MARICO LTD.,MUMBAI vs. ADDL.C.I.T. RG. 9(2), MUMBAI

8858/11 &8713/11-Marico

Arithmetic Mean 1.17 1.45 Assessee 11.93 In view of the above the assessee claimed that the royalty transaction was at ALP.The TPO found that the assessee had entered into agreement with two of its AEs.He tabulated the royalty charge from MBL and MME as under :- MBL MME Rate of royalty on sales @0.5% from 01.4.2006 to 30.9.2006 2.5% for FY 2006-07 made by AEs for @1% from 01.10.2006 to 31.3.2007 ‘Parachute’ brand Royalty amount charged Rs.48,87,000/- Rs.45,86,000/- He asked the assessee to show cause as to why rate charged to MME and MBL were different for the similar brand and why royalty rate of 2.5% was not used to charge MBL as well.Vide its letter dtd.25.10.10,the assessee filed detailed submission in that regard.After considering the explanation of the assessee,the TPO held that as per the provisions of section 92(1)income arising from IT.s had to be computed having regard to ALP,that no enterprise would charge lower rate of royalty under Arm’s length circumstances,that the royalty charged by the assessee to MBL did not comply with its Arm’s length standard, that transaction with other AE of an assessee can very well be considered for understanding the transaction and determining the ALP thereof,that Parachute brand was well tested in India and overseas market, that the benefits would be surely enjoyed by MBL in the near future without much brand development expenditure,that the argument of the assessee about non recognition of brand parachute could not be accepted,that the assessee was not justified in arguing that MBLwould have to incur brand development expenditure to popularise the parachute brand in Bangladesh.He further held that TNMM was not the most appropriate method to determine ALP of the royalty payment,that it would be reasonable and appropriate to benchmark the transaction by taking royalty rate charged to the other AE i.e.@2.5%.Accordingly,he determined the ALP of the royalty to be charged to MBL as under- Period Sales made Rate of Royalty Arm’s ALP of the Transfer by AEs on royalty amount length rate Transaction(B) Pricing 3

8858/11 &8713/11-Marico which royalty charged received by to be (Amt. In Rs.) adjustmetn is charged the assessee charged (B-A) (Amt. In Rs.) (CUP ) (Rs.) 01.4.2006 to 29,32,97,000 0.50% 14,66,485/- 2.5% 73,32,425/- 58,65,940/- 30.9.2006 1.10.2006 to 34,19,30,000 1% 34,20,515/- 2.5% 85,48,250/- 51,27,735/- 31.3.2007 TOTAL 48,87,000/- 1,58,80,675/- 1,09,93,675/- In view of the above he proposed an adjustment of Rs1.09 crores to the value of the IT pertaining to royalty payment. 2.1.The TPO took notice of the break up interest on loan to AE and tabulated the same as follows: S.No. Name of AE/Country Purpose of loan Rate of Interest (%) Interest (Rs. In Crs.) 1. M/s. Sundari LLC, USA Working Capital LIBOR + 150 bps/6% 1.65 2. M/s. MME, UAE Working Capital 9.5% 4.36 TOTAL 6.01 He called for an explanation in that regard. It was argued that the assessee had obtained a working capital loan in AY.2004-05 of US$2.15million from HSBC @LIBOR + 150 basis points(BPS),that during AY 2005-06 the rate was reduced to LIBOR + 100 bps, that it had charged the same rate, i.e.LIBOR + 150bps on the loans advanced to its AE prior to AY 2006-07, that it had charged interest @ 6% on loans made available to its AE from AY.2006-07 onwards-except the loan given in AY.2006-07 on which interest @ LIBOR + 150 bps was charged to M/s. Sundari LLC, USA,that both the transactions took place at the same period of time and in the same currency i.e. USD, that the loan to AE was secured by all the assets of the AE, that it had not given any security to HSBC banks while obtaining loan from it, that loan taken from HSBC was repaid on 2.2.2006, that as per the provisio to Rule 10B (4) of the Income tax Rules,1962 the rates charged by HSBC for AY.2006-07 could be considered CUP for justifying ALP.The TP found that,during the year under consideration, the assessee had given a fresh loan to M/s. Sundari LLC, equivalent to USD 12.50 lakhs.He tabulated the monthly interest rates charged to the AE and charged by HSBC to the assessee.Analysing the table,he held that the interest charged by the assessee from the AE was higher than the interest paid by the assessee to 4

8858/11 &8713/11-Marico HSBC.He found that the AE had purchased the TM ‘Fiancee’ as well as shares of Egyptian American Investment and Industrial Developmental Company for a total consideration of USD 35.1 Million, that the assessee had agreed to finance the consideration initially to the extent of Rs.17.6 million charging interest @9.5%, that the AE got part of its funding finance from ICICI Bank Behrain at the interest rate of 5.5%. The TPO observed that the assessee had charged interest at 9.5% to its AE i.e MME, that it should also have charged at least the rate of interest at the rate 9.5% p.a. to Sundari LLC, as well, that cost of funds had no relevance.In view of the above he concluded that the assessee should have charged the interest rate of 9.5% to Sundari LLC.He proposed following adjustment:

Date Amount of outstanding loan No. of days for which Arm’s length interest to be amount (in USD) interest to be charged charged @ 9.5% p.a. to M/s. Sundari, LLC 1.4.2006 32,13,973 365 305,327 1.4.2006 15,97,842 365 151,795 4.4.2006 1,00,000 362 9,422 28.4.2006 1,00,000 338 8,797 30.5.2005 1,00,000 306 7,964 16.6.2006 50,000 289 3,761 17.7.2006 1,00,000 258 6,715 14.8.2006 1,00,000 230 5,986 31.8.2006 1,00,000 213 5,544 06.10.2006 2,00,000 177 9,214 16.11.2006 1,00,000 136 3,540 06.12.2006 1,00,000 116 3,019 17.01.2007 1,00,000 74 1,926 12.02.2007 1,00,000 48 1,249 Total 524,260/- Arm’s length interest to be charged in Rs.@45.08(A) 2,36,32,987/- 1,65,45,240/- Amount charged by the assessee (B) Transfer pricing Adjustment (A-B) 70,87,747/- 2.3.The TPO found that the assessee had provided Corporate Guarantee(CG) to Citibank (India)so that MBL Industries Ltd.(MBLIL) could avail the credit facility in Bangladesh,that it had also provided CG to ICICI Bank Behrain so that MME could avail the credit facility from ICICI Bank UAE.He found that the assessee had charged following CG fee from its AE.s

8858/11 &8713/11-Marico S.No. Name of AEs Amount of Guarantee(Rs.) Rate of Guarantee No. of days Amount Fees 1. M/s.MBL 32,62,50,000 0.8% 282 20,16,493 2. M/s.MBL 16,31,25,000 0.8% 83 2,96,753 3. M/s.MBLIL 16,31,25,000 0.8% 83 2,96,753 4. M/s.MME 87,00,00,000 0.8% 111 21,16,603 The TPO observed that for a bank providing the CG was normal business activity, that for a company engaged in manufacturing of consumer products providing CG could not be a normal business activity, that if the AE would be bankrupt or would default in making payment with the bank, the assessee would be liable to pay the loan to the bank, that such a situation warranted a higher price, that the assessee should have charged from the AE,that to cover the risk a mark up of 400 bps on the rate charged by HDFC would be appropriate, that it had exposed itself to a big risk by providing the CG.Accordingly,he worked CG charges as under :- SN. Name of AEs Amount of Arms’slength No. of Arm’s Length Amount TPpricing Guarantee (Rs.) Guarantee days Guarantee already adjustment charge Fees(Rs.)(A) charged (Rs.) (A-B) 1. M/s.MBL 32,62,50,000 4.80% 282 1,20,98,959 20,16,493 1,00,82,466 2. M/s. MBL 16,31,25,000 4.80% 83 17,80,521 2,96,753 14,83,767 3. M/s.MBLIL 16,31,25,000 4.80% 83 17,80,521 2,96,753 14,83,767 4. M/s.MME 87,00,00,000 4.80% 111 1,26,99,616 21,16,603 1,05,83,014 TOTAL 2,83,59,616 47,26,603 2,36,33,014 Accordingly,an adjustment of Rs.2.36 crores was proposed by the TPO under the head guarantee fees.After receiving order of the TPO, the AO passed the order making addition of all the three proposed additions.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).It made elaborate submissions before him with regard to royalty.With regard to interest on loans,the assessee submitted,before the FAA,that it had made strategic investment by acquiring 63%equity stake in Sundari LLC,vide purchase agreement dt.26.2.2003,that it increased stake to 75.5% during FY.2004-05, that pursuant to the said agreement it extended revolving credit loan,that the rate of interest charged for loans given,prior to 9.6.2005,wasLIBOR+150bps,that vide amendment dated 9.6.2005 and 29.08. 2005 it increased the overall revolving credit loan amount,that the rate of 8858/11 &8713/11-Marico interest fixed was not less than the prevailing bank rate in India as notified by the RBI,that the loan given to Sundari was secured by all of its assets,that the average LIBOR rate during the year under consideration was 5.29%,that the assessee had charged interest to its AE at LIBOR+ 150bps / 6%p.a,that the rate of interest charged by the assessee to its AE was comparable and was at Arm’s length.The assessee made a reference to the RBI guidelines in respect of borrowings.Referring to the issue of CG the assessee argued that it had charged GC using external CUP as benchmark,that bank guarantee commission ranged from 0.7% to 1% as per the quotation dtd.31.03.2006 of the HDFC Bank,that it had provided CG to its AEs in order to facilitate them to avaial credit facilties, that CG was provided to support the AEs and to protect its own business interest.

4.After considering the submissions of the assessee and the orders of the TPO/AO, with regard to the royalty payment,the FAA held that the assessee had received payment on account of brand royalty from its AE.s located in Bangladesh and UAE,that the TPO had used the controlled transaction for the purpose of comparability,that he did not consider the factors like geographical differences and the subject matter of royalty, that the expenditure incurred by MBL for advertisement etc. were not same as that of the UAE AE.Finally,he held that the action of the TPO in benchmarking the IT of assessee ,relating to royalty from MBL against the rate of royalty received by it from MME,was not sustainable.

4.1.With regard to interest charged by the assessee from its AE,the FAA held that the assessee had given loan to its AE-Sundari LLC-and had charged interest @ 6%,that it had bench marked the IT with its own cost of funds i.e. interest charged to it by HSBC in the immediate preceding year, that in the AY. 2004- 05 the assessee had availed working capital loan from HSBC,that rate of interest

8858/11 &8713/11-Marico charged with Dynamics of economy,that there was nothing to prove that rate of interest charged to the assessee by HSBC had any influence in determining the transfer price of the interest rate charged to the AE,that the TPO had taken rate of interest at 9.5%,that the assessee had charged the said rate of interest to its one of the AEs, that formula adopted for benchmarking suffered from the fact of the rate being charged to one of the AEs of the assessee by it,that,thus,it was a controlled transaction,that for the foreign currency loan the rate applicable should be LIBOR based,that the rate adopted by TPO and consequent bench - marking was not as per law,that there was no independent CUP rate available to benchmark the IT.Accordingly, he considered it reasonable to look into the RBI guidelines that were prevailing in respect of External Commercial Borrowings (ECB).He directed the assessee to provide certain details about ECB.Referring to the Master Circular No.07/2006-07 dated 1.7.2006,of the RBI,he held that rate of interest had to be fixed at 7.4012%.Partly allowing the appeal of the assessee,he restricted the disallowance to Rs.18.66 lakhs.

