COLGATE-PALMOLIVE (INDIA) LIMITED ,MUMBAI vs. PRINCIPLE COMMISSIONER OF INCOME TAX -6, MUMBAI

On 23/02/202, assessee filed detailed reply to the questionnaire which is exhibited at pages 85 to 90 of the paper book with supporting evidence from pages 91 onwards. The relevant reply for the issues under consideration reads as under:- “10) With respect to the Deductions under chapter VI-A during the year under consideration, we submit the below specified details as requested by your goodself: a) Deduction under Chapter VI-A are claimed under section 80G of the Act - Donations to certain funds, charitable institutions, etc for INR 1 5,042,600/- and under section 80JJAA of the Act for employment of new employees for INR 7,667,132/-. In relation to section 80JJAA we have claimed INR 4,711,690 as deduction carry forward for AY 2016-17 (second year), INR 2,356,117 as deduction carry forward for AY 2017-18 (first year) and INR 5,99,325 as deduction carry forward for AY 2015-16 (third year) since as per provisions of section 80JJAA deduction is available for 3 assessment years starting from the year in which the employment is provided. b) We enclosed herewith donation receipts for the amount claimed under section 80G at Annexure 3 along with below details in brief: Name of Donnee INR Eligible INR Network in Thane By People 1,535,200 50% 767,600 Water For People India Trust 13,000,000 50% 6,500,000 Pratham Mumbai Education 1,000,000 50% 500,000 Seva Mandir 8,000,000 50% 4,000,000 Action Aid Association 50,000 50% 25,000 Social Empowerment and 6,500,000 50% 3,250,000 Economic Development Grand Total 30,085,200 15,042,600 c) Also enclosed audit report as certified by chartered accountant in Form 10DA for AY 2015-16, AY 2016-17 and AY 2017-18 at Annexure 4 respectively for claiming deduction under section 80JJA of the Act.”

In respect to other query relating to employee stock ownership plan (ESOP), the reply of the assessee reads as under:- 12) With respect to "Any Other Amount Allowable as deduction "claimed in Schedule BP of return of INR 203,366,118 we submit details as follows: Particulars Amount in INR Amount Allowed as Deduction/Considered separately - (A) 244A Interest on Income tax Refund - considered separately and offered to tax under Income from other sources 5,257,803 Actual expense of Employee Stock Option exercised during the year 135,061,022 As per IND AS Notional Interest income recognized on Security Deposit 15,469,173 Profit on sale of Fixed assets 56,800 Reversal of Provision for Bad Debts which was disallowed in AY 2015-16 14,811,465 Actual payment of Gratuity and Pension 79,067,369 VRS deduction u/s 35DDA of the Act - 1/5th of the amount being 2nd year of deduction 58,510,841 Total of Deduction Claimed - (A) 308,234,473 Add: Amount disallowed in computation of Income - (B) As per IND AS the Company has fair valued these security deposits. Difference between the fair value and transaction value of the security deposit has been recognized as prepaid expense. Since it is notional and debited to P&L it is disallowed 16,298,560 Employee Stock Option debited to P&L - Under Ind AS, the cost of equity shares is recognised based on the fair value. 88,569,795 Total disallowed - (B) 104,868,355 Net Amount allowed as deduction in ITR (A - B) 203,366,118

At this juncture, it would be pertinent to consider the computation of income for the year under consideration and the same reads as under:- Colgate - Palmolive (India) Limited AY 2017-18 Computation of Income under Normal Provision TAX COMPUTATION FOR THE YEAR ENDED MARCH 31,2017 Net Profit before tax as per P&L 8,514,292,799 ADD: DISALLOWANCES Donation 165,200 Depreciation/Amortisation as per books 1,332,427,842 Disallowance under section 14A (As per TAR) 145,150 Corporate Social Responsibility 155,806,642 Amount of Interest paid to Micro, Small and Medium Enterprises (As per Sec 23 of MSMED) 2,897,173 Expenses allocable to Income from House Property 359,109 Municipal Tax allocable to Income from House Property 1,170,880 Income under section 41(3) - Sale of RTC asset 55,556 Employee Stock Option debited to P&L - IND AS adjustment 88,569,795 Disallowance under section Sec 40 (a) (as per TAR) 113,008,030 Disallowance under section Sec 43B(as per TAR) 32,337,902 Amortisation of Prepaid Expenses for Security Deposit (INDAS) 16,298,560 VRS expenditure during the year 1,743,241,840 LESS: ALLOWANCES Exceptional Items Employee Stock Option credited to P&L - IND AS adjustment 135,061,022 Amortisation of Notional Interest income for Security Deposit (INDAS) 15,469,173 Profit on sale of Fixed assets 56,800 Provision for Bad Debts - AY 15-16 14,811,465 Depreciation as per Income tax (As per TAR) 1,781,318,831 244A Interest on Refund - Credited to P&L and considered separtely 5,257,803 Allowance under 32AC 266,922,835 Allowance under 32AD 57,421,231 Gratuity + Pension benefits considered in Comprehensive Income 79,067,369 Interest Income considered separately 276,423,878 Rental Income considered separately 19,845,000 Deduction under section Sec 43B(as per TAR) 3,094,518 Deduction under section Sec 40 (a) (as per TAR) 117,471,211 VRS deduction u/s 35DDA 58,510,841 2,830,731,977 Income from Business or Profession 7,426,802,662 Income from other sources 244A Interest on Refund 5,257,803 Interest Income 276,423,878 Less: Tax free Interest income 22,221,350 254,202,528 259,460,330 Total Income from other sources Income from House Property Rental Income 19,845,000 Municipal Tax 1,170,880 Less: 30% 18,674,120 5,602,236 13,071,884 13,071,884 Chapter VI A deductions: Section 80G(2) -Donations 15,042,600 22,709,732 Section 80JJAA - Workmen 7,667,132 GROSS TOTAL INCOME 7,699,334,876 TOTAL INCOME ROUNDED TO 7,676,625,145 7,676,625,140 Tax @ 30% on Other than Capital Gain 2,302,987,542 Tax @ 20% on Capial Gain 2,302,987,542 Surcharge @ 12% 276,358,505 Education CESS @ 3% 77,380,381 Total tax payable including surcharge 2,656,726,428 Tax payable u/s 115JB -MAT 1,792,136,224 Higher of the two 2,656,726,428 Less: MAT credit Net tax liability 2,656,726,428 Less: Credit u/s 91 27,414,267 Less: Tax Deducted Source 2,629,312,161 Balance Payable Less: Advance Tax paid June 15,2016 350,000,000 Sept 15,2016 850,000,000 Dec 14,2016 970,000,000 Mar 15,2017 570,000,000 2,740,000,000 Balance payable/(Refundable) (110,687,839) Add: Interest u/s. 234C Balance Refundable (110,687,839)

A careful perusal of the aforementioned computation of income show that the assessee has added Rs.15,58,06,642/- being expenditure claimed under Corporate Social Responsibility (CSR). It can also be seen that the assessee has added employee stock option debited to its P&L account amounting to Rs.8,85,69,795/- and thereafter claimed a deduction of Rs.13,50,61,022/- and deduction under Chapter VIA u/s 80G(2) of the Act was claimed at Rs.1,50,42,600/-.

After considering the reply of the assessee to the first notice, on 16/03/2021, the AO issued another notice which is exhibited at page 115 to 119 of the paper book. The relevant queries reads as under:- “1. With respect to Foreign Outward Remittances, made during the year please provide following: 1a) Kindly submit details of all the payments made under various to no-residents in the below format. Also explain the source of Foreign remittance made with supporting documents: Name of Payee Amount (Rs.) Country of Residence Payee of Nature Payment of 1b) Kindly explain for each such payment, weather income tax was not deducted or was deducted at lower rate. If you have any certificate to that extent from the Tax Department, please submit copy of the same. 1c) For all such payments where income tax is not deducted or deducted at lower rate, kindly submit copies of bills and TRC submitted by those parties along with copies of agreements entered into with them for those transactions. 1d) Please reconcile the amount of foreign remittances with the 15CA/CB certificates available with the department for the year consideration. 1e) kindly provide the complete bank account statement, highlighting such transactions.

With respect to Any Other Amount Allowable as deduction "claimed in Schedule BP of return, please furnish the justification on allowability of these deductions with supporting and legal arguments with respect specific section under Income tax Act.”

On 24/03/2021, the assessee filed a detailed reply which is exhibited at pages 126 to 131 of the paper book supported with documentary evidence placed at pages 132 to 136 of the paper book. The relevant part is extracted for ready reference:- 2) In relation to Chapter VIA deduction payment details, we have claimed deduction under section 80G of the Act and we have attached herewith bank statements at Annexure 3 highlighting major payments. Name of Donee INR Eligible INR Network In Thane By People 1,535,200 50% 767,600 Water For People India Trust 13,000,000 50% 6,500,000 Pratham Mumbai Education 1,000,000 50% 500,000 Seva Mandir 8,000,000 50% 4,000,000 Action Aid Association 50,000 50% 25,000 Social Empowerment And Economic Develo 6,500,000 50% 3,250,000 Grand Total 30,085,200 15,042,600 5) In relation to “Any Other Amount Allowable as deduction” we had already provided a break up in our submission dated March 5,2021. We further submit the brief explanation at Annexure 13 and supporting attached from Exhibit 1 to 4.” Sr No. Particulars Amount in INR 1 244A Interest on Income tax Refund - considered separately and offered to tax under Income from other sources. Kindly refer page 43 of ITR 6 wherein income has been offered to tax under schedule "Schedule OS Income from other sources" Actual expense of Employee Stock Option exercised during the year - As informed earlier the company has adopted IND AS wherein the accrual of stock option expenses are added back and actual expenses is claimed as dedcuton. Accordingly, during the year the company has added back INR 885.70 lacs (as per point no. 8 of this table). and claimed actual expenses of INR 1350.61 lacs as dedcution. Please find attached payment debit notes at Exhibit 1 3 IND AS Notional Interest income recognized on Security Deposit - since it is notional income as per IND AS the same is excluded from computation of taxable income. Under the IGAAP, interest free lease deposits (that are refundable in cash on completion of the lease term) are recorded at their transaction value. However under Ind AS, all financial assets are required to be recognised at fair value. 4 Profit on sale of Fixed assets as per Note 27 of FY 2016-17 financials 5 Reversal of Provision for Bad Debts which was disallowed in AY 2015-16. We had disallowed the provision of INR 994.25 lacs in the computation of taxable income and offered the same tax in AY 2015-16. During the year against the said provison for bad ebts the assessee has reversed INR 148.11 lacs hence we have reduced this amount in the computation of income of AY 2017-18. The same was debited in expenses under: Other expenses in AY 2015-16. Attached financials of FY 2014-15 at Exhibit 2, please refer page 83, Note 27: Other expenses "Provision for Doubtful Debts" of INR 994.25 lacs. 6 This total amount of gratuity of INR 1273.57 lacs was paid in october 2017 (before return filing date). The total gratuity payment was INR 1273.57 whch can be traced in the attached bank statemnet at Exhibit 3. Out of the total amount of gratuity of INR 1273.57 lacs the company debited INR 488.32 lacs to P&L following IND AS accounting treatment and balance amount of INR 784.96 lacs is debited in OCI and the same has been claimed as deduction. We have accordingly claimed deduction for the amount paid as recognised in OCI since the same was not reduced from Profit Before Tax amount in the financials. 5,257,803 135,061,022 15,469,173 56,800 14,811,465 79,067,369 7 VRS deduction u/s 35DDA of the Act - 1/5th of the amount being 2nd year of deduction. We had incurred INR 29.26 crore expenses which is allowable under section 35DDA of the Income tax Act to be claimed over a period of 5 years. Attaching VRS scheme for your reference at Exhibit 4. 58,510,841 Add: Amount allowed in computation of Income - (A) As per IND AS the Company has fair valued these security deposits. Difference between the fair value and transaction value of the 8 security deposit has been recognized as prepaid expense. Since it is notional and debited to P&L it is disallowed 9 Employee Stock Option debited to P&L - Under Ind AS, the cost of equity shares is recognised based on the fair value. Less: Amount disallowed /added back in computation of income- (B) Net Amount allowed as deduction in ITR (A-B) 16,298,560 88,569,795 104,868,355 203,366,118

Page 120 of the paper book is the copy of the e-mail sent along with annexures. All these evidences go on to show the level of enquiry made by the AO at the time of the scrutiny assessment proceedings. Assuming juri iction conferred upon him by the provisions of Section 263 of the Act, the PCIT issued following showcause notice to the assessee:- GOVERNMENT OF INDIA MINISTRY OF FINANCE INCOME TAX DEPARTMENT OFFICE OF THE PRINCIPAL COMMISSIONER OF INCOME TAX PCIT, Mumbai-6 To, COLGATE PALMOLIVE INDIA LTD COLGATE RESEARCH CENTRE, MAIN STREET POWAI MUMBAI 400076, Maharashtra India PAN/TAN: AAACC4309B AY: 2017-18 DIN & Notice No: ITBA/REV/F/REV1/2023- 24/1060281672(1) Dated: 30/01/2024 NOTICE FOR THE HEARING M/s/Mr/Ms Subject: Notice for Hearing in respect of Revision proceedings u/s 263 of the THE INCOME TAX ACT, 1961-Assessment Year 2017-18. In this regard, a hearing in the matter is fixed on 08/02/2024 at 03:00 PM. You are requested to attend in person or through an authorized representative to submit your representation, if any alongwith supporting documents/information in support of the issues involved (as mentioned below). If you wish that the Revision proceeding be concluded on the basis of your written submissions/representations filed in this office, on or before the said due date, then your personal attendance is not required. You also have the option to file your submission from the e-filing portal using the link: incometaxindiaefiling.gov.in 1. You have filed the return of income for AY 2017-18 on 29.11.2017 declaring a total income of Rs. 767,66,25,140/-. The assessment was completed u/s 143(3) rws 144C(13) on 17.02.2022 determining the total income at Rs. 1329,94,00,950/-.

On perusal of assessment order u/s.143(3) rws 144C(13) dated 17.02.2022, it is observed that the order is erroneous and prejudicial to the interest of revenue for the following reasons:

1 On verification of the records, it is seen from the P & L A/c and Computation of Income, that you have incurred expenses of Rs. 15,58,06,642/- and Rs. 1,65,200/- towards CSR expenses and "Donation", which have been added back in the computation of income as disallowable. It is further seen that a deduction of Rs.1,50,42,600 u/s.80G, has been claimed against the said expenses as “Donation”, as per qualifying limit, which was allowed by the department, although the assessee is eligible to claim a deduction of only Rs. 82,600/-. Further, as per Finance Act, 2014, CSR expenses is not an allowable expenditure u/s.37(1) of the Act. Hence, excess expenditure to the extent of Rs. 1,49,60,000 (1,50,42,600-82,600) has been allowed in the assessment order dated 17.02.2022, thereby rendering the assessment erroneous.

2 Similarly, it is also observed that the assessee has debited Rs.8,85,69,795/- towards Employee Stock Option Plan Expenditure-Ind AS Adjustment, which was added back to computation of total income. Further, it is also seen from the computation of income, the assessee has claimed deduction of Rs.13,50,61,022/- towards Employee Stock Option Plan Expenditure-Ind As Adjustment (Transfer to employee) which was accepted and allowed by the department. However, further scrutiny reveals that the Shares issued were of the parent company and not the assessee, hence such expenses should not be covered under the ESOP expenses of this company as its share position remains totally unchanged and ought to have been disallowed. Failure to do so has lead to excess allowance of Rs.13,50,61,022/-, thereby rendering the assessment order dated 17.02.2022 erroneous.

In view of the above, it is seen that the order passed u/s 143(3) rws 144C(13) dated 17.02.2022 is erroneous and prejudicial to the interests of revenue and is required to be set-aside on the above issue by invoking the provisions of section 263 of the Act. Hence, it is requested to show-cause as to why the same should not be quashed/set aside for fresh adjudication after considering the facts as discussed above.

In this connection, you are hereby given an opportunity of being heard and your case is fixed for hearing/making submission online on or before 08.02.2024 at 03.00 PM. In case of non-compliance, it will be presumed that you have no objection to the proposed revision u/s 263 of the Act, of the assessment order passed by the Assessing Officer u/s. 143(3) rws 144C(13) dated 17.02.2022. ANURAG SRIVASTAVA PCIT, Mumbai-6

Insofar as the issue relating to allowability of expenses on account of employee stock options, it was explained that Colgate Group has a global employee stock option policy where the employees of the Colgate Group company are given an option to acquire the shares of Colgate-Palmolive Company, US, for a prescribed grant price. When the employees of the group company exercise such option, the Colgate- Palmolive Company, US, issues the shares to the employees at the pre- decided grant price and recovers the differential cost (i.e. difference between prevailing market price at the time of exercise less grant price) from the concerned Colgate Group Company. The said difference is also treated as income in the hands of the employees and taxed as perquisite.

It was further explained that the company recognized the ESOP expenses as a debit to P&L over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, as determined on the grant date, based on the fair value of the options. It was further pointed out that such charge to P&L account is disallowed while computing the taxable income as has been show in the computation of income elsewhere.

This claim of the assessee was claimed to be supported by the decision of the Co-ordinate Benches in the case of Novo Nordisk India (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle-12(2), Bangalore [2014] 42 taxmann.com 168, Northern Operating Services (P.) Ltd. vs. Joint Commissioner of Income-tax [2023] 149 taxmann.com 52, and the decision of the Special Bench in the case of Biocon Ltd. [2013] 35 taxmann.com 335 (SB) which has been subsequently approved by the Hon'ble Karnataka High Court in the case of Biocon Ltd. [2020] 121 taxmann.com 351. 11. Insofar as the claim of CSR expenses is concerned, it was pointed out that in the computation of income exhibited elsewhere, the assessee has disallowed the CSR expenses of Rs.15,58,06,642/-. It need to be pointed out here specifically that the claim of deduction u/s 80G is a different issues and the same has been explained by supporting evidence mentioned elsewhere. Considering the assessment proceedings, we are of the opinion that the AO has examined each and every issue thoroughly with vortex of evidence. Therefore, it would be unjust if the PCIT says that the impugned assessment order was erroneous and prejudicial to the interest of the revenue because of non- enquiry on part of the AO.

While coming to the aforementioned conclusion, we draw support from the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd., 243 ITR 83 (SC), where the Hon'ble Supreme Court has laid down the following ratio:- “A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of juri iction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order 7 is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous ".

Further, the Hon'ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bombay), while dealing with identical issue has held as under:-

We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji J. (as his Lordship then was) in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT . In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated it is a quasi judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination