royalty of Rs. 5.34 Lakhs for part of the period in this year and no royalty was paid for remaining part of this year for the reason of increase in operating expenditure. Since, the claim of increase in operating expenditure in this year was found to be false it is held that assessee has deliberately avoided charging the royalty for flimsy and unacceptable reasons.” 12. The TPO was of the view that the assessee had right to charge royalty from the AE for full period of year under consideration. He, therefore, asked the assessee to furnish the computation of royalty on the basis of agreement. In

ITA Nos. 3257 & 3492/Del/2013 14 Dabur India Ltd. response, the assessee furnished the computation as per following details:

Company FOB Sales Rs. in Royalty Rs. in Lakhs Lakhs Dabur Nepal (P) Ltd Nepal 3319.5 99.59 Dabur International UAE 7526.84 75.27 Total 10846.34 174.85

“In terms of the agreement for receipt of royalty with Dabur International Limited and Dabur Nepal Limited, payment of royalty was received from these two companies till FY 2004-05. However during the year no payment of royalty has been received from these two companies. During the course of proceedings a computation of royalty was furnished amounting to Rs. 1.74 Crores which could have been received from these two companies. You are required to show cause as to why the arm's length value of the arrangement between the assessee company with Dabur International Limited and Dabur Nepal Limited not be computed at Rs. 1.74 Crores keeping in view the fact that there is no change in the business model of the assessee company during the year.” 14. In response to the above show cause notice, the assessee submitted as under:

ITA Nos. 3257 & 3492/Del/2013 15 Dabur India Ltd. "In view of the brand building exercise undertaken by Dabur International Limited the assessee is not entitled to any royalty, hence the same cannot be considered since there is neither any liability to pay by them nor any right to receive by the assessee is applicable." 15. The TPO did not accept the claim of the assessee that there was no liability to pay royalty by the AE or right to receive royalty by the assessee for the following reasons:

“(a) it is not a claim of the assessee that right of both the AEs to use intangibles of the assessee has been withdrawn in the year under consideration by the agreement or otherwise. (b) It is a matter of record that both the AEs have used intangibles of the assessee in the year under consideration both in manufacturing and using the trademark of the assessee for the sale. These facts clearly prove that both the AEs have enjoyed the benefit of the intangibles to generate income in the year under consideration. (c) from the arm's length prospective no comparables independent enterprise would be willing to transfer a right in its intangible property to a third party for the use without any adequate compensation particularly in the circumstances when the benefit from the use of the intangibles is proved beyond doubts. (d) In this case, under the identical facts and circumstances both the AEs have paid licence

ITA Nos. 3257 & 3492/Del/2013 16 Dabur India Ltd. royalty for use of intangibles till immediately preceding A.Y. The assessee has failed to prove extraordinary circumstances under which it has no right to receive royalty in this year, (e) All the other argument of the assessee have been examined in great details in paragraphs 7.4 to 7.8 and have been found unacceptable for the discussions and the reasons mentioned in these paragraphs.” 16. The TPO was of the view that both the royalty agreements were under operation because neither of the agreement was terminated nor expired in the year under consideration and both the AEs had paid royalty to the assessee till immediately preceding assessment year. The TPO observed that there was an arrangement for using trade brand name “Dabur” by the AEs. The brand name was owned by the assessee and the agreements were in existence for payment of royalty which was paid in accordance with the terms and conditions of those agreements till the preceding year. However, for the reasons best known to the assessee royalty was not received by the assessee during the current year and the claim of the assessee that it had no right to receive royalty was devoid of any evidence or merits because under arm’s length situation, no independent party was allowed to use of brand name by any third party without any

ITA Nos. 3257 & 3492/Del/2013 17 Dabur India Ltd. consideration. The TPO was of the view that the AEs had used the trade name/brand name owned by the assessee without any compensation. Therefore, the transaction of receipt of royalty was not at arm’s length and that the computation of the royalty, furnished by the assessee was computed incorrectly for the following reasons:

“(a) the assessee has computed royalty of Rs. 99.59 Lakh on net FOB sale of Rs. 3319.5 Lakhs by Dabur Nepal (P) Ltd in the year under consideration whereas as per clause 3 of the agreement the royalty was payable @ 7.5% of net sales and the correct amount of the royalty payable to the assessee in this year is at Rs. 248.96 Lakh. Since the assessee has wrongly computed the royalty, the correct arm's length price of the royalty is computed at Rs. 248.96 Lakh. (b) in the case of Dabur international UAE the assessee has computed royalty payable at Rs. 75.27 Lakh as against royalty of Rs. 301.07 Lakh payable to the assessee in the year under consideration as per clause 4 of the royalty agreement which stipulates for payment of the royalty @ 4% of net FOB sales.” 17. The TPO computed the arm’s length price of the royalty in the year under consideration as under: Company FOB Sales Rs. Royalty Rs. In Royalty shown Difference In Lakhs Lakhs in the books of Rs. In accounts Lakhs Dabur Nepal 3319.5 248.96 5.34 243.62 (P) Ltd.,

ITA Nos. 3257 & 3492/Del/2013 18 Dabur India Ltd. Nepal Dabur 7526.84 301.07 - 301.07 International UAE 550.03 5.34 544.69 Accordingly, an adjustment of Rs.544.69 lakhs was proposed by the TPO on account of arm’s length price of royalty.

� Hajmola Unit, Baddi � Pudin Hara Unit, Baddi � Softgel Unit, Baddi � C.Prash Unit, Baddi � Amala extract/Honey Unit, Baddi � Glucose unit,Baddi � Shampoo unit � Tooth paste unit, Baddi � Honitus Unit, Baddi � Jammu unit

ITA Nos. 3257 & 3492/Del/2013 19 Dabur India Ltd. � Uttranchal unit � Calcutta Unit, West Bengal � Katni Unit M.P. � Matsya Industrial Area, Alwar � Unit-1, 2 & 3, Sahibabad � Various Branches situated throughout India 19. The AO observed that out of above said units, profits from the following units were claimed to have been eligible for deduction u/s 80IB/80IC of the Act: � Honitus Unit, Baddi � Softgel Unit, Baddi � C.Prash Unit, Baddi � Amala extract/Honey Unit, Baddi � Glucose unit.Baddi � Shampoo unit � Tooth paste unit, Baddi � Jammu unit � Uttranchal unit 20. The AO also pointed out that the assessee had claimed deduction u/s 80IC of the Act for the first time in respect of the profit of unit named as Honitus Unit located at Baddi and submitted the audit report in Form No. 10CCB as well as details with evidences to satisfy all the conditions for the eligibility of deduction u/s 80IC of the Act. The AO observed that the TPO after taking into consideration all the submissions of the assessee had determined the arm’s length price of transaction relating to sale of investment at

ITA Nos. 3257 & 3492/Del/2013 20 Dabur India Ltd. Rs.4150.11 lacs as against declared at Rs.2185.35 lacs and worked out the difference at Rs.1964.76 lacs and that the TPO had determined the arm’s length price of the transaction relating to royalty from Dabur Nepal and Dabur International UAE at Rs.550.03 lacs as against declared at Rs.5.34 lacs. The AO asked the assessee to explain as to why an addition of Rs.2509.45 lacs (Rs.1964.76 lacs + 544.69 lacs) should not be made to the total income on account of aggregate difference in arm’s length price of the transaction relating to sale of investments and receipt of royalty from Dabur Nepal and Dabur International UAE. The assessee vide reply dated 07.12.2009 submitted as under:

“With regards to justification regarding transfer price of international transactions it is submitted that the action of TPO in assuming the role of verification officer and considering royalty payment which have never accrued to the assessee as income is illegal opposed to the facts of the case. The transfer price officer further erred in not considering the transfer price report of PWC submitted and ignoring the same is highly arbitraries and opposed to the facts under consideration The detailed submissions made before the transfer price officer and the valuation report submitted on

ITA Nos. 3257 & 3492/Del/2013 21 Dabur India Ltd. projection basis and subsequently on the basis of actual basis clearly establishes without any doubt that the transaction at which Dabur Nepal shares and Dabur overseas shares transferred by the assessee company clearly satisfies the ALM principle and no additions is warranted at all. The Transfer price officer erred in assuming the role of valuation officer without making any reference to an independent valuer. It is submitted after accepting the entire methodology adopted by the valuation report as submitted by the assessee the TPO ignored the projection as well as the actual results and the valuation pertaining thereto. Assuming, while denying, assuming a different view is possible, as held by Supreme Court of India in Vegetable Product's Case the transfer price officer erred in not adopting a view which is favorable to the assessee company. The valuation and the addition on account of royalty by TPO, who is not competent authority to do the valuation which never accrued can not under any stretch of any imagination can be considered as not satisfying of ALM. The detailed submission made by letter dt. 16-10-2009 is enclosed herewith along with the royalty agreement is furnished before your good self. The transfer value of the Dabur Nepal Pvt Ltd and Dabur Overseas Ltd on the basis of annual report without considering the liabilities of the aforesaid companies could not be considered as consider action ignoring the actual consideration received.

ITA Nos. 3257 & 3492/Del/2013 22 Dabur India Ltd. The TP study report of PWC is furnished. In view of the above and the submission made before the TPO be considered part and parcel of the submission. Therefore the highly arbitrary considered and addition made of Rs 2509.45 lacs to the international transactions against the value of transactions entered after satisfying the ALM principle is clearly not justifiable.'” 21. The AO after considering the submissions of the assessee observed that the explanation of the assessee was not acceptable as the submissions made were similar to one made before the TPO and had already been considered in order u/s 92CA(3) of the Act dated 26.10.2009. The AO accordingly made an addition of Rs.544.69 lacs on account of transaction relating to royalty from Dabur Nepal and Dabur International UAE.

ITA Nos. 3257 & 3492/Del/2013 23 Dabur India Ltd. India w.e.f. FY 2005-06. This has been the bone of contention and that the AO/ TPO opting to levy royalty for the said usage of brand by overseas AEs on a premise that no third party would ever allow any third person usage of its own brand without any consideration and accordingly the said transaction is violative of TP principles. Another crucial fact that was considered by the Ld AO/TPO is that Dabur India was charging royalties from its overseas AEs in the immediately preceding FYs. As the appellant has not brought out any revealing fact for not charging royalty, the AO took the royalty rates as applied in earlier years by the appellant as the basis for computing the arm's price. The appellant in its submission before AO/TPO did bring out the facts for not charging the royalty from its overseas AEs. The reasons were that Dabur India did not have any significant sales outside India and mainly its customers were Indian Diaspora. With a vision to explore overseas market, Dabur India had acquired a business in UAE in Sept. 2004 with Redrock Ltd. Thereafter, the business model of overseas AEs was to produce locally and sell locally under the Dabur brand. A significant aspect of this new model was that Redrock Ltd, (latter renamed as Dabur International Ltd) would be incurring all costs relating to marketing and sales (AMP) by itself. As against this new model, both Dabur India and Dabur UAE and Dabur Nepal cancelled their royalty agreement. This fact was brought to the notice of AO/TPO who did take into account this

ITA Nos. 3257 & 3492/Del/2013 24 Dabur India Ltd. emerging and new fact before concluding the royalty addition. Jurisdiction of TPO 8.2 During the FY 2005-06, the Ld. TPO has made transfer pricing adjustments on account of non- receipt of royalty from Dabur Nepal Pvt Ltd and Dabur International Ltd of Rs 2.49 crores and Rs 3.01 crores respectively. As per the 92CA(3) Order for the relevant assessment year, the Ld TPO received a reference from the AO to determine the arm's length price u/s 92CA(3) in respect of 'international transactions' entered into by the appellant during the FY 2005-06. 8.3 Before going further, the appellant at this point would like to provide a factual summary of relevant international transactions as reported in the Form 3CEB for the relevant AY: Name of the Dabur Nepal P. Dabur International Asian Consumer entity Ltd., Nepal Ltd., UAE Care P. Ltd. Bangladesh Amount in INAR Lakhs Royalty received Rs.5.34** No Transaction Rs.21.02 reported **The amount of Rs. 5.34 lakhs was never accrued nor receivable by the appellant. A unilateral entry of Rs. 5.34 lakhs was passed in the hooks shown as royalty on TDS for previous year was latter on reversed in immediately following the previous year. Since, it was an unilateral entry it cannot be termed as 'international transaction'

ITA Nos. 3257 & 3492/Del/2013 25 Dabur India Ltd. The said Form 3CEB for the relevant assessment year was filed with the Ld. AO within the prescribed time. On the basis of the details filed by the appellant, the Ld. AO referred the matter relating to arm's length determination u/s 92(1) to the Ld. TPO. 8.4 Once the matter is referred to the Ld. TPO, the Ld. TPO per section 92CA(2) is duty bound to determine arm's length price in relation to the international transactions referred to in sub- section (1). It is emphasized that the Ld. TPO has jurisdiction only of those 'international transactions' which are referred to him by the Ld. AO u/s 92CA(1). From the perusal of Form 3CEB, it is evident that there was no 'international transaction' pertaining to royalty with Dabur International Ltd, and that royalty transaction with Dabur Nepal was inadvertently reported at Rs 5.34 lakhs . As there was no royalty transaction entered by the appellant during the relevant assessment year, the Ld. AO did not order a reference of the same to the Ld. TPO within the meaning of section 92CA(1). As the international transaction(s) of royalty was never referred by the AO to the TPO u/s 92CA, there was no occasion for the TPO to acquire jurisdiction and the hence the adjudication of arm's length price on royalty transaction is faulty and liable to be quashed. 8.5 Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes on 20.05.2003 on the Role of TPO states that:

ITA Nos. 3257 & 3492/Del/2013 26 Dabur India Ltd. (ii) Role of Transfer Pricing Officer: The role of the TPO begins after a reference is received from the Assessing Officer, In terms of section 92CA this role is limited to the determination of arm's length price in relation to the international transaction(s) referred to him by the Assessing Officer. If during the course of proceedings before him it is found that there are certain other transactions which have not been referred to him by the Assessing Officer, he will have to take up the matter with the Assessing Officer so that afresh reference is received with regard to such transactions. It may be noted that the reference to the TPO is transaction and enterprise specific. Recent Ruling of Hon'ble Delhi High Court in case of CIT v Amadeus India (P) Ltd 246 CTR 338 in case of jurisdiction of TPO u/s 92CA concurs that: 24. we do not agree with the submission made by the learned counsel for the revenue that when a reference is made by an Assessing Officer to the Transfer Pricing Officer, the reference includes entire gamut of transactions between the assessee and its associated enterprise. The Assessing Officer is the person who has been entrusted with the duty to determine as to whether a transaction is an international transaction or not. Then, if it is an international transaction of the nature specified in section 92B of the said Act, the Assessing Officer feels it is necessary or expedient so to do, he may refer the computation of the arm's length price of the specific international transactions, after obtaining prior approval of the Commissioner of the Income-tax,

ITA Nos. 3257 & 3492/Del/2013 27 Dabur India Ltd. to the Transfer Pricing Officer. It is quite possible that in the case of a particular assessee, there may be several international transactions and the Assessing Officer may only wish to refer- some of those transactions for the purposes of computing the arm's length price while in respect of others, he may compute the arm's length price himself. Thus, the jurisdiction of the Transfer Pricing Officer is limited and restricted to computing arm's length price of only those transactions which have been specifically referred to him by the Assessing Officer. We once again clarify that this is position prior to introduction of sub-section (2A) of the said Act which we have held to be prospective in operation. Similar view has been taken in case of Infotech Ltd v DCIT 136 TTJ 641 (Mum) wherein it has been held as below: "In the present case, the Assessing Officer referred to the TPO for determination of ALP the transactions set out in Form No. 3CEB by his letter dated 29-9-2003. The details of these transactions have already been set out above in the earlier paras. The transaction by which the assessee deputed three of its employees to ICICI Infotech, USA, was not considered as an international transaction to be set out in Form No. 3CEB by the assessee. The Assessing Officer, therefore, never referred the computation of ALP to the TPO the transaction of deputation of three of its employees by the assessee to ICICI Infotech, USA. The jurisdiction of the TPO is,

ITA Nos. 3257 & 3492/Del/2013 28 Dabur India Ltd. therefore, restricted to the transactions referred to him by the Assessing Officer under section 92CA(1). The TPO, therefore, could not under section 92CA(3) determine the ALP in relation to an international transaction not referred to him by the Assessing Officer under section 92CA(1). In this regard, Instruction No. 3 of 2003, dated 20-5-2003 issued by the CBDT regarding computation of income from international transaction having regard to arm's length price, is very clear. In the said instructions, the CBDT explaining the role of TPO has instructed that in terms of section 92CA of the Act, the TPO's role is limited to the determination of arm's length price in relation to the international transactions referred to him by the Assessing Officer and if during the course of proceedings before him it is found that there are certain other transactions which have not been referred to him by the Assessing Officer, he will have to take up the matter with the Assessing Officer so that afresh reference is received with regard to such transaction. The Board has further opined that reference to the TPO is transaction and not enterprise specific. In the present case, the determination of ALP in respect of the transaction by which the assessee deputed three of its employees to IC1CI Infotech, USA, by the TPO is, therefore, non est to that extent and cannot form the basis for making an addition to the total income. The Assessing Officer, therefore, could not have made the impugned addition on the basis of the order of the TPO. Since the impugned addition has