4.2.Deciding the issue of guarantee commission,the FAA held that CG was an IT,that the assessee itself had shown the transaction as IT in form 3 CEB,that it had charged GC@0.8% from its AEs,that in the earlie year GC @ 0.8% was accepted by his predecessors.Reversing the order of the TPO/AO,he held that rate of GC adopted by the assessee was justifiable.

5.Before us,Departmental Representative (DR) contended that the TPO had rightly made adjustment about the difference in the royalty,that there was no justification for charging royalty at lower rates from Bangladesh AE ,that the TPO had used the LIBOR+bps method to determine the ALP,that CUP method was applicable to the facts of the case, that if the AE.s had taken loan from outsiders they would be required to pay more interest,that non-compete fee was not an asset,that no depreciation was allowable,that the ratio of Meghalaya Steel

8858/11 &8713/11-Marico was not applicable to the facts of the case, that the Leasing was not the business of the assessee, that there was no first level connection between the income earned by the assessee and deduction claimed.

The Authorised Representative(AR)argued that internal CUP could not be applied by comparing two controlled entities,that the royalty was paid to MBL since 2001,that in all the earlier years the TPO had allowed the royalty payment without any adjustment.He relied upon the cases of Akzo Noble Chemicals Ltd. (1477/PN/2010);Tech Mahindra Ltd.(12taxmann.com132),Skoda Auto India Pvt. Ltd.(30 SOT 319).

5.1.Regarding the interest issue,the AR stated that the rate for LIBOR for the period 1/04/2006 to 35/03/2007 was 5.29%,that the assessee had charged interest at the rate of 6% which was higher than the LIBOR rate. He relied upon the cases of Tata Autocomp Systems Ltd.(ITA 1320 of 2012 of the Hon’ble Bombay High Court),Siva Industries and Holding Ltd.(46 SOT112),Cotton Naturals(I)Private Ltd.(ITA/5855/Del/2012).He further stated that the Hon’ble Delhi High Court had confirmed the order of the Cotton Naturals,while deciding the appeal filed by the Department.

5.2.The AR stated that guarantee commission was not an IT.He referred to the cases of Bharti Airtail Limited(43 Taxmann.com 150)Micro Ink Limited (63Tax -mann.com 353)and Siro Clinfarm Private Ltd. (ITA/2618 and 2876/ Mum/ 2014).Alternatively,it was argued that the rate should be restricted to 0.8%,as accepted by the Department in assessee’s own case in earlier years.He referred to the cases of Aditya Birla minacs worldwide Limited.(56 Taxmann 317) , Everest Kento Cylinders Ltd.(ITA 1165 of 2013 of the Hon’ble Bombay High Court).The DR supported the order of the TPO and the AO.

8858/11 &8713/11-Marico 6.We have heard the rival submissions and perused the material before us.We find that the assessee had received payments towards brand royalty from two of its AEs,that one was located in Bangladesh and the other was in UAE, that the agreement with the Bangladesh AE was in respect of Parachute,that with the UAE the assessee had entered into agreement in respect to TMs of Parachute as well as of GGN,that MBL would sell pure edible coconut oil as per the agree - ment,that the UAE-AE was allowed to sell hair creams,hair gels hair oil etc.,that as per the agreement it would use brand GGN,that there was issue relating to use of controlled transaction for the purpose of comparability,that there was geographical difference,that there was also difference in respect of brands as well as products,that on the same terms and conditions the brand royalty charged by it to MBL had been accepted by the TPO till the AY.2006-07,that during the year there had been increase in the rate of royalty charged to MBL,that it had been increased from 0.5% to 1% w.e.f. 1.10.2006, that the TPO had not specifically rejected assessee’s benchmarking,that overall profitability of the assessee was much higher than the arithmetic mean of the comparables. Considering the above facts,the FAA had held that TP adjustment proposed/ made by the TPO/ AO were liable to be deleted.We do not find any infirmity in the order of the FAA.The AO/TPO had failed to bring anything on record to prove that there was material change in the facts as compared to earlier years.If facts were identical,then justification for deviating from the conclusions of previous year had to be highlighted.

6.1.It is found that during the year under appeal,the assessee had provided working capital loan to Sundari LLC,that it had charged LIBOR +150 bps on loans prior to AY.2006-07 and had charged interest @ 6% for the next year,that it had taken working capital loan from HSBC@ LIBOR+ 150bps,that later on HSBC reduced the rate,that the assessee repaid the loan in the month of Feb. 2006,that the TPO adopted interest rate of 9.5% p.a.,being the interest charged 10

