Document:

exv10w2

Exhibit 10.2

TAX MATTERS AGREEMENT

by and among

ITT CORPORATION,

XYLEM INC.,

and

EXELIS INC.

Dated as of      , 2011

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page	 
	ARTICLE I DEFINITIONS AND INTERPRETATION
	 	 	2	 
	 
	Section 1.1 Definitions
	 	 	2	 
	Section 1.2 References; Interpretation
	 	 	11	 
	Section 1.3 Effective Time
	 	 	11	 
	 
	ARTICLE II PREPARATION AND FILING OF TAX RETURNS
	 	 	12	 
	 
	Section 2.1 Responsibility of ITT to Prepare and File Tax Returns
	 	 	12	 
	Section 2.2 Responsibility of Parties to Prepare and File Covered Water Separate U.S. Income Tax Returns and Covered
Defense Separate U.S. Income Tax Returns

	 	 	12	 
	Section 2.3 Responsibility of Parties to Prepare and File Post-Distribution Income Tax
Returns, Non-U.S. Income Tax Returns, and Non-Income Tax Returns

	 	 	14	 
	Section 2.4 Time of Filing Tax Returns; Manner of Tax Return Preparation
	 	 	14	 
	Section 2.5 Costs and Expenses
	 	 	14	 
	 
	ARTICLE III RESPONSIBILITY FOR PAYMENT OF TAXES
	 	 	15	 
	 
	Section 3.1 Responsibility of ITT for Taxes
	 	 	15	 
	Section 3.2 Responsibility of Defense for Taxes
	 	 	15	 
	Section 3.3 Responsibility of Water for Taxes
	 	 	15	 
	Section 3.4 Timing of Payments of Taxes
	 	 	16	 
	 
	ARTICLE IV REFUNDS, CARRYBACKS AND AMENDED TAX RETURNS
	 	 	16	 
	 
	Section 4.1 Refunds
	 	 	16	 
	Section 4.2 Carrybacks
	 	 	16	 
	Section 4.3 Amended Tax Returns
	 	 	16	 
	 
	ARTICLE V DISTRIBUTION TAXES
	 	 	17	 
	 
	Section 5.1 Liability for Distribution Taxes
	 	 	17	 
	Section 5.2 Definition of Fault
	 	 	17	 
	Section 5.3 Limits on Proposed Acquisition Transactions and Other Transactions During Restricted Period
	 	 	18	 
	Section 5.4 IRS Ruling, Tax Representation Letters, and Tax Opinions; Consistency
	 	 	19	 
	Section 5.5 Timing of Payment of Taxes
	 	 	19	 
	 
	ARTICLE VI GAIN RECOGNITION AGREEMENTS
	 	 	19	 
	 
	Section 6.1 Gain Recognition Agreement Compliance
	 	 	19	 

i

 

	 	 	 	 	 
	 	 	Page	 
	Section 6.2 Gain Recognition Agreement Taxes
	 	 	19	 
	Section 6.3 Timing of Payment of Taxes
	 	 	20	 
	 
	ARTICLE VII INDEMNIFICATION
	 	 	20	 
	 
	Section 7.1 Indemnification Obligations of ITT
	 	 	20	 
	Section 7.2 Indemnification Obligations of Water
	 	 	20	 
	Section 7.3 Indemnification Obligations of Defense
	 	 	20	 
	 
	ARTICLE VIII PAYMENTS
	 	 	21	 
	 
	Section 8.1 Payments
	 	 	21	 
	Section 8.2 Treatment of Payments made Pursuant to Tax Matters Agreement
	 	 	21	 
	Section 8.3 Payments Net of Tax Benefit Actually Realized and Tax Cost
	 	 	22	 
	 
	ARTICLE IX AUDITS
	 	 	22	 
	 
	Section 9.1 Notice
	 	 	22	 
	Section 9.2 Audits
	 	 	22	 
	Section 9.3 Payment of Audit Amounts
	 	 	25	 
	 
	ARTICLE X COOPERATION AND EXCHANGE OF INFORMATION
	 	 	29	 
	 
	Section 10.1 Cooperation and Exchange of Information
	 	 	29	 
	Section 10.2 Retention of Records
	 	 	30	 
	 
	ARTICLE XI ALLOCATION OF TAX ATTRIBUTES AND OTHER TAX MATTERS
	 	 	30	 
	 
	Section 11.1 Allocation of Tax Attributes
	 	 	30	 
	Section 11.2 Allocation of Tax Items
	 	 	30	 
	 
	ARTICLE XII DEFAULTED AMOUNTS
	 	 	31	 
	 
	Section 12.1 General
	 	 	31	 
	Section 12.2 Subsidiary Funding
	 	 	31	 
	 
	ARTICLE XIII DISPUTE RESOLUTION
	 	 	31	 
	 
	Section 13.1 Resolution in Accordance with Distribution Agreement
	 	 	31	 
	 
	ARTICLE XIV MISCELLANEOUS
	 	 	32	 
	 
	Section 14.1 Counterparts; Facsimile Signatures
	 	 	32	 
	Section 14.2 Survival
	 	 	32	 
	Section 14.3 Notices
	 	 	32	 
	Section 14.4 Waivers
	 	 	33	 
	Section 14.5 Amendments
	 	 	33	 
	Section 14.6 Assignment
	 	 	33	 
	Section 14.7 Successors and Assigns
	 	 	33	 

ii

 

	 	 	 	 	 
	 	 	Page	 
	Section 14.8 Certain Termination and Amendment Rights
	 	 	33	 
	Section 14.9 No Circumvention
	 	 	33	 
	Section 14.10 Subsidiaries
	 	 	34	 
	Section 14.11 Third Party Beneficiaries
	 	 	34	 
	Section 14.12 Title and Headings
	 	 	34	 
	Section 14.13 Exhibits and Schedules
	 	 	34	 
	Section 14.14 Governing Law
	 	 	34	 
	Section 14.15 Consent to Jurisdiction
	 	 	34	 
	Section 14.16 Specific Performance
	 	 	34	 
	Section 14.17 Waiver of Jury Trial
	 	 	35	 
	Section 14.18 Force Majeure
	 	 	35	 
	Section 14.19 Interpretation
	 	 	35	 
	Section 14.20 Changes in Law
	 	 	35	 
	Section 14.21 Authority
	 	 	35	 
	Section 14.22 Severability
	 	 	36	 
	Section 14.23 Tax Sharing Agreements
	 	 	36	 
	Section 14.24 Exclusivity
	 	 	36	 
	Section 14.25 No Duplication; No Double Recovery
	 	 	36	 

Schedules

	 	 	 

	Schedule 1.1(6)
	 	List of ATOB Entities
	Schedule 1.1(26)
	 	List of Distributions
	Schedule 1.1(85)
	 	List of Section 355 Entities
	Schedule 6.1
	 	List of GRAs

iii

 

TAX MATTERS AGREEMENT

     THIS TAX MATTERS AGREEMENT (this “Agreement”) is made and entered into as of the            day of
        , 2011, by and among ITT Corporation, an Indiana corporation (“ITT”), Xylem
Inc., an Indiana corporation (“Water”), and Exelis Inc., an Indiana corporation
(“Defense”). Each of ITT, Water, and Defense is sometimes referred to herein as a “Party” and
collectively, as the “Parties”.

WITNESSETH:

     WHEREAS, ITT, acting through its direct and indirect Subsidiaries, currently conducts a number
of businesses, including (i) the Water Business (as defined herein), (ii) the Defense Business (as
defined herein), and (iii) the ITT Retained Business (as defined herein);

     WHEREAS, the Board of Directors of ITT has determined that it is appropriate, desirable and in
the best interests of ITT and its stockholders to separate ITT into three separate, publicly traded
companies, one for each of (i) the Water Business, which shall be owned and conducted, directly or
indirectly, by Water, (ii) the Defense Business, which shall be owned and conducted, directly or
indirectly, by Defense, and (iii) the ITT Retained Business which shall be owned and conducted,
directly or indirectly, by ITT;

     WHEREAS, in order to effect such separation, the Board of Directors of ITT has determined that
it is appropriate, desirable and in the best interests of ITT and its stockholders (i) to enter
into a series of transactions whereby (A) ITT and/or one or more members of the ITT Group will,
collectively, own all of the ITT Retained Assets and assume (or retain) all of the ITT Retained
Liabilities, (B) Water and/or one or more members of the Water Group will, collectively, own all of
the Water Assets and assume (or retain) all of the Water Liabilities, and (C) Defense and/or one or
more members of the Defense Group will, collectively, own all of the Defense Assets and assume (or
retain) all of the Defense Liabilities and (ii) for ITT to distribute to the holders of ITT Common
Stock on a pro rata basis (in each case without consideration being paid by such stockholders) (A)
all of the outstanding shares of common stock, par value $.01 per share, of Water (the “Water
Common Stock”), and (B) all of the outstanding shares of common stock, par value $.01 per share, of
Defense (the “Defense Common Stock”) (such transactions as they may be amended or modified from
time to time, collectively, the “Plan of Separation”);

     WHEREAS, it is the intention of the Parties that each of the contributions of assets to, and
the assumption of liabilities by, Water and Defense together with the corresponding distribution of
all of the Water Common Stock and the Defense Common Stock, respectively, shall qualify as a
reorganization within the meaning of Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of
1986, as amended (the “Code”);

     WHEREAS, it is the intention of the Parties that each of the distribution of Water Common
Stock and Defense Common Stock, respectively, to the stockholders of ITT will qualify as a tax-free
under Section 355(a) of the Code to such stockholders and as tax-free to ITT under Section 361(c)
of the Code;

 

 

     WHEREAS, notwithstanding the implementation of certain internal transactions undertaken
preparatory to and in contemplation of aligning and properly capitalizing the Water Business, the
Defense Business, and the ITT Retained Business prior to the Distributions, it is the intention of
the Parties that the shared responsibility for certain Tax liabilities (including certain
Distribution Tax liabilities) be given effect no earlier than and only upon the Effective Time, all
as described more fully herein; and

     WHEREAS, in connection with the Plan of Separation, the Parties desire to set forth their
agreement on the rights and obligations with respect to handling and allocating Taxes and related
matters.

     NOW, THEREFORE, in consideration of the foregoing and the terms, conditions, covenants and
provisions of this Agreement, each of the Parties mutually covenant and agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

          Section 1.1 Definitions. As used in this Agreement, the following terms shall have
the following meanings:

     (1) “Active Business” means the business conducted by each of the ATOB Entities as of
the applicable distribution date.

     (2) “Affiliate” means a Person that directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with, a specified Person.
A Person shall be deemed to control another Person if such first Person possesses, directly or
indirectly, the power to direct, or cause the direction of, the management and policies of such
other Person, whether through the ownership of voting securities, by contract or otherwise. For
purposes hereof, none of the Parties or their respective Subsidiaries shall be considered an
“Affiliate” of any of the other Parties or their respective Subsidiaries (determined on the same
basis).

     (3) “Agreement” has the meaning set forth in the preamble hereto.

     (4) “Ancillary Agreements” has the meaning set forth in the Distribution Agreement.

     (5) “Assets” has the meaning set forth in the Distribution Agreement.

     (6) “ATOB Entities” mean the entities listed on Schedule 1.1(6).

     (7) “Audit” means any audit (including a determination of the status of qualified and
non-qualified employee benefit plans), assessment of Taxes, other examination by or on behalf of
any Taxing Authority (including notices), proceeding, or appeal of such a proceeding relating to
Taxes, whether administrative or judicial, including proceedings relating to competent authority
determinations initiated by a Party or any of its Subsidiaries.

2

 

     (8) “Audit Management Party” means the Party responsible for administering and
controlling an Audit pursuant to Section 9.2(a)(i) or (b)(ii).

     (9) “Audit Representative” means the Chief Tax Officer of each Party (or such other
officer of a Party that may be designated by that Party’s Chief Financial Officer from time to
time).

     (10) “Audit True-Up Date” means fifteen (15) days after the earlier of (i) the date
that is ten (10) years following the Distribution Date and (ii) the expiration of all applicable
statute of limitations periods for any ITT Federal Income Tax Returns, ITT U.S. State Income Tax
Returns, and ITT Non-U.S. Income Tax Returns.

     (11) “Big Four Accounting Firm” means each of Deloitte & Touche LLP, Ernst & Young
LLP, KPMG LLP, and Pricewaterhouse Coopers LLP.

     (12) “Business Day” means any day other than a Saturday, Sunday or a day on which
banks are required to be closed in New York, New York.

     (13) “Change of Control” has the meaning set forth in the Joint Defense Agreement.

     (14) “Code” has the meaning referred to in the recitals to this Agreement.

     (15) “Covered Defense Separate U.S. Income Tax Returns” means any Defense Separate
U.S. Income Tax Return required to be filed (i) for a Pre-Distribution Tax Period, (ii) for a
Straddle Tax Period, or (iii) for a Stub Tax Period.

     (16) “Covered Water Separate U.S. Income Tax Returns” means any Water Separate U.S.
Income Tax Return required to be filed (i) for a Pre-Distribution Tax Period, (ii) for a Straddle
Tax Period, or (iii) for a Stub Tax Period.

     (17) “Defense” has the meaning set forth in the recitals hereto.

     (18) “Defense Assets” has the meaning set forth in the Distribution Agreement.

     (19) “Defense Business” has the meaning set forth in the Distribution Agreement.

     (20) “Defense Common Stock” has the meaning set forth in the recitals hereto.

     (21) “Defense Group” has the meaning set forth in the Distribution Agreement.

     (22) “Defense Separate U.S. Income Tax Return” means any U.S. federal, state, or local
Income Tax Return (including any consolidated, combined, unitary, or similar return) (i) that is
not an ITT Combined U.S. Income Tax Return and (ii) that Defense or any member of the Defense Group
is responsible under applicable Law for filing.

     (23) “Defense Federal Sharing Percentage” means thirty percent (30%).

     (24) “Defense U.S. State Sharing Percentage” means twenty-nine percent (29%).

3

 

     (25) “Dispute” has the meaning set forth in Section 13.1.

     (26) “Distribution” or “Distributions” means, individually or collectively:

          (a) the distribution on the Distribution Date to holders of record of shares of ITT Common
Stock as of the Distribution Date of the Defense Common Stock and the Water Common Stock owned by
ITT, and

          (b) the distributions listed on Schedule 1.1(26).

     (27) “Distribution Agreement” means the Distribution Agreement by and among
ITT, Water, and Defense, dated as of      , 2011.

     (28) “Distribution Date” means the date on which the Distributions to holders of
record of shares of ITT Common Stock of the Defense Common Stock and the Water Common Stock owned
by ITT are effectuated pursuant to the Distribution Agreement.

     (29) “Distribution Sharing Percentages” means, with respect to ITT, [•] percent
([•]%), with respect to Water, [•] percent ([•]%), and with respect to Defense, [•] percent
([•]%).1

     (30) “Distribution Taxes” mean any and all Taxes (a) required to be paid by or imposed
on a Party or any of its Affiliates (determined on a “with and without” basis) resulting from, or
directly arising in connection with, the failure of the Distributions to qualify under Section
355(a) or (c) of the Code or, if applicable, Section 361(c) of the Code, or the application of
Section 355(d) or (e) of the Code to the Distributions (or the failure to qualify under or the
application of corresponding provisions of the Laws of U.S. state or local jurisdictions).

     (31) “Due Date” means the date (taking into account all valid extensions) upon which a
Tax Return is required to be filed with or Taxes are required to be paid to a Taxing Authority,
whichever is applicable.

     (32) “Effective Time” has the meaning set forth in the Distribution Agreement.

     (33) “Fault” has the meaning set forth in Section 5.2.

     (34) “Federal Sharing Percentages” means, with respect to ITT, the ITT Federal Sharing
Percentage, with respect to Water, the Water Federal Sharing Percentage, and with respect to
Defense, the Defense Federal Sharing Percentage.

     (35) “Final Determination” means the final resolution of liability for any Tax for any
taxable period, by or as a result of:

          (a) a final decision, judgment, decree or other order by any court of competent jurisdiction
that can no longer be appealed;

 

			
	1	 	Percentages to reflect expected market
capitalization at the Distribution Date.

4

 

          (b) a final settlement with the IRS, a closing agreement or accepted offer in compromise under
Sections 7121 or 7122 of the Code, or a comparable agreement under the Laws of other jurisdictions,
which resolves the liability for the Taxes addressed in such agreement for any taxable period;

          (c) any allowance of a refund or credit in respect of an overpayment of Tax, but only after
the expiration of all periods during which such refund may be recovered by the jurisdiction
imposing the Tax; or

          (d) any other final disposition, including by reason of the expiration of the applicable
statute of limitations.

     (36) “GRA” means any “gain recognition agreement” as such term is used in Treasury
Regulations Section 1.367(a)-8 or defined in Treasury Regulations Section 1.367(a)-8T(a)(1)(v), as
applicable.

     (37) “Group” means the ITT Group, the Water Group, or the Defense Group.

     (38) “Income Taxes” mean:

          (a) all Taxes based upon, measured by, or calculated with respect to (i) net income or profits
(including, but not limited to, any capital gains, minimum tax or any Tax on items of tax
preference, but not including sales, use, real, or personal property, gross or net receipts, value
added, excise, leasing, transfer or similar Taxes), or (ii) multiple bases (including, but not
limited to, corporate franchise, doing business and occupation Taxes) if one or more bases upon
which such Tax is determined is described in clause (a)(i) above; and

          (b) all U.S., state, local or non-U.S. franchise Taxes.

     (39) “Income Tax Returns” mean all Tax Returns that relate to Income Taxes.

     (40) “Indemnified Party” means the Party which is or may be entitled pursuant to this
Agreement to receive any payments (including reimbursement for Taxes or costs and expenses) from
another Party or Parties to this Agreement.

     (41) “Indemnifying Party” means the Party which is or may be required pursuant to this
Agreement to make indemnification or other payments (including reimbursement for Taxes and costs
and expenses) to another Party to this Agreement.

     (42) “IRS” means the United States Internal Revenue Service or any successor thereto,
including, but not limited to its agents, representatives, and attorneys.

     (43) “IRS Ruling” means the requests submitted to the IRS for all private letter
rulings to be obtained by ITT from the IRS in connection with the Plan of Separation, and any
supplemental materials submitted to the IRS relating thereto, and the IRS private letter rulings
received by ITT with respect to the Plan of Separation.

     (44) “ITT” has the meaning set forth in the preamble of this Agreement.

5

 

     (45) “ITT Combined or ITT Separate U.S. Income Tax Return” means (i) any ITT Combined
U.S. Income Tax Return and (ii) any ITT Separate U.S. Income Tax Return required to be filed for
any Pre-Distribution Tax Period or Straddle Tax Period.

     (46) “ITT Combined U.S. Income Tax Return” means any U.S. federal, state, or local
consolidated, combined, unitary or similar Income Tax Return that actually includes, by election or
otherwise, one or more members of the ITT Group together with one or more members of either the
Water Group or the Defense Group.

     (47) “ITT Common Stock” has the meaning set forth in the Distribution Agreement.

     (48) “ITT Federal Income Tax Return” means any U.S. federal consolidated Income Tax
Return that actually includes, by election or otherwise, one or more members of the ITT Group
together with one or more members of either the Water Group or the Defense Group.

     (49) “ITT Federal Income Tax Audit” means any Audit of any ITT Federal Income Tax
Return.

     (50) “ITT Federal Income Tax Audit Amount” has the meaning set forth in Section
9.3(a).

     (51) “ITT Federal Sharing Percentage” means nineteen percent (19%).

     (52) “ITT Group” has the meaning set forth in the Distribution Agreement.

     (53) “ITT Income Tax Audit Amount” means the sum of the ITT Federal Income Tax Audit
Amount, the ITT U.S. State Income Tax Audit Amount, and the ITT Non-U.S. Income Tax Audit Amount.

     (54) “ITT Non-U.S. Income Tax Audit” means any Audit of any ITT Non-U.S. Income Tax
Return.

     (55) “ITT Non-U.S. Income Tax Audit Amount” has the meaning set forth in Section
9.3(c).

     (56) “ITT Non-U.S. Income Tax Return” means any Non-U.S. Income Tax Return (including
any consolidated, combined, unitary, or similar return) that includes, by election or otherwise,
one or more members of the ITT Group and that is required to be filed for any Pre-Distribution Tax
Period or Straddle Tax Period.

     (57) “ITT Non-U.S. Sharing Percentage” means eighty-four percent (84%).

     (58) “ITT Retained Assets” has the meaning set forth in the Distribution Agreement.

     (59) “ITT Retained Business” has the meaning set forth in the Distribution Agreement.

6

 

     (60) “ITT Retained Liabilities” has the meaning set forth in the Distribution
Agreement.

     (61) “ITT Separate U.S. Income Tax Return” means any U.S. federal, state, or local
Income Tax Return (including any consolidated, combined, unitary, or similar return) (i) that is
not an ITT Combined U.S. Income Tax Return and (ii) that ITT or any member of the ITT Group is
responsible under applicable Law for filing.

     (62) “ITT U.S. State Income Tax Audit Amount” has the meaning set forth in Section
9.3(b).

     (63) “ITT U.S. State Income Tax Return” means any U.S. state or local Income Tax
Return (including any consolidated, combined, unitary, or similar return) that includes, by
election or otherwise, one or more members of the ITT Group required to be filed for any
Pre-Distribution Tax Period or Straddle Tax Period.

     (64) “ITT U.S. State Sharing Percentage” means sixty-five percent (65%).

     (65) “Law” means any U.S. or non-U.S. federal, national, supranational, state,
provincial, local or similar statute, law, ordinance, regulation, rule, code, administrative
pronouncement, order, requirement or rule of law (including common law), or any income tax treaty.

     (66) “LIBOR” has the meaning set forth in the Distribution Agreement.

     (67) “Losses” has the meaning assigned to the term “Indemnifiable Losses” in the
Distribution Agreement.

     (68) “Majority of the Parties” means the consent of at least two of the Parties.

     (69) “New York Courts” has the meaning set forth in Section 14.15.

     (70) “Non-Income Tax Returns” mean all Tax Returns other than Income Tax Returns.

     (71) “Non-U.S. Income Tax Returns” means all Income Tax Returns required to be filed
with any Taxing Authority of any jurisdiction outside the U.S.

     (72) “Non-U.S. Sharing Percentages” means, with respect to ITT, the ITT Non-U.S.
Sharing Percentage, and, with respect to Water, the Water Non-U.S. Sharing Percentage.

     (73) “Participating Party” has the meaning set forth in Section 9.2(c)(i).

     (74) “Party” has the meaning set forth in the preamble hereto.

     (75) “Person” means any natural person, firm, individual, corporation, business trust,
joint venture, association, company, limited liability company, partnership, or other organization
or entity, whether incorporated or unincorporated, or any governmental entity.

7

 

     (76) “Plan of Separation” has the meaning set forth in the recitals hereto.

     (77) “Post-Distribution Income Tax Returns” mean, collectively, all Income Tax Returns
required to be filed by a Party or its Affiliates for a Post-Distribution Tax Period.

     (78) “Post-Distribution Ruling” has the meaning set forth in Section 5.3.

     (79) “Post-Distribution Tax Period” means a Tax period beginning and ending after the
Distribution Date.

     (80) “Pre-Distribution Tax Period” means a Tax period beginning and ending on or
before the Distribution Date.

     (81) “Proposed Acquisition Transaction” means a transaction or series of transactions
(or any agreement, understanding, arrangement, or substantial negotiations within the meaning of
Section 355(e) of the Code and the Treasury Regulations promulgated thereunder, to enter into a
transaction or series of related transactions), (i) as a result of which any of the Parties or any
of the Section 355 Entities (or any successor thereto) would merge or consolidate with any other
Person, or (ii) as a result of which any Person or any group of Persons would (directly or
indirectly) acquire, or have the right to acquire (through an option or otherwise), from any of the
Parties or any of their Affiliates (or any successor thereto) and/or one or more holders of their
stock, respectively, any amount of stock of any of the Parties or any of the Section 355 Entities,
as the case may be, that would, when combined with any other changes in ownership of the stock of
such Party or any of the Section 355 Entities, result in a shift of more than thirty-five percent
(35%) of (a) the value of all outstanding stock of such Party or any of the Section 355 Entities as
of the date of such transaction, or in the case of a series of transactions, the date of the last
transaction of such series, or (b) the total combined voting power of all outstanding stock of such
Party or any of the Section 355 Entities as of the date of such transaction, or in the case of a
series of transactions, the date of the last transaction of such series. For purposes of
determining whether a transaction constitutes an indirect acquisition for purposes of the first
sentence of this definition, any recapitalization or other action resulting in a shift of voting
power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of
stock by the non-exchanging shareholders. This definition and the application thereof is intended
to monitor compliance with Section 355(e) of the Code and the Treasury Regulations promulgated
thereunder and shall be interpreted accordingly by the Parties in good faith.

     (82) “Qualified Tax Advisor” means any Big Four Accounting Firm or any law firm of
nationally recognized standing.

     (83) “Requesting Party” shall have the meaning set forth in Section 5.3.

     (84) “Restricted Period” means the period beginning at the Effective Time and ending
on the two-year anniversary of the day after the Distribution Date.

     (85) “Section 355 Entities” mean the entities listed on Schedule 1.1(85).

     (86) “Simpson” means Simpson Thacher & Bartlett LLP.

8

 

     (87) “Spinco Parties” mean, each individually and collectively, Water and Defense.

     (88) “Straddle Tax Period” means a Tax period beginning before the Distribution Date
and ending after the Distribution Date.

     (89) “Stub Tax Period” means a short Tax period beginning immediately following the
Distribution Date.

     (90) “Subsidiary” has the meaning set forth in the Distribution Agreement.

     (91) “Tax” or “Taxes” means (i) all taxes, charges, fees, imposts, levies or
other assessments, including all net income, gross receipts, capital, sales, use, gains, ad
valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property
and estimated taxes, custom duties, fees, assessments and charges of any kind whatsoever,
(ii) liability for the payment of any amount of the type described in clause (i) above arising
as a result of being (or having been) a member of any group or being (or having been) included or
required to be included in any Tax Return related thereto, and (iii) liability for the payment of
any amount of the type described in clauses (i) or (ii) above as a result of any express or implied
obligation to indemnify or otherwise assume or succeed to the liability of any other Person.
Whenever the term “Tax” or “Taxes” is used it shall include penalties, fines, additions to tax and
interest thereon.

     (92) “Tax Attributes” mean for U.S. federal, state, local, and non-U.S. Income Tax
purposes, earnings and profits, tax basis, net operating and capital loss carryovers or carrybacks,
alternative minimum Tax credit carryovers or carrybacks, general business credit carryovers or
carrybacks, income tax credits or credits against income tax, disqualified interest and excess
limitation carryovers or carrybacks, overall foreign losses, research and experimentation credit
base periods, and all other items that are determined or computed on an affiliated group basis (as
defined in Section 1504(a) of the Code determined without regard to the exclusion contained in
Section 1504(b)(3) of the Code), or similar Tax items determined under applicable Tax law.

     (93) “Tax Benefit Actually Realized” means with respect to a Party and its
Subsidiaries a reduction in the amount of Taxes that are required to be paid or an increase in
refund due, whether resulting from a deduction, from reduced gain or increased loss from
disposition of an asset, or otherwise, such reduction or increase in refund due determined on an
“actually realized” basis. For purposes of this definition, a Party or its Subsidiaries will be
deemed to have “actually realized” such reduction or increase in refund due at the time the amount
of Taxes such Party or any of its Subsidiaries is required to pay is reduced or the amount of any
refund due is increased. The amount of any Tax Benefit Actually Realized shall be computed on a
“with and without” basis.

     (94) “Tax-Free Status” means the qualification of a Distribution or any other
transaction contemplated by the IRS Ruling or any Tax Opinion as a transaction in which gain or
loss is not recognized, in whole or in part, and no amount is included in income, including by
reason of Distribution Taxes, for U.S. federal, state, and local income tax purposes (other than

9

 

intercompany items, excess loss accounts or other items required to be taken into account
pursuant to Treasury Regulations promulgated under Section 1502 of the Code).

     (95) “Taxing Authority” means any governmental authority or any subdivision, agency,
commission, or authority thereof or any quasi-governmental or private body having jurisdiction over
the assessment, determination, collection, or imposition of any Tax (including the IRS).

     (96) “Tax Opinions” mean certain Tax opinions and supporting memoranda rendered by
Simpson to ITT or any of its Affiliates in connection with the Plan of Separation.

     (97) “Tax Package” means Tax data and information relating to the operations of a
Spinco Party and/or its Subsidiaries, the Water Business (in the case of Water), or the Defense
Business (in the case of Defense) that is reasonably necessary to prepare and file any ITT Combined
or ITT Separate U.S. Income Tax Return, Covered Water Separate U.S. Income Tax Return, or Covered
Defense Separate U.S. Income Tax Return, as applicable, and is consistent with the content and
format of Tax data and information submitted by Affiliates of Water or Water Business divisions (in
the case of Water) or Affiliates of Defense or Defense Business divisions (in the case of Defense)
to ITT for Tax Returns (both U.S. and non-U.S.) for Tax periods prior to 2011.

     (98) “Tax Representation Letter” means any letter containing certain representations
and covenants issued by ITT or any of its Affiliates to Simpson in connection with the Tax
Opinions.

     (99) “Tax Returns” mean any return, report, certificate, form or similar statement or
document (including any related or supporting information or schedule attached thereto and any
information return, amended tax return, claim for refund, or declaration of estimated tax) required
to be supplied to, or filed with, a Taxing Authority in connection with the determination,
assessment or collection of any Tax or the administration of any Laws, regulations, or
administrative requirements relating to any Taxes.

     (100) “Transition Services Agreement” has the meaning set forth in the Distribution
Agreement.

     (101) “Treasury Regulations” mean the income tax and administrative regulations
promulgated from time to time under the Code, as in effect for the relevant Tax Period.

     (102) “Unqualified Tax Opinion” means an unqualified “will” opinion of a Qualified Tax
Advisor, which opinion is reasonably acceptable to each of the Parties and upon which each of the
Parties may rely to confirm that a transaction (or transactions) will not result in Distribution
Taxes.

     (103) “U.S.” means the United States.

     (104) “U.S. State Sharing Percentages” means, with respect to ITT, the ITT U.S. State
Sharing Percentage, with respect to Water, the Water U.S. State Sharing Percentage, and with
respect to Defense, the Defense U.S. State Sharing Percentage.

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     (105) “Water” has the meaning set forth in the recitals to this Agreement.

     (106) “Water Assets” has the meaning set forth in the Distribution Agreement.

     (107) “Water Business” has the meaning set forth in the Distribution Agreement.

     (108) “Water Common Stock” has the meaning set forth in the recitals hereto.

     (109) “Water Federal Sharing Percentage” means fifty-one percent (51%).

     (110) “Water Group” has the meaning set forth in the Distribution Agreement.

     (111) “Water Liabilities” has the meaning set forth in the Distribution Agreement.

     (112) “Water Non-U.S. Sharing Percentage” means sixteen percent (16%).

     (113) “Water Separate U.S. Income Tax Return” means any U.S. federal, state, or local
Income Tax Return (including any consolidated, combined, unitary, or similar return) (i) that is
not an ITT Combined U.S. Income Tax Return and (ii) that Water or any member of the Water Group is
responsible under applicable Law for filing.

     (114) “Water U.S. State Sharing Percentage” means six percent (6%).

          Section 1.2 References; Interpretation.

          (a) Terms not otherwise defined herein shall have the meaning ascribed to them in the
Distribution Agreement. References in this Agreement to any gender include references to all
genders, and references to the singular include references to the plural and vice versa. Unless the
context otherwise requires, the words “include”, “includes”, and “including” when used in this
Agreement shall be deemed to be followed by the phrase “without limitation”. Unless the context
otherwise requires, references in this Agreement to Articles, Sections, Exhibits and Schedules
shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this
Agreement. Unless the context otherwise requires, the words “hereof”, “hereby”, and “herein” and
words of similar meaning when used in this Agreement refer to this Agreement in its entirety and
not to any particular Article, Section or provision of this Agreement.

          Section 1.3 Effective Time.

          (a) The Parties acknowledge that the Plan of Separation contemplates a series of interrelated
and intermediate internal transactions undertaken preparatory to and in contemplation of the
Distributions that must be completed prior to the Effective Time in order to align and properly
capitalize the Water Business, the Defense Business, and the ITT Retained Business.

          (b) Notwithstanding that these interrelated and intermediate internal transactions must be
given effect prior to the Distributions, the agreements contained herein,

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including, but not limited to, the manner in which Taxes are shared amongst the Parties, shall
be effective no earlier than and only upon the Effective Time.

ARTICLE II

PREPARATION AND FILING OF TAX RETURNS

          Section 2.1 Responsibility of ITT to Prepare and File Tax Returns.

          (a) General. To the extent not previously filed and subject to the rights and
obligations of each of the Parties set forth herein, ITT shall prepare or cause to be prepared all
(i) Tax Returns required to be filed (taking into account any applicable extensions) on or prior to
the Distribution Date, (ii) ITT Combined or ITT Separate U.S. Income Tax Returns, and (iii) ITT
Non-U.S. Income Tax Returns. ITT shall file or cause to be filed all such Tax Returns with the
applicable Taxing Authority. To the extent any member of the Water Group or the Defense Group could
be liable after the Distribution Date for Taxes with respect to such Tax Returns (taking into
account any provision under this Agreement), ITT shall be required to prepare such Tax Returns in a
manner consistent with the past practice of ITT and its Affiliates (unless otherwise modified by a
Final Determination or required by applicable Law). All Tax Returns filed under this Section 2.1
shall be filed in a manner consistent with (and the Parties and their Affiliates shall not take any
position inconsistent with) the IRS Ruling, the Tax Representation Letters, and the Tax Opinions.
Subject to the foregoing standards, ITT shall have the right with respect to any Tax Return filed
under this Section 2.1, to determine: (a) except as provided in Section 11.2, the manner in which
such Tax Return will be prepared and filed, including the elections, method of accounting,
positions, conventions, and principles of taxation to be used and the manner in which any Tax item
will be reported; (b) whether any extensions may be requested; and (c) except as provided in
Section 11.2, the elections that will be made by ITT, any member of the ITT Group, any member of
the Water Group, or any member of the Defense Group on such Tax Return.

          (b) Tax Package. To the extent not previously provided, Water and Defense shall (at
their own cost and expense), to the extent that an ITT Combined or ITT Separate U.S. Income Tax
Return includes items of that Party or its Affiliates, the Water Business (in the case of Water),
or the Defense Business (in the case of Defense), prepare and provide or cause to be prepared and
provided to ITT a Tax Package relating to such Tax Return. Such Tax Package shall be provided in a
timely manner consistent with the past practices of the Parties and their Affiliates. In the event
a Party does not fulfill its obligations pursuant to this Section 2.1(b), ITT shall be entitled, at
the sole cost and expense of such Party, to prepare or cause to be prepared the information
required to be included in the Tax Package for purposes of preparing any such ITT Combined or ITT
Separate U.S. Income Tax Return.

          Section 2.2 Responsibility of Parties to Prepare and File Covered Water Separate U.S.
Income Tax Returns and Covered Defense Separate U.S. Income Tax Returns.

          (a) General. Subject to the rights and obligations of each of the Parties set forth
herein, ITT shall prepare or cause to be prepared all Covered Water Separate U.S. Income Tax
Returns and all Covered Defense Separate U.S. Income Tax Returns required to be filed

12

 

after the Distribution Date. Water shall file or cause to be filed all such Covered Water
Separate U.S. Income Tax Returns with the applicable Taxing Authority, and Defense shall file or
cause to be filed all such Covered Defense Separate U.S. Income Tax Returns with the applicable
Taxing Authority. All such Tax Returns shall be prepared in a manner (i) consistent with the past
practice of the Parties and their Affiliates unless otherwise modified by a Final Determination or
required by applicable Law; (ii) consistent with (and the Parties and their Affiliates shall not
take any position inconsistent with) the IRS Ruling, the Tax Representation Letters, and the Tax
Opinions; and (iii) consistent with any ITT Combined U.S. Income Tax Returns.

          (b) Tax Package. To the extent not previously provided, Water and Defense shall (at
their own cost and expense), prepare and provide or cause to be prepared and provided to ITT a Tax
Package relating to any Covered Water Separate U.S. Income Tax Return (in the case of Water) or
Covered Defense Separate U.S. Income Tax Return (in the case of Defense). Such Tax Package shall be
provided in a timely manner consistent with the past practices of the Parties and their Affiliates.
In the event a Party does not fulfill its obligations pursuant to this Section 2.2(b), ITT shall be
entitled, at the sole cost and expense of such Party, to prepare or cause to be prepared the
information required to be included in the Tax Package for purposes of preparing any such Covered
Water Separate U.S. Income Tax Return or Covered Defense Separate U.S. Income Tax Return.

          (c) Procedures Relating to the Preparation and Filing of Covered Water Separate U.S.
Income Tax Returns and Covered Defense Separate U.S. Income Tax Returns.

               (i) In the case of Covered Water Separate U.S. Income Tax Returns and Covered Defense Separate
U.S. Income Tax Returns required to be filed after the Distribution Date, no later than forty-five
(45) days prior to the Due Date of each such Tax Return (reduced to twenty (20) days for state or
local Tax Returns), ITT shall make available or cause to be made available drafts of such Tax
Returns to Water or Defense, respectively. Water or Defense (as the case may be) shall have access
to any and all data and information reasonably necessary for the preparation of all such Tax
Returns, and ITT and Water or Defense (as the case may be) shall cooperate fully in the preparation
and review of such Tax Returns. Subject to the preceding sentence, no later than fifteen (15) days
after receipt of such Tax Returns (reduced to five (5) days for state or local Tax Returns), Water
shall have a right to object to such Covered Water Separate U.S. Income Tax Return (or items with
respect thereto) by written notice to ITT and Defense shall have a right to object to such Covered
Defense Separate U.S. Income Tax Return (or items with respect thereto) by written notice to ITT;
such written notice shall contain such disputed item (or items) and the basis for its objection.

               (ii) With respect to a Covered Water Separate U.S. Income Tax Return or Covered Defense
Separate U.S. Income Tax Return submitted by ITT to another Party pursuant to Section 2.2(c)(i), if
the other Party does not object by proper written notice within the time period described, such Tax
Return shall be deemed to have been accepted and agreed upon, and to be final and conclusive, for
purposes of this Section 2.2(c)(ii). If a Party does object by proper written notice within such
applicable time period, ITT shall reflect such Party’s comments on such Tax Return;
provided, however, that ITT shall not be required to reflect comments to the extent
such comments are inconsistent with the standards set forth in Section 2.2(a). The Parties shall
act in good faith to resolve any such dispute as promptly as practicable. If the Parties have

13

 

not reached a final resolution with respect to all disputed items for which proper written
notice was given within ten (10) days (reduced to two (2) days for state or local Tax Returns)
prior to the Due Date for such Tax Return, such Tax Return shall be filed as prepared pursuant to
this Section 2.2 (revised to reflect all initially disputed items that the Parties have agreed upon
prior to such date).

               (iii) In the event that a Covered Water Separate U.S. Income Tax Return or Covered Defense
Separate U.S. Income Tax Return required to be filed after the Distribution Date is filed that
includes any disputed item for which proper notice was given pursuant to this Section 2.2(c) that
was not finally resolved and agreed upon, such disputed item (or items) shall be resolved in
accordance with Article XIII. In the event that the resolution of such disputed item (or items) in
accordance with Article XIII with respect to a Covered Water Separate U.S. Income Tax Return or
Covered Defense Separate U.S. Income Tax Return is inconsistent with such Tax Return as filed, the
Party entitled under applicable Law to amend such Tax Return (with cooperation from the other
Parties) shall, as promptly as practicable, amend such Tax Return to properly reflect the final
resolution of the disputed item (or items). In the event that the amount of Taxes shown to be due
and owing on a Covered Water Separate U.S. Income Tax Return or Covered Defense Separate U.S.
Income Tax Return required to be filed after the Distribution Date is adjusted as a result of a
resolution pursuant to Article XIII, proper adjustment shall be made to the amounts previously paid
or required to be paid by the Parties in accordance with Article III in a manner that reflects such
resolution.

          Section 2.3 Responsibility of Parties to Prepare and File Post-Distribution Income Tax
Returns, Non-U.S. Income Tax Returns, and Non-Income Tax Returns. The Party or its Affiliate
responsible under applicable Law for filing a Post-Distribution Income Tax Return (other than a Tax
Return for a Stub Tax Period), a Non-U.S. Income Tax Return (other than an ITT Non-U.S. Income Tax
Return), or a Non-Income Tax Return (in each case required to be filed after the Distribution Date)
shall prepare and file or cause to be prepared and filed that Tax Return (at that Party’s own cost
and expense). All such Tax Returns shall be filed in a manner (i) consistent with (and the Parties
and their Affiliates shall not take any position inconsistent with) the IRS Ruling, the Tax
Representation Letters, and the Tax Opinions and (ii) consistent with any ITT Combined U.S. Income
Tax Returns.

          Section 2.4 Time of Filing Tax Returns; Manner of Tax Return Preparation. Each Tax
Return shall be filed on or prior to the Due Date for such Tax Return by the Party responsible for
filing such Tax Return hereunder. Unless otherwise required by a Taxing Authority pursuant to a
Final Determination, the Parties hereto shall prepare and file or cause to be prepared and filed
all Tax Returns and take all other actions in a manner consistent with (and shall not take any
position inconsistent with) any assumptions, representations, warranties, covenants, and
conclusions provided by the Parties in connection with the Plan of Separation.

          Section 2.5 Costs and Expenses. Unless otherwise provided in this Agreement, the party
responsible for preparing any Tax Return under Section 2.1, 2.2, or 2.3 shall be responsible for
the costs and expenses associated with preparing such Tax Returns. Notwithstanding the foregoing,
the external costs and expenses associated with preparing all ITT Combined or ITT Separate U.S.
Income Tax Returns, Covered Water Separate U.S. Income Tax Returns, and Covered Defense Separate
U.S. Income Tax Returns shall be shared on an equal

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one-third (1/3) basis by each of the Parties; provided, however, if ITT determines
that such shared external costs and expenses are reasonably expected to exceed $1,500,000, then at
such time the Chief Executive Officer of ITT shall notify the Chief Executive Officers of each of
Xylem and Exelis of such expected overage, and the Parties shall use their good faith efforts to
determine within thirty (30) days the amount of the additional shared external costs and expenses
that are reasonably necessary for the preparation of such Tax Returns.

ARTICLE III

RESPONSIBILITY FOR PAYMENT OF TAXES

          Section 3.1 Responsibility of ITT for Taxes. Except as otherwise provided in this
Agreement, ITT shall be liable for and shall pay or cause to be paid the following Taxes to the
applicable Taxing Authority:

          (a) any Taxes due and payable on all Tax Returns required to be filed (taking into account any
applicable extensions) on or prior to the Distribution Date;

          (b) any Taxes due and payable on all ITT Combined or ITT Separate U.S. Income Tax Returns;

          (c) any Taxes due and payable on all ITT Non-U.S. Income Tax Returns; and

          (d) any Taxes due and payable on all Post-Distribution Income Tax Returns, Non-U.S. Income Tax
Returns, and Non-Income Tax Returns that ITT is required to file or cause to be filed with such
Taxing Authority pursuant to Section 2.3.

          Section 3.2 Responsibility of Defense for Taxes. Except as otherwise provided in this
Agreement, Defense shall be liable for and shall pay or cause to be paid the following Taxes to the
applicable Taxing Authority:

          (a) any Taxes due and payable on all Covered Defense Separate U.S. Income Tax Returns required
to be filed after the Distribution Date; and

          (b) any Taxes due and payable on all Post-Distribution Income Tax Returns, Non-U.S. Income Tax
Returns, and Non-Income Tax Returns that Defense is required to file or cause to be filed with such
Taxing Authority pursuant to Section 2.3.

          Section 3.3 Responsibility of Water for Taxes. Except as otherwise provided in this
agreement, Water shall be liable for and shall pay or cause to be paid the following Taxes to the
applicable Taxing Authority:

          (a) any Taxes due and payable on all Covered Water Separate U.S. Income Tax Returns required
to be filed after the Distribution Date; and

          (b) any Taxes due and payable on all Post-Distribution Income Tax Returns, Non-U.S. Income Tax
Returns, and Non-Income Tax Returns that Water is required to file or cause to be filed with such
Taxing Authority pursuant to Section 2.3.

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     Section 3.4 Timing of Payments of Taxes. All Taxes required to be paid or caused to
be paid by a Party to a Taxing Authority pursuant to this Article III shall be paid or caused to be
paid by such Party on or prior to the Due Date of such Taxes. All amounts required to be paid by
one Party to another Party (including obligations arising under Article VII) pursuant to this
Article III shall be paid or caused to be paid by such first Party to such other Party in
accordance with Article VIII.

ARTICLE IV

REFUNDS, CARRYBACKS AND AMENDED TAX RETURNS

          Section 4.1 Refunds.

          (a) Each Party shall be entitled to refunds (including any similar credit or offset of Taxes)
that relate to Taxes for which it is liable hereunder in accordance with Article III;
provided, however, that (i) any refunds of Taxes received in connection with any
ITT Federal Income Tax Audit, an ITT U.S. State Income Tax Audit, or ITT Non-U.S. Income Tax Audit
by a member of the ITT Group for a Pre-Distribution Tax Period or that relate to the portion of a
Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2) shall be
treated as reducing the ITT Federal Income Tax Audit Amount, ITT U.S. State Income Tax Audit
Amount, or ITT Non-U.S. Income Tax Audit Amount, as applicable (but only to the extent that a
member of the ITT Group is entitled to retain such refund after application of clause (ii) below)
and (ii) if such refunds are received, ITT shall make payments to the Spinco Parties in accordance
with their Federal Sharing Percentages, U.S. State Sharing Percentages, or Non-U.S. Sharing
Percentages, as applicable, to reflect the Spinco Parties’ prior liability, if any, for additional
Taxes under Section 9.3(a)(iii), (b)(iii), or (c)(iii).

          (b) Any refund or portion thereof to which a Party is entitled pursuant to this Section 4.1
that is received or deemed to have been received as described herein by another Party, shall be
paid by such other Party to such first Party in immediately available funds in accordance with
Article VIII.

          Section 4.2 Carrybacks. The Spinco Parties agree and will cause their Subsidiaries
not to carry back any Tax Attribute for any taxable period ending after the Distribution Date to an
ITT Combined U.S. Income Tax Return, except as is required by applicable Law.

          Section 4.3 Amended Tax Returns.

          (a) Notwithstanding Sections 2.1 and 2.2, a Party or its Subsidiary that is entitled to file
an amended Tax Return for a Pre-Distribution Tax Period or a Straddle Tax Period for members of its
Group shall be permitted to prepare and file an amended Tax Return at its own cost and expense;
provided, however, that (i) such amended Tax Return shall be prepared in a manner
(x) consistent with the past practice of the Parties and their Affiliates unless otherwise modified
by a Final Determination or required by applicable Law; (y) consistent with (and the Parties and
their Affiliates shall not take any position inconsistent with) the IRS Ruling, the Tax
Representation Letters, and the Tax Opinions; and (z) consistent with any ITT Combined U.S.

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Income Tax Returns; and (ii) if such amended Tax Return could result in one or more other
Parties becoming responsible for a payment of Taxes pursuant to Article III or a payment to a Party
pursuant to Article IX, such amended Tax Return shall be permitted only if the consent of such
other Parties is obtained. The consent of such other Parties shall not be withheld unreasonably and
shall be deemed to be obtained in the event that a Party or its Subsidiary is required to file an
amended Tax Return as a result of an Audit adjustment that arose in accordance with Article IX.

          (b) A Party or its Subsidiary that is entitled to file an amended Tax Return for a
Post-Distribution Tax Period shall be permitted to do so without the consent of any Party.

          (c) A Party that is permitted (or whose Subsidiary is permitted) to file an amended Tax Return
shall not be relieved of any liability for payments pursuant to this Agreement notwithstanding that
another Party consented thereto.

ARTICLE V

DISTRIBUTION TAXES

          Section 5.1 Liability for Distribution Taxes. In the event that Distribution Taxes
become due and payable to a Taxing Authority pursuant to a Final Determination, then,
notwithstanding anything to the contrary in this Agreement:

          (a) No Fault. If such Distribution Taxes are not attributable to the Fault of any
Party or any of its Affiliates, the responsibility for such Distribution Taxes shall be shared by
the Parties in accordance with their Distribution Sharing Percentages. Notwithstanding anything to
the contrary in this Agreement, such Distribution Taxes shall not be subject to Section 9.3
(including for purposes of determining the ITT Federal Income Tax Audit Amount or ITT U.S. State
Income Tax Audit Amount).

          (b) Fault. If such Distribution Taxes are attributable to the Fault of one or more
Parties or any of their Affiliates, the responsibility for such Distribution Taxes shall reside
with the Party or Parties at Fault. If more than one Party is at Fault, the responsibility for the
Distribution Taxes shall be allocated equally among all of the Parties at Fault. Notwithstanding
anything to the contrary in this Agreement, such Distribution Taxes shall not be subject to Article
III or Section 9.3 (including for purposes of determining the ITT Federal Income Tax Audit Amount
or ITT U.S. State Income Tax Audit Amount).

          Section 5.2 Definition of Fault. For purposes of this Agreement, Distribution Taxes
shall be deemed to result from the fault (“Fault”) of a Party if such Distribution Taxes are
directly attributable to, or result from:

          (a) any act, or failure or omission to act, by such Party or any of such Party’s Affiliates
following the Distributions that results in one or more Parties (or any of their Affiliates) being
responsible for such Distribution Taxes pursuant to a Final Determination, regardless of whether
such act or failure to act (i) is covered by a Post-Distribution Ruling, Unqualified Tax Opinion,
or waiver in accordance with Section 5.3, or (ii) occurs during or after the Restricted Period, or

17

 

          (b) the direct or indirect acquisition of all or a portion of the stock of such Party or of
any of the Section 355 Entities (or any transaction or series of related transactions that is
deemed to be such an acquisition for purposes of Section 355(e) of the Code and the Treasury
Regulations promulgated thereunder) by any means whatsoever by any person including pursuant to an
issuance of stock by such Party or any of its Affiliates.

          Section 5.3 Limits on Proposed Acquisition Transactions and Other Transactions During
Restricted Period. During the Restricted Period, no Party shall:

          (a) enter into any Proposed Acquisition Transaction, approve any Proposed Acquisition
Transaction for any purpose, or allow any Proposed Acquisition Transaction to occur with respect to
any of the Section 355 Entities;

          (b) merge or consolidate with any other Person or liquidate or partially liquidate; or approve
or allow any merger, consolidation, liquidation, or partial liquidation of any of the Section 355
Entities or the ATOB Entities;

          (c) approve or allow the discontinuance, cessation, or sale or other transfer (to an Affiliate
or otherwise) of any Active Business;

          (d) approve or allow the sale, issuance, or other disposition (to an Affiliate or otherwise),
directly or indirectly, of any share of, or other equity interest or an instrument convertible into
an equity interest in, any of the ATOB Entities;

          (e) sell or otherwise dispose of more than 35 percent (35%) of its consolidated gross or net
assets, or approve or allow the sale or other disposition (to an Affiliate or otherwise) of more
than 35 percent (35%) of the consolidated gross or net assets of any of the Section 355 Entities
(in each case, excluding sales in the ordinary course of business and measured based on fair market
values as of the date of the applicable Distribution or other transaction);

          (f) amend its certificate of incorporation (or other organizational documents), or take any
other action or approve or allow the taking of any action, whether through a stockholder vote or
otherwise, affecting the voting rights of the stock of such Party, any of the Section 355 Entities;

          (g) purchase, directly or through any Affiliate, any of its outstanding stock after the
Distributions, other than through stock purchases meeting the requirements of Section 4.05(1)(b) of
Revenue Procedure 96-30;

          (h) take any action or fail to take any action, or permit any of its Affiliates to take any
action or fail to take any action, that is inconsistent with the representations and covenants made
in the IRS Ruling or in the Tax Representation Letters, or that is inconsistent with any rulings or
opinions in the IRS Ruling or any Tax Opinion; or

          (i) take any action or permit any of its Affiliates to take any action that, in the aggregate
(taking into account other transactions described in this Section 5.3) would be reasonably likely
to jeopardize Tax-Free Status;

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provided, however, that a Party (the “Requesting Party”) shall be permitted to take
such action or one or more actions set forth in the foregoing clauses (a) through (g) if, prior to
taking any such actions: (1) such Requesting Party or ITT shall have received a favorable private
letter ruling from the IRS, or a ruling from another Taxing Authority (a “Post-Distribution
Ruling”), in form and substance reasonably satisfactory to the other Parties that confirms that
such action or actions will not result in Distribution Taxes, taking into account such actions and
any other relevant transactions in the aggregate; (2) such Requesting Party shall have received an
Unqualified Tax Opinion in form and substance reasonably satisfactory to the other Parties that
confirms that such action or actions will not result in Distribution Taxes, taking into account
such actions and any other relevant transactions in the aggregate; or (3) such Requesting Party
shall have received a written statement from each of the other Parties that provides that such
other Party waives the requirement to obtain a Post-Distribution Ruling or Unqualified Tax Opinion
described in this paragraph. The Requesting Party shall bear all costs and expenses of securing any
such Post-Distribution Ruling or Unqualified Tax Opinion.

          Section 5.4 IRS Ruling, Tax Representation Letters, and Tax Opinions; Consistency.
Each Party represents that the information and representations furnished by it in or with respect
to the IRS Ruling, the Tax Representation Letters, or the Tax Opinions are accurate and complete as
of the Effective Time. Each Party covenants that if, after the Effective Time, it or any of its
Affiliates obtains information indicating, or otherwise becomes aware, that any such information or
representations is or may be inaccurate or incomplete, to promptly inform the other Parties. The
Parties shall not take any action or fail to take any action, or permit any of their Affiliates to
take any action or fail to take any action, that is or is reasonably likely to be inconsistent with
the IRS Ruling, the Tax Representation Letters, or the Tax Opinions.

          Section 5.5 Timing of Payment of Taxes. All Distribution Taxes required to be paid or
caused to be paid by a Party to a Taxing Authority under applicable Law shall be paid or caused to
be paid by such Party on or prior to the Due Date of such Distribution Taxes. All amounts required
to be paid by one Party to another Party (including obligations arising under Article VII) pursuant
to this Article V shall be paid or caused to be paid by such first Party to such other Party in
accordance with Article VIII.

ARTICLE VI

GAIN RECOGNITION AGREEMENTS

          Section 6.1 Gain Recognition Agreement Compliance. Each Party and its Affiliates
shall take any action reasonably necessary to prevent the transactions that are part of the Plan of
Separation from constituting “triggering events” with respect to the GRAs listed in Schedule 6.1 or
any related new or amended GRAs (including amending existing GRAs or entering into new GRAs as well
as complying with any related requirements).

          Section 6.2 Gain Recognition Agreement Taxes. In the event that any Taxes become due
and payable to a Taxing Authority with respect to the GRAs listed in Schedule 6.1 or any related
new or amended GRAs, then, notwithstanding anything to the contrary in this Agreement:

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          (a) Non-Compliance. If such Taxes are attributable to one or more Parties’ or any of
their Affiliates’ failure to comply with Section 6.1, the responsibility for such Taxes shall
reside with such Party or Parties. If more than one Party or any of its Affiliates has failed to
comply to with Section 6.1, the responsibility for such Taxes shall be allocated equally among all
such Parties. Notwithstanding anything to the contrary in this Agreement, such Taxes shall not be
subject to Article III or Section 9.3 (including for purposes of determining the ITT Federal Income
Tax Audit Amount or ITT U.S. State Income Tax Audit Amount).

          (b) Post-Distribution Actions. If such Taxes are not covered by Section 6.2(a) and
are attributable to any action of a Party or any of its Affiliates after the Distributions, the
responsibility for such Taxes shall reside with such Party. Notwithstanding anything to the
contrary in this Agreement, such Taxes shall not be subject to Article III or Section 9.3
(including for purposes of determining the ITT Federal Income Tax Audit Amount or ITT U.S. State
Income Tax Audit Amount).

          Section 6.3 Timing of Payment of Taxes. All Taxes subject to Section 6.2 required to
be paid or caused to be paid by a Party to a Taxing Authority under applicable Law shall be paid or
caused to be paid by such Party on or prior to the Due Date of such Taxes. All amounts required to
be paid by one Party to another Party (including obligations arising under Article VII) pursuant to
this Article VI shall be paid or caused to be paid by such first Party to such other Party in
accordance with Article VIII.

ARTICLE VII

INDEMNIFICATION

          Section 7.1 Indemnification Obligations of ITT. ITT shall indemnify Water and Defense
and hold them harmless from and against (without duplication):

          (a) all Taxes and other amounts for which the ITT Group is responsible under this Agreement;
and

          (b) all Taxes and Losses attributable to a breach of any representation, covenant, or
obligation of ITT under this Agreement.

          Section 7.2 Indemnification Obligations of Water. Water shall indemnify ITT and
Defense and hold them harmless from and against (without duplication):

          (a) all Taxes and other amounts for which the Water Group is responsible under this Agreement;
and

          (b) all Taxes and Losses attributable to a breach of any representation, covenant, or
obligation of Water under this Agreement.

          Section 7.3 Indemnification Obligations of Defense. Defense shall indemnify ITT and
Water and hold them harmless from and against (without duplication):

20

 

          (a) all Taxes and other amounts for which the Defense Group is responsible under this
Agreement; and

          (b) all Taxes and Losses attributable to a breach of any representation, covenant or
obligation of Defense under this Agreement.

ARTICLE VIII

PAYMENTS

          Section 8.1 Payments.

          (a) General. In the event that an Indemnifying Party is required to make a payment to
an Indemnified Party pursuant to this Agreement, such payment shall be made to the Indemnified
Party within the time prescribed for payment in this Agreement, or if no period is prescribed,
within twenty (20) days after delivery of written notice of payment owing together with a
computation of the amounts due. If the Indemnifying Party fails to make a payment to the
Indemnified Party within the time period set forth in this Section 8.1 or as otherwise provided in
this Agreement, such Indemnifying Party shall pay to the Indemnified Party interest that accrues
(at a rate equal to LIBOR) on the amount of such payment from the time that such payment was due to
the Indemnified Party until the date that payment is actually made to the Indemnified Party;
provided, however, that this provision for interest shall not be construed to give the
Indemnifying Party the right to defer payment beyond the due date hereunder.

          (b) Right of Setoff. It is expressly understood that an Indemnifying Party is hereby
authorized to set off and apply any and all amounts required to be paid to an Indemnified Party
pursuant to this Section 8.1 against any and all of the obligations of the Indemnified Party to the
Indemnifying Party arising under Section 8.1 of this Agreement that are then either due and payable
or past due, irrespective of whether such Indemnifying Party has made any demand for payment with
respect to such obligations.

          Section 8.2 Treatment of Payments made Pursuant to Tax Matters Agreement. Unless
otherwise required by a Final Determination or this Agreement or otherwise agreed to among the
Parties, for U.S. federal Tax purposes, any payment (other than payments of interest pursuant to
Section 8.1(a)) made pursuant to this Agreement by:

          (a) a Spinco Party to ITT shall be treated for all Tax purposes as a distribution by such
Spinco Party to ITT with respect to stock of the Spinco Party occurring after the Spinco Party is
directly owned by ITT and immediately before the applicable Distribution;

          (b) ITT to either of the Spinco Parties shall be treated for all Tax purposes as a tax-free
contribution by ITT to the appropriate Spinco Party with respect to its stock occurring after the
Spinco Party is directly owned by ITT and immediately before the applicable Distribution;

          (c) a Spinco Party to another Spinco Party shall be treated for all Tax purposes as a
distribution by the first Spinco Party to ITT with respect to stock of that Spinco Party occurring
after the Spinco Party is directly owned by ITT and immediately before the

21

 

applicable Distribution followed by a tax-free contribution by ITT to the recipient Spinco
Party with respect to its stock occurring after the Spinco Party is directly owned by ITT and
immediately before the applicable Distribution; and

          (d) in each case, none of the Parties shall take any position inconsistent with such
treatment. In the event that a Taxing Authority asserts that a Party’s treatment of a payment
pursuant to this Agreement should be other than as required pursuant to this Agreement (ignoring
any potential inconsistent or adverse Final Determination), such Party shall use its commercially
reasonable efforts to contest such challenge.

          Section 8.3 Payments Net of Tax Benefit Actually Realized and Tax Cost. All amounts
required to be paid by one Party to another pursuant to this Agreement or the Distribution
Agreement shall be reduced by the Tax Benefit Actually Realized by the Indemnified Party or its
Subsidiaries in the taxable year the payment is made or any prior taxable year as a result of the
claim giving rise to the payment. If the receipt or accrual of any such payment (other than
payments of interest pursuant to Section 8.1(a) or Section 11.11 of the Distribution Agreement)
results in taxable income to the Indemnified Party or its Subsidiaries, such payment shall be
increased so that, after the payment of any Taxes with respect to the payment, the Indemnified
Party or its Subsidiaries shall have realized the same net amount it would have realized had the
payment not resulted in taxable income.

ARTICLE IX

AUDITS

          Section 9.1 Notice. Within fifteen (15) Business Days after a Party or any of its
Affiliates receives a written notice from a Taxing Authority (reduced to five (5) Business Days for
written notices received from a state or local Taxing Authority) of the existence of an Audit that
may require indemnification pursuant to this Agreement, that Party shall notify the other Parties
of such receipt and send such notice to the other Parties via overnight mail. The failure of one
Party to notify the other Parties of an Audit shall not relieve such other Party of any liability
and/or obligation that it may have under this Agreement, except to the extent that the Indemnifying
Party’s rights under this Agreement are materially prejudiced by such failure.

          Section 9.2 Audits.

          (a) Determination of Administering Party.

               (i) Subject to Sections 9.2(b) and 9.2(c), ITT and its Subsidiaries shall administer and
control all ITT Federal Income Tax Audits, ITT U.S. State Income Tax Audits, and ITT Non-U.S.
Income Tax Audits.

               (ii) Audits of Water Separate U.S. Income Tax Returns, Defense Separate U.S. Income Tax
Returns, Post-Distribution Income Tax Returns, Non-U.S. Income Tax Returns (other than ITT Non-U.S.
Income Tax Returns), and Non-Income Tax Returns shall be administered and controlled by the Party
and its Subsidiaries that would be primarily liable under applicable Law to pay to the applicable
Taxing Authority the Taxes resulting from such Audits. Such Audits shall not be subject to
Sections 9.2(b) and 9.2(c).

22

 

          (b) Administration and Control; Cooperation.

               (i) Subject to Sections 9.2(b)(ii) and 9.2(c), the Audit Management Party shall have absolute
authority to make all decisions (determined in its sole discretion) with respect to the
administration and control of such Audit, including the selection of all external advisors. In that
regard, the Audit Management Party (a) may in its sole discretion settle or otherwise determine not
to continue to contest any issue related to such Audit without the consent of the other Parties,
and (b) shall, as soon as reasonably practicable and prior to settlement of an issue that could
cause one or more other Parties to become responsible for Taxes under Section 9.3, notify the Audit
Representatives of such other Parties of such settlement. The other Parties shall (and shall cause
their Affiliates to) undertake all actions and execute all documents (including an extension of the
applicable statute of limitations) that are determined in the sole discretion of the Audit
Management Party to be necessary to effectuate such administration and control. The Parties shall
act in good faith and use their reasonable best efforts to cooperate fully with each other Party
(and their Affiliates) in connection with such Audit and shall provide or cause their Subsidiaries
to provide such information to each other as may be necessary or useful with respect to such Audit
in a timely manner, identify and provide access to potential witnesses, and other persons with
knowledge and other information within its control and reasonably necessary to the resolution of
the Audit.

               (ii) In the case of any Audit in respect of Distribution Taxes for which a Party could be
liable pursuant to Section 5.1(b) or Taxes for which a Party could be liable pursuant to Section
6.2, such Party shall have the right to administer and control such Audit (and shall have any
rights, and be subject to any limitations or obligations, set forth in Section 9.2 applicable to
the Audit Management Party); provided, however, that such Audit Management Party
shall not settle such Audit without the prior written consent of any other Party if such settlement
could have a material adverse impact on such Party or any of its Affiliates. In event more than
one Party would be liable under Section 5.1(b) or Section 6.2, such Parties shall each have the
right to jointly act as Audit Management Party with respect to such Audit in accordance with this
Section 9.2(b)(ii), and such Parties may agree upon additional terms to govern such joint
responsibility.

          (c) Participation Rights of Parties and Information Sharing with respect to Audits.

               (i) Each Party that would be responsible under Section 9.3 for Taxes resulting from an Audit
(other than the Audit Management Party) (a “Participating Party”) shall have limited participation
rights as set forth in this Section 9.2(c) with respect to such Audit. Upon the reasonable request
of a Participating Party, the Audit Management Party shall make available relevant personnel and
external advisors to meet with the Participating Party and its independent auditor in order to
review the status of the Audits. The Participating Parties shall provide the Audit Management Party
with reasonable notice of such requested meetings or information.

               (ii) Each Participating Party shall have access to any written documentation in the possession
of the Audit Management Party that pertains to the Audit (including any written summaries of issues
that the Audit Management Party has developed in

23

 

the context of evaluating the financial reporting of the Audit); provided,
however, that if documentation was prepared solely by or on behalf of a Party, then the
documentation must relate to the joint defense of the Audit. Copies of the documentation will be
made available to the Participating Parties at their sole cost and expense.

               (iii) The Participating Parties are encouraged to provide consultation to the Audit Management
Party in regards to Audit strategy and shall, upon request of the Audit Management Party, provide
such consultation. The Participating Party may elect to employ separate counsel to advise the
Participating Party as additional counsel in or in connection with an Audit, but in that event, the
fees and expenses of the separate counsel shall be paid solely by the Participating Party. The
Audit Management Party shall in good faith consider all advice and other input received from the
Participating Parties in connection with their consultations with respect to an Audit. However, the
Audit Management Party shall retain the sole authority to make all Audit decisions. In that regard,
the Participating Parties and their separate counsels shall not be allowed to participate in any
Audit-related meetings other than those described in (i) or (ii) above (unless such a meeting is
attended by the personnel of a Participating Party, in which case that Participating Party may
attend the meeting but may not actively participate), respond directly to a Taxing Authority
conducting the Audit, or in any manner control resolution of the Audit.

          (d) Sharing of Certain Audit-related Internal and External Costs and Expenses.

               (i) External Costs and Expenses. All external costs and expenses (including all costs
and expenses of calculating Taxes and other amounts payable hereunder) that are incurred by the
Audit Management Party with respect to any ITT Federal Income Tax Audit, ITT U.S. State Income Tax
Audit, or ITT Non-U.S. Income Tax Audit (including any external costs and expenses incurred as a
result of any reporting obligations that arise out of an Audit, such as the reporting of any Audit
adjustments to the various U.S. states) shall (a) if incurred in 2012, be borne by the Audit
Management Party to the extent such external costs and expenses do not exceed $500,000 and
thereafter be shared on an equal one-third (1/3) basis by each of the Parties, (b) if incurred in
2013, be borne by the Audit Management Party to the extent such external costs and expenses do not
exceed $600,000 and thereafter be shared on an equal one-third (1/3) basis by each of the Parties,
(c) if incurred in 2014, be borne by the Audit Management Party to the extent such external costs
and expenses do not exceed $600,000 and thereafter be shared on an equal one-third (1/3) basis by
each of the Parties, and (d) if incurred after 2014, be shared on an equal one-third (1/3) basis
by each of the Parties; provided, however, that any external costs and expenses
incurred by any Party in respect of an Audit in respect of Distribution Taxes for which a Party
could be liable pursuant to Section 5.1(b) or Taxes for which a Party could be liable pursuant to
Section 6.2 shall be borne by the Party incurring such external costs and expenses and shall not be
subject to the foregoing arrangements. The Audit Management Party shall provide to the other
Parties at the end of each calendar year an invoice for each other Party’s share of the external
costs (along with supporting invoices received from the external service providers), and each other
Party shall remit, within sixty (60) days after receipt of the invoice, payment of their share of
the external costs to the Audit Management Party.

24

 

               (ii) Internal Costs and Expenses. All internal costs and expenses incurred by any
Party with respect to any ITT Federal Income Tax Audit, ITT U.S. State Income Tax Audit, or ITT
Non-U.S. Income Tax Audit shall be borne by such Party.

          (e) Power of Attorney/Officer Signature. Each Party hereby appoints (and shall cause
its Subsidiaries to appoint) the Audit Management Party (and its designated representatives) as its
agent and attorney-in-fact to take the actions the Audit Management Party deems necessary or
appropriate to implement the responsibilities of the Audit Management Party under this Agreement.
Each Party also shall (or shall cause its Subsidiaries to) execute and deliver to the Audit
Management Party a power of attorney, and such other documents as are reasonably requested from
time to time by the Audit Management Party (or its designee).

          Section 9.3 Payment of Audit Amounts.

          (a) ITT Federal Income Tax Audits. In connection with any ITT Federal Income Tax
Audit:

               (i) ITT shall pay all additional Taxes due and payable as a result of such Audit that relate
to the portion of a Straddle Tax Period (as determined under Section 11.2) beginning after the
Distribution Date.

               (ii) To the extent that the aggregate amount of additional Taxes due and payable with respect
to all ITT Federal Income Tax Audits for a Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2)
(the “ITT Federal Income Tax Audit Amount”) does not exceed $27,100,000, ITT shall be liable for
and shall pay or cause to be paid to the applicable Taxing Authority all additional Taxes due and
payable as a result of such Audit for a Pre-Distribution Tax Period or that relate to the portion
of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2).

               (iii) To the extent that the ITT Federal Income Tax Audit Amount exceeds $27,100,000:

	 	1)	 	ITT shall be
liable for and shall pay or cause to be paid to the
applicable Taxing Authority an amount equal to the ITT
Federal Sharing Percentage of the additional Taxes due
and payable as a result of such Audit for a
Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the
Distribution Date (as determined under Section 11.2).
	 
	 	2)	 	Defense shall be
liable for and shall pay or cause to be paid to ITT an
amount equal to the Defense Federal Sharing Percentage
of the additional Taxes due and payable as a result of
such Audit for a Pre-Distribution Tax Period or that
relate to the portion of a Straddle Tax Period ending on
the Distribution

25

 

	 	 	 	Date, as determined under Section 11.2 (and ITT shall
pay or cause to be paid such amounts to the
applicable Taxing Authority).
	 
	 	3)	 	Water shall be
liable for and shall pay or cause to be paid to ITT an
amount equal to the Water Federal Sharing Percentage of
the additional Taxes due and payable as a result of such
Audit for a Pre-Distribution Tax Period or that relate
to the portion of a Straddle Tax Period ending on the
Distribution Date, as determined under Section 11.2 (and
ITT shall pay or cause to be paid such amounts to the
applicable Taxing Authority).

          (b) ITT U.S. State Income Tax Audits. In connection with any ITT U.S. State Income
Tax Audit:

               (i) ITT shall pay all additional Taxes due and payable as a result of such Audit that relate
to the portion of a Straddle Tax Period (as determined under Section 11.2) beginning after the
Distribution Date.

               (ii) To the extent that the aggregate amount of additional Taxes due and payable with respect
to all ITT U.S. State Income Tax Audits for a Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2)
(the “ITT U.S. State Income Tax Audit Amount”) does not exceed $8,600,000, ITT shall be liable for
and shall pay or cause to be paid to the applicable Taxing Authority all additional Taxes due and
payable as a result of such Audit for a Pre-Distribution Tax Period or that relate to the portion
of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2).

               (iii) To the extent that the ITT U.S. State Income Tax Audit Amount exceeds $8,600,000:

	 	1)	 	ITT shall be
liable for and shall pay or cause to be paid to the
applicable Taxing Authority an amount equal to the ITT
U.S. State Sharing Percentage of the additional Taxes
due and payable as a result of such Audit for a
Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the
Distribution Date (as determined under Section 11.2).
	 
	 	2)	 	Defense shall be
liable for and shall pay or cause to be paid to ITT an
amount equal to the Defense U.S. State Sharing
Percentage of the additional Taxes due and payable as a
result of such Audit for a Pre-Distribution Tax Period
or that relate to the portion

26

 

	 	 	 	of a Straddle Tax Period ending on the Distribution
Date, as determined under Section 11.2 (and ITT shall
pay or cause to be paid such amounts to the
applicable Taxing Authority).
	 
	 	3)	 	Water shall be
liable for and shall pay or cause to be paid to ITT an
amount equal to the Water U.S. State Sharing Percentage
of the additional Taxes due and payable as a result of
such Audit for a Pre-Distribution Tax Period or that
relate to the portion of a Straddle Tax Period ending on
the Distribution Date, as determined under Section 11.2
(and ITT shall pay or cause to be paid such amounts to
the applicable Taxing Authority).

          (c) ITT Non-U.S. Income Tax Audits. In connection with any ITT Non-U.S. Income Tax
Audit:

               (i) ITT shall pay all additional Taxes due and payable as a result of such Audit that relate
to the portion of a Straddle Tax Period (as determined under Section 11.2) beginning after the
Distribution Date.

               (ii) To the extent that the aggregate amount of additional Taxes due and payable with respect
to all ITT Non-U.S. Income Tax Audits for a Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2)
(the “ITT Non-U.S. Income Tax Audit Amount”) does not exceed $10,600,000, ITT shall be liable for
and shall pay or cause to be paid to the applicable Taxing Authority all additional Taxes due and
payable as a result of such Audit for a Pre-Distribution Tax Period or that relate to the portion
of a Straddle Tax Period ending on the Distribution Date (as determined under Section 11.2).

               (iii) To the extent that the ITT Non-U.S. Income Tax Audit Amount exceeds $10,600,000:

	 	1)	 	ITT shall be
liable for and shall pay or cause to be paid to the
applicable Taxing Authority an amount equal to the ITT
Non-U.S. Sharing Percentage of the additional Taxes due
and payable as a result of such Audit for a
Pre-Distribution Tax Period or that relate to the
portion of a Straddle Tax Period ending on the
Distribution Date (as determined under Section 11.2).
	 
	 	2)	 	Water shall be
liable for and shall pay or cause to be paid to ITT an
amount equal to the Water Non-U.S. Sharing Percentage of
the additional Taxes due and payable as a result of such
Audit for a Pre-

27

 

	 	 	 	Distribution Tax Period or that relate to the portion
of a Straddle Tax Period ending on the Distribution
Date, as determined under Section 11.2 (and ITT shall
pay or cause to be paid such amounts to the
applicable Taxing Authority).

          (d) Audit True-Up Payment. If on the Audit True-Up Date the ITT Income Tax Audit
Amount is below $46,300,000, then ITT shall pay or cause to be paid (i) to Water an amount equal to
(a) thirty-five percent (35%) multiplied by (b) the amount of the difference between the ITT Income
Tax Audit Amount and $46,300,000 and (ii) to Defense an amount equal to (a) twenty-three percent
(23%) multiplied by (b) the amount of the difference between the ITT Income Tax Audit Amount and
$46,300,000. Any additional Taxes in connection with an ITT Federal Income Tax Audit, ITT U.S.
State Income Tax Audit, or ITT Non-U.S. Income Tax Audit that are due and payable after the Audit
True-Up Date shall be subject to Section 9.3(a)(iii), Section 9.3(b)(iii), or Section 9.3(c)(iii),
as the case may be.

          (e) Audits of Water Separate U.S. Income Tax Returns, Defense Separate U.S. Income Tax
Returns, Post-Distribution Income Tax Returns, Non-U.S. Income Tax Returns, and Non-Income Tax
Returns. In connection with any Audits of ITT Separate U.S. Income Tax Returns, Water Separate
U.S. Income Tax Returns, Defense Separate U.S. Income Tax Returns, Post-Distribution Income Tax
Returns, Non-U.S. Income Tax Returns (other than ITT Non-U.S. Income Tax Returns), and Non-Income
Tax Returns, the Party whose Group contains the entity that is primarily liable under applicable
Law for the relevant Taxes shall be liable for and shall pay or cause to be paid to the applicable
Taxing Authority the amounts due and payable as a result of such Final Determination.

          (f) Payment Procedures. In connection with any Audit or the determination of the ITT
Income Tax Audit Amount pursuant to Section 9.3(d) that results in an amount to be paid pursuant to
Section 9.3, (b), (c), or (d), the Audit Management Party shall, within thirty (30) Business Days
following a final resolution of such Audit or such determination pursuant to Section 9.3(d), submit
in writing to the other Parties a preliminary determination (calculated and explained in detail
reasonably sufficient to enable the Parties to fully understand the basis for such determination
and to permit such Parties and their Affiliates to satisfy their financial reporting requirements)
of the portion of such amount to be paid by each of the Parties pursuant to Section 9.3(a), (b),
(c), or (d), as applicable. Each of the Parties and its Affiliates shall have access to all data
and information necessary to calculate such amounts and the Parties and their Affiliates shall
cooperate fully in the determination of such amounts. Within twenty (20) Business Days following
the receipt by a Party of the information described in this Section 9.3(f), such Party shall have
the right to object only to the calculation of the amount of the payment (but not the basis for the
payment) by written notice to the other Parties; such written notice shall contain such disputed
item or items and the basis for its objection. If no Party objects by proper written notice to the
other Parties within the time period described in this Section 9.3(f), the calculation of the
amounts due and owing from each Party shall be deemed to have been accepted and agreed upon, and
final and conclusive, for purposes of this Section 9.3(f). If any Party objects by proper written
notice to the other Parties within such time period, the Parties shall act in good faith to resolve
any such dispute as promptly as practicable in accordance with Article XIII. The Party or its
Affiliate responsible for paying to the applicable Taxing Authority

28

 

under applicable Law amounts owed shall make such payments to such Taxing Authority prior to
the Due Date for such payments. The other Parties shall reimburse the paying Party in accordance
with Article VIII for the portion of such payments for which such other Parties are liable pursuant
to this Section 9.3. The time periods specified above for submitting a preliminary determination
and objecting may be shortened to a time period determined by a Majority of the Parties if these
Parties ascertain that such shortened time period is necessary to meet the Audit obligations of the
Parties and their Affiliates.

ARTICLE X

COOPERATION AND EXCHANGE OF INFORMATION

          Section 10.1 Cooperation and Exchange of Information. The Parties shall each
cooperate fully (and each shall cause its respective Affiliates to cooperate fully) and in a timely
manner (considering the other Party’s normal internal processing or reporting requirements) with
all reasonable requests from another Party hereto, or from an agent, representative, or advisor to
such Party, in connection with the preparation and filing of Tax Returns, claims for refund,
Audits, determinations of Tax Attributes and the calculation of Taxes or other amounts required to
be paid hereunder, and any applicable financial reporting requirements of a Party or its
Affiliates, in each case, related or attributable to or arising in connection with Taxes or Tax
Attributes of any of the Parties or their respective Subsidiaries covered by this Agreement. Such
cooperation shall include, without limitation:

          (a) the retention until the expiration of the applicable statute of limitations or, if later,
until the expiration of all relevant Tax Attributes (in each case taking into account all waivers
and extensions), and the provision upon request, of Tax Returns of the Parties and their respective
Subsidiaries for periods up to and including the Distribution Date, books, records (including
information regarding ownership and Tax basis of property), documentation, and other information
relating to such Tax Returns, including accompanying schedules, related work papers, and documents
relating to rulings or other determinations by Taxing Authorities;

          (b) the execution of any document that may be necessary or reasonably helpful in connection
with any Audit of any of the Parties or their respective Subsidiaries, or the filing of a Tax
Return or refund claim of the Parties or any of their respective Subsidiaries (including the
signature of an officer of a Party or its Subsidiary);

          (c) the use of the Party’s reasonable best efforts to obtain any documentation and provide
additional facts, insights or views as requested by another Party that may be necessary or
reasonably helpful in connection with any of the foregoing (including without limitation any
information contained in Tax or other financial information databases); and

          (d) the use of the Party’s reasonable best efforts to obtain any Tax Returns (including
accompanying schedules, related work papers, and documents), documents, books, records, or other
information that may be necessary or helpful in connection with any Tax Returns of any of the
Parties or their Affiliates.

29

 

     Each Party shall make its and its Subsidiaries’ employees and facilities available on a
reasonable and mutually convenient basis in connection with the foregoing matters. Except for costs
and expenses otherwise allocated among the Parties pursuant to this Agreement, including costs
incurred under Article II and Article IX, no reimbursement shall be made for costs and expenses
incurred by the Parties as a result of cooperating pursuant to this Section 10.1.

     Water and Defense shall have the right to access, retrieve, and utilize any and all Tax data
and information as it relates to members of the Water Group and Defense Group, respectively, from
ITT’s existing Tax data and information systems until the time each establishes its own Tax data
and information systems.

          Section 10.2 Retention of Records. Subject to Section 10.1, if any of the Parties or
their respective Subsidiaries intends to dispose of any documentation relating to the Taxes of the
Parties or their respective Subsidiaries for which another Party to this Agreement may be
responsible pursuant to the terms of this Agreement (including, without limitation, Tax Returns,
books, records, documentation, and other information, accompanying schedules, related work papers,
and documents relating to rulings or other determinations by Taxing Authorities), such Party shall
or shall cause written notice to the other Parties describing the documentation to be destroyed or
disposed of sixty (60) Business Days prior to taking such action. The other Parties may arrange to
take delivery of the documentation described in the notice at their expense during the succeeding
sixty (60) day period.

ARTICLE XI

ALLOCATION OF TAX ATTRIBUTES

AND OTHER TAX MATTERS

          Section 11.1 Allocation of Tax Attributes. ITT shall in good faith advise each Spinco
in writing of the portion, if any, of any Tax Attributes, earnings and profits, or other
consolidated, combined or unitary attribute that ITT determines shall be allocated or apportioned
to each Group under applicable Law; provided, however, that such determination shall be made in a
manner that is (a) reasonably consistent with the past practices of the Parties; (b) in accordance
with the rules prescribed by applicable Law, including the Code and the Treasury Regulations; and
(c) consistent with the IRS Ruling, the Tax Representation Letters, and the Tax Opinions. ITT
agrees to provide the other Parties with all of the information supporting the Tax Attribute and
other determinations made by ITT pursuant to this Section 11.1.

          Section 11.2 Allocation of Tax Items. All determinations for purposes of Section 4.1
and Section 9.3 regarding the allocation of Tax items (other than Tax items arising after the
Distribution Date outside the ordinary course of business) between the portion of a Straddle Tax
Period that ends on the Distribution Date and the portion that begins the day after the
Distribution Date shall be made based on a closing of the books method unless the Parties
unanimously agree otherwise. Any such allocation of Tax items shall initially be made by ITT. To
the extent that Defense or Water disagrees with such determination, the dispute shall be resolved
pursuant to the provisions of Article XIII. For purposes of preparing any Income Tax Returns for
the year of the Distributions that require an allocation of Tax items between a Pre-

30

 

Distribution Tax Period and a Post-Distribution Tax Period, Tax items shall be allocated based
on a closing of the books method unless the Parties unanimously agree otherwise.

ARTICLE XII

DEFAULTED AMOUNTS

          Section 12.1 General. In the event that one or more Parties defaults on its obligation
to pay Distribution Taxes for which it is liable pursuant to Article V to another Party, then each
non-defaulting Party shall be required to pay an equal portion of such Distribution Taxes to such
other Party; provided, however, that no payment obligation shall exist under this
Section 12.1 with respect to Distribution Taxes that are attributable to the Fault of one or more
Parties; provided, further, that any payment of Distribution Taxes by a non-defaulting Party
pursuant to this Section 12.1 shall in no way release the defaulting Party from its obligations to
pay such Distribution Taxes and any non-defaulting Party may exercise any available legal remedies
available against such defaulting Party; provided, further, that interest shall accrue on any such
payment by a non-defaulting Party at a rate per annum equal to the then applicable LIBOR. In
connection with the foregoing, it is expressly understood that any defaulting Party’s rights to any
amounts to be received by such defaulting Party hereunder may be used via a right of offset to
satisfy, in whole or in part, the obligations of such defaulting Party to pay the Distribution
Taxes that are borne by the non-defaulting Parties; such rights of offset shall be applied in favor
of the non-defaulting Party or Parties in proportion to the additional amounts paid by any such
non-defaulting Party or Parties.

          Section 12.2 Subsidiary Funding. Without limitation of the Parties’ rights and
obligations otherwise set forth in this Agreement and provided that no other Party has defaulted on
any of its obligations pursuant to this Agreement, each Party agrees to provide or cause to be
provided such funding as is necessary to ensure that its respective Subsidiaries are able to
satisfy their respective Tax liabilities to a Taxing Authority that arise as a result of a Final
Determination under Section 9.3 of this Agreement, including any such Tax liabilities that, upon
default by a Party’s Subsidiary, may result in another Party’s Subsidiary paying or being required
to pay the defaulted Tax liabilities to a Taxing Authority.

ARTICLE XIII

DISPUTE RESOLUTION

          Section 13.1 Resolution in Accordance with Distribution Agreement. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation to the
interpretation, performance, nonperformance, validity or breach of this Agreement or otherwise
arising out of, or in any way related to this Agreement or the transactions contemplated hereby,
including any claim based on contract, tort, statute or constitution (“Dispute”), such Dispute
shall be subject to the provisions of Article IX of the Distribution Agreement.

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ARTICLE XIV

MISCELLANEOUS

          Section 14.1 Counterparts; Facsimile Signatures. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same agreement, and shall
become effective when one or more such counterparts have been signed by each of the Parties and
delivered to the other Parties. For purposes of this Agreement, facsimile signatures shall be
deemed originals.

          Section 14.2 Survival. Except as otherwise contemplated by this Agreement or the
Distribution Agreement, all covenants and agreements of the Parties contained in this Agreement
shall survive the Distribution Date and remain in full force and effect in accordance with their
applicable terms; provided, however, that all indemnification for Taxes shall
survive until ninety (90) days following the expiration of the applicable statute of limitations
(taking into account all extensions thereof), if any, of the Tax that gave rise to the
indemnification; provided, further, that, in the event that notice for indemnification has been
given within the applicable survival period, such indemnification shall survive until such time as
such claim is finally resolved.

          Section 14.3 Notices. All notices, requests, claims, demands, and other
communications under this Agreement shall be in writing and shall be given or made (and shall be
deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier
service, by facsimile with receipt confirmed (followed by delivery of an original via overnight
courier service), or by registered or certified mail (postage prepaid, return receipt requested) to
the respective Parties at the following addresses (or at such other address for a Party as shall be
specified in a notice given in accordance with this Section 14.3):

     To ITT:

ITT Corporation

1133 Westchester Avenue

White Plains, NY 10604

Attn: General Counsel

Facsimile: (914) 696-2970

     To Water:

Xylem Inc.

1133 Westchester Avenue, Suite 2000

White Plains, NY 10604

Attn: General Counsel

Facsimile: [•]

     To Defense:

32

 

Exelis Inc.

1650 Tysons Boulevard, Suite 1700

McLean, VA 22102

Attn: General Counsel

Facsimile: [•]

          Section 14.4 Waivers. The failure of any Party to require strict performance by any
other Party of any provision in this Agreement will not waive or diminish that Party’s right to
demand strict performance thereafter of that or any other provision hereof. Any consent required
or permitted to be given by any Party to the other Parties under this Agreement shall be in writing
and signed by the Party giving such consent and shall be effective only against such Party.

          Section 14.5 Amendments. Subject to the terms of Section 14.8 hereof, this Agreement
may not be modified or amended except by an agreement in writing signed by a duly authorized
representative of each of the Parties.

          Section 14.6 Assignment. This Agreement shall be assignable in whole in connection
with a merger or consolidation or the sale of all or substantially all the assets of a Party hereto
so long as the resulting, surviving or transferee entity assumes all the obligations of the
relevant Party hereto by operation of law or pursuant to an agreement in form and substance
reasonably satisfactory to the other Parties to this Agreement. Otherwise this Agreement shall not
be assignable, in whole or in part, directly or indirectly, by any Party hereto without the prior
written consent of the others, and any attempt to assign any rights or obligations arising under
this Agreement without such consent shall be void

          Section 14.7 Successors and Assigns. The provisions of this Agreement and the
obligations and rights hereunder shall be binding upon, inure to the benefit of and be enforceable
by (and against) the Parties and their respective successors and permitted transferees and assigns.

          Section 14.8 Certain Termination and Amendment Rights. This Agreement (including
indemnification obligations hereunder) may be terminated and each Distribution may be amended,
modified or abandoned at any time prior to the Distribution Date by and in the sole discretion of
ITT without the approval of Water or Defense or the stockholders of ITT. In the event of such
termination, no Party shall have any liability of any kind to any other Party or any other Person.
After the Distribution Date, this Agreement may not be terminated except by an agreement in writing
signed by a duly authorized representative of each of ITT, Water, and Defense.

          Section 14.9 No Circumvention. The Parties agree not to directly or indirectly take
any actions, act in concert with any Person who takes an action, or cause or allow any member of
any such Party’s Group to take any actions (including the failure to take a reasonable action) such
that the resulting effect is to materially undermine the effectiveness of any of the provisions of
this Agreement, the Distribution Agreement or any other Ancillary Agreement (including adversely
affecting the rights or ability of any Party to successfully pursue indemnification or payment
pursuant to the provisions of this Agreement).

33

 

          Section 14.10 Subsidiaries. Each of the Parties shall cause to be performed, and
hereby guarantees the performance of, all actions, agreements and obligations set forth herein to
be performed by any Subsidiary of such Party or by any entity that becomes a Subsidiary of such
Party on and after the Distribution Date.

          Section 14.11 Third Party Beneficiaries. This Agreement is solely for the benefit of
the Parties and should not be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing without reference to this
Agreement.

          Section 14.12 Title and Headings. Titles and headings to sections herein are inserted
for the convenience of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.

          Section 14.13 Exhibits and Schedules. The Exhibits and Schedules shall be construed
with and as an integral part of this Agreement to the same extent as if the same had been set forth
verbatim herein.

          Section 14.14 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal Laws, and not the Laws governing conflicts of Laws (other than
Sections 5-1401 and 5-1402 of the New York General Obligations Law), of the State of New York.

          Section 14.15 Consent to Jurisdiction. Subject to the provisions of Article XIII,
each of the Parties irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of
the State of New York, New York County, and (b) the United States District Court for the Southern
District of New York (the “New York Courts”), for the purposes of any suit, action, or other
proceeding to compel arbitration or for provisional relief in aid of arbitration in accordance with
Article XIII or to prevent irreparable harm, and to the non-exclusive jurisdiction of the New York
Courts for the enforcement of any award issued there under. Each of the Parties further agrees that
service of any process, summons, notice, or document by U.S. registered mail to such Party’s
respective address set forth above shall be effective service of process for any action, suit, or
proceeding in the New York Courts with respect to any matters to which it has submitted to
jurisdiction in this Section 14.15. Each of the Parties irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit, or proceeding arising out of this Agreement
or the transactions contemplated hereby in the New York Courts, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that any such action,
suit or proceeding brought in any such court has been brought in an inconvenient forum.

          Section 14.16 Specific Performance. The Parties agree that irreparable damage would
occur in the event that the provisions of this Agreement were not performed in accordance with
their specific terms. Accordingly, it is hereby agreed that the Parties shall be entitled to an
injunction or injunctions to enforce specifically the terms and provisions hereof in any court of
the United States or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at Law or in equity.

34

 

          Section 14.17 Waiver of Jury Trial. EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HEREBY (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 14.17.

          Section 14.18 Force Majeure. No Party (or any Person acting on its behalf) shall have
any liability or responsibility for failure to fulfill any obligation (other than a payment
obligation) under this Agreement so long as and to the extent to which the fulfillment of such
obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of
Force Majeure (as defined in the Distribution Agreement). A Party claiming the benefit of this
provision shall, as soon as reasonably practicable after the occurrence of any such event: (a)
notify the other applicable Parties of the nature and extent of any such Force Majeure condition
and (b) use due diligence to remove any such causes and resume performance under this Agreement as
soon as feasible.

          Section 14.19 Interpretation. The Parties have participated jointly in the
negotiation and drafting of this Agreement. This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party drafting or causing
any instrument to be drafted.

          Section 14.20 Changes in Law.

          (a) Any reference to a provision of the Code, Treasury Regulations, or a Law of another
jurisdiction shall include a reference to any applicable successor provision or Law.

          (b) If, due to any change in applicable Law or regulations or their interpretation by any
court of Law or other governing body having jurisdiction subsequent to the date hereof, performance
of any provision of this Agreement or any transaction contemplated hereby shall become
impracticable or impossible, the Parties hereto shall use their commercially reasonable best
efforts to find and employ an alternative means to achieve the same or substantially the same
result as that contemplated by such provision.

          Section 14.21 Authority. Each of the Parties hereto represents to each of the other
Parties that (a) it has the corporate power (corporate or otherwise) and authority to execute,
deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement
by it have been duly authorized by all necessary corporate or other action, (c) it has duly and
validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid, and
binding obligation, enforceable against it in accordance with its terms subject to applicable

35

 

bankruptcy, insolvency, reorganization, moratorium, or other similar Laws affecting creditors’
rights generally and general equity principles.

          Section 14.22 Severability. In the event any one or more of the provisions contained
in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and therein shall not in
any way be affected or impaired thereby. The Parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect
of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

          Section 14.23 Tax Sharing Agreements. All Tax sharing, indemnification and similar
agreements, written or unwritten, as between any of the Parties or their respective Subsidiaries,
on the one hand, and any other Party or its respective Subsidiaries, on the other hand (other than
this Agreement or in any other Ancillary Agreement), shall be or shall have been terminated as of
the Distribution Date and, after the Distribution Date, none of such Parties (or their
Subsidiaries) to any such Tax sharing, indemnification or similar agreement shall have any further
rights or obligations under any such agreement.

          Section 14.24 Exclusivity. Except as specifically set forth in the Distribution
Agreement or any other Ancillary Agreement, all matters related to Taxes or Tax Returns of the
Parties and their respective Subsidiaries shall be governed exclusively by this Agreement. In the
event of a conflict between this Agreement, the Distribution Agreement or any Ancillary Agreement
with respect to such matters, this Agreement shall govern and control.

          Section 14.25 No Duplication; No Double Recovery. Nothing in this Agreement is intended to
confer to or impose upon any Party a duplicative right, entitlement, obligation, or recovery with
respect to any matter arising out of the same facts and circumstances.

36

 

     IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed the day and
year first above written.

	 	 	 	 	 
	 	ITT CORPORATION

 	 
	 	
 	 
	 	Name:  	 	 
	 	Title:  	 	 
	 
	 	XYLEM INC.

 	 
	 	
 	 
	 	Name:  	 	 
	 	Title:  	 	 
	 
	 	EXELIS INC.

 	 
	 	
 	 
	 	Name:  	 	 
	 	Title:exv10w3

Exhibit 10.3

MASTER TRANSITION SERVICES AGREEMENT

          This Master Transition Services Agreement (this “Agreement”) is entered into as of
[•], 2011, by and among ITT Corporation, an Indiana corporation (“ITT”), Exelis Inc., an
Indiana corporation (“Exelis”) and Xylem Inc., an Indiana corporation (“Xylem”).
Each of ITT, Exelis and Xylem is sometimes referred to herein as a “Party” and collectively as the
“Parties.” Capitalized terms used herein and not otherwise defined herein have the meanings given
to such terms in the Distribution Agreement of even date herewith, by and among ITT, Exelis and
Xylem (as such may be amended from time to time, the “Distribution Agreement”).

W I T N E S S E T H :

          WHEREAS, the Board of Directors of ITT has determined that it is appropriate, desirable and in
the best interests of ITT, ITT’s shareholders and ITT’s other constituents, to separate, pursuant
to and in accordance with the Distribution Agreement, ITT into three separate, publicly traded
companies, one for each of (i) the ITT Retained Business, which shall be owned and conducted,
directly or indirectly, by ITT, (ii) the Defense Business, which shall be owned and conducted,
directly or indirectly, by Exelis and (iii) the Water Business, which shall be owned and conducted,
directly or indirectly, by Xylem.

          WHEREAS, in order to provide for an orderly transition under the Distribution Agreement, each
of ITT, Exelis and Xylem desire to provide to the other certain services for specified periods
following the Distribution Date, all in accordance with and subject to the terms and conditions set
forth herein.

          NOW, THEREFORE, in consideration of the mutual covenants and agreements of the Parties
contained herein, the Parties agree as follows:

     1. Services Provided.

          (a) With respect to each Service (as defined in Section 1(b)), the Party required to
provide such Service is the “Service Provider” and the other Party is the “Service
Recipient”. In performing the Services, Service Provider and each of its Affiliates shall use
commercially reasonable efforts to provide, or to ensure that any Third Party Provider (as defined
in Section 1(b)) shall provide, the Services in the same manner, within the same amount of
time and at the same level of service (including, as applicable, with respect to type, frequency,
quality, and quantity), with the same degree of reasonable skill and care and with the same level
of security and control as provided and used in providing the Services during the twelve month
period prior to the Distribution Date (excluding any actions taken in contemplation of the
Distribution). Notwithstanding the foregoing, if there is an increase in the complexity of a
Service (whether as a result of increased quantity or quality, changing frequency or regulatory
requirements or otherwise), Service Recipient acknowledges and agrees that such Service may not be
provided within the same amount of time as it had previously taken during such period, and, in
such a case, Service Provider and each of its Affiliates shall use commercially reasonable efforts
to provide, or to ensure that any Third Party Provider shall provide, such Service in a timely
manner. Notwithstanding anything herein to the contrary, the Services are to be provided
in a manner that does not disparately treat Service Recipient (or its Subsidiaries or its or
their

 

 

personnel or business) as compared to Service Provider’s treatment of itself (or its
Affiliates or its or their personnel or business) in connection with the provision of a
Self-Service (as defined in Section 2(a)(v)).

          (b) During the period commencing on the Distribution Date and ending on the date that is two
(2) years from the date hereof, unless an earlier or later date is otherwise specified for a
Service on Schedule A, Schedule B or Schedule C hereto (for each such Service, such end date being
herein referred to as the “Termination Date”, with Schedule A, Schedule B and Schedule C
being herein referred to as the “Services Schedules”), Service Provider shall provide, or
shall cause one or more of its Affiliates or a contractor, subcontractor, vendor or other
third-party service provider (each, a “Third Party Provider”) to provide, upon the terms
and subject to the conditions set forth herein, the services described on the Services Schedules,
including under the headings “General Services Description” and “Scope of Services” (the
“Services”); provided, Service Provider shall obtain the consent of Service
Recipient (not to be unreasonably withheld, delayed or conditioned) in the event any such Service
is to be provided by a Third Party Provider or Affiliate if such Services were not provided by such
Third Party Provider or Affiliate to Service Recipient during the twelve month period prior to the
Distribution Date; provided further, Service Provider shall remain primarily
responsible for the performance by any such Affiliate or Third Party Provider of its obligations
hereunder. Irrespective of whether Service Provider, an Affiliate or a Third Party Provider is
providing a Service, Service Recipient may direct that any such Service be provided directly to
Service Recipient or any other member of such Party’s Group.

          (c) Each Service provided hereunder shall be terminated on its applicable Termination Date (as
defined in Section 1(b)), unless otherwise terminated earlier by Service Recipient pursuant
to Section 11. Service Provider shall be under no obligation to provide a Service to
Service Recipient after the Termination Date applicable to such Service, except to the extent
otherwise agreed in writing by Service Provider and Service Recipient.

     2. Consideration.

          (a) Costs and Fees.

     (i) For each Service, Service Recipient shall pay (in accordance with Section
2(b)) Service Provider an amount equal to the Monthly Costs (as defined in Section
2(a)(i)(1)); provided that (i) for any Service performed from and after January
1, 2012 through and including the day before the expiration date of the Minimum Service
Period (as defined in Section 11(b)) for such Service, Service Recipient shall pay,
along with and in addition to such Monthly Costs, an amount equal to 2% of such Monthly
Costs and (ii) for any Service performed from and after the expiration date of the Minimum
Service Period for such Service through and including the date as of which the provision of
such Service hereunder has been terminated, Service Recipient shall pay, along with and in
addition to the Monthly Costs, an amount equal to 10% of such Monthly Costs, unless, upon
request by Service Recipient to terminate a Service, Service Provider is unable to
transition the Service to Service Recipient or its designated Subsidiary in a commercially
reasonable manner which does not unduly disrupt the Service and as a result, Service
Recipient is unable to terminate such Service on or after the date on which

2

 

the Minimum
Service Period expires (in which case any third party, out-of-pocket costs resulting to
Service Recipient shall be shared in accordance with Section 11(b)).

     (1) The “Monthly Costs” for each Service shall be an amount equal to the sum of
(A) the costs or expenses incurred as set forth on the applicable Services Schedule;
provided that if a Services Schedule is silent regarding costs and expenses,
the amount under this subsection (A) shall be equal to Service Provider’s allocated
costs (including salary, wages and benefits, but excluding severance and retention
costs, which shall be handled pursuant to Section 2(a)(ii)) for any of its
(or its Affiliates’) employees involved in providing Services, plus (B) any
reasonable out-of-pocket costs and expenses incurred in connection with retaining
Third Party Providers, including any fees for any Third Party Consent or Alternate
Method, or pursuing any warranty or indemnity against a Third Party Provider in
accordance with Section 3(d); provided that Service Recipient shall only be
responsible for 50% of the fees for any Third Party License, with Service Provider
responsible for the other 50%, plus (C) any sales, transfer, goods,
services, value added, gross receipts or similar taxes, fees, charges or assessments
(including any such taxes that are required to be withheld); provided that
the Parties agree to use commercially reasonable efforts to minimize any such tax
with respect to the Services, plus (D) other reasonable miscellaneous
out-of-pocket costs and expenses; provided, however, that any such
expenses exceeding $5,000 per month for each Service (other than routine business
travel and related expenses) shall require advance approval of Service Recipient.
The Monthly Costs for a Service shall not include any severance and retention costs
incurred by Service Provider as a result of retaining the necessary employees to
supply such Service to Service Recipient in accordance with the terms of this
Agreement, which costs shall be handled pursuant to Section 2(a)(ii) below.

     (2) Any costs and expenses provided for on a Services Schedule shall be subject
to an increase of 4.5% per annum beginning on January 1, 2012 in order to adjust for
inflation.

     (3) Service Provider shall notify Service Recipient of any event that may
reasonably be expected to increase the Monthly Costs by more than 5%.

     (ii) Subject to the terms of this Section 2(a)(ii), Service Provider shall use
commercially reasonable efforts to retain its workforce required to provide the Services
and, consistent with its severance and retention policies then in effect, may make severance
and retention payments to employees providing the Services. As provided for on Annex
A (the “Severance and Retention Schedule”), Service Recipient shall be
responsible for the percentage as therein provided of Service Provider’s actual severance
and retention costs (which are estimated in the Severance and Retention Schedule) for those
individuals or job descriptions as set forth therein; provided that Service
Recipient shall only be so responsible for its portion of severance costs if such costs were
incurred as a result of terminating such an employee in connection with the termination of a
Service; provided further that (a) if the severance and retention costs
change from the

3

 

estimates provided in the Severance and Retention Schedule, Service
Recipient shall be responsible for its percentage of such costs so long as such change in
costs is consistent with the Service Provider’s severance and retention policies as then in
effect and (b) any such employee is actually terminated and not rehired for at least ninety
(90) days following such termination. Service Provider shall prepare and deliver, within
thirty (30) days following the end of each quarterly period ending each March 31, June 30,
September 30 and December 31 (it being understood that the first such period shall be
shorter than one quarter), to Service Recipient an invoice setting forth the amount of
severance and retention costs to be paid by Service Recipient in accordance with the
foregoing provisions of this Section 2(a)(ii), which invoice Service Recipient shall
pay pursuant to the terms of Section 2(b).

     (iii) Unless the Parties otherwise agree in writing, (i) where Services are provided in
a country outside of the United States by a Person located in the same country, amounts
shall be invoiced and paid in the local currency of the entity providing the Services and
(ii) if payments are to be made between legal entities not within the same country, such
amounts shall be invoiced and paid in U.S. Dollars. To the extent necessary, local currency
conversion on any such invoice shall be based on Service Provider’s internal exchange rate
for the then-current month, based upon the average for such month, as calculated
consistently with how such local currency conversion was calculated in the twelve month
period prior to the Distribution Date.

     (iv) All charges based on a monthly or other time basis will be pro-rated based on
actual calendar days elapsed during the period of service.

     (v) With respect to any service that a Service Provider provides or causes an Affiliate
to provide to itself or its Affiliates that is the same or substantially similar to a
Service provided to Service Recipient or its Subsidiaries hereunder (such service, a
“Self-Service”), if Service Provider determines to no longer provide such Self
—Service to itself or its Affiliates, Service Provider shall notify Service Recipient of
such termination no later than the number of days prior to such termination as is provided
in Section 11(b) for terminating the corresponding Service. If Service Provider
terminates a Self-Service prior to the end of the Minimum Service Period applicable for the
corresponding Service, the Monthly Costs of such Service following any such termination and
up to but not including date on which the Minimum Service Period expires shall be calculated
as if Service Provider had not terminated such Self-Service. Notwithstanding the foregoing,
Service Provider shall continue to provide the Service in accordance with the provisions of
this Agreement, unless such Service is otherwise terminated pursuant to Section 11,
and Service Provider shall not be permitted to terminate any Self-Service prior to the
Termination Date for the applicable Service if such termination would adversely affect the
level of service, security or control of such Service or the scope or content thereof
required pursuant to Sections 1(a) and 4(a).

          (b) Invoices and Payment.

     (i) Service Provider shall invoice Service Recipient for the amounts owed hereunder in
arrears on a calendar monthly basis or, in the case of Section 2(a)(ii), as

4

 

provided
therein, and shall provide reasonable documentation supporting such amounts owed pursuant to
Section 2(a), except to the extent such amounts are set forth on the Services
Schedules. Service Recipient shall pay the amount of such invoice by electronic transfer of
immediately available funds not later than thirty (30) days after of the date of such
invoice. Neither Party nor any of its respective Subsidiaries shall have a right of set-off
against the other Party or its Subsidiaries, except in connection with any amounts billed
hereunder. In the event Service Recipient does not pay Service Provider in accordance with
the terms hereof (i) all amounts so payable and past due shall accrue interest from the
31st day after the date of the invoice to the receipt of payment at a rate per
annum equal to the six (6)-month LIBOR rate (as quoted in the “Money Rates” section of The
Wall Street Journal or any other similarly reputable published source on the 31st
day after the date of the invoice, or the next Business Day, if such day is not a Business
Day) plus 3% (the “Interest Rate”, with the applicable rate to be
recalculated every six months), until such amounts, together with all accrued and unpaid
interest thereon, are paid in full, and (ii) Service Recipient shall pay, as additional
fees, all reasonable out-of-pocket costs and expenses incurred by Service Provider in
attempting to collect and collecting amounts due under this Section 3, including all
reasonable attorneys fees and expenses.

     (ii) In the event that Service Recipient in good faith disputes an invoice submitted by
Service Provider, Service Recipient may withhold payment of any amount subject to the
dispute; provided, however, that (x) Service Recipient shall continue to pay
all undisputed amounts in accordance with the terms hereof, (y) Service Recipient shall
notify Service Provider, in writing, of any disputed amounts and the reason for any dispute
by the due date for payment of the invoice containing any disputed charges and (z) in the
event any dispute is resolved in the Service Provider’s favor, any amount that the Service
Recipient should have paid shall be deemed to have accrued interest at the Interest Rate
from the date such payment should have been made. In the event of a dispute regarding the
amount of any invoice, the Parties shall use all reasonable efforts to resolve such dispute
within thirty (30) days after Service Recipient provides written notification of such
dispute to Service Provider. Each Party shall provide full supporting documentation
concerning any disputed amount or invoice within thirty (30) days after written notification
of the dispute. Unpaid fees that are under good faith dispute shall not be considered a
basis for default hereunder. To the extent that a dispute regarding the amount of any
invoice cannot be resolved pursuant to this Section 2(b)(ii), the dispute resolution
procedures set forth in Section 9 herein shall apply.

     3. Cooperation.

          (a) Service Recipient and Service Provider shall cooperate and work together in good faith to
develop a global transition plan in order to facilitate a smooth and orderly termination of a
Service by its applicable Termination Date or at such earlier time as Service Recipient terminates
Service Provider’s performance of the Services in accordance with Section 11. In
furtherance of the foregoing, Service Provider will, if requested and at Service Recipient’s
expense, provide Service Recipient with reasonable support necessary to transition or migrate
the services to Service Recipient or any third party or parties chosen by the Service

5

 

Recipient,
which may include consulting and training and providing reasonable access to data and other
information and to Service Provider’s employees; provided, however, that such
activities shall not unduly burden or interfere with Service Provider’s business and operations.

          (b) It is understood that it will require significant efforts by the Parties to implement this
Agreement and ensure performance hereunder. Service Recipient shall (i) cooperate with and provide
Service Provider with such information and documentation as is reasonably necessary for Service
Provider to perform the Services; and (ii) perform such other duties and tasks as may be reasonably
required to permit Service Provider to perform the Services, including (x) cooperating in obtaining
any consents or approvals from third parties necessary to facilitate Service Provider’s ability to
provide the Services and (y) upon thirty (30) days prior written notice by the Service Provider,
conducting such testing as may be reasonably required by Service Provider in connection with any
updates or changes to the applicable systems or processes involved in providing a Service. A
Service Provider shall not be deemed to be in breach of its obligations to provide or make
available any Service to the extent that Service Recipient has not provided information and access
to appropriate personnel that is reasonably necessary for the performance of such Service.

          (c) Service Recipient shall use commercially reasonable efforts to make or obtain any
approvals, permits and licenses and implement any systems as may be necessary for it to perform the
Services independently in each country and applicable jurisdiction as soon as practicable following
the Distribution Date.

          (d) Upon Service Recipient’s written request and without prejudice to Service Recipient’s
direct rights against a Third Party Provider, Service Provider shall use commercially reasonable
efforts to pursue any warranty or indemnity under any contract Service Provider or its Subsidiaries
may have with a Third Party Provider with respect to any Service provided to Service Recipient by
such Third Party Service Provider.

          (e) Service Provider shall use commercially reasonable efforts to obtain, if required, the
consent of any relevant Third Party Provider (a “Third Party Consent”) or a license from
any relevant Third Party Provider (a “Third Party License”), and Service Recipient shall,
as necessary, cooperate with Service Provider in obtaining any such Third Party Consent or Third
Party License. If a Third Party Consent or Third Party License cannot be obtained on reasonable
terms, the Parties will use commercially reasonable efforts to arrange for an alternative method of
obtaining any such Service on Service Recipient’s behalf (“Alternative Method”), which may
include Service Provider providing such Service itself. If there is any Third Party Consent or
Third Party License which was not required as of the date hereof but will subsequently be required
before the Minimum Service Period expires for a particular Service, Service Provider shall identify
in writing to Service Recipient such Third Party Consent or Third Party License within sixty (60)
days of the date hereof.

          (f) The Parties shall use the fiscal month, quarter and year ends as set forth in Schedule D
in connection with the provision and receipt of applicable Services hereunder, for so long as such
Services are being provided.

6

 

          (g) In connection with the provision of Services hereunder, except as provided pursuant to
Section 2(a)(iii) for local currency conversion for invoices, the Parties shall use the
same methodology to determine the appropriate foreign exchange conversion rate as used in the
twelve month period prior to the Distribution Date, which may be determined or based upon the
average for the month or other applicable period or the spot rate at the end of such month or
period or otherwise.

     4. Performance Standard; Reports; Personnel.

          (a) Except as otherwise provided in the Services Schedule and Section 1(a) herein,
nothing in this Agreement shall require or be interpreted to require Service Provider to provide a
Service to Service Recipient beyond the scope and content of such Service as provided by Service
Provider to the ITT Retained Business, Water Business or Defense Business, as the case may be,
during the twelve month period prior to the Distribution Date, excluding any actions taken in
contemplation of the Distribution.

          (b) Service Provider shall not make changes in the manner of providing a Service
unless (i) Service Provider is making similar changes in a Self-Service being performed for
itself or its Subsidiaries or such changes are de minimus, in each case so long as such changes do
not adversely affect the level of service, security or control of such Service or the scope or
content thereof required pursuant to Sections 1(a) and 4(a) above, (ii) such
changes are required by Service Provider or Service Recipient pursuant to applicable Law (including
changes required by Service Provider or Service Recipient in connection with the provision of the
Services to the other Party) or (iii) Service Recipient provides its prior written consent (which
shall not be unreasonably withheld, conditioned or delayed) to such changes (in each case, for the
avoidance of doubt, with the costs of any such change to be included in the calculation of Monthly
Costs). In the event Service Provider determines to change the location of delivery of any
Service, Service Provider shall provide Service Recipient with thirty (30) days prior written
notice. All Services shall be performed in compliance with applicable Law, including all
applicable U.S. and non-U.S. laws and regulations relating to export controls, sanctions, and
imports, including without limitation those regulations maintained by the U.S. Department of the
Treasury’s Office of Foreign Assets Control, the Export Administration Regulations maintained by
the U.S. Department of Commerce, Bureau of Industry and Security, and the International Traffic in
Arms Regulations maintained by the U.S. Department of State, Directorate of Defense Trade Controls.

          (c) In performing the Services, Service Provider shall prepare and furnish to Service
Recipient reports concerning the Services with such reports to contain substantially the same data,
in substantially the same format, and prepared and delivered on substantially the same timetable,
as reports prepared during the twelve month period prior to the Distribution Date (excluding any
reports solely prepared in contemplation of the Distribution), except as may be otherwise required
by Service Recipient or Service Provider pursuant to applicable Law. Upon Service Recipient’s
written request for modifications to the reporting and data transfer practices
reasonably required to assist Service Recipient in transitioning off the Service, Service
Provider shall cooperate and consult in good faith with Service Recipient to make such
modifications; provided that if Service Provider reasonably determines in its sole
discretion that any such

7

 

modification may cause Service Provider to be in breach of its obligations
to the other Party hereunder (including as a result of breaching its obligations as a Service
Provider to the other Party as Service Recipient), then Service Provider shall not be under any
obligation to make such modifications.

          (d) Service Provider shall use commercially reasonable efforts consistent with past practice
to make available such personnel as may be required to provide the Services. Service Provider shall
have the right to designate which personnel it will assign to perform the Services. Service
Provider also shall have the right to remove and replace any such personnel at any time or
designate any of its Subsidiaries or a Third Party Provider (subject to Section 1(a)
herein) at any time to perform the Transition Services; provided, however, that
Service Provider shall use its commercially reasonable efforts consistent with past practice to
limit the disruption to Service Recipient in the transition of the Services to different personnel.
Subject to and consistent with Section 2(a)(ii), Service Provider shall have no obligation
to retain any individual employee for the sole purpose of providing a particular Transition
Service.

          (e) In the event Service Recipient or any of it Subsidiaries hires away an employee of Service
Provider or its Subsidiaries, and such employee was providing Services to Service Recipient and
will not continue to provide such Service, Service Provider shall have the option, in its sole
discretion (in addition to any other remedies available to it under the Distribution Agreement or
otherwise), upon ten (10) Business Days written notice to Service Recipient to reduce its
obligations with respect to such Service (with a proportionate reduction in the applicable Monthly
Costs) effective on the date of such employee’s termination of employment with Service Provider.
Any provision of Service thereafter pursuant to such a reduction in Service Provider’s obligations
shall be deemed to be consistent with Service Provider’s obligations under this Agreement, so long
as Service Provider satisfies the other obligations contained in this Section 4 with
respect to such Service.

          (f) Each Party agrees that it shall take appropriate action by instruction of or agreement
with its personnel (including any Third Party Provider) to ensure that all such personnel
performing or otherwise involved with Services shall be bound by and comply with all of the terms
and conditions of this Agreement.

          (g) In the event Service Provider has received a notice of default or breach in the
performance of a Service hereunder (including as a result of substantial errors in the performance
of such Service), it will use its commercially reasonable efforts to cure such default or breach.
In the event Service Provider is unable to cure such default within thirty (30) days from receipt
of notice thereof, in addition to the rights available under Section 11, there shall be an
adjustment to Monthly Costs to reflect the costs to Service Recipient associated with such default,
breach or error, including any reasonable out-of-pocket costs and expenses incurred by Service
Recipient in retaining any Third Party Provider to provide such Service or in providing the such
Service itself.

          (h) Each Party shall notify the applicable other Party as promptly as practicable after
becoming aware of any breach of this Agreement committed by either it or the applicable other
Party. Service Provider shall notify Service Recipient of any event that may reasonably be
expected to materially impact a Service provided hereunder, which may include a

8

 

Termination Notice (as defined in Section 11(b)) provided by the other Party as
Service Recipient hereunder or a notice of termination of a Self-Service, issued pursuant and in
accordance with, Section 2(a)(v).

          (i) In the event of any conflict, as reasonably determined by Service Provider in its sole
discretion, between requests for modification or termination of Services made by the two other
Parties and each properly delivered hereunder, Service Provider shall determine which request it
received first and, subject to the other terms and conditions of this Agreement, make such
modifications or terminations pursuant to the request that was first received before making any
modifications or terminations pursuant to any requests received afterwards.

     5. New Services.

          If, after the date hereof and on or prior to March 31, 2012, or, with respect to Services
provided in connection with any Transfer that, pursuant to Section 2.6(a) of the Distribution
Agreement, is not consummated at or prior to the Effective Time, one hundred (100) days following
the actual date of such Transfer (notwithstanding that under Section 2.6(b) of the Distribution
Agreement such Transfer may be deemed to have occurred on the Effective Time) the Parties determine
that a service required by Service Recipient and provided by Service Provider or one of its
Subsidiaries prior to the Distribution Date was inadvertently omitted from the Services Schedules,
Service Recipient may request that Service Provider perform such service (“New Service”) in
addition to the Services being provided hereunder. Service Provider shall promptly begin
performing any New Service consistent with past practice upon a timely written request from Service
Recipient (which request may be in the form of email) including (i) a description of the work
Service Recipient anticipates being performed by Service Provider in connection with such New
Service and (ii) a schedule for commencing and completing such New Service, and Service Provider
and Service Recipient shall enter into good faith negotiations to agree to an amendment to the
Services Schedules providing for such New Service; provided that if no agreement for an
Additional Service Schedule Amendment has been reached in writing in thirty (30) days, such New
Service shall be deemed to have a Minimum Service Period expiring on June 30, 2012 and a
Termination Date of two years from the Distribution Date, with Monthly Costs as provided for in
Section 2(a)(i), calculated as if the amendment to the Services Schedule for such New
Service were silent regarding costs and expenses (such amendment or deemed amendment pursuant to
the foregoing proviso, an “Additional Service Schedule Amendment”). Any New Service shall
be considered a Service hereunder and the Services Schedules shall incorporate, and be deemed to be
duly amended by, such Additional Service Schedule Amendment.

     6. Intellectual Property; IT Security.

          (a) Except as provided in the Services Schedules, the Monthly Costs shall include the
allocable portion of any amounts that are required to be paid by Service Provider to
any third party licensors of software that is used by Service Provider in connection with the
provision of any Services hereunder, including (i) license, right-to-use and royalty fees and (ii)
any amounts required to obtain the consent of such licensors to allow Service Provider to provide
any of the Services hereunder. Service Recipient agrees to comply and cause its Subsidiaries to
comply with the terms of any license or other agreement of Service Provider or

9

 

any of its
Subsidiaries relating to software that is provided to Service Recipient and is used in connection
with the provision of any Services hereunder; provided that in the event that Service
Provider enters into new software licenses after the Distribution Date, Service Recipient shall
have the prior opportunity to review and confirm its ability to comply therewith, which it shall do
in good faith. In the event that Service Recipient provides notice of its inability to comply
therewith, Service Provider may at its sole discretion discontinue its provision of any Services
under such new software licenses effective after thirty (30) days notice of the same, and Service
Recipient shall indemnify Service Provider for any claims by third parties arising out of or in
connection with Service Recipient’s noncompliance or violation of such software licenses. Subject
to the foregoing, Service Provider shall use commercially reasonable efforts to obtain any consent
that may be required from such licensors in order to provide any of the Services hereunder and the
Parties shall cooperate to identify any material licenses or consents necessary for such provision
and shall use commercially reasonable efforts to minimize the costs associated therewith.

          (b) If the receipt or provision of any Service hereunder requires the use by a Party of the
Intellectual Property (other than Trademarks) of the other Party, then such Party and its
Subsidiaries shall have the non-exclusive, royalty-free, non-sublicensable (except as required for
its and its Subsidiaries’ receipt or provision of Services) right and license to use such
Intellectual Property for the sole purpose of, and only to the extent necessary for, the receipt or
provision of such Services hereunder, pursuant to the terms and conditions of this Agreement. This
license does not permit a Party to access, possess, or modify the source code of the other Party or
to reverse engineer the software of the other Party. Upon the Termination Date applicable to such
Service, or the earlier termination of any Services in accordance with Section 11, the license
herein to the applicable Intellectual Property will terminate; and the applicable Service Recipient
and/or Service Provider shall cease all use of the Intellectual Property licensed hereunder.
Nothing in this Section 6(b) shall be deemed to limit, modify or terminate any License
Agreement between the Parties.

          (c) Subject to the limited licenses granted in Section 6(b), each Party shall
exclusively own any Intellectual Property that it creates, develops or invents in connection with
the provision of any Services hereunder.

          (d) While using or accessing any computers, systems, software, networks, information
technology or related infrastructure or equipment (including any data stored thereon or transmitted
thereby) (“Systems”) of the other Party (whether or not a Service), each Party shall and
shall cause each of its Subsidiaries to, adhere in all respects to the other Party’s controlled
processes, policies and procedures (including any of the foregoing with respect to Confidential
Information, data, communications and system privacy, operation, security and proper use) as in
effect on the Distribution Date or as communicated to such Party from time to time in writing.

          (e) Those employees of Service Recipient and Service Provider (or their respective Affiliates)
having access to the other Party’s Systems may be required by Service Provider or Service
Recipient, as the case may be, to enter into a customary non-disclosure agreement in connection
with, and as a condition to, such access.

10

 

     7. Records.

          Service Provider shall provide to Service Recipient, taking into consideration the financial
reporting, internal controls and other public company requirements of Service Recipient, all
information and records reasonably required to maintain full and accurate books relating to the
provision of Services to the extent any such information and/or records were provided or maintained
during the twelve month period prior to the Distribution Date, excluding any actions taken in
contemplation of the Distribution. Upon reasonable notice and reasonable request from the Service
Receiver, and at the Service Receiver’s cost, Service Provider shall (a) make available for
inspection and copying by Service Receiver’s agents or representatives such information, books and
records relating to the Services during reasonable business hours and (b) certify that the controls
in effect prior to the Distribution Date continue to be in effect, or if Service Provider is aware
of any instances where such controls are not so in effect, in lieu of certification for such
instances, provide a list of such instances and descriptions of the change in such controls
thereof.

     8. Force Majeure; Reduction of Services.

          No Party (or any Person acting on its behalf) shall have any liability or responsibility for
failure to fulfill any obligation (other than a payment obligation) under this Agreement so long as
and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered or
delayed as a consequence of circumstances of Force Majeure. A Party claiming the benefit of this
provision shall, as soon as reasonably practicable after the occurrence of any such event: (a)
notify the other applicable Parties of the nature and extent of any such Force Majeure condition
and (b) use due diligence to remove any such causes and resume performance under this Agreement as
soon as feasible. Notwithstanding the foregoing, Service Recipient shall be entitled to terminate
Services so affected by a Force Majeure upon fifteen (15) day prior written notice in respect of
any such delay or failure resulting from any such Force Majeure without any penalty or obligation
to pay for Services not performed; provided that, for the avoidance of doubt, Service Recipient
shall remain responsible, pursuant to and in accordance Section 2(a)(ii), for its portion
of any severance and retention costs for any such Services.

     9. TSA Managers; Dispute Resolution.

          (a) Each Party shall nominate in writing one representative to act as the primary contact with
respect to the provision and receipt of Services (a “TSA Manager”), with the initial TSA
Managers as listed on Schedule E. Each Party may, at its discretion, from time to time
select another individual to serve in these capacities during the term of this Agreement;
provided, however, each Party shall notify the other Party promptly (and in any
event within five (5) Business Days) of any change in an individual serving in this capacity,
setting forth the name
and contact information of the replacement, and stating that such replacement is authorized to
act for such Party in accordance with this Section 9(a).

          (b) The TSA Managers shall meet as expeditiously as possible to resolve any dispute hereunder,
and notwithstanding anything in Article IX (Dispute Resolution) of the Distribution Agreement to
the contrary, in the event any dispute is not so resolved within thirty

11

 

(30) days, a TSA Manager
may provide written notice of such dispute to the Chief Financial Officer of each Party (or such
other executive as designated by the Chief Executive Officer of such Party), who shall attempt
within a period of fifteen (15) days following the end of such previous thirty (30) day period to
conclusively resolve any such issue, and in the event the dispute remains unresolved following such
fifteen (15) day period, either Party may submit the dispute to mediation in accordance with
Section 9.2 (Mediation) of the Distribution Agreement (provided that, for the avoidance
of doubt, the forty-five (45) day waiting period referenced therein shall be inapplicable), and if
any dispute remains unresolved after the Mediation Period (as defined in the Distribution
Agreement), such dispute shall be determined, at the request of either Party, by arbitration in
accordance with Section 9.3 (Arbitration) of the Distribution Agreement and the other
applicable provisions of Article IX (Dispute Resolution) of the Distribution Agreement. Each Party
may treat an act of any other Party’s TSA Manager or Chief Financial Officer (or such other
executive as designated by the Chief Executive Officer of such other Party), in each case that is
consistent with the provisions of this Agreement, as being authorized by such other Party to
resolve such dispute without inquiring behind such act or ascertaining whether such TSA Manager or
Chief Financial Officer (or such other executive as designated by the Chief Executive Officer of
such other Party) had authority to so act; provided, however, that none of the TSA Managers or
Chief Financial Officer or other executives so designated shall have authority to amend this
Agreement, except as otherwise provided pursuant to Section 16.

          (c) In the event of any dispute between the Parties regarding a Service, prior to the
applicable Termination Date, Service Provider shall not discontinue the supply of any such Service,
unless so provided for in a settlement agreement between the Parties or arbitral determination
pursuant to and in accordance with Section 9(b) herein and Article IX of the
Distribution Agreement or as requested by Service Recipient pursuant to a Termination Notice.

     10. Disclaimer; Limited Liability.

          (a) Service Recipient acknowledges that Service Provider is not in the business of providing
the Services and that the Services being provided pursuant to this Agreement are provided as an
accommodation to Service Recipient. Other than in the event of Service Provider’s gross negligence
or willful misconduct, Service Provider will not be liable for any error or omission in rendering
Services under this Agreement, or for any defect in Services so rendered; provided that if
there is a substantial error in any of the Services, Service Provider shall use commercially
reasonable efforts to attempt to correct the error, or if Service Provider is unable to so correct
such error, to provide an adjustment to the Monthly Cost for such Service in reasonable proportion
to that which the error bears to the Service provided for such month, which adjustment may,
pursuant to Section 4(g), include any reasonable out-of-pocket costs and expenses incurred
by Service Recipient in retaining a Third Party Provider to provide such
Service or in providing such service itself. Other than in the event of Service Recipient’s
gross negligence or willful misconduct, and other than for the Monthly Costs, severance and
retention costs owed under Section 2(a)(ii) and other amounts expressly owed hereunder,
Service Recipient will not be liable for any damages caused in connection with the Services
provided under this Agreement.

12

 

          (b) Service Provider shall have no responsibility to maintain insurance to cover any loss or
damage to goods or equipment to which Service Recipient has title that are in the possession or
control of Service Provider, its Subsidiaries or a Third Party Provider as a result of this
Agreement and the risk of loss with respect to such goods or equipment shall be solely with Service
Recipient. Service Recipient shall obtain from its insurance company a waiver of subrogation on
behalf of Service Provider and its Subsidiaries effective as of Distribution Date. Service
Recipient shall have no responsibility to maintain insurance to cover any loss or damage to goods
or equipment to which Service Provider has title that are in the possession or control of Service
Recipient or its Subsidiaries as a result of this Agreement and the risk of loss with respect to
such goods or equipment shall be solely with Service Provider. Service Provider shall obtain from
its insurance company a waiver of subrogation on behalf of Service Recipient and its Subsidiaries
effective as of the Distribution Date.

          (c) NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED (INCLUDING WARRANTIES
OF NON-INFRINGEMENT, MERCHANTIBILITY, ACCURACY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR
PURPOSE OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION), ARE MADE BY SERVICE PROVIDER OR ANY OF
ITS AFFILIATES WITH RESPECT TO THE PROVISION OF SERVICES UNDER THIS AGREEMENT AND, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ALL SUCH REPRESENTATIONS OR WARRANTIES ARE HEREBY WAIVED AND
DISCLAIMED. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, UNDER NO CIRCUMSTANCES, INCLUDING THE
FAILURE OF THE ESSENTIAL PURPOSE OF ANY REMEDY, SHALL SERVICE PROVIDER BE LIABLE FOR, INCLUDING BUT
NOT LIMITED TO, ANY LOST PROFITS, REMITTANCES, COLLECTIONS, INVOICES, PENALITIES, INTEREST OR
SPECIAL, INCIDENTIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES CAUSE BY THE PERFORMANCE OF, ANY DELAY IN
THE PERFORMING, FAILURE TO PERFORM OR DEFECTS IN THE PERFORMANCE OF, THE SERVICES CONTEMPLATED TO
BE PERFORMED BY SERVICE PROVIDER PURSUANT TO THIS AGREEMENT, REGARDLESS OF WHETHER A PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

     11. Term and Service Termination Dates.

          (a) This Agreement (other than Sections 9, 10, 11 and 13)
shall terminate upon the last of the Termination Dates in respect of all Services to be provided
hereunder; provided that the rights of the parties in respect of any claims that have
accrued prior to such termination shall survive such termination.

          (b) For each Service, the minimum service period (“Minimum Service Period”) during
which Service Provider is obligated to provide such Service to Service Recipient is set forth on
the Services Schedule. The Parties agree to cooperate if necessary to adjust such Minimum Service
Period (and the applicable Termination Date) to end on a date that is the end of a calendar or
fiscal month, as deemed appropriate. Service Recipient may terminate any Service prior to its
Termination Date by providing to Service Provider written notice of termination, which shall be
deemed irrevocable upon delivery (a “Termination Notice”), not less

13

 

than (i) thirty (30)
days before the date of such earlier termination if the Service is to be terminated on or before
December 31, 2011, (ii) sixty (60) days before the date of such earlier termination if the Service
is to be terminated after December 31, 2011 but on or before June 30, 2012, (iii) ninety (90) days
before the date of such earlier termination if Service is to be terminated after June 30, 2012 but
on or before December 31, 2012 and (iv) one hundred and twenty (120) days before the date of such
earlier termination if Service is to be terminated on or after January 1, 2013; provided
that if the Services Schedule indicates that any Service is dependent on one or more other
Services, then each such Service must be terminated together; provided further that
any termination may be on a location by location basis if so indicated on the Services Schedules.
In the event a Service is terminated prior to the end of its Minimum Service Period pursuant to
Service Recipient’s Termination Notice, Service Recipient shall pay a make-whole fee equal to the
actual out-of-pocket costs and any additional costs that would have been incurred by Service
Provider if such Service had not been terminated (which costs, for the avoidance of doubt, exclude
the 2% and 10% increases described in Section 2(a)(i)) between the actual date of
termination of the Service and the applicable date on which the Minimum Service Period expires
(subject to Service Provider exercising commercially reasonable efforts to mitigate such costs).
Notwithstanding the foregoing, upon the receipt of a Termination Notice, if Service Provider is
unable to transition the applicable Service to the Service Recipient or its designee in a
commercially reasonable manner which does not unduly disrupt the Service on the requested
termination date, Service Provider shall use commercially reasonable efforts consistent with past
practice to transition such Service as soon as possible, and any resulting third party,
out-of-pocket costs to Service Recipient shall be shared equally between Service Provider and
Service Recipient.

          (c) In the event either Party defaults in the performance of any of its obligations under this
Agreement, and if such default is not excused and not cured within thirty (30) days after written
notice from the other Party specifying such default, then the non-defaulting Party may at any time
thereafter terminate, at its option, any such Service that is the subject of such default by giving
five (5) days prior written notice; provided that if no such termination notice is given
within fifteen (15) days after the end of the thirty (30) day cure period, then the non-defaulting
Party waives all rights to terminate such Service with respect to such default; provided
further, that such fifteen (15) day period referred to in the immediately foregoing proviso
shall be extended if (x) the Parties dispute whether there has been a default hereunder or (y)
agree that there has been a default hereunder and have a dispute related to such default, and in
either case are attempting to resolve such dispute pursuant to Section 9(b) until ten (10)
days after there has been a final determination pursuant to the procedures in Section 9(b).

     12. Independent Contractor.

          The Parties hereto understand and agree that this Agreement does not make either of them an
agent or legal representative of the other for any purpose whatsoever. No Party is granted, by
this Agreement or otherwise, any right or authority to assume or create any obligation or
responsibilities, express or implied, on behalf of or in the name of any other Party, or to bind
any other Party in any manner whatsoever. The Parties expressly acknowledge (i) that Service
Provider is an independent contractor with respect to Service Recipient in all respects,

14

 

including
the provision of the Services, and (ii) that the parties are not partners, joint venturers,
employees or agents of or with each other.

     13. Confidentiality.

          (a) Any Confidential Information of either Party shall be subject to Section 8.6 of
the Distribution Agreement. With respect to any information disclosed by one Party to another
Party for the purpose of this Agreement or otherwise accessible to such other Party during the
performance hereunder (“Confidential Information”), the Party receiving such Confidential
Information agrees that it will use the same skill and care as set forth in Section 4(a)
to prevent the disclosure or accessibility to others of the disclosing Party’s Confidential
Information and will use such Confidential Information only for the purposes of this Agreement, the
Distribution Agreement and the Ancillary Agreements. The receiving Party and its employees,
representatives and agents (including any Third Party Provider) (collectively, the “Recipient
Parties”) shall only disclose and permit access to the other’s Party’s Confidential Information
to such Recipient Parties who have a need to know such Confidential Information for the purposes of
this Agreement, the Distribution Agreement and the Ancillary Agreements. For Confidential
Information provided with respect to any Service, the obligations of the Recipient Parties pursuant
to this Section 13 shall expire on the date that is five (5) years from the termination of
such Service. Each Party shall provide prompt written notice of any breach of the obligations
under this Section 13 by such Party or its Recipient Parties and shall use commercially
reasonable efforts to assist the other Party in remedying any such breach.

          (b) Specifically excluded from the definition of Confidential Information is any and all
information that:

     (i) is independently developed by or on behalf of a Recipient Party without use of or
reference to Confidential Information;

     (ii) is or becomes available to the public, other than as the result of a breach by a
Recipient Party of the confidentiality obligations under this Agreement; or

     (iii) is rightfully received from a third party not known by the Recipient Party to be
bound by an obligation of confidentiality to the disclosing Party.

          (c) If the Recipient Party is required to disclose Confidential Information by law, process or
regulation, to the extent legally permissible, such Recipient Party shall promptly notify the
disclosing Party, reasonably cooperate with the disclosing Party to the extent it may seek to limit
such disclosure and, insofar as a protective order or waiver from the disclosing Party is not
obtained, only disclose such Confidential Information as is required to be disclosed.

          (d) In connection with any permitted disclosure of this Agreement to any third party, each
Party shall redact the portions of the Services Schedules that are not relevant to such third
party’s inquiry.

          (e) It is further understood and agreed that money damages may not be a sufficient remedy for
any breach of this Section 13 and that each Party shall be entitled to seek

15

 

equitable relief,
including injunction and specific performance, as remedy for any such breach. Such remedies shall
not be deemed to be the exclusive remedies for a breach, but shall be in addition to all other
remedies herein described available at law or equity.

     14. Beneficiary of Services; No Third Party Beneficiaries.

          This Agreement is for the sole benefit of the Parties hereto, and nothing expressed or implied
shall give or be construed to give any person any legal or equitable rights hereunder, whether as a
third-party beneficiary or otherwise. Each Party agrees, and each Party in its capacity as a
Service Recipient represents and warrants, that the Services shall be provided solely to, and shall
be used solely by, Service Recipient and its Subsidiaries. Service Recipient shall not resell or
provide the Services to any other Person, or permit the use of the Services by any Person other
than Service Recipient and its Subsidiaries.

     15. Entire Agreement.

          This Agreement, together with the Distribution Agreement and the other Ancillary Agreements,
constitutes the entire agreement of the Parties with respect to the subject matter hereof, and
supersedes all prior agreements, understandings and negotiations, both written and oral, between
the Parties with respect to the subject matter hereof. In the event and to the extent that there
shall be a conflict between the provisions of this Agreement and the provisions of the Distribution
Agreement or any other Ancillary Agreement, the Parties agree that this Agreement shall govern. The
Parties agree that, in the event of an express conflict between the terms of this Agreement and a
Services Schedule, the terms of the Services Schedule shall govern.

     16. Amendment; Waiver.

          This Agreement and the Services Schedules may be amended, and any provision of this Agreement
may be waived, if but only if such amendment or waiver is in writing and signed, in the case of an
amendment, by each of the Parties, or in the case of a waiver, by the Party against whom the waiver
is effective. No failure or delay by either Party in exercising any right, power or privilege
under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any other right, power or
privilege.

     17. Notices.

          All notices, requests and other communications to any Party hereunder shall be in writing
(including telecopy or similar writing) and shall be given as follows:

          if to ITT or to any of its Affiliates:

ITT Corporation

1133 Westchester Avenue

Suite 3000

White Plains, NY 10604

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Attn: General Counsel

Facsimile: (914) 696-2970

          if to Exelis or to any of its Affiliates:

Exelis Inc.

1650 Tysons Boulevard

Suite 1700

McLean, VA 22102

Attn: Chief Legal Officer

Facsimile:

          if to Xylem or to any of its Affiliates:

Xylem Inc.

1133 Westchester Avenue

Suite 2000

White Plains, NY 10604

Attn: General Counsel

Facsimile:

or to such other address or telecopy number and with such other copies, as such
Party may hereafter specify for the purpose of notice to the other parties. Each such notice,
request or other communication shall be effective (i) if given by fax, when such fax is transmitted
to the fax number specified in this Section 17 and evidence of receipt is received or (ii)
if given by any other means, upon delivery or refusal of delivery at the address specified in this
Section 17.

     18. Non-Assignability.

          Neither this Agreement nor any of the rights, interests or obligations of either Party
hereunder may be assigned or transferred by any such Party without the prior written consent of the
other Party (not to be unreasonably withheld, delayed or conditioned), and any purported
assignment, without such prior written consent shall be null and void; provided a Party may
assign or transfer all its rights hereunder without such consent to an acquirer in connection with
a sale of all or substantially all of its assets or other similar change in control of such Party.

     19. Further Assurances.

          From time to time after the date hereof, without further consideration, each Party shall use
commercially reasonable efforts to take, or cause to be taken, all appropriate action, do or cause
to be done all things reasonably proper or advisable under applicable Law, and execute and deliver
such documents as may be required or appropriate to carry out the provisions of this Agreement and
to consummate, perform and make effective the transition contemplated hereby.

17

 

     20. Definitions and Rules of Construction.

     (a) Defined terms used in this Agreement have the meanings ascribed to them by
definition in this Agreement or in the Distribution Agreement.

     (b) This Agreement shall be construed without regard to any presumption or rule
requiring construction or interpretation against the Party drafting or causing any
instrument to be drafted.

     (c) Whenever the words “include”, “including”, or “includes” appear in this Agreement,
they shall be read to be followed by the words “without limitation” or words having similar
import.

     (d) As used in this Agreement, the plural shall include the singular and the singular
shall include the plural.

     21. Counterparts; Effectiveness.

          This Agreement may be executed in two or more counterparts, each of which shall be deemed to
be an original and all of which together shall be deemed to be one and the same instrument. Copies
of executed counterparts transmitted by telecopy, telefax or other electronic transmission service
shall be considered original executed counterparts for purposes of this Section 21,
provided that receipt of copies of such counterparts is confirmed. This Agreement shall become
effective when each Party has received a counterpart hereof signed by the other Party hereto.

     22. Section Headings.

          The section headings contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.

     23. Severability.

          If any provision of this Agreement shall be declared by any court of competent jurisdiction to
be illegal, void or unenforceable, all other provisions of this Agreement shall not be affected and
shall remain in full force and effect, and the Parties shall negotiate in good faith to replace
such illegal, void or unenforceable provision with a provision that corresponds as closely as
possible to the intentions of the parties as expressed by such illegal, void, or unenforceable
provision.

     24. Governing Law.

          This Agreement shall be governed by and construed in accordance with the Laws, but not the
Laws governing conflicts of Laws (other than Sections 5-1401 and 5-1402 of the New York General
Obligations Law), of the State of New York.

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          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.

	 	 	 	 	 
	 	ITT CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

	 	 	 	 	 
	 	EXELIS INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

	 	 	 	 	 
	 	XYLEM INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

19

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