ITA Nos. 3257 & 3492/Del/2013 29 Dabur India Ltd. been made by the Assessing Officer only by placing reliance on the report of the TPO, the addition cannot be sustained." 8.6 The appellant, in view of above rulings pleads, that determination of arm's length price by the Ld TPO for the Royalty transaction with Dabur Nepal and Dabur International Ltd is beyond jurisdiction and liable to quashed and deleted. Section 92CA(2A) vs Retrospective Amendment 8.7 Before concluding the point on jurisdiction of TPO u/s 92CA, it is interesting to take note of sub- section 2A of section 92CA as inserted by the Finance Act 2011 w.e.f 1-6-2011 as reproduced below: (2A) Where any other international transaction [other than an international transaction referred under-section (1)], comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section(l). With the amendment in section 92CA w.e.f. 1-6- 2011, now it is possible for TPOs to exercise jurisdiction also on those international transactions that has not been referred to him by the AO u/s 92CA(1). The only question that needs to be answered here is whether sub section 2A would apply retrospectively or prospectively. Hon'ble Delhi High Court in case of Amadeus

ITA Nos. 3257 & 3492/Del/2013 30 Dabur India Ltd. (supra) had the occasion to examine this issue and was of view that sub section (2) cannot have retrospective effect inasmuch as it deals with the jurisdiction of the Transfer Pricing Officer and , therefore sub-section (2A) cannot be regarded as being a mere procedural provision. At Para 20 of the Amadeus Ruling, the Hon' Delhi High Court stated that: Similarly, in the case before us, we find that there is nothing in the statute to indicate that sub-section (2A) was introduced in a manner so as to operate with retrospective effect. Sub- section (2A) expands the jurisdiction of the TPO by empowering him to determine the arm's length price of any international transaction other than an international transaction referred to him by the Assessing Officer under sub section (1) of Section 92CA. This is clearly an expansion of the jurisdiction of the TPO and, therefore, sub- section (2A) can only have prospective effect from 01.06.2011 and would have no application to the present appeal which is in respect of the assessment year 2006-07. 8.8 With respect to point of jurisdiction u/s 92CA(1) and enlarged scope under sub-section (2A), the appellant submitted as follows: - Royalty Transaction with Dabur International Ltd, UAE was never referred by the AO to the TPO, and hence the TPO while computing the arm's length of this transaction clearly exceeded jurisdiction and that recourse to sub-section (2A) cannot be also availed as Sub-section (2A)

ITA Nos. 3257 & 3492/Del/2013 31 Dabur India Ltd. can be applied only retrospectively from 01.06.2011. As a result of this, the ALP of Rs 301.07 lakhs with respect to royalty transaction with Dabur International Ltd, UAE should be deleted. - Royalty Transaction with Dabur "Nepal P Ltd, Nepal, the appellant had inadvertently reported a transaction of Rs 5.43 lakhs which was never a transaction and hence, adjudication of ALP by the TPO also clearly violated the provisions of section 92CA and that recourse to sub-section (2A) cannot be also availed as Sub-section (2A) can be applied only retrospectively from 01.06.2011. As a result of this, the ALP of Rs 248.96 lakhs with respect to royalty transaction with Dabur Nepal should be deleted. 8.9 Without prejudice to above on point of jurisdiction, the appellant would like to submit the following: Contractual Agreement 8.10 The appellant does not have any contractual agreement with Dabur International Ltd and Dabur Nepal Pvt Ltd so as to enforce the royalty payment from its associated enterprises. In the absence of any contractual obligations between the parties a right to receive royalty cannot be unilaterally made by the appellant. The Ld. TPO on the basis of past expired royalty agreements of the appellant with Dabur International and Dabur Nepal computed the ALP for the royalty, which is total

ITA Nos. 3257 & 3492/Del/2013 32 Dabur India Ltd. violation of the TP principles and making the addition notional and arbitrary. 8.11 Further, in connection with Dabur Nepal, Udyog Mantralaya of Nepal (a wing of Nepali Government) must pre-approve the agreement before the payment can be made by it to the appellant. The agreement with DNPL had expired and was not renewed by the parties and to effect the termination of the agreement, letter dated May 2005 was given by Dabur Nepal to the appellant stating its desire not to pay the royalty. This letter was accepted by the appellant and thereafter no royalty legally was payable by Dabur Nepal to the appellant. 8.12 Similarly, with Dabur International, the agreement had expired and not renewed by the parties and to effect the termination of the agreement, letter dated 7 April 2005 was given by Dabur International to the appellant stating its desire not to pay the royalty. This letter was accepted by the appellant and thereafter no royalty was payable by Dabur International to the appellant. 8.13 Given that there is no contractual obligation between the parties, no royalty can as such be enforced by the appellant from its associated enterprises. In the absence of contractual obligation, the right to use the Trademarks/logo etc was discretionary upon the associated enterprises due to which the appellant could not have compelled its associated enterprises to pay for the Trademark/logo.

ITA Nos. 3257 & 3492/Del/2013 33 Dabur India Ltd. 8.14 In the ruling of Maruti Suzuki India Ltd. Vs. Addl CIT, Delhi High Court has recommended certain guidelines on payment of royalty which is reproduced below: "If a domestic entity, which is an Associate Enterprise of a foreign entity within the meaning of Section 92A of the Act, uses a foreign trademark and/or logo on its products or on containers, packaging, etc, manufactured and/or sold in India, no payment to the foreign entity on account of such user, is necessary, in case the use of the foreign trademark and/or logo is discretionary for the domestic entity. However, the income arising from such international transactions needs to be determined at arm's length price, in terms of section 92C of the Act" "If the domestic entity which is an Associated Enterprise of the foreign entity within the meaning of Section 92A of the Income Tax Act, is mandatorily required to use the foreign trademark and/or logo on its products and/or their containers, packaging, etc, appropriate payment in this regard should be made by the foreign entity to the domestic entity, on account of the benefit it derives in the form of marketing intangibles, obtained by it from such mandatory use of its trademarks" 8.15 The aforesaid guidelines on royalty payment of Delhi High Court are directly connected with the appellant's case too. In case of appellant, the AEs are not mandatorily required to use the Trademarks, logo etc on products, as such it is

ITA Nos. 3257 & 3492/Del/2013 34 Dabur India Ltd. discretionary upon the AEs to use the Dabur Trademarks/logo etc. The use of such Trademarks / logo by the AEs has resulted into economic gain for the appellant as the overseas AEs were responsible for developing marketing intangible in the foreign jurisdiction right from the concept of product, packaging, designing etc. The appellant does not own its own spent directly or indirectly any sum on marketing, advertisement which is intended to benefit to the AEs commercially, neither the appellant is reimbursing any advertisement or marketing cost to the overseas AEs. The AEs themselves are responsible to create their own markets, advertise their product in their jurisdiction. Any such brand building exercise by the AEs have positive impact on the trade name, trademarks of the appellant, product intangibles as the appellant directly or indirectly gets its name promoted in foreign jurisdiction without incurring any cost. Marketing spent of Foreign AEs 8.16 The AEs of the appellant are into nascent stage of operations and were looking to stand on their own. An understanding was reached with the overseas AEs that the overseas AEs will not pay any royalty to the appellant and at the same time and the overseas AEs will themselves be responsible for the marketing and promotion of the Dabur Products. The appellant, been a FMCG player was aware of the fact that marketing and promotion of a product is a huge task and that brand building takes years. Given this, a commercial understanding was put in place. That

ITA Nos. 3257 & 3492/Del/2013 35 Dabur India Ltd. the overseas AEs are incurring substantial marketing and promotion cost it is worthwhile to look into the marketing spent incurred by Dabur International and Dabur Nepal over the years.

Dabur International Ltd S.No FY Sales Turnover- AD spent- Rs % of AD spent Rs in Lakhs in Lakhs on Sales 12% 1 2004-05 (1st Year 5,427.15 631.01 of operation) 2 2005-06 7,643.00 1,416.85 18% 3 2006-07 11,425.00 2,298.77 19% 4 2007-08 14,926.00 2,241.14 15% 5 2008-09 21,728.00 2,918.08 13%

Dabur Nepal Pvt Ltd S.No FY Domestic Sales- AD spent- Rs % of AD spent Rs Lakhs Lakhs on sales 1 2003-04 2,401.00 14.91 1% 2004-05 3,878.00 258.72 7% 2 3 2005-06 3,772.00 320.79 9% 4 2006-07 4,416.00 368.39 8% 5 2007-08 5,836.00 421.08 7% 6 2008-09 12,324.00 847.48 7%

8.17 The above chart indicates that the AEs are committing massive investment in brand building exercise for the appellant. The amount spent on AD, Publicity, Marketing consistently over the years indicates that brand is relatively unknown in the foreign jurisdiction and in order to increase awareness about its products the AEs are required to spent huge sum on advertisement and publicity. By virtue of spending massive sum in foreign territory the AEs are directly and indirectly promoting the brand 'Dabur' in its own jurisdiction, thereby doing honorary/ chargeable

ITA Nos. 3257 & 3492/Del/2013 36 Dabur India Ltd. service to the appellant. In view of Delhi High Court ruling, the foreign AEs can charge a service fee (assuming the principle of Transfer Pricing holds well) from the appellant for promoting and building its brand. Foreign AEs is not directly benefited by usage of Dabur Brand 8.18 The foreign AEs are required to create awareness about its products with local customers on its own and the parent Company has no role or insignificant role towards the same. Given that, as such there is no distinct advantage on using the 'Dabur' Brand in the foreign jurisdiction, because the usage of Brand as such would mean – a) reduced marketing spent by AEs b) the appellant is incurring marketing and sales promotion expense to promote sales of its AEs c) any other benefit is conferred on AEs. Accordingly, from perspective of the AEs, there is no economic justification why AEs should pay royalty to the appellant and at the same time incur significant expenditure of marketing and publicity of the products. Given this, the appellant was not charging any royalty from its AEs. Overseas Brand Building by the Appellant 8.19 With prejudice to aforesaid paras, the appellant submits that even assuming the foreign AEs were to pay royalty at the arm's length rate, the Company would then had to reimburse the

ITA Nos. 3257 & 3492/Del/2013 37 Dabur India Ltd. substantial marketing and publicity costs of the AEs. This expenditure in view of the Company would have exceeded the royalty income if any. A chart below shows that marketing costs incurred by Dabur Nepal and Dabur International against the proposed royalty addition by the Ld. TPO: Name of the AE Financial Year Marketing and Royalty proposed in promotion cost in Rs Rs crores Crores 2005-06 14.17 3.01 Dabur International Ltd, UAE 2005-06 Dabur Nepal P 3.21 2.48 Ltd 8.20 From the above table, it can be seen that the appellant would have to incur more costs in India on account to marketing and promotion spends incurred by overseas AEs then earning on account of royalty. As stated earlier, the overseas AEs are incurring more than normal levels of advertisement expenses in their jurisdiction to get firm footage as they are in their early stage of operation in those countries. The appellant instead of first reimbursing the ad spent and then recover royalty thought it fit to adopt a model where the overseas AEs will themselves incur the ad spent without paying any royalty to the appellant. This business model, the appellant submits, is line with arm's length action. 8.21 Further, as per section 92(3) of the Income- tax Act, any computation of arm's length price has effect of reducing the taxable income of the tax payer, the provision of section 92 shall not apply. Thus, in view of appellant, any reimbursement of

ITA Nos. 3257 & 3492/Del/2013 38 Dabur India Ltd. advertisement expenses by the appellant at gain of royalty income would have been prejudicial to the tax base of India, accordingly, the provisions of transfer pricing should not be applicable. 8.22 The arm's length price in relation to any international transaction has to be judged from the FAR contribution by each member to the transaction. Therefore, in relation to royalty before coming to a conclusion that royalty payment accrues to Dabur India, it needs to be ascertained what are factors which entitle Dabur India right to royalty and factors which points out why no royalty is chargeable. The table below analyses the FAR analysis in relation to royalty: S. NO. FAR Points Dabur India Overseas AEs Who is the legal owner of brand Yes No 1. 2. Who incurs the cost of registration and Yes No renewal cost 3. Who decides what products to be No Yes launched in overseas market 4. Who forms marketing strategy for brand No Yes promotion in overseas market 5. Who decides on sales strategy No Yes From the above table it can be inferred that Dabur India has no role in brand building of its products and the task of brand building is completely the decision of the overseas AEs. Given this fact, there is an irrefutable fact that the overseas AEs are performing a crucial function of building Dabur India's products/ brand in a relatively unknown territory.

ITA Nos. 3257 & 3492/Del/2013 39 Dabur India Ltd. 8.23 Going by the FAR analysis of royalty and the contribution of each parties, the conclusion that Dabur India despite been legal owner has rightfully surrendered its right to charge to royalty, as both Dabur UAE and Dabur Nepal was actively promoting the Dabur brand in their respective geography much beyond what an independent party would have done. The fact that both Dabur UAE and Dabur Nepal has become economic owner of the Dabur brand hence cannot be disputed. In such circumstances, it would be totally unfair to the economic owner of the brand if it is asked to compensate the legal owner for the usage of Dabur brand, a brand which is itself promoted by them. Such an analogy would defeat the FAR analysis undertaken by Dabur India and Overseas AEs, if royalty is enforced from overseas AEs. 8.24 In view of the above, the appellant humbly submits that no notional royalty as such can be charged from the AEs unless the Appellant compensates the AEs for the advertisement and publicity expenses. On the contrary, the Appellant is getting hugely benefitted from the brand building exercise done by the foreign AEs which enhances the marketing intangible of the Appellant. Thus, the Appellant is, of considered view, that the Appellant is fully justified in not charging any royalty from its AEs. In light of the above, the appellant pleads to delete the addition made on royalty as the proposed action is unjustified and contrary to the principles of arm's length pricing.”

ITA Nos. 3257 & 3492/Del/2013 40 Dabur India Ltd. 23. The ld. CIT(A) after considering the submissions of the assessee held that royalty @ 2% of FOB sales would be at arm’s length price in respect of Dabur International Ltd. and Dabur Nepal Pvt. Ltd. by observing in paras 9.1 to 9.13 of the impugned order which read as under:

“9.1 I have carefully gone through various contentions raised by the appellant and other material placed on record. The relevant facts are that the appellant (Dabur India) is legal owner of brand 'Dabur' and other sub-category brands like 'Vatika', 'Hajmola' etc. Overseas AE's of the appellant had been using Dabur India's trademarks and trade names. Upto FY 2004-05, the appellant was getting royalty payments from its AE's, whereas during FY 2005-06 which is period under present appeal, appellant either did not receive any royalty or reported very nominal amount of royalty received. Comparative figures of the royalty received by the appellant from AE's during FY 2004-05 and 2005-06 are as under: Name of AE Royalty received in FY Royalty received in 2004-05 (Rs. In Lakhs) FY 2005-06 (Rs. In Lakhs) Dabur Nepal (P) Ltd., 43.34 5.34 Nepal 164.41 NIL Dabur International Ltd., UAE Asian Consumer Care 46.87 21.02 P. Ltd., Bangladesh

The case of the appellant is that the agreements under which royalty was received in earlier period

ITA Nos. 3257 & 3492/Del/2013 41 Dabur India Ltd. were no longer in existence. Moreover, the overseas AE's are incurring substantial expenses for brand promotion in their respective territories and therefore there is no payment of royalty. In order u/s 92CA(3), the TPO computed arm's length price of royalty as under: Name of AE FOB sales Royalty Difference Rate of Royalty shown royalty in books Dabur Nepal (P) 3319.50 7.5% 248.96 5.34 243.62 Ltd., Nepal Dabur 7526.84 4.0% 301.07 — 301.07 International Ltd., UAE Adjustment 544.69

Value of royalty received from Asian Consumer Care P. Ltd., Bangladesh was not changed by the TPO. The TPO computed arm's length royalty by applying rate of royalty as mentioned in agreement dated 05.11.1992 with Dabur Nepal (P) Ltd., Nepal and dated 01.04.2003 with Dabur International Ltd., UAE. 9.2 The appellant has contended that TPO has determined arm's length price of royalty without a valid jurisdiction. As per arguments of the appellant, TPO gets jurisdiction only when a valid reference is made by the AO to TPO to determine arm's length price u/s 92CA(3) in respect of ‘International Transactions’ entered into by the appellant during FY 2005-06. In Form 3CEB, only international transaction declared by the appellant is royalty received from Dabur Nepal and no international transaction with Dabur UAE was reported. Accordingly, as per arguments of the appellant, TPO gets no jurisdiction with respect to