8858/11 &8713/11-Marico to MME as ALP,that he made an addition of Rs.70.87 lakhs,that referring to the ECB rates the FAA had given part relief to the assessee.We are of the opinion that the LIBOR rate has to be considered a valid base for determining ALP for foreign loans.If the loan taken and received are in foreign currency LIBOR would be the safest tool to justify or reject the claim of the AO/an assessee.In the cases of Siva Industries & Holdings Ltd.(46 SOT 112);Cotton Naturals (I) Private Ltd.(5855/ Del/2012)the issue under appeal has been dealt in details.In both the cases the Tribunal has held that in case of foreign currency Loan, LIBOR rates should to be applied.The Hon’ble Bombay High Court in the case of Tata Autocomp Systems Ltd.(ITA No.1320 of 2012 dtd.03.02.2015) has deliberated upon the issue.Fact of the case have been narrated by the Hon’ble court as under: “The respondent-assessee is engaged in the business of manufacturing of plastic parts and rendering engineering services.The respondent -assessee had advanced an amount of EURO 26.25 lakhs to its wholly owned subsidiary in Germany. The respondent-assessee charged no interest on the above loan.However,during the course of examination of respondent-assessee’s international transaction with its subsidiary company i.e.Associated Enterprises transfer pricing officer (TPO) determine the arm’s length price (ALP) i.e. interest on the loan advanced by the respondent-assessee to its German subsidiary at 10.25%. The measure of interest was on the basis leading rate charged by the banks in India.The Assessing Officer passed a draft assessment order in line with the order of the TPO. 4.Being aggrieved, the respondent-assessee carried the draft assessment order to Dispute Resolution Panel (DRP).The DRP enhanced ALP i.e. the interest on loan given by the respondent-assessee to its German Associate Enterprise to 12%. Consequent to the direction of DRP, the Assessing Officer by an assessment order dated 19.9.2011 charged interest of Rs. 1.76 crores on the above account as a part of the respondent assessee’s income. 5.Being aggrieved, the respondent-assessee preferred an appeal to the Tribunal. The Tribunal by the impugned order held: (a) that the interests the loan extended by a company or its Associated Enterprise comes within the ambit of International Transaction and the issue to be examined in such a case would be the ALP of such an International Transaction; and (b) with regard to quantum of addition on account of interest by ALP the impugned order held that as the amounts were advanced Associate Enterprises in Germany, the rate of interest is to be determined on the EURIBOR rate of interest i.e. rates prevailing in Europe.Thus partly allowed the respondent-assessee’s appeal by applying the decision of the Tribunal in the case of “VVF Ltd Vs.DCIT (ITA No. 673/Mum/06)” and DCIT Vs.Tech Mahindra Ltd.(46 SOT141) by holding that the 8858/11 &8713/11-Marico loan advanced to an Associated Enterprise situated abroad, the rate of interest to be applied is the rate prevailing in the country where the loan has been consumed.” The Hon’ble Court has decided the matter as follows: “7.We find that the impugned order of the Tribunal inter alia has followed the decision of Bombay bench of Tribunal in the case of “VVF Ltd Vs,DCIT (supra) and DCIT Vs.Tech Mahindra Ltd.(supra) to reach the conclusion that ALP in the case of loan advanced Associate Enterprises would be determined on the basis of rate of interest being charged in the country were the loan is received/consumed. Mr.Suresh Kumar the learned Counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in PVF Ltd Vs. DCIT (supra)and DCIT Cs.Tech Mahindra Ltd.(supra)on the above issue. No reason has been shown to us as to why the revenue seeks to take a different view in respect of the impugned order from that taken in “VVF Ltd Vs.DCIT” (supra) and “DCIT Vs.Tech Mahindra Ltd.(supra).” After considering the above orders of the Tribunal and judgment of the Hon’ble Court we are of the opinion that TPO was not justified in making adjustment under the head interest to be charged.The rate of interest was higher than LIBOR,so,we hold that the IT in question was at arm’s length.

6.2.We find that during the year under appeal the assessee had provided corporate guarantee through Banks for its AE.s namely MBL,MME,MBLIL, that it charged commission @0.8% of the guarantee amount,that it had charged GC using the external CUP as the benchmark, that it had obtained quotation from HDFC bank,that the bank quoted GC in the range of 0.7% to 1%, that the TPO adopted 4.8% of the guarantee amount as appropriate benchmark, that he had made an addition of Rs.2.38crores on account of GC,that the TPO had quoted the SBI charges,bank guarantee @2.7% of amount of guarantee+ Rs.100/-.But, he had not mentioned in his order as to which period the rate of 2.75% was applicable.In our opinion,there is no difference between the bank or a corporate entity as far as GC is concerned. Both have to consider the functions performed,assets employed and risks assumed.In case of default by the borrow - er,the corporate guarantor is exposed to the same risk of a bank.In case of an AE the risk would not be as high as in case of an outsider.We find that the assessee argued that GC was not an IT. In the cases of Siro Clinpharm Private

8858/11 &8713/11-Marico Limited(ITA No.2618 and 2876/2014);Bharti Airtel Limited (43 taxmann.com 150);Micro ink Limited (63 taxmann. com 353), Redington India Ltd. (513/ Mds/2014)it has been held that GC is not an IT.We are reproducing the relevant part of the order of the Bharati Airtel(supra) and same reads as under: “25. An analysis of this definition of ' international transaction' under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following:

1. 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident.

2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction shall include shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises.

4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE.

26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012.

27. This Explanation states that it is merely clarificatory in nature inasmuch as it is ' for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of ' international transaction' under Section 92 B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92 B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of' international transactions'.

28. The first two categories of transactions, which are stated to be included in the scope of expression ' international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions' in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is ' use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered by 2 (b) and 3 above in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any 13

8858/11 &8713/11-Marico contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises". That leaves us with two clauses in the Explanation to Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money.

