TP: Unilateral action without agreement or understanding cannot be termed as a transaction

Perfetti Van Melle India Pvt Ltd. Vs ACIT (ITAT Delhi)

Thus, in order to be characterized as an ‘international transaction’, it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert. A ‘transaction’, per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a ‘transaction’. A unilateral action, therefore, could not be characterized as an ‘international transaction’ invoking the provisions of Section 92 of the Act.

FULL TEXT OF THE ORDER OF ITAT DELHI

The aforesaid appeal has been filed by the assessee company against the Final Assessment Order passed by National e-Assessment Centre, New Delhi on 31.03.2021 under section 143(3) read with sections 143(3A) & 143(3B) of the Income-tax Act, 1961 (hereinafter called “the Act”) pertaining to Assessment Year 2016-17.

2. The assessee has raised as many as 49 grounds of appeal. However, for the sake of brevity, the same can be categorized as under-

(a). Ground No. 1 and 2 – General in nature.

(b). Ground No. 3 to 8 – Regarding the Transfer pricing addition – jurisdictional grounds.

(c). Ground No’s. 9 to 21 – on merits of the AMP adjustment regarding Advertising and marketing expenses (AMP Adjustment).

(d). Ground No’s. 22 to 26 – Regarding the erroneous finding given the Dispute Resolution Panel (DRP) on the issue of AMP adjustment.

(e). Ground No’s. 27 to 35 – Regarding the applicability of the Profit Split Method by the TPO.

(f). Ground No’s. 36 to 39 – Regarding the protective adjustment made by applying the Bright Line Method (BLT).

(g). Ground No’s. 40 to 46 – Regarding the reduction of deduction under section 80IC of the Act on account of apportionment of expenses between the eligible and non-eligible units.

(i). Ground No. 47 – Against disallowance of loss owing to floods.

(j). Ground No’s. 48 and 49 – Relating to applicability of interest under sections 234B/234C of the Act and initiation of penalty proceedings under section 271(1)(c) of the Act.

3. That apart, the assessee has also moved an application raising an additional ground regarding the allowability of education cess vide letter dated 23.07.2021.

4. However, the principle issue which arises in this appeal for consideration is the transfer pricing adjustment on account of AMP expenses. There are two other corporate tax issues, which would be addressed and dealt with separately. We propose to address the transfer pricing grounds first.

Brief Facts and Background:

5. Briefly stated, the facts relevant to the issue under consideration are that the assessee is a subsidiary of PVM, Netherlands and started it operations in India in 1994. It is engaged in manufacturing and selling of variety of confectionary products from its factories in Tamil Nadu, Haryana and Uttarakhand. The assessee’s products include Big Babool, Alpenliebe, Centre Fresh, Centre Fruit, Chloromint, Fruitella, Cofitos, Happydent white, Mentos, etc. These brands are owned by the Associated Enterprises (AE) of the assessee and are licensed to it.

6. For the assessment year under consideration, the assessee had filed its return of income on 29.11.2016 thereby declaring an income of Rs. 19,41,49,790/-. Thereafter, the assessee company revised its return of income declaring an income of Rs. 17,94,93,210/- on 03.08.2017. The case of the assessee was selected for scrutiny through CASS and notices under section 143(2) read with section 142(1) of the Act, were issued. During the year under consideration, the assessee reported certain international transactions in Form 3CEB. A reference was made by the AO to the Transfer Pricing Officer under section 92CA(1) of the Act for determination of the Arms’ Length Price (ALP) of the international transactions entered into by the assessee with its AE’s.

7. By way of an order dated 28.10.2019 the TPO passed an order under section 92CA(3) of the Act proposing a substantive adjustment of Rs. 135.52 crores on account of AMP expenses, while also retaining the protective adjustment of Rs. 144.92 crores. However, in the computation of income in the final assessment order dated 31.3.2021, only the substantive adjustment of Rs. 135.52 crores has been retained. The assessee has, nevertheless, impugned both the substantive and protective adjustments made relating to the AMP expenses.

8. Accordingly, Draft Assessment Order was passed by the Assessing Officer on 19.12.2019 and the income of the assessee was proposed to be determined at Rs. 171,60,34,368/- on the account of the following additions / disallowances:-

S. No.	Particulars	Amount (Rs.)
1.	Transfer Pricing Adjustment on account of AMP expenses	135,52,80,000/-
2.	Disallowance of deduction claimed under section 80-IC of the Act	17,96,61,158/-
3.	Disallowance of loss on account of Floods in Chennai	16,00,000/-

9. Aggrieved with the additions / disallowances proposed in the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (herein referred to as the “DRP”). The DRP disposed of the objections preferred by the Assessee vide directions dated 27.01.2021 and confirmed the additions / disallowances proposed in toto.

10. Consequently, the final assessment order dated 31.3.2021 was passed by the National e-Assessment Centre giving effect to the directions issued by the DRP. The present appeal emanates out of the said final assessment order.

11. The first issue raised in this appeal is the addition on account of transfer pricing adjustment of Rs. 135,52,80,000/-made by the Assessing Officer on account of AMP expenses. The principle issue raised in the appeal is that the incurring of AMP expenses by the assessee was not an international transaction within the meaning of section 92B of the Act. Various other grounds have also been raised in the appeal relating to this issue. However, whether there existed an international transaction is the core issue.

12. Mr. Deepak Chopra, Ld. Counsel for the assessee submitted that the issue of making transfer pricing adjustments in the assessee’s case is a legacy issue and the assessee has been facing additions on this count since AY 2008-09. He submitted that the appeals of the assessee for the earlier years have been repeatedly restored to the file of the Assessing Officer/ TPO for re-examination of the issue in light of the available judicial precedence available at that point of time. The issue pertaining to incurrence of excessive AMP expenses for the promotion of the brand owned by the AE was raked up for the first time, as mentioned above, in AY 2008-09. The adjustment in that year was computed by applying the Brightline method (BLT). When the issue travelled before the Tribunal, the matter was remanded back to the file of the Assessing Officer for re-examination of the issue in the light of the ratio laid down by the Special Bench of ITAT in the case of LG electronics India Pvt. Ltd. vs. ACIT : [2013] 140 ITD 41. We are informed that the appeal for AY 2008-09 is currently pending adjudication before the CIT (A). The AMP dispute, in the other assessment years, has also suffered similar fate. The status of the AMP appeals of the assessee is being depicted with the help of the chart filed by the assessee before us:-

S. No.	AY	Date of ITAT Order	Outcome of AMP issue	Present status of appeals
1.	2008-09	18.10.2013	Remanded for re-examination of issue in the light of ratio laid down in LG Special Bench	Two rounds of litigation – now pending with CIT(A) after second round.
2.	2009-10	15.04.2014 And 16.05.2017	First Round Remanded for re- examination of issue in the light of ratio laid down in LG Special Bench Second Round  Remanded following the decision passed in assessee’s own case for AY 2011­12.	Third round of litigation. Assessee is in the process of filing an appeal against the Final assessment Order before the Tribunal.
3.	2010-11	2.06.2015	Remanded to the file of the TPO for re-examination of the issue in light of Sony Ericsson Mobile Communications India Pvt Ltd : 374 ITR 118 (Del HC).	Two rounds of litigation
4.	2011-12	28.04.2017	Remanded to the file of the TPO for re-examination of the issue in the light of Sony Ericsson Mobile Communications India Pvt Ltd : (supra)	Two rounds of litigation. Assessee is in the process of filing an appeal against the Final assessment Order before the Tribunal.
5.	2012-13	24.05.2017	Remanded to the file of the TPO for re-examination ofthe issue in the light of Sony Ericsson Mobile Communications India Pvt Ltd : (supra)	Two rounds of litigation. Assessee is in the process of filing an appeal against the Final assessment Order before the Tribunal.
6.	2013-14 and 2014-15	–	–	Pending with CIT(A)
7.	2015-16	11.08.2020	–	Assessment quashed.
8.	2016-17	–	–	Year under consideration – First Round – Appeal pending disposal before the ITAT.

13. Given the repeated remands by the Tribunal in the earlier years and the revenue towing the same line for making the AMP adjustment, with minor variations, we deem fit that, in the interest of justice and to bring a finality to the issue, the present appeal should be decided on merits of the matter rather than simply remanding the matter back to the TPO for a fresh consideration in light of the available judicial precedence’s on the subject matter. Decision on merits would be both in the interest of the assessee as well as the revenue and would prevent precious judicial time. It has been informed that inspite of repeated remands nothing much has been achieved except the same issue being raised in the remand orders and the matter travelling back to the Tribunal in the same or a minor altered form.

14. In support of this contention that matter in this case should not be remanded back, the Ld. Counsel cited various decisions and also filed a case-law compilation. Primary reliance was placed upon the decision of the Delhi High Court in the case of PepsiCo India Holding Pvt. Ltd: ITA No. 100/2017. In that case too, the issue regarding AMP adjustment had been restored back to the file of the Transfer Pricing Officer for re-examination in the light of the ratio laid down in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (374 ITR 118) (Del). Aggrieved with the remand, the assessee challenged the ITAT order and preferred an appeal before the High Court. The Hon’ble Delhi High Court whilst relying upon the decision in the case of Le Passage to India Tour and Travels (P) Ltd vs. DCIT (ITA 368/2016 decided on 12.01.2017) held that, “the ITAT itself should consider the matter as to the applicability or otherwise of the rule enunciated in Sony Ericsson (supra) and render its decision on merits after applying the correct test as to whether the expenses in the present case should be subjected to adjustments.” Reliance was also placed upon other decisions rendered by the Delhi High Court in the case of Daikin Air Conditioning India Pvt Ltd vs. ACIT : (2016) (96 CCH 0486); Le passage to India Tour and Travel (P) Ltd vs. DCIT (98 CCH 0009) and on the Bombay High Court decisions in the case of Sony Pictures Networks India Pvt Ltd vs. ITAT (W.P. 3508 of 2018) and Coca -Cola India Private Ltd (2014) (90 CCH 0080).

15. As stated above, the assessee-company is carrying out the business of manufacturing and sale of variety of confectionary products from its various factories in India. From the perusal of the impugned orders, we find that even for the assessment year under consideration, the genesis of the entire case of the revenue lay in the application of BLT and determination of excessive AMP expenses so as to make the TP adjustment. Further for the assessment year under consideration, the TPO while making the transfer pricing adjustment has made protective adjustment using BLT and simultaneously made a substantive adjustment by applying a concoctive version of the profit split method (“PSM”). It is further noticed that, even while applying the so called PSM, the genesis was still the BLT. From perusal of the impugned order, it is seen that on a reference made by the Assessing Officer for the determination of arm’s length price (ALP) of the international transactions, the Transfer Pricing Officer has stated that the assessee had incurred AMP expenses amounting to Rs. 220,11,36,339/- and had also paid royalty of Rs. 25,39,25,025/-to its AE at varying rates depending on the products. Considering the “Trademark License Agreement” between the assessee and its AE, the TPO noticed that para 3 of the agreement provides for extensive support in marketing activity by the AE through its specialized brand teams. The TPO then referred to Para 10 of the Agreement and concluded that the assessee was found to be entitled for compensation in lieu of advertising expenses, but, not upon the termination of the agreement. The TPO alleged that the assessee company had incurred huge amount of AMP expenses in respect of the brands manufactured by it, however, these brands were entirely owned by the AE. The TPO further observed that under the agreement, the assessee had been mandated “to actively advertise and sell in the territory the products manufactured by them” which showed that the AMP activities were actively supervised and dictated by the AE. Control and supervision over marketing activities was also alleged basis the fact that all the group companies were availing services from the same Advertisement agency, viz., Mcann and Ogilvy and Mather, across various jurisdictions. The TPO further alleged that in para 11 of the Trademark agreement, the AE itself recognized that due to AMP functions and activities being performed by the assessee, there was a generation of copyrights and other intangibles and that all such intangibles created as a consequences thereof shall be the intellectual property of the AE “in all circumstances”. Even the taglines curated by the assessee locally in the native languages such as “Ekdum Bajedar” were registered as copyright in the name of the AE. Not only that, vernacular versions of the brand slogans developed in India, such as, “Dimag Ki Batti Jala De” is being used across other jurisdictions like Sri Lanka and Bangladesh by Group Companies and the assessee does not receive any kind of compensation for the same. Further, any new product or formulation developed by the assessee in India, is registered in the name of AE and is the property of the AE. For instance, ‘Alpenliebe, Mangofillz’, a variant of one of the brands owned by the AE that was developed in India, is registered as a trademark in the name of the AE. The TPO came to the conclusion that the assessee incurred AMP expenses for promoting the brand / trade name which was owned by the AE and hence, the same constituted an international transaction.

16. Before us, Ld. Counsel appearing on behalf of the assessee, Mr. Deepak Chopra submitted that the Bright Line approach was the primary approach of the TPO. He drew our attention to para 3.1 of the TPO’s order, where the TPO has noted that the stand of the revenue was that BLT should be applied and any AMP expenditure incurred by the tax payer in excess of the expenditure incurred by the comparables should be considered as the expenditure incurred by the tax payer for the benefit of the parent AE and the corresponding adjustment should be made. The TPO further goes on to record that the Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has rejected the applicability of BLT, but since the Department has filed an SLP before the Hon’ble Supreme Court, the primary contention of the Revenue continues to be BLT. Thus, by applying BLT, the TPO determined the amount of routine AMP expense and proposed transfer pricing adjustment on protective basis for a sum of Rs. 201.16 crores. In computing the above amount of transfer pricing adjustment, the TPO applied a mark-up of 15.81%, being weighted average of comparable companies rendering marketing support services.

12. The Ld. Counsel further submitted that having computed an adjustment applying the BLT, the TPO did not stop there and proceeded to work out the transfer pricing adjustment towards AMP expenses on a substantive basis by using the Residual Profit Split Method (RPSM). He drew our attention to para 6 of the TPO’s order where the so called substantive adjustment has been made. He further submitted that in para 6.7, the TPO laid bare his understanding and noted “that since the legal and economic ownership of the brand and the marketing intangibles lied with the AE, the non-routine AMP expenses had been incurred only for the benefit of the parent AE. However, super normal profits that are being earned in India on this account are being retained by the Assessee.

18. He submitted that the underlying tone even while making the substantive adjustment was to determine the non-routine AMP expenses which are evidenced by the methodology adopted by him in para 6.9, 6.10 and 6.11 of his order. The Ld. Counsel specifically drew our attention to the computation drawn up in para 10.4.8 of the TPO’s order, where the TPO first determined a comparable operating margin at 4.36%. Thereafter, he calculated the non-routine AMP expenses at Rs. 173.70 crores. At this stage, the Ld. Counsel also drew our attention to para 5.1 where by applying the BLT method, the TPO had determined the excessive AMP expenditure at Rs. 173.70 crores. Coming back to the methodology applied by the TPO on page 57 of the order, he drew our attention that the TPO determined the Assessee’s operating profitability at 15.70% while the comparables were at 4.36%. The TPO then calculated the residual profit at 11.34%.

Since, he had determined that the profit split to be conferred to the AE was 20% (refer to para 6.9 of the TPO’s order) the TPO applied the 20% on the excessive profit on the 11.34%. Hence, he calculated the AE’s share at 2.27% and applying the same on the gross sales and taking into consideration the excessive AMP at Rs. 173.70 crores, determined the transfer pricing adjustment at Rs. 135.52 crores.

19. The Ld. Counsel further submitted that the methodology adopted by the TPO is inconsistent with Rule 10B(1)(d) of the Income Tax Rules, 1962 and it was not open for the TPO to apply his own concocted version of this method. That apart, he also submitted that on a bare perusal of the methodology and the computation done by the TPO would reveal that the Assessee was earning a profit of 15.70% which was far in excess of the operating profitability of the comparables as determined by the TPO. He submitted that on this short ground alone the transfer pricing adjustment deserves to be deleted. He also submitted that, as can be evidenced from this computation alone would show that, the entire case of the Revenue hinges on the applicability of the BLT method and the determination of non-routine expenses. This approach, he submitted is inconsistent with the applicable judicial precedents and the whole approach of the Revenue is erroneous.

20. Thereafter, the learned counsel for the assessee submitted that the assessee company had incurred expenditure on AMP to cater to the needs of the customers in the local market. Such AMP expenditure was neither incurred at the instance/ behest of overseas AE, nor was there any mutual agreement or understanding or arrangement as to allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by the assessee company for the purpose of its business. In absence of any understanding, arrangement, etc., it was submitted, no ‘transaction’ or ‘international transaction’ could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the provisions of Transfer Pricing regulations. Further it was reiterated that payment for advertisement, marketing and sales promotion was made by the assessee company (which is a tax resident of India) to other Indian third parties.

21. The Ld. Counsel for the assessee submitted that the twin requirements of section 92B did not exist in the present case i.e. the transaction involved was between Indian parties and no foreign party was involved and the transaction of AMP expenses did not take place between two AEs.

22. Thereafter, Mr. Chopra invited our attention towards the decisions of the Hon’ble High Court of Delhi in this regard. He submitted that the Hon’ble High Court had held that the onus was upon the Revenue to demonstrate that there existed an arrangement between the assessee and its AE under which assessee was obliged to incur excess of amount of AMP expenses to promote the brands owned by AE. He submitted that the TPO had heavily relied upon clause 9 in the Trademark, Technology & Know-how License Agreement dated 1.4.2010, which empowered the foreign AE to approve and review the material labels, packaging materials, advertising materials but he failed to appreciate that it was only the advertisement content and not the quantum of the AMP expenditure, which was sent to the AE for alignment. It has been clarified by the Ld. Counsel that the alignment from parent was only to ensure that the applicable “Brand guardrails” are being followed by AE’s across the world and it is not at all directed to control the marketing functions in various Geographies. He submitted that it must be appreciated that marketing for impulse products like confectionary had to be managed locally as per the ethos, culture and aspirations of the local population and it could not be remotely managed. He stressed on the point that the assessee company had a full blown marketing team in India who with the help of local marketing agencies and consultants managed the marketing function across the country.

23. The Ld. Counsel for the assessee placed heavy reliance on the decision of the Hon’ble High Court of Delhi in Maruti Suzuki India Pvt. Ltd. v. CIT [2016] 381 ITR 117 (Delhi), to buttress the averment that the onus was cast upon the Revenue to prove the existence of international transaction vis-à-vis incurrence of AMP expenses, which was not discharged by the TPO in the present case. He placed reliance on the following passage from the decision of the Hon’ble High Court of Delhi in Maruti Suzuki India Pvt. Ltd. (supra):

“60…………….. Even if the resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is “any other transaction having a bearing” on its “ profits, income or losses” for a ‘transaction’ there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the ‘includes’ part of clause (c,) the revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC

61…………………….. Even if the word ‘transaction’ to include ‘arrangement’, ‘understanding’ or ‘action in concert’, ‘whether formal or in writing’, it still incumbent on the revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.”

24. The Ld. Counsel also placed reliance on few other decision of the Hon’ble High Court of Delhi that have upheld the same proposition: Whirlpool of India Ltd vs. DCIT [2016] 381 ITR 154; Bausch & Lomb Eyecare (India) Pvt Ltd vs. ACIT [2016] 381 ITR 227; Honda Siel Power Products Ltd vs. DCIT [2016] 283 CTR 322.

23. The Ld. Counsel also referred to the Transfer Pricing Study report and catena of other decisions in support of his argument that incurring of AMP expenses by the assessee company did not fall within the ambit and definition of “international transaction” within the meaning of section 92B of the Act. He submitted that the AMP expenditure was incurred by the Assessee to promote the sales of its products in India. He also stated that the Assessee is a full-fledged risk bearing manufacturer and is solely responsible for its functions /activities and related returns. He explained that the assessee has been granted a long term, exclusive right to use the trademark in respect of manufacturing and sale of various kinds of confectionary products in India. It pays royalty on account of technical collaboration and for use of the trademarks owned by the licensors. It incurs the marketing expense to increase its sales and profits in India. It is not required to agree to any minimum AMP spends as a part of its licensee obligations. It also makes the important strategic decisions around sales and marketing in India, including advertisements developed entirely for India. Moreover, the marketing team at Perfetti India is responsible to study the market, for which it may perform a market research or survey to monitor the market demand. On the basis of results of the study, the teams at Perfetti India generally assess and decide whether to launch a new product in India. The products launched in India and ownership of the cost and risk around the launch is borne by Perfetti India. In a circumstance, when the product thus launched by Perfetti India fails or is unsuccessful, then the costs related to take the product off-shelf is borne by Perfetti India. On similar lines, if a product succeeds beyond expectations, Perfetti India reaps the benefits as well. The assessee employs various promotional strategies including TV commercials, visual clip in local cables, advertisement in newspapers, magazine etc. Perfetti India doesn’t incur any expenditure to promote the Perfetti Brand or a product not sold in India. Perfetti India develops advertisements in local Indian languages; as required. The nature of advertisement varies depending upon factors such as the target audience, nature of product, etc. Due to the huge competition in the market, Perfetti India aims to make the advertisements appealing to Indian customers across different age groups and socio-economic backgrounds through humour and emotion with some story or an Indian film shoot associated with it. The Company undertakes campaigns to promote new and existing products in the Indian market via visual and audio media and print media to gain competitive advantage. TV advertisements/commercials and video clips in local cable networks and advertisements in local radio networks are produced in local languages to make a difference in the minds of the customer. The Company also gives print ads in newspapers and magazines on regular basis. The marketing team at Perfetti India decides the mix to be used for promotional activities. Perfetti India offers discounts and rebates to third party distributors to promote the products. The costs for offering such schemes/offers to distributors are borne by the Company. Perfetti India earns the benefits from enhanced sales arising from the exploitation of intangibles. Perfetti India does not incur “excessive” AMP expenditure at the behest of the brand-owning AEs. It also assumes all the business risks. As can be seen from Perfetti India’s financial performance, its return has not been that of a distributor. The fluctuation in its income over the years demonstrates that it bore the risk as an entrepreneur. It also demonstrates that it earned the residual income over the years. Moreover, Perfetti India’s international transactions with AEs are relatively small as compared to its turnover and the imports for the year under consideration, i.e., AY 2016-17, is only 2.73% of its turnover. This also indicates that its risk could not have been reduced by the AEs through transfer pricing.

26. Mr. Chopra also elaborately referred to the Trademarks Technology and Knowhow License Agreement dated April 1, 2010, which is annexed at pages 186 to 195 of the Paper book filed before the Tribunal. Referring to the said Agreement, he submitted that this Agreement was entered into between three parties, i.e., Perfetti Van Melle Benelux BV ( which was the owner of the Trademarks, hereinafter referred to as “PVM Blx”), Perfetti Van Melle Holding BV (which was the owner of the knowhow, hereinafter referred to as “PVM Holding”) and Perfetti Van Melle India Pv.t Ltd.( which was the licensee). He submitted that PVM Blx held the trademarks used for confectionary products and other kinds of goods. PVM Holding on the other hand held proprietary rights in the technology applied to the manufacturing of confectionary products and extensive sophisticated knowhow in the manufacturing, sales, advertising, promotion, food law, legal assessments and any other fields related to the business activity in the confectionary field. Mr. Chopra submitted that a reference to the relevant clause of this Agreement was essential to determine whether the conclusions drawn by the TPO and his interpretation of such clauses were incorrect or not. He further submitted that in Clause 3 of the Preamble it is provided that PVM Holding could provide extensive support in (a) Marketing activity through the support of specialized brand teams, (b) R&D/ new product development and process engineering (c) food law products assessments and (d) legal support in IP and other legal issues relating to trademark, design etc. He referred to Clause 4 of the preamble where it is provided that the licensee (Perfetti India) expresses interest in using the said trademarks, technology and knowhow for the manufacturing and sale of confectionary products in India.

27. He thereafter referred to clause 1 of the Agreement which provides that PVM Blx/Holding granted to the licensee, the license to manufacture and sell various kinds of confectionaries. PVM Blx/Holding also granted to the licensee, the license to use their technological, technical, marketing and commercial knowhow in the manufacturing, sales, advertisements and promotion of the products. The Agreement also provides that PVM Blx and PVM Holding also offered to the licensee their technicians, marketeers, sales men, in house legal counsel and any other experienced employees to assist the licensee in the manufacturing, sales, advertisement and promotion of the products and in solving any technological or commercial problem that may arise during the manufacturing and sales of the products.

24. He again referred to clause 9 of the said Agreement which provides that in connection to the products, the licensee undertook to use only raw material, labels, packaging materials and advertising materials specifically approved in the writing by PVM Blx and PVM Holding or as generally approved by PVM Blx or PVM Holding. He submitted that this clause has been misconstrued by the Revenue since in terms of the best practices and to confirm to the brand guardrails of the owners of the trademark and technology, the advertising materials and packing etc. have to be approved. This he submitted does not lead to any inference that there was any “arrangement” between the parties so as to constitute an international transaction in term of Section 92B of the Act.

29. Mr. Chopra then referred to clause 10 of the Agreement where it has been provided that the licensee will actively advertise and sell in the territory the products manufactured by them. The clause further provides that no compensation would be provided to the licensee regarding the advertisement expenses in the event of termination of the Trademark and License Agreement. This, he submitted has been misconstrued by the TPO in Para 4.1 of his order where the TPO has erroneously concluded on a misinterpretation of this clause that the assessee was entitled for a compensation of the advertising expenses. This inference he submitted was patently incorrect and was also on an incorrect understanding of the above clause of the Agreement.

28. As regards the allegation of the TPO that certain brands such as “Alpenliebe Mangofillz” were conceptualized and developed in India but the trademark in respect of these brands was owned by the foreign AE, it was submitted by him that only a different flavour of the product was developed in India and not a separate product as such had been created. Alpenliebe is and has been a very old and popular brand sold by the Perfetti group across the globe and only a distinct mango flavour was added to suit the palate and taste of the customers in India. Further, it was submitted by him that the manufacture and sales of these product/brand was largely limited to India and no benefit, as such, could have been said to have accrued to the AE on account of promotion of these brands. Moreover, royalty paid by the assessee, constituted only 1.56% of its sales during the year and therefore, it could not be alleged that the assessee was incurring the cost of developing new brands in India and was simultaneously enriching its AE by paying royalties.

31. He further submitted that the allegation of the TPO that vernacular version of the brand slogans developed in India such as “Dimaag ki Batti jala de” and “Ekdum Bajedar” were used by other jurisdictions, such as Sri Lanka and Bangladesh, which evidences that the assessee’s AMP activities were controlled by the foreign AE, were devoid of any merit. First of all, usage of common brand slogans does not, in any manner, demonstrate that there existed an arrangement between the assessee and its AE qua AMP spent. Secondly, advertisement expenses and activities for locations such as Bangladesh and Sri Lanka is managed and borne by Perfetti entities native to those jurisdictions and not by the assessee. Therefore, the question of compensating the assessee does not arise as the cost of developing and airing the advertisement(s) in Sri Lanka and Bangladesh was borne by Perfetti Bangladesh and Perfetti Sri Lanka respectively and not by the assessee. The advertisement content across all jurisdictions has to confirm to the brand guardrails set by the brand owning entity and the slogan might have been similar as the content developed by assessee had met the brand guardrails. In any case, the assessee company has already reaped the benefits of the advertisement expenditure incurred by it during the year as it had earned super-normal profits during the year.

32. At this juncture he referred to a coordinate Bench decision in the case of Pepsi Foods Pvt. Ltd. v. ACIT (ITA No. 1334/Chd/2010) (judgment dated 19.11.2018) where in Para 55 of the said judgement, the Tribunal considered and adjudicated on a similar aspect of the matter where the advertising campaign and the materials were subjected to approval by the parent AE. There the Tribunal while following another coordinate Bench decision in the case of Goodyear (supra) held that a review of the advertising material by the AE to confirm to the broad advertising guard rails does not constitute an arrangement or a direction by the AE to incur AMP expenses on its behalf.

33. That apart, as regard the construction of clause 10 of the Agreement he referred to the following judgments of the Hon’ble Supreme Court in support of the contention that a contract is a commercial document between parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. Based on the said decisions he also contended that the meaning of a contract must be gathered by adopting a common sense approach and must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation-

• Bhopal Sugar Industries Limited vs. Sales Tax Officer, Bhopal, (1977) 3 SCC 147 (Hon’ble Supreme Court);
• Nabha Power Limited vs. Punjab State Corporation Limited and Another, (2018) 11 SCC 508 (Hon’ble Supreme Court);
• Satya Jain (Dead) Through Lrs. and Others vs. Anis Ahmed Rushdie (Dead) Through Lrs. and Others, (2013) 8 SCC 131 (Hon’ble Supreme Court;
• Bank of India and Another vs. K. Mohandas and Others, (2009) 5 SCC 313 (Hon’ble Supreme Court);
• M/s D.N. Revri and Co. and Others vs. Union of India, (1976) 4 SCC 147 (Hon’ble Supreme Court).

34. He further submitted that it is not open for the Revenue to recharacterize a commercial arrangement and read into an arrangement so as to give an interpretation which is inconsistent to the intention of the parties. He also submitted that it is a matter of record that no compensation was provided by the foreign AE’s qua the AMP expenses and this conclusion of the TPO was patently perverse.

35. Mr. Chopra then referred to the various judgments of the Delhi High Court which have been followed by the coordinate Bench in the case of Pepsi Foods (supra). He submitted that the crux of the judgments is that merely on the basis of determining excessive AMP expenditure, it could not be inferred that there existed an arrangement or there was a direction by the foreign AE to incur advertising expenses in India. He referred to the following judgements of the Delhi High Court in support of the above contentions-

• Maruti Suzuki India Pvt. Ltd. v. CIT (381 ITR 117);
• CIT v. Whirlpool India Ltd. (381 ITR 154);
• Bausch & Lomb Eyecare India Pvt. Ltc. V. ACIT (381 ITR 227);
• Honda Siel Power Products Ltd. v. Dy. CIT (237 Taxmann 304).

36. That apart, he also submitted that there arose patent errors in the order of the Dispute Resolution Panel (DRP). He drew our attention to the directions issued by the DRP dated 27.1.2021 in this regard. He also drew our attention to para’s 3.1.3.5 and 3.1.3.6 (on page 7 of such directions) where the DRP, without any basis had classified the assessee as a “distributor”. The DRP specifically notes that “the assessee is in the business of distributing as well as marketing the products of its parent company”. Further, the DRP also erroneously notes that the “contention of the assessee that it is a mere distributor of the product of the AE without any value addition is not acceptable as the assessee is not distributor or reseller of products”. The Ld. Counsel submitted that the conclusions of the DRP were wholly flawed and apparently it seems that the findings have been copy pasted from some other matter. He also submitted that apart from this callous approach, the DRP also failed to appreciate that the assessee was a full risk bearing manufacturer, which fact was not even denied by the TPO. In fact, in the TPO’s order dated 28.10.2019, in para 2 itself it is noted that the assessee is engaged in the business of manufacturing and selling of confectionary products. He submitted that this fundamental fallacy in the DRP’s understanding has led to erroneous conclusions being drawn.

37. Mr. Chopra also submitted, that without prejudice to the above contentions, in view of the development in terms of various coordinate Bench decision of the Tribunal, the intensity approach could also be applied to determine whether the assessee’s profitability was in excess of the comparables. This approach was laid down by the Delhi High court in the case of Sony Ericson Mobile Communication (supra) case and has been followed by various coordinate benches of the Tribunal. He also cited the judgments rendered in the cases of M/s Sennheiser Electronics India Ltd. : ITA No. 7574/Del/2017 and M/s Pernod Ricard India Pvt. Ltd vs. DCIT : ITA No. 91/Del/2015 in support thereof. He then referred to the order of the TPO, where the TPO has himself concluded that for the year under consideration the assessee was earning a profit margin of 15.70 % as against the PLI of the comparables determined by the TPO at 4.36 %. Thus, he submitted that where the entity level profitability of the assessee was far in excess of the comparables, there was no question of shifting of profits outside India and hence no adjustment to any transaction was warranted. Therefore, it was contended that this fact would lead to the irrefutable conclusion that there was no arrangement between the assessee and the foreign AE for incurring of the AMP expenses. He also submitted that although the profitability could vary from year to year owing to external factors like increase in prices of sugar etc. but overall the assessee has maintained a healthy profitability over the comparables.

38. As regard the substantive AMP adjustment by applying the Residual Profit Split method, he submitted that this issue was also considered by the coordinate Bench in the case of Pepsi Foods(supra) in Para 65 of its order. It was held by the coordinate Bench that in a proper application of RSPM method it was incumbent on the TPO to determine the combined profit from the so called international transaction of incurring of AMP expenses and then the TPO was required to split the combined profit in proportion to the relative contribution made by both entities. The order of the TPO reveals that he has not followed this methodology and as per his own admission, the assessee was earning super normal profits in India. Thus, he submitted that the approach of the TPO in applying the profit spit method is completely inconsistent with Rule 10B of the Rules.

39. The Ld. CIT DR, Ms. Meera Shrivastava, in opposition and to counter the submissions made on behalf of the assessee, relied on the order of the TPO and DRP and specifically referred to Paras 4.1, 2.2, 2.4 to 2.15 of TPO’s order to allege an arrangement between the assessee and its AE’s.

40. The ld. DR also relied on the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have been held to be an international transaction and the matter of determination of its ALP has been restored. It was submitted that there is no blanket rule of the AMP expenses as a non-international transaction. She further stated that the Hon’ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expenses exists. It was argued that the Tribunal in the preceding years has restored the issue to the file of TPO to be decided afresh in the light of the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. She also relied on a later judgment of the Hon’ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del), also a manufacturer, and still another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction has been restored for a fresh determination. The Ld. DR still further referred to three recent judgments of the Hon’ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), also a manufacturer, Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon’ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued that the judgments in the cases of Rayban Sun Optics India Ltd. (supra), Toshiba India Pvt. Ltd. (supra), Bose Corporation (India) (supra) and Yum Restaurants and Sony Ericson (for AY 2010-11) (supra) delivered in the year 2016 are posterior in time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc., and, hence, the matter should be restored for a fresh determination. She also relied on a host of orders passed by the Tribunal restoring the matter to the file of TPO for a fresh determination of the question of the existence or otherwise of the international transaction of AMP expenses, post the above referred three sets of judgments by the Hon’ble Delhi High Court – in favour of the Revenue (Sony Ericsson, the earlier judgment); in favour of the assessee (Whirlpool and Maruti etc.); and restoring the matter for a fresh determination (Rayban Sun Optics India Ltd., Toshiba India Pvt. Ltd., Bose Corporation (India), Yum Restaurant and Sony Ericsson, the later judgment)

41. Thereafter, the Ld. DR also took us through the Trademark and License Agreement dated April 1, 2010 and referred to various clauses cited in the order of the TPO to substantiate her argument that there existed an arrangement between the assessee and its AEs. She also referred to clause 10 of the said Agreement and the conclusion of the TPO that the assessee was entitled to compensation in respect of the AMP expenses.

42. That apart, the DR also submitted that the primary approach of the TPO was BLT and since the Revenue was in appeal on the applicability of BLT, before the Supreme Court, such approach should be upheld by the Tribunal in view of the Special Bench decision in the case of LG Electronics.

43. In his rejoinder, the Ld. Counsel for the assessee briefly reiterated her contentions and opposed a remand given that inspite of multiple remands by the Tribunal, the basic approach of the Revenue is still centred in the applicability of the BLT. He further submitted that given the judgement of the Delhi High Court in the case of Sony Mobile (Supra) the Special Bench decision to that extent stands overruled. He also submitted that there was no stay of the decision of operation of the decision of the Delhi High Court on this issue. Thus, he prayed that the decision of Pepsi Foods be followed and the transfer pricing adjustment on AMP expenses be deleted.

44. He also submitted that the reliance placed by the DR on the decision of the Hon’ble High Court in Sony Ericsson Mobile Communication India Pvt. Ltd. (supra) was completely misplaced. The learned counsel for the assessee submitted that the DR had relied upon the said decision of the Hon’ble High Court to contend that mere incurrence of AMP expenditure in respect of brands not owned by the assessee had to be treated as an international transaction under the provisions of the Act. The learned counsel for the assessee, thereafter directed our attention towards the following passage from the decision of the Hon’ble Delhi High Court in Maruti Suzuki India Pvt. Ltd (supra):

“41. Having considered the above submissions the Court proceeds to analyse the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) to determine if it conclusively answers the issue concerning the existence of an international transaction as a result of incurring of AMP expenditures by an Assessee.

42. As already noticed, the judgment in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) does not seek to cover all the cases which may have been argued before the Division Bench. In particular, as far as the present appeal ITA No. 110 of 2014 is concerned, although it was heard along with the batch of appeals, including those disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, at one stage of the proceedings on 30th October 2014 the appeal was delinked to be heard separately.

43. Secondly, the cases which were disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessee’s were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act.

44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative ‘adjustment’ to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue’s case is negated.”

45. In view of the above passage, the Ld. Counsel for the assessee submitted that Sony Ericsson Mobile Communication India Pvt. Ltd. (supra) was specifically a case of distributor and there was no dispute as far as existence of international transaction was concerned. However, in the present case, it was submitted that the very issue of existence of international transaction pertaining to incurring of AMP expenses was in dispute and hence reliance on Sony Ericsson on this count was completely misplaced by the Ld. DR. He also submitted that the reliance of the Ld. DR on the decision of Toshiba India Pvt Ltd. (supra) was also misplaced since the same stood overruled by the decisions of the Hon’ble Delhi High Court in Maruti Suzuki India Pvt. Ltd (supra), Whirlpool of India Ltd (supra), Bausch & Lomb Eyecare (India) Pvt Ltd (supra), Honda Siel Power Products Ltd (supra) and the decisions of the coordinate benches of this Tribunal in M/s Essilor India Pvt Ltd vs. DCIT: IT(TP)A No. 29/Bang/2014, M/s Heinz India Private Limited vs. ACIT: ITA No. 7732/Mum/2010, L’oreal India Private Limited vs. DCIT : ITA No. 7714/Mum/2012 and Goodyear India Ltd (supra) and Honda Siel Power Products Ltd vs. DCIT: ITA No. 551/Del/2014. To conclude he submitted that if the threshold of lack of international transaction is not crossed then the other issues raised in the appeal qua AMP adjustment would not require a separate adjudication.

DECISION

46. We have heard the rival submissions and perused the relevant finding given in the impugned orders as well as material referred to before us. The core issue raised in the appeal qua the transfer pricing adjustment on account of incurring of AMP expenses by the assessee is, whether on the facts and circumstances of the case, can it be reckoned as international transaction within the meaning of Section 92B of the Act; and if that is so then whether any adjustment is justified on the facts of the case. The assessee company under the license granted and owned by AE is engaged in the manufacturing of variety of confectionary products and selling them as an independent entity in India. Though, we have discussed the various observations and finding of the ld. TPO, however the underline genesis is application of BLT and determination of excessive AMP expenses and consequently making transfer pricing adjustment. Though the TPO has made protective assessment using BLT, but at the same time has proceeded to make substantive adjustment in his own version of profit split method (PSM). While applying his version of PSM, he still was circumscribed by the BLT method while making the adjustment. The core reason of the ld. TPO was that, since the economic ownership of the brand and marketing tangible lies with AE, therefore, routine expenses has been incurred only for the benefit of the parent AE. Not only that, the AMP expenses are leading to enhancement of the brand value and the market penetration of these brands which needs to be compensated to the assessee for the same by the AE. The manner in which he has made the adjustment, we have already discussed in detail in the foregoing paragraphs as highlighted by both the parties.

47. Coming to the issue whether the incurrring of AMP expenses in the present case can be reckoned as ‘international transaction’, as defined in Section 92B of the Act. The relevant Section for the sake of ready reference is reproduced as under:

“Section 92B – Meaning of international transaction:

“(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to 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 sub-section (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.”

48. Further from perusal of clause (v) of section 92F of the Act defines the term ‘transaction’ to include an arrangement, understanding or action in concert – whether or not such arrangement, understanding or action is formal or in writing; or whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. Section 92F only provides “definitions” of certain terms relevant to computation of arm’s length price and had to be read in conjunction with Section 92B of the Act. The said section cannot be considered/ read in isolation to cover any and every transaction that a company enters into with any unrelated party that too domestically. From the conjoint reading of the provisions of clause (v) of section 92F and sub-section (1) of section 92B of the Act, it could be inferred that Transfer Pricing regulations would be applicable to any ‘transaction’, being an arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises.

49. Thus, in order to be characterized as an ‘international transaction’, it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert. A ‘transaction’, per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a ‘transaction’. A unilateral action, therefore, could not be characterized as an ‘international transaction’ invoking the provisions of Section 92 of the Act.

50. As culled out from the records and also explained by the ld. Counsel that the entire expenditure of AMP was only to cater to the needs of the customer in the local market of India. It was neither incurred at the instance or behest of overseas AE, nor was there any mutual agreement or understanding or arrangement to the allocation or contribution by the AE towards remuneration of any part of AMP expenditure incurred by the assessee-company for the purpose of its business in India. The entire risk of profit and loss from sales or for incurring of AMP expenses solely lied upon the assessee-company. At the threshold we do not find that there was any such understanding or arrangement or action in concert, etc, which can be inferred that AMP expense would tantamount to international transaction in the present case. The AMP expense was made by the assessee-company which is a tax resident of India to other third parties in India and no foreign party was involved and neither AMP expenses has taken place between two AEs. It is well settled law that, onus is upon the Revenue to demonstrate that their existed an arrangement between assessee and its AE wherein assessee was obliged to incur excess amount of AMP expenses and to promote the brands owned by AE. It has been held so by Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. Vs. CIT (supra). The relevant observation and the principles laid down in the said judgment are incorporated in the foregoing paragraph 23.

51. The ld. TPO has mainly harped upon clause (9) of the ‘Trade Market Technology and Knowhow License Agreement’ dated 04.09.2010 which empowered the foreign AE to approve and review the label materials, packaging materials and advertisement materials. Nowhere the agreement envisages about quantum of AMP expenditure albeit it was only to monitor the advertisement content. Monitoring and reviewing the advertisement content is merely for the alignment to ensure applicable “brand guardrails” are being followed by all the AEs across the world. It does not lead to any inference that there is any direct or indirect control the marketing functions in various geographies. Looking to the nature of the confectionary products, the marketing for such impulse products, the same has to be done as per the local ethos, culture, taste and aspiration of the local population and it cannot be governed by the AE sitting outstanding India. It has been stated before us that the assessee company had full-fledged marketing team with the help of local marketing agencies and consultant use to manage the marketing functions and advertisement across the country based on the local requirements and sales. Here, in this case, it is to be kept in mind that the entire AMP expenditure has been incurred by the assessee company to promote the sale of its product in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns.

52. The royalty has been paid on the ground of long term exclusive right to use the trademark in respect of manufacturing and sale of various kinds of confectionary products in India. It is purely technical collaboration and use of the trademark owned by the licenses. However, in so far marketing expenses are concerned, the same is for increasing the sales and profits in India reaped only by the Indian entity, i.e., assessee-company. There is no obligation or a binding covenant to agree any minimum AMP expenses as a part of its license obligation. The entire strategic decisions for sales and marketing in India is purely on the assessee-company which is developed by the assessee in India only after the study of market and survey etc. any profit or loss on a launch of any product or increase or dip in sale is owned by the Indian entity.

53. Further, nowhere from the agreement or any arrangement it can be inferred that assessee is incurring any expenditure to promote the Perfetti brand or product which are not sold in India. In this aspect, the detail submission made by the ld. Counsel ss incorporated above in the foregoing paragraph which is unrebutted. This explains that there is no correlation of incurring of AMP expenditure of any kind, for which any benefit is being derived by the AE by incurring such of expenditure by Assessee Company. In case of full risk bearing entrepreneur the entire responsibility of sales and profitability or loss is on the Indian entity.

54. In so far as reference made by the TPO to the ‘Trademarks Technology License and Knowhow Agreement’, it has been already discussed in detail in the argument of the ld. Counsel in the foregoing paragraphs that; the clause (1), clause (3) and clause (4) of the agreement referred to providing certain kind of support relating to trademark, design, etc; using of trademark technology and knowhow for the manufacturing and selling of confectionary product in India; and license to manufacture and sell various kinds of confectionaries and to offer any experience employee to assist the licensee manufacturing, sale and advertisement and promotion of the products and any technology and problem during the manufacturing and sale of the products. From the reading of the said clause it can be deduced that AMP expenses should be incurred either on behest or on behalf of the AEs or for their benefit. Similarly, clause (9) of the agreement was purely for asserting best practices to confirm the brand of the owner and the trademark and technology and advertisement material, etc. Another important clause which has been referred by the TPO is clause (10), wherein it has been provided that the licensee will actively advertise and sell in the territory to the products manufactured by him but at the same time it also provides that no compensation would be provided to the licensee regarding advertisement expenses in the event of the termination of the agreement. Nowhere, it has been brought on record by the TPO that by virtue of this clause the assessee was entitled for compensation of advertising expenses.

55. In so far as other observations and allegation of the TPO that certain brands were conceptualized and developed in India with trademark with respect of this brand with the foreign AE it has been clarified by the ld. Counsel that it was only for conceptualising and making a different view of the products for looking to the local taste and not a separate product which has been created in India. The manufacture and sale of these products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co-ordinate Bench in the Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf.

56. Another reasoning given by the ld. TPO to justify that AMP expenditure and international transaction is that at least two brand developments as discussed by him in paragraphs 6.1 to 6.6. This issue has been discussed by the Hon’ble Jurisdictional High Court in detail in the case of Sony Ericsson Mobile Communication vs. CIT (supra) which for the sake of ready reference is reproduced hereunder: –

“Brand and brand building

102. We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L. G. Electronics India Pvt Ltd. (supra). The term “brand”, it holds, refers to name, term, design, symbol or any other feature that identifies one seller’s goods or services as distinct from those of others. The word “brand” is derived from the word “brand” of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and emotional 103 It is a matter of perception and reputation as it reflects customers ‘ experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described “a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely”. The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe “goodwill”, can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord Mac Naghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of “goodwill” it was observed:

“It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired.

I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will—of course, under the conditions attaching to property of that nature … What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again …”

104 “Brand” has reference to a name, trade mark or trade name. A brand like “goodwill”, therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean :

“It has been horticulturally and botanically viewed as ‘a seed sprouting’ or an ‘acorn growing into the mighty oak of goodwill’. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the ‘attracting force’. In terms of comparative dynamics, goodwill has been described as the ‘differential return of profit’. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a ‘habit and sociologically it is a ‘custom’. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the ‘sap and life’ of the business.”

There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with’. Quality control being the most important element, which can mar or enhance the value.

Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and’ sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands.

Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise.

In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CIT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read:

“4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits.”.

(Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi).

Accepting the parameters of the “bright line test” and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the “bright line test” with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Electronics India Pvt Ltd.’s case (supra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the “bright line test” in terms of paragraph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark).

112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products “own” and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm’s length price. The aforesaid discussion substantially negates and rejects the Revenue’s case. But there are aspects and contentions in favour of the Revenue which requires elucidation.”

56.1 Thus, the Hon’ble High Court after describing the concept of the “brand” had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value of Brand fluctuates from time to time depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, and then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected.

57. Thus, on the facts of the present case, it cannot be held that there was any kind of understanding or arrangement with the AE which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure.

58. Otherwise also, if we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee’s profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% and therefore, at the entity level profitability assessee’s margin was far excess of the comparables and accordingly no adjustment on such transaction can be made.

58. Lastly, as regards the substantive AMP adjustment of applying residual profits split methods, it is incumbent upon the TPO firstly to combine profit from the so called international transaction of incurring of AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. The manner in which RSPM has been applied by the TPO cannot be held as same is consistent with Rule 10B of the Income Tax Rules. Accordingly, this ground raised by the assessee is allowed.

Corporate tax grounds – Disallowance made under section 80-IC

59. Ground Nos. 40 to 46 deal with disallowance of deduction under section 80-IC of the Act. Briefly stated, the facts of this ground are that the assessee has three manufacturing units in India, viz., Manesar – Haryana, Chennai – Tamil Nadu and Rudrapur – Uttarakhand, viz the eligible unit. In the year under consideration, the unit at Rudrapur claimed deduction under section 80-IC of the Act, amounting to Rs. 43,62,65,693/-. The deduction under section 80-IC was claimed for the first time in AY 2008-09 and this was the ninth year of deduction and consequentially, only 30% of the profits earned by eligible unit were claimed as a deduction. We are given to understand that for the purposes of computing the deduction, specific expenses incurred on a particular brand were shown separately against that brand and were charged to the unit where the brand was manufactured. In case, the brand was manufactured by both the eligible as well non-eligible unit, the expense was allocated on the basis of individual brand sales ratio, i.e., ratio of “unit wise sales value of brand or product upon total sales value of brand”. Common expenses, which were not directly identifiable with any of the brand /unit were allocated between the eligible unit and non-eligible unit on the basis of turnover ratio, i.e., ratio of “total sales of eligible unit upon total sales of PVM India”. The said ratio, for the year under consideration, was worked out to be 51.26: 48.74 and all the common expenses which were not directly identifiable with any of the brand / unit were allocated to the eligible unit in this ratio. The Assessing Officer, however, rejected the allocation of expenses carried out by the assessee whilst following the ratio laid down in the CIT(A)’s order for AY 2009-10. In that year, the CIT (A) had re-computed the turnover ratio after excluding excise duty from sales of non-eligible units. Following the findings given by the CIT(A) in AY 2009-10, the AO recomputed the turnover ratio for the year under consideration at 52.97 : 47.03 and accordingly, disallowed deduction so claimed to the extent of Rs. 17,96,61,158/-. Aggrieved, the assessee is in appeal before us.

60. The Ld. Counsel submitted that the besides the allocation being purely arbitrary and patently illegal, the disallowance worked out by the AO suffered from various flaws. He submitted that section 145A of the Act, which deals with method of accounting for income tax purposes, specifically provides that sale of goods should be inclusive of the amount of tax, duty, cess or fees actually paid or incurred by the assessee. Thus, exclusion of excise duty for the purpose of calculating turnover is contrary to the mandate of the taxing statute. Further, he drew our attention to the definition of the term “Turnover” under various statutes.

61. The Central Sales Tax Act, 1956 defines “Turnover” as follows:

“turnover” used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-State trade or commerce made during any prescribed period and determined in accordance with the provisions of the Act and rules made there under.

62. Further, section 8A(1) of the said Act, provides that in determining turnover, deduction of sales tax should be made from the aggregate of sales price.

63. The term “Turnover” has also been defined under Section 2(91) of the Companies Act, 2013 as follows:

“2(91) “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year”.

64. Thus, as per Companies Act, 2013, the term turnover means the sum realized by sale of products which is inclusive of excise duty and thus, excluding the same for the purpose of calculating turnover for allocation will lead to an irrational allocation ratio.

65. In addition thereto, the Ld. Counsel submitted that Excise duty arises as a consequence of manufacture of excisable goods and is as much a cost for a company as any other expenditure. To support his argument, he referred to “Guidance Note on Accounting Treatment for Excise Duty” issued by Institute of Chartered Accountant of India (ICAI), which read as under:

“10. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/disposal of goods thereafter, e.g., sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is an exaction or a levy or because it is unavoidable. In fact, in a wider context, any expenditure is an imposition which a manufacturer would like to minimise.”

66. In view thereof, the Ld. AR submitted that the excise duty paid is an expense against the sale value and hence, should not be reduced from sales to arrive at correct allocation ratio. In addition thereto, it was also pointed out by the Ld. AR, that in assessee’s own case for AY 2011-12, the AO had accepted the deduction claimed by the assessee and had not objected to the inclusion of excise duty in the total turnover and therefore, it was not open to the AO to adopt an inconsistent approach in the year under consideration.

67. Besides the above, it was pointed out that the AO had erroneously assumed the total amount of AMP expenses of Rs. 110,56,61,711/- as the common un-allocable advertising expenses and had bifurcated them basis turnover ratio. He submitted that a large portion of advertising expenses was specifically identifiable to each brand and had been allocated on that basis only. He filed a detailed chart explaining the allocation of advertising expenses. From a reading of Chart A, it was shown that the assessee had incurred total advertising expenses of Rs. 115,55,70,416. From the said figure, an amount of Rs. 4,99,08,629, being specifically allocable to the eligible unit, was reduced to arrive at the figure of Rs. 110,56,61,787. Thereafter, the advertising expenses were bifurcated basis the individual brand wise sales ratio. Chart B depicts the individual brand sales wise allocation of expenses to the eligible unit. On perusal of Chart B, it can be seen that brands such as Big Babool, Centre Fresh, Centre Fruit, Creamfillz, Alpenliebe Mangofillz were manufactured at the eligible unit and that Big babool, Creamfillz and Alpenliebe Mangofillz was exclusively manufactured at the Rudrapur unit and therefore, the entire advertising expenditure specifically identifiable to these brands was allocated to the eligible unit at Rudrapur. For the rest of the brands, such as Centre Fruit and Centre Fresh, expense was allocated basis brand wise sales effected from the eligible unit. For e.g., 81.57% of the total sales of “Centre Fresh” brand was effected from the eligible unit and therefore, 81.57% of the advertisement expenditure incurred in relation to “Centre Fresh” brand was allocated / charged to the eligible unit. Likewise 90.57% of the total units sold of “Centre Fruit” brand was produced by the eligible unit and therefore, 90.57% of the advertisement expenditure incurred in relation to “Centre Fruit” brand was allocated / charged to the eligible unit. The remaining expenses that could not be allocated basis on the brand wise sales ratio were allocated on the basis of turnover ratio. As can be seen from Chart B, expenses under the GL Code “Corporate” and “Brand Code” have been allocated on the basis of turnover ratio. The allocation of the expenses between the eligible and non-eligible units was accordingly, worked out as under:-

S.No.	Advertising Expenses	Total Expenses	Eligible Unit	Non-Eligible Unit
	Advertising Expenses directly identifiable to Eligible Unit	4,99,08,629	4,99,08,629	–
	Advertising Expenses directly identifiable to Non- Eligible Unit	58,00,96,923	–	58,00,96,923
Advertising Expenses specifically identifiable (A)		63,00,05,552	4,99,08,629	58,00,96,923
	Advertising Expenses allocated on the basis of individual brand sales ratio	35,68,39,196	31,13,61,383	4,54,77,813
	Advertising Expenses allocated on the basis of turnover ratio	16,87,25,668	8,64,95,701	8,22,29,967
Common allocable advertising expenses (B)		52,55,64,865
Total (A+B)		115,55,70,416	44,77,65,713	70,78,04,703

68. Basis the aforesaid working, it was contended by the Ld. AR that instead of Rs. 110,56,61,711/-, an amount of Rs. 52,55,64,865/- should have been considered as the common un-allocable advertisement expenses.

69. Without prejudice to above, he also submitted that the AO has erred in making 100% disallowance of common overhead expenses allocated to the non-eligible unit without considering the fact that as the assessee had claimed deduction of only 30% of the profits derived from the eligible unit as per section 80-IC(2)(a) of the Act, therefore, disallowance if any should also be restricted to 30% of the expenditure allocated to non-eligible unit.

70. On the other hand, the Ld. DR relied upon the findings given by the AO and DRP.

DECISION

71. We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as material referred to before us in respect of the disallowance made by the AO in respect of the deduction claimed under section 80-IC of the Act.

72. The following issues emerge for our consideration-

i. Whether given the actual allocation of expenses done by the assessee could be disturbed by the AO so as to attribute such expenses on the basis of the sales turnovers of the eligible and non-eligible units.

ii. Alternatively even if the unallocated expenses had to. Be attributed, could the Assessing officer have reduced the sales turnovers by the element of excise duty qua the ineligible units.

iii. Whether owing to the allocation of expenses to the eligible unit, the consequential disallowance would be restricted to 30% given that this was the ninth year of deduction claimed by the 80IC unit at Rudrapur and was eligible only to 30% deduction in that year

73. As regards the first issue, the assessee has submitted three charts before us wherein “Chart A” depicts the details of advertisement expenses incurred on common brands manufactured at each units for the subject year, “Chart B” depicts the total advertisement expenses incurred on various brands product wise, “Chart C” shows details of allocation of common expense between the eligible and non-eligible units. One major discrepancy that has been pointed out by the Ld. Counsel of the assessee is qua the allocation of advertising and marketing expenses to the tune of Rs. 110,56,61,711/-. He pointed out that a large portion of the advertising expenses were specifically identifiable to each brand and was allocated on that basis. From a perusal of “Chart A” it was shown by the assessee that it has incurred total advertising expenses of Rs. 115,55,70,416/-. Out of these expenses, the expenses of Rs. 4,99,08,629/- were specifically allocable to the eligible unit which left the balance expenses of Rs. 110,56,61,787/-. These balance expenses have been allocated in “Chart B” on a brand wise basis. What is noteworthy that while allocating these expenses brand wise between the eligible and noneligible units based on the actual manufacture in these units, the advertising expenses have been allocated by the assessee. This methodology was brought to the attention of AO by way of its letter dated 28.11.2019 which is annexed at pages 511 to 520 of the paper book. This has not been disputed by the AO. We find that after these actual allocations only an amount of Rs. 52,55,64,865/- are left to be allocated between the eligible and non-eligible units, which brings us to the second issue.

74. The second issue which required our consideration is whether the lower authorities were correct in reducing the element of excise duty from the total sales turnover of the ineligible unit so as to determine the ratio of allocation between the eligible and non-eligible units. The assessee while allocating the un allocable common expenses, which were not identifiable to any brand or unit, allocated such expenses on the basis of turnover ratios, i.e. ratios of total sales of eligible unit upon total sales of PVM India. The said ratio for the year under consideration was worked out to be 51.26: 48.74 and all common expenses were allocated on this basis. The AO however rejected this basis of allocation and while determining the percentage of expenses to be allocated simply removed the element of excise duty from the turnover of the ineligible units which changed the percentage adopted by the assessee at 51.26 % to 52.97% which resulted in the addition of Rs. 17,96,61,158/- and the consequential deduction under section 80IC. While doing so the AO relied on the order of the CIT (A) for AY 2009-10.

75. Given the absence of any error pointed out by the lower authorities, we find no justification in the reduction of the turnover of the ineligible units by the excise duty which has disturbed the overall allocable percentages. We find force in the contention of the assessee that even for the purposes of section 145A of the Act which deals with the method of accounting for income tax purposes specifically provides that the sale of goods should be inclusive of the amount of tax, duty, cess or fees actually paid or incurred by the assessee. The Ld. Counsel also placed reliance on the definition of the term turnover under the Central Sales Tax Act and the Companies Act.

76. We also find that the assessee has filed a copy of the order of the CIT(A) for AY 2009-10 which is placed on Pages 525 of the paper book. A perusal of the said order shows that the CIT(A) discarded the approach of the assessee in terms of taking the turnover basis for allocating the common expenses, which for the ineligible units included the element of excise duty. He determined such allocation on the basis of the tonnage production between these units and thus, arrived at a different percentage for allocation of such expenses. The CIT(A) also relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Lakshmi Machine Works Ltd. ((2007) 160 Taxman 404) to support his contention that excise duty had nothing to do with the cost of production and as such should not be considered for computing the turnover. We find that the methodology applied by the CIT (A) in AY 2009-10 cannot be blindly applied in every year because that was based on total production between the units. We also find that the CIT (A) has grossly misapplied the decision of the Hon’ble Supreme Court in the case of Lakshmi Machine Works (supra). That was a case relating to the deduction under section 80HHC and the issue involved was regarding the computation of the eligible profits. The issue which was considered by the Supreme Court was regarding the interpretation of the term “total turnover” in the formulae contained in Section 80HHC(3) and whether excise duty and sales tax could form part of the total turnover being the denominator in the said formulae. It was in that context the Supreme Court observed that for the purposes of computing deduction under section 80HHC, excise duty and sales tax should not be considered as part of the total turnover since they have no bearing on the activity of exports and would make the formulae unworkable. Thus, in our view, respectfully this decision has no bearing on the matter.

77. We find support in the order of the coordinate Bench in the case of Indica Industries Pvt. Ltd. v. ACIT, (2018 53 CCH 0516(Delhi)), where it has been held that where the assessee adopted a reasonable basis for allocation of expenses, there was no warrant for interference to change such basis. Another coordinate Bench in the case of Mahle Filter System Pvt. Ltd. v. ACIT, (2019 56 CCH 0226(Delhi)) has also accepted the apportionment of expenses on the basis of sales. We also find support from the decision of the Delhi Tribunal in Hero Motocorp Ltd. v. DCIT, (2018 53 CCH 200(Delhi)), where while examining the issue of the comparison of price between goods procured from third party vendors and the non-eligible units, the coordinate Bench held that a different formula cannot be applied and while taking the cost of such material and the same yardstick has to be applied and no further substitution is warranted. The turnover basis has also been accepted as a reasonable basis for allocation of common expenses in Dr. Reddy’s Laboratories Ltd. Vs. ACIT (2013) (37 CCH 532) (Hyd.).

78. Thus, we do not find any basis for the change of allocation from the turnover basis to the production basis since the production basis does not reflect all the costs relating to the manufacturing. In our view, the basis of allocation done by the assessee by taking the actual turnover of the eligible and non-eligible units was a reasonable basis since the non-eligible units were subjected to excise duty and there was no reason to reduce the element of excise duty while taking the turnover of the non-eligible units for allocation of common expenses.

79. The last issue which has been raised by the assessee is that having allocated the common expenses if there resulted in any consequential allocation of expenses to the eligible unit then the reduction of the 80IC claim would be limited to 30% of such expenses. We find force in this contention of the assessee given that this was the ninth year of such claim by the assessee in respect of such unit. As per the applicable provision of Section 80IC the deduction is 100% of the eligible profits for the first five years and 30% of the eligible profits for the balance five years. Thus if at all any reduction of the claim had to be made by the AO it has to be limited to 30% of such allocable expenses and no more.

80. In result thereof, Grounds Nos. 40 to 46 are allowed.

81. There are certain other grounds of appeal being ground no’s. 48 and 49 raised by the assessee in its appeal which pertain to the levy of interest as well as initiation of penalty proceedings and as such are consequential in nature. Therefore, the same are pre-mature at this stage and hence are being dismissed.

Re: Additional Ground – Education Cess

82. The assessee has filed an additional ground before us seeking allowability of the education cess paid by it, for the captioned assessment year. It was argued that being a legal ground can be taken up at any time before the higher authorities. The Ld. AR relied on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. vs. CIT : (1998) 229 ITR 383. Admission of additional ground has been opposed in principle by the Ld. DR.

82. Before us, ld. Counsel has relied upon the decision of Co­ordinate Bench in the case of M/s. Expeditors International (India) Pvt. Ltd vs. DCIT, in ITA No. 2242/Del/2015 vide order dated 30.07.2021 wherein similar additional ground was admitted and matter was decided in favour of the assessee.

83. Since it is purely a legal ground, therefore, same is being admitted hereinafter.

84. The claim of the assessee is that education cess is an allowable business expenditure and it is not hit by the Section 40(a)(ii) which for the sake of ready reference is reproduced hereunder:

“Amounts not deductible, – Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits & gains of business or profession’, –

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise based on, any such profits or gains.”

Thus, as per the provisions of section 40(a)(ii) of the Act, any sum paid on account of any rate or tax shall be disallowed in the following two cases:

a) where the said rate or tax is levied on the profits or gains of any business or profession, or

b) where the aforesaid rate or tax is assessed at a proportion of or otherwise based on any such profits or gains.

85. The contention of the assessee is that what has been envisaged in the section is that, rates and taxes levied on profits and gains of business is not be allowed, and since cess has not been mentioned, therefore it is not disallowable and in support reliance has been placed on certain decisions which we shall discuss herein after.

86. First of all we have to examine whether cess is part of tax and rate or surcharge. At present, on income tax and surcharge 2% education cess and 1% secondary and higher education cess is charged on the amount of income tax. It was introduced for the first time by the Finance Bill (2) of 2004 as under:-

CHAPTER VI

Education Cess.

81. (1) Without prejudice to the provisions of sub-section (11) of section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalised quality basic education.

(2) The Central Government may, after due appropriation made by Parliament by law in this behalf, utilise, such sums of money of the Education Cess levied under sub-section (11) of section 2 and this Chapter for the purposes specified in sub-section (1), as it may consider necessary.

Definition.

82. The words and expressions used in this Chapter and defined in the Central Excise Act, 1944  (1 of 1944), the Customs Act, 1962 (52 of 1962) or Chapter V of the Finance Act, 1994 (32 of 1994), shall have the meanings respectively assigned to them in those Acts or Chapter, as the case may be.

Notes on clauses of that finance bill provided as under:-

“It is also proposed that the amount of income-tax as specified in sub-clauses (4) to (10) of clause 2 of the Finance (No. 2) Bill, 2004 and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the “Education Cess on Income-tax” so as to fulfil the commitment of Government to provide and finance universalised quality basic education, calculated at the rate of two per cent, of such income-tax and surcharge. The Education Cess on Income-tax shall be payable during the previous year beginning on 1st April, 2004.”

87. The memorandum explaining the provisions of the Finance Bill provides as Under:-

II. Rates for deduction of income-tax at source during the financial year 2004-05 from income other than “Salaries”

An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge.

III. Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of income-tax in special cases during the financial year 2004­2005.

“The rates for deduction of income-tax at source from “Salaries” during the financial year 2004-2005 and also for computation of “advance tax” payable during that year in the case of all categories of taxpayers have been specified in Part 111 of the First Schedule to the Bill. These rates are also applicable for charging income-tax during the financial year 2004-2005 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, or assessment of bodies formed for short duration, etc. An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted inclusive of surcharge.”

88. Budget speech of the Hon’ble Finance Minister while presenting budget for the year 2004-05 before the Parliament.

Relevant portion of said budget speech is reproduced below:

“Education

22. In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates Government to levy an education cess. I propose to levy a cess of 2 per cent. The new cess will yield about Rs. 4000- 5000 crores in a full year. The whole of the amount collected as cess will be earmarked for education, which will naturally include providing a nutritious cooked midday meal. If primary education and the nutritious cooked meals scheme can work hand-in-hand, I believe there will be a new dawn for the poor children of India.”

89. Thus, from the above finance bill and memorandum explaining the provision of finance bill, it is clear that education cess is an additional surcharge on the tax levied. The controversy which has been raised is, whether this education cess is allowable to the assessee as business expenditure while carrying out business and profession as education from his profits and gains and business or information. Section 37 which deal with allowability of the expenditure, which is incurred for the purpose of the business. Though the word “cess” has not been defined under the Act, however, way back the Hon’ble Supreme Court in the year 1967 in the case of Shinde Brothers, (AIR 1967 SC 1512) held that it is a tax only. The relevant observation of the Hon’ble Apex court is as under:

“the word ‘cess’ is used in Ireland and is still in use in the India although the word rate has replaced it in England. It means a tax and is generally used when the levy is for some special administrative expense which the name (health cess, education cess, road cess, etc.) indicates. When levied as an increment to an existing tax, the name matters not for the validity of the cess must be judged of in the same way as the validity of the tax to which it is an increment.”

90. The aforesaid principle of the Hon’ble Supreme Court has been referred in India Cement India Ltd. Vs. State of Tamil Nadu (1990) 1 SCC 12; wherein the Hon’ble Supreme Court after referring to the judgment in the case of Shinde Brothers (supra) held that ordinarily a cess is also a tax, but is a special kind of a tax. Further, in Union of India v. Mohit Mineral (P) Ltd. [TS-512-SC-2018-NT], the Supreme Court held that the expression “cess” means a tax levied for some special purpose, which may be levied as an increment to an existing tax.

91. In a landmark judgment of Hon’ble Supreme Court in the case of CIT vs. K Srinivasan in 83 ITR 346 has held that, “The expression “income tax” used in the Finance Act and the Income-tax Act includes surcharge and additional surcharge wherever provided in the Act. The surcharge, the special surcharge and the additional surcharge form part of the income-tax and super tax and are not separate taxes by themselves.”

87. Thus, there was never a controversy that cess is not surcharge or part of tax. However, way back in the year 1967, CBDT has issued a Circular F.No. 91/58/66-ITJ (19) dated 18th of May 1967 which was in the context of disallowance of cess u/s. 40(a)(ii) of the Act has clarified in the following manner:

“1. Recently a case has come to the notice of the Board where the Income-tax officer has disallowed the “cess” paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the 1922 Act and section 40(a) (ii) of the 1961 Act.

2. The view of the Income-tax Officer is not correct. Clause 40(a) (ii) of the Income-tax Bill, 1961, as introduced in the Parliament, stood as under :

“(ii) any 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 onwards.

3. The Board desire that the changed position may please be brought to the notice of all the Income-tax Officers so that further litigation on this account may be avoided.” sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed.”

93. Whether cess is an allowable expenditure or not in light of this CBDT Circular had never come up for interpretation, because prior to year 2004 there was no cess levied as additional surcharge or surcharge under the Income Tax Act, but there were many other kinds of cess levied under other taxing statutes and direct taxes. Under the Income Tax Act, otherwise the charge of the tax has been defined in Section 4(1) which reads as under:

“4(1) Where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income tax) of, this Act] in respect the total income of the previous year of every person.”

Section 4 is the charging section fixes “rate of tax” for a previous year and enacts various amendments, omissions and insertions in the Income tax Act. Without the Finance Act there cannot be any taxation of income in a prescribed manner and imposition of tax. Section 294 of the Act provides that if on April 1, in any year, the new Finance Bill has yet not been placed on the statute book, the provision in force in the preceding year or the provision proposed in the Bill, then before the Parliament, whichever is more favourable to the assessee, shall apply until the new provision becomes effective. This clearly indicates that Income tax Act is part of the Finance Act and cannot operate in isolation of the Finance Act. The Finance Act provides the “rate of tax” according to which income-tax is levied on the total income of any previous year. Chapter II, section 2 of the Finance Act which provides for rates of income-tax, defines “income-tax” as under:

Income-tax

“2. (1) Subject to the provisions of sub-sections (2) an (3), for the assessment year commencing on the 1st day of April 2018, income-tax shall be charged at the rates specified in Part I of the First Schedule and such tax shall be increased by a surcharge, for the purposes of the Union, calculated in each case in the manner provided therein.”

2(11) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the purposes of the Union, to be called the “Education Cess on income-tax”, calculated at the rate of two per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance universalized quality basic education.

2(12) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by a surcharge /”underlined words substituted by the applicable surcharge – from Finance Act, 2009], for the purposes of the Union, calculated in the manner provided therein, shall also be increased by an additional surcharge, for the purposes of the Union, to be called the “Secondary and Higher Education Cess on income-tax”, calculated at the rate of one per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance secondary and higher education.”

94. Ergo, if cess is considered as part of surcharge, i.e., the additional surcharge on tax, then if income tax payable under the Act is not reckoned as allowable expenditure u/s.37. Ostensibly by this logic, the cess also cannot be held to be allowable business expenditure, because the cess is always calculated and paid on percentage of income tax payable and not actually incurred for the business or profession of assessee. In the context of 115JB Hon’ble Calcutta High Court in the case of Srei Infrastructure Finance Ltd. as reported in (2017) 395 ITR 291 (Cal) held that both surcharge and education cess are part of the income tax, though payable in addition to the income tax. The Hon’ble Court after quoting provision of the Finance Act observed that income tax being increased by the amount of surcharge and cess. Accordingly, it was held that surcharge and education cess is nothing other than income tax.

95. However, the above CBDT Circular of 1967 has been referred and relied upon by the Hon’ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT, as reported in 107 taxmann.com 484 (Raj) and held that in view of the said CBDT circular, the cess is not disallowable u/s. 40(a)(ii) and hence the assessee’s claim that education cess is an allowable expenditure was upheld. Subsequently, in a very detailed judgment of Hon’ble Bombay High Court in the case of Sesa Goa Ltd. Vs. JCIT, reported in 423 ITR 426 has dealt this issue as under:

“Therefore, the substantial questions of law Nos.(i) and (ii) framed in Tax Appeal No. 17 of 2013 are hereby answered in favour of the Appellant – Assessee and against the Respondent-Revenue. To that extent, the view taken by the ITAT in its impugned judgment and order dated 17th May, 2013 is ordered to be modified.

15. The substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the only substantial question of law in Tax Appeal No. 18 of 2013 is one and the same namely, ‘whether Education Cess and Higher and Secondary Education Cess, collectively referred to as “cess” is allowable as a deduction in the year of its payment ?’.

16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, –

(a) in the case of any assessee –

(ia)

(ib)

(ic)

(ii) any sum paid on account of any 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.

[.Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]

[Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]

17. Therefore, the question which arises for determination is whether the expression “any rate or tax levied” as it appears in section 40(a)(z7) of the IT Act includes “cess”. The Appellant – Assessee contends that the expression does not include “ce^” and therefore, the amounts paid towards “cess” are liable to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. However, the Respondent – Revenue contends that “cess” is also included in the scope and import of the expression “any rate or tax levied” and consequently, the amounts paid towards the “cess” are not liable for deduction in computing the income chargeable under the head “profits and gains of business or profession”.

18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Mfg. Co. Ltd. v. Raval, [1959] 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.

19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT v. Motors & General Stores [1967] 66 ITR 692 (SC)].

20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT v. Radhe Developers [2012] 17 taxmann.com 156/204 Taxman 543/341 ITR 403 (Guj.). One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear v. State of Haryana [1991] 188 ITR 402(SC)].

21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber v. CIT [1998] 233 ITR 207/[1997] 92 Taxman 268 (Mad.)].

22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(z7) has provided that “any rate or tax levied” on “profits and gains of business or profession” shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”. There is no reference to any “cess”. Obviously therefore, there is no scope to accept Ms. Linhares’s contention that “cess” being in the nature of a “Ta x” is equally not deductable in computing the income chargeable under the head “profits and gains of business or profession”. Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in section 40(a)(ii) of the IT Act.

23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, “education cess” or any other “cess”, then, the legislature could have easily included reference to “cess” in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the “cess”, when it comes to computing income chargeable under the head “profits and gains of business or profession”.

24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows :

“(if) 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”

25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income-tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Since the deletion of expression “cess” from the Income-tax Bill, 1961. was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No. 91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :—

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the ‘cess ‘ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax 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.

3. The Board desire that the changed position may please be brought to the notice of all the Income-tax Officers so that further litigation on this account may be avoided.[Board’s F. No. 91/58/66-ITJ( 19), dated 18-5-1967.]

27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression “cess” ought not to be read or included in the expression “any rate or tax levied” as appearing in section 40(a)(z7) of the IT Act.

28. In the Income-tax Act, 1922, section 10(4) had banned allowance of any sum paid on account of ‘any cess, rate or tax levied on the profits or gains of any business or profession’. In the corresponding Section 40(a)(z7) of the IT Act, 1961 the expression “cess” is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression “cess” and consequently, this expression finds no place in the final text of the provision in Section 40(a)(z7) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(z7) does not include, “cess” and consequently, “cess” whenever paid in relation to business, is allowable as deductable expenditure.

29. In Kanga and Palkhivala’s “The Law and Practice of Income Tax” (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(z7) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT v. Gurupada Dutta [1946] 14 ITR 100 (PC), where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the ‘circumstances’ of the assessee, including his business income. The Privy Council held that the rate was not ‘assessed on the basis of profits’ and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT 1971 [82 ITR 580] that the expression ‘profits or gains of any business or profession’ has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to ‘estimated income’ or by a municipality with reference to ‘gross income’. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to ‘cess’ and therefore, a ‘cess’ even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.

30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income-tax Appeal No. 52/2018 decided on 31st July, 2018 Chambal Fertilisers and Chemicals Ltd. v. CIT, by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held that the ITAT erred in holding that the “education cess” is a disallowable expenditure under section 40(a)(z7) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee.

31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltdfsupra) was followed and it was held that the amounts paid by the Assessee towards the ‘education cess’ were liable for deduction in computing the income chargeable under the head of “profits and gains of business or profession”. They are as follows :—

(i) Dy.CIT v. Peerless General Finance and Investment and Co. Ltd. [IT Appeal No. 1469 and 1470/Kol/2019 decided on 5-12-2019 by the ITAT, Calcutta;

(ii) Dy.CIT v. Graphite India Ltd. [IT Appeal No.472 and 474 Co. No. 64 and 66/Kol/2018 dated on 22-11 – 2019)by the ITAT, Calcutta;

(iii) Dy.CIT v. Bajaj Allianz General Insurance [IT Appeal No. 1111 and 1112/PUN/2017 dated on 25-7-2019) by the ITAT, Pune.

32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT.

33. The ITAT, in the impugned judgment and order, has reasoned that since “cess” is collected as a part of the income tax and fringe benefit tax, therefore, such “cess” is to be construed as “tax”. According to us, there is no scope for such implications, when construing a taxing statute. Even, though, “cess” may be collected as a part of income tax, that does not render such “cess”, either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(//) of the IT Act. The mode of collection, is really not determinative in such matters.

34. Ms. Linhares, has relied upon Unicorn Industries v. Union of India [2019] 112 taxmann.com 127 (SC) in support of her contention that “cess” is nothing but “tax” and therefore, there is no question of deduction of amounts paid towards “cess” when it comes to computation of income chargeable under the head profits or gains of any business or profession.

35. The issue involved in Unicorn Industries {supra) was not in the context of provisions in Section 40(a)(i7) of the IT Act. Rather, the issue involved was whether the ‘education cess, higher education cess and National Calamity Contingent Duty {NCCD)’ on it could be construed as “duty of excise” which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression “duty of excise” and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries {supra).

36. The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as “duty of excise” when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant – Assessee towards the “cess” can never be regarded as the amounts paid towards the “tax” so as to attract provisions of Section 40(a)(z7) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries {supra) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries {supra) can be of no assistance to the Respondent – Revenue in the present matters.

37. Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant – Assessee, in its original return, had never claimed deduction towards the amounts paid by it as “ce.s.y”. She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze {India) Ltd. v. CIT [2006] 284 1TR 323/157 taxman 1 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant – Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference.

38. Although, it is true that the Appellant – Assessee did not claim any deduction in respect of amounts paid by it towards “cess” in their original return of income nor did the Appellant – Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant – Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant – Assessee, both before the Commissioner (Appeals) as well as the ITAT.

39. In CIT v. Pruthvi Brokers & Shareholders (P.) Ltd. [2012] 349 1TR 336/208 Taxman 498/23 taxmann.com 23 (Bom), one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze {supra) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze {supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351/66 Taxman 27 (Bom.) to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law.

40. The decision in Goetze {supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze India Ltd. {supra), the Hon’ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers Shareholders (P.) Ltd. {supra) as well and this is the distinction which the ITAT failed to note in the impugned order.

41. Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant – Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner (Appeals) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare’s contention based upon the decision in Goetze India Ltd. {supra).

42. For all the aforesaid reasons, we hold that the substantial question of law No. {iii) in Tax Appeal No. 17 of 2013 and the sole substantial question of law in Tax Appeal No. 18 of 2013 is also required to be answered in favour of the Appellant – Assessee and against the Regpondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification.

96. The aforesaid judgment clinches the issue in favour of the assessee not only in allowing the claim made for the first time but also the allowability of cess as business expenditure while computing the profit. Following the aforesaid two decisions of the Hon’ble High Courts, Co-ordinate Bench of this Tribunal has allowed the claim of the assessee.

97. Though, we have just expressed our view in the foregoing paragraphs, but the two above decisions of the Hon’ble High Court are directly covered on this point and as a matter of judicial precedence which has also been followed by the various Benches of this Tribunal, we allow the claim of the assessee.

98. In the result, the additional ground raised by the assessee is allowed.

99. Accordingly appeal of the assessee is allowed. Order pronounced in the open Court on 22nd September, 2021.