ITA Nos. 3257 & 3492/Del/2013 42 Dabur India Ltd. Dabur UAE. The appellant has further argued that even royalty from Dabur Nepal never accrued or received and the entry was reversed in subsequent year. The appellant has placed reliance upon CBDT instruction no. 3 of 2003 and CIT v Amadeus India Pvt. Ltd. 246 CTR 338 (Del). The appellant has further argued that subsection 2A of section 92CA as inserted by Finance Act 2011 w.e.f. 01.06.2011 is not retrospective in operation as held in case of Amadeus case supra. 9.3 I have carefully examined various arguments of the appellant. In Annexure-VIII of Form 3CEB, the appellant has reported international transaction in respect of royalty received from Dabur Nepal (5.34 lacs) and Asian Consumer Care P. Ltd., Bangladesh (21.02 lacs). The AO referred these international transactions in respect of royalty to TPO u/s 92CA(1). Since these international transactions have been duly reported by the appellant in Form 3CEB, the reference by AO to TPO is in order and TPO gets a valid jurisdiction to determine arm's length price of these transactions. Further, it is pertinent to notice that is no mention in Form 3CEB that royalty income from Dabur Nepal never accrued to the appellant. Once an international transaction is reported in Form 3CEBand it is referred by AO to TPO, the TPO gets valid jurisdiction. Regarding jurisdiction of TPO to determine arm's length price of royalty received from Dabur UAE, the case is covered by provisions contained in sub-section 2B of section 92CA as inserted by Finance Act, 2012 w.e.f. 01.06.2002. This sub-section is reproduced as here-under:-

ITA Nos. 3257 & 3492/Del/2013 43 Dabur India Ltd. Where in respect of an international transaction, the assessee has not furnished the report u/s 92 E and such transaction comes to notice of the TPO during course of proceeding before him, the provisions of this chapter shall apply as if such transaction is an international transaction referred to him under sub- section (I). In view of specific provisions of 92CA(2B) which are operative w.e.f. 01.06.2002, the contention of the appellant cannot be accepted. Therefore, this argument of the appellant fails. 9.4 Another argument of the appellant is that there are no operative contractual agreements with Dabur Nepal and Dabur UAE which can be enforced to get royalty payment from overseas AE's. TPO has worked out arm's length price of the royalty by resorting to old agreements which had expired during period under consideration. According to appellant, it is settled law that notional income cannot be brought to tax. This contention of the appellant has been duly considered. The simple fact is that the appellant has allowed its AE in Nepal and UAE to use its brand name but no royalty has been charged from them. This cannot be the situation in case of transaction between independent parties. This is an international transaction the price of which is to be determined as per transfer pricing regulation u/s 92 of the Act. In present case, the appellant has taken price of its said international transaction at Nil. But according to section 92, income arising from such international transaction has to be computed having regards to arm's length price. Whether there is any contractual

ITA Nos. 3257 & 3492/Del/2013 44 Dabur India Ltd. basis of receipt of royalty income or not is not relevant for computing income arising from such international transaction having regards to arm's length price. As in present case, if there is no agreement to get any royalty income in return for permitting the use of brand name, it does not mean that transfer pricing regulation shall not apply. Therefore, quantum of income arising from an international transaction has to be computed having regards to arm's length price and it does not depend upon existence or otherwise of agreement to get royalty income. Hence contention of the appellant that in absence of an operative agreement for getting royalty income, a notional royalty cannot be assessed under TP regulations is not legally tenable. 9.5 Undisputedly, Dabur India is legal owner of brand name 'Dabur' and other sub-brands and Dabur Nepal and Dabur International which are AEs of Dabur India have been permitted by Dabur India to use its brand names. The appellant has contended that Dabur Nepal and Dabur International have spent significant AMP expenses (advertisement, marketing and prom.: expenses) and therefore 'Dabur' brand is being built-up in foreign territories by the efforts of AEs of the appellant and hence in-fact AEs are providing service to the appellant for which AEs need to be remunerated. However, no remuneration for such services is being given to AEs and accordingly no royalty is being charged from them because if such remuneration is taken into account, it will exceed the royalty chargeable and hence income of the appellant shall further go down. The appellant has further argued

ITA Nos. 3257 & 3492/Del/2013 45 Dabur India Ltd. that even otherwise, the value of brand 'Dabur' is not very significant as no state of art technology is involved in manufacturing process of products involved. These contentions of the appellant have been duly considered. Firstly, it cannot be said that value of brand 'Dabur' is Nil as no royalty has been accounted for by the appellant. There must be some value of the brand for which royalty income has to be determined having regards to arm's length price. Secondly, the appellant has not established that AE in Nepal and UAE are incurring abnormal AMP expenses which exceed 'Bright Line Test'. Rather perusal of chart of AMP expense on AEs as reproduced in para 8.16 supra shows that %age of such expense to sales shows decreasing trend over subsequent years and in no way such expense can be labeled as abnormally high. The appellant has not established its view by giving figures of AMP in case of comparables operating in respective geographical locations. The appellant has not established that tax authorities of Nepal and UAE have held such AMP expenses as exceeding bright line. Upto AY 2005-06, the appellant has been receiving royalty income from its AEs. The appellant could not establish that after AY 2005-06, its AMP expenses have decreased and AMP expenses of its AEs have increased substantially which may point towards appellant's case that its AEs are doing brand building efforts and hence providing service to it. Therefore, appellant's contention that ratio of recent decision of Hon'ble Delhi IT AT in case of LG Electronics India Pvt. Ltd. (1TA. No. 5140/Del/2011) is applicable in its case is not factually and legally tenable. The appellant has further argued that foreign AEs did not derive any

ITA Nos. 3257 & 3492/Del/2013 46 Dabur India Ltd. benefit by use of its trade mark / trade name. This contention of the appellant is superfluous as AEs would be the best judge to decide whether they need support of Dabur logo or not. If they are not befitted by the arrangement, nobody is forcing them to continue with it. 9.6 Now the question arises what should be the quantum of royalty having regards to arm's length price. The appellant has not provided any comparables so as to justify its nil royalty income. The TPO has relied upon royalty agreements entered into by the appellant with its AEs to arrive at arm' length price. The reasoning given by TPO is two-fold. Firstly, royalty agreements under which the appellant had been receiving royalty income upto AY 2005-06 are operative during the year under consideration as there is no evidence that these agreements have been terminated. Secondly, without prejudice, even if it is assumed that these agreements are not operative during period under consideration, royalty chargeable as per these agreements represents arm's length price as per TP regulations. In view of various contentions of the appellant and reasoning given by TPO, royalty issue in respect of both AEs involved is being discussed in following paragraphs. 9.7 Dabur International Ltd. The appellant has entered into an agreement dated 01.04.2003 with Redrock Ltd. (presently Dabur International Ltd.) which inter-alia provided for technical and R&D support, know-how, information, operational improvements and skills in area of cost

ITA Nos. 3257 & 3492/Del/2013 47 Dabur India Ltd. management, manufacturing, production procurement, sale marketing and distribution of products. It also permitted Redrock to use Dabur logo on both products manufactured by using Dabur's technology and know-how and also products manufactured by it without Dabur's know- how. As per clause 4 of the agreement, Dabur India is entitled to royalty of 3% of FOB sales of Redrock of Dabur branded products which are manufactured using Dabur's know How and 1% of FOB sales of Dabur branded products manufactured without using technical and R&D support from Dabur. Based on this, the TPO has computed royalty chargeable from Dabur International Ltd. @ 4% of sales while the appellant has not declared any royalty income. The appellant has contended that w.e.f. 01.04.2005, this agreement has been terminated and has furnished letters dated 07.04.2005 and 01.02.2013. The appellant has further contended that Dabur International was not sourcing any technical know-how from Dabur India for its products manufactured in UAE and has furnished letters dated 18.07.2011 and 20.07.2011 which state that products manufactured by Dabur International Ltd. in UAE are different from those manufactured in India and no technical support from Dabur India is being taken for the purpose. 9.8 The AO was required to submit remand report u/r 46A as these new evidences were not produced during assessment stage. The remand report has been received from the AO vide letter dated 04.02.2013. The appellant has also filed its rejoinder vide letter dated 04.03.2013. In its remand report, the AO has stated that despite adequate

ITA Nos. 3257 & 3492/Del/2013 48 Dabur India Ltd. opportunities made available to the appellant, these documents were not furnished at assessment stage. On merits, the AO has said that Dabur International has been using Dabur logo and therefore royalty becomes chargeable. Further, complete list of products sold in UAE has not been furnished, therefore it is not possible to ascertain whether technology of Dabur India has been used in manufacturing of such products in UAE. The appellant has argued that at assessment stage, TPO/AO did not require it to produce any evidence to the effect that Dabur International has not sourced any technology from Dabur India. I have considered remand report, reply of the appellant and factual matrix. The issue whether Dabur International has sourced technical know-how from Dabur India is vital to decide the rate at which royalty becomes chargeable. Considering facts and circumstances of the case, additional evidence is admitted u/r 46A as it is vital to decide the relevant issue. 9.9 The appellant has argued that agreement with Dabur International has become inoperative w.e.f. 01.04.2005 and hence there was no obligation on part of Dabur International to pay royalty. As discussed supra in para 9.4, since income arising from international transaction has to be determined having regards to arm's length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur International Ltd, has been

ITA Nos. 3257 & 3492/Del/2013 49 Dabur India Ltd. permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto preceding AY. The TPO has treated said agreement dated 01.04.2003 as basis for arm's length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct in adopting 4% rate of royalty chargeable from Dabur International Ltd. Clause 4 of said agreement is reproduced as under: "In consideration for due discharge by Dabur of its obligations hereunder and use of its trademark/trade name, Dabur is entitled during terms of agreement to a royalty of: (a) 3% of FOB sales (net of taxes and sales return} ofRedrock of Dabur branded products which are developed and marketed by Redrock through technical and R&D support from Dabur and which are manufactured in accordance with technical specifications detailed by Dabur (b) 1% of FOB sales (net of taxes and sales return) of Redrock of Dabur branded products which are developed by Redrock from any other party without any technical and R&D support from Dabur." The appellant has argued that since Dabur International had not sourced any technical support from Dabur India, clause (a) above shall not apply. This contention of the appellant cannot be brushed aside completely in view of letters furnished by the appellant mentioned supra. Even, this was also the stand of the appellant before TPO when appellant

ITA Nos. 3257 & 3492/Del/2013 50 Dabur India Ltd. furnished working of royalty at Rs. 75.27 lakhs on FOB sales of Rs. 7526.84 lakhs ie. @ 1%. This fact has been mentioned in para 7.9 and 7.16 of TPO's order. Rejecting this computation of the appellant, TPO has worked out royalty @ 4% of FOB sales. This approach of TPO is faulty because even if it is assumed that Dabur International has manufactured all its products by using technical know-how of Dabur India, royalty shall be payable @ 3% as per clause 4(a) above and in that case, sub-clause(b) shall not come into operation. However, considering the material furnished by the appellant, it is seen that products manufactured by Dabur International in UAE are different from those manufactured in India and in case of same name of products, it has been shown that oil base (raw material) is different from those products manufactured in India. Therefore, it can be safely inferred that most of the products if not all manufactured in UAE are being manufacture without technical support from Dabur India. In view of this, there shall be a portion of FOB sales on which royalty becomes payable @ 3% and another substantial portion of FOB sales on which royalty shall become payable @1%. Under no circumstances, royalty shall become payable @ 4% on total FOB sales as held by TPO. In view of these facts, it shall be more realistic and reasonable if royalty payable is worked out @ 2% on total FOB sales i.e. average rate. Accordingly, I hold that arm's length price of royalty from Dabur International is Rs. 150.52 lakhs. The AO is directed to give relief to the appellant on this account accordingly.

ITA Nos. 3257 & 3492/Del/2013 51 Dabur India Ltd. 9.10 Dabur Nepal Pvt. Lid. The appellant has entered into an agreement dated 05.11.1992 with Dabur Nepal Pvt. Ltd., clause 3 of which is reproduced as below: "That as Dabur is allowing DNPL to use its trademarks for sale of products in Nepal, India and other third countries and also entire marketing expenses including salaries and allowances of sales personnel would be borne by Dabur, DNPL will pay to Dabur inform of royalty @ 7.5% of net sales." Based on this, the TPO has computed royalty chargeable from Dabur Nepal @ 7.5% of sales while the appellant has declared royalty income of Rs. 5.34 lakhs. The appellant has contended that even the said declared royalty income never accrued to it and consequently it has been reversed immediately after PY. The appellant has contended that w.e.f. 01.04.2005, this agreement has ceased to be operative and has furnished letters dated May, 2005 and 05.02.2013 in support. The appellant has contended that TPO has wrongly applied rate of 7.5% as mentioned in agreement dated 05.11.1992 while that agreement was amended and rate of royalty was changed to 3% w.e.f 01.04.2004. The appellant has furnished copy of amended agreement in which only rate of royalty has been changed to 3% while rest of the terms remained the same. 9.11 As discussed supra in para 9.4, since income arising from international transaction has to be determined having regards to arm's length price,

ITA Nos. 3257 & 3492/Del/2013 52 Dabur India Ltd. existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur Nepal has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto preceding AY. The TPO has treated said agreement dated 05.11.1992 as basis for arm's length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct in adopting 7.5% rate of royalty chargeable from Dabur Nepal. The approach of TPO in relying upon agreement dated 05.11.1992 and not considering amended agreement dated 01.04.2004 is fallacious as contemporaneous material/document should have been considered instead of document which is remote in time. Accordingly, TPO is not correct in applying rate of 7.5% and ignoring rate of 3% as mentioned in amended agreement. When specifically asked by TPO, the appellant has given working of royalty @ 3% on total FOB sales as mentioned in para 7.9 and 7.16 of TPO's order. Why then TPO has applied rate of 7.5% is not supported by reasoning given by TPO. 9.12 Further, appellant has argued that as per clause 3 of the agreement, Dabur India was under obligation to bear entire marketing expenses including salaries and allowances of sales personnel. However, Dabur India could met with its obligations and hence Dabur Nepal did not pay any royalty. This contention of the appellant carries

ITA Nos. 3257 & 3492/Del/2013 53 Dabur India Ltd. some weight as rate of royalty might have been fixed after considering reimbursement of marketing expenses by Dabur India. The TPO has not established that this contention of the appellant is factually incorrect. 9.13 Considering the contentions of the appellant that it had not met with obligations cast upon it under clause 3 of the agreement, it would not prudent to apply rate of 3% as mentioned in amended agreement to work out royalty chargeable. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur Nepal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur International. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur Nepal also and this would take care of non-discharge of obligations on part of the appellant. In this manner, royalty chargeable from Dabur Nepal comes out to be Rs. 66.39 lakhs. The AO is therefore directed to give relief on this account accordingly.” 24. Now the assessee is in appeal against the sustenance of addition while department is in appeal against the relief allowed to the assessee.

ITA Nos. 3257 & 3492/Del/2013 54 Dabur India Ltd. 25. The ld. Counsel for the assessee submitted that the assessee is engaged in the business of manufacturing of Ayurvedic medicines and herbal products since the inception of the company and later on entered into FMCG products, for that purpose, the assessee either established its subsidiaries in other countries or acquired companies outside India. It was stated that the assessee established subsidiary in Nepal as a joint venture with others and also acquired M/s Redrock Ltd. in UAE, which was in the business of production and manufacture of FMCG products and later on, the name of the company also changed to Dabur International Ltd. who after acquisition, became 100% subsidiary of the assessee. It was submitted that as far as M/s Dabur Nepal Pvt. Ltd. was concerned, the assessee for the purpose of manufacturing of the products had entered into an agreement on 5th November 1992 for providing the technical know-how, marketing, financial and managerial support for the manufacture of hair oil, Lal Dant Manjan, Dant Mukta, tooth power/tooth paste and herbal candies etc. A reference was made to page no. 111 of the assessee’s paper book. It was further submitted that as per the said agreement M/s Dabur Nepal Pvt. Ltd. was entitled to use trademark of Dabur for the sale of its products and in turn the assessee was entitled for royalty @ 7.5% of net sales. It was agreed that the entire marketing expenses

ITA Nos. 3257 & 3492/Del/2013 55 Dabur India Ltd. including salaries and allowances of sale personnel would be borne by Dabur Nepal Pvt. Ltd. and that the agreement shall become effective only after the approval by the Government of Nepal and this agreement shall remain valid for a period of 10 years from that date unless renewed by mutual consent in writing and with prior approval of Government of Nepal. It was emphasized that this agreement was amended with effect from 1st April, 2004, a reference was made to page no. 113 of the paper book. It was stated that in the said amended agreement, the royalty was reduced from 7.5% to 3% on local sales of branded products only. However, later on M/s Dabur Nepal Pvt. Ltd. informed the assessee in May 2005 that on account of higher operational cost and expenditure on various administrative costs, no royalty would be payable to the assessee and this was accepted by the assessee who failed to bear the marketing cost, a reference was made to page no. 123 of the assessee’s paper book. It was contended that the assessee had entered into an agreement with M/s Redrock Ltd., UAE for providing technical information, R&D support and skills in the areas of cost management, manufacturing etc. in the territory of UAE vide agreement dated 1st April, 2003, a reference was made to page no. 114 of the assessee’s paper book. It was further contended that as per the said agreement, the products manufactured with the R&D support