8858/11 &8713/11-Marico mitigates, the significance of expression' having a bearing on profits, income, losses or assets' appearing in Section 92 B(1).

8858/11 &8713/11-Marico abroad, notably in Canada, dealing with the determination of arm's length price of guarantees. His argument seemed to be that even such a view is to be upheld, entire transfer pricing jurisprudence will be turned upside down. There does not seem to be any legally sustainable merits in this argument either. As for the decisions dealing with quantum of ALP adjustments in the guarantee charges, in none of these cases the scope of ' international transactions' under section 92B(I) has come up for examination. A judicial precedent cannot be an authority for dealing with a question which has not even come up for consideration in that case. It is only elementary that, as was also held by Hon'ble Bombay High Court in the case of CIT v. Sudhir layantiIal Mulji [1995] 214 ITR 154/[1996] 84 Taxman 205, that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein. As observed by Hon'ble Supreme Court in the case of CITv. Sun Engg Works {P} Ltd. [1992] 198 ITR 297/64 Taxman 442 a " judgement must be read as a whole and the observations from the judgement have to be considered in the light of the question which were before court" and that "a decision takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this court, to support their reasoning." It would, therefore, be wholly inappropriate to use those judicial precedents, dealing with ALP of guarantee commission, to decide a question which was not even before those judicial forums. Coming to the foreign decisions on the issue of ALP adjustments in guarantee commission, we have noted that in the case of GE Capital Canada Inc (supra), the Tax Court of Canada has indeed dealt with ALP determination of the guarantee fees but then it was done in the light of their domestic law provisions which are quite at variance with the Indian transfer pricing legislation. Unlike elaborate wordings of Section 92B of the Indian Income Tax Act, 1961 defining , international transaction', Section 247 of the Canadian Income Tax Act only gives an inclusive definition which does not even really attempt to define the expression ' transaction'. It is nobody's case that the relevant legal provisions are in pari materia. We need not, therefore, deal with those foreign judicial precedents. Suffice to say that we have reached our conclusions on the basis of the legal provisions under section 92 B and no judicial precedent, contrary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra & Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92 B and leaves the issue open by stating that post insertion of Explanation to Section 92 B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of' international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us.

8858/11 &8713/11-Marico

Assessing Officer to delete the impugned ALP adjustment of Rs.33,10,161. The assessee gets the relief accordingly.” Following the above,we hold that GC is not an IT and hence the provisions of chapter X will not be applicable or GC.First effective Ground is decided against the AO. 7.Second ground of appeal is about

80. IB deduction.We find that the issue of deduction under the said section has also been agitated by the assessee in its appeal.We would like to deal the entire issue,while adjudicating the appeal filed by it.

ITA/8858/Mum/2011:

8.First ground of appeal,filed by the assessee,is about that portion of interest which was upheld by the FAA while deciding the TP adjustment of the loan transaction i.e.Rs.18.66 lakhs.We find that he had applied the ECB rates for making the adjustment.In our opinion, after considering the fact that the interest rate charged by the assessee was higher than LIBOR rate,he should not have partly upheld the order of the TPO.Following our discussion at paragraph 6.2.of our order,we decide Gr.No.1 in favour of the assessee .

9.Second ground of appeal is about disallowance of 10% of the other miscallan -eous expenses,amounting to Rs.1,08,25,908/-,on ad hoc basis.During the appellate proceedings,the FAA held that his predecessor has upheld the similar disallowance in earlier year.Considering the order for the last year,he confirmed the order of the AO.

9.1.Before us,the AR contended that the assessee had submitted entire details during the course of assessment proceedings,that the AO had not given any factual findings that expenses were not incurred for business purposes,that the FAA had upheld the disallowance merely on the basis of order for the previous year.

8858/11 &8713/11-Marico 9.2.After hearing the rival sides,we are of the opinion that the AO/FAA had not given any plausible reasoning for making the ad hoc addition.The assessee had filed audited accounts and the auditors had not qualified any item for disallowance out of the Miscellaneous Expenses.The AO had also not rejected the books of accounts of the assessee.It is also not clear from the order that as what was the basis for adopting 10% of the expenditure as not allowable.There is finding to show that the expenditure in question was not incurred wholly and exclusively for the business purposes.We find that the FAA had simply followed the order of his predecessor and had not met any of the arguments advanced by the assessee before him.Therefore,reversing his order,we decide ground no.2 in favour of the assessee.

10.Next two grounds(GOA3&4)pertain to claims that were made by way of filing revised computation and not by filing revised returns.These claims were about i)reduction of book profit, being depreciation on intangible assets,not charged to profit and loss account,ii)depreciation on non-compete fee treated as capital expenditure in earlier years and reduction of book profit being depreciation on intangible assets not charged to profit and loss account.

10.1.During the appellate proceedings,the FAA held that without filing a revised return the assessee cannot claim a fresh relief.He referred to the case of Goetz India, wherein it was held that the assessee had to file a return if he want to claim a deduction or exemption.

10.2.Before us,the AR relied upon the case of Prithivi Brokers and shareholders (349ITR336)of the Hon’ble Bombay High Court.The DR stated that assessee had not filed revised return and the AO had rightfully rejected the claim made by it.We have heard the rival submissions and perused the material before us.

