TMI Blog2021 (2) TMI 1329X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of computing the 'average value of investments within the meaning of Rule 8D(2)(iii). Our aforesaid view is supported by the order of the Special bench of the ITAT, Delhi in the case of Vireet Investments [ 2017 (6) TMI 1124 - ITAT DELHI] . As such, we herein restore the issue for the limited purpose of computing the disallowance under Sec.14A r.w Rule 8D(2)(iii) to the file of the A.O in terms of our aforesaid observations. The Ground of appeal No. 1 is partly allowed. Disallowing expenditure w.r.t travel, hotel and food expenses incurred by the assessee company treated as an unexplained expenditure - HELD THAT:- We have given a thoughtful consideration and are of the considered view that as the aforesaid expenses were incurred by an employee of the assessee company viz. Mr. George Joseph, sales manager, by purportedly using the credit cards of the assessee company, the same, thus, could not have been summarily discarded by the lower authorities. Although, we are not oblivious of the fact that the assessee could not substantiate that the expenses in question were incurred wholly and exclusively for the purpose of its business, but then, we also cannot sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange gain on raw and packing material was duly eligible for deduction u/s 80IC of the Act. We, thus, direct the A.O to allow the asessee s claim for deduction u/s 80IC w.r.t the foreign exchange gain on raw and packing material - The Ground of appeal No. 2 is allowed in terms of our aforesaid observations. Adjustment to the income of the assessee w.r.t the provision of the research and development/testing services - Comparable selection - HELD THAT:- Exclude Alphageo (I) Ltd. from the final list of comparables as functionally not comparable. PCG Life Sciences ltd - On a perusal of the order of the TPO and that of the DRP, we find, that neither of the said authorities had given any cogent reason for including/upholding the inclusion of the aforementioned company as a comparable in the final list of the comparables for benchmarking the international transactions of the assessee before us. Admittedly, as is discernible from the financial statements of the aforementioned company, we find that it is inter alia engaged in the business of selling chemical compounds, which as observed by us hereinabove constitutes 1/3rd of its total turnover - no segmental information w.r.t the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .26,92,193 under Section 14A of the Income Tax Act, 1961 ('the Act') having failed to appreciate that the Appellant company has not incurred any expense directly in relation to the earning of tax free income. The Appellant prays that the sum of Rs.26,92,193 be allowed as business expenditure and the disallowance may kindly be deleted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in computing the disallowance as per the method prescribed under Rule 8D(2)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. The Appellant prays that disallowance of proportionate interest expenditure under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules kindly be deleted. 3. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in not considering the alternative computation of disallowance under Section 14A of the Act submitted by the Appellant without providing justification for rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had incurred non-routine AMP expenses and that the AMP expenses incurred by the Appellant benefited the AE; and v. confirming the adjustment despite the fact that the advertisements were product specific and not brand specific and disregarding the fact that many of the products manufactured by the Appellant were India specific. The Appellant therefore prays that appropriate relief be granted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in considering third party market research expenses and manufacturing standard costs, being in the nature of selling distribution expenses, for computing the alleged excessive AMP spend of the Appellant. The Appellant therefore prays that appropriate relief be granted. 3. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in i. applying bright line method to determine the alleged excessive AMP spend without appreciating that no such method has been prescribed under the Act and Rules; ii. co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 5 above and in the alternative, on the facts and in circumstances of the case, the learned AO, under the directions issued by the DRP, has erred in consequently not revising the profit from the Baddi unit eligible for deduction under Section 80IC of the Act by the amount of Advertising, Marketing and Promotion expenditure alleged to have not been incurred for the purpose of business of Appellant's undertaking. The Appellant prays that the learned AO be directed to recompute the deduction under Section 8oIC of the Act by adjusting the Advertising and Marketing expenditure considered as not having been incurred for the purpose of business of Appellant's undertaking. The Appellant craves leave to add to, omit or alter all or any of the above Grounds of appeal before or during the hearing of aforesaid matter. On the other hand the revenue has challenged the impugned order on the following grounds: 1. Whether on the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in holding that the distribution expenses including trade discounts and promotional activities do not lead to adding a brand value to the brand. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 144C(1), dated 25.02.2013 wherein he proposed to assess the income of the assessee company under the normal provisions at Rs.232,59,02,620/- and the book profit under Sec. 115JB at Rs.335,27,33,202/-. 5. Aggrieved, the assessee assailed the additions/disallowances that were proposed by the A.O vide his draft assessment order before the Dispute Resolution Panel-1, Mumbai (for short 'DRP ). After deliberating on the issues that were raised before him in the backdrop of the contentions advanced by the assessee, the DRP issued directions vide its order passed under Sec. 144C(5), dated 31.10.2013. 6. The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 31.10.2013, therein framed the assessment under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 wherein he inter alia made the following additions/disallowances: Sr. No. Particulars Amount 1. Disallowance under Sec. 14A Rs. 26,92,193/- 2 Transfer Pricing Adjustment under Sec.92CA(4) Rs.31,63,26,783/- 3. Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. A.R that as against the share capital and reserves and surplus of Rs.21,629.57 lacs, its investments amounted to Rs. 38,32.89 lacs. Apart from that, it was submitted by the ld. A.R that during the year in question it had made a fresh investment of only Rs.73.83 lacs. To sum up, it was the claim of the ld. A.R that as the assessee had substantial owned funds to justify the investments made in the exempt income yielding assets, thus, no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii) in its hands. Adverting to the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(iii), it was submitted by the ld. A.R that the A.O while computing the said disallowance had wrongly included the investments which though had not yielded any exempt income during the year under consideration. In support of his aforesaid contention the ld. A.R relied on the order of the ITAT special bench in the case of ACIT Anr. Vs. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 (Del)(SB). In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that the A.O be directed to re-compute the disallowance under Rule 8D(2)(iii) after excluding the inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, and had wrongly treated the same as an unexplained expenditure. Facts leading to the controversy in hand lies in a narrow compass. As per the AIR information, it was gathered by the A.O that the assessee had made certain payments using credit cards, as under: Sr. No. Name and address Transaction amount Transaction party 1. George Joseph No. 79/8C Sunny Brooks NXT to Wipro Corporation, office Sajapur Road, Bangalore- 56 Rs. 2,88,727 Citi Bank 2. Colgate- Palmolive, Main St. Hiranandani Grds, Powai, Mumbai 76 Rs. 11,46,49,356 American Express Bank 3. George Joseph No.79/8C Sunny Brooks NXT to Wipro Corporation, office Sajapur Road, Bangalore 56 3,99,249 American Express Bank On being queried as regards the expenditure stated to have been incurred by Mr. George Joseph, it was the claim of the assessee that the same pertained to travel, hotel and food expenses of the aforesaid person who was rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Although, certain documentary evidence to support the aforesaid claim for deduction of expenses was thereafter furnished by the assessee before the DRP, the same, however, was not entertained by the panel, for the reason, that neither the assessee had requested for admission of the said 'additional evidence nor explained why it had failed to present the same before the A.O. Apart from that, we find that the DRP had also observed that the documents furnished by the assessee did not instil much of confidence. We have given a thoughtful consideration and are of the considered view that as the aforesaid expenses were incurred by an employee of the assessee company viz. Mr. George Joseph, sales manager, by purportedly using the credit cards of the assessee company, the same, thus, could not have been summarily discarded by the lower authorities. Although, we are not oblivious of the fact that the assessee could not substantiate that the expenses in question were incurred wholly and exclusively for the purpose of its business, but then, we also cannot shut our eyes to the fact that the documentary evidence produced by the assessee before the DRP were considered by the panel with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of the aforesaid directions of the DRP, the A.O excluded 25% of scrap sales i.e an amount of Rs.17,28,926/- (25% of Rs.69,15,703/-) and worked out the assessee s claim for deduction under Sec. 80IC at Rs.251,92,58,451/-. 17. Aggrieved, the assessee has assailed the order passed by the A.O/DRP wherein its entitlement towards deduction under Sec. 80IC had been restricted by both the lower authorities. It was averred by the ld. A.R that the restriction of the assessee s claim for deduction under Sec. 80IC by the A.O/DRP by attributing only 75% of the scrap sales to the manufacturing activity of the assessee s industrial undertaking was not as per the mandate of law. It was submitted by the ld. A.R that as per Sec. 80IC, the gross total income of an assessee including any profits and gains derived by an undertaking or an enterprise from an eligible business therein contemplated was to be allowed as a deduction while computing the total income of the assessee. It was averred by the ld. A.R that as the generation and the consequential sale of scrap pursuant to the manufacturing activity of the industrial undertaking was inextricably linked or in fact interwoven with the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Answering the aforesaid issue, the Hon ble High Court in the backdrop of the judgment of the Hon ble Supreme Court in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax reported in (2003) 262 ITR 278 (SC), had observed, that as the scrap generated in the course of the manufacturing process of the assessee s eligible business had a direct and immediate nexus with its industrial undertaking, the same, thus, was eligible for deduction u/s 80-HH of the Act. Observations of the Hon ble High Court for the sake of clarity are reproduced as under: Now we come to the Question No. 11 which relate to deduction under Section 80- HH before the Assessing Officer. Under Section 80- HH, the assessee was entitled to the deduction equal to 20% of the gross total income of the assessee, which includes any profit and gains derived from the industrial undertaking. The assessee's case is that income of Rs. 63,66,932/- was deducted treating to be income from other sources and deduction under Section 80-HH was not given on the aforesaid amount of Rs. 63,66,932/-. The assessee filed appeal against the said order and the Appellate Authority in Paragraph No. 6.2 directed the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 1 of the Paper Book). The A.O. has deducted this income while working out the relief allowable u/s 80HH. The learned counsel for the appellant has submitted that the sum of Rs. 83,66,932 represented sale of Scrap and sale of Scrap was business income of the different Units of the appellant. This was, therefore, to be taken as profit of the Industrial Under-taking and the same should not have been reduced from the net assessable income adopted by the A.O. for the purpose of section 80HH. Reliance was place on the decision of Madras High Court in the case of CIT, Tamilnadu-III Vs. Wheels India Ltd., 141-ITR-745 to the effect that the sale of Scrap was as income of the priority Industry and, hence, relief u/s 80-I was available in respect of these units. After considering the submissions of the appellant, I direct the A.O. to take the income from sale of Scrap by xerographic equipment Unit and Toner, Developer, Photocopier Unit as profit of the said Units (and not income from other sources) for purpose of deduction u/s 80HH. However, as I have held in the case of the appellant in previous asst. year that the income/profit derived by the appellant by service and trading Unit d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. 6. The word derived has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said (page 328) : The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition. The proposition laid down by the Hon'ble Apex Court that the said case was to the effect that the word derived from under Section 80- HH has to be under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 740.87 109.31 14.75% 3. Godrej Consumer Products Ltd. Cinthol, FairGlow, Ezee 1087.41 93.34 8.58% 4. Jyothi Laboratories Ltd. Ujala, Maxo 351.53 17.97 5.08% 5. Procter Gamble Hygiene Healthcare Ltd. Whisper, Vicks 772.81 89.56 11.58% 6. Nirma Ltd. Nirma 3030 47.93 1.58% 7. Hindustan Unilever Ltd. Pepsodent 10.55 ARITHMETICAL MEAN 9.14% therein observed, that as the aforementioned comparables were either Indian companies which owned their brands developed by it or companies with significant foreign shareholding, therefore, the AMP expenses in the case of the assessee could safely be taken at a lower figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the AMP expenses that were required to be reimbursed by the assessee s AE, viz. Colgate-Palmolive, USA, however, following the view taken by its predecessor it directed the TPO to reduce the AMP expenses by the amount of distribution expenses of Rs.89.3 crores, and therein work out the corresponding adjustment after adding the mark up of 15% to the amount of expenditure incurred by the assessee on behalf of its AE. On the basis of the aforesaid direction of the DRP, the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 made a TP adjustment under Sec. 92CA(4) of Rs.31,63,26,783/-. 