ITA Nos. 3257 & 3492/Del/2013 56 Dabur India Ltd. and technical know-how provided by the assessee, M/s Redrock Ltd., UAE shall be entitled to use ‘Dabur’ mark on the products manufactured and for that the assessee was entitled for royalty of 3% on FOB sales. It was pointed out that the assessee and M/s Redrock Ltd. agreed that for the products manufactured by the said company without technical know-how and R&D support etc. of the assessee, M/s Redrock Ltd. may use the Dabur mark on the products subject to the consent of assessee and in turn the assessee would be eligible for royalty @ 1% of FOB sales of the products manufactured by Redrock Ltd. without the technical know-how and R&D support of the assessee. This agreement was to remain effective for the period of 24 months w.e.f. 1st April, 2003. It was submitted that later on, the assessee acquired the controlling stakes of M/s Redrock Ltd. and the name of the company changed to M/s Dabur International Ltd. who became a 100% subsidiary of the assessee. It was stated that after the completion of the term of the agreement, M/s Redrock Ltd. also informed the assessee vide letter dated 07.04.2005 that in view of heavy advertisement expenditure incurred by them and no contribution by the assessee in brand building exercise, the royalty agreement ceased to exist w.e.f. 1st April, 2005 onwards and the assessee agreed for the same, a reference was made to page no. 122 of the

ITA Nos. 3257 & 3492/Del/2013 57 Dabur India Ltd. assessee’s paper book. It was stated that the AO for the purpose of determination of arm’s length price of royalty chargeable from Dabur International Ltd., UAE and Dabur Nepal Pvt. Ltd., referred the matter to the TPO before whom the assessee contended that in the absence of any contractual agreement between the assessee and the respective AEs, the assessee was not eligible to receive any royalty from Dabur International Ltd. as well as Dabur Nepal Pvt. Ltd. but the TPO was of the view that as per transfer pricing provisions contained in Section 92C of the Act, it was necessary that there should be an agreement between the parties in writing but it may be an oral understanding also. The ld. Counsel for the assessee pointed out that the assessee in respect of Dabur International Ltd., submitted before the TPO as under: “(i) The assessee is mainly in the business of Ayurvedic medicines and herbal products, and in FMCG business it is a new entrant. (ii) In UAE, FMCG markets are controlled by the big multi-international companies of US and European countries. (iii) In geographical area of UAE, Dabur's presence is almost unknown in FMCG market. (iv) For promoting the trade name Dabur, the assessee has not made any efforts but all the efforts have been made by Dabur International so much so

ITA Nos. 3257 & 3492/Del/2013 58 Dabur India Ltd. even no financial contribution has been made by the assessee in brand building exercise in the geographical area of UAE and other surrounding smaller countries and all the risks and efforts as well as the expenditure have been borne by Dabur International UAE for which they had not only incurred huge expenditure on advertisement etc. but had selected the products as per local need and taste also. (v) All the risks, efforts and costs have been borne by Dabur International UAE for market penetration strategy for enhancing the value of product and establishing the name. In other words, Dabur International by way of such functioning has become the economic owner in that area though legal ownership remains with the assessee. (vi) Dabur International UAE had not manufactured any product with R&D support and technical information of the assessee but it had manufactured all products as per the local requirement and acceptability in the local public. (vii) The assessee vide letters dated 18th July 2011 and 20th July 2011 had brought to the notice of TPO and CIT (Appeals) that the products as manufactured by Dabur International UAE are totally different from the products manufactured by the assessee in India. A list of the products manufactured by Dabur International UAE was also furnished to the CIT (Appeals). See page 125 of Paper Book.

ITA Nos. 3257 & 3492/Del/2013 59 Dabur India Ltd. (viii) In the year under consideration, the use of Dabur's name on the products manufactured by Dabur International UAE is not on account of any support provided by the assessee but it was on account of ownership interest because after the acquisition of Rodrock by the assessee, it had become hundred per cent subsidiary of the assessee and name also changed to Dabur International Ltd. and as per the statutory laws, the name of the manufacturer has to be mentioned on the products so manufactured. So the "Dabur" name mentioned on the products of UAE represents the ownership mark basically just like a TATA product which is generally used on the products by TATA Group. (ix) In earlier years, the said Rodrock had paid the royalty @ 1% because no product has been manufactured by Rodrock with the help and support of assessee in accordance with terms and conditions of agreement. However, the TPO, after taking into account the royalty agreement as entered by the assessee-company with Rodrock in earlier years, computed the royalty chargeable from Dabur International @ 4%. While working out such royalty rates, the TPO had clubbed the rates of royalty 3% being the royalty payable on the items manufactured with the support of assessee-company while using the technical know-how provided by the assessee and 1% on the products manufactured without the aid and support of assessee-company but marketed by using "Dabur" name.” The ld. Counsel for the assessee, in respect of M/s Dabur Nepal Ltd., submitted as under:

ITA Nos. 3257 & 3492/Del/2013 60 Dabur India Ltd. “(a) During the year under consideration, in absence of any written contract, no royalty is chargeable. (b) In spite of the agreement, as existed in earlier years, the assessee-company had to bear the cost of marketing expenses, but the assessee failed to contribute anything. (c) All the efforts including risk and cost for the establishment of the brand have been made by Dabur Nepal and for that they have to incur lot of expenses on advertisement in order to penetrate the market. (d) Only few products were manufactured by Dabur Nepal and the survival based on such few products in a poor country like Nepal without any contribution by the assessee was difficult. (e) The royalty has been reduced from 7.5% to 3% vide amendment to the agreement from 1st April 2004 and based on the amended agreement the royalty was received in preceding year. (f) The TPO in the case of Dabur Nepal, without bringing any comparability, calculated the alleged royalty chargeable to tax @ 7.5% as was provided in the agreement dated 5th November 1992.” 26. It was contended that the ld. CIT(A) did not accept the assessee’s contention that in the absence of operative contractual agreement, no royalty was chargeable to tax and that M/s Dabur International Ltd., UAE and M/s Dabur Nepal

ITA Nos. 3257 & 3492/Del/2013 61 Dabur India Ltd. Pvt. Ltd. had spent significant AMP expenses and accordingly Dabur brand was being built up in foreign territories by the efforts made by AEs and hence in fact, the AEs were providing services to the assessee for which those AE’s need to be remunerated and because no remuneration for such services was being paid to AEs, hence no royalty was being charged from them. It was stated that for the purpose of sub-section (2) of Section 92C of the Act, the procedure for various methods had been prescribed under Rule 10B of the IT Rules, 1962 and that the provisions of Sub-Rule (2) of Rule 10C provides that the comparability of international transactions with an uncontrolled transaction shall be judged with reference to the following: “(a) The specific characteristic of the property transferred or services provided in either transactions. (b) The function performed, taking into account the assets employed and the risk assumption by the respective parties to the transactions. (c) The contractual terms of the transactions which lay down explicitly or implicitly how the responses, risk and benefits are to be divided between the respective parties to the transactions. (d) Conditions prevailing in the markets in which the respective parties to the transactions operate,

ITA Nos. 3257 & 3492/Del/2013 62 Dabur India Ltd. including the geographical location and size of the market, the laws and Government orders in force, costs of labour and capital in the market, overall economic development and level of competition and whether the markets are wholesale or retail.” 27. It was submitted that as per the provisions contained in Section 92C of the Act read with Rules 10B and 10C of the IT Rules, 1962, it is clear that under the Transfer Pricing regulation for the purpose of making adjournment, the ALP has to be determined by finding out the receipt of royalty payment received by similarly situated and comparable independent entities, but in the absence of any comparable, no upward addition can be made. The reliance was placed on the following case laws: � CIT Vs Patni Computer Systems Ltd. in (2013) 33 Taxmann.com 3 (Bom) � Sony Ericsson Vs CIT 374 ITR 118 (Del) It was further submitted that as per paragraph 6.38 of OECD Transfer Pricing Guidelines, if the AE has undertaken all the market development activities and incurred extraordinary marketing expenditure, the AE is required to be adequately compensated either by lower purchase price or reduction in royalty rate as the case may be.

ITA Nos. 3257 & 3492/Del/2013 63 Dabur India Ltd. 28. It was contended that there was no agreement in force to charge royalty and in FMCG, Dabur India was basically a new entrant in UAE and for the penetration of market, Dabur International Ltd. had made great efforts and incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. Therefore, it was required to be compensated by reduction of royalty because the assessee had neither made any efforts nor contributed any money for the establishment of its name in geographical area of UAE. It was reiterated that the products manufactured by UAE were totally different from the products manufactured in India by the assessee and so much so even in the case of some of the products having identical name, the raw material and medium used in the manufacture were totally different from the raw material and medium used in India. So merely on the basis of Dabur's name, the products manufactured by Dabur International were not accepted in UAE and that M/s Dabur International ltd. had manufactured the products as per the local needs and taste of the public residing in the public area of UAE. It was stated that the brand value in a particular area does not depend upon ownership but it depends upon various factors like quality and acceptable products in local public and that M/s Dabur International Ltd. UAE by incurring expenditure and

ITA Nos. 3257 & 3492/Del/2013 64 Dabur India Ltd. making efforts had become the economic owner of the mark in commercial sense for that area. Therefore, instead of charging the royalty from M/s Dabur International Ltd. UAE, the assessee had to make some payments for providing the services for establishment of its name in UAE. It was explained that earlier, royalty agreement dated 1st April, 2003 was with M/s Redrock Ltd. and at that time it was not the associated company/enterprise of the assessee but later on the assessee had acquired the controlling stakes of M/s Redrock Ltd. in the year 2003, by virtue of which, the said company i.e. Redrock had become 100% subsidiary of the assessee and thereafter the name had been changed from M/s Redrock Ltd. to Dabur International Ltd. Therefore, after the conversion of name from M/s Redrock Ltd. to M/s Dabur International Ltd., it was all the necessary for M/s Dabur International Ltd. to use and depict the name "Dabur" which basically denotes the ownership mark on the products manufactured and continuation of the use of name of “Dabur” on the products was the shareholder's activity not only to secure the investment made by the assessee but also to enhance the value of "Dabur" mark.

ITA Nos. 3257 & 3492/Del/2013 65 Dabur India Ltd. product with the technical know-how and R&D support of the assessee but has manufactured on its own, in accordance with the requirement and local taste of the local public and had verified that in earlier years, the said Dabur International Ltd. had paid the royalty @ 1% only. Therefore, the action of the ld. CIT(A) in directing the AO to calculate the royalty @ 2% instead of 4% levied by TPO was without any basis and reasons and at any rate was very excessive because the ld. CIT(A) had neither given the benefit of geographical area, where Dabur was very little known nor any FAR analysis had been done which was a condition precedent for working out arm’s length price.

ITA Nos. 3257 & 3492/Del/2013 66 Dabur India Ltd. expenses to M/s Dabur Nepal Pvt. Ltd. and in that very situation the income of the assessee would have been reduced. It was also stated that the TPO/AO had not applied any Transfer Pricing method as prescribed under the Act, but simply made the adjustment in respect of royalty based on the earlier agreements which had already expired. It was further submitted that no royalty was being chargeable to tax neither from the M/s Dabur International Ltd., UAE nor from Dabur Nepal Pvt. Ltd. because as far as M/s Dabur International Ltd. was concerned, the agreement which was entered by M/s Redrock Ltd. in the year 2002, at that point of time, M/s Redrock Ltd. was considering the manufacturing of the products with the technical and R&D support of M/s Dabur India i.e. the assessee in respect of the Ayurvedic/herbal products in which the assessee was one of the pioneers. But later on, M/s Redrock Ltd. realized that the Ayurvedic products were not acceptable in UAE because there were no Ayurvedic doctors available and only Unani system of medicines was acceptable as per the local trend and custom, then, it had abandoned the idea of manufacturing the Ayurvedic/herbal products and entered into the business of FMCG products which too were manufactured by them with their own technology as per the requirement and taste of the local public keeping into

ITA Nos. 3257 & 3492/Del/2013 67 Dabur India Ltd. consideration the geographical & market situation, used "Dabur" name on its products and as the agreement was in force up to 31st March 2005, M/s Dabur International UAE as per contractual terms paid the royalty charges @ 1% of FOB sales on the products manufactured by them without the aid and support of the assessee and then did not renew the agreements. It was stated that for the purpose of market penetration of the products, M/s Dabur International Ltd. UAE, adopted its own market strategy and had made all the efforts for the establishment of "Dabur" name in the UAE which was very little known in that geographical area, and had also borne all the risks in relation to the funds employed as well as the loss of money and market failure as well as the quality. It was further stated that the assessee neither had made any efforts in establishing the trade name nor had made any contribution whatsoever, therefore, keeping into consideration the said factors, M/s Dabur International Ltd. had not renewed the royalty agreement because the assessee was not willing to undertake any risk/obligation/responsibility. However, neither the AO/TPO nor ld. CIT(A) had made any adjustment based on FAR analysis as contemplated under Rule 10C of the Income Tax Rules, 1962 nor had given any benefit of geographical

ITA Nos. 3257 & 3492/Del/2013 68 Dabur India Ltd. condition and size of the market as well as the risk assumed by M/s Dabur International Ltd.

ITA Nos. 3257 & 3492/Del/2013 69 Dabur India Ltd. products are totally different from UAE. It was pointed out that earlier agreements on the basis of which royalty was payable, were not inexistence and the assessee did not incur any expenditure for the year under consideration and that when the assessee was having 100% ownership it could not have received the royalty from itself. It was also stated that the assessee was purchasing 80% products manufactured by M/s Dabur Nepal Pvt. Ltd., therefore, no royalty could have been paid to the assessee in respect of those goods which were sold to the assessee. It was pointed out that the Nepal Government had not renewed the agreement, as such, no royalty was payable by M/s Dabur Nepal Pvt. Ltd. The ld. Counsel for the assessee submitted that the arbitrary addition made by the AO/TPO and sustained by the ld. CIT(A) was not justified.

ITA Nos. 3257 & 3492/Del/2013 70 Dabur India Ltd. royalty was to be paid to the assessee and the TPO was justified in working out the royalty from M/s Dabur International Ltd., UAE @ 4% and M/s Dabur Nepal Pvt. Ltd. @ 7.5% on FOB sales which was in accordance with the agreement effective from 1st April, 2004 and the ld. CIT(A) was not justified in reducing the royalty @ 2% on FOB sales. He requested to restore the order of the TPO and set aside the impugned order passed by the ld. CIT(A).

ITA Nos. 3257 & 3492/Del/2013 71 Dabur India Ltd. manufacturing and producing various products for sale after utilizing technical information provided to it by the assessee in terms of agreements executed from time to time and lastly on 2nd day of April 2001 which had expired on 31st day of March 2003. Thereafter, another agreement was entered on 1st April 2003 which is placed at page nos. 115 to 121 of the assessee’s paper book. The said agreement was effective upto 31st March 2005 and was not renewed thereafter. The assessee entered into agreement with M/s Rodrock Ltd., UAE for providing technical information and R&D support, know- how, information, operational improvements and skills in the areas of cost management, manufacturing, production etc. in the Territory of UAE vide agreement dated 1st April 2003 and as per the said agreement, the products were manufactured with the R&D support. However, later on the assessee acquired the controlling stake of M/s Redrock Ltd. and name changed to M/s Dabur International Ltd. UAE. In the present case, on completion of the agreement, the said company informed the assessee vide letter dated 07.04.2005 that heavy advertisement expenditure were to be incurred by them and the assessee had not agreed to reimburse such expenditure incurred, therefore, the royalty payment agreement ceased to exist w.e.f. Financial Year 2005-06. For the said proposition, both the parties agreed (copy of the said

ITA Nos. 3257 & 3492/Del/2013 72 Dabur India Ltd. letter is placed at page no. 122 of the assessee’s paper book). So, there was no agreement for the year under consideration to make the payment of royalty as agreed in between M/s Redrock Ltd. UAE and the assessee. In the instant case, when the agreement was in existence, the assessee provided technical know-how and R&D support in respect of the products which were mainly Aurvedic medicines and Herbal products. But later on, the assessee entered into business of FMCG products and acquired M/s Redrock Ltd., UAE and also changed its name to M/s Dabur International Ltd., UAE. In the earlier year, M/s Dabur International Ltd., UAE formerly known as M/s Redrock Ltd. had paid the royalty @ 1% because no product had been manufactured with the help and support of the assessee and the agreement was only upto 31st March 2005, the payment of royalty was paid in accordance with the agreement which was in existence with the said preceding year. However, for the year under consideration, there was no such agreement and the product manufactured by M/s Dabur International Ltd., UAE were totally different from the products manufactured in India and even the raw material used in those products manufactured in UAE was different from the raw material used in India. In the present case, nothing is brought on record to substantiate that the products manufactured in UAE were with the help of

ITA Nos. 3257 & 3492/Del/2013 73 Dabur India Ltd. technical know-how and R&D support of the assessee. On perusal of the provisions contained in Section 92 of the Act it would be clear that the income arising from an international transaction shall be computed having regard to the arm’s length price which shall be determined by any of the 5 methods prescribed in Sub-Section (1) of Section 92 of the Act which are following: “(a) Comparable and controlled price method; (b) Resale price method; (c) Cost plus method; (d) Profit split method; (e) Transactional net margin method; or such other method as may be prescribed by the Board.” 34. It is also not in dispute that for determination of the arm’s length price, the provisions contained in Sub-Section (2) of Section 92C of the Act shall be applied. The various methods has been prescribed under Rule 10B of the Income Tax Rules, 1962 to determine the arm’s length price u/s 92C of the Act and Rule 10C of Income Tax Rules, 1962 further states that in selecting the most appropriate method, following factors shall be taken into consideration: “(a) The specific characteristic of the property transferred or services provided in either transactions.

