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TMI Blog2013 (8) TMI 1092X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,73,15,234/-. Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 106,44,25,680 on account of the alleged difference in the arm's length price of international transactions. 2.1 That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to ₹ 106,44,25,680 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding / arrangement between the appellant and the associated enterprise. 2.3 That the assessing officer/DRP erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 92B, so as to invoke the provisions of section 92 of the Act. 2.4 That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products. 2.12 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 2.13 The TPO / DRP erred on facts and in law in holding that the efforts to create marketing intangibles are in the nature of services and entrepreneurial efforts undertaken by the appellant. 2.14 That the assessing officer erred in failing to appreciate that the scheme of Transfer Pricing under Chapter-X of the Act only provides for determination of 'price' from an international transaction including any expenditure arising from an international transaction but it cannot determine the 'quantum' of international transaction or extent of business expenditure. 2.15 That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1998-461, aff d in part, rev'd in part 285F.3d.1285. 89AFTR2d2002-1978(CA-9,2002);and Glaxo Smith Kline Holding (Americas) Inc. vs. Commissioner, T.C.No. 5750-04 and T.C.No. 6959-05, which were rendered in the context of specific provision under the Transfer Pricing Regulations of United States of America. 2.23 Without prejudice that the assessing officer erred on facts and in law hi considering the following expenses for the purpose of calculating alleged AMP expenditure of the appellant TABLE Particulars Amount (Rs in lacs) Selling and distribution expenses 1067.50 Market Research expenses 969.16 Total 2036.66 2.24 Without prejudice that the assessing officer erred on facts and in law hi not considering the following companies as comparable for benchmarking advertisement and publicity expenses: Company Name Total Sales & Dist Expn/Sales % Cadbury India Ltd. 18.03 Gillette India Ltd. 27.12 Hindustan Unilever Ltd. 20.20 Nestle India Ltd. 9.32 Procter & Gamble Hygiene & Health Care Ltd. 19.72 18.88 2.25 The TPO / DRP erred on facts and in law hi holding that for the purpose of computing the bright line AMP expenses companies which are engaged hi brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and hi law in reducing the returned income by an amount of ₹ 170,88,165/-, without appreciating that the assessee had claimed a deduction of the closing balance lying in PLA amounting to ₹ 32,62,786/- and consequently added back the opening balance lying in PLA amounting to ₹ 2,03,50,951/- resulting in a net addition of ₹ 1,70,88,165/- 5. That the assessing officer erred on facts and in law in making disallowance of ₹ 1,72,00,000/-, claimed in respect of liability for post retirement medical benefits to employees on the basis of actuarial valuation, in accordance with the revised Accounting Standard 15, relating to accounting of employee benefits, on the ground that same is an unascertained liability. 5.1 That the assessing officer erred on facts and in law in observing that the aforesaid provision made for post retirement medical benefits to employees has resulted in double deduction to employees inasmuch as deduction has also been claimed by the assessee in respect of medical insurance premium paid during the relevant year(s). 5.2 That the assessing officer erred on facts and in law in observing that the provision has been made by debiting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 962 ('the Rules') and the amount suo motu disallowed by the appellant. 8.1 That the assessing officer erred on facts and in law in invoking Rule 8D of the Rules and computing disallowance of ₹ 1,08,39,000/- under section 14A of the Act, without appreciating that conditions precedent for applying Rule 8D as prescribed hi sub-sections (2)7 (3) of the said section were not satisfied. 8.2 That the assessing officer erred on facts and in law in attributing part of the interest expenditure incurred during the year towards earning of the exempt income, while computing disallowance under section 14A of the Act hi accordance with provisions of Rule 8D of the Rules, without appreciating that the appellant had no borrowed funds at all. 8.3 That the assessing officer erred on facts and in law in holding that the disallowance of ₹ 6,06,977/- made by the appellant, suomotu, in the return of income under section 14A of the Act was incorrect. 8.4 That the assessing officer erred on facts and in law in not appreciating that even in case of mixed pool of funds, where surplus funds are more than investment made, a presumption needs to be drawn in favour of assessee that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts i.e. malted milk food products and drinks under the brands Horlicks, Boost, Maltova and Viva. During the year under consideration the assessee also exported malted milk food to its group companies, which were manufactured by third party vendors in India and thus acted as traders. Further it provided certain administrative support services such as marketing, sales inputs, IT support, training and accounting etc. to its group companies. The Assessing Officer noted that the assessee had entered into international transaction with associated enterprises and the amount of transaction involved was more than ₹ 15 crores. The Assessing Officer referred the case to Transfer Pricing Officer (herein after refer to as TPO, Chandigarh) for determining arms' length price in relation to international transactions under section 92CA of the Act. The Addl. Commissioner of Transfer Pricing vide order dated 21.10.2011 computed the value of international transaction under section 92CA(3) of the Act at ₹ 109,22,10,830/-. The Dispute Resolution Panel thereafter issued directions under section 144C (5) of the Act dated 3.9.2012 pursuant to which the Assessing Officer had passed the order u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income declaring total income of ₹ 2,75,73,15,234/-. The Assessing Officer vide letter dated 9.8.2010 and thereafter vide letter dated 27.7.2011 and further letter dated 23.8.2011 made reference to the TPO under section 92CA(1) of the Act. The details of the said communication are enlisted under paras 2.1 to 2.3 at pages 1 and 2 of the order of the TPO. The TPO after considering the business activities of the associated enterprises and holdings of the assessee company by holding company, concluded that the assessee company incorporated