ACIT 5(1), MUMBAI vs. CADBURY INDIA LTD, MUMBAI

आयकर आयकर आयकर अपीलीय आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण, मुंबई अिधकरण मुंबई मुंबई “केकेकेके” खंडपीठ मुंबई खंडपीठ खंडपीठ खंडपीठ Income-tax Appellate Tribunal -“K”Bench Mumbai सव�ी राजे��,लेखा सद�य एवं सी. एन. �साद,�याियक सद�य Before S/Sh.Rajendra,Accountant Member and C.N. Prasad,Judicial Member आयकर आयकर अपील आयकर आयकर अपील अपील संसंसंसं./I.T.A./5470/Mum/2012,िनधा�रण अपील िनधा�रण िनधा�रण वष� िनधा�रण वष� वष� /Assessment Year: 2005-06 वष� Mondelez India Foods Private Addl. CIT, Range-5(1) Limited Mumbai. (formerly known as M/s. Cadbury India Limited), Mondelez House, Unit Vs. No.2001, 20th Floor, Tower-3 (Wing C)India Bulls Finance Centre, Parel. Mumbai-400 013. PAN: AAACH 0460 H आयकर आयकर अपील अपील संसंसंसं./I.T.A./5876/Mum/2012,िनधा�रण िनधा�रण वष� वष� /Assessment Year: 2005-06 आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Addl. CIT,6(3),Aayakar vs. Mondelez India Foods Private Bhavan,M.K. Road, Mumbai-20 Limited Mumbai-400 013. (अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: S/Shri N.K.Chand-CIT Assessee by: Shri J.D. Mistry, Nishant Thakkar & Ms. Jasmin सुनवाई क� तारीख / Date of Hearing: 18.04.2016 घोषणा क� तारीख / Date of Pronouncement: 18.05.2016 आयकर आयकर अिधिनयम आयकर आयकर अिधिनयम अिधिनयम,1961 क� अिधिनयम क� क� धारा क� धारा धारा 254(1)केकेकेके अ�तग�त धारा अ�तग�त अ�तग�त आदेश अ�तग�त आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद� राजे� के अनुसार PER RAJENDRA, AM- Challenging the order,dated 12/7/2012, of the CIT (A)-15,Mumbai the assessee and the Assessing Officer(AO) have filed cross appeals for the year under consideration.Assessee-company,engaged in the business of manufacturing and marketing of malted food,drinks and chocolates,filed its return of income on 31/10/2005,declaring total income of Rs.61.98 crores.The AO completed the assessment u/s.143(3) of the Act,on 31/01/2008,determining the income of the assessee at Rs. 75.67 crores. 2.First ground of appeal is about disallowance of Rs.7.30 crores out of the royalty payment made by the assessee to its associated enterprise(AE),M/s. Cadbury Schweppes Overseas Ltd.,UK(CSOL)on the ground that same was not at arm’s length price(ALP)During the assessment proceedings,the AO found

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that assessee had entered into international transactions (IT.s)with its Associated Enterprise(AE).For determining the ALP of such transactions,he made a reference to the Transfer Pricing Officer (TPO).

2.1.During the Transfer Pricing proceedings,the TPO observed that the assessee had entered into a technical assistance and royalty agreement with CSOL on 09.03.93for availing benefits of technical knowhow developed by the AE relating to the manufacturing,processing,distributing and marketing of products as well as benefits of continuing research and development (R&D) undertaken by CSOL,that it had also entered into an agreement with AE on 20. 12.2000, that the assessee had agreed to pay royalty to the AE @ 1.25%, that it had paid royalty to the tune of Rs.6.35crores,that it also paid Rs.730.41 lakhs for the use of trade mark.The TPO was of the opinion that royalty paid by the assessee (Rs. 7.30crore)on trademarks could not be allowed.In the appellate proceedings, the First Appellate Authority(FAA) upheld the disallowance.

2.2.During the course of hearing before us,the Authorised Representative(AR) stated that identical issue was decided in favour of the assessee by the Tribunal while adjudicating the appeal for 2002-03(ITA No.7408/Mum/ 2010 & 7641/ M/10;dt.13.11.2013; para 37-43; Pg-No.15-16),that the said order was followed by the Tribunal,while deciding the appeals for AY.s 2003-04 and 04-05,that in the TP order for the AY.2010-11 and 2011-12,the TPO had not made any disallowance for the identical payment.The Departmental Representative (DR)left the issue to the discretion of the Bench.