8858/11 &8713/11-Marico 10.3.We find that the Hon’ble tradition High Court has decided the issue of relief claimed in the additional grounds, while deciding the matter of Prithvi Brokers(supra).We would like to reproduce the relevant portion of the judgement and same reads as under: “Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. A long line of authorities establish clearly that an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims to wit claims not made in the return filed by it. It is necessary to refer to some of these decisions only to deal with submissions on behalf of the department. The first is with respect to an observation of the Supreme Court in Jute Corporation of India Limited v. Commissioner of Income Tax. In many of the cases, the grounds were, in fact, available when the return was filed and/or the assessment order was made. In Jute Corporation of India Ltd. case for instance, the ground was available when the return was filed. The assessee did not claim any deduction of its liability to pay purchase tax as "it entertained a belief that it was not liable to pay purchase tax under the Bengal Raw Jute Taxation Act, 1941". Thus, the ground existed when the return was filed. The assessment order was even made and received by the assessee. It is only after the appeal was filed that the assessee claimed a deduction in respect of the amount paid towards the purchase tax under the said Act. The Supreme Court upheld the decision of the Appellate Assistant Commissioner in allowing the deduction. It is indeed a question of exercise of discretion whether or not to allow an assessee to raise a claim which was not raised when the return was filed or the assessment order was made. As held by the Supreme Court there may be several factors justifying the raising of a new plea in appeal and each case must be considered on its own facts. However, such cases include those, where the ground though available when the return was filed or the assessment order was made, was not taken or raised for reasons which the appellate authorities may consider valid. In other words, the jurisdiction of the appellate authorities to consider a fresh or new ground or claim is not restricted to cases where such a ground did not exist when the return was filed and the assessment order was made. Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. It is not necessary that the deduction be allowed only if a revised return of income would have been filed.….” From the above,it is clear that the FAA is empowered to entertain the claim made by way of submission/additional ground,that AO cannot allow such claim if an assessee does not file a revised return.Therefore,we are of the opinion that in the interest of Justice,the matter should be restored back to the file of the FAA,who would decide the fresh claims,made by the assessee,as per law.All the three Grounds are decided in favour of the assessee,in part. 19

8858/11 &8713/11-Marico 11.The next ground deals with depreciation of Rs.75.27 lakhs under the head non-compete fees paid in the AY.2006-07.As the claim was not made in the regular return of income,so,the AO rejected the same.During the appellate proceedings,the FAA confirmed the order of the AO.

11.1.Before us,the AR contended that provisions of section 32 mandated the definition should be allowed even though the assessee had not claimed, that the assessee was not aware of depreciation claim on non-compete fee till the date of receipt of assessment order for the AY. 2006-07,that it was beyond the date for revising the return of income,that the assessee had no option other than claiming it by way of revised computation.To support the argument that depreciation was allowable on non-compete fees,he placed reliance on the matters of Pentasoft Technologies Ltd.(222Taxmann209)of the Hon’ble Madras High Court and Ingersoll Rand International Ltd.(48 Taxmann 349) of the Hon’ble Karnataka High Court.DR supported the order of the FAA.

11.2.We have heard the rival submission.While deciding the earlier two grounds we have held that appellate authorities are not prohibited from entertaining the new claims,though the AO cannot accept such a claim if same is not raised by way of filing of revised return.Following the judgment of Prithvi Brokers(supra) we are restoring back the matter to the file of the FAA for fresh adjudication. Ground no.5 is decided in favour of the assessee,in part.

12.Sixth ground pertains to computation of deduction u/s.80IB/80IC of the Act. During the assessment proceedings,the AO found that the assessee had claimed deduction of Rs.74.33 crores under section 80 IB/80IC of the Act,in the revised return of income.He computed the deduction by making adjustment under the heads rent and store charges,miscellaneous sales and other income. He observed that the assessee had allocated expenses to undertaking of Goa, Pondicherry and Dehradun on the basis of rent and storage cost directly identifying product wise 20

8858/11 &8713/11-Marico and undertaking wise,that rent and storage charges in respect sales division in ratio of turnover of the undertaking to the total turnover of the company were computed.The AO held that such expenses could not be allocated on the basis of ratio of turnover of the undertaking. He further found that the assessee had considered income from by products,sale of scrap and other items,sale of assets,insurance claim and lease rent,while claiming deduction under section 80 IB/80 IC.But,the AO did not agree with the assessee and excluded such income from the profit of the respective undertaking while computing the deduction on the ground that above income could not be said to be arising out of business of the assessee,that though the income was attributable to the business of the assessee it was not derived from the business carried out by it.

12.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA.Before him,it was argued that the assessee had allocated rent and storage expenses on the basis of cost directly identifiable, that common rent and storage expenses were allocated in the ratio of turnover of each unit, that the AO had not assigned any reason for deviating from the basis of allocation made by the assessee,that it was consistently following the above method of a location in the earlier years. The AR pointed out the mistakes committed by the AO in working out the deduction.

With regard to miscellaneous sales(Rs.3.59 crores +Rs.12.5 lakhs +Rs.7.07 crores) the AR contended that the assessee was in the business of manufacturing and dealing in FMCG,that sale of miscellaneous items included sale of by products, scrap that would arise during the course of manufacturing, that at Pondicherry unit crushing of Copra to extract oil, after filtration, would generate by product called cake,that sale of scrap comprised of sale of gunny bags, chemical empty drums and unusable oil, that generation of by products/scrap was directly linked to the manufacture of products by the eligible

8858/11 &8713/11-Marico undertaking,that the by products/ scrap could not be generated independent of the Manufacturing process,that the miscellaneous sales had direct nexus with the industrial undertaking and ought to be considered as forming part of the profits eligible for deduction under section 80 IB/80IC.The AR relied upon certain case laws.