ITA Nos. 3257 & 3492/Del/2013 74 Dabur India Ltd. (b) The function performed, taking into account the assets employed and the risk assumption by the respective parties to the transactions. (c) The contractual terms of the transactions which lay down explicitly or implicitly how the responses, risk and benefits are to be divided between the respective parties to the transactions. (d) Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the market, the lodge and Government orders in force, costs of labour and capital in the market, overall economic development and level of competition and whether the markets are wholesale or retail.” 35. From the co-joint reading as contemplated u/s 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, it would be clear that for the purpose of making transfer pricing adjustments, the arm’s length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities. But in the present case, no comparable case has been brought on record by the TPO or the ld. CIT(A) while making adjustment on account of royalty. Moreover, no agreement was inforce to charge royalty from the AEs and that the FMCG products are new to the assessee who is known for its Herbal and Aurvedic products. In the instant case, it is not

ITA Nos. 3257 & 3492/Del/2013 75 Dabur India Ltd. brought on record that the assessee had incurred any expenses for marketing the products manufactured by M/s Dabur International Ltd. (AE) in UAE and that the assessee either made any efforts or contributed any money for the establishment of its name in geographical area of UAE and the products manufactured by the UAE were not different from the products manufactured in India by the assessee. Moreover, the claim of the assessee that the raw material and medium used in the manufacturing at UAE was totally different from the raw material and medium used in India has not been rebutted. The products manufactured by the assessee were as per the local needs and taste of the public residing in UAE. Furthermore, the ld. CIT(A) himself admitted that M/s Dabur International Ltd., UAE had not manufactured any products with the technical know-how and R&D support of the assessee but had manufactured on its own, in accordance with the requirement and local taste of the local public, however, he directed the AO to calculate the royalty @ 2% but without any basis. In the present case, it is an admitted fact that the TPO/AO had not applied any transfer pricing method as prescribed under the Act and simply made the adjustment in respect of royalty based on the earlier agreements which had already expired and there was no new agreement between the assessee and its AEs. The

ITA Nos. 3257 & 3492/Del/2013 76 Dabur India Ltd. earlier agreement was entered by M/s Redrock Ltd. on 1st April 2003, at that point of time, the said company was manufacturing the products with the technical know-how and R&D support of the assessee in respect of Aurvedic/Herbal products. But later on, when the said company found that the Aurvedic products were not acceptable in UAE as in the said country Unani system of medicines was acceptable as per the local trend and custom. The said AE in UAE had abandoned the manufacturing of the Ayurvedic/herbal products and then entered into the business of FMCG products which were earlier manufactured by the Redrock Ltd. with its own technology as per the requirement and taste of a local public of UAE by keeping into consideration the geographical and market situation. The said company was acquired by the assessee and now for the manufacturing of its products, the assessee did not provide any market strategies, nothing is brought on record that the assessee had borne the expenses, provided the funds or compensated for market failure and the quality etc. It, therefore, appears that the assessee had not made any effort for establishing the trade name nor had made any other contribution. Therefore, the assessee did not receive any royalty for the year under consideration and in the preceding year, the royalty @ 1% was paid to the assessee for the reason that Ayurvedic products were made

ITA Nos. 3257 & 3492/Del/2013 77 Dabur India Ltd. with the technical know-how and R&D support of the assessee. However, for the year under consideration, the FMCG products were manufactured which were different from the Indian products having different raw material and medium used in the manufacture. At the same time, the brand name of the assessee was used by the AE and in the earlier years the assessee provided the R&D support, know-how technologies etc. which helped the AE for the year under consideration also to some extent. It is also noticed that the assessee received the royalty @ 1% in the preceding year. The TPO also while working out the royalty rate for the year under consideration was of the view that the royalty @ 1% was chargeable on the products manufactured without the aid and support of assessee company but marketed by using “Dabur” name, however, no basis has been given for the same. In our opinion the estimate made by the TPO for the rate of royalty was highly excessive. We, therefore, after considering the totality of the facts are of the view that the ld. CIT(A) was not justified in directing the AO to charge the royalty from Dabur International UAE @ 2%. Particularly when, the assessee was not using the technical know-how or R&D support from the assessee, in our opinion it will be fair and reasonable to charge the royalty @ 0.75% by considering this fact that in the year under consideration the assessee had

ITA Nos. 3257 & 3492/Del/2013 78 Dabur India Ltd. incurred huge expenses on marketing, advertisement & brand building etc. and that in the preceding year the royalty was although charged @ 1% on the products manufactured without R&D support and technical know-how from the assessee but the aforesaid expenses were comparability less.

ITA Nos. 3257 & 3492/Del/2013 79 Dabur India Ltd. royalty will be payable from Financial Year 2005-06. It was also claimed that as per the Clause 7 of the original agreement dated 05.11.1992, the agreement shall become effective only after the approval by HMG Nepal and shall remain valid for a period of 10 years from the said date, unless renewed by mutual consent in writing and with prior approval of HMG Nepal. In the present case, it is not brought on record that the original agreement dated 05.11.1992 valid for 10 years, was renewed for further period and approval of HMG Nepal was taken. In the present case, the contention of the assessee that 80% of the products manufactured by M/s Dabur Nepal Pvt. Ltd. were purchased by the assessee has not been rebutted. It is also not in dispute that the royalty was payable earlier on the sales, therefore, it is unbelievable that the assessee charged the royalty on the purchases made by it from M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. Even if it is presumed that the royalty was to be charged by the assessee then same amount was to be added in the purchases thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by the same amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee. In the present case, it is an admitted fact that there was no agreement in

ITA Nos. 3257 & 3492/Del/2013 80 Dabur India Ltd. existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed here in above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, therefore, the addition made on the said basis is deleted. 37. Vide Ground Nos. 8 & 9 of the assessee’s appeal and Ground No. 3 of the departmental appeal, the issue relates to the sale of shareholdings in M/s Dabur Overseas Ltd. and M/s Dabur Nepal Pvt. Ltd. 38. The facts related to this issue in brief are that the TPO during the course of proceedings before him noticed that the assessee had sold share holdings in M/s Dabur Overseas Ltd. and M/s Dabur Nepal Pvt. Ltd. (DNPL) to M/s Dabur International Ltd. UAE, the international transactions relating to sale of investment had been benchmarked using CUP in the TP study report. The assessee claimed the transactions at arm’s length price by stating as under: “Further, as regards the intra-group transaction of sale of investments, during the current financial year, the shares held by DIL in DNPL and in

ITA Nos. 3257 & 3492/Del/2013 81 Dabur India Ltd. Dabur Overseas Ltd., were sold to Dabur International Ltd., UAE. For this purpose, a share valuation exercise was undertaken by an independent third party valuer, for both the sale transactions. The price arrived at in each case, by the independent third party valuer represents a comparable uncontrolled price for the price at which DIL sold the shares in DNPL and in Dabur Overseas Ltd., respectively, to Dabur International Ltd., UAE, and both of these were the same, i.e., DIL’s sale price was as per the valuation report of the independent third party valuer in both cases.” 39. The TPO pointed out that the assessee was holding 79.96% of the shares of M/s Dabur Nepal Pvt. Ltd. which were sold to M/s Dabur International Ltd. for an amount of Rs.17.16 crores and as a consequence to these transactions, the assessee ceased to be the holding company and M/s Dabur International Ltd. became 97.46% owner of M/s Dabur Nepal Ltd. He also observed that the assessee was holding 100% shares of M/s Dabur Overseas Ld. which in turn was holding 76% of the shares of M/s Dabur Egypt Ltd. and the shares of Dabur Overseas Ltd. were sold by the assessee to M/s Dabur International Ltd. for an amount of Rs.4.69 crores and as a consequence to these transaction, the assessee ceased to be the holding company of M/s Dabur Overseas Ltd. and that after the execution of this transaction M/s Dabur International Ltd. became 100% owner of M/s Dabur

ITA Nos. 3257 & 3492/Del/2013 82 Dabur India Ltd. Overseas Ltd. & Dabur Egypt Ltd. The TPO pointed out that after the execution of the aforesaid transactions, the share holdings structure of the assessee represented the following diagram:

Dabur India Ltd. 100% 97.46% Dabur International Ltd. 100% 100% 24% Dabur Nepal Ltd. Dabur Overseas Ltd. 76% 2.54% 76% Dabur Egypt Ltd. Others

ITA Nos. 3257 & 3492/Del/2013 83 Dabur India Ltd.

Dabur Nepal Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 2008-09 2009-10 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 3Ist March 31st March 31st March 31st March 31st March 31st March 31st March 31st March Actual Actual Actual Estimated Forecast Forecast Forecast Forecast 27961.79 28347.35 29634.41 Sales 28152.69 26745.06 25407.80 24137.41 22930.54 10% 1% 4310.15 3864.07 3074.02 EBIDTA 2919.43 2773.46 2634.79 2503.05 2377.90 15% 14% 10% EBIDTA/Sales 10% 10% 10% 10% 10% 3210.8 2781.7 2044.61 EBIT 1864.61 1792.05 17 18.55 1644.68 1570.92 1976.44 1841.53 1381.21 PBT 1294.32 1379.32 1466.57 1557.16 1570.00 1521.86 1445.6 1116.68 PAT 1016.04 1082.77 1151.26 122237 1231.45

Shareholder valuation of Dabur Nepal based on Discounted Cash Flow Model in NRS lakhs 2006 2007 2008 2009 2010 Perpetuity 12 12 12 12 12 12 Revenues (Please enter value) 28152.69 26745.06 25407.80 24137.41 22930.54 22930.54 YOY growth -5% -5% -5% -5% -5% 0% Operating profit margin 10% 10% 10% 10% 10% 10% EBIT 1864.61 1792.05 1718.55 1644.68 1570.92 1570.92 add Depredation 1054.82 981.41 916.24 858.37 806.98 806.98 less Capex 450 400 400 400 400 400 less Incremental working capital 0 0 0 0 0 0 less Tax on EBIT 400.76 385.07 368.94 353.46 337.55 337.55 Free cash flow 2469.43 2373.46 1865.85 1749.59 1640.35 1640.35 18.10% 18.10% 18.10% 1.8.10% 18.10% 18% Discount rate Discount factor 0.82 0.67 0.54 0.44 0.36 9076.95 Present value of free cash flows 2015.86 1581.65 1015.01 594.64 3351.89 776.95 5984.11 Total Net Present Value Present value of perpetuity 3351.89 Total Business Value 9336.00 V- Less Debt 5843.00 Shareholder value 3493.00

ITA Nos. 3257 & 3492/Del/2013 84 Dabur India Ltd. Dabur Egypt Limited 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Income statement 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 3Ist March 31st March 31st March 31st March 31st March 31st March 31st March 31st March Actual Actual Actual Estimated Forecast Forecast Forecast Forecast 1067450.28 1147796 2054711 Sales 2445106.09 2909676.25 3462514.73 4120392.53 4903267.11 -7% -5% 116589 -719 193567 EBIDTA 230328.99 274091.50 316168.89 388140.98 461887.76 10% 0% 9% EBIDTA/Sales 9% 9% 9% 9% 9% 97048 021374 135037 EBIT 185328.99 233091.50 288168.89 353140.98 429887.76 56170 -58563 79908 PBT 185328.99 233091.50 288168.89 353140.98 429887.76 56170 058563 79908 PAT 185328.99 233091.50 195954.844 240135.864 292323.678

Shareholder valuation of Dabur Egypt based on Discounted Cash How Model in USD lakhs 2006 2007 2008 2009 2010 Perpetuity 12 12 12 12 12 12 Revenues (Please enter wine) 24.45 29.10 34.63 41.20 49.03 52.96 YOY growth 19% 19% 19% 19% 6% 19% Operating profit margin 9% 9% 9% 9% 9% 9% EBIT 1.85 2.33 2.88 3.53 4.30 4.55 0.45 0.41 0.38 0.35 0.32 0.34 add Depredation 0.1 0.1 0.1 0.1 0.15 0.16 Less Capex less Incremental working capital 0.01 0.01 0.01 0.01 0.01 0.01 less Tax on EBIT 0 0 0.92 1.13 1.38 1.46 Free cash flow 2.19 2.63 2.23 2.64 3.08 3.27 Dsconnt rate 22.50% 22.50% 22.50% 22.50% 22.50% 17% Discount factor 0.82 0.67 0.54 0.44 0.36 19.79 Present value of free cash lows 1.79 1.75 1.21 1.17 1.12 5.86 Total Net Present Value 7.05 Present vane of perpetuity 5.86 12.91 Total Business Value T -' Less Debt 0.00 12.91 Shareholder value

ITA Nos. 3257 & 3492/Del/2013 85 Dabur India Ltd. The assessee furnished a note of valuation and assumption which read as under: “NOTE ON VALUATION AND ASSUMPTIONS: 1. The assessee company has during the year disposed of its holding in Dabur Overseas Ltd. and Dabur Nepal Pvt. Ltd. 2. Dabur Overseas Ltd. - Dabur Overseas Ltd. is an investment company. - It has no sales. - It is continuing incurring loss. - It hold 76% of investment in Dabur Egypt Ltd. - Dabur Overseas shares were valued at Net Assets Value Method. - The Valuation report -was obtained from Aggarwal & Ahluwalia, Chartered Accounts after considering the following recognized method of valuation: • Market Price method • Discounted Cash Flow Value method • Net Assets value method. - Market value method cannot be adopted since; Dabur Overseas Ltd.’s shares are unquoted shares. - Discounted value method-was adopted since there is no net cash outflow. - However, the value of its Dabur Overseas Holding in Dabur Egypt was valued at discounted value method after considering various methods of valuation namely; i) Market Price Method

ITA Nos. 3257 & 3492/Del/2013 86 Dabur India Ltd. ii) Net Assets Value method iii) Discounted cash flaw method - Discounted cash Flaw method was found suitable in view there being net cash flow and being a manufacturing company engaged in manufacture, import, export warehousing & distribution of beauty care product. - Thus the shares of Dabur Overseas having only investment activity, for valuing the valuer has adopted net assets value method being most appropriate method satisfying Arm's Length Principle. - It continues to have losses from F.Y. 2004-05 onwards. - Dabur Overseas Ltd. incurring losses and there was decline in PBT in FY. 2004-05 by 3% and the projections were duly made by continuing 3% decline in profits in future years as well. - However, the Dabur Egypt Pvt. Ltd being having manufacturing profits having net cash flow from operations, after considering 19% annual growth on the sales of FY. 2004-05 in accordance with the industry trend, adopted discounted cash flow method. It is pertinent to add that being a not listed share, market value method is not considered. Similarly net assets value method is not found suitable for valuation purposes. - Dabur Egypt Ltd had growth in sales of approx 19% in 2005-06 and EBIDTA to sales of 9% in

ITA Nos. 3257 & 3492/Del/2013 87 Dabur India Ltd. 2005-06. Accordingly the future projections were duly made growth in sales in accordance with industry trend of sales growth rate of 19% and EBITA/Sales of 9%. - Thus the assessee after considering as per valuation principle after considering various valuation methodologies valued the shares adopted most appropriate method for valuation of shares disposed of Dabur Overseas Ltd at Rs 469.45 and the assessee satisfies the Arms Length Principle. - Thus accordingly fair value of Dabur Overseas Ltd. was arrived of including shares held in Dabur Egypt at Rs. 268.45 lacs. 3. Dabur Nepal Pvt. Ltd. - Dabur Nepal Pvt. Ltd. is a manufacturing company. - The same is located in Nepal having political instability as well known for frequent labour unrest. - The assessee company wants to reduce its independence. - The assessee company has established alternative source of supply from Siliguri W.B. and as well as Newai, Rajasthan. -The assessee disposed of 100% of investment in Dabur Nepal Pvt. Ltd. held by it. - The sales value were estimated to come down by 5% every year on the sales value from FY 2004-05.

ITA Nos. 3257 & 3492/Del/2013 88 Dabur India Ltd. - There has been net cash flow of Dabur Nepal Pvt. Ltd operations. - Valuation report was obtained and duly submitted to RBI under FEMA regulations. - The valuations report obtained from Aggarwal & Ahluwalia, Chartered Accountants after considering the following recognized method of valuation, i) market Price method ii) Net Assets Value Method iii) Discounted cash Flow method - Market value method cannot be adopted since Dabur Nepal Pvt. Ltd.’s shares are unquoted shares. - Discounted cash flow value method was adopted since the assessee company reduced dependence on its Nepal subsidiary and having alternate facilities available in Siliguri, W.B. and Newai at Rajasthan. - Thus according to the estimate, the sales value were estimated to come down in view of alternative supply available to assessee company. - The valuation report obtained after duly considering various factors as per accepted methods of valuation by Aggrawal & Ahluwalia, Chartered Accountants. Dabur Nepal Pvt. Ltd sales had been projected keeping in view less dependence in future years by the assessee company. Growth in sales for F.Y. 2005-06.”

ITA Nos. 3257 & 3492/Del/2013 89 Dabur India Ltd. 42. The TPO after considering the submissions and the reports furnished by the assessee observed as under: “a. The valuation report is dated 07.06.2005. b. On the date of valuation the actual financial for the financial year 2004-05 were available. c. However projected Profit and Loss Accounts and Balance Sheets for all the companies under valuation for the financial year ending on March 2006, 2007, 2008, 2009 and 2010 were prepared ignoring actual financial of FY 2004-05. d. Such Projected P/L A/cs and Balance Sheets were based on the management projections which were not corroborated with any documentary evidence. e. Based on these projections the Valuer had made the valuation following Discounted Cash Flow Method in the case of Dabur Egypt Limited and Dabur Nepal Limited. f. In the case of Dabur Nepal Limited the projection of sales was done at a growth of (-)5% for a period of next 5 years as against the growth of (+) 5% in the immediately preceding year i.e. 2004-05 over 2003-04. The EBIDTA was projected @ 10% which was the EBIDTA in the year 2004-05. g. In the case of Dabur Egypt Limited the projection of sales was done at a growth of 19% for a period of next 5 years as against the growth of 89% in the immediately preceding year i.e. 2004-05 over 2003-

ITA Nos. 3257 & 3492/Del/2013 90 Dabur India Ltd. 04. The EBIDTA was projected @ 9% which was the EBIDTA in the year 2004-05. h. There are no cogent basis and reasons available for the projections made by the Management.” 43. The TPO was of the view that the projections made for the purpose of valuation of shares were without any cogent reasons and basis. He pointed out that a company (Dabur Nepal Pvt. Ltd.) which had shown a growth of 5% in the immediately preceding year would grow at (-) 5% for next five years was an illogical presumption and no basis for the same had been furnished by the assessee. He was also of the view that another company (Dabur Egypt Ltd.) which had shown a growth of 89% in the immediately preceding year would grow at 19% for next five years was a presumption without any cogent basis. He, therefore, recomputed the valuation of the aforesaid companies and issued a show cause notice to the assessee which reads as under: “Sale of Investment: (i) During the year an international transaction for sale of investment to the tune of Rs. 21.8537 Crores has been entered into by the assessee company with Dabur International Limited, It is seen from the details furnished in Form 3CEB and Transfer Pricing Study Report that the transaction has been benchmarked using CUP. The details of transaction as furnished during the course of proceedings have been examined. It is seen that in order to furnish the

ITA Nos. 3257 & 3492/Del/2013 91 Dabur India Ltd. CUP data, valuation reports prepared by Agarwal and Ahluwalia Chartered Accountants have been filed. During the course of proceedings Mr. Sanjay Agarwal, CA also appeared and attained the method of valuation. A detailed note was also filed in this respect by the AR on 07.10.2009. (ii) On the basis of various information filed, it is seen that the valuation report of Dabur Overseas Limited, Dabur Egypt Limited and Dabur Nepal Limited has been prepared using following methods: 1. Dabur Overseas Limited Net Asset Value Method 2. Dabur Egypt Limited Discounted Cash Flow Method 3. Dabur Nepal Limited Discounted Cash Flow Method (iii) The valuation reports have used the actual data for financial years 2002-03, 2003-04 and 2004-05 and have used the projected financials for the financial years 2005-06 to 2009-10. As mentioned in Para 2 of the reports, the projected profit and loss account and balance sheet for Dabur Overseas Limited, Dabur Egypt Limited and Dabur Nepal Limited for financial year ending as at March 2006, 2007, 2008, 2009 and 2010 is based on management projections. (iv) It is further seen from the computation charts in the case of Dabur Egypt Limited that the growth in sales has been projected @ 19% as against the growth in FY 2004-05 @ 89%. Similarly in the case of Dabur Nepal Limited the growth in sales has been projected @ (-)5% as against the growth in FY 2004-05 @ 5%.

ITA Nos. 3257 & 3492/Del/2013 92 Dabur India Ltd. (v) On the basis of above information I am of the view that the projection done by the management for the sales for financial year ending as at March 2006. 2007, 2008, 2009 and 2010 is not based on any cogent basis. I therefore propose to recompute the valuation of the companies on the basis of growth in the sales of the companies in the immediately preceding year. Charts showing the computations are attached herewith.(The charts have been reproduced below in this order) (vi) On the basis of computations shown in the chart appended herewith the valuation of Dabur India Ltd's shareholding in Dabur Nepal Ltd has been computed at Rs. 28.79 Crores as against the value of international transaction of Rs. 17:16 Crores. Similarly, the valuation of Dabur. Overseas Limited (including the valuation of Dabur Egypt Limited) has been computed at Rs. 12.70 Crores as against the value of international transaction of 'Rs. 4.69 Crores. I propose to compute the arm's length price of the international transactions for sale of investment as shown in point (vi) above. You may raise objections if any for the proposed action.” 44. The TPO proposed the changed valuation of shareholding as under: Particulars Shown by the Computed Difference assessee Rs. Rs. in Lakhs by me Rs. in in Lakhs Lakhs Value of Shareholding in Dabur 469.35 1270.35 801.00 Overseas Limited

ITA Nos. 3257 & 3492/Del/2013 93 Dabur India Ltd. Value of Shareholding in Dabur Nepal 1716.00 2879.76 1163.76 Limited Total 2185.35 4150.11 1964.76

ITA Nos. 3257 & 3492/Del/2013 94 Dabur India Ltd. shares of Dabur Nepal Limited from unrelated parties viz. Lunar Trading Company and Bibhuti Pvt. Ltd. and the cost of acquisition is comparable with the cost at which the shares have been sold by Dabur India Limited.” 46. The TPO with regard to M/s Dabur Egypt Ltd., did not find merit in the objection of the assessee by observing as under: “As already mentioned the growth of 89% has been projected by me on the basis of figures of sales of preceding year i.e. FY 2004-05, whereas the assesses company has not given any basis for reducing actual growth rate of 89% in the immediately preceding year to the projection of 19% growth in spite my requesting for the same. The AR for the assessee has neither given any evidence that growth of 89% as disclosed in audited accounts for FY 2004-05 was incorrect nor was any basis or reason for making a projection at low growth rate of 19% as compared to growth rate of 89% in the immediately preceding financial year. This clearly proves that presumption of growth rate @ 19% in FY 2005-06 to FY 2009-10 was not based on growth rate of immediately preceding year or any other disclosed basis. In view of these facts that the assessee could not substantiate the key presumption on the basis of which the CUP has been determined for determining the arm's length price of the shares sold by the assessee, I reject the objections raised by the assessee.”

ITA Nos. 3257 & 3492/Del/2013 95 Dabur India Ltd. 47. He adopted growth rate of 5% for the financial year 2009-10 in the case of M/s Dabur Nepal Ltd. He also pointed out that the valuation report was drawn on 07.06.2005 and at that time the only relevant data on the basis of which a projection could have been made was growth rate of immediately preceding year which was available to the assessee while making such projections, but the assessee ignored the said data deliberately and had made projection on the basis of undisclosed data. According to him the actual growth during the period 2006 to 2009 was much higher than what was projected by the management. The TPO also did not accept the objection of the assessee that he had ignored increased cost on account of interest paid, capex expenditure, incremental cost of working and tax outflow and observed that he had followed the same method of valuation which was used by the assessee. As regards to the argument of the assessee that the valuation of the assessee was accepted by the exchange Control Authority, the TPO observed that the said valuation did not have any bearing on the determination of arm’s length price and that the approval of Exchange Control Authority was for the purpose of transactions in the foreign exchange whereas the proceeding before him was to examine and determine the arm’s length price of the transaction. As regards to the submissions of the assessee

ITA Nos. 3257 & 3492/Del/2013 96 Dabur India Ltd. that that shares of M/s Dabur Nepal Ltd. had been transacted between M/s Dabur Nepal Ltd. and the unrelated parties at almost the same rate. The TPO observed that only certificate had been filed by the assessee which was issued by M/s Dabur International Ltd. and that buying a small stake in any company and buying the whole company through managing stakes were two different issues which would carry two different prices i.e. purchase price of quoted shares for the purpose of having controlling right in a company would be different from purchase prices of small investment and there was difference in strategic investment and routine investment. Thereafter, the assessee furnished fresh valuation reports of the shares by substituting the figures of projected sale with the actual sale achieved during the period 2006-09 as under: Dabur Egypt Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 2008-09 2009-10 12 months 12 months 12 months In USD 12 months 12 months 12 months 12 months 12 months 3 1st March 31st March 31st March 31st March 31st March 3 1st March 3 1st March 3 1st March Actual Actual Actual Actual Actual Actual Actual Forecast 1147796.00 1085213.00 2054711.00 Sales 3031132.51 4808413.57 7188537.37 14330719.85 4903267.11 -5% -7% 116589.00 -719.00 193567.00 EBIDTA 350504.36 876043.10 262517.19 2258390.65 461887.76 10% 0% 9% EBIDTA/Sales 11.56% 18.22% 3.65% 15.76% 97048.00 -21374.00 135037.00 EBIT 304470.43 795116.92 202430.08 2049862.45 429572.42 56170.00 -58563.00 79908.00 PBT 220472.26 749564.42 175653.37 1991723.98 429572.42 56170.00 -58563.00 79908.00 PAT 220472.26 749564.42 149770.75 1538720.77 292109.25

ITA Nos. 3257 & 3492/Del/2013 97 Dabur India Ltd. Shareholder valuation of Dabur Egypt based on Discounted Cash Flow Model In USD lakhs Period ending March 31 2006 2007 2008 2009 2010 Perpetuity Number of Months 12 12 12 12 12 Basis Actual Actual Actual Forecast Forecast Actual Revenues 30.31 48.08 71.89 143.31 49.03 52.96 YOY growth 47.52% 58.63% 49.50% 99.36% 6% Operating profit margin 11.56% 18.22% 3.65% 15.76% 9% 9%

EBIT 3.04 7.95 20.50 4.30 4.55 2.02 Add Depreciation 0.46 0.81 0.60 2.09 032 0.46 Less interest paid 0.84 0.46 0.27 0.58 0 0 Less Capex 1.63 1.56 10.54 11.59 0.15 0.16 less Incremental working capital -1.87 0.54 -9.28 9.23 0.01 0.01 less Tax on EBIT 0 0 0.26 4.53 1.37 1.46 Free cash flow 2.90 6.21 0.84 -3.35 3.08 3.27 22.50% 22.50% 22.50% Discount rate 22.50% 22.50% 16.50% Discount factor 81.60% 66.60% 54.40% 44.40% 36.30% 19.79% Present value of free cash flows 2.37 4.13 0.45 -1.49 1.12 5.86 Total Net Present Value 6.59 Present value of perpetuity 5.86 12.45 Total Business Value 5.54 Less Debt as on 31.03.2009 Shareholder value 6.91

Dabur Nepal Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 200849 2009-10 12 months 12 months 12 months Nrs In Lakhs 12 months 12 months 12 months 12 months 12 months 31st March 31st March 31st March 31st March 3 1st March 3 1st March 3 1st March 31st March Actual Actual Actual Actual Actual Actual Actual Forecast 28347.35 29634.41 Sales 31040.46 35181.33 39159.92 43519.23 22930.54 27961.79 10% 1% 4310.15 3864.07 3074.02 2790.96 3028.50 2995.23 2232.29 2376.98 EBIDTA 15% 14% 10% EBIDTA/Sales 9% 8% 5% I0% 9% 3210.80 2781.70 2044.61 EBIT 1593.26 1695.81 1632.78 674.62 1570.00 1976.44 1841.53 1381.21 PBT 944.38 1086.24 906.78 28.03 1570.00 1521.86 1445.60 1116.68 PAT 775.50 852.70 705.30 23.65 1232.45

ITA Nos. 3257 & 3492/Del/2013 98 Dabur India Ltd. Shareholder valuation of DNPL based OB Discounted Cash Flow Model In Nrs lakhs Period ending March 31 2006 2007 2008 2009 2010 Perpetuity Number of Months 12 12 12 12 12 Basis Actual Actual Forecast Forecast Actual Actual Revenues 31040.46 35181.33 39159.92 43519.23 22930.54 22939.54 YOY growth 4.74% 13.34% 11.31% 11.13% 0% Operating profit margin 9% 9% 8% 5% 10% 10% EBIT 1593.26 1695.81 1632.78 674.62 1570.00 1570.00 Add Depreciation 1197.70 1332.69 1362.448 1557.66 806.98 806.98 Less interest paid 648.88 609.57 726 646.59 0.00 0.00 Less Capex 2650.16 1401.01 3866.06 1270.08 400.00 400.00 less Incremental working capital -186.94 3032.78 -2266.35 1993.30 0 0 372.29 233.54 201.49 4.38 337.55 337.55 Less Tax on EBT Free cash flow -693.43 -2248.40 468.03 -1682.07 1639.43 1639.43 18.10% 18.10% 18.10% 18.10% 18.10% 18.10% Discount rate Discount factor 84.70% 71.70% 60.80% 51.50% 43.60% 9076.95% Present value of free cash flows -587.33 -1612.10 284.56 -866.27 714.75 3351.89 Total Net Present Value -206639 Present value of perpetuity 3351.89 Total Business Value 1285.50 Less Debt as on 31.03.2009 3887.31 Shareholder value -2601.81

b. The sale for the year ending March 2010 has not been estimated by applying any growth rate. It can be seen that the projected sales for the year ending March 2010 is almost 52% of the actual sales of March 2009 in the case of Dabur Nepal Limited. Similarly the projected sale for the year ending

ITA Nos. 3257 & 3492/Del/2013 99 Dabur India Ltd. March 2010 is almost 34% of the actual sales of March 2009 in the case of Dabur Egypt Limited. It cannot be believed that the sales would go down to such an extent in the year 2009-10. Even otherwise any projection without any basis is a pure guess work and such pure guess work cannot determine the price of shares. c. Various other figures for the Capex and incremental working capital have been changed for the purpose of fresh report.” 49. The TPO was of the view that it would not be prudent to use the actual data (for financial year) to compute the value of M/s Dabur Nepal Pvt. Ltd. and M/s Dabur Egypt. For the aforesaid view, he mentioned that the provisions of Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm’s length price.

ITA Nos. 3257 & 3492/Del/2013 100 Dabur India Ltd. make it impossible to comply with the transfer pricing regulations. The TPO was of the view that the assessee needs to determine the arm’s length price on the basis of data of relevant assessment year and not on the basis of data of subsequent year as provided by the Indian Transfer Pricing Legislation but in this case the assessee valued the important shares of M/s Dabur Overseas Ltd. and M/s Dabur Nepal Ltd. in the beginning of the financial year 2005-06 and at that time data could have been used for projection and determining the share price and data of subsequent year i.e. financial year 2006-07 and onwards which was not available at the time of drawing the valuation report, could not have been used. The TPO accordingly rejected the valuation report of shares, prepared by M/s Agarwal and Ahluwalia, Chartered Accountants for the purpose of CUP for benchmarking the international transaction for sale of shares and that the value of shares using the projections based on the sales of the preceding year (which was available at the time of valuation of shares) shall be used as CUP for benchmarking the international transactions for sale of shares. The TPO determined the arm’s length price of the international transactions relating to sales of shares as under:

ITA Nos. 3257 & 3492/Del/2013 101 Dabur India Ltd. Difference Value at which Ann's length % of the Rs. in Lakhs Particulars price of the difference International with the Shares sold transaction value at by the assessee has taken which the company Rs. in place Rs. in international Lakhs Lakhs transaction has taken place

469.35 1270.35 801.00 170.66% Value of Shareholding in Dabur Overseas Limited 1716.00 2879.76 1163.76 67.77% Value of Shareholding in Dabur Nepal Limited Total 2185.35 4150.11 1964.76 89.90%

ITA Nos. 3257 & 3492/Del/2013 102 Dabur India Ltd. year 2005-06. The assessee provided a brief history of background and past financial results of the entities as under: “11.5 Dabur Nepal Pvt. Ltd., Nepal Dabur Nepal is owned by Dabur India wherein Dabur India holds 79.96% and balance is held by Dabur International Ltd and Mr. SS Rana with stake of 17.50% and 2.54% respectively. The share holding pattern of Dabur Nepal Pvt. Ltd. is provided below.