23. Aggrieved, the assessee had assailed the aforesaid TP adjustment made by the A.O/TPO towards AMP expenses. It was submitted by the ld. A.R that the issue herein involved was squarely covered by the order of the Tribunal in the assessee s own case for A.Y 2005-06 and A.Y. 2007-08 in ITA No. 6073/Mum/2014 and ITA No. 2778/Mum/2011, respectively. It was submitted by the ld. A.R that the Tribunal on the basis of exhaustive deliberations had struck down the TP adjustment that was made by the A.O/TPO w.r.t AMP expenses by relying on a host of judicial pronouncements. In order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or creating marketing intangibles for the assessee. 5.3 Proceeding further, the contention of the assessee that has incurred the said expenditure to promote its own products in the market has remained uncontroverted. It is also uncontroverted that the aforesaid payments were primarily made to independent third parties without rendering any services to its AE. 5.4 Further, we find that Ld. TPO has computed the said adjustment by applying Bright Line Test without carrying out any analysis of the impugned expenditure to corroborate his stand. The aforesaid methodology, as per settled legal position, is not a recognized methodology and not one of the prescribed methods as envisaged by Rule 10B. 5.4 Upon due consideration, we find that the facts of the above case are quite similar to facts in the decision of Mumbai Tribunal rendered in Johnson Johnson Ltd. Vs. CIT [43 Taxmann.com 15] wherein it has held as under:- 37. Relevant facts are that the TPO has stated that the assessee incurred publicity and sales promotion expenses of Rs.163.27 crores during the relevant financial year. The TPO has stated that said expenses on publicity and sales promotion has result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result of higher sales realized by assessee through higher and higher expenses by way of publicity and sales promotion undertaken by assessee without the overseas AE bearing any cost thereto He stated that it constitutes arrangement between the two entities wherein the entire cost is borne by assessee, whereas the parent company J J US is getting its share of benefit from those increased sales. The TPO worked out the cost at the rate of 4.22% of the publicity and sales promotion expenses which comes to Rs.6.88 crores. However, the TPO stated that the cost is restricted to 200.82 lakhs (being 1.23% of Rs.163.27 crores) in view of disallowance/adjustment in income made on account of royalty on technical know-how, the income tax, R D cess and service tax paid thereon aggregating to Rs.41.27 crores out of total payment of Rs.58.37 crores. Hence, TPO disallowed Rs.200.82 lakhs from the publicity and sales promotion expenses incurred towards cost allocable to parent company. DRP after considering the submissions of the assessee company confirmed the action of the TPO. Accordingly the AO disallowed a sum of Rs.200.82 lakhs while making assessment. Hence, assessee is in appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the TPO while suggesting the disallowance of 200.82 Lakhs out of the expenses incurred by assessee on publicity and sales promotion has not followed any of the method and therefore the said adjustment/disallowance suggested by TPO is outside its jurisdiction. During the course of hearing, ld. DR submitted that the matter could be restored to TPO to decide afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. (supra). Since no specific submissions were made and considering the fact that the assessee justified the payment of technical know-how royalty at the rate of 4% of net sales which is lower than Arm's length rate of 4.84% and the said fact, we have also discussed herein above in para 33 of this order, that the payment of royalty by assessee to its parent company is at Arm's Length, we do not find any justification to make the said disallowance of Rs.200.82 lakhs as suggested by TPO towards the shares to be contributed by AE of the assessee company. Therefore, we delete the said disallowance made by AO by allowing ground No.18 of the appeal taken by assessee. Upon further appeal by revenue [80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above-mentioned decisions, it has categorically been held that in the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. Another aspect of the issue is absence of machinery provisions as observed by Hon ble Delhi High Court, in Bausch Lomb Eyecare (India) (P.) Ltd. [381 ITR 237] where Hon ble Court after considering various judgments has elaborately discussed the issue in the following manner:- 51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are nonresident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preted the expression acted in concert and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no persons acting in concert unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of person acting in concert is as meaningless as criminal conspiracy without any agreement to commit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction in that regard, with B L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions . Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods. In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ony Ericsson Mobile Communications India (P.) Ltd. was rendered in the context where the assessees were distributors of products manufactured by the foreign AE. The said assessees themselves were not manufacturers. More over none of the said assesses appears to have questioned the very existence of international transaction with foreign AE. It was also not disputed that the said international transaction of incurring AMP expenditure could be subject matter of TP adjustments in terms of Sec.92 of the Act. Therefore, the same is distinguishable on facts. Similarly, the decisions rendered in BMW India Private Limited and Perfetti Van Melle India Pvt. Ltd. has been rendered in a situation where there existed an agreement between the assessee and its AE to undertake Advertisement and Sales promotion. The case law of Cushman Wakefied is not related with determination of ALP of AMP expenditure and further in that case the benchmarking of reimbursement of expenses was not done by the assessee. Hence, the cited case laws could not help the revenue on factual matrix. The case law of Maruti Suzuki India Ltd., in fact, support the stand of the assessee which is evident from the fact that Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in context of the issue pertaining to the scaling down of the TP adjustment made by the A.O in pursuance to the directions of the DRP. However, as we have already struck down the TP adjustment w.r.t the AMP expenditure, therefore, the aforesaid grievance of the revenue having been subsumed in our aforesaid observations is rendered as infructuous and is accordingly disposed off in terms of our observations recorded hereinabove. The Grounds of appeal Nos. 1 to 4 raised by the revenue before us are accordingly dismissed. 30. The appeal of the revenue is dismissed in terms of our aforesaid observations. A.Y: 2010-11 IT No. 1925/Mum/2015 (Assessee s appeal) ITA No. 1852/Mum/2015 (Revenues appeal) 31. We shall now deal with the cross-appeals for A.Y 2010-11. The assessee has assailed the impugned order on the following grounds of appeal before us: Ground No 1; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in disallowing a sum of Rs. 14,39,636 under Section 14A of the Income Tax Act, 1961 ('the Act') having failed to appreciate that the Appellant company has not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No 3: 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in making an adjustment towards advertisement, marketing, sales promotion ('AMP expenses') of Rs. 108,00,22,597 to the income of the Appellant under the presumption and without any basis that the Appellant has benefited the Associated Enterprise ('AE'). 1.1 On the facts and in the circumstances of the case and in law, the learned AO erred in: i. disregarding that the issue of marketing intangibles is not relevant to entrepreneurial licensed manufacturers as is the case of the Appellant; ii. presuming that there existed an arrangement and consequently a transaction between the Appellant and its AE and thereby erred in contending that the AE ought to compensate the Appellant towards the alleged excessive AMP spend; iii. presuming without any direct or indirect evidence that the Appellant had incurred non-routine AMP expenses and that the AMP expenses incurred by the Appellant benefited the AE; and iv. confirming the adjustment despite the fact that the advertisements were product specific a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and that the Appellant had prepared the Transfer Pricing documentation bona fide/^ha in good faith in compliance with the Act and the Rules; b) using single year data (i.e. Financial Year 2009-10) as against the multiple year data used by the Appellant for the comparability analysis; c) rejecting comparable companies without appropriate reasons from the comparability analysis carried out by the Appellant; d) failing to provide any structured search process and arbitrarily selecting 2 additional companies as comparable without appreciating that the companies were functionally different from the assessee; e) not granting the economic adjustments to the Appellant on account of differences between risk profile, working capital cycle of the Appellant vis-avis the comparables; and Accordingly, the Appellant prays that the addition of Rs. 69,81,039 may kindly be deleted. Ground No 5; 1. Without prejudice to Ground No. i to 5 above and in the alternative on the facts and in circumstances of the case, the learned AO, under the directions issued by the DRP, has erred in consequently not revising the profit from the Baddi unit eligible for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar had carried out certain international transactions with its AE, the A.O made a reference to the TPO under Sec. 92CA(1) of the Act. TPO vide his order passed under Sec. 92CA(3), dated 30.01.2014 made the following TP adjustments: Sr. No. Nature of TP Adjustment Amount 1. Extra ordinary AMP expenses to be reimbursed by AE Rs.108,00,22,597 2. Research and development/testing services segment Rs.95,88,825/- Total Rs.108,96,11,422/- After receiving the aforesaid order of the TPO, the A.O vide a draft assessment order passed under Sec.143(3) r.w.s 144C(1), dated 03.03.2014 inter alia proposed the following additions/disallowances to the returned income of the assessee: Sr. No. Particulars Amount 1. TP adjustment under Sec. 92CA(4) Rs.108,96,11,422/- 2. Disallowance under Sec. 14A Rs. 14,39,636/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the ld. A.R that as the assessee had sufficient self owned funds to justify the investments in the exempt income yielding assets, thus, no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii). Also, it was submitted by the ld. A.R that the A.O while computing the 'average value of investments for the purpose of quantifying the disallowance of the administrative expenses attributable to earning of the exempt income as per Rule 8D(2)(iii), had erred, by including those investments which had not yielded any exempt income during the year under consideration. It was submitted by the ld. A.R that the matter may be restored to the file of the A.O with a direction to exclude such investments which had not yielded any exempt income for the purpose of quantifying the disallowance under Rule 8D(2)(iii). 38. Per contra, the ld. D.R relied on the orders of the lower authorities. 39. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements pressed into service by the respective parties in context of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the DRP, the panel directed the A.O to consider 75% of scrap sale for the purpose of deduction under Sec. 80IC. Insofar the foreign exchange gain on raw and packing material was concerned, it was observed by the DRP that as the said income had no nexus to the manufacturing activity, thus, the same not being an income derived from the industrial undertaking within the meaning of Sec.80IC was rightly excluded by the A.O for the purpose of computing the assessee s entitlement for deduction u/s 80IC of the Act. 43. The A.O after receiving the aforesaid order of the DRP under Sec. 144C(5), therein vide his order passed under Sec. 143(3) r.w.s. 144C(13), dated 30.01.2015 restricted the assessee s claim for deduction under Sec. 80IC to an amount of Rs.322,53,90,250/-. 44. Aggrieved, the assessee has assailed the scaling down/restriction of its claim of deduction under Sec. 80IC before us. Insofar, the restriction of the assessee s claim for deduction under Sec. 80IC w.r.t scrap sale is concerned, we find, that as the facts and the issue therein involved remains the same as were there before us in the assessee s appeal for the immediately preceding year for A.Y 2009-10, in ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial undertaking, the same, thus, was entitled for being allowed under Sec. 80IB of the Act. In the backdrop of the aforesaid view so taken by the Hon ble High Court, we are of the considered view that the foreign exchange gain on raw and packing material credited by the assessee before us in its profits and loss account can safely be held to be eligible for deduction under Sec.80IC of the Act. Accordingly, we concur with the claim of the assessee that the foreign exchange gain on raw and packing material was duly eligible for deduction u/s 80IC of the Act. We, thus, direct the A.O to allow the asessee s claim for deduction u/s 80IC w.r.t the foreign exchange gain on raw and packing material of Rs.1,55,34,162/-. The Ground of appeal No. 2 is allowed in terms of our aforesaid observations. 45. We shall now deal with the asessee s claim that the A.O/DRP had erred in making an adjustment towards AMP expenses of Rs.108,00,22,597/- to the income of the assessee on the basis of a baseless presumption that the assessee by incurring the aforesaid expenses had benefitted its AE, viz. Colgate-Palmolive, USA. As the facts and the issue pertaining to the TP adjustment made by the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Aurigine Discovery Technologies Limited 20.09 2. Chokshi Laboratories Limited 20.82 3. Vimta Labs Limited 7.08 4. GVK Biosciences Pvt. Ltd. 23.5. 5. Alphageo (India) Ltd. 789231206 25.13 6. TCG Lifesciences Ltd. 40.14 Arithmetic Mean 22.80 The assessee is aggrieved with the inclusion of the two new comparables selected by the TPO viz. (i) Alphageo (India) Ltd; and (ii) TCG Life Sciences Ld. It was averred b the ld. A.R that as both of the aforesaid companies were functionally not comparable, the same, thus, had wrongly been selected by the TPO. On objections filed by the assessee the DRP had upheld the inclusion of the aforesaid two companies in the final list of comparables. 48. The ld. A.R in order to impress upon us that both of the aforesaid two companies were functionally incomparable to the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt before us, they provide testing related services to Colgate Palmolive USA. Therefore, we have no hesitation in excluding Alphageo (India) Ltd. from the set of comparables arrived at by the TPO/AO. Accordingly, we direct the AO to exclude Alphageo (India) Ltd. from the final set of comparables. 50. Per contra, the ld. D.R could not controvert the aforesaid contentions advanced by the counsel for the assessee. 51. We have deliberated at length on the issue under consideration and find that the aforementioned company viz. Alphageo (India) Ltd. that was selected by the TPO as a comparable in the assessee s own case for A.Y. 2008-09, was thereafter excluded by the tribunal from the final list of the comparables, for the reason, that the same was functionally not comparable. As neither the functional profile of the assessee or that of the aforesaid company had witnessed any change during the year under consideration nor any perversity has been pointed out by the ld. D.R, therefore, finding no reason to take a different view and by adopting a consistent approach, we, herein direct the A.O/TPO to exclude Alphageo (I) Ltd. from the final list of comparables. 52 . PCG Life Scie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial force in the contention of the ld. A.R that as no segmental information w.r.t the aforementioned company was available, the same, thus, could not have been adopted as a comparable for benchmarking the international transactions of the assessee for the year under consideration. Apart from that, we find that the coordinate bench of the Tribunal i.e ITAT, Mumbai bench K , Mumbai in the case of Evonic Dequssa India Pvt. Ltd. Vs. DCIT (OSD), Mumbai, ITA No. 7767/Mum/2012, dated 11.11.2016, had observed, that the aforementioned company could not have been selected as a comparable for benchmarking the international transactions of the assessee before them that was inter alia providing services to its associated enterprise. For the sake of clarity the observations of the Tribunal are reproduced as under: 10. Having considered the rival stands, we find that the plea of assessee is quite potent and is also borne out of the material on record. In this context, our attention was also invited to the Paper Book wherein is placed the relevant extracts from the Annual Financial Statements of M/s. TCG Lifesciences Ltd. which show that the total sales have been classified as 'contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for inclusion of the aforesaid company in the final list of comparables, the ld. A.R took us through its profit and loss account, which revealed that the same was mainly comprised of the contract clinical research and service fees. 57. Per contra, the ld. D.R. could not controvert the aforesaid claim of the counsel for the assessee that the lower authorities had whimsically excluded the aforementioned company from the final list of comparables. 58. We have given a thoughtful consideration to the aforesaid issue and are persuaded to subscribe to the claim of the ld. A.R that the TPO/DRP had without giving any cogent reason excluded the aforesaid comparable of the assessee from the final list of comparables. We are unable to concur with such non-speaking observation of the lower authorities, and in all fairness and in the interest of justice restore the matter to the file of the A.O/TPO for deciding the aforesaid issue afresh. Needless to say, the A.O/TPO while re adjudicating the aforesaid issue shall pass a speaking order after affording an opportunity of being heard to the assessee. (B) Fortis Clinical Research Limited: 59. It was submitted by the ld. A.R that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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