With regard to other miscellaneous income,it was argued that the income included insurance claim received,lease rent, exchange gain and money received for the material return to the vendor.It was further argued that insurance claims(Rs.2.85 lakhs +Rs.2.64 lakhs) were received for loss of products on transport from eligible undertaking to the depot,that the insurance claim received was in relation to products manufactured and sold, that costs with respect to loss was debited to P&L account,that the insurance claim received was nothing but reimbursement of such loss and was directly related to respective undertaking, that such loss was considered as expenditure while computing the profit under section 80 IB/80IC,that the corresponding insurance claim received on the same had to be considered as business income.

With regard to other miscellaneous income(Rs.15.72 lakhs)the AR stated that it included exchange gain money received for materials return to the vendor’s,that the receipts had direct and immediate nexus with the industrial undertaking.

After considering the submission of the assessee and the assessment order, the FAA held that his predecessor had accepted the contention of the assessee with regard to rent and storage charges in the earlier years,that the facts for the year under consideration were similar.He directed the AO to follow the orders of his predecessor for the earlier years and allowed the appeal filed by the assessee.

8858/11 &8713/11-Marico With regard to income from sale of by-products and scrap,the FAA held that in the case of Pandian Chemicals Ltd.(270 ITR 448)certain principles were laid down. Relying upon the said judgement,he upheld the order of the AO.

Relying upon the judgements of Pfizer Ltd (supra) and Pandian Chemicals Ltd. (supra),the FAA allowed the claim made by the assessee with regard to insurance claim.

He further held that lease rent income of blow moulding machine, provided to the sub-contractor,could not be considered to be the income derived from the eligible undertaking,that it was not the case of the assessee that it used the machine directly for purpose of business of eligible undertaking.

He also held that receipts arising on account of exchange gain and money received from material return to the vendor were eligible for deduction,that such receipts had arisen out of the income derived from the eligible industrial undertaking.

12.2.Before us,the AR contended that by product and scraps were generated in the process of manufacturing, that the receipt from sale of such products was derived from industrial undertaking,that deduction under section 80 IB had to be allowed for the rent received from blow moulding machine,that the rental income was received from the contractor who would fill and packages the products manufactured by the eligible undertaking of the assessee,that it had paid conversions charges to the contractor which had been considered for the purpose of 80 IB deduction,that lease rent should also be considered for the purpose of deduction.

With relation to sale of by product,the AR referred to the cases of Meghalaya Steel Ltd.(Civil Appeal No.762 of 2014 of Hon’ble Supreme Court)and Recon Oil Industries Ltd.(2 SOT 732).He relied upon the cases of Biotech Medicals P 23

8858/11 &8713/11-Marico Limited(119 ITD143),Sadhu Forging (336 ITR 444)Avanti Feeds Ltd.(35 SOT 50) with regard to the deductibility of scrap for the purpose of 80 IB deduction.

About the rent and storage charges,the AR argued that identical issue was allowed in favour of the assessee by the FAA for the AY.s.1999 -00 to 2001-02, 2008-09 and 2009-10,that the AO had not challenged the relief before the Tribunal,that there was no change the facts.

With regard to miscellaneous income exchange gain and money received on material return to vendor and insurance claim, the AR argued that both the issues were directly related to sale/purchase transaction of the undertaking, that income arousing of such transactions was eligible for deduction under section 80 IB of the Act.He relied upon the case of Meghalaya Steel Ltd. (supra)Sadhu Forging(supra)Raghunath Exports Private Limited(330 ITR 57), Pfizer Ltd.(330 ITR 62).

12.3.We have heard the rival submissions and perused the material before us. While dealing with ground related to deduction u/s.80IB/80IC of the Act,in the earlier part of the our order,we have mentioned that the issue will be dealt later on as the assessee has also challenged the order of the FAA with regard to the said deduction.It is found that the AO had challenged the decision of the FAA about (i)rent and storage charges,(ii)exchange gain and money received from material return to the vendor,(iii) insurance claim.The assessee is aggrieved in respect of income shown under the heads (i)sale of by-products and scrap,(ii) lease rent income of blow moulding machine.

12.3.a.We find that the AO had allowed the claim of the assessee with regard to rent and storages in earlier years,that he had not brought on record any fact/(s)that could distinguish such facts from the facts of the current year,that the orders of the FAA for the earlier years were not challenged before the 8858/11 &8713/11-Marico Tribunal is also a fact.Considering this if the FAA has allowed the appeal of the assessee,then his order had to be endorsed.Issue regarding rent and storage charges is decided against the AO.

12.3.b.In the matter of Raghunath Exports Pvt. Ltd.(330 ITR 57)it has been held that surplus realisation due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purposes of s. 80HHC.Paragraph 12 of the judgment reads as follow: “We have considered the contentions of the learned advocates for the parties and checked the records. It is not disputed that tea was exported and payment was received in foreign currency and it is also admitted that when realisation of the export was made there has been fluctuation of foreign currency, as such, there was a surplus realisation in terms of Indian currency. The question is whether the aforesaid surplus realisation of Rs. 10,61,326 can be treated to be a part of export turnover or not. In our view, going by the definition of the export turnover, the aforesaid amount was realised in connection with the export followed by payment of the price, by the foreign buyer. Unless there has been an export the aforesaid surplus would not have been realised. Hence, this surplus realisation is certainly relatable to the export. Therefore, we hold that this is an export turnover.” Considering the above,we are of the opinion that gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act.So, confirming the order of the FAA,issue is decided against the AO.