FY 2005-06 FY 2004-05 FY 2003-04 Share Holding in % 1. Dabur India 0 79.96% 79.96% Ltd., India 2. Dabur 97.50% 17.53% 0.00% International Ltd, IOM 3. SS Rana, Nepal 2.50% 2.50% 2.50% 4. Bibuti Pvt Ltd, 0.00% 0.00% 7.51% Nepal 5. Lunar Trading 0.00% 0.00% 10.02% Company, Nepal Date of Sale of 15-06-2005 28-03-2005 Shares (Dabur (Bibuti & India) Lunar) Share Holding in No of Shares Dabur India Ltd., 6,38,520 6,38,520 India Bibuti Pvt. Ltd., - 60,000 Nepal Lunar Trading - 80,000 Company, Nepal SS Rana 20,000 20,000 20,000 Dabur 7,78,520 1,40,000 - International Total 7,98,420 7,98,520 7,98,520

ITA Nos. 3257 & 3492/Del/2013 103 Dabur India Ltd. Initially, two shareholders namely, Bibuti Pvt Ltd, Nepal and Lunar Trading Co, Nepal sold their equity stakes of 7.51 % and 10.02% respectively to Dabur International Ltd, IOM on 28 March 2005. Then, after about 3 months, Dabur India Ltd divested its complete holding of 79.96% in Dabur Nepal to Dabur International Ltd. Dabur Nepal is primarily into the business of manufacture and sale of fruit juices, hair oils and digestives. Dabur Nepal derives its substantial sales from Dabur India. Dabur Nepal operates as a low risk manufacturer with no intangibles. Despite been a low risk manufacturer, Dabur Nepal off late has suffered on account of trade vagaries and political disturbances in Nepal The financial details of Dabur Nepal prior to selling of shares in June 2005 are given below: FY Sales (Rs in Profit (Rs In % on sales Lakhs) Lakhs) 2004-05 17,370.15 650.24 3.74% 2003-04 16,591.46 841.77 5.07% 2002-03 16,953.33 919.51 5.42% 2001-02 15,249.05 1,007.60 6.61%

It can be seen from above, that Dabur Nepal is earning a nominal return. Dabur Nepal holds no intangibles and accordingly, the return would also be nominal. Dabur India, the appellant decided to sell its total stake in Dabur Nepal in 2005 for which a valuer was appointed to evaluate the shares of Dabur

ITA Nos. 3257 & 3492/Del/2013 104 Dabur India Ltd. Nepal. As per the valuation report, the value of 79.96% of stake was arrived at Rs 17.16crores. The appellant took that valuation as the basis of arriving at the sale consideration. This report was also submitted to the authorized banker per the FEMA guidelines. The copy of the valuation report is submitted. As stated, this valuation report was considered as an external benchmark / CUP method for the compliance of Transfer Pricing regulations. Further, two more shareholders also sold off their investment in Dabur Nepal to Dabur International at same price. The copy of such sale of shares by such shareholders is furnished. The price received by Dabur India Ltd from Dabur International Ltd is almost similar to price received by two independent parties disposing their 17.53% within a span of about 3 months. Thus, appellant submits, that price charged by it is fully in compliance of transfer pricing regulations and cannot be further enhanced as alleged by the Ld. TPO in his order.

Name of Financial No of Price Date of Date of seller Year of Shares USD Purchase/ Valuation Sale Agreement report Dabur 2005-06 6,38,520 6.1852 15-06-2005 07-06-2005 India Ltd, India Bibuti Pvt 2004-05 60,000 6.4133 28-03-2005 NA Ltd, Nepal Lunar 2004-05 80.000 6.0800 28-03-2005 NA Trading Co, Nepal Total 7,78,520

ITA Nos. 3257 & 3492/Del/2013 105 Dabur India Ltd. In relation to sale of shares of Dabur Nepal, the appellant submits that: - The basis of valuation of shares was done per the prevailing market conditions and projected financial of Dabur Nepal; - The appellant arrived the value of sale consideration by appointing an independent valuer/ expert and whose report was considered for the purpose of final sale price. - Two more shareholders i.e. Bibhuti P Ltd and Lunar Trading Company also disposed their stake at similar values as adopted by the appellant giving a strong evidence of justified sale consideration. - Dabur Nepal had no intangibles and hence the return on investment would have been only nominal. A growth factor of +5% as taken by TPO against negative outlook and growth of Nepal given political stability was totally unjustified. - As per the valuer's report, the valuation was done on the discounted cash flow method (DCF) and this method is recognized by RBI as well for the purpose of unlisted equity share valuation. - The appellant had paid capital gains tax on the capital gains made by Dabur India. In light of the above, the appellant submits that the valuation arrived by the TPO by altering the projected sales figure at +5% and keeping other items of expense constant is contrary to the facts

ITA Nos. 3257 & 3492/Del/2013 106 Dabur India Ltd. and prevailing market conditions and is notional and adhoc and thus should be rejected. Thus, the addition on account of Dabur Nepal of Rs 11.64 crores should be deleted. 11.6 Dabur Overseas Ltd /Dabur Egypt Ltd. Dabur Overseas Ltd. is an Investment Company in which Dabur India is holding 100% stake. Dabur India is intending to sale its 100% stake in Dabur Overseas to Dabur International Dabur Overseas Ltd in turn was holding 76% stake in Dabur Egypt In order to arrive at correct valuation of Dabur Overseas, valuation of Dabur Egypt was also undertaken simultaneously. Similar to Dabur Nepal, Dabur Egypt also operated as a low risk / limited manufacturer with no intangibles and is in business of manufacture of hair care oil, vinegar, rose water, glucose etc. The financial details of Dabur Egypt prior to sell of shares in June 2005 are given below: In USD FY Sales Profit % on sales 2004-05 2,054,711 79,908 3.89% 2003-04 1,085,213 (58.563) -5.40% 2002-03 1,147,796 56,170 4.89% 2001-02 1,224,010 77,856 6.36% It can be seen from above, that Dabur Egypt is earning a nominal return. Dabur Egypt holds no intangibles and accordingly, the return would also be nominal.

ITA Nos. 3257 & 3492/Del/2013 107 Dabur India Ltd. Dabur India decided to sell its total stake in Dabur Overseas in 2005 for which a valuer was appointed to value the shares of Dabur Overseas / Dabur Egypt. As per the valuation report, the value of 100% of stake was arrived at Rs 4.70 crores, in which the 76% stake of Dabur Egypt is also factored. The appellant took that valuation as the basis of arriving at the sale consideration. This report was also submitted to the authorized banker per the FEMA guidelines. The copy of the valuation report is submitted. As stated, this valuation report was considered as an external benchmark / CUP method. In relation to sale of shares of Dabur Overseas/ Dabur Egypt, the appellant submits that: - The basis of valuation of shares was done per the prevailing market conditions and projected financial of Dabur Overseas/ Dabur Egypt; - The appellant arrived the value of sale consideration by an appointing an independent valuer/ expert and whose report was considered for the purpose of final sale price. - Dabur Overseas/ Dabur Egypt had no intangibles and hence the return on investment would have been only nominal. A growth factor of +89% on YOY as taken by TPO was totally unjustified and the TPO has not demonstrated how an entity in FMCG sector grow every year by 89%. The high handed action of TPO is totally unwarranted and needs to be quashed. A growth factor of +19% on YOY basis is

ITA Nos. 3257 & 3492/Del/2013 108 Dabur India Ltd. very reasonable and achievable and accordingly the valuer had factored the growth at 19%. - As per the valuer's report, the valuation was done on the discounted cash flow method (DCF) and this method is recognized by RBI as well for the purpose of unlisted equity share valuation. In light of the above, the appellant submits that the valuation arrived by the TPO by altering the projected sales figure at +89% and keeping other items of expense constant is contrary to the facts and prevailing market conditions and is notional and adhoc and thus should be rejected. Thus, the addition on account of Dabur Overseas/ Dabur Egypt of Rs 8.01 crores should be deleted.” 53. The assessee further submitted that the valuation arrived at by the valuer was almost sacrosanct and could not have been substituted with any other amount for computing the capital gains. The reliance was placed on the following case laws: � CIT v Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC) � KP Verghese 131 ITR 597 (SC) � CIT v Shivakami Co Ltd 159 ITR 71 (SC) � CIT v George Henderson and Co Ltd 66 ITR 622 (SC) � ITO v Balaji Textile Mills Pvt Ltd - ITA No 3197/Mum 2010

ITA Nos. 3257 & 3492/Del/2013 109 Dabur India Ltd. 54. It was further submitted that the assessee during the course of assessment proceedings provided working of share valuation wherein comparison between projected and actual numbers were made as per following details: Name Valuation based on Valuation based on projection figures actual figures Dabur Nepal Ltd 3433.59 -2601.81 (Nepalse Rs Lakhs) (Nepalse Rs Lakhs) Dabur Overseas 12.91 6.91 Ltd, BVI (USD in Lakhs) (USD in Lakhs)

ITA Nos. 3257 & 3492/Del/2013 110 Dabur India Ltd. growth factor was not and basis if minuscule number. calculation/valuation report should be accepted. Expenditure The appellant The Ld TPO As the TPO has not while projecting while increased the the sales growth increasing the operating expenses, has worked out sales % by 5% the growth factor of expenses and 89% for 5% and 89% accordingly. Nepal and becomes unrealistic Egypt did not and untenable and correspondingly requires to be increase the quashed down. operating expenses of the those companies. Perpetuity The appellant The TPO has The Ld TPO has Valuation had determined accepted this accepted the the perpetuity method of perpetuity valuation valuation of valuation of the but disturbed the present values of appellant sale factor for free cash flow of period 2006-2010 Dabur Nepal at implying that his NRS 3351 Lakhs idea was just to and USD 12.91 make some additions lakhs for Dabur without any basis Egypt. Dabur 1) The appellant 1) TPO did not The arithmetical Nepal’s has determined deduct tax on error by not Valuation, the free cash EBIT to arrive reducing tax and wrongly flow after at free cash wrong application of done by reducing tax on flow. 2) The discount factor has TPO EBIT 2) Discount factor inflated the Secondly the has been valuation of Dabur Discount factor wrongly used by Nepal to determine PV the TPO of cash flows has been arrived by a formula Valuation The TPO was The TPO did It’s true that actual based on submitted the not accept the valuation cannot be actual results for 2006- actual used to compute the numbers for 2009 on actual valuation valuation number for 2006 to basis while the stating it to be Year 2005. However, 2009 in keeping violation of TP the actual valuation favour of perpetuity principles. gives a fair idea

ITA Nos. 3257 & 3492/Del/2013 111 Dabur India Ltd. appellant constant. The whose valuation was results of this more closer to valuation was in reality. On favour of tax comparison it can be payer seen that TPO’s method of valuation was grossly wrong and liable to be deleted. CUP Two more TPO ignored The appellant’s available independent this submits that analogy for Nepal parties disposed comparative drawn by the Ld TPO their information, is faulty. CUP here consolidated stating it to be is directly available equity stake of non and should have 17.53% at avg comparable. been accepted as price of USD discharge of ALP. 6.245 per share as against appellant’s disposal of 79.96% at USD 6.1852 per share for Dabur Nepal

ITA Nos. 3257 & 3492/Del/2013 112 Dabur India Ltd. 57. The ld. CIT(A) after considering the submissions of the assessee held that the arm’s length value of shares as determined by the independent valuer need not be disturbed and accordingly upward adjustment of Rs.11.64 crores in respect of sale of shares of M/s Dabur Nepal Pvt. Ltd. was directed to be deleted. The relevant findings have been given in paras 12.1 to 12.4 of the impugned order which read as under:

“12.1 I have carefully gone through various submissions made by the appellant and other material placed on record. The material facts in brief are that during the period under consideration, the appellant had sold its investment in snares of Dabur Nepal and Dabur Overseas to Dabur International Ltd., which is AE of the appellant The appellant has obtained independent valuer's report for the purpose of ascertaining arm's length value of the shares and has paid capital gains taxes accordingly. The TPO has accepted the report of independent valuer in principle but adopted higher projected growth rates than that adopted by independent valuer, and has worked out arm's length price on higher side & thereby has proposed upward, adjustment Position in respect of two companies whose shares have been sold is being discussed in subsequent paragraphs.

ITA Nos. 3257 & 3492/Del/2013 113 Dabur India Ltd. 12.2 Dabur Nepal Pvt. Ltd.: It is seen that the appellant has sold 6,38,520 shares of Dabur Nepal to Dabur International (AE) on 15.06.2005. Since the shares were unquoted, the appellant obtained a report dated 07.06.2005 from independent valuer, wherein value of shares has been determined at Rs. (Nepalese) 3433.59 lacs (INR 17.16 crows) as on 31.05.2005 by following discounted cash flow (DCF) method. This value has been adopted by the appellant as ALP. At the time of sales, actual figures of financials of Dabur Nepal were available upto FY 2004-05 and for subsequent years, projected sales growth of (-)5% was taken in the said valuation report on the basis that there is political turmoil in the Nepal state and hence growth prospects are bleak. The TPO has not accepted projected sales growth of (-)5% for FY 2005-06 onwards and has taken (+)5% figure of projected growth based on actual figure of FY 2004-05. By taking +5% projected growth rate, TPO has worked out valuation of shares sold at INR 28.80 crores, thereby proposing upward adjustment of Rs. 11.64 crores. 12.3 The appellant has vehemently argued that since the shares of Dabur Nepal were unquoted, report of independent valuer was obtained to determine the value of shares at time of sale. Independent valuer worked out the value of shares by following discounted cash flow method which is an accepted method for valuation of unquoted shares. The TPO also followed, the report of independent valuer except that TPO adopted +5% projected growth whereas independent valuer adopted -5% projected growth. The reasoning

ITA Nos. 3257 & 3492/Del/2013 114 Dabur India Ltd. given by the appellant for using (-)5% as projected growth is that there was political turmoil in Nepal state during that period and therefore atmosphere in Nepal was not conducive for normal business. This is a fact that Nepal had been facing acute political turmoil since long and it has a bearing on business climate. Further, valuation study is based on projected figures when actual figures were not available. During assessment stage, appellant furnished fresh valuation report from same independent valuer in which actual figures were used and this report shows valuation of shares at a lower figure than that reported in earlier report Now, question arises which figure of value of shares is more near to the reality - value as worked out in original valuation report with -5% projected growth OR value worked out by TPO using +5% projected growth. Subsequent valuation report using actual financial figures shows value at lower figure and it indicates that the value determined in original valuation report is naturally more close to reality than the value determined by TPO. Now, question arises whether subsequent valuation report using actual figures can be used as tool for TP study when it is obviously not contemporaneous. Purpose of TP study is to find out arm's length price by any reasonable mean when none of the prescribed method could be applied. In present case, none of method prescribed in section 92C(1) seems to be appropriate. Even TPO has accepted this position and has relied upon discounted cash flow method as used by independent valuer. The position being so, now question arises what should be correct projected growth rate. The independent valuer has

ITA Nos. 3257 & 3492/Del/2013 115 Dabur India Ltd. used -5% whereas TPO has used +5%. From financials of Dabur Nepal, it is clear that actual growth rate in FY 2002-03, 2003-04 and 2004-05 is 10%, 1% and 5% respectively. This indicates wide variation in growth rate which is result of unstable political atmosphere in Nepal state. Therefore, TPO's approach of using +5% projected growth for future years does not seem to be rational. TPO's approach is faulty on other accounts also when he has taken figures of profit by adopting +5% projected growth whereas he has not enhanced outgoings/expenses correspondingly. Further, subsequent independent valuer report which is based on actual financial figures clearly supports the valuation done with -5% projected growth in original report of independent valuer. 12.4 Moreover, it is seen that two independent parties have also sold shares of Dabur Nepal to Dabur International about three month before the sale of shares by the appellant. The sale price in case of sale transaction by two independent parties is comparable, rather same as that in case of the appellant. There is no reason why those sale transactions by third parties should not be considered as CUP (comparable uncontrolled price). It is not the case of TPO that sale transaction by Bibuti Pvt. Ltd. and Lunar Trading Company are not uncontrolled. The sale transaction by these independent parties and that of the appellant are broadly comparable, only difference being in quantity of shares sold. Then, quantity of shares sold being lesser in case of two independent parties, those should be in position to have a better bargain than the appellant.

