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TMI Blog2020 (6) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... peal of the revenue for hearing on merits. 3. Since the issues involved in all the appeals are common and identical, therefore these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as facts narrated in ITA No. 625/Kol/2016, for A.Y. 2011-12, have been taken into consideration for deciding the appeals pertaining to transfer pricing issues, enmesse. 4. At the outset itself, we note that these appeals filed by the revenue as well as assessee for A.Y. 2010-11 and 2011-12, contained multiple grounds of appeal. However, at the time of hearing, we have carefully perused all the grounds raised by the revenue as well as assessee. The most of the grounds raised by the revenue as well as assessee, are either academic in nature or contentious in nature. However to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the revenue and assessee as well. With this background, we summarize and concise the grounds raised by the revenue as well as assessee as follows: Grounds relating to Transfer Pricing 1.Transfer Pricing adjustment in relation to payment of ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 23,400,187/-. This ground covers ground no. 4 of assessee's appeal in ITA No. 404/Kol/2015 for A.Y. 2010-11 Additional Grounds raised by the assessee 1.Refund of dividend distribution tax (DDT) paid in respect of non-residence share holders. This ground relates to A.Y. 2011-12 2.Deduction of education cess on income tax paid by the assessee is allowable expenditure. This ground relates to A.Y 2011-12. 5.Now, we shall take these grounds one by one. Grounds relating to Transfer Pricing 1.Transfer Pricing adjustment in relation to payment of royalty to the tune of Rs. 787,096,934/- This ground covers ground no. 5 to 7 of revenue's appeal in ITA No. 529/Kol/2015, for A.Y. 2010-11, Ground no. 6 of revenue's appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12,Ground No.4a to4b of assessee`s appeal in ITA No.625/Kol/2016 for A.Y.2011-12 and additional grounds raised by the assessee in A.Y. 2011-12 wherein the assessee stated that payment of royalty was subsumed in the entity level Transactional Net Margin Method (TNMM), analysis conducted by the assessee using combined transaction approach. 6. Facts of this ground, as stated in the TPO/AO order are as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Total 19,47,78,665/- 9.1 You are requested to provide the details of such patents etc. received by you in case of products under these brand names which are of recent development so as to provide you with continuing benefit. In case this is not provided and established, then you are requested to show cause as to why the royalty for the same should not be taken as Rs. Nil as no benefit has been received and no patent or know-how has been transferred. Further, please specify which patents are registered for "Dettol Antiseptic Liquid" as the details given by you do not pertain to Dettol Antiseptic Liquid. In case you are not able to provide the same which has a recent origin/development and which can be considered to provide you with continuing benefits, then please show cause as to why the royalty should not be considered as Rs. Nil in case of this product. 10. The taxpayer has benchmarked the Royalty using TNMM as the Most appropriate method with Operating Profit on cost as PLI of the comparable. On the basis of search conducted on Prowess and Capitaline database the taxpayer had identified 9 companies as comparable to RBIL. The average operating profit on cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been derived by use of the bunch of intangibles and not solely because of patents, which also has been agreed by your goodself in the subject notice. In facts and circumstances of the present case, the application of 'benefit test' is unwarranted, because payment of royalty has not been made by us on a standalone basis, it depends on the sales and thus application of 'benefit test' to royalty payment is irrational and erroneous. It is not correct to judge payment of royalty on the yardstick of 'benefit test'. Such a test to benchmark a transaction and arrive at the arm's length price is not based on any of the methods prescribed under section 92C of the Act. (b) Our submissions regarding applicability of CUP in the way suggested by your goodself as against TNMM adopted by the company for the transaction of payment of royalty In this regard, at para 10 of the show cause notice dated 06 January 2014, your goodself has sought to rejected TNMM, as adopted by the assessee, to benchmark the payment of royalty transaction and instead suggested to adopt CUP on the grounds that the assessee's transaction on royalty is different in scope, risk and return. We would like t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us were broadly similar to the functions performed by RBIL, the TNMM, which involves net margin comparison, was considered as the most appropriate method for testing the margin of RBIL". 