12.3.c.In the matter of Pfizer Ltd.(330ITR62)the issue of insurance claim had been dealt as under: “Submission that the insurance claim has no element of export turnover and that consequently it must sustain a reduction of ninety per cent under Expln. (baa) is not sustainable. It is necessary to note that Expln. (baa) in terms does not refer to export turnover. Sub-s. (1) of s. 80HHC contemplates a deduction to the extent of profits derived by the assessee from the export of goods or merchandise to which the section applies. The basic issue therefore is to determine the extent of profits derived by the assessee from the export of such goods or merchandise. The formula in sub-s. (3) of s. 80HHC has been provided by the Parliament, for the purposes of sub-s. (1) to compute the profits derived from the export of goods. Clause (a) of sub-s. (3) specifies that where the export is of goods or merchandise manufactured or processed by the assessee the profits derived from the export shall be the amount which bears to the profits of business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, in determining the profits derived from the export of goods or merchandise the proportion of the export turnover to the total turnover of the business is applied to the 25

8858/11 &8713/11-Marico profits of the business. The profits of the business in turn are defined in Expln. (baa) to s. 80HHC. Hence, the element of export turnover is a facet which has been taken care of by the legislature in the application of the formula which is referred to in sub- s. (3) of s. 80HHC. The insurance claim for loss of stock-in-trade must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-in- trade. Insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges; hence, such a receipt would not be subject to a deduction of ninety per cent under cl. (1) of Expln. (baa)”. Considering the above,we are of the opinion that the order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned.We are aware that the judgment is about section 80HHC of the Act. But,it is applicable to the provisions of section 80IB/80IC too.Confirming the order of the FAA,we decide this issue also against the AO.

12.3.d.With regard to the eligibility of sale proceeds of by products and scrape for the 80IB/80IC deduction,we would like to refer to the case of Sadhu Forging (336 ITR444).In that matter the Hon’ble Delhi High Court has dealt with the issue of sale of scrap for claiming deduction u/s.80IB of the Act and has held as under: 13. Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job work charges, it can thus be said that the appellant had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts cannot be said to be independent income of the manufacturing activities of the undertakings of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under s. 80-IB. These were gains derived from industrial undertakings and so entitled for the purpose of computing deduction under s. 80-IB. There cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under s. 80-IB.” Respectfully,following the above,we hold that the FAA was not justified in denying the 80IB/80IC deduction to the assessee on sale of scrap. Reversing his decision,we decide the issue in favour of the assessee.

8858/11 &8713/11-Marico 12.3.e.Now we would like to take up the claim made by the assessee about lease rent income of blow moulding machine.It is a fact that the machine was not used by the assessee,that it was given to a contractor,that the contractor was performing certain activities that were related to the manufactured goods of the assessee.In our opinion for claiming deduction u/s.80IB/80IC there should be close nexus of the income and the business carried out by an industrial undertaking.Anything and everything indirectly linked to the business of the assessee cannot be held to an eligible activity for claiming deduction. Confirm - ing the order of the FAA,we decide the issue before us,against the assessee.

13.The last ground of appeal is about disallowance made under section 14. A of the Act.During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs. 8.90 lakhs from investment in mutual funds. Before him,the assessee argued that it had not incurred an expenditure in relation to the dividend income. However,he did not accept the contention of the assessee and disallowed 50% of the dividend income i.e. Rs. 4.45 lakhs under section 14. A of the act.

13.1.During the appellate proceedings,before the FAA,the assessee argued that no specific or material expenses were incurred to earn dividend income,that the AO had not brought anything on record to prove that expenses of Rs. 4.45 lakhs were incurred by the assessee.The assessee relied upon the case of Minda Investments Ltd.(52 DTR 1) and Hero Cycles Ltd.(233CTR74).

After considering the submission of the assessee and the assessment order, the FAA held that assessee had made some investment against which it had earned an income which was not forming part of the total income, that the provisions of section 14A were clearly applicable in respect of disallowance of corresponding expenditure debited by the assessee in its P&L account,that apart from the direct cost that might have been incurred in respect of employee’s salary and in the 27

8858/11 &8713/11-Marico work in the company there would be costs associated with infrastructure facilities used for investment,that there would be certain direct/indirect expenses relating to the investments, that it could not be set that there were no costs/ expenses attributable to earning of the income,that disallowance had to be worked out in view of the provisions of section 14A. Referring to the judgement of the Hon’ble Bombay High Court delivered in the case of Godrej and Boyce Mfg.Company Ltd.,the FAA restricted the disallowance to Rs.2.10 lakhs.

13.2.Before us,the AR stated that applicability of Rule 8D was prospective,that provisions of the Rule could not be applied in the year under consideration, that the assessee had not incurred any expense in relation to earning of exempt income.Alternatively,it was argued that disallowance should be restricted to 5% of the dividend income.He relied upon the case of Godrej Agrovet Ltd (ITA/94 of 2011 of the Hon’ble Bombay High Court).

13.3.We have heard the rival submissions and perused the material before us. We find that the AO had made a disallowance of Rs. 4.45 lakhs, that the FAA had restricted the disallowance,that the assessee had claimed that it had not incurred an expenditure to earn the exempt income, that the AO/FAA had not brought on record any fact to prove that certain expenditure was incurred for earning dividend income.Therefore,the action taken by both the authorities cannot be endorsed.However,considering the judgement of Godrej Boyce and Mgf. Company Ltd.(supra),we are of the opinion that a reasonable disallowance could be made for the year under consideration also with regard to disallowance to be made under section 14A of the Act.We are of the opinion that in the interest of justice the disallowance should be restricted to 5% of the dividend income, as held in the case of Godrej Agrovet (supra).Ground number seven is allowed in favour of the assessee, in part.