Income Tax Appellate Tribunal - Mumbai
Cadbury India Ltd, Mumbai vs Department Of Income Tax on 22 October, 2013
`आयकर अपील य अ धकरण "के" यायपीठ मंब
ु ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K", MUMBAI
ी ड. क नाकर राव, लेखा सद य एवं ी ववेक वमा, या यक सद य के सम ।
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
आयकर अपील सं. : 7408/मम
ु /2010
नधारण वष A.Y. 2002-2003
ITA No. : 7408/Mum/2010
(Assessment year: 2002-2003)
M/s. Cadbury India Ltd, Vs Addl Commissioner of Income
Cadbury House, Tax, Range -5(1),
19, B Desai Road, Mumbai
Mumbai 400 026
अपीलाथ (Appellant) यथ (Respondent)
आयकर अपील सं. : 7641/मम
ु /2010
नधारण वष A.Y. 2002-2003
ITA No. : 7641/Mum/2010
(Assessment year: 2002-2003)
Addl Commissioner of Income Vs M/s. Cadbury India Ltd,
Tax, Range -5(1), Mumbai 400 026
Mumbai थयी लेखा सं.:PAN: AAACC 0460 H
अपीलाथ (Appellant) यथ (Respondent)
Appellant-assessee by : Shri J.D. Mistry
Shri Nishant Thakkar
Respondent-revenue by : Shri Ajeet Kumar Jain
Shri O.P. Singh
सनवाई
ु क तार ख /Date of Hearing : 22-10-2013
घोषणा क तार ख /Date of Pronouncement : 13-11-2013
आ दे श
ORDER
ववेक वमा, या स:
PER VIVEK VARMA, JM:
The Cross Appeals have been filed by the department and the assessee against the order of CIT(A) 15, Mumbai, dated 25.08.2010. For the sake of brevity and convenience, we passing a common and consolidated order.
2 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 ITA No. 7641/Mum/2010: (Appeal filed by the department):
2. The department has raised the following grounds of appeal:
"1. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in concluding that M/s. Cadbury India Limited has received several benefits on account of payment of Technical Knowhow Royalty and whether the Ld. CIT(A) was justified in concluding that Royalty for Trademark at 1% and Technical Knowhow at 1.25% for ht entire FY 2001-02 is at Arm's Length.
2. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in treating 50% the expenses incurred on Architect & Interior Design amounting to Rs. 21.94 Lacs and expenses incurred on Supply & Installation of Electrical Items amounting to Rs. 14.44 Lacs as Revenue"?
3. The facts in brief are that the assessee is in the business of manufacture, distribution and marketing of malted food drinks, cocoa powder, chocolates, toffees, drinking chocolates and sugar confectionaries. The assessee, having its head office at Mumbai, is having its factories at Thane, Induri and Malanpur and marketing offices located at Delhi, Chennai, Kolkata and Mumbai.
4. The assessee is a subsidiary of M/s Cadbury Schewepps PLC, U.K. Cadbury group has presence in more then 200 countries and it enjoys the distinction of being world's third largest soft drinks company in sales volume and is among the fourth largest confectionary company in the world.
5. Cadbury India Ltd., the assessee entered into certain international transactions with its Associated Enterprises (AEs), which are as follows:
S Name of the Country of Nature of Description of Amount No. Associated tax relationsh transaction with Received/receiv Enterprise (AEs) residence of ip AEs able AEs paid/payable as per books of accounts (Rs) (1) (2) (3) (4) (5) (6) 1 M/s Cadbury U.K. 92A(2)(b) (i) Purchase of CDM 277,238 International Limited Flavor oils
(ii) Cocoa buying 3,460,441 service charges 2 M/s Cadbury Australia 92A(2)(b) Purchase of Cocoa 1,243,244 Schweppes Pty beans Limited, Australia 3 M/s Cadbury Malaysia 92A(2)(b) Purchase of 10,110,412 confectionery, chocolates
3 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 Malaysis Sdn. Bhd, Malaysia 4 M/s Cadbury (Pty) South Africa 92A(2)(b) Purchase of 1,047,364 Limited, South Africa Chocolates 5 M/s Cadbury Middle United Arab 92A(2)(b) Sale of Chocolates 4,343,153 East FZE, Dubai, Emirates and malted food United Arab drinks Emirates 6 M/s Cadbury U.K. 92A(2)(a) (i) Royalty for the 63,668,247 Schweppes use of Trade Mark Overseas Limited, (ii) Royalty for 56,624,003 UK technical know-how 7 M/s Cadbury U.K. 92A(1)(a) Payment of ERP 3,601,240 Schweppes Plc., UK license and maintenance fees The issue of ALP was referred to the TPO u/s 92CA with regard to transactions relating to Royalty for the use of trademarks at Rs. 6,36,68,247/- and Royalty for technical knowhow at Rs. 5,66,24,003/-
6. With regard to Royalty on technical knowhow, it was found that the assessee had entered into an agreement with its parent AE on 09.03.1993, with the approval(s) of SIA, Government of India, which were granted at various points of time.
7. According to the agreement, the assessee shall pay Royalty at 1.25% of internal sales and exports (Net sales), against which the parent AE shall supply and disclose and make available to CIL (Indian Co.) all knowhow, advice and assistance at all such time that may be mutually agreed between the parties.
8. The TPO, gathering information from other Cadbury units across the globe required the assessee to submit a reply, as to why 1% of gross sales be not taken to be at arm's length instead of 1.25% taken by the assessee in the case of technical knowhow.
9. Looking into the facts of the case, the TPO found out that the assessee has used TNMM for computing ALP of the International transactions by comparing the net margin of the company at entity level, with that of companies engaged in food products, beverages and tobacco business. According to the TPO transactions pertaining to 4 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 payment of Royalty is not separately and independently benchmarked. He further noted that companies identified by the assessee company i.e. DFM Foods Ltd., Bakeman Industries Ltd., Modern Food Industries (India) Ltd., Parrys Confectionary Ltd and Ravalgaon Sugar Farm Ltd., did not pay any technical fee/royalty. According to him, these companies could not be used in the analysis for benchmarking the royalty payments. Since the total sales of the company is at Rs. 645 crores and international transactions pertaining to this segment is only 14.50 crores, being only 2.24% would not effect the profitability, if the ALP is to be determined at TNMM at entity level. According to the TPO, the most appropriate method, therefore, would be CUP because all other comparables, as supplied by the assessee, either developed their own technology, or they had acquired the technology long back and are no more paying for the transfer of technology. This, in the case of the assessee is not the case, because, the assessee company, i.e. Cadbury India Ltd., is required to pay royalty to its parent AE, CSDL, for the continuous upgradation of technology.
10. The TPO, therefore, concluded that in the case of royalty on technical knowhow the ALP should be computed at 1% of sales, which comes to Rs. 4,52,99,207/- against 1.25% taken by the assessee at Rs. 5,66,24,003/-.
11. Similarly, the TPO computed royalty paid on trademarks, at Rs. 5,03,31,678/- in place of Rs. 6,36,68,247/- taken by the assessee.
12. Before the TPO, it was submitted this was the first year for the payment of royalty on trademark use, because, earlier, the payment was banned under FERA Rules.
13. After the prohibition was lifted, the assessee in the Board meeting held on 24.04.2001 authorized the company to pay the royalty on use of trademark at 1% of the net sales value, w.e. from April 2001.
5 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 After getting the approval from the Reserve Bank of India (RBI) an agreement was entered into between Cadbury Limited, Trebor Bassett Limited, Cadbury Scheweppes Overseas Ltd. and Cadbury India Ltd., on 12.02.2002, according to which Cadbury and Trebor granted Cadbury overseas the exclusive rights to distribute its products and use the trademarks and technical information throughout the territory. The said agreement provided "that Cadbury Overseas hereby grants to company and the Company hereby accepts the exclusive non transferable licence to manufacture, market and sell the products under the Cadbury Trade Marks and Trebor Trade Marks in the territory in accordance with the technical information and specifications". Herein territory meant India, Nepal, Bangladesh, Bhutan and Sri Lanka.
14. According to the TPO, the agreements seemed to be overlapping, therefore, he asked the assessee to submit the information regarding payments received by CSOL from all group companies. The company vide its letter dated 04.02.2005 submitted the copy of email sent to it from CSOL, which is as under:
S Overseas Company Territory Royalty rate/ Type of Agreement No. Fee Net Basis (1) (2) (3) (4) (5) 1 Cadbury Adams Canada & Export 2.50% Trade mark licence-
Canada Inc. Territory Exclusive & transferable
2 Cadbury Food Co. Ltd., Not specified but 3.5% Trademark licence sole
China excludes exports non-transferable rights
3 Cadbury Egypt S.A.E. Republic of Egypt 2% Trade mark licence
Export territories exclusive
listed
4 Cadbury France France and such 2.00% Trade mark licence
other territories
5 Cadbury Ghana Ghana 2.00% Combined technical
Limited services & trademark user
agreement
6 PT Cipta Rasa The Republic of 2.50% Trade mark licence -
Primatama Indonesia Exclusive & non-
transferable
7 Cadbury Kenya Kenya, Uganda and 2.00% Trade mark licence
Limited Tanzania and any
other territories
8 Cadbury Confectionery East & West 2.00% Royalty technical
Malaysia SDN BHD Malaysia & Brunei information and trade
& such other mark licence agreement -
territories exclusive & non-
transferable
9 Cadbury Nigeria plc Nigeria 2.00% Trade mark licence
(1) (2) (3) (4) (5)
10 Cadbury Poland Sp zo.o Poland 2.5% Trademark licence-
6 M/s. Cadbury India Ltd
ITA No. 7408/Mum/2010
ITA No. 7641/Mum/2010
exclusive and non-
transferable
11 Dlrol Cadbury LLC Russia plus named 3% for Trade mark licence
export territories confectionery exclusive and non-
** transferable
12 Cadbury Dulciora SA Spain and such 3.00% Trademark licence and
other countries non-transferable
13 Crystal Candy (PVT) Zimbawe and such 2.00% Trade mark licence
Limited other territories exclusive & non-
transferable
14 Cadbury Nigeria plc Nigeria 2.00% Technical Service
Agreement
15. From the chart, the TPO inferred that royalty on trademarks usage is 2% but the assessee company is paying the royalty between 1 to 2.5% and the average on the above comes to 2.32%. The issue was put to the assessee who replied, "The company contended that, "Technical Assistance and Royalty Agreement was approved by Govt. of India, Ministry of Industry, vide letter dated 14.09.2000. The rate of royalty payable as per approval letter was authorized at 1.25%. The comparability of international transaction of payment towards technical assistance can also be judged with reference to the laws and government orders In force [Rule 10B(2)(d)]. Accordingly, under the facts of the case, the payment towards technical assistance to SQL can be said to comply with the Arm's Length Princiole."
The company submitted the copy of application dated 30.04.2001. addressed to the General Manager, Reserve Bank of India, Exchange Control Department, Regional Office, Mumbai, for automatic approval for payment of royalty towards trademarks to Cadbury Schweppes Overseas Limited, U.K. In the application, it is mentioned that "the trademarks belonging to Cadbury Schweppes Overseas Limited, U.K. In the application, it is mentioned that "the trademarks CADBURY and several other trademarks belonging to CSOL are used by us on our chocolate, drinking chocolate, malted foods and sugar confectionery products which are being manufactured and sold by our company in India and certain other countries. It requested to issue the automatic approval effective 01.04.2001". The Reserve Bank of India, Exchange Control Department, vide letter dated 25.06.2001, has given the approval to enter into Technical Collaboration for manufacture/use of trademarks. The Press Note No.9 (2000 series), of the Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion (SIA) allowed payment of royalty upto 2% for exports and 1% for domestic sales under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer.
From the above, it is seen that the approval was sought by the company and granted by the Reserve Bank of India, under the Exchange Control Policy of the Government of India. The branding fee payment, as a general rule is allowed by a Press Note No.9 issued by Ministry of Commerce and Industry. This approval indicates that such payments are not prevented or blocked by the Government, considering the present Exchange Control Policy. There is no intervention from the Government for such payments considering the Exchange Control Policy, but such transaction satisfies the principles of Arm's Length or not is not the concern or within the jurisdiction of the Reserve Bank of India. This requires to be decided as per the provisions of Income Tax Act, 1961. The payment should satisfy the provisions of the Act, separately and independently, irrespective of the allowability of payment as per Exchange Control Policy. Similar is the view of Tax Administration of most of the countries. The Guidelines of Tax Administration of France, on the issue, refers to "please note, finally, that, although the authorization given by the Ministry of Industries or by any other technical department, with respect to the rate of a royalty or of the amount 7 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 which may be transferred abroad, is not binding on the tax administration, the Inspector, nevertheless have regard to it (source IBFD Publications)' The company also cited CBDT Circular No.6-P, dated 06.07.1968 and the decision of Pune ITAT, in the case of Kinetic Honda Motor Limited vs. Jt. CIT [77 ITD 396), in support of Its contentions. The Board's Circular and the decision are gone through. The circular as well as the decision of ITAT, Pune, deals with payments covered u/s.40A(2)(b) of the I.T. Rules, 1962 Hon'ble Tribunal referred to the Circular No.6-P, dated 06.07.1968 and observed that, when payments are approved by one wing of the Government, there is no question of such payments being treated s excessive or unreasonable having regard to legitimate business needs. The Tribunal's decision deals with the remuneration of director of a company approved by Company Law Board. In the present case, as discussed above, the approval by the Reserve Bank of India cannot be considered as an approval for making payments at Arm's Length. The approvals from the Foreign Investment Promotion Board/SIA/RBI, are for the purpose of satisfying the requirements of Foreign Exchange Regulations. In all the applications, the companies were required to justify the payments in Foreign Exchange, by indicating, how the country will be benefiting by the Net Foreign Exchange earning in the arrangements. These approvals are for checking the effect of agreements on the Foreign Exchange Reserve of the country. Due to this, the contention of the company that, the agreement is approved by the Reserve Bank of India, on its own, does not support the Arm's Length nature of the payment, accordingly, rejected.
(ii) It further contended that, "The Transfer Pricing Regulations introduced in India requires complying with Arm's Length Principle by testing the controlled transactions with that of comparable uncontrolled transactions. In other words, it is respectfully submitted that transactions entered into inter-se between associated enterprises-controlled transactions cannot be applied to test the compliance with Arm's Length principle".
16. The TPO rejected the reply of the assessee, observing that controlled transactions cannot be used for computing ALP, as per OECD guidelines in para 1.70, which classified, "... that evidence from enterprises engaged in controlled transactions with associated enterprise may be useful in understanding the transactions with associated enterprise may be useful in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where:
(i) There is sufficient data available to demonstrate their reliability.
(ii) Related party comparable data provides the most reliable available data upon which to determine or estimate an Arm's Length outcome.
(iii) In the FMCG Sector, most of the big companies in India, are part of Multi-National Enterprises, and their transactions would certainly be the controlled transactions. There would be very few companies, in the FMCG Sector other than MNCs, wherein, any royalty is paid by them to unrelated parties. The details regarding any such company could not be found on the website of SIA/RBI "www.siadipp.nic.in/publicat/newsltr" meaning thereby in FMCG sector, such royalty payments are not approved".
Considering the above and as the information regarding payment of royalty by the Cadbury Group entities to CSOL is available, the same is used as a bench mark to decide the Arm's Length rate of royalty and the contention of the company is rejected".
"The company, itself, vide letter dated 20.01.2005 submitted the meaning of the term "Trademark" in the commercial parlance, the same is reproduced below "a market place device by which consumers identify good and services and their source. In the context of trademark nomenclature, it is that the consumers will make future purchase of the same goods and services."
"Trademark recognition develops from years of customer service, consistent packaging, and quality control. Depending on the strength of a trademark, the 8 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 maintenance of the desired consumer awareness level generally requires significant, continuing advertising investment."
In the case of company, Cadbury India is investing huge amounts in Advertising Campaigns; therefore, It is Cadbury India, who is building the brand value, without commensurate compensation from CSOL. Due to these reasons, it would be more appropriate, to club the payments made for two agreements and compare the same with the payments made by other affiliated companies.
(iv) Cadbury India argued that, "the company in conformity with the regulations and the guidelines, benchmarked the payment of brand fees by application of TNMM. The TNMM method was applied by comparing the margin earned by comparables independent enterprises. As per the said analysis, the net profit margin of the company is within the range of the margins earned by comparable companies. Accordingly, under the facts of the case, the payment towards technical assistance can be said to comply with the Arm's Length Principles/' The assessee has used Transactional Net Margin Method for computing the Arm's Length Price of the International Transactions by comparing the Net Profit Margin of the company :at entity level with that of other companies engaged in Food Products1 Beverages and Tobacco Business. The transaction pertaining to payment of Royalty is not separately and independently benchmarked. The company has identified DFM Foods Ltd., Bakemans Industries Ltd., Modern Food Inds. (India) Ltd., Parrys Confectionery Ltd. and Ravalgaon Sugar Farm Ltd. From the Prowess/Capitaline Database, it is seen that none of these companies are paying any technical fees/royalty. Therefore, these companies cannot be used in the analysis for benchmarking the royalty payments. The total sales of Cadbury India Ltd. is nearly Rs.645 crores and all international transactions, are of value of 14.50 crores, which is only 2.24% of the turnover. The use of Transactional Net Margin Method, at entity level, for benchmarking such a small transaction, will not be the most appropriate method, because, such a transaction does not in a big way affect the profitability of the company. In the present case, the data regarding comparable, though controlled transactions are available, and therefore, Comparable Uncontrolled Price method is the most appropriate method".
"The total royalty worked out by the company is Rs.63,668,246/-. The company was asked to submit the working of royalty as per Press Note No.1 (2002 Series), issued by Secretariat for Industrial Assistance, Government of India. As per this Press Note, the formula for calculation of royalty for the use of trademark and brand name is:
"Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents/dealers' commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts, components imports from the foreign I/censor or its subsidiary/affiliated company."
The company submitted the working for the same in Annexure 4 of the letter dated 11.02.2005. The revised royalty payment works out to Rs.61,840,438/- Tax Deduction:
The chronological events leading to payments of this royalty are
(i) Date : 26.04.2001 - Cadbury Board passes the resolution for payment of royalty w.e.f. 01.04.200 1.
(ii) Date : 30.04.2001 - Application made to RBI for approval of royalty payment.
(iii) Date : 25.06.2001 - Date of approval of Exchange Control Department of Reserve Bank of India, providing approval to enter into technical collaboration, for use of trademarks. As per the approval, the duration of agreement will be 10 years from the date of agreement or 7 years from the date of commencement of commercial production whichever is earlier.
(iv) Date : 12.02.2002 - Trademark License Agreement made, though commencement date Is mentioned at 01.04.2001.
The royalty could not have been paid without the approval of RBI, therefore, the company was asked to submit objection to the intention of this office to compute the royalty for Tax Deduction purpose, for the period of 25.06.2001 to 31.03.2002 only. The company submitted that, the Reserve Bank of India, after considering the application of the company, approved payment of trademark royalty from 01.04.2001. The application of the company made to RB! is gone through, wherein, the company requested to issue automatic approval effective 01.04.2001 so that the payment can commence from that date. The approval of 9 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 RBI, does not refer to effective date of payment, therefore, the royalty for the period of July, 2001 to March, 2002 only, is allowable as Tax Deduction for the year. For these months, the Brand Royalty is computed at Rs. 51,819,324/- and the same worked out as per the computation provided in Press Note No.1 amounts to Rs. 5O,331,678/-".
He, therefore, computed the royalty payment on trademark usage at Rs. 5,03,31,678/-.
17. The TPO, therefore, suggested a net adjustment of Rs. 2,46,61,370/- on payment of both kinds of royalties, i.e. royalty on technical knowhow and royalty on trademarks as:
S. Transaction As per books ALP as per Difference
No. TPO
1. Royalty on tech. knowhow 5,66,24,003 4,52,99,202 1,13,24,801
2 Royalty on trade marks 6,36,68,247 50,33,678 1,33,36,569
Total 12,02,92,250 9,56,30,880 2,46,61,370
18. The AO, in accordance with the above, made addition to the tune of Rs. 2,46,61,370/- to the income of the assessee.
19. The assessee approached the CIT(A), before whom the assessee reiterated its submissions made before the TPO/AO. The CIT(A) on examining the submissions, made proposal for enhancement for disallowing the entire payment of royalty on trademark usage technical knowhow at 1.25%, as the same were not wholly and exclusively incurred for the purpose of the appellant's business.
20. On receipt of the show cause notice for enhancement, the assessee gave a detailed reply with regard to the genuineness and correctness of royalty payments on both counts. The CIT(A), on receipt of the detailed submission from the assessee held, "Based on the submissions filed on record, explanations provided from time to time, documents evidencing provision of technical know-how, I am satisfied that the Appellant has received several benefits on account of payment of technical know-how royalty and the same have been evidenced by supporting documents"
21. On observations with regard to brand ownership, the CIT(A) held, "5.7 The Appellant, has submitted that the Overseas AEs have merely granted the Appellant, the rights to use the trademarks and all the rights with regard to decision making on licensing / exploitation / sa1e of trademarks, 10 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 maintaining the trademarks, protecting the trademarks etc continues to lie with the Overseas AEs.
Extracts from The Report on the Attribution of Profits to Permanent Establishments dated 17 July 2008 issued by the OECD were brought to my attention that defines, economic ownership' in the context of Article 7, as under:
"The economic ownership over an intangible asset relates to the ongoing contribution and investment in the property to maintain the development and value of the intangible. This is generally evidenced by marketing expenditure but is not limited to this. It also relates to the exertion of practical control over the intellectual property and hence decision making with respect to the use and exploitation of the asset. In respect of trademarks for example, while expenditure for promotions and advertising may be contributing to the value of the asset through promotion of the brand this may not be sufficient of itself to demonstrate economic ownership of the asset."
In this regard, the Appellant submitted that the economic ownership over an intangible asset could relate to the ongoing significant contribution and investment in the intellectual property to maintain and .develop the value of .the intangible. Thus, the economic owner must have the rights to use and exploit the asset in the first instance. Thereafter the extent to which the exploitation and economic control over the intellectual property is possible subject to the legal contractual relationship between the two parties which governs the terms and conditions.
The Appellant explained that Overseas AE is the intellectual property owner of the trademarks and without access to this trademarks, the Appellant would be unable to exploit the intellectual property in the Indian market. With respect to the exploitation of the intellectual property, it was submitted that the Appellant has merely been granted the right to use the trademarks on the licensed products manufactured in accordance with the prescribed specifications. The Appellant thereafter undertakes marketing and selling of the products using the brand "Cadbury".
It was further explained that economic and commercial value of, a 'brand' is typically driven by the income-stream it generates. However, the Appellant has merely contributed approximately 1% of the total sales of CSOL over the years from 2001-2008. This clearly indicates the Appellant has hardly contributed to the total group turnover and hence it cannot be termed as the economic owner of the 'Cadbury' brand. In fact, it is because of the global brand that it represents that the Appellant has been able to capture approximately 75% of the market share. It was also stated that while Cadbury has been in India from 1948, the brand per-se has been in existence since 1824 and it was a well developed brand even before it was introduced in India.
5.8 Advertisement expenses incurred by the Appellant With respect to the advertisement expenditure incurred by the Appellant, it was submitted that marketing expenditure in itself is insufficient for a claim to economic ownership over an asset.
The Appellant has contended that it is in the business of manufacturing and distribution of chocolates, sugar confectionery and malted food drinks in India based on the technology licensed by Overseas AEs, and in this regard, it incurs various business related expenses inter-alia for undertaking advertisements for the creation of "product" awareness of new products and recall value of existing product portfolio in the minds of its customers.
It was further stated the advertising expenditure is typically incurred by the Appellant for the purposes of;
a) Increasing sales of existing products by continuously reminding the customers of its products especially in case of a end in sales or when competitors launches new products / advertisement campaigns such as Kit Kat, Munch, Eclairs etc
b) Counte ring competition / acting as entry barriers for new players eg. Lindt, Mars etc
c) Informing consumers of its new product launches such as Bournville, Cadbury Silk, etc
d) Creating awareness of discounts offered on various products at a particular point of time
e) Creating a recall value of chocolates (as an alternative to Indian sweets) on festive occasions such as Diwali, New Year, Holi etc 11 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
f) Reaching out to rural markets for its low cost products
g) Marketing its health drinks/nutraceutical products (Bournvita) The Appellant has also placed on record sample copies of the advertisement mandates provided to the advertising agencies which evidence the objective and desired outcome of the advertising to be achieved.
It has been contended that advertisements are largely undertaken to create "product recall", "popularize products in the market" "counter competition" etc. It was reemphasized based on the advertising mandated filed by the Appellant, that creating "brand" awareness was not the objective of the advertisements since "Cadbury" brand is already well known respected in India. It has been submitted that the Overseas AEs provide strict brand guidelines so as to ensure that the overall strategy and vision associated with the brand is adhered to by the Appellant in India. The appellant has also submitted the copy of branding guidelines before me to corroborate the above. It has also been highlighted by the Appellant that while the increased sales may have benefited the. Overseas AEs by way of increased royalty at 1% on the incremental sales, the same is insignificant as compared to the incremental quantum of profits earned by the Appellant on the increased sales and the taxes paid thereon to the Indian Government Treasury. The Appellant has contended that the correct way of looking at royalty payment is to see the turnover achieved by the Appellant as a result of the license. It has been contended that the payment of Rs 635.68 lakhs to achieve a turnover of Rs 63,606.53 lakhs and to realize the net profit of Rs 8,892.88 lakhs is certainly reasonable and at arm's length.
Further the Appellant has also highlighted that that the advertisement and marketing efforts undertaken by the Appellant, for promoting the sales of its products in India, does not benefit the Overseas AEs directly, as they are not involved in the business of manufacture/trading of such products in India either on its own or through any of its other subsidiaries. Hence, the entire advertisement and marketing expenses incurred are purely for its own, benefit and no direct benefit accrues to Overseas AEs as such. 5.9. With respect to points raised by me during the appellate proceedings on the ruling of the AAR in case of Fosters Australia Ltd, the Appellant submitted that even the AAR and the Revenue department, in the case of Fosters Australia Limited had accepted that the owner of the trademark and the technology was Fosters Australia, overseas company and that the Indian company was only licensed the trademark and technology for its usage. Accordingly, it is submitted that considering the decision of the AAR in the case of Fosters Australia, the Appellant cannot be considered as the economic owner of the trademark Cadbury".
22. The CIT(A) also took into consideration the AA Ruling in the case of Fosters Australia Ltd., where Fosters Australia was the owner of the trademark and technology and the Indian company was the licensed user. In the decision, it was held that the applicant cannot be considered as the economic user of the trademark. Before the CIT(A) the assessee also relied on certain third party agreements and other group companies, wherein terms and conditions, assigned in the agreements were similar. The assessee placed the copy of agreement with Harshey Food Corp. US, who had been given right to produce, market, advertise, promote, sell and distribute Cadbury licensed products under the trademark of Cadbury UK. It was also argued that the group companies and third parties to whom license has been 12 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 granted are legally obliged to incur marketing/advertising expenditure while paying Royalty to the licensor and none of these partners' had faced any TP adjustment on the issue of royalty payment to the overseas AE, while undergoing TP audits.
23. The CIT(A), while examining the detailed arguments held, 6.5. The appellant had benchmarked its Royalty for trade mark and technical know how under the TNMM. Its operating margin on operating revenue came to 13.28% whereas those of its comparables in confectionary industry came to 2.17% only. TNMM is a profit based method. A royalty rate for the related party is determined indirectly by selecting a royalty rate that would give the licensee post royalty operating profits that are similar to what an unrelated party would earn by using the intangibles.
The theoretical basis of the TNMM takes the stance that, if intangible property is contributing to an entity nature, the entity will earn profits in excess of what could be observed in the absence of such intangible property. Applied to the facts of this case, the appellants 13.28% margin vis a vis average margin of comparables at 2.17% clearly establishes that the intangible property (Trademark and Technical Know How) has contributed to its excess profits. The TPO has no objection to the selection of comparable companies for benchmarking but has taken the stand that since they (comparables) are not paying trademark royalty and technical know how fees, hence cannot be used for benchmarking this transaction lacks force. In fact what distinguishes the appellant (Cadbury) from its competitors in the chocolate & confectionary market is its valuable brand name backed by the high quality products and it is this crucial factor that gives it a tremendous competitive advantage translating into an operating margin of 13.28% despite huge turnover. In the absence of such intangible property the comparables average is languishing at 2.17% only. This huge gap justifies the 2.25% payment by the appellant to its AE. There is a direct co-relation between Cadbury's "intangible capital" and its performance. 6.6. As regard the issue of period of royalty payment based on the submissions filed before me and the explanations provided, and reviewing the chain of events, I am of considered view that the Appellant always intended to pay brandname royalty from 1 April 2001 and the same was accordingly stated in its application to the RBI. The payment of brandname royalty was approved by the RBI and RBI has not raised any question on the effective date of royalty payments. It is merely that the Appellant received the RBI approval at a subsequent date. This would however not change the effective date of payment, approved by the RBI and hence the same is allowed.
6.7. To sum up the appellant has demonstrated that the royalty payment for trade mark and know how meets the Arms Length test under TNMM. It has backed it with CUP method including third party comparables like HERSHEY, unrelated third parties in Asia to whom license has been granted. It also demonstrated that its advertisement, marketing and promotion expenses are at par with other in the same line of business. Hence, for reasons recorded as aforesaid and after taking into account all facts and circumstances the royalty for trademark at 1% and technical knowhow 1.25% for the entire F.Y. 2001-02 is considered to be at Arms Length. The consequent addition of Rs. 11,13,24,801/- for technical know how and Rs. 1,33,36,564/- for Trade marks so made is deleted".
24. The CIT(A), not only dropped the enhancement proceedings, he deleted the addition made on account of TP adjustment.
25. Against this decision, the department has filed the appeal before the ITAT.
13 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
26. Before us, the DR submitted that the revenue authorities picked up two of the other international transactions, which really pertained to Royalty payment for technical knowhow and use of trademarks. It has been submitted that royalty on technical knowhow was being paid by the assessee company to its parent AE since the signing of the agreement dated 19.03.1993 which was valid upto 08.03.2000, which was extended by SIA vide approval upto 08.03.2000, which was extended by SIA vide approval upto 14.09.2000. He further submitted that since agreement dated 20.12.2000 upto present date, the assessee company has been paying royalty on technical knowhow at the rate of 1.25%. This is being in accordance with the agreements signed on various dates.
27. He further submitted that the assessee started to pay royalty on use of trademark after taking approval of the Board of Directors on 26.04.2001 and consequential approval by the RBI. It was submitted that the assessee had been paying royalty from 12.02.2002 to its parent AE.
28. The DR, advancing the objection made by the TPO submitted that the agreements entered into by group companies in other parts of the world had been paying composite royalty, which came to 2%, whereas, the assessee had been paying royalty ranging between 1% to 1.25% and that the agreements entered into by the assessee company and its parent AE have overlapping clauses, pertaining to the payment of royalty on technical knowhow and trademark usage.
29. Besides this objection, the DR submitted that in the course of proceedings before TPO, the TPO raised the issue of payment of AMP, which had been left without any comments, in respect of computation of ALP.
14 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
30. The DR also submitted that CUP method would be most suitable method, as there are no segment wise data available. The DR further submitted that the assessee brought on record fresh agreements, which have not been seen by the AO/TPO along with AMP issue and for this reason, the issue deserves to be restored to the AO who shall reexamine the issue afresh.
31. The Senior Counsel appearing on behalf of the assessee responded that in so far as the royalty on technical knowhow is concerned, 2% has been accepted in the case of the assessee over the years. He further pointed out that as per the data placed before the TPO and then before the CIT(A) the average royalty received by the parent AE from global entities is coming to 2.32% (as recorded by the revenue authorities in their orders). According to the Senior Counsel, even the guidelines issued by OECD is at a higher percentage at 2.25%, therefore, the royalty paid to the parent AE is well within the prescribed limits and therefore, no AL adjustment is called for. Similarly, the royalty payment on trademark usage, at 1% is well within the arms length and has been continued from the preceding year.
32. On the issue of AMP issue, the Senior Counsel submitted that since the issue was never before the TPO, the enhancement proceedings as initiated by the CIT(A) were dropped, after being fully satisfied.
33. The Senior Counsel placed reliance on the decision of Lumax Industries Ltd. vs ACIT, in ITA No. 4456/Del/2012, wherein the coordinate Bench at Delhi has accepted TNMM on royalty payments. He submitted that the case law relied upon by the DR, wherein the ITAT rejected TNMM and restored the issue to the file of the AO, does not have any relevance, when a definite finding from the coordinate Bench is there.
15 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
34. He further relied on the decision in the case of ITO vs Industrial Roadways, reported in 112 ITD 293, wherein the coordinate Bench at Mumbai held, "that if additional evidence furnished by the assessee before the first appellate authority is in nature of a clinching evidence, leaving no further room for doubt or controversy, in such a case no useful purpose would be served by following evidence/material to AO to obtain report and in such exceptional circumstances, said requirement may be dispensed with". He therefore, submitted that there is no occasion for restoring the TP issue to the file of the AO to look into the issue of AMP, which is not impugned before us.
35. The Senior Counsel, therefore, submitted that the CIT(A) was correct in holding that the payments made under both the types of royalties were at arms length and no adjustment addition needs to be made.
36. The DR in the rejoinder submitted that the in the interests of justice the issue needs to be restored to the file of the TPO.
37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage.
38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions.
39. On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its 16 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 parent AE right from 1993, as, other group companies are paying across the globe. It has been accepted by the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arms length.
40. Coming to the issue of royalty payment on trademark usage, we find that the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee's payment is coming to a lesser figure, as discussed in detail by the CIT(A).
41. We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the table supplied by the assessee and taken note of by the TPO and the CIT(A).
42. We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance.
43. On the basis of the above observations, we are of the opinion that the royalty payment on trademark usage is within the arms' length and does not call for any adjustment.
17 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
44. We, therefore, sustain the order of the CIT(A) and reject the grounds as claimed by the department.
45. Ground no. 1 as raised by the department is rejected.
46. Ground no. 2 pertains to domestic issue, wherein the CIT(A) allowed the 50% of expenses incurred on renovation of office complex and other expenses pertaining to electric installation, treating the same to be revenue.
47. The facts are that the assessee undertook refurbishing of the Cadbury House and claimed an aggregate expense of Rs. 2,39,38,000/-, which is as under:
Party Name Description Amount (Rs.)
Dalal Consultants Upgradation of Cadbury House 21,73,793
Dalal Consultants Upgradation of Cadbury House 5,73,924
Nitin Parulekar Architects Architects, interior design work 88,860
Hitesh Shah & Associates Plumbing/removing window frams/debris, etc. 30,160
Hitesh Shah & Associates Plumbing/removing window frams/debris, etc. 30,160
Hitesh Shah & Associates Fixing Ms Steel support/bamboo scaffolding 29,040
Roshan Electrical Contractor Supply & Installation of electrical items 14,44,694
Interscape Civil, Exterior and Plumbing works 1,60,63,652
S.R. Network UTP CAT 5 cable/connectors/cords/cabling 10,45,103
work
Geeta Network Repairing with upholstery work Board rooms 34,240
chairs
Geeta Network Repairing with upholstery work /Dir 99,720
Chairs/Meeting room chairs/staff chairs
Neutron Electronics Reinstallation charges NEC-M-100 50,000
TOTAL 2,39,38,000
48. The assessee in its submissions before the AO claimed that in fact the repairs, renovation, refurbishing, plumbing expenses and architects fee was much higher and much more. The assessee had suo moto capitalized all the expenses, which were in the nature of capital.
49. The AO disallowed the entire expenditure, claimed as revenue by the assessee. The AO observed in the assessment order that "the whole exercise has resulted into the additional utilizable space and long term increase in the value and strength of the building. The items claimed as revenue expenditure are part and parcel of the total expenses incurred on renovation and therefore, only a part cannot be said as capital 18 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 expenses and remaining as revenue expenditure, therefore, the entire expenditure is disallowed as capital expenditure and 10% depreciation is allowed". He, therefore, added back Rs. 2,15,44,200/- (Rs. 2,39,38,000 0 Rs. 23,93,800/-).
50. The assessee approached the CIT(A), before whom the assessee reiterated its submissions. The CIT(A) taking into consideration the submissions placed before him, along with the evidence and details, pertaining to the issues of various renovation jobs, allowed benefit to the extent of 50% on the interior designs work at Rs. 21,94,800/- and supply and installation of electrical items at Rs. 14,44,694/-.
51. Against these allowances, the department is in appeal before the ITAT.
52. Before us, the DR submitted that the view taken by the AO was correct because the nature of renovation work is of enduring benefit and falls squarely within the capital field. On the basis of these arguments, the DR submitted that even the allowance of 50% by the CIT(A) was unjustified.
53. The AR on the other hand pleaded that the expenses incurred by the assessee are purely in the nature of repairs and maintenance and are allowable as revenue.
54. We have heard the arguments of the parties before us and area of dispute for our consideration is very limited, i.e. 50% allowance on the payment made to Nitin Parulekar Architects for interior design works at Rs. 21,984,800/- and payment made to Roshan Electric Contractors at Rs. 14,44,694/-.
55. The CIT(A) has allowed only 50%, though, on adhoc basis, the impugned expense, which according to us are quite reasonable.
19 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010
56. We, therefore, sustain the order of the CIT(A) and reject the ground of appeal, as filed by the department.
57. Ground no. 2 is therefore, rejected.
58. In the result, appeal filed by the department is dismissed.
ITA No. 7408/Mum/2010: (Assessee appeal):59. The following grounds have been raised:
"GROUND NO. 1- Expenditure incurred on rural development Rs. 1,07,891/-.
On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the Additional Commissioner of Income Tax, Range 5(1), Mumbai ("the AO") of disallowing Rs. 1,07,891/-, being expenditure incurred on rural development in villages near the Appellant's factory, on the alleged ground that the said expenditure has no nexus with the business carried out by the Appellant without considering the fact that such expenditure incurred out of commercial expediency, it enhances the corporate image of the Appellant Company and also promote its business.
GROUND NO. 2: 8OHHC - Miscellaneous Income and Trade Discount Rs. 9944,920/- and Rs. 5,13,72,467/-
On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of treating miscellaneous income and trade discount as part of the total turnover for the purpose of computing deduction u/s. 8OHHC of the Act.
GROND NO. 3 : 8OHHC -- Interest Rs. 6,47,94,044/-
On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of reducing 90% of the gross interest received while computing deduction u/s. 8OHHC of the Act on the alleged ground that there is no nexus between the two without netting off the same against interest paid.
GROUND NO. 4: Payment to Third Party Manufacturer Rs. 22,64,396/-
On the facts and in the circumstances of the case and in law the CIT(A) erred in not considering and directing the AO to allow the deduction of Rs 22,64,396/- being actual payment made to the Third Party Manufacturer on account of contractual obligation GROUND NO.5: General The Appellant craves leave to add, to alter and/or amend all or any of the foregoing grounds of appeal.
60. Ground no. 1 pertains to disallowance of Rs. 1,07,891/- on account of rural development.
61. The CIT(A) sustained the disallowance, following the order of his predecessor in the preceding year(s). We also find that the addition has been sustained by the coordinate Bench in the assessee's own case in assessment year 2001-02 in ITA No. 975/Mum/2005.
62. In the impugned order, we find that the assessee has placed reliance on the decision of CIT vs Madras Refineries Ltd., reported in 20 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 266 ITR 170 (Mad). This case has not been considered by the CIT(A), rather, the CIT(A) followed his predecessor's order. As a correct judicial propriety, the issue should be held against the assessee, following the order of the coordinate Bench in the preceding year, but the fact that the assessee factory is located in the village belts at Induri, near Mumbai and Malana, in Madhya Pradesh. The upliftment of these areas, though not directly relatable to the business of the assessee but is certainly a matter of good corporate governance through corporate citizen, which is encouraged by the government. This is what has been held in the case of Madras Refineries Ltd. (supra). It may not be out of place to mention, that in the case of Indian Rayon & Industries Ltd. (now known as Aditya Birla Nuvo Ltd.), (where one of us was a party to the decision), in ITA No. 5421/Mum/2005 have allowed a similar expense.
63. In these circumstances, in the interest of justice and the current need for being a better corporate citizen, the issue is restored to the file of the AO, who shall reexamine the nature of expense in the light of Madras Refineries Ltd. (supra) and Aditya Birla Nuvo Ltd. ITA No. 5421/Mum/2005 (supra) and allow the expense, if the assessee has incurred expenditure for upliftment of local village community, as a good corporate citizen.
64. Issues raised in Grounds No. 2 to 4 are dealt with and are covered by the various orders of the coordinate Benches of the ITAT, in the case of the assessee. Since the grounds are covered on identical issues, we for the sake of brevity are not deviating from the inferences drawn by the coordinate Benches.
65. Ground no. 2 pertains to Miscellaneous income and trade discounts amounting to Rs. 99,44,920/- and Rs. 5,13,72,467/-.
66. At the time of hearing, the AR pointed out that the issue is covered by the order of the coordinate Bench in ITA No. 21 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 957/Mum/2005 in assessment year 2001-02 in assessee's own case, wherein in para 6.1, it has been held, "6.1 After hearing both parties, we find that this issue is covered by the decision of the Tribunal in assessee's own case in assessment year 1995-96 in ITA No.1641/M/2003 dated 8.10.2010. The Tribunal in the said year noted that the miscellaneous income which included trade discounts, miscellaneous sales, sales tax, excise duty etc. had to be included in the total turnover except the sales tax and excise duty which did not contain an element of turnover in view of the judgment of the Hon'ble Supreme Court in the case of CIT vs. Lakshmi Machine Works (290 ITR 667). The facts this year are identical. Therefore, we confirm the order of CIT(A) except in relation to sales tax and excise duty which will be excluded from the total turnover.
7. The sixth dispute is regarding reduction of 90% of interest from profit of business as per Explanation (baa) while computing deduction under section 80 HHC. Assessee had received interest on FDRs, ICDs and others aggregating to Rs.5,21,04,545/-. The AO excluded 90% of the same from the profit of the business while computing deduction under section 80 HHC which in appeal was confirmed by CIT(A). Assessee has disputed the decision of authorities below to exclude 90% of the gross interest and not net interest income. 7.1 We have heard both the parties, perused the records and considered the matter carefully. Earlier the Hon'ble High Court of Bombay in case of CIT vs. Asian Star Co. Ltd. (326 ITR 56) had held that 90% of gross interest has to be reduced from the profit of business as per Explanation (baa). However the said decision of the Hon'ble High Court has not been up held by the Hon'ble Supreme Court who in the case of ACG Associated Capsules Ltd. (343 ITR 89), have recently held that 90% of net receipts have to be reduced as per Explanation (baa). We, therefore, set aside the order of CIT(A) and hold that 90% of net interest income is required to be reduced after deducting expenses incurred having nexus with earning of interest income. The issue is thus restored to AO for working out 90% of net interest income after allowing opportunity of hearing to the assessee".
67. The DR placed reliance on the orders of the revenue authorities.
68. We have gone through the orders of the revenue authorities and have also perused the order in ITA No. 975/Mum/2005 (supra). We find the issue is covered and we do not find any reason to deviate from the order in the assessee's own case. We hold accordingly.
69. Ground no. 2 is therefore allowed.
70. Ground no. 3 pertains to reduction of gross interest from the computation of deduction u/s 80HHC.
71. At the time of hearing, the AR pointed out that the issue is covered by the order in ITA No. 975/Mum/2005 in paras no. 7 and 7.1, which reads as under
7. The sixth dispute is regarding reduction of 90% of interest from profit of business as per Explanation (baa) while computing deduction under section 80 HHC. Assessee had received interest on FDRs, ICDs and others aggregating to Rs.5,21,04,545/-. The AO excluded 90% of the same from the profit of the business while computing deduction under section 80 HHC which in appeal 22 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 was confirmed by CIT(A). Assessee has disputed the decision of authorities below to exclude 90% of the gross interest and not net interest income. 7.1 We have heard both the parties, perused the records and considered the matter carefully. Earlier the Hon'ble High Court of Bombay in case of CIT vs. Asian Star Co. Ltd. (326 ITR 56) had held that 90% of gross interest has to be reduced from the profit of business as per Explanation (baa). However the said decision of the Hon'ble High Court has not been up held by the Hon'ble Supreme Court who in the case of ACG Associated Capsules Ltd. (343 ITR 89), have recently held that 90% of net receipts have to be reduced as per Explanation (baa). We, therefore, set aside the order of CIT(A) and hold that 90% of net interest income is required to be reduced after deducting expenses incurred having nexus with earning of interest income. The issue is thus restored to AO for working out 90% of net interest income after allowing opportunity of hearing to the assessee".
72. On going through the order of the revenue authorities and the order of the Coordinate Bench in assessee's own case in assessment year 2001-02, we are of the opinion that for the sake of continuity and consistency the issue be restored to the file of the AO.
73. Ground no. 3 is allowed for statistical purposes.
74. Ground no. 4 pertains to payments of Rs. 22,64,396/- made to third party manufacturers.
75. The CIT(A) has followed the decision taken by his predecessor. In the order of the ITAT in ITA No. 975/Mum/2005, in the preceding year, the addition has been sustained, wherein it has been held in paras no. 3 and 3.1, "3. The second dispute is regarding disallowance of provision for contractual liability towards 3rd party manufacturers/ convertors in relation to excise duty payable amounting to Rs.61,44,628/-. The assessee was is engaged in the business of manufacturing and sale of malted foods, cocoa based products including confectionary which were being manufactured at its own factory as well as under agreement with third party manufacturers/converters at their factories. In respect of products manufactured at company's own factory, excise duty is paid on the basis of company's wholesale trade price less permissible deductions in the nature of post manufacturing expenses (PME) incurred by the company on freight, octroi, additional sales tax etc. The third party manufacturers converters were initially paying excise duty on the products manufactured for Cadbury on the basis of cost of raw material, packing material and conversion charges which included third party manufacturers/converters' margin of profit. However, the excise authorities disputed the said basis of valuation and claimed that excise duty on products manufactured by third party manufacturers/converters is payable on the basis of Cadbury's whole sale trade price less PME. Accordingly, the excise department issued a show cause cum demand notice and directed the manufacturers/converters to pay excise duty on the basis of normal price worked out from the prices charged by the assessee company to their wholesale dealers. The said third party manufacturers/converters disputed the basis adopted by the Excise authorities for levy of excise duty and the said dispute became the subject matter of appeal before the Excise Duty Appellate Authorities. Although the primary liability to pay the excise duty was that of the third party 23 M/s. Cadbury India Ltd ITA No. 7408/Mum/2010 ITA No. 7641/Mum/2010 manufacturers/converters, the said excise duty liability was to be paid by the assessee company as per the agreements as and when was payable. Since the said dispute was not settled in the year under consideration, the assessee company retained the liability in respect of the disputed amount to the extent of Rs.61,44,628/- in view of its contractual obligations towards the third party manufacturers/ converters by reducing its sales to that extent and crediting the accounts of the third party manufacturers/converters. In the result, the sales were shown less to that extent in the Profit & Loss Account and in effect, deduction was claimed on account of provision for liability towards contractual obligation to the third party manufacturers/ converters in computing the total income which was disallowed by the AO following decision in earlier year. In appeal the CIT(A) has confirmed the disallowance following the appellate order in the earlier year, aggrieved by which the assessee is in appeal before the Tribunal. 3.1 After hearing both the parties, we find that this issue had been adjudicated by the Tribunal in assessment year 1994-95 in ITA No.282/M/00. In the said year, the Tribunal noted that the assessee was following mercantile system of accounting as per which contractual liability accrued on the date of its ascertainment and was allowable in the year of ascertainment. In this case, the liability was pending in dispute and therefore, the same had not been incurred during the year. Facts this year are identical and, therefore, respectfully following the decision of the Tribunal in the year 1994-95 (supra), we confirm the order of CIT(A)disallowing the claim".
76. As the facts are identical and the reasoning given by the ITAT is one the similar basis, we, therefore, following the order of the coordinate Bench in the preceding assessment year, confirm the disallowance.
77. Ground no. 4 is rejected.
In the result, appeal filed by the assessee is partly allowed. To sum up:
Assessee's appeal in ITA 7408 of 2010 stands partly allowed Revenue's appeal in ITA 7641 of 2010 stands dismissed. Order pronounced in the open Court on 13th November, 2013.
Sd/- Sd/-
( ड. क नाकर राव) ( ववेक वमा)
लेखा सद य याईक सद य
(D. KARUNAKARA RAO) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
ममबई
ु Mumbai, दनाक Date: 13th November, 2013
24 M/s. Cadbury India Ltd
ITA No. 7408/Mum/2010
ITA No. 7641/Mum/2010
त/Copy to:-
1) अपीलाथ /TheAppellant.
2) यथ /The Respondent.
3) आयकर आयु त(अपील) -15, Mumbai / The CIT (A)-15, Mumbai.
4) The CIT-5,/Concerned _____, Mumbai,
5) वभागीय त न ध "के" , आयकर अपील य अ धकरण, मंुबई/
The D.R. "K" Bench, Mumbai.
6) गाड फाईल
Copy to Guard File.
आदे शानसार
ु /By Order
/ / True Copy / /
[
उप/सहायक पंजीकार
आयकर अपील य अ धकरण, मंुबई
Dy./Asstt. Registrar
I.T.A.T., Mumbai
*च हान व. न.स
*Chavan, Sr. PS