under the laws of India, was 43.16% owned by Horlicks Ltd., U.K., which in turn was part of GSK Group. The TPO thus held that it was associated enterprise within the meaning of section 92A(2)(a) of the Act. The TPO at part of page-4 and page-5 has enlisted summary of business activities and nature of relationship with the assessee company of various associated enterprises. At page 6 of the report of the TPO it has been observed as under: "6. Transfer pricing method adopted by the assessee: 6.1 International transactions of exports of malted food/biscuits and exports of packing material/tazzos have been separately benchmarked adopting TNMM a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE and in order to examine the arms' length price, it was necessary to compare total expenditure incurred by the assessee on behalf of the AE in India and the amount paid by the assessee in India as contribution for advertisement expenditure by the AE. 15. The assessee was thus show caused as to why it should not be inferred that it had incurred both routine and non-routine advertisement and marketing expenses on brand promotion and development of marketing intangibles for the associated enterprises (in short 'AE'). The TPO also analysed the results of comparables relied upon by the assessee at page 9 to page 14 of the order of TPO. 16. The TPO thereafter finally selected four companies out of list of sixteen companies selected by the assessee for benchmarking the international transaction of export of malted foods, biscuits to AEs taking into consideration the expenses incurred on selling and distribution expenses. The TPO thereafter determined the arms' length price of reimbursement for brand promotion and marketing intangible of the AE in India as per table at pages 15 and 16 of the order of the TPO and the arms' length value of subsidy was determined at ₹ 1,65,49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsidy at ₹ 1,09,22,10,830/- as against nil subsidy received by the assessee. The TPO thus held that an adjustment of ₹ 1,09,22,10,830/- was to be made to the income of the assessee on which assessee would not be entitled to deduction under sections 10A, 10AA, 10B or under Chapter VI-A in respect of the enhanced amount. 18. The main plea of the assessee before the TPO was as under, which was rejected by the TPO: "8.5.11 The assessee has contended that expenditure on AMP is recurring in nature, it is for the promotion of products manufactured and sold in India which has not resulted into indirect benefit to the AE and has directly benefited it. According to it, such expenditure does not result in the creation of any asset. Alternately, it has claimed that any marketing intangible, if created were not on behalf of or transferred to the AE. The assessee has also provided data of AMP expenditure incurred by GSK Worldwide but the same is for the year 2010 and therefore no inference is drawn. 8.5.12 The assessee has pleaded that all the advertisements in print media, press or otherwise in relation to products aimed to benefit only the products sold by the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th directions. It was also pointed out by the learned A.R. for the assessee that certain portion of the said expenditure being relatable to the brands owned by the assessee had been directed to be allowed by the Tribunal in earlier year. 22. The ground No.2 raised by the assessee is general in respect of the aforesaid adjustment made on account of AMP expenditure. The issue in ground Nos.2.1 to 2.16 is whether the transaction is an international transaction. The Chandigarh Bench of the Tribunal in assessee's own case relating to assessment year 2007-08 observed as under: 21. The ground No.2 raised by the assessee is general in respect of the aforesaid adjustment made on account of AMP expenditure. The issue in ground Nos.2.1 to 2.7 is whether the transaction is an international transaction. The Special Bench of the Tribunal in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra) vide paras 14.1 to 14.20 of the decision held as under: 14.1. Having seen that there was a transaction between the assessee and the foreign AE, now let us examine as to whether such transaction can be called as international transaction. It was submitted by the ld. counsel for the assessee and some of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee incurred advertisement expenses for which the payments were made to third parties unrelated to it. Such transactions got concluded on the incurring of advertisement expenses without any direct or indirect involvement of the assessee's foreign AE. It was stated that a transaction with a third party or a part of such transaction cannot be called as transaction with the AE. As the entire advertisement expenses were incurred in India vis a vis third parties, the requirement of sec. 92B was claimed to be lacking. The ld. AR argued that there should be a first degree nexus between the incurring of advertisement expenses and the brand promotion for the foreign AE so as to regard it as an international transaction. Any incidental benefit resulting to the foreign AE, out of the expenses incurred by the assessee in India, cannot be termed as international transaction. As there was no transaction between the assessee and its foreign AE insofar as incurring of AMP expenses is concerned, the ld AR argued that the same ceased to be an international transaction. It was argued that the present so-called transaction of brand building for the foreign AE by the assessee is neither covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount incurred for its AE as its own expense, this would have the effect of reducing the profit without reason, thereby depriving Indian exchequer from its rightful share of taxes. It was stated on behalf of the Revenue that the assessee incurred AMP expenses with a tacit understanding of creating the marketing intangible for its foreign AE. The assessee not only claimed deduction for the AMP expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. 14.7. The third way of looking at this as an international transaction was its inclusion under the relevant part of section 92B(1), which runs as under : 'and shall include a mutual agreement or arrangement (there is an oral understanding) between two or more associated enterprises (between the assessee and foreign AE) for the allocation or apportionment of..... any cost or expense incurred or to be incurred (brand promotion expenses) in connection with a benefit, service or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless a transaction is an international transaction within the meaning of sec. 92B, the same cannot be subjected to the TP provisions. The expression 'international transaction' has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. 