M/S UNITED SPIRITS LIMITED ,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE-7 , BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “B”, BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM IT(TP)A No.3091/Bang/2018 : Asst.Year 2014-2015 M/s.United Spirits Limited The Joint Commissioner of 6th Floor, UB Towers, Income-tax, Special Range-7 v. Bangalore. # 24 Vittal Mallya Road Bangalore – 560 001. PAN : AACCM8043J. (Appellant) (Respondent)

Appellant by : Sri.Percy Pardiwala, Senior Counsel and Sri.Ankur Pai, Advocate Respondent by : Sri. Manjunath Karkihalli, CIT –DR Date of Pronouncement : 22.11.2022 Date of Hearing : 17.11.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 10.10.2018 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2014-2015.

2 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. Transfer Pricing Officer (TPO) to determine the Arm’s Length Price of the international transaction undertaken by the assessee. The TPO passed order dated 26.10.2017 u/s 92CA of the I.T.Act, determining the TP adjustment at Rs.1004,25,07,785. The Assessing Officer passed the draft assessment order on 26.12.2017 u/s 143(3) r.w.s. 144C(1) of the I.T.Act, wherein he incorporated the TP adjustment suggested by the TPO. Further, the A.O. also proposed certain additions / disallowances on the corporate tax front.

3 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited.

Sr. Grounds of appeal Tax effect relating No. to each ground of appeal 1. Grounds of appeal relating to Rs.2,21,91,57,664 imputation of notional interest on interest free advances / loans given to associated enterprises – Adjustment amount Rs.6,52,88,54,556 2. Grounds of appeal relating to charging Rs.38,02,51,121 corporate guarantee commission from the AEs – Adjustment amount Rs.1,11,87,14,685 3. Grounds of appeal relating to purchase of 81,40,39,611 raw materials (grain spirit, malt spirit and scotch concentrate) from Whyte and Mackay Limited (W&M) – Adjustment amount Rs.2,39,49,38,544 4. Grounds of appeal relating to disallowance 10,58,79,156 u/s 14A of the Act – Adjustment amount Rs.31,15,00,900 5. Grounds of appeal relating to the 25,07,71,885 disallowance u/s 36(1)(iii) of the Act – Adjustment amount Rs.73,77,81,361 6. Grounds of appeal relating to Rs.8,47,72,791 advertisement and sales promotion expenditure – Adjustment amount Rs.24,94,05,093 7. Grounds of appeal relating to disallowance Rs.3,56,55,510 on / adjustments pursuant to findings of the disallowance project spirit report. Rs.28,06,21,440 on DDT and interest of Rs.15,43,41,791 u/s 115P of the Act. 8. Grounds of appeal relating to short credit of 37,78,149 tax deducted at source / tax collected at source – Rs.37,78,149 9. Grounds of appeal relating to levy of 2,03,53,26,920 interest u/s 234B of the Act – Rs.203,53,26,920 Total tax effect 6,36,45,96,039

4 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited.

We shall adjudicate the above issues / grounds as under:

Notional interest imputed on interest-free advances extended by the assessee to its AE (Ground 1) (TP Adjustment)

6.1 Aggrieved, the assessee has raised this issue before the Tribunal. We find an identical issue was considered by the Tribunal in assessee’s own case for assessment year 2013- 2014 in IT(TP)A No.2701/Bang/2017 (order dated 05.04.2022). The above order of the Tribunal for assessment year 2013-2014 had followed the earlier order of the Tribunal in assessee’s own case for assessment year 2012-2013 in IT(TP)A No.489/Bang/2017 (order dated 29.05.2020). The Tribunal had upheld the action of the TPO by imputing notional interest on interest free advances extended by the assessee to its AE. However, as regards the computation of ALP, direction was made by the Tribunal for applying LIBOR rate and the matter was restored to the files of the A.O. The

5 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. relevant finding of the Tribunal for assessment year 2013- 2014 (supra) reads as follows:-

“7.7 We have heard rival submissions and perused the material on record. In the instant case the admitted facts are that the assessee provided interest free loans to AEs. These loans were given for the purposes of acquisition of business of various global suppliers of liquor. The TPO made an adjustment of Rs. 548,04,95,014 computed as per Annexure 1 to order passed under section 92CA and the DRP confirmed the same. As mentioned earlier, the learned AR argued at length on the following points. (i) No TP adjustment can be made in the absence of any income arising from the international transactions i.e., concept of real income. (ii) Interest free loans was given for the purpose of acquisition of business overseas. Hence, no TP adjustment is to be made. Relies on the decision Bennett Coleman & Co Ltd v DCIT [2021] 129 taxmann.com 398 (Mumbai Trib) (iii) Interest free advances given to USL Holdings Ltd, BVI are converted to shares vide Board resolution dated 27.7.2020 and hence no TP adjustment should be made. (iv) Without prejudice, computation of interest is not correct. Libor plus 162 basis points to be adopted.

7.7.1 It is to be mentioned that the above arguments were also made before the Tribunal in assessee’s own case for the AY 2012- 13. The co-ordinate bench in IT(TP)A No 489/Bang/2017 (order dated 29.05.2020) considered all the arguments and held that TP adjustment on interest free advances is to be made. As regards the computation of TP adjustment based on LIBOR, the Tribunal restored the said issue to the file of AO/TPO with a direction to examine the claim of the assessee by duly considering the decisions relied on by the assessee in the set aside proceedings. The relevant finding of the Tribunal on identical facts in assessee’s own case for assessment year 2012-2013, read as follows:- “26. We heard the parties on this issue and perused the record. Admitted fact is that the assessee has given interest free loans to its AE located in British Virgin Islands. It is stated that, in the earlier years also, the assessee has given such kinds loans, but no adjustment was made by the TPO. However, the principle of res- judicata shall not apply to the income tax proceedings and hence there cannot be any bar on the AO to examine the applicability of

6 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. the transfer pricing provisions to the loan transactions in this year. Further, the Finance Act, 2012 has amended the provisions of sec.92B by inserting an Explanation under it, wherein the definition of the expression “International transactions” has been inserted. The same is defined in an inclusive manner and was also given retrospective effect from1.4.2002. As per the definition of the expression “International Transaction”, it shall include capital financing, including any type of long-term or short-term borrowing, lending or guarantee etc. Hence, TPO has examined the interest free loan given by the assessee to its AE, as the same falls under the definition of “International Transaction” and made Transfer Pricing adjustment in this year. 27. We shall now deal with various arguments advanced by the assessee. The Ld A.R submitted that Chapter X dealing with determination of Arms Length price of international transactions is a machinery provision and the same cannot acquire primacy over the charging provisions like sec.4,5, 15 etc. Accordingly, he submitted that the “income” should have accrued to the assessee and then only the provisions of Chapter X can be applied to international transactions, i.e., it was submitted that the provisions of sec.92(1) could be invoked only when there arises any “income” from the international transaction, since the provisions of sec.92(1) uses the expression “Any income arising from an international transactions shall be computed having regard to the arms length price”. Accordingly, it was contended that existence of “income” is sine qua non for invoking the provisions of sec.92(1) of the Act. It was contended that the assessee does not have any contractual right to receive any income from the interest free loan given by the assessee to its AE. Hence, no “income” arises to the assessee from the interest free loan given by it to its AE and hence provisions of sec.92(1)/Chapter X should not be applied. It was also contended, by placing reliance on certain case laws, that the Courts cannot be invited to supply the omission made by the Legislature. 28. There is no doubt that real income principle should be followed under the Income tax Act. However, under the Income tax Act, the tax is levied on “total income”. The expression “total income” is defined u/s 2(45) of the Act as under:- “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act.” Though section 5 defines “Scope of total income”, yet the total income has to be computed in the manner laid down in the Act. The term “income” is defined in sec. 2(24) in an inclusive manner. The said income, when computed in the manner laid down in the Act becomes “total income”. Hence there is difference between the expression “income” and “total income”. The Income tax Act contains certain legal fictions/deeming provisions like sec. 40A(3), 40(a)(ia) etc., The Ld A.R, during the course of arguments also pointed out that sec. 50CA, 50D, 45(4) contain

7 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. deeming provisions. While computing total income, the real income is adjusted by including therein various legal fictions/deeming provisions incorporated in the Income tax Act. After this process only, the total income is arrived at. Sec.92(1) states that any “income” arising from an international transaction shall be computed having regard to the arms’ length price. U/s 92C(4), the AO may compute the total income of the assessee having regard to the arms’ length price so determined. Hence, if the income arising from an international transaction is not at arms length, the AO is entitled to compute the total income by substituting the actual income with the arms length income. In effect, under Chapter X also, the Income tax Act has introduced a legal fiction/deeming provision. As stated earlier, while computing “total income”, the legal fictions/deeming provisions included under the Act should be given effect to. 29. The Chapter X is titled as “Special Provisions relating to Avoidance of Tax” and same includes sec. 92 to 94A. We have earlier noticed that the expression “international transactions” has been defined to include capital financing, loan transactions etc. Hence there should not be any dispute that the impugned interest free loan given by the assessee to its AE shall fall under the definition of “International transaction”. However, it is the case of the assessee that there is no requirement of determining ALP of transactions, when there is no “income” at all from the international transactions. This argument was rejected by the Ld DRP by following the decision rendered by the Special bench of ITAT in the case of Instrumentarium Corporation Ltd (supra) and the Ld DRP has extracted following observations made by the Special bench dealing with the above said contentions of the assessee:- “37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. (supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these

8 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm's length price of loan given to an associated enterprise. Similarly, learned counsel's contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co.'s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions. 38. As for the assessee' s claim that the loan being extended free of interest was in the nature of shareholder service, this plea is being taken up for the first time before us and the assessee has not even furnished basic evidences for the factual elements embedded in this proposition. Such facts cannot be inferred or assumed; there has to be some material on record to demonstrate, or even indicate, the existence of these facts. The references to OECD report and BEPS report is in the context of benefit test, but then the benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re- characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the

9 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. transaction, inasmuch as it continues to be a loan transaction and inasmuch as the substitution of zero interest by arm's length interest does not alter the basic character of transaction. The question of re characterization arises only when the very nature of transaction is altered, such as capital subscription being treated as loan or such a trade advance received being treated as a borrowing. There is no change in the character of transaction in this case. Learned counsel's reliance on EKL Appliances Ltd.'s case (supra) and Cotton Naturals India (P.) Ltd. case (supra) is thus irrelevant. In the case of Abhishek Auto Industries Ltd. (supra), what was done was that of the joint venture agreement, which was duly approved by the Reserve Bank of India and other regulatory bodies, was disregarded by questioning its need, and it was in this context that the Tribunal observed that legally binding joint venture arrangements cannot be disregarded by the revenue authorities. This observations, taken out of the context, cannot be interpreted to mean that an arm's length price of an interest free loan cannot be adopted for ascertaining income from loan transaction. 39. In our considered view, the assessee is not really correct in contending that when the assessee has not reported any income from a particular international transaction, the ALP adjustment cannot compute the same. The computation of income on the basis of arm's length price does not require that the assessee must report some income first, and only then it can be adjusted for the ALP. Section 92(1) is not an adjustment mechanism; it is a computation mechanism. The arm's length price principle requires that an arm's length price is assigned to the transactions between the associated enterprise, and if the income in computed, if any, on the basis of the arm's length price so assigned. As regards reliance on the Vodafone India Services (P.) Ltd.'s case (supra), that deals with a situation in which the international transaction was inherently incapable of producing the income chargeable to tax as it was in the capital field. This is evident from the observation of Hon'ble Bombay High Court to the effect that, "In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax". Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is

10 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. to be taken as an arm's length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm's length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law.” 30. The contention of the assessee that there should arise some “income” from the international transaction in order to invoke the provisions of sec. 92 has been duly addressed by the Special bench in Paragraph 39 of the order. The loan transactions have been included in the definition of the term “International transactions”. If the loan is given at free of interest, the same should be construed as having been given at “Zero interest”. Hence the income relating to loan transactions with the AE is required to be tested under Arms length principles u/s 92(1) of the Act, even if no interest income is contemplated between the parties. It can be noticed that the Special bench has specifically addressed the case of charging of Zero interest or no interest and held that so long as the transactions fall under the category of “international transactions”, the arms length principle has to be applied. We may look at another instance also. The new definition of “International transaction” shall also include “the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing” The purchase transaction is in the nature of expenditure and the same, per se, does not produce any income. Yet the purchase transaction is included under the definition of “International transaction”. The purpose of the same is explained hereafter. The product purchased by an assessee from its AE shall produce income, only when it is sold. However, if an assessee purchases certain article or product from its AE, then the said purchase transaction is reported as an International Transaction and the same is also tested under Arms length principle. If it is found that the price paid by the assessee for the said purchase is not at arms

11 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. length, i.e., if it is more than the arms length price, then the AO is required to substitute actual purchase price with the arms length price. By substituting so, the total income of the assessee under the Income tax Act gets increased by such excess amount. In fact, the purchase transaction, being international transaction, has not produced any income. At this stage, it is relevant to refer to the Explanation below sec.92(1), which reads as under:- “Explanation:- For the removal of doubts, it is hereby clarified that the allowance for any expenses or interest arising from an international transaction shall also be determined having regard to the arms’ length price.” The argument of the assessee that income should arise out of the international transaction contradicts the above said Explanation, because “allowance for any expenses” per se cannot produce any income. However, if the said claim for any expense falling under international transaction is not at arms’ length, then the same shall produce “income” to the extent of payment made in excess of arms’ length price. As observed by the Special bench, if the transaction falls under the definition of “international transaction, then the same is required to be tested under arms length principle even if it did not produce any real income to the assessee. Suppose the income that arose to the assessee from an international transaction is Rs.100/- and the arms length price is Rs.125/- For computing total income, the AO shall adopt Rs.125/- only as income arising from the said international transaction. The real income principle fails here, since Chapter X brings in a legal fiction/deeming provision and the same is required to be complied with in order to arrive at the total income. As explained by Hon’ble Supreme Court in the case of DIT vs. Morgan Stanely & Co. (292 ITR 416), the object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Hence, the interest free loan should be taken as a case of Zero interest and accordingly the impugned loan transactions should also be examined under arms’ length principles. 31. We notice that the decisions rendered by the Mumbai bench of Tribunal in the case of Shilpa Shetty (supra) and M Suresh Company P Ltd (supra) did not consider binding decision rendered by the Special bench of ITAT, Kolkatta and hence the above said decisions so rendered by the Mumbai bench are per-incurium and cannot be followed. Various other decisions relied upon by Ld A.R are related to the computation of income under general provisions of the Act, whereas Chapter X is Special provision relating to Avoidance of Tax. As held by the Special bench, the general provisions have to give way to the special provisions. The Special bench has also observed that the decision rendered by Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd (supra) has been rendered in a different context. So is the case with

12 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd (supra). 32. In view of the above, we hold that the tax authorities are justified in invoking the provisions of Chapter X to the impugned loan transactions. 33. The Ld A.R also argued that the loan transactions are in the nature of quasi equity, since the impugned loans are intended to be converted into equity capital. The fact remains that, during the year under consideration, the impugned transactions remained as loan transactions only. The loan has been given to a holding company and the proposed acquisition of a foreign company was proposed to be executed through Special Purpose Vehicles. Thus we notice that there appears to be multiple layers in the proposed scheme. There was no contractual obligation or option for converting the loan into equity as existed in the case of Cadila healthcare Ltd (supra). It is a fact that the TPO/DRP did not deal with the contentions of the assessee regarding quasi-equity. However, it is stated that the assessee has intended to convert the loan into equity. When the loan transactions remained as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee. 34. The Ld A.R submitted that the AO/TPO was not right in adopting yield rate applicable to bonds rated by CRISIL agency. He submitted that the impugned loan has been given to a foreign AE and hence the LIBOR rate should have been applied by the TPO. He also placed his reliance on the decision rendered by Hon'ble Rajasthan High Court in the case of Vaibhav Gems Ltd (supra). He also submitted that the LIBOR has been accepted by the co-ordinate bench of Bangalore ITAT in the case of M/s Sasken Technologies Ltd vs. DCIT (IT(TP)A 550/Bang./2016). In view of these judicial rulings, we restore this issue to the file of AO/TPO with the direction to examine this claim of the assessee by duly considering the decisions referred above and also that may be relied upon by the assessee in the set aside proceedings.” 7.7.2 The assessee has filed the additional evidence for conversion of loan to shares subsequent to the year under consideration. However, as the issue of shares was not made during the year under consideration, the additional evidence filed is not relevant and hence not considered. 7.7.3 During the course of hearing, the learned AR extensively relied on the order of the Mumbai Bench of ITAT in the case of Bennett Coleman & Co Ltd v DCIT [2021] 129 taxmann.com 398 (Mumbai Trib) and argued that TP adjustment should not be made.

13 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. The Tribunal in the above order held that there cannot be a transaction of interest free debt funding of an overseas SPV by its sponsorer. It was further held by the Mumbai ITAT that if such a transaction between independent enterprises is at all hypothetically possible, the arm's length interest on such funding will be 'nil' under the CUP method. Further, it was held that if there has to be an arm's length consideration under the CUP method, other than interest, for such funding, it has to be net effective gains (direct and indirect), attributable to the risks assumed by the sponsorer of the SPV, of the SPV in question. The said decision rendered was on its peculiar facts and the Tribunal decided the issue on first principles without relying on any of the decided cases. The Hon’ble Mumbai ITAT has come to a categorical finding that when borrower has no discretion of using funds gainfully, commercial interest rates do not come into play at all, whereas in the instant case, assessee has not been able to establish that borrower has no discretion of using funds gainfully. In the present case, as mentioned earlier, the co- ordinate bench in assessee’s own case for the earlier assessment year has considered all the facts, arguments, decisions and passed a very elaborate order. It is not in dispute that the facts are same in this year as compared to earlier year. Therefore, we bound to follow the co-ordinate bench decision in assessee’s own case in IT(TP)A No 489/Bang/2017 for the AY 2012-13 and confirm the action of the AO/TPO in making TP adjustment in respect of interest free advances to its AEs. 7.7.4 As regards the applicability of LIBOR, the assessee relied on the judgment of the Rajasthan High Court in the case of CIT v Vaibhav Gems Ltd [2017] 88 taxmann.com 12. The SLP was dismissed by the Supreme Court. The applicability of LIBOR has also been restored by the Tribunal to the file of the AO for the AY 2012-13. Following the ITAT’s order in assessee’s own case for assessment year 2012-2013, we restore this issue to the file of AO/TPO. The TPO is directed to follow the direction given at para 34 of decision in assessee’s own case in IT(TP)A No 489/Bang/2017 for the AY 2012-2013. The TPO shall ascertain the applicable LIBOR during the year under consideration and make the adjustment. 7.8. In the result, ground 1.1 to 1.13 are partly allowed for statistical purposes.” 6.2 In view of the above order of the Tribunal, we uphold the TPO’s action, which was affirmed by the DRP in imputing notional interest on interest free advances made by the assessee to its AE. However, the TPO is directed to ascertain

14 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. and apply the LIBOR rate during the year under consideration and make the TP adjustment accordingly.

6.3 The learned AR, however, for the year under consideration, has advanced additional arguments as to why TP adjustment should not be made on interest free advances to its AEs. It was argued that in view of provision for doubtful loans and advances made to the extent of 36,164.529 (in Rs. Million) against the loans and advances given to AEs, the amount of loans and advances receivable from the AEs have been reduced to that extent and hence no TP adjustment should be made for the year under consideration. The facts leading to creation of provision for doubtful loans and advances and reduction of receivables from the AEs as per the notes to financial statements for the year under consideration are as under:-

Note No 27(b) to the financial statements [Page 1290, 1291 of paper book volume 4]

27(b) Subsequent to the Balance Sheet date, as per the explanatory statement dated 9 May 2014 sent to the members. (i) Further to Diageo plc's undertakings offered to UK's Office of Fair Trade (now called Competition and Markets Authority, UK), in January 2014, the Company's Board of Directors decided to initiate a process based on the outlined time-table provided in connection with the decision of the OFT to explore a potential sale of all or part of Whyte and Mackay. As a culmination of this process, subsequent to the year end, on 9 May 2014 the Company's wholly owned subsidiary, United Spirits (Great Britain) Limited (seller or USGBL) entered into a Share Sale and Purchase agreement (SPA) with Emperador UK Limited and Emperador Inc. in relation to the sale of the entire issued share capital of Whyte and Mackay Group Limited (WMG) for an Enterprise Value of £430 Million (calculated with a normalized level of working capital) from which deduction has been

15 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. made for the payment of a warranty and indemnity insurance premium of £0.85 Million agreed between the seller and the purchaser. The Company has also obtained an opinion from a leading merchant banker and considers that the Enterprise Value is fair from a financial point of view of the Company. (ii) The aggregate consideration for the sale of share capital of WMG payable to USGBL is approximately £429.15 Million ("Aggregate Consideration "). which is subject to adjustments following completion of the sale pursuant to the terms of the SPA ("Completion") reflecting: (a) movements in net working capital (above or below a pre-agreed threshold), net indebtedness and cash of the WMG between signing and Completion; and (b) an agreed sum of £ 19.2 Million in relation to the defined pension scheme deficit, net of pensions contributions for the period commencing 1 April 2014 ("Completion Accounts")' Further, the seller has given warranties and indemnities which are customary for a transaction of this nature and these are not currently expected to have any financial implication and will be reassessed at each reporting date. (iii) The financial closu.re of the proposed transaction as contemplated by the terms of the SPA (as may be amended and modified from time to time). is subject to satisfaction of certain condition precedent. (iv) The equity shareholders of the Company have approved the proposed sale of WMG by USGBL.The Company has filed an application with Reserve Bank of India (through authorized dealer of the Company) for approval. Further to the signing of the SPA. The following provisions has been recorded as an exceptional item. (v) the net proceeds of sale will be insufficient to fully repay the intra-USL Group Loan, the balance of which stands at Rs.47,928.849 Million as of 31 March 2014. The Company, required, pursuant to mandatory applicable accounting standards, to impair its nvestment in USL Holdings Ltd, BVI and provide for the Intra-USL Group Loan as per details below:-

Rs. In Million Particulars Provision for investment 22.183 Provision for loans given (net of FCTR balance 36,142.346 of Rs.9,378.534 Million) Total 36,164.529 In addition to the above, based on the Management's assessments of the recoverability of the underlying assets, an aggregate provision for diminution in the value of investment of Rs. 7,051. 733

16 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. Million has been made on investments held in Palmer Investment Group Limited Rs.6,917. 801 Million and Montrose International S.A Rs.133. 932 Million. 6.3.1 The submissions made before the TPO and DRP were also referred to wherein the sale of entire issued share capital of W&M group by USGBL to Emperador UK Limited was completed on 31.10.2014. It was submitted that with the above sale, W &M group and its 45 subsidiaries have ceased to be subsidiaries of the Company and it has resulted in provision towards recoverability of the investments and loans given for W&M group.

6.3.2 The learned Senior Counsel argued that when the principal itself is not recoverable, there is no question of charging interest on such irrecoverable amounts. The decisions in UCO Bank v CIT [1999] 237 ITR 889 (SC) Godhra Electricity Co Ltd v CIT [1997] 91 Taxman 351 (SC), ACIT v Bombay Dyeing & Mfg Co Ltd. [2018] 94 taxmann.com 486 (Mumbai Trib) and Hilti Manufacturing India Pvt. Ltd v ACIT ITA No.1565/Mum/2017 dated 12.7.2021 were relied on by the learned Senior Counsel in support of the contention that TP adjustment for interest on AE receivables should not be made in view of the above facts and Circumstances of the case.

6.4 We have heard rival submissions and perused the material on record. The impugned addition is made by the TPO under the provisions of Chapter X of the Act relating to computation of income from international transactions having regard to arm's length price. The mandate of section 92(1) is

17 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. that any income arising from an international transaction shall be computed having regard to the arm's length price. As per section 92B, 'international transaction', inter alia, means a transaction between two or more associated enterprises, either or both of whom are non residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. As per Explanation to section 92B, 'International transaction' shall include, inter alia, (c) capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (e) a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date. The term 'transaction' as per section 92F(v) includes an arrangement, understanding or action in concert (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.

6.4.1 In the present case, there is no dispute to the fact that the loans and advances given to AEs are an

18 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. international transaction. However, the reduction of such loans and advances receivable from the AEs by making provision for doubtful loans and advances in the books of account is an unilateral act of the assessee. It may be true that the provision for doubtful loans and advances was necessitated out of doubtfulness of the recovery of loans given to AEs on account of facts described above. However, the act of making provision for doubtful loans and advances remains a voluntary and unilateral act of the assessee. Further, the 'Project Spirit report' elaborates the ways and means of diversion of funds by the assessee company through inter company transfer transactions, transfer of funds to USL Holdings BYI (the entity receiving the loan amount for acquisition of W&M). Hence, the provision made for doubtful loans and advances cannot be accepted when the transaction of loan given itself is under question. Consequently, the reduction of loans given to AEs due to provision for doubtful loans and advances have to be disregarded under the provisions of Chapter X of the Act relating to computation of income arising out of international transactions having regard to the arm's length price. 6.4.2 Even if the reduction of loans and advances to AEs by making provision for doubtful loans and advances is to be accepted, the same would be subject to the mandate of computation of arm's length price. The term 'arm's length price' is defined in section 92F(ii) to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled

19 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. conditions. In the present case, provision for doubtful loans and advances is made in respect of receivables from AEs. In an uncontrolled condition and between persons other than associated enterprises, no prudent person would have given huge loans to a third party and reduce the same by making a provision for bad and doubtful loans and advances. The ALP of the same under the comparable uncontrolled price method or other method would be NIL. Thus, even for this reason, we cannot accept the argument that TP adjustment should not be made merely because of reduction of receivables by making provision for doubtful loans and advances. The decisions relied on by the learned AR on real income theory are under the general provisions and not under the transfer pricing regime. Similarly, the other decisions relied on by the learned AR are not applicable to the facts of the present case as the genuineness of the loans given and the subsequent provision made for the same is under question by the `Project Spirit report’. In view of the above, we confirm the findings of the TPO in making the TP adjustment on interest free loans given to AEs. As mentioned earlier, the applicability of LIBOR, the TPO is directed to follow the direction given at para 34 of the order of the ITAT in assessee’s own case in IT(TP)A No.489/Bang/2017 for the A.Y. 2012-2013. It is ordered accordingly.

Fee Imputed on corporate guarantee extended to subsidiaries (Ground 2) (TP Adjustment)

20 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 7. The learned AR submitted that the above issue has been considered by the Tribunal in assessee’s own case for assessment year 2013-2014 (supra) and the findings of the Tribunal by restricting the TP adjustment on corporate guarantee at 0.5% may be adopted in the relevant assessment year also.

7.1 The learned DR was duly heard.

7.2 We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2013-2014 (supra), had reduced the rate of corporate guarantee commission to 0.5% of the corporate guarantee given. The Tribunal had followed the reasoning of the judgment of the Hon’ble Bombay High Court in the case CIT v. Everest Kento Cylinders Ltd. reported in (2015) 378 ITR 57 (Bom) and the Co-ordinate Bench order of the Bangalore Tribunal in the case of Manipal Global Education Services Pvt. Ltd. in ITA No.388/Bang/2016. The relevant finding of the Tribunal in assessee’s own case for assessment year 2013-2014, reads as follows:-

“8.6 We have heard rival submissions and perused the material on record. The assessee provided corporate guarantee to USL Holdings Ltd, BVI and USL Holdings UK Ltd without charging any guarantee commission. The TPO computed the TP adjustment of Rs. 122,24,28,300 calculated at 3% of corporate guarantee given amounting to Rs. 4074,76,10,000. The DRP confirmed the TP addition made by the TPO. The learned AR argued that corporate guarantee was not an international transactions, it was given out of commercial expediency and as a part of shareholder activity. It was thus argued that TP adjustment should not be made for the corporate guarantee given. It was also argued that without prejudice, the TP adjustment should be restricted to 0.5% of the

21 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. corporate guarantee given. The assessee also relied on the decision of the Bombay High Court in CIT v Asian Paints India Ltd [2016] 75 taxmann.com 152 and contended that the adjustment if any should be restricted to 0.2% as held in the above decision. The learned DR relied on the TPO, DRP orders and justified the addition. 8.6.1 The Bombay High Court in CIT v Everest Kento Cylinders Ltd [2015] 378 ITR 57 dismissed the revenue’s appeal and upheld the charging of guarantee commission at 0.5% on the corporate guarantee. Thus, the contention of the learned AR that TP adjustment should not be made cannot be accepted. The co-ordinate bench in the case of Manipal Global Education Services Pvt. Ltd ITA No 388/Bang/2016 and recently in Medreich Ltd ITA No 1574 to 1576/Bang/2019 (order dated 12.4.2021) has followed the Bombay High Court decision mentioned above and confirmed the TP addition at 0.5%. Following the above decisions, we direct the AO/TPO to restrict the TP addition on corporate guarantee at 0.5% of the corporate guarantee. In the result, ground 2.1 to 2.5 are partly allowed.” 8.7

7.3 In view of the above order of the Tribunal in assessee’s own case, which is identical to the facts of the instant case, we direct the TP addition to be restricted at 0.5% of the corporate guarantee given by the assessee to its subsidiaries. It is ordered accordingly.

7.4 In the result, ground 2 is partly allowed.

Purchase of raw material from Whyte & Mackay (Ground 3) (TP Adjustment) 8. It is admitted by both the learned AR and the learned DR that an identical issue was considered by the Tribunal in assessee’s own case for assessment year 2013-2014 (supra), wherein the addition made was restored to the files of the AO / TPO for a proper consideration of the facts and to decide as per law after affording sufficient opportunity of hearing to the

22 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. assessee. The relevant finding of the Tribunal in assessee’s own case for assessment year 2013-2014, reads as follows:-

“9.5 We have heard rival submissions and perused the material on record. The TPO made an addition of Rs. 68,60,16,563 for the reason that the payments made to W&M for stock purchase has been diverted for onward remittance to Ultra Dynamix and other third parties. The TPO relied on the internal report of the taxpayer submitted to him and held that the international transaction with W&M is same as indicated in the internal report. The TPO therefore determined the ALP of this transaction to be NIL by such other method prescribed by the CBDT and the entire amount of Rs. 68,60,16,563 was determined as the adjustment under section 92CA. Before the DRP, assessee assailed the impugned findings of the TPO on various factual reasons as incorporated at page 23 and 24 of the DRP directions. The assessee also argued that proper opportunity of hearing was not provided to the assessee in this regard. The DRP however relied on the TPOs impugned findings and confirmed the above adjustment. 9.5.1 On a perusal of the material on record, we find that the assessee was not allowed sufficient opportunity of hearing in connection with the impugned addition. The submissions of the assessee before the DRP has also not been considered and addressed on merits. We thus set aside the impugned TP adjustment of Rs. 68,60,16,563 and restore the issue to the file of the AO/TPO for proper consideration of facts and to decide as per law after allowing sufficient opportunity of hearing to the assessee. 9.6 In the result, grounds 3.1 to 3.3 are allowed for statistical purposes.”

8.1 Since the facts raised in ground 3 is identical to the facts considered by the Tribunal in assessee’s own case for assessment year 2013-2014, we restore the impugned TP adjustment to the files of the AO / TPO. The AO / TPO is directed to decide the issue afresh after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.

23 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 8.2 In the result, ground 3 is allowed for statistical purposes.

Disallowance u/s 14A of the I.T.Act (Ground 4) (Corporate Tax Issue) 9. The Assessing Officer by invoking the provisions of section 14A of the I.T.Act, had disallowed a sum of Rs.31,15,900. The learned AR at the very outset submitted that an identical issue was considered by the Tribunal in assessee’s own case for assessment year 2013-2014 (supra), wherein the Tribunal by following the assessee’s own case for assessment year 2012-2013 (supra) had restored the matter to the AO to re-compute the disallowance u/s 14A of the I.T.Act.

9.1 The learned DR also agreed that on identical facts, disallowance u/s 14A of the I.T.Act was restored to the files of the AO for assessment year 2013-2014 with certain specific directions and similar course of action may be taken for this assessment year also.

9.2 We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2013-2014 (supra) by following the order of the Tribunal for assessment year 2012-2013 (supra) had restored the matter to the files of the AO to re-compute the disallowance u/s 14A of the I.T.Act. The relevant finding of the Tribunal for assessment year 2013-2014 reads as follows:-

24 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited.

“10.6 We have heard rival submissions and perused the material on record. In the final assessment order, following the DRP directions, the AO made the disallowance under section 14A as per rule 8D at Rs. 48,04,00,000. The Tribunal in assessee’s own case for the AY 2012-13 in IT(TP)A No. 489/Bang/2017 order dated 29.5.2020 considered the arguments made on similar disallowance and remanded the issue to the AO with various directions. The arguments of the learned AR are similar to the arguments considered by the Tribunal in the above order. The findings of the ITAT for the earlier year are as under:- “36. We heard the parties on this issue and perused the record. The Ld A.R made various contentions and hence this issue requires to be restored to the file of the AO for examining it afresh in the light of various contentions of Ld A.R, which are summarized below:- (a) It is the contention of Ld A.R that the own funds available with it is in excess of the investments. The jurisdictional Hon'ble Karnataka High Court in the case of CIT vs. Microlabs Limited (2016)(383 ITR 490) has dealt with an identical issue. The High Court extracted following decision rendered by the Tribunal:- …….. Accordingly, we direct the AO to examine the claim of the assessee and if it is found that the own funds available with the assessee is in excess of the value of investments, then no disallowance u/r 8D(2)(ii) out of interest expenditure is called for. (b) In the alternative, the assessee has also submitted that the loan funds were taken for specific purposes and utilised the same for those purposes. Accordingly, it was contended that, when the assessee would be able to show the nexus between the interest expenditure and its utilization for specific purposes, no interest disallowance is called for. In this regard, it is stated that it has paid interest on security deposits, cash credits/overdrafts, working capital demand loan, bill discounting facilities. When the disallowance is worked out under rule 8D(2)(ii), this contention of the assessee would loose its significance. (c) The Ld A.R submitted that, for the purpose of computing average value of investments, the AO should consider only those investments which have actually yielded exempt dividend income. We notice that this argument of the assessee finds support from the decision rendered by the Special bench in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi-SB).

25 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. Accordingly, we direct the AO to exclude investments, which did not yield exempt income, while computing average value of investments. (d) The Ld A.R also contended that the disallowance should not exceed the amount of exempt income. In this regard, he placed his reliance on the decision rendered by jurisdictional High Court in the case of Pragathi Krishna Gramin Bank vs. JCIT (2018)(95 taxmann.com 41). We direct the AO to take into consideration above said binding decision while examining this issue. Accordingly, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra.” 10.6.1 Following the above order of the ITAT in assessee’s own case for assessment year 2012-2013, we set aside the disallowance under section 14A of the I.T.Act and restore the issue to the file of the AO. The AO shall follow the above directions of the ITAT and recompute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. 10.7 In the result, ground 4.1 to 4.12 are allowed for statistical purposes.”

9.3 In view of the above order of the Tribunal in assessee’s own case for assessment year 2013-2014 and 2012-2013 (supra), we restore the issue of disallowance u/s 14A of the I.T.Act to the files of the AO. The AO shall follow the directions of the ITAT given in assessment year 2012-2013 and shall re-compute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly.

9.4 In the result, ground 4 is allowed for statistical purposes.

Disallowance of interest u/s 36(1)(iii) of the I.T.Act (Ground 5) (Corporate Tax Issue)

26 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 10. We find an identical issue was considered by the Tribunal in assessee’s own case for assessment year 2013- 2014 (supra), which had in turn followed the Tribunal’s order for assessment year 2012-2013. The Tribunal had directed the A.O. to examine the issue in the light of the judgment of the Hon’ble Apex Court in the case of CIT v. Reliance Industries Limited reported in (2019) 410 ITR 466 (SC). The Tribunal directed the A.O. to examine whether the own funds of the assessee is in excess of the aggregate amount of interest free advances and in such event, the Tribunal held that no disallowance is called for. With the above said directions, the matter was restored to the files of the AO for de novo consideration. The relevant finding of the Tribunal for assessment year 2013-2014 (supra), reads as follows:-

“11.5 We have heard rival submissions and perused the material on record. The AO made a disallowance of Rs.138,05,93,276 under section 36(1)(iii) for the reason that the interest bearing funds have been given as interest free loans to various related parties including AEs. The DRP upheld the disallowance made by the AO with a direction that the disallowance of interest by the AO to the extent of TP adjustment in relation to this interest free loan should be only on protective basis. Following the directions, the AO in the final assessment order, made an addition of Rs.140,46,63,276 and a protective addition of Rs. 26,77,06,867 under section 36(1)(iii) of the I.T.Act. 11.5.1 The Tribunal in appellant’s own case for the AY 2012- 13 in IT(TP)A No. 489/B/2017 order dated 29.5.2020 considered similar issue and held as follows:- “42. We heard Ld D.R and perused the record. From the arguments of the ld A.R, we notice that the own funds available with the assessee is in excess of the aggregate amount of interest free advances and hence the decision rendered by Hon'ble Supreme Court in the case of Reliance Industries Ltd (supra) shall apply to the facts of the present case, in which event, no interest disallowance is called for.

27 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. We notice that this contention of the assessee has not been examined by the AO in the light of decision of Hon'ble Supreme Court referred above. Accordingly, we restore this issue to the file of the AO to examine the factual aspects and for deciding this issue following the decision rendered by Hon'ble Supreme Court, referred above. If the disallowance gets deleted on this ground, then other contentions of the assessee would be rendered academic in nature. However, if any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings.” 11.5.2 Following the above order of the ITAT, we set aside the substantive and the protective addition made under section 36(1)(iii) and restore the issue to the file of the AO to follow similar directions as given above. 11.5.3 Hence grounds 5.1 to 5.14 is allowed for statistical purposes.”

10.1 In view of the above order of the Tribunal, we restore the issue raised in ground 5 to the files of the AO. The learned AR has also pointed out that for the relevant assessment year the assessee has been charging interest (as per the amendment to the Companies Act, 2013) at the rate of 13% on advances made to its subsidiaries. This argument raised by the learned AR is also to be examined by the A.O. for the relevant assessment year and if the assessee is charging interest on the advances made during the relevant assessment year, no disallowance is called for u/s 36(1)(iii) of the I.T.Act in respect of the said advances. It is ordered accordingly.

10.2 In the result, ground 5 is allowed for statistical purposes.

28 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. Disallowance of payments for promotion and advertisement expenses (Ground 6) (Corporate Tax Issue)

“12.6 We have heard rival submissions and perused the material on record. The AO disallowed the sales promotion and advertisement expenses totally amounting to Rs. 44,33,55,403 [36,91,12,995 + 7,42,42,408] for the reason that these expenses are brand promotion expenditures of USL logo, it promotes the brand the assessee, gives enduring benefit and hence capital in nature. The DRP confirmed the action of the AO. 12.6.1 Similar issue has been considered by the Tribunal in assessee’s own case for the AY 2012-13 in IT(TP)A No. 489/B/2017 order dated 29.5.2020 wherein it was held as under:-

“45. We have heard Ld D.R on this issue and perused the record. We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd (ITA 5974/Mum/2013 dated 26- 04-2017) and it was held that the same is allowable as revenue expenditure. For the sake of convenience, we extract below the operative portion of the order passed by Mumbai bench of Tribunal on an identical issue:- “3. Second ground of appeal pertains to deleting the disallowance on account of sponsorship fees and management fees. In the earlier part of our order, we have mentioned the facts about the various disallowances made by the AO including the capitalisation of sponsorship. Treating it as an intangible asset, he allowed depreciation on it @25%.

29 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited.

3.1. The FAA after considering the elaborate submissions of the assessee,held that it had entered into an agreement with the sports company namely India-Win in the month of March, 2010, that the assessee-group became cosponsor of Mumbai Indian IPL cricket team as an associate partner, that as per the agreement the ground logo of the assessee group was displayed permanently in the cricket stadium is also on the playing gear of the players,that in the terms of the agreement and amount of Rs.4.50 crores was paid towards sponsorship fees during the year under consideration, that the sponsorship fees for different years had been apportioned and allocated to 3 entities of the assessee group which were using the brand logo in the ratio of their respective turnovers during the year, that out of the expenditure of Rs. 2.50 crores and amount of Rs. 21.61 lakhs was allocated to the assessee, that the expenditure incurred on IPL sponsorship did not provide it any benefit of enduring nature, that the expenditure had been incurred year after year by the assessee group with a view to get visibility, that it was in nature of some kind of advertisement expenditure, that same should be allowed as revenue expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court, the FAA allowed the appeal filed by the assessee. 3.1.a. With regard to management fee, the FAA observed that there was no doubt about the genuineness of expenditure, that the expenditure was incurred for availing infrastructure facilities administrative support, like manpower recruitment, HR services, uses of computer, telephone, photo copiers, infrastructure set