2.3.We have heard the rival submissions and perused the material before us.We find that while deciding the appeal for AY 2002-03(supra) the Tribunal has decided the issue as under:-

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“37.We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38.From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions. 39.On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe. It has been accepted by the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm’s length. 40.Coming to the issue of royalty payment on trademark usage, we find that the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee’s payment is coming to a lesser figure, as discussed in detail by the CIT(A). 41.We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the table supplied by the assessee and taken note of by the TPO and the CIT(A). 42.We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance. 43.On the basis of the above observations, we are of the opinion that the royalty payment on trademark usage is within the arms’ length and does not call for any adjustment.” Respectfully,following the above order,and the order for subsequent AY.s we decide the Ground of Appeal No.1 in favour of the assessee.

3.The second ground of appeal is about disallowance of AMP expenses (Rs.71. lakhs)towards the cost allocable to CSOL for the benefit accruing to it.On perusal of the accounts of the assessee,the TPO noticed that the assessee had debited advertisement and marketing expenses amounting to Rs.85.15crores, that it was 11.11% of the sales recorded by the assessee during the year,that industry average under the said head worked out to 6.55% only.The TPO

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directed the assessee to file the details of AMP expenses, sales and royalty paid for a period of last 10 years.After analysing the details,the TPO concluded that the assessee was paying higher and higher royalty to the AE,that the AMP had also recorded steady growth over time and so had the sales,that the marketing expenditure which was Rs.20.13crores in the AY19 96-97 had increased to Rs.85.15crores for the year under appeal, that the royalty had increased from Rs.2.07 crores to Rs.13.56crores for the same period.He held that high degree of correlation between the royalty payment and sales on one hand and marketing and advertisement expenditure and sales on the other was not a matter of coincidence, that it was coming out as a feature of business undertaken by the assessee,that the AMP expenses debited by the assessee in the P&L Account was borne by it,that the benefit of higher net sales was accruing in part to the AE as well.Vide his showcause notice,dt.12.12.07,he asked the assessee to show cause as to why the cost of higher marketing expenditure entirely borne by it should not be apportioned/allocated in the ratio of benefit accruing to the overseas AE as a result of higher sales.The cost of benefit accruing to the assessee was computed at the same level at which the benefit was accruing to the AE.He held that the benefit to the assessee from the sales was 1.78% of the net sales,that the overseas AE should bear 1.7% of the AMP expenses that were entirely borne by the assessee.The TPO computed Rs.1.52 crores(1.78%) as the cost apportioned/allocable out of the AMP cost incurred by the assessee for the benefit accruing to the AE.However,the cost was restricted to Rs.71.00 lakhs (being 0.87% of Rs.85.15crores), in view of the disallowance/adjustment in income made on account of royalty for trade mark. The AO passed the order and made the said addition.

3.1.Aggrieved by the order of the AO the assessee preferred an appeal before the FAA.Before him,the assessee argued that it was primarily operating a chocolate confectionary segment,that it was the market leader in so far as it 4

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related to the chocolate market in India,that it was commanding 70% of the market share,that in order to maintain its leadership and further maintain its market share it was required to incur an expenditure on AMP for the products manufactured by it,that the expenditure was incurred wholly and exclusively for its business in the licensed territory,that the products manufactured by the assessee were in the impulse-purchase category,that for such products higher advertising and marketing was a pre-requisite to increase product awareness, that the AMP expenditure was incurred for creation of product-awareness of new products and recall-value of existing product in the minds of Indian customers primarily,that it had a local marketing strategy of making advertise- ment campaigns and slogans in the local language,that local advertisement campaigns were driven towards creating consumer appeal,that given the number of new multi-national players in the industry it was important to advertise its products,that the intellectual property owner of the Cadbury brand were the overseas AE.s,that they were responsible for brand positioning,design and the overall strategic direction,that the AE.s had provided strict brand guidelines to ensure that overall strategy and vision associated with the brand was adhered to by the assessee in India,that the AE.s would also do their brand related exercise at their own cost for over all brand positioning and management on global basis which would also benefit the assessee in an indirect manner,that the expenditure the AE would incur as brand owner had substantially benefitted the assessee from a commercial stand point,that one of the key benefit to the assessee was the brand itself,that it signified quality and thereby allowed the assessee to charge a premium price,that the increased sales might have benefitted the AE by way of increased royalty at 1% on the incremental sale,that same was insignificant as compared to the incremental quantum of profits earned by the assessee on the increased sales with higher profitability,that the correct way of looking at business need was to see the turnover as a result of the license,that if 5

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the assessee could not have achieved the turnover without the license it clearly meant that the net turnover of Rs.766.21crores had been achieved on account of license,that payment of Rs.13.66 crores to achieve the turnover and to realise the net profit of Rs.46.36 crores was reasonably at arm’s length,that the AMP exepenses incurred by the assessee for promoting the sales of its products in India did not benefit the AE.s directly,that they were not involved in the business of manufacturing/trading of such products in India either on its own or through any of its subsidiaries,that the entire AMP expenses incurred by it were purely for assessee’s own benefit,that the profit of the assessee belonged to the it on which taxed were paid in India,that the average expenditure under the head AMP by the leading FMCG companies for the period 2001-05 was 10.28%, that the AMP expenditure incurred by the assessee during the same period was 10.45%,that the increased AMP expenditure that led to enhanced sales and profitability on year on year basis,that for the purpose of analying the AMP expenditure incurred by the assessee vis-a-vis the comparables it would be necessary to consider the factors like growth rate,nature of business, number of products launched, territories serviced and turnover/profits achieved,that the entire expenditure was focused on the Indian consumer,that the said fact was evident from the local flavour/language/concepts,that there was neither any reason nor any contractual obligation to recover money from the AE.s.The assessee relied upon the case of Maruti Suzuki India Ltd,decided by the Hon’ble Delhi High Court.

3.2.During the course of appellate proceedings,the FAA directed the assessee to submit the average expenditure incurred by the companies in the FMCG sector/ comparables.The assessee filed details by its letter dated 14/12/2011.The FAA observed that the average of expenditure of the companies in the FMCG segment was 8.89% on sales is against such expenditure of the assessee at the rate of 10.45%. He held that the companies chosen by the assessee were not the 6

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same that could be considered for benchmarking,that if the amount correspond - ing to the difference in average marketing and advertisement expenses of those companies(@8.89%)and that of the assessee (@10.45%) would be at 1.56%. He applied the difference to the total sale (Rs.766.21 crores) and determine the adjustment to Rs.11.95 crores.He further held that the said amount would possibly be the amount of contribution that the AE should be paying to the assessee if the concept of bright line was applied, that the TPO had taken much conservative approach by considering only the amount of expenditure incurred by the assessee on AMP,that he had applied ratio of royalty paid for use of know-how to sale and had arrived at the total adjustment of Rs. 71 Lacs only, that the assessee had contended that average profitability(PBT to sales ratio) at 10.85%were much higher compared to the average profitability of the comparables at 3.57% in the FMCG sector,that higher rate of profitability could not be justification of disproportionate and higher expenditure, that there could not be any justification to incur such expenditure which was benefiting it as well as it’s AE,that in an ALP situation for any benefit which had been enjoyed by the AE and which was payable in monetary terms had to be adequately comp -ensated to the assessee.

The assessee had contended that the companies in the FMCG sector were,in general,paying higher royalty following the automatic route,that it was only paying royalty of 1.25% of know-how and 1% for use of brand/trademark, that the TPO had not disturbed the arm’s length rate of royalty paid by the assessee at 1.25%for the use of know-how,that the higher royalty paid by the comparables in the FMCG segment could not be considered to be any justifica - tion for the assessee to incur certain expenditure by it which was otherwise benefiting the AE,that the FAA had given the relief to the assessee in the earlier years following the judgement of Maruti Suzuki Ltd.,that later on the Hon’ble Apex court had directed the TPO to compute the ALP without being influenced 7

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by the decision of the Hon’ble High Court,that while deciding the appeal for the earlier year the FAA had adopted incorrect figures.Finally,he upheld the order of the TPO.

3.3.During the course of hearing before us,the Authorised Representative (AR) contended that AMP expenses was not an IT,that there was no express provision in the act deeming the AMP expenditure to be an IT,that the TPO/FAA had not shown any existence of an agreement/ arrangement/ understanding between the assessee and its AE whereby it was obliged to incur AMP expenditure in excess of the bona fide requirements of its own business, that the assessee was risk bearing entity,that the expenditure was incurred to promote its own products, that it had not advertised the brand owned by its AEs.He relied upon the cases of Maruti Suzuki India Ltd.(64 Taxmann.com 150), Honda Ciel Power Products (64Taxmann.com328),Whirlpool of India Ltd.(64 Taxmann.com 324),delivered by the Hon’ble Delhi High Court.Referring to the case of Sony Ericsson Mobile Communication India Private Ltd.(231 taxmann 113),he stated that matter should not be remanded back to the file of the TPO in view of the said decision. He further argued that the assessee had made investment as per the policy declared by government of India,that the money had come through automatic investment route.He referred to the press note of 2002.(Page 84 of the paper book).