14.11. The case of the revenue is that it is an international transaction in terms of sub-sec. (1) of sec. 92B. Let us see the prescription of this provision, which is as under :- "92B. Meaning of international transaction.--(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means atransaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (1) of sec. 92B it is noticed that it uses both the words 'means' and 'includes'. When we examine the Explanation to this section clarifying the meaning of the expression 'international transaction' and 'intangible property', then it becomes clear that both have again been defined in inclusive manner. Even though sub- clauses (a) to (c) and (e) of clause (i) of the Explanation defining 'international transaction' are exhaustive, but sub-clause (d) being the 'provision of services' is again inclusive as 'including' provision of market research, market development, marketing management,...'. It is of critical importance to observe that the expression 'international transaction' itself has been defined in this Explanation only in an inclusive manner. As a result of insertion of the Explanation with retrospective effect, the otherwise exhaustive definition of 'international transaction' given in sub-section (1) has been converted into an inclusive one. Clause (ii) of the Explanation also defines the expression 'intangible property' in an inclusive manner. Sub-clause (a) of clause (ii) embraces 'marketing related intangible assets&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Explanation is simply inclusive and not exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclusions. 14.18.1. Now we will examine as to whether this transaction falls within any of the sub-clauses of clause (i) of Explanation to section 92B. The learned counsel for the assessee contended that the view point of the ld. DR that the transaction of brand building is in the nature of 'provision of service', is not tenable. He submitted that Indian entity is engaged in the business of manufacturing and selling of electronic goods etc. and not in rendering services of advertisement and promotion of a brand to its customers. His contention was that in order to bring any transaction within the scope of 'provision of services', it is sine qua non that the main business activity of the Indian enterprise and the nature of service provided to the foreign AE must be same. As it is not so in the present case, the ld. AR contended that the transaction cannot be held as a 'provision of service'. 14.18.2. We do not find any force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR that it is also an international transaction having a 'bearing on the profits, income, losses or assets' of the assessee on one hand and/or towards allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, on the other. 14.19. Now we take up the contention of the ld. AR that there was no transaction between the assessee and its foreign AE insofar as incurring of AMP expenses is concerned and further the assessee entered into transactions with the third parties who are advertising agencies and it is not the case of the Revenue that the terms of transactions with such third parties were determined in substance by the foreign AE. Insofar as the part of the contention of the ld. AR about the deemed international transaction u/s 92B is concerned, we find that it is nobody's case that the transaction in question is a deemed international transaction. In order to be covered under sub- sec. (2) of Sec. 92B for making a transaction with a third party as deemed international transaction, it is essential that the AE of the assessee should have i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.7 are thus dismissed. 23. The issue in the present appeal is identical to the issue raised before the Tribunal in assessee's own case and following the majority decision of the Special Bench of the Delhi Tribunal in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra) and order of Tribunal in assessee' own case relating to assessment year 2007-08, we hold that the transaction undertaken by the assessee is an international transaction, liable to be considered under section 92B of the Act and the Assessing Officer was justified in treating the said transaction as an international transaction. The ground Nos.2.1 to 2.16 are thus dismissed. 24. Vide ground Nos.2.17 to 2.22 the assessee is aggrieved by the application of the prescribed method for determining the arms' length price of the international transaction. As admitted by the learned A.R. for the assessee, similar issue arose before the Special Bench of the Delhi Tribunal in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra) and also before the Chandigarh Bench of the Tribunal in assessee's own case relating to assessment year 2007-08 (supra) wherein vide paras 24 and 25 it was held as under: 24. The next issue raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [(1973) 91 ITR 8 (SC)], to canvass the view that the assessee cannot be expected to earn maximum profit. It was submitted that the action of the Revenue in firstly taxing higher rate of net profit on sales and thereafter further increasing the income by making addition on account of AMP expenses, runs contrary to the cardinal principle laid down in that case. He explained that in that case the Revenue opined that the assessee should have transferred its goods at a higher price than that declared. Rejecting this contention, the Hon'ble Supreme Court came to hold that that once a transaction is bona fide, the profit cannot be computed by taking market price, ignoring the real price fetched. In the light of this judgment it was contended that the action of the Revenue in firstly benchmarking the net profit by applying TNMM on the international transaction of imports and then making separate addition for AMP expenses is akin to the stand of the Revenue in that case, being the maximization of profit in all possible ways, which cannot be sustained. With reference to certain material from the paper book, the ld. AR submitted that the assessee's net profit rate was better than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made sale of similar goods to its foreign AE through several invoices and has also incurred some expenses or paid interest to it, it would mean that all the transactions of sales are closely linked and these can be processed as one unit. However the transactions of payment of interest or incurring of any other expense would be required to be separately scrutinized under Chapter-X because these are of a different nature vis-a-vis the transactions of sales. 21.5. It is undisputed that under the TNMM, it is always the operating profit from the concerned international transaction that is viewed in relation to the total cost, sales or capital employed etc. of that international transaction. It is not as if the percentage of the margin is to be determined by considering the net profit of the entity in relation to the total sales of the entity. When we consider operating profit to total costs of an international transaction, all the items of non-operating expenses and non-operating income qua such international transaction are liable to be excluded. The correct approach under the TNMM is to consider the operating profit from each international transaction in relation to the total cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the ld. AR that no addition was made by the TPO on account of application of the TNMM on the imports made by the assessee from its foreign AE. In our considered opinion, there is a noteworthy difference between two situations, viz., one where the TNMM is wrongly applied on entity level and some addition is made to the overall net profit of the Indian AE while testing the international transaction of imports of raw material and also some further addition is made by applying the TP provision on AMP expenses; and the situation in which no addition is made to the overall profit on account of application of the TNMM but an addition is made by applying the TP provisions on the transaction of AMP expenses incurred towards brand building for the foreign AE. 21.8. We find no bar on the power of the TPO in processing all international transactions under the TP provisions when the overall net profit earned by the assessee is better than others. Earning an overall higher profit rate in comparison with other comparable cases cannot be considered as a licence to the assessee to record other expenses in international transactions without considering the benefit, service or facility out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian customers because these are not international transactions. In such a case, there can be no benchmarking of the profits realized from such Indian customers so as to form a platform for contending that the TNMM has been applied on the overall profits and hence the AMP expenses should not be subjected to the TP provisions. In fact, the assessee is a manufacturer and only raw materials are imported from its foreign AE. The transaction of import of raw-material is a separate international transaction liable to be subjected to the TP provisions. Apart from such purchase of raw- material, the assessee, as a manufacturer is also required to incur several other expenses on manufacturing, financing and selling which constitute part of the total cost of product along with the cost of raw materials. Subjecting the international transaction of purchase of raw material to the TP provisions would only show that purchase price of raw-material is not unnecessarily inflated. It is self evident that net profit is not dependent only on the purchase cost. A host of other factors contribute to the earning of profit. It may be possible that a manufacturer succeeds in making economical purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income arising from an international transaction shall be computed having regard to the arm's length price.' Similarly it is pertinent to take stock of sub-section (3) of section 92, which provides that : 'The provisions of this section shall not apply in a case where the computation of income under sub- section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into'. On a careful perusal of sub-section (3) in combination with sub- section (1), it transpires that if the computation of income having regard to ALP of an international transaction has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account, then the provisions of section 92 will be ignored. It can be understood by way of a simple example. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction. Such ALP can be determined inter alia by comparable uncontrolled price (CUP) method or Cost Plus method or even by the TNMM. All the five methods, as prescribed under section 92(1) and rule 10B, aim at determining the ALP of an international transaction in one way or the other. First is the CUP method, by which the price charged or paid for property transferred etc. in a comparable uncontrolled transaction is identified. Such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transaction. The adjusted price arrived at is taken as ALP in respect of the property transferred etc. in the international transaction. In the like manner all the methods including TNMM provide for determining the ALP of an international transaction. The main focus of the ld. AR was on restricting the application of the provisions of Chapter-X to other international transactions when one transaction has been processed under the TNMM. It has been argued so on the ground that under the TNMM, the net profit of the entity is considered which includes the effect of all other transactions also. The natural consequence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble jurisdictional High Court in the case of Maxopp Investment Ltd. & Ors. Vs. CIT [(2012) 247 CTR (Del.) 162], the ld. AR contended that Rule 10AB, specifying the sixth method, cannot have retrospective operation when it has been made applicable from A.Y. 2012-13. 22.2. Coming back to his point, it was argued that the TPO/DRP have determined ALP in respect of AMP expenses by applying the bright line test, which is not one of the five recognized methods under the Indian legislation. As determination of ALP has not been done as per any of the methods u/s 92C, the ld. AR contended that the same should be set aside. He relied on an order passed by the Mumbai Bench of the Tribunal in CA Computer Associates Pvt. Ltd. Vs. DCIT dated 28-1-2010, in which the assessee paid royalty to its parent company. The TPO rejected the ALP of royalty payment as shown by the assessee on the ground that some of the sales did not materialize for various reasons and the same were written off by the assessee in the same financial year. It was opined that there was no question of paying royalty on such sales merely on the basis of raising invoices. The Tribunal rejected the Departmental stand by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR emphasized on the word ―any‖ as used in subsection (1) of section 92C(1). His contention was that the word ―any‖ in subsection (1) cannot be read as restricting itself to any one of the five methods but it may also be a combination of two or more of such methods. He relied on certain tribunal orders to buttress his point that the ALP can be determined be any method even though it is not specifically one of such five methods. He invited our attention towards an order passed by the Bangalore Bench of the Tribunal in which it has been held that Excess Earning Method (EEM) should be applied for determination of ALP which is nothing but enlargement of the CUP method. He also referred to another order passed by the Bangalore Bench of the Tribunal in which scope of the CUP method has been enlarged. In this case the Tribunal directed the determination of ALP by computing written down value of the asset as against the value as per the Registered Valuer's report, which was adopted by the TPO. The learned DR contended that the main thrust of the TP provision is on the determination of ALP and methods are only means to achieve this end result. He argued that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies below then what are the consequences. 22.9. Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Computation of arm's length price has been set out in section 92C. Subsection (1) provides that the ALP of an international transaction shall be be determined by any of the following methods, being the most appropriate method. Five methods are distinctly prescribed u/s 92C(1) and then there is clause (f) which talks of any other method as may be prescribed. Since sixth method has been prescribed under rule 10AB through the Income-tax (6th Amendment) Rules, 2012 which has been made applicable from the A.Y. 2012-13, the same cannot apply to the assessment year under consideration in view of the judgment of the Hon'ble jurisdictional High Court in Maxopp Investment Ltd. (supra). Rule 10B provides the modus operandi for the computation of ALP under these five methods. Sub-section (1) of section 92C starts with : ―The arm's length price in relation to an international transaction shall be determined by any of the following methods, being most appropriate method ...... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methods for determining the ALP, is not correct. 22.10. As regards the contention that methods are tools for determining the ALP, we find that there is no dispute that the main purpose of Chapter X is to determine the ALP of an international transaction, but such determination can be done only by way of the methods specified by the statute. When the legislature has specifically enshrined a provision u/s 92C requiring the computation of ALP by any of the prescribed methods, it does not fall in the realm of the TPO or for that matter any other authority to breach such mandate and apply or direct to apply any other method. Going by the dictate of the provision as subsists under sub-section (1) of section 92C, there can be absolutely no doubt on adoption of any single method out of those set out in section. 22.11. Rule10B has specified a set procedure to be followed for determining the ALP distinctly under the five methods. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorized to add one or more new steps in the prescribed procedure or to substitute any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost plus method as per rule 10B(1)(c), we find that the first step is to determine the cost of services provided by an enterprise to its associated enterprise. We have noticed above that the authorities below have computed the cost/value of the service provided to the foreign AE at '161.21 crore. It is this amount which constitutes the first step under the cost plus method. The second step is to determine the amount of normal gross profit mark-up to such costs arising from the provision of similar service by an unrelated enterprise in an uncontrolled comparable transaction. The third step under the cost plus method is to adjust the gross profit mark-up as determined under the second step to take into account the functional or other differences between the comparable uncontrolled transaction and the international transaction. The DRP determined 13% profit mark-up. The adoption of 13% constitutes steps 2 and 3 of the cost plus method. Step 4 talks of increasing the cost as determined under step 1 by such adjusted profit mark-up. In this case, the DRP increased cost of '161.21 crore under step 1 with 13% as determined under steps 2 and 3 to find out the amount as per 4 th step at '1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en non-AEs. One has to necessarily pass through these steps for determining ALP under the cost plus method. When these steps unequivocally provide for determining normal gross profit mark-up from the provision of similar services by an unrelated enterprise in a comparable uncontrolled situation, what is required to be done is to first find out some comparable uncontrolled transaction; then ascertain the profit mark-up of such comparable uncontrolled transaction; and then adjust it to bring it at par with the international transaction under consideration by removing the effect of factors of non-comparability. The cost plus method under Rule 10B(1)(c) does not provide for assuming a hypothetical profit mark-up under steps 2 and 3 for determining ALP. It has to be a profit mark-up of a comparable uncontrolled transaction. The DRP suggested 13% mark- up without showing such mark-up in a comparable uncontrolled transaction. This course of action cannot be sanctioned. When the rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode. Accordingly we do not approve the action taken by the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In that sense it would be a case of irregularity. Once an irregularity intervenes at a particular stage of the proceedings, the requirement is to take the hands of clock back to such stage and then make the necessary correction. Any proceedings become nullity when these are taken without any jurisdiction or beyond the limitation period. The test to determine as to whether the order passed is invalid or irregular is to see whether there is a lack of jurisdiction or a procedural default. Coming back to our context, we find that the lapse came in applying the procedure of determining ALP correctly. Such a lapse coupled with the fact that there was otherwise valid jurisdiction and the action was well within the time limit, cannot in our considered opinion lead to the declaration of the order as a nullity. There occurred an irregularity due to such lapse which can very well be cured by correcting it from the stage at which such lapse occured. In view of the foregoing discussion, we are of the considered opinion that there is no merit in the contention of the learned AR that the entire proceedings be declared as null and void simply because of some procedural lapse in determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in its reply dated 29.12.2011 filed before the Assessing Officer had elaborately commented upon the report of the TPO which is reproduced at pages 73 to 102 of the assessment order. The assessee had furnished tabulated details before the Assessing Officer under which the following details were considered to be AMP expenditure: Nature Amount (Rs.Lacs) Amount (Rs.Lacs) - Discount - sales - Market research - Sales promotion - Scientific research & development - Selling & distribution - Advertising - Service charges to selling agents 53.35 969.16 4,460.21 244.60 1,067.50 10,641.11 11.16 _______ 17,447.09 27. The plea of the assessee was that out of the total expenditure of ₹ 17447.09 lacs expenses totaling ₹ 2345.77 were not in the nature of advertisement and sales promotion and the break up of the said expenditure was as under: Nature Amount (Rs.Lacs) Amount (Rs.Lacs) - Discount - sales - Market research - Selling & distribution - Scientific research & development - Service charges to selling agents - Total 53.35 969.16 1,067.50 244.60 11.16 _______ 2,345.77 28. Further plea of the assessee was that the expenses incurred for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We do not find any force in the contention of the learned DR made in this regard. The logic in the exercise of finding out the AMP expenses towards creation of marketing intangibles for the foreign AE starts with the expenses which are otherwise in the nature of advertisement, marketing and promotion. If an expenditure itself is not in the nature of advertising, marketing or promotion, that ought to be excluded at the very outset. We, therefore, reject this contention raised by the learned DR. 18.6. As we are presently considering the term 'advertisement marketing and promotion expenses', which is analogous to, if not lesser in scope than the term 'advertisement, publicity and sales promotion' as employed in the erstwhile subsec. (3B) of sec. 37, all the judgments rendered in the context of sub-sec. (3A) & (3B) of sec. 37 will squarely apply to the interpretation of the scope of AMP expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of ―advertisement, marketing and promotion expenses‖ for determining the cost/value of the international transaction. 27. The plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing expenditure as the same do not fall within the AMP expenditure and thus these are not to be considered for computing the cost/value of international transactions. The expenditure are as under: Nature Amount (Rs.Lacs) Amount (Rs.Lacs) Market Research Sales Promotion (Rs.4460.21 - ₹ 1167.35) Selling & Distribution expenses Rs.969.16 ₹ 3292.86 ₹ 1067.50 3292.86 33. The assessee vide ground No.3 has raised the issue against disallowance of consumer market research expenses of ₹ 969.16 lacs in view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses this ground of appeal is thus allowed. The ground Nos.2.23 and 3 are thus allowed. 34. The next issue raised by the assessee is vide ground of appeal Nos.2.24 to 2.30 wherein the assessee is aggrieved by the order of the Assessing Officer in not considering certain companies as comparables for benchmarking, advertisement and publicity expenses. The next grievance of the assessee is that both the TPO and DRP had held that for the purpose of computing the bright line test, AMP expenses of companies which are engaged in brand building exercise and creating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic cases not using any foreign brand. Of course when effect will be given to the relevant factors as discussed above, it will correctly reflect the cost/value of international transaction. 31. The plea of the assessee in this regard was that the expenditure was incurred on foreign brand name i.e Horlicks and also on domestic brands such as Boost, Viva, Maltova, etc., and the expense as a percentage on sales of foreign brand was 10.37% and on domestic brand was 14.02%. Consequently the AMP expenditure incurred on foreign brand being lower than what is incurred on domestic product, no transfer pricing adjustment is to be made. As the issue of determining the transfer pricing adjustment in relation to AMP expenses incurred by the assessee being set aside to the file of TPO for redetermining the ALP of international transaction after considering the comparables companies, we direct the TPO to consider the aspect raised by the assessee in this regard and redetermine the value of arms' length price in relation to the AMP expenditure incurred by the assessee for the brand promotion of the foreign brand and also following the directions given by the Special Bench of the Tribunal (majorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Excise Authorities as on 31-03-2008 was ₹ 32,62,786/-whereas the same amount as on 31-03-2007 was ₹ 2,03,50,951/- and accordingly, the assessee has reduced its income by ₹ 1,70,88,165/- (i.e. difference between Opening Excise Balance of ₹ 32,62,786/- and Closing Excise Balance of ₹ 2,03,50,951/-) in the return. Since the claim for deduction of ₹ 36,87,481/- was not accepted in the previous year, therefore, in order to V" maintain judicial consistency in the stand taken by the Department in the earlier years in the assessee's own case, the addition of ₹ 1,70,88,165/- is not called for in the current year which is subject to rectification u/s 154 as per decision of Appellate Authorities for earlier assessment years. Accordingly, the returned income will decrease by the said amount of ₹ 1,70,88,165/-. 40. The Assessing Officer disallowed the claim of the assessee in view of the appeal pending before the appellate authority on this issue. 41. The learned A.R. for the assessee pointed out that similar issue arose before the Tribunal in assessee's own case in the preceding year and the Tribunal vide paras 38 to 41 allowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts i.e. on 31.3.2007 and 31.3.2006 of ₹ 36,87,481/- was claimed by the assessee as a deduction under the provisions of section 43B of the Act. The present issue raised vide ground No.3 stands covered in favour of the assessee by the order of the Special Bench of the Chandigarh Tribunal in assessee's own case relating to assessment year 2001-02, reported in 107 ITR 343 (Chd)(SB) (supra). The said deduction had been consistently allowed in the case of the assessee i.e. in the preceding years 1998-99 to 2000-01 and thereafter in assessment years 2002-03 to 2006-07. The Tribunal in ITA No.1238/Chd/2010 relating to assessment year 2006-07 - order dated 25.1.2012 vide para 49 allowed the claim of the assessee in turn following the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Raj & Sandeeps Ltd. (supra) observing as under: "49. The present issue is covered by the decision of Special Bench in the case of the assessee itself. Further the Jurisdictional High Court in Raj & San Deeps Ltd. (supra) has held that where the assessee had deposited the excise duty payable in advance in account-current, after the goods were manufactured, such amount was deductibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable by way of tax, duty, cess or fee; (c) the assessee must have incurred liability in respect of such tax, duty, etc. On fulfilling these conditions, the assessee's claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term "liability to pay such sum was incurred by the assessee" together with the words "a sum for which the assessee incurred liability" in Expln. 2 underline that payment must relate to the incurred liability to be called 'any sum payable'. In the present case, the assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in r. 173G that it "shall keep an account current"). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit. The Revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore, not relatable to any "liability Incurred" is without any basis.. The arrangement prescribed by the rule is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning we direct the Assessing Officer to allow expenditure of ₹ 32,62,786/-. Further the second plea of the assessee in respect of the addition of ₹ 1,70,88,165/- is not warranted. However, the Assessing Officer shall verify the claim of the assessee in this regard and after affording reasonable opportunity of hearing shall work out the consequential effect. The ground No.4 raised by the assessee is allowed and ground No.4.1 is allowed for statistical purposes. 44. The ground Nos.5 to 5.2 relate to the addition made on account of disallowance of ₹ 1.72 crores in respect of liability of postretirement medical benefits to employees. The learned A.R. for the assessee pointed out that similar issue arose before the Tribunal in assessment year 2007-08 and the same had been decided in favour of the assessee. Another aspect which was pointed out by the learned A.R. for the assessee that in the preceding year, the said amount was debited to the reserve account, however during the year under consideration the said amount had been debited to the Profit & Loss Account. 45. The brief facts relating to the issue are that during the year under consideration the assessee had cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dard-15 is enclosed at pages 836 to 902 of the Paper Book. The objective of the revised Accounting Standard-15 is to prescribe the accounting and disclosure for employee benefits. The Standard requires an enterprise to recognize: (a) Allowability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b) An expenses when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. 52. The scope of the said Accounting Standard-15 was mandatorily to be applied by an employer in accounting for all employee benefits, except employee share-based payment. Clause4 defines employee benefits include: (a) Short-term employee benefits, such as wages, salaries and social security contributions (e.g., contribution to an insurance company by an employer to pay for medical care of its employees), paid annual leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees; (b) Post-employment benefits such as gratuity, pensio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. In view thereof the assessee obtained an actuarial valuation certificate which reads as under: ACTUARIAL VALUATION CERTIFICATE - MEDICAL Ref:Actval/m/gsk_0307 GlaxoSmithKline Consumer Healthcare Limited. Re: Actuarial Valuation - Post Retirement Medical Assistance as on 31.03.2007. The actuarial value of liability of the Company towards post retirement medical assistance to the retired /retiring officers as per the Company's Scheme upto the date of valuation mentioned above has been calculated and the results of valuation are as given below: 1. BASIS: (a) Discount Rate - 8.00 % p.a. (b) Mortality - L.I.C. (1994-96) Ult. (c) Rate of Withdrawal - As applicable to the group. (d) Projected Unit Credit Method adopted. 2. DETAILS OF STAFF: The individual details in respect of 366 officers covered by these benefits & 140 retired officers have been made available for the purpose. 3. BENEFITS: The medical assistance is granted for due to accident or sickness and is limited as under: Directors Rs1,50,000 per year Managers Rs.1,50,000 per year Executives Rs.1,00,000 per year The Company has assured the benefits with National Insurance Company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, did not include the amount of premium paid for which deduction was already claimed. (e) The deduction was claimed because of change in the method of accounting and where there is a bonafide change in the method of accounting, the claims on the basis of the changed method, even if pertaining to earlier years, would be allowable deduction in the year of change, more so since the liability in regard thereto has not been claimed deduction in such earlier years. (f) Since the liability on account of medical assistance pertaining to services rendered in the earlier years has been accounted or claimed in the relevant year for the first time, in view of the bonafide change in the method of accounting (pursuant to mandatory AS-15 (Revised), for which no deduction was claimed in the earlier years nor would be claimed again in the year of payment, the said liability is allowable deduction in the relevant year itself. The deduction on account of liability towards medical reimbursement expenses aggregating to ₹ 11.09 crores being actuarial valuation in respect of subsisting liability has been correctly claimed by the appellant. (g) The Assessing Officer had disallowed the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service - the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under : (i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognized by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss as held by the Hon'ble Apex Court in Sutlej Cotton Mills Ltd. Vs. CIT (supra). It was further held by the Hon'ble Apex Court that what is necessary to be considered is the true nature of transaction and whether in fact it has resulted in profit or loss to the assessee. Further the said deduction was claimed during the year under consideration and the claim being bonafide is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkmen - 73 ITR 53 has held as under :- " Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if property ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a "reserve". Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year. Where the fixed assets are revalued and the difference between its cost and the value fixed on such revaluation is credited to the capital reserve, unless the Tribunal finds that the revaluation is mala fide, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act in 1973 was as follows:- 1 xxxx 2 xxxx 3 xxxx 4 xxxx 5. Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under Section 28 or section 37 of the Act." ITA 873/2008 & 1156/2008 Page 6 of 25 7. The Division Bench of this Court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT vs Hewlett Packard India (P) Ltd, by its judgment passed in Appeal No. ITA 486/2006 dated 31.03.2008, upheld the deductibility of the provision for warranty on the ground that it was made on the basis of actuarial valuation being covered by the principle set out in Metal Box Company (supra). In view of the aforesaid decisions and given the fact that the provision was estimated based on actuarial calculations, we are of the opinion that the deduction claimed by the assessee had to be allowed. We find no fault with the reasoning of the Tribunal. No substantial question of law arises for our consideration." 5.2 Considering the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine the issue observing as under: "We have carefully considered this issue. It is seen that this issue is covered by the judgment of the Supreme Court in the case of Swaraj Engines Ltd. 309 ITR 443 (SC). The AO is directed to re-determine this issue after verification of facts with the references to the agreement in questions entered into by the assessee with M/s Glaxo Smithkline Asia Ltd. on 7/2/97, in view of he directions of he Hon'ble SC in their aforesaid judgment." 49. The Assessing Officer on perusal of judgment of Hon'ble Supreme Court in the case of Swaraj Engines Ltd. (supra) held as under: 9.7 Perusal of the judgement shows that the basic issue as to whether the royalty paid is revenue or capital in nature has been remitted back and depending on the answer to that question, the issue of applicability of section 35AB of the Income Tax Act, 1961 is to be decided by the Hon'ble Courts. The Hon'ble Supreme Court has also held that the High Court is to decide whether the expenditure is revenue or capital in nature after construing the agreement between the parties. 9.8 Hence, it is seen that the Hon'ble Supreme Court has remitted the issues for fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of facts with reference to the agreement entered upon by the assessee. In respect of ground No.6.2 raised by the assessee it was pointed out that the said claim was made without prejudice to the issue raised vide ground Nos.6 and 6.1. 52. The learned D.R. for the Revenue placed reliance on the orders of the authorities below. 53. We have heard the rival contentions and perused the record. The issue arising vide the above said ground of appeal Nos.6 and 6.1 is in relation to the expenditure claimed by the assessee on account of payment of royalty to the GSKAP. Admittedly the assessee was paying the said royalty from year to year as per the terms of agreement dated 7.2.1997. As per the terms of the said agreement the payment was made for the licence/rights to use trade mark provided by GSKAP. The copy of the agreement is placed at pages 1 to 17 of the Paper Book and as per clause-12 it is provided as under: "12. In consideration of the right to use the Trade Marks granted herein, SBCH shall pay to SB Asia a royalty of upto five (5) percent of the "Net Sales Value" of the Contract Products sold under the Trade Marks. "Net Sales Value" for the purpose of this Clause shall mean s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The said expenditure was duly allowable in the hands of the assessee. Reliance is placed on the ratio laid down by the Delhi High Court in Sharda Motor Industrial Ltd. [319 ITR 109 (Del)] wherein it was held that royalty paid on the basis of rate per unit of production is revenue expenditure and could not be considered as capital expenditure. Another aspect to be kept in mind is that the issue of payment of royalty was also referred to the TPO during the year under consideration, being deemed international transaction and after fully scrutinizing the transaction, the TPO has accepted the arms' length price of the transaction for the year under consideration. Accordingly, we direct the Assessing Officer to allow the claim of royalty paid at ₹ 5556.64 lacs. The ground Nos.6 and 6.1 raised by the assessee are thus allowed. 57. The ground No.6.2 being without prejudice to ground Nos.6 and 6.1 is dismissed in view of our allowing the ground Nos.6 and 6.1. 58. The issue in ground No.7 raised by the assessee is against disallowance of interest in terms of proviso to section 36(1)(iii) of the Act amounting to ₹ 1,54,76,000/-. 59. The brief facts relating to the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its Balance Sheet. The closing balance as on 31.3.2008 was ₹ 1812.21 lacs as against closing balance as on 31.3.2007 reflected at ₹ 767.17 lacs. In view of the increase in the closing CWIP balance and in view of the assessee having incurred interest expenditure of ₹ 474.07 lacs , the Assessing Officer was of the view that the interest relatable to the assets which have not been put to use as the amount had been shown as CWIP, merits to be disallowed in view of the provisions of proviso to section 36(1)(iii) of the Act. The assessee had furnished details of interest expenditure totaling ₹ 474.07 lacs which is as under: DETAILS OF INTEREST EXPENSE Rs.In Lacs Interest on Deposits from Dealers/Wholesalers 290.06 Interest on Cheque discounting with banks 83.71 Differential Interest on Housing Loan to employees 96.95 Interest on Others 3.35 TOTAL 474.07 63. Out of the above said list of interest paid, the differential interest on housing loan to employees at ₹ 96.95 lacs had been excluded on the instructions of the DRP by the Assessing Officer. However, as the net interest expenditure paid by the assessee was over and above the interest r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t read with Rule 8D of Income Tax Rules. 67. The brief facts relating to the present issue are that during the year under consideration the assessee had received dividend income of ₹ 1954.70 lacs on mutual fund, which in turn was claimed as exempt under section 10(34) of the Act. The assessee in the return of income had disallowed expenditure of ₹ 6,06,977/- which is claimed to have been incurred in relation to earning of exempt dividend income. The Assessing Officer, however, applying the provisions of section 14A of the Act read with Rule 8D of Income Tax Rules computed disallowance both on account of interest expenditure and administrative expenditure resulting in disallowance of ₹ 102.32 lacs. 68. After hearing both the authorized representatives and after perusing the record, the first aspect of the issue is whether the provisions of section 14A of the Act read with Rule 8D of Income Tax Rules are applicable? The assessee during the year under consideration had received dividend on mutual funds amounting to ₹ 1954.70 lacs. The assessee on its own motion had disallowed expenditure of ₹ 6,06,977/- being relatable to earning of the exempt income. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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