9. However, the TPO rejected the contention of the assessee and worked out the transfer pricing adjustments in respect of royalty as follows: "36. Thus on conjoint reading of the agreement entered into by the asseseee with its A.E and above facts it well established that the A.E also provide the formula and trade name to the assesse to fracture the products the products which has application in Skincare etc. Hence, the contention of the assesse is rejected and the royalty is restricted to 1.5% of the net sales. The calculation of Royalty is as under Particulars Amount Gross Sales (As per Audited Financial Statement) 22,83,09,91,385 Less (a) Sales of Raw Material or Packing Material 6,66,80,033 (b) Export to Associated Enterprises 10,21,81,297 (c) Excise Charges 28,66,70,314 Net Sales on which Royalty is paid 22,37,54,59,740 Royalty @ 1.5% x 22,37,54,59,740 33,56,31,896 Actual Royalty Paid 1,118,772,987 Adjustment 78,31,41,091 37. WITHOUT PREJUD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are 20 percent above the generic level. Therefore, the total intellectual contribution (TIC) of Nograine is estimated at 20 percent. The transfer pricing regulations provide no guidance on how to allocate the TIC. The only example in the regulations [Treas. Reg. [section] 1.482-5(e), Example 4] allocates the entire TIC to the developer. It is, however, unrealistic to allocate the entire TIC to the developer of the intangible asset. Because the licensee assumes the risks and challenges of commercialization, the licensee will expect to capture some of the benefits produced by the technology. The simplest way to split the TIC between the licensor and licensee is to use a rule of thumb. Caves, who did a study of technology licenses, writes that "in an imperfect license market, the monopolist of a technology cannot fully approximate maximum rent...the bargaining appears to yield between one-third to one-half to the licensor with a mean of about 40 percent. Various court cases (all of which dealt with CUTS, not CPM) confirm Cave's position as a reasonable rule of thumb. In Bausch & Lomb, the Court favored a 50-50 split between the licensor and licensee. In Eli Lilly v. Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how etc for the products pertaining to 'Mincream' and 'Robinson Barley' - two brands continuing from 1940s up to the limitation period. Accordingly, based on the documents submitted to date, it is held that the assessee has not received any support/ know-how w.r.t. these two brands/products to support any payment of royalty and the arm's length price of the royalty paid in case of these two items is determined to be Rs.Nil under the CUP Method. Thus, the total income of the assessee is required to be adjusted upwardly by Rs. 39,55,843/- on this account. Total Adjustment in respect of Royalty is 78,70,96,934/- (78,31,41,091 + 39,55,843/-)" 10. Thus, during the TPO proceedings, as noted above, the assessee was asked as to why royalty was charged in respect of certain products/brands which were in existence years before acquisition of the assessee by Benckiser Group. The assessee gave detailed submission in respect of various products. Assessee company stated that it has adopted the TNMM method for benchmark the royalty payment. Assessee company also explained that none of the brands with respect to products manufactured by assessee company is owned by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts for which Royalty has been paid by RBIL to its AEs. RBIL also submitted the detailed write-up on the benefits received by the company from its AEs in the form of various intellectual property rights, improvements and developments, design & model, know-how, patents, products, trademarks etc. We submit that the RBIL has received services on an ongoing basis w.r.t. intellectual property rights, products/ brands, designs & model rights, know how from its AEs. The same has resulted in the significant growth in all segments despite tough competition only due to the active involvement and contribution from the Licensors. However, the TPO in its order held that the assessee has not produced any evidence of any support/ know how received with respect to 'Mincream' and 'Robinson Barley' brands/ products to support payment of Rs. 3,505,809 as royalty and thus the ALP was taken at NIL by using the CUP method. The TPO made the adjustment since the assessee was not able to produce any evidence of receipt of any technical know-how etc. for the products, 'Mincream' and 'Robinson Barley' up to the date of limitation of passing the transfer pricing order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy in manufacturing and distribution of products and the assessee in fact has got the goods manufactured on the basis of technology. * That the assessee does not undertakes any significant research and development activity on its own and totally depends upon the associate enterprise for provision of technology and thus agreed that the entire business of the assessee depends upon the technology provided by the AE and without the license to use such technology, the assesses would not be able to continue its business. * Premium value of products allows the assessee to increase the sales and charge higher price which leads to higher profitability and that growth in the revenue of the assessee clearly demonstrates the benefit derived by the assessee from the use of technology. * On the basis of the same licensing agreement the royalty was paid in earlier years. In earlier years the payment of the royalty has not been held to be non-bona fide expenditure by TPO. * ............the TPO's conclusion that there is no benefit to the assessee from the payments of royalty is unsustainable. In view of the foregoing discussion we hold that payment of royalty satisfies the benefit tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm's length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be proper. The same is, accordingly, directed to be deleted." Note: For assessment year 2011-12, the ld DRP did not pass a detailed order but it relied on its directions for A.Y.2010-11. 12.Aggrieved by the order of the DRP/AO, the Revenue as well as assessee is in appeal before us. 13. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. Before us, ld Counsel for the assessee reiterated the submissions made before the authorities below and relied on the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken." We are of the view that the above cited precedent on principle of consistency is squarely applicable to the assessee under consideration. In the facts of the assessee's case, the Ld. TPO has not pointed out the change in facts or any provision of law whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;" 16. The Organization for Economic Co-operation and Development ("OECD‟, for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm‟s length price principle and explains article 9 of the OECD Model T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs." (ii) Frigoglass India Pvt Ltd V DCIT [2016] 180 TTJ 401(Del-trib) "9. On the issue of royalty, the Ld. AR submitted that the assessee has entered into royalty agreement with its AE - Frigoglass SAIC (Head Office) on account of receipt of ICM Technology and for use of trademark. It was submitted that CUP method could not be applied in the case as neither the AE nor the assessee have entered into similar royalty arrangements with third parties and the data for external comparable transactions between independent parties in India was not available. It was submitted that the only method which could be correctly applied was TNMM (which has been applied by the assessee). It was further submitted that the benchmarking approach adopted by the assessee has been wrongly rejected and that the application of CUP method was erroneous.It was submitted that FIPL's principal activity being manufacturing of glass doo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service, marketing services, product development and future technologies. It was submitted that most of the clients of the FIPL were global clients and the use of the trademark had a positive impact on the sales of FIPL in India. The Ld. AR made a reference to the comparative profitability chart from FY 2005-06 to FY 2009-10 and submitted that the profitability has been increasing on an year to year basis because of availing of the services of Frigoglass SAIC and, therefore, since the benefits received from FIPL from receipt of such services outweigh the payment for such services, the assessee was justified in making payments for royalty. 10. It was also submitted that royalty has been paid only as per the terms of the agreement. The Ld. AR submitted that the disallowance for royalty was ultimately made on the ground of commercial expediency and he placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd. 345 UTR 241 (Del) and that of the ITAT Hyderabad 'B' Bench in the case of DCIT vs Air Liquide Engineering in I.T.A. No. 1040/Hyd/2011 for the proposition that so long as the expenditure or payment has been demonstrated to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered by the Supreme Court again in CIT v. Rajendra Prasad Moody , (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. " It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an overall TNMM for examining the royalty" 19. In the case of DCIT - LTU vs CLSA India Ltd. (2013) 33 taxmann.com 260 (Mumbai Tribunal), the Bench held that CUP method cannot be applied if the relevant information is not available. No such comparable transaction has been brought on record by the Assessing Officer or even by the DRP. No such comparable case has been placed by the revenue even now. 20. Hence, following the ratio of the Hon'ble Delhi High Court in CIT vs EKL Appliances (supra), we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is liable to be deleted. Hence, ground nos. 4.1 and 4.2 are allowed." 18.Taking into account the facts narrated and the case law cited above, we note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expensesin excess of'bright line test' laid down by the Special Bench in M/s LG Electronics India Pvt. Ltd vs. ACIT (1TA NO. 5140/Del/2011) should be made? In response, the assessee submitted that RBIL is engaged in the business of manufacturing and trading of Fast Moving Consumer Goods ('FMCG')/ products. The RBIL manufactures and distributes various brands of household products, and over-the-counter pharmaceutical products. Some of the key products are Dettol Soap, Disprin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortem insecticide, Collin etc. The RBIL manufactures products at its own facilities and also engages third party contract manufacturers for manufacturing some products. The detailed list of products and the their brands have been submitted before TPO. It is to be noted that, the name of all products sold by Reckitt Benckiser, in India bear the name of the brand (e. g. the products of brand 'Airwick', Airwick spray, Airwick aerosol, Airwick Freshmatic, Airwick-Car Air Freshner etc.). The assessee has incurred certain expenses on advertisement, amounting to Rs. 302.43 crores (which includes sales promotion expenses, rebates and discount etc.) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.22% Jocil Limited 9.64 16820.65 0.06% Jyothy Laboratories Limited 2620.25 33982.65 7.71% Pee Cee Cosma Soap Limited 7.82 2876.19 0.27% Standard Surfactants Limited 2.12 4234.18 0.05% Ultramarine & Pigments Limited 72.84 10,105.32 0.72% Average Mean 6.09% Thus, as per the table above, comparable companies have an AMP to sales ratio of 6.09% while the assessee has a ratio of 11.03%. Hence an excess amount of Rs. 93,02,03,439/- [representing 4.94%=11.03%-6.09%] is considered as cost part of the arm's length price of international transaction pertaining to brand promotion. To arrive at the margin on such cost, search for entities carrying out normal marketing and advertising resulted in two companies namely M/s Marketing Consultants & Agency Limited and M/s Quadrants Communications Ltd. The mark-up on cost earned by these two entities is as follows: Thus, a mark up of 12.27% is to be added to the cost of the brand promotion activity of the assessee. Accordingly, the margin on cost is computed at Rs. 11,41,35,962/- (93,02,03,439 * 12.27%) which the assessee should have earned over its cost incurred for brand promotion activities. Thus, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel also pointed out that addition of any profit mark-up over the costs of AMP is unwarranted from the facts of the assessee`s case. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the TPO/Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. We note that issue before us relates to TPO's action in applying provision of Section 92of the Act in respect of advertisement marketing and promotion (AMP) expenses treating them as international transaction covered under the purview of section 92of the Act. The assessee had entered into license agreement with its AE Reckitt Benckiser NV and Reckitt Colman Ltd for transfer and intellectual property right for provision of sale, distribution and marketing of Reckitt Benckiser products. It was manufacturing and distributing various brands of such products and had incurred substantial marketing and promotion expenses in respect of same amounting to Rs. 3,02,43,43,377/-.Such expenses were related to the promotion of the brand owned by the AE of the assessee which were prominently displayed in the advertisement. The TPO further observed that A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal activities in order to promote the brands and related IPRs. Neither there is an undertaking between RBIL and any of its Associated Enterprise) ['AE(s)] including the brand owners to incur such expenses for brand promotion as per any global or nation specific strategy, unlike in LG Electronics (supra) case. The RBIL has complete autonomy to incur expenses relating to marketing and promotion of its products for enhancing better sales and marketing and is under no obligation from any of its AE(s). In the light of above facts we note that arm`s length price adjustment (ALP) made by TPO and confirmed by DRP is not justified for that we rely on the judgment of Hon`ble Delhi High Court in the case of Maruti Suzuki India Ltd V.CIT [2016] 381 ITR 117 (Del-HC), wherein it was held as follows: "66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. 69. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. The Revenue is not joining issue, the Court was told, that the Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise" 27. Our view is also fortified by the decision of the Coordinate Bench of ITAT Kolkata in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." In view of we note that the facts of the above cases are identical to the present issue, thus, the principle laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue." 28.We note that the AMP transaction does not represent the international transaction between the assessee and its AE's as the revenue failed to bring on record any contract or arrangement between assessee and its AE for making AMP expenses for promotion of brand of its AE.In the assessee`s case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. These are routine advertisement expenses. Therefore, in assessee`s case the AMP cannot be regarded as international transaction as held by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drock is a project implemented for global transition of the network services provider from infonet NL to AT&T for overall cost reduction on network undertaken at the behest of RBCSL. The cost incurred in relation to such change in service provider (such as change in server for enhancement of the connectivity between RBIL and RB Global offices including expenses on network lines, etc) was incurred by RBIL during the year. However, as a matter of financial support to the assessee, these costs incurred by RBIL have been reimbursed by the AE. It may be appreciated that no services have been rendered by the assessee to the AE, on the contrary the assessee has received services from third parties and is the sole beneficiary of the services received by it. The expenses recovered from the assessee are purely on account of financial support extended by the AE. Hence, a question of charging a mark-up on costs reimbursed by the AE does not arise." 32. However, the ld. TPO rejected the contention of the assessee and computed the upward transfer pricing adjustment as follows: "40. The submission of the assesse is not tenable as the recovery from A.E is not one off or infrequent transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the choice of comparables and not substantively challenged the item wise choice of comparables so chosen by the TPO, hence no specific directions are issued. The objection is accordingly disposed of as above." 34. Aggrieved by the order of the ld DRP/TPO, the assessee is in appeal before us. 35.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP and other materials brought on record. Learned Counsel for the assessee submitted before us that TPO has erred in proposing an addition in relation to expenses recovered by RBIL from its AE, without appreciating that there is no element of service provided by RBIL in respect of the impugned international transactions. The ld TPO also did not appreciate that recovery of expenses was only on cost basis. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the TPO, which we have already noted in our earlier para and is not being repeated for the sake of brevity. We note that the TPO without appreciating the true n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 294 of PB-1). Aggrieved by the order of the TPO, the assessee carried the matter before the ld DRP. The ld DRP inadvertently did not give any directions vis-a-vis the said issue. However, vide rectified directions dated 18.02.2016 rejected the approach of the TPO of using external TNMM. The TPO is yet to give effect to the rectified DRP Directions. Therefore, Ld Counsel prayed the bench that ld TPO may be directed to give effect to the rectified DRP Directions. In the interest of justice and fair play, we direct the TPO to give effect to the rectified DRP Directions. For statistical purposes, the ground raised by the assessee are allowed. Grounds relating to Corporate Tax issue 38. Summarized ground No. 1 of corporate tax issue reads as follows: "1.Apportionment of expenses between fiscal units, non-fiscal units and head office of Rs. 261,160,962/-. This ground covers ground No.8 of revenue`s appeal in ITA No.529/Kol/2015 for A.Y. 2010-11 and ground nos. 1 and 2 of revenue`s appeal in ITA No.518/Kol/2016 for A.Y.2011-12." 39.When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 20.04.2018, passed by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to be deleted. Ground No.3 raised by the assessee is allowed. 5.As far as Ground No.2 raised by the revenue is concerned, this issue again pertains to apportionment of residual cost of Rs. 40.43 crores. The total cost as per the Profit & Loss A/c of the assessee is a sum of Rs. 717.26 crores. The details of the other expenses isgiven in Schedule 16 to the Profit & Loss A/c. As far as residual cost is concerned, the assessee allocated residual cost amount to the eligible and non-eligible units in the ratio of number of employees at the corporate office who are directly involved in the management of these eligible units like production, procurement, quality, logistics etc. to the total number of employees at the corporate office. According to the assessee these expenses primarily relates to the corporate office of the company. The benefit of which is derived by the whole organization including the eligible units, the allocation of cost incurred on account of residual cost among eligible and non-eligible units should have to be done in the ratio of eligible workers of eligible undertakings to the total number of workers across all the manufacturing units. The Assessing Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company. This is because the expenditure incurred by the assessee company on the residual functions have also been used and benefited the whole company including the eligible units hence it has to be bifurcated in the ratio of total workforce of the eligible units with total number of workers of the company to arrive at the correct and true profit. This is also supported by the fact that on an average all the expenditures which has either been bifurcated in the ratio of sales or on the basis of actuals are in the percentage of almost average of 22% whereas the percentage of these particular expenditures are around 5.69%. This itself proves beyond doubt that this expenditure has not been bifurcated properly by the assessee company. Moreover, the assessee's arguments that the accounts of the company are audited does not have a bearing on the deduction being claimed u/s 80IB/IC of the Act. The income-tax Act specifically provides that the profits of these undertakings is required to be computed in the manner as if these are independent and only source of income of the assessee company. This effect has probably not been given by the auditor who has filed the accountants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l submissions, we note that the basis of allocation of residual cost to the eligible units has been done by the Assessing Officer is as follows: It can be seen from the above Chart that the allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office level to be eligible. That can be done only by allocation on the basis of number of employees linked to factory operation divided by total number of employees into corporate office into sales of the eligible units divided by total sales. This allocation of residual cost done by the assessee was logical and we find no infirmity in the action of the CIT(A) in accepting this basis of allocation. We, therefore, do not find any merit in Ground No.2 ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulted in, which has asaleable Value. To say that the scrap materials has no direct link or nexus with the industrial undertaking cannot be at all be expected or commend acceptance, especially, on the facts and in the circumstances of the case. For the sake of emphasis, we may say that the scrap materials come within the manufacturing process of the industrial undertaking in the manufacture- of certain products such as V-Belts, oil seals, 0-Rings: and certain rubber moulded products- etc. In this view of the matter, we are of the view that profits andgains from the sale of scrap materials is eligible to deduction in an amount equal to twenty per cent under section 80IC, inasmuch as such gains or profits' are derived from the industrial undertaking and includible in, the gross total income of the assessee and the question relatable to the profit on the sale of scrap is thus answered in favour of the assessee" We are persuaded by the reasoning of the said Court and answer the question accordingly. The question in the revenue's appeal is answered in the negative, in favour, of the assesses and against the revenue. Accordingly, both the applications being GA No.1420 of 2014 and G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of the impugned disallowance. It is pleaded that the above interest income of Rs. 1,60,27,000/- is inclusive of Rs. 3,39,26,000/- relating to its parwanu unit in respect of which it had claimed section 80IC deduction. It is clarified that the said deduction was allowable to the extent of 30% only being 6th year of claim. It thus submits that only 33% of Rs. 3,39,26,000/- i.e. Rs. 1,01,77,800/- formed part of Section 80IC deduction in respect of Parwanu unit whereas the entire interest of Rs. 3,39,26,000/- stands disallowed/added in both the lower proceedings. It pleads double addition of interest income amounting to Rs. 2,37,48,200/- therefore, Learned CIT DR on the other hand vehemently contends that there is no dispute on the non-allowbility of interest income for the purpose of section 80IB/80IC deduction. It then avers that the assessee has raised an additional ground regarding quantification on the impugned disallowance which requires verification of facts. We find force in Revenue's contention therefore and restore the instant additional issue raised at assessee's behest dated 24.06.2018 to the Assessing Officer for necessary factual verification of facts. This additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been clarified that the effect of omission of the word 'cess' from Sec. 40(a)(ii) of the Act is that only taxes paid are to be disallowed and not cess. Relevant extract of circular is as under:- "Recently a case has come to the notice of the Board where the ITO has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of s. 10(4) of the old Act and s. 40(a)(ii) of the new Act. The view of the ITO is not correct. Clause 40(a) (ii) of the IT Bill, 1961 as introduced in the Parliament stood as under: "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains". When the matter came up before the Select Committee, it was decided to omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided " 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act,1961, on account of Education Cesses paid by the assessee while arriving at the assessed income for the year under appeal. " 38. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present ground of appeal is no longer res integra. The education cess being not 'income tax' is allowable as deduction under section 37 (1) of the Act. For this, we rely on the judgment of the coordinate Bench of IT AT Kolkata in the case of ITC Limited, ITA No.685/Kol/2014, order dated 27.11.2018, wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the assessing officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. " (iii)Tega Industries -vs.- ACIT (ITA no. 404/Kol/2017)- "We further to notice that assessee has raised an identical additional ground in both cases seeking to claim education cess on provision for Income-tax amount of Rs. 71,65,049/- and Rs. 77,76,699 (assessment year wise); respectively as allowable in computing to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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