The Departmental Representative (DR)stated that in the case of LG Electronics (140ITD41)the special bench of the Tribunal had held that AMP was a separate IT,that it had approved the BLT for the purposes of determination of ALP of international transaction of AMP,that the Hon’ble High Court of Delhi,in the case of Sony Ericsson Mobile Communication, (supra)had held AMP to be an international transaction,that BLT was not approved by the Court,that the Hon’ble court had laid down certain important principles of TP,that the court

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had laid emphasis on conducting detailed functional analysis that would include AMP functions/expenses,that the court had observed that selection of comparab -les also required to be matched with the functions and obligations performed by tested parties including AMP expenses, that bundled transaction approach had to be followed in such cases and that detailed functional analysis had to be conducted.He referred to eight cases, decided by the Delhi Tribunal,wherein the issue of AMP expenditure was restored back to the file of the AO in light of the judgment of Sony Ericsson. With regard to the decision of Hon’ble Delhi High Court in the case of Maruti Suzuki,the DR stated that up to the date of decision i.e.11/12/2015,the departmental authorities did not have the benefit of the decision,that they were following the order of the LG Electronics (supra)using BLT, that in some cases BLT had been followed and the expenditure on AMP had been sliced into two portions,that the non routine expenditure in excess of BLT was considered separately as international transaction and benchmarked accordingly for the purpose of ALP,that non-routine excess expenditure taken out for benchmarking of AMP would be required to be considered as the part of cost base/expenditure He referred to the cases of Toshiba India Private Limited, India Medtronics Private Limited, Johnson & Johnson India Ltd,Essilor India Private Limited and Molson Coors India Ltd.and stated that the Tribunal had restored back the issue of AMP expenses to the file of the AO.s in all the cases,that the case under consideration should also be sent back to the file of the AO.

3.4.We have heard the rival submissions and perused the material before us. Before proceeding further,it would be useful to understand the philosophy and to consider the historical background of the TP provisions.It is said that the purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transferring income yielding assets to non-residents even while retaining the power to enjoy the 9

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fruits of such transactions i.e. the income so generated.As a concept,it is not totally a new idea.A reference to the provisions of section 42(2)to the Indian Income Tax Act,1922,could be made in this regard-as it was a somewhat similar section and dealt with the trans-border transactions.The provisions of the said section broadly provided that where a non-resident carried out business with the person resident in the taxable territory and it appeared to the AO that on account of a close connection between such persons the business was so arranged that the business conducted by the resident with the non-resident either yielded no profit or,less than ordinary profit,which may be expected to arise in that business then,the AO was empowered to tax profits which were derived or which may reasonably be deemed to be derived from the business in the hands of a person resident in the taxable territory.Thus,it can safely be concluded that TP provisions were part of tax administration even during the 1922 Act days- though at infancy stage.The present provisions were been incorporated vide Finance Act,2001.Same were further amended vide Finance Act,2002 and are being amended from time to time to meet the new challenges thrown up by the dynamism of the current commercial and business realities.Having regard to the object for which provisions have been enacted,applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transaction. So,intra-group transaction is the first pre-condition for invoking the TP provisions.Calculation of ALP is the next and logical step.But,if the first step itself is missing,the AO cannot go to the second stage.In other words,the AOs cannot climb the second storey of a building without reaching to the first storey- if the existence of an IT and calculation of ALP can be compared with a double- storeyed building.

3.4.1.We find that the assessee is the market leader of the chocolate market in India,that it was commanding 70% of the market share in the year under 10

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appeal,that it had debited AMP expenses,amounting to Rs.85.15crores to its P& L.a/c,that the net turnover of the assessee was of Rs.766.21crores,that it was 11.11% of the sales recorded by the assessee during the year,that it had also paid royalty amounting to Rs.13.56 crores for the same period,that the TPO computed Rs.1.52 crores(1.78%) as the cost apportioned/allocable out of the A&M cost incurred by the assessee for the benefit accruing to the AE,that he restricted the cost to Rs.71 lakhs(being0.87% of Rs.85.15crores)in view of the disallowance/ adjustment in income made on account of royalty for trade mark,that the average AMP expenditure by the leading FMCG companies for the period 2001-05 was 10.28%,that the AMP expenditure incurred by the assessee during the same period was 10.45%,that the assessee had contended that its profitability(PBT to sales ratio) @10.85%was much higher compared to the average profitability of the comparables at the rate of 3.57%,that the FAA had held that higher rate profitability could not be a justification of this proportionate expenditure, that in the appellate proceedings the FAA had proposed further addition,that finally he upheld the order of the TPO and confirmed the addition of Rs.71 lakhs,that there was no contractual obligation to recover money from the AE,that it was separately paying royalty for use of brand and trademark. There is no reason for not holding that the increased AMP expenditure led to enhanced sales and profitability,that for the purpose of analysing the AMP expenditure incurred by and the comparables it is necessary to consider various factors.If factors like growth rate, nature of business,number of products launched,territories serviced and turnover/profits achieved have necessarily to be considered for determining the AMP expenses.The entire expenditure was focused on the Indian consumer and it is evident from the local flavour/ language/concepts.It is also an undeniable fact that new players were entering India after liberalisation-era started.If the expenditure incurred by the assessee is considered in the back ground of the growth achieved by it one has 11

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to agree with the argument of the assessee that it made rapid progress in the Indian market post liberalisation period and AMP played an important role in it.

Here,we would also like to mention that there exists a fundamental and basic distinction between the provisions of section 37 and section 92 of the Act-as the first is expense oriented and the second is pricing oriented.The FAA tried to incorporate the ingredients of Section 37 while dealing with the TP adjustments, when he talked of the‘higher expenditure’and‘justification’of such expenditure. In our opinion,the approach of the FAA was not in accordance with the basic philosophy of TP provisions.In our opinion,it is the assessee who has to decide how much to spend for earning his income.The tax authorities are prevented from entering into the proverbial shoes of the assessee to decide the justification of the expenditure.The Act stipulates that in certain conditions only the so- called higher expenditure can be questioned.The FAA had not proved that the expenditure incurred by the assessee for advertisement etc.was covered by those sections.If it was the case then the transaction would not fall under section 92 of the Act.Therefore, in our opinion he had adopted a totally incorrect approach, while dealing the allowability of AMP expenditure.

3.4.2.We further hold that the claim of the assessee is factually correct that it had incurred the AMP expenditure for creating product awareness and to recall the value of existing products and that it had a local marketing strategy of making advertisement/slogans in the local language.In our opinion,KUCH MEETHA HO JAY campaign proves the claim made by the assessee.The TPO had ignored the fact that films/TV advertisements of the assessee had the local messaging concept.Such local advertisement campaigns can never be held to be driven towards serving the interests of the AE.It is also a fact that new multinational players in the industry had entered the Indian market.The commercial wisdom of any assessee,in such a situation,would compel it to be

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innovative and to spent reasonable expenditure for maintaining its position in the market.The TPO/FAA had not controverted the fact that the AE was the owner of intellectual property of the ‘Cadbury’brand and that it was responsible for promoting the brand all over the globe and that the brand related exercise at the cost of the AE for the overall brand positioning and management benefited the assessee also in an indirect manner.Nothing has been brought on record to prove that the assessee was directly or indirectly promoting the global brand rather than promoting its own products.In our opinion, there exists a fine but very important distinction between products promoted and nurtured by an assessee and the brand owned and supported by its AE.In the modern world both exist and play different and specified roles.Therefore,until and unless some -thing positive is brought on record about sharing/incurring AMP expenditure under the head by an assessee on behalf of its AE,it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE.In the case under consideration,the assessee was incurring expenditure for its products whereas the AE was looking after the ground at global level.If the AMP expenditure incurred by them benefited indirectly in the local/ international market it would not mean that it was an IT. The basic purpose of introducing the various provisions of chapter X,as stated earlier,was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE.In our opinion,a perceived/notional indirect benefit to the AE,due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India.

3.4.3.We find that in the cases of Maruti Suzuki(supra),Whirlpool India(supra), Bausch & Lomb Eyecare(India)Pvt.Ltd(ITA 643 of 2014 of Hon’ble Delhi HC), the issue of AMP expenses had been deliberated upon extensively and each and 13

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every argument raised by the TPO/DRP have been analysed thread bare.We would like to reproduce relevant portion of the judgment of Bausch & Lomb Eyecare(India) Pvt.Ltd.(supra) and same reads as under: “53.Areading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price.The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(1) For the purposes of this section and sections 92,92C,92D and 92E ,"international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and 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. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into

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between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise."

56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises.

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Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC."

"The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree 16

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

"68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an· exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of 17

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an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions",Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT,

71- Since a quantitative adjustment is not permissible for the purposes of a TP adjust - ment under Chapter X,equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore,what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT,is excessive,thereby evidenc - ing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.

74.The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to

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Section 928 of the Act.The problem does not stop here.Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?

"75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand,which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on.A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance.”

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explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.

Considering the facts-like absence of an agreement between the assessee and the AE.s.for sharing AMP expenses,payment made by the assessee under the head AMP to the domestic parties,failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon’ble Delhi High Court delivered in the case of Bausch and Lomb(India)Pvt.Ltd(supra),we are of the opinion that the transaction-in - question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction.

3.4.4.With regard to the submissions of the AR that the issue of AMP should be restored back to the file of the AO,we want to mention that law as a concept is supposed to evolve with passage of time-it cannot be static always.Non- availability of a particular decision of the higher forum cannot justify the restora -tion of issue/cases to the file of AO in each and every case.Unnecessary litigation has to be avoided and issues have to be settled for once and all.We are of the opinion that after the judgments of Maruti Suzuki and Bausch & Lomb (supra)there is no scope of any other interpretation about the AMP expenditure. In the case under consideration,the AO/TPO has not brought anything on record

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that there existed and agreement,formal or informal,between the assessee and the AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled.Conducting FAR analysis or adopting an appropriate method is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not.Without crossing the first threshold second cannot be approached,as stated earlier.In the case under consideration,we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO.Considering the facts and circumstances of the case under consideration,we are of the opinion that the FAA was not justified in upholding the order of the TPO.Therefore,reversing his order,we decide second ground in favour of the assessee.

4.Next ground of appeal deals with disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers (TMPs).The AR fairly conceded that the identical issue was decided against the assessee by the Tribunal,while deciding the appeals for the earlier years (ITA/282/Mum/2000-AY.1994-95,ITA/4135/Mum/2010-AY.1997- 98,ITA3510/Mum/2011-AY.2003-04,ITA/4205/Mum/2011-AY.2004-05). We find that while deciding the appeal for the year AY.1994-95,the Tribunal had discussed and decided the issue as under: “33.Ground No.12 of this appeal relates to the addition made by the A.O. and confirmed the learned CIT(A) by way of disallowance made on account of assessee’s claim for deduction of excise duty liability of third party manufacturers/converters.” XXXXXXXXXXXXXXX 49. As such considering all the facts of the case and keeping in view the legal position emanating from the various judicial pronouncements discussed above, we are of the view that the provision made by the assessee for the amount payable to third party manufacturers/convertors on account of excise duty payable by them as per the 21

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agreement had not been crystallised or ascertained during the year under consideration as the sum was not paid by the third party manufacturers/convertors but was disputed by them, which dispute was not settled in the year under consideration. The said liability was a contingent liability and it was not while computing the business income of the assessee for the year under consdiration. In that view of the matter, we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. on this issue sand dismiss ground No.12 of assessee’s appeal.” Respectfully,following the orders of the Tribunal for the earlier years,we decide ground number four against the assessee.

5.Fifth ground is about disallowance of appreciation on marketing know-how (in pursuance of worldwide stock and asset purchase agreement entered into by Pfizer US and the parent company of the assessee).

The AR stated that while deciding the appeals for the AY.s.2003-04 and 2004- 05(ITA/3510/Mum/2011&ITA/4205/Mum/2011)had adjudicated the identical issue in favour of the assessee.We would like to reproduce the relevant portion of the order and same reads as under: 12. The ground no.5 is regarding disallowance of depreciation on marketing knowhow. 13. The assessee acquired on going non-chocolate confectionary business of M/s. Warner Lambert (I) Pvt. Ltd in pursuance of worldwide stock and asset purchase agreement between Pfizer and Cadbury Schweppes Plc of UK, the respective parent companies of the parties. The assessee has paid total consideration of Rs.33,35,00,000/-. In the valuation report submitted by the assessee out of the total consideration, the assessee has allocated a sum of Rs.18,49,30,000/- towards market know how. The assessee claimed depreciation on the market know how being tangible assets. The AO has questioned the claim of the assessee and held that it is not acceptable. The AO accordingly, disallowed the claim of the depreciation on the marketing know how. On appeal, the ld. CIT(A) has confirmed the action of the AO. 14. Before us, the ld.Sr.Counsel of the assessee has submitted that the issue is now covered by the series of judgments including the judgment of the Hon’ble Delhi High

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Court in the case of CIT V/s HINDUSTAN COCO COLA BEVERAGES P. LTD [2011] 331 ITR 192 (Del) wherein the Hon’ble High Court after considering the facts that the specific payment for goodwill represents the consideration for marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how, including information of the territory and allowed the depreciation on such payment on intangible assets. He has also relied upon the decision of the Tribunal in the case of DCIT V/s WEIZMANN FOREX LTD. [2012] 51 SOT 525 (ITAT)[Mum]) as well as the series of other decisions of this Tribunal, wherein the Tribunal held that marketing strategies and distribution network, customer lists, marketing strategies, and software as intangible assets eligible for depreciation u/s 32(1)(ii) of the Act. The Sr.Counsel further submitted that the AO has disallowed the depreciation on the marketing knowhow on the ground that the amount is considered towards goodwill and no depreciation is allowed on this. He has also relied upon the decision of the Hon’ble Supreme Court in the case of CIT V/s SMIFS SECURITIES LTD.[2012] 348 ITR 302 (SC) and submitted that the Hon’ble Supreme Court has held that goodwill is an asset u/s 32 of the Act and eligible for deduction under section 32 of the Act. 15. On the other hand, the ld. DR relied on the orders of authorities below. 16. We have considered the rival submissions and perused the material available on record. The AO has denied the claim of depreciation on “marketing knowhow”. The concluding paragraph of the assessment order is reproduced for the sake of convenience as under: “ 11.6 With regard to the assessee’s submission that the market knowhow is a marketable right which can be valued and on which depreciation may be claimed it is to be noted that even list of telephone numbers may be a marketable commodity. However, when something has to be a right then it connotes much more than a mere commodity. The said object should be in exclusive position of the right holder and at the exclusion of others. The assessee has not shown any evidence that it has acquired anything from Warner Lambert to this effect. Secondly, the report of Bansi Mehta and & Co,also states that market value can be taken as 3 months advertising cost. This also shows that this know how is general in nature and not in exclusive possession of' anybody. Moreover, it can be an intangible asset which would depreciate in value with usage and time. In view of this the assessee’s stand is not accepted and allocation of 184.93 lakhs under the head intangible asset viz. market knowhow is rejected. This amount is 23

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considered as towards goodwill and no depreciation is allowed on this. Hence, depreciation @12.5% (for less than 180 days) claimed by the assessee onthis asset is disallowed. The disallowance works out to Rs.23,11,625” (emphasis is ours) 17. It is clear that the AO has denied the claim of depreciation by treating the amount paid by the assessee as consideration towards goodwill. Thus, the AO has treated the said payment towards goodwill. Once, the payment is accepted for goodwill then the judgment of Hon’ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (supra) is applicable on the issue. The Honblé Supreme Court has decided the issue of depreciation on goodwill as under : "Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said section ?" Answer In the present case, the assessee had claimed deduction of Rs.54,85,430 as depreciation on goodwill. In the course of hearing, the explanation regarding the origin of such goodwill was given as under : "In accordance with the scheme of amalgamation of YSN Shares and Securities (P.) Ltd. with Smifs Securities Ltd. (duly sanctioned by the hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares and Securities (P.) Ltd. were transferred to and vest in the company. In the process goodwill has arisen in the books of the company." It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities P. Ltd. (amalgamating company) should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the amalgamating company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income-tax Act, 1961 ("the Act", for short). We quote hereinbelow Explanation 3 to section 32(1) of the Act : "Explanation 3.—For the purposes of this sub-section, the expres sions 'assets' and 'block of assets' shall mean— (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature :"

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Explanation 3 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. A reading the words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income-tax (Appeals) ("the CIT(A)", for short) has come to the conclusion that the authorised representatives had filed copies of the orders of the High Court ordering amalgamation of the above two companies ; that the assets and liabilities of M/s. YSN Shares and Securities P. Ltd. were transferred to the assessee for a consideration ; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee- company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by the Income-tax Appellate Tribunal ("the ITAT", for short). We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, against the decision of the Income-tax Appellate Tribunal, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. For the afore-stated reasons, we answer question No. (b) also in favour of the assessee. Question No. (c)” Without going into the controversy of allowbility of depreciation on other tangible assets when the AO has accepted the payment in question for goodwill then in view of the judgment of the Hon’ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (supra), the depreciation is allowable on the marketing knowhow. Hence, we allow the claim of the assessee.” 25

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Considering the above discussion,ground number 5 is decided in favour of the assessee.

6.Last ground pertains to disallowance made u/s.14A of the Act,amounting to Rs.2,00,52,715/-.During the assessment proceedings,the AO found that the assessee had claimed exempted income of Rs.5.29 crores (dividend income- 5.27 crores,interests received on US 64 tax free bonds -Rs. 2.90 lakhs).The AO raised a query as to what expenses had been incurred for earning the exempt income,so that same could be disallowed as per the provisions of section 14A of the Act.The assessee submitted that it had made investment in the mutual fund schemes periodically out of its surplus funds which were not needed immediate -ly,that it had not taken any loans and had not paid any interest,that for managing the investment in the mutual funds no expense was incurred except one person in the finance department who would spend an hour a day on an average for monitoring such investments, that no other expenditure had been incurred for earning the exempt income,that the salary of treasury manager, who was managing the investment of the assessee,was Rs. 10.76 lakhs, that if at all any disallowance was to be made than 10% of his salary could be attributed to the earning of exempt income.After considering the submission of the assessee, held that the assessee had shown net profit to be 67.64 crores,that the total exempt receipts were at Rs.5.29 crores,that percent contribution to the net profit of the exempt income was7.82%,that 7.82% of the common expenses of Rs.32. 73 crores would be a justifiable disallowance.Finally, he made a disallowance of Rs. 2.55 crores,invoking the provisions of section 14 A of the Act.

6.1.Aggreived by the order of the AO, the assessee preferred an appeal before the FAA.Before him the assessee made elaborate submissions and relied upon number of cases.It was argued that administrative expenses amounting to Rs. 2.13 Lacs(salary paid to the manager and executive of the Treasury Department)

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incurred during the year could only be considered to have been incurred for earning of exempt income,that disallowance u/s.14A should be restricted to Rs. 2.13 Lacs.The FAA issued a show cause notice on 24/10/2011 asking the assessee to explain as to why disallowance u/s.14 A should not be computed in accordance with the formula mentioned therein.The assessee submitted that the formula mentioned in the notice was akin to the method prescribed by the rule 8D of the Income Tax Rules,1962(Rules),that it was only with effect from AY. 2007-08that the AO.s had been empowered to determine the amount of expenditure incurred in relation to exempt income in accordance with a prescribed method if the AO was not satisfied with the correctness of the claim of the assessee, that the rule 8D was not applicable retrospectively. The assessee relied upon the decision of the Hon’ble Bombay High Court delivered in the case of Godrej and Boyce Manufacturing Ltd.(43 DTR 177).After considering the submission of the assessee and the assessment order,the FAA worked out the disallowance at Rs.2,00,52,715/- and thus partly allowed the appeal.

6.2.Before us,the AR stated that while deciding the appeal for the AY.2004-05 (supra)the Tribunal had at paragraphs 38-40 at pages 18-19 had dealt with the issue,that in earlier years the disallowance was restricted to 1% -2% of the dividend income,that same disallowance should be made for the year under consideration also.He relied upon the cases of Greaves Leasing Finance Ltd. (ITA/5634/Mum.2009)J.R.Enterprises(124ITD493),The Diamond Company Ltd.(ITA/ 1265/KOL/2010).The DR stated that disallowance suggested by the assessee was not reasonable.

6.3.We have heard the rival submissions and perused the material before us. We find that while deciding the appeal for the earlier year, the Tribunal had decided the issue as under: 38. Ground No.2 is regarding disallowance made under section 14A of the Act.

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Respectfully following the above, we are of the opinion that the disallowance should be restricted to 2% of the exempt income. Accordingly, ground number six is decided in favour of the assessee,in part. I.T.A./5876/Mum/2012, AY: 2005-06: 7.The solitary ground of appeal,raised by the AO,is about disallowance u/s.14A of the Act.He has objected to the reduction of disallowance by the FAA. In the earlier paragraph,we have dealt with the issue of disallowance to be made with regard to exempt income.Following the same we hold that disallowance of two percent of the exempt income would be reasonable.The issue raised by the AO is decided accordingly.

As a result appeals filed by the assessee and the AO stand partly allowed. फलतः िनधा�रती और िनधा�रती अिधकारी �ारा दािखल क� गई अपील अंशतःमंजूर क� जाती है.

Order pronounced in the open court on 18th May, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 18 मई , 2016 को क� गई । Sd/- Sd/- (सी. एन. �साद / C.N. Prasad ) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांकDated : 18.05.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� ितिलिप ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ� 2. Respondent /��यथ� 3.The concerned CIT(A)/संब� अपीलीय आयकर आयु�, 4.The concerned CIT /संब� आयकर आयु� 5.DR “A ” Bench, ITAT, Mumbai /िवभागीय �ितिनिध, खंडपीठ,आ.अ.�याया.मुंबई 6.Guard File/गाड� फाईल स�यािपत �ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.