ITA Nos. 3257 & 3492/Del/2013 116 Dabur India Ltd. Therefore, even this difference works against the appellant as far as capacity to bargain a better price is concerned. Despite this, sale price in case of the appellant is comparable to that in case of other two parties. Thus, it is seen that even CUP method supports that value of shares determined by independent valuer.” 58. As regards to the valuation of Dabur Overseas Ltd., the ld. CIT(A) held that arm’s length value of the shares was to be determined by adopting 25% projected growth rate. He, therefore, directed the assessee to furnish required financial data before the AO, so as to work out the arm’s length price of shares by adopting 25% as projected growth instead of 19% as taken in valuation report. The relevant findings have been given in paras 12.6 & 12.7 of the impugned order which read as under: “12.6 The relevant facts are that the appellant has 100% stake in Dabur Overseas Ltd., an investment company (DOS) which has its registered office at British Virgin Islands, which in turn has 76% stake in Dabur Egypt Ltd. Remaining 24% of stake in Dabur Egypt Ltd. was held by Dabur International Ltd. The appellant, Dabur India Ltd. sold its 100% stake (50,000 shares) in DOS to Dabur International Ltd. and since these shares were unquoted, it obtained a report for valuation of shares as on 31.05.2006 from an independent valuer wherein value of shares has been determined at Rs. 4.70 crores by following discounted cash flow method. In this valuation,

ITA Nos. 3257 & 3492/Del/2013 117 Dabur India Ltd. report, value of 76% stake in Dabur Egypt Ltd. has been also factored in. This value has been adopted by the appellant as ALP. At the time of sale transaction under consideration, actual figures of financials of Dabur Egypt Ltd, were available upto FY 2004-05 and for subsequent years, projected sales growth of 19% was taken in the said valuation report. The TPO has not accepted projected sales growth of 19% for FY 2005-06 onwards and has taken 89% figure of projected growth based on actual figure of FY 2004-05. By taking 89% projected growth rate, TPO has worked out valuation of shares sold at Rs. 12.71 crores, thereby proposing upward adjustment of Rs. 8.01 crores. 12.7 The appellant has vehemently argued that since the shares of Dabur Nepal were unquoted, report of independent valuer was obtained to determine the value of shares at time of sale. Independent valuer worked out the value of shares by following discounted cash flow method which is an accepted norm in this regard. The TPO also followed the report of independent valuer except that TPO adopted 89% projected growth whereas independent valuer adopted 19% projected growth. Further, valuation study is based on projected figures when actual figures were not available. During assessment stage, appellant furnished fresh valuation report from same independent valuer in which actual figures were used and this report shows, valuation of shares at a tower figure than that in earlier report The question arises which is more realistic / reasonable projected growth. The TPO has just adopted figure of 89% which was

ITA Nos. 3257 & 3492/Del/2013 118 Dabur India Ltd. reported in financials of FY 2004-05. TPO somehow ignored actual growth figures of (-)7% and, (-)5% for preceding two years. It will not be prudent to assume that projected growth for several future years shall be 89% when it had been negative in immediate preceding years. TPO has not given any cogent reason to adopt such an astronomical figure for several future years. Further, TPO in his own working has taken enhanced figure of profit by adopting 89% projected growth while outgoing/expense have not been correspondingly altered. This approach of TPO is not reasonable which is further substantiated by subsequent valuation report based on actual financials which shows value of shares at a lower figure than that based on projected figures. However, even the appellant could not explain why figure of 19% has been chosen as projected growth. In view of this, it was proposed that it will be more realistic to adopt figure of projected, growth by taking average of growth figures available for three preceding years which comes out to be 25%. The appellant did not furnish any cogent objections to this proposal.” 59. Now both the parties are in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee had got valued the shares from an independent valuer M/s Agarwal & Ahluwalia, Chartered Accountants, who had determined the value of shares on the basis of discounted cash flow method which was prevalent in the commercial

ITA Nos. 3257 & 3492/Del/2013 119 Dabur India Ltd. market and the TPO had also taken the same method of valuation in to consideration. It was further submitted that for the purpose of valuation, the valuer had adopted the actual data for the earlier 3 years i.e. 2002-03, 2003-04 and 2004-05 whereas for the subsequent 5 years he had adopted the data based on estimate. It was submitted that for the subsequent years, the growth rate was estimated at (-)5% due to uncertain well known political scenario on account of Maoist movement against the monarchy. However, the TPO was of the view that the future growth rate should have been the same as was shown in the immediately preceding year i.e. 5% and not the (-)5% as shown by the valuers on logical presumptions. It was stated that the two other shares holders namely, M/s Lunar Trading Co. and M/s Bibuti Pvt. Ltd. had also sold the shares of M/s Dabur International Ltd. on 28.03.2005 i.e. about three months before the assessee’s transaction almost on the same price and this constitutes CUP. It was pointed out that at the time of scrutiny assessment, the actual data of the subsequent years were available and the valuers prepared another valuation report on the basis of actual data available for the period 2005-06 to 2008-09 (copy of which have been reproduced by the TPO at page no. 7 of his order). It was also pointed out that on the basis of actual data available for the subsequent years, the

ITA Nos. 3257 & 3492/Del/2013 120 Dabur India Ltd. shares value was worked out in a figure of (-) Rs.2601 lakhs against the earlier projected shareholders value at Rs.3493 lakhs. Therefore, no upward adjustment was called for. It was further submitted that no comparable had been brought on record by the TPO and as per the provisions contained in Rule 10D of the Income Tax Rules, 1962, the information for document has to be maintained up to the date upto which the information or document has to be maintained by the assessee but the Rule 10D does not provide the cutoff date upto which the TPO can consider the data available in public domain for determining the ALP, in other words, there is no provision to use the data which was not available at the time of TP study available at the time of assessment and in the present case, the actual data of subsequent years was available to the TPO on the basis of which revaluation report was prepared. Therefore, on the basis of the said revaluation report, the adjustment made by the AO/TPO was not justified. The Reliance was placed on the following case laws: � Centilluim India (P) Ltd. Vs DCIT (2012) 8 TMI 83 (Bang.) � DCIT Vs Vodafone India Services (P) Ltd. (2011) 7 TMI 509 (Mum.) � Yodlee Infotech (P) Ltd. Vs ITO (2013) 11 TMI 925 (Bang.)

ITA Nos. 3257 & 3492/Del/2013 121 Dabur India Ltd. 60. As regards to the sale of shares of M/s Dabur Overseas Ltd., it was stated that the assessee had sold the shares of M/s Dabur Overseas to M/s Dabur International Ltd. for an amount of Rs.4.69 crores. It was further stated that M/s Dabur Overseas Ltd. was basically a holding company and no actual business was being carried out, though the M/s Dabur Egypt was in the business of manufacturing of hair care oil, vinegar, rose water and glucose etc. and operated in low risk area. However, in order to work out the valuation of shares of M/s Dabur Overseas Ltd. and the valuation of shares of M/s Dabur Egypt was also made, on the basis of discounted cash flow method as per the guidelines of FEMA. It was contended that while preparing the valuation report the valuer used the actual data for the financial years 2002-03 to 2004-05 and for subsequent years, in the absence of any actual data, the estimated data had been used by keeping into consideration the past history as well as the future growth potential and the political volatility present in Egypt. It was pointed out that in the financial year 2002-03, the actual growth rate was (-) 7% in financial year 2003-04, it was (-) 5% whereas in financial year 2004-05 it was 89%. However, for the subsequent years by keeping in view the various factors including the general growth trend in FMCG sector, the future growth had been estimated at 19% and the

ITA Nos. 3257 & 3492/Del/2013 122 Dabur India Ltd. operating profit margin at 9%. However, the TPO adopted the growth rate of 89% only on the basis of the just preceding previous year i.e. 2004-05. It was pointed out that the assessee furnished the revaluation report on the basis of actual data available for future years which has been reproduced by the TPO on page no. 16 of his order. It was stated that from the said report prepared on the basis of actual data, it was very much clear that growth rate in the subsequent year was not constant and it fluctuated, so much so even the operating profit margin had also fluctuated. It was pointed out that on the basis of actual data, the shareholder’s value was worked out at Rs.6.91 crores against the original value worked out at 12.91 crores. In other words, the shareholder’s value had been worked out less than the transacted value, on the basis of actual data. It was stated that the ld. CIT(A) held that the growth rate of 89% as adopted by the TPO for the purpose of valuation of shares of M/s Dabur Egypt was an astronomical figure, not based on any reason and it was highly improbable in the commercial world and that the assessee also could not explain why the figure of 19% had been choosen as projected growth and then thereafter the ld. CIT(A) held that it would be more realistic to adopt figure of projected growth by taking average of growth figure available for three preceding years which came

ITA Nos. 3257 & 3492/Del/2013 123 Dabur India Ltd. to 25%. It was stated that the department had not filed any appeal against the order of the ld. CIT(A) in relation to the valuation of shares of M/s Dabur Egypt. It was also stated that the valuation by adopting 25% projected growth rate as directed by the ld. CIT(A) was not justified when the valuer by considering the actual data of subsequent years adopted the 19% projected growth rate.

ITA Nos. 3257 & 3492/Del/2013 124 Dabur India Ltd. of (-)5% was taken on the basis of political turmoil in Nepal state. However, the TPO rejected the negative sale growth of (-)5% and had taken +5% projected growth rate to work out the valuation of shares sold at Rs.28.80 crores. In the present case, during the course of assessment proceedings, the actual figures of the financials for subsequent years were available and on the basis of those figures the valuer prepared the revaluation report which was on the lower side and indicated that the value determined in original valuation report was more closed to the reality than the value determined by the TPO. Therefore, the said valuation was rightly accepted by the ld. CIT(A) particularly when the TPO had also accepted this position and had relied upon the discounted cash flow method as used by an independent valuer. In the present case, the ld. CIT(A) categorically stated that two independent parties namely, M/s Bibhuti Pvt. Ltd. and M/s Lunar Trading Co. also sold shares of M/s Dabur Nepal Ltd. to M/s Dabur International Ltd. about three months before the sale of shares by the assessee and the sale price in case of sale transaction by those independent parties was comparable, so there was no reason to discard the sale transaction by third parties as CUP (comparable uncontrolled price), particularly when the sale transaction by those independent parties and that of the assessee were broadly

ITA Nos. 3257 & 3492/Del/2013 125 Dabur India Ltd. comparable, the only difference was in the quantity of the shares sold which was lesser in the case of two independent parties. Therefore, those parties were in a better position to have a better bargain than the assessee. We, therefore, considering the totality of the facts are of the confirmed view that the ld. CIT(A) was fully justified in holding that arm’s length value of shares as determined by the independent valuer in the case of M/s Dabur Nepal Pvt. Ltd. need not be disturbed. We do not see any valid ground to interfere with the findings given by the ld. CIT(A).

ITA Nos. 3257 & 3492/Del/2013 126 Dabur India Ltd. consideration, the actual figures of financials of M/s Dabur Egypt Ltd. were available upto financial year 2004-05 and for subsequent years, projected sale growth of 19% was taken in the valuation report. However, the TPO had not accepted projected sale growth of 19% for financial year 2005-06 onwards and had taken the figure at 89% based on actual figure of financial year 2004-05, accordingly, he determined the value of shares sold at Rs.12.71 crores. In the present case, the TPO ignored the actual growth figure of (-) 7% and (-) 5% for the preceding two years i.e. FY 2002-03 & 2003-04 respectively. He had also not given any cogent reason to adopt an astronomical figure for several future years at 89% as projected growth. Moreover, he had not altered the corresponding outgoing/expense for those future years. Therefore, the approach adopted by the TPO was not reasonable, particularly when, in the subsequent valuation report obtained from an independent valuer, the actual financials which were available during the course of assessment proceedings were adopted. In the present case, the ld. CIT(A) although directed the AO to adopt average of growth figure available for three years which came to 25% but ignored the growth rate based on actual figures for the future years. In the instant case, it is not pointed out as to how and in what manner the average growth figure taken by

ITA Nos. 3257 & 3492/Del/2013 127 Dabur India Ltd. the assessee at 19% for succeeding years, on the basis of valuation report of an independent valuer was wrong. Therefore, we are of the view that the ld. CIT(A) was not justified in adopting the figure of average growth at 25% instead of 19% adopted by the assessee. Accordingly, we modify the order of the ld. CIT(A) to this extent that the AO for the valuation of shares of M/s Dabur Overseas Ltd., shall adopt the figure of projected growth by taking average of growth figure at 19% instead of 25% directed by the ld. CIT(A). Accordingly, this issue is decided in favour of the assessee and against the department.

ITA Nos. 3257 & 3492/Del/2013 128 Dabur India Ltd. omitted and no disallowance could have been made in respect of any sum payable by the employer by way of contribution to PF or another fund for the welfare of employees if the sums are actually paid before the due date of filing the return u/s 139(1) of the Act. The reliance was placed on the following case laws: � Allied Motors Vs CIT (2002) TIOL 558 (SC) � CIT Vs Alom Extrusions Ltd. (2009) TIOL 125 (SC) 67. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 15 of the impugned order as under: “I have carefully considered the submissions made by the appellant. The AO has observed that as per point no. 16(b) of Form 3CD, employees contribution to EPF/VPF/ESI has been deposited by the appellant after due date as per respective Acts. However, it is undisputed that all these payments have been made before due date of filing the return of income. Therefore, such payments cannot be disallowed as per provisions contained in 1st proviso to section 43B, when 2nd proviso to section 43B has been omitted w.e.f. 01.04.2004. In view of position of law on the issue, I hold that addition made by the AO of Rs. 210,614 is to be deleted. The ground of appeal is accordingly allowed.” 68. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the ld. CIT(A) categorically

ITA Nos. 3257 & 3492/Del/2013 129 Dabur India Ltd. stated that all the payment had been made by the assessee before due date of filing the return of income u/s 139(1) of the Act. Therefore, such payments could not be disallowed as per the provisions contained in first proviso to Section 43B of the Act. The view taken by the ld. CIT(A) was inconsonance with the ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs Alom Extrusions Ltd. (2009) TIOL 125 (supra). We, therefore, do not see merit in the appeal of the department on this issue.

ITA Nos. 3257 & 3492/Del/2013 130 Dabur India Ltd. allowed to the assessee in the preceding years. It was stated that the said expenditure was neither excessive nor unreasonable and was fully allowable u/s 37(1) of the Act. It was also pointed out that the similar disallowance was deleted by the ld. CIT(A) for the assessment year 1995-96 and the department had not preferred any appeal against the said order. Therefore, the disallowance made by the AO may be deleted.

ITA Nos. 3257 & 3492/Del/2013 131 Dabur India Ltd. then ld. CIT(A) for the assessment year 1995-96 which was not challenged by the department. Therefore, on the principle of consistency also the ld. CIT(A) was justified in deleting the impugned amount, particularly when nothing was brought on record to substantiate that the personal element was actually involved. The expenses were incurred by the assessee on account of entrance fee and subscription for various club partnership in order to promote the business interest which was neither personal nor resulted in any benefit in the capital filed to the assessee. We, therefore, do not see any merit in this ground of the departmental appeal.

ITA Nos. 3257 & 3492/Del/2013 132 Dabur India Ltd. 76. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the above the issues relating to the above said disallowance were decided in favour of the assessee by the then ld. CIT(A) for the assessment year 2005-06. It was further submitted that the disallowances u/s 40(a)(ia) of the Act were the additional sum of business income, so it was eligible for deduction u/s 80IB/80IC of the Act.

ITA Nos. 3257 & 3492/Del/2013 133 Dabur India Ltd. business or profession. It was further stated that the recovery of rent was made from the workers who were provided dormitory facilities inside the factory premises, so there was a close proximity with the running of the undertaking and that the assessee had received a token sum which at best can be termed as recovery of maintenance cost of premises or upwell of the property which goes to reduce the maintenance cost of the property. It was also stated that such a recovery was not a rental income of the assessee but was in the nature of reducing its maintenance cost of the factory premises. Therefore, it was eligible for deduction for computation u/s 80IB/80IC of the Act.

ITA Nos. 3257 & 3492/Del/2013 134 Dabur India Ltd. allowed to stay in factory compound) should be taken for calculation purpose in arriving at income of various units eligible for deduction u/s 801B/80IC. In this connection, it is held that income arising out of scarp sales is generated from core integral activities of these units and therefore income out of scrap sale has to be taken for working out the profits of eligible unit for purpose of 80IB/801C. As regards the rental income received from factory workers, it is seen that given the facts that this is just token amount received from workers who are allowed to stay at the factory premises and is received as for upkeep of factory building, this amount of recovery which has been termed as rent is also basically income of that business unit having close proximity to running of business, which accordingly is eligible for computation of deduction u/s 80IB/80IC. As regards the disallowances made u/s 40(a)(ia) and 43B are concerned, it is held that once these disallowances are made from computation of business income which is in accordance with provisions contained in section 30 to 43D, it is but a logical corollary that deduction u/s 80IB/80IC would also be required to be given on eligible profits taking into account such disallowances. In this connection, reliance is placed on decision CIT v Gem Plus Jewellery India Ltd. 233 ITR 248 which has been relied upon by the appellant as also on case of Raj Kumar Exports Pvt. Ltd. v ACIT (2009- T1OL-808-ITAT-MAD). As a result, the above grounds of appeal are decided in favour of the appellant."

ITA Nos. 3257 & 3492/Del/2013 135 Dabur India Ltd. 21.2 In view of above, following the reasoning given by my predecessor for AY 2005-06, I hold that all the three items, i.e. disallowance u/s 40(a)/(ia), income from sale of scrap and rental income constitute eligible profits of the units for purpose of computing deduction available u/s 80IB/IC. The grounds of appeal are accordingly allowed.” 80. Now the department is in appeal. The ld. DR strongly supported the order passed by the AO and reiterated the observations made in the assessment order.

ITA Nos. 3257 & 3492/Del/2013 136 Dabur India Ltd. the facts for the year under consideration and preceding year are identical.

ITA Nos. 3257 & 3492/Del/2013 137 Dabur India Ltd. 87. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the additional ground has been raised by the assessee relating to the ESOP expenses which were debited in the profit and loss account but added back while computing the income allegedly under some misconception of facts and law. The issue raised by the assessee is a legal issue.

ITA Nos. 3257 & 3492/Del/2013 138 Dabur India Ltd. assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal.” It has further been held that: “Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.” 89. We, therefore, by keeping in view the ratio laid down by the Hon’ble Supreme Court in the aforesaid referred to case admit the additional ground raised by the assessee. However, it is an admitted fact that this issue has been raised by the assessee first time and the authorities below had no occasion to deal with this issue. We, therefore, deem it appropriate to remand this issue to the file of the AO/TPO to be decided in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

ITA Nos. 3257 & 3492/Del/2013 139 Dabur India Ltd.

Sd/- Sd/- (Sudhanshu Srivastava) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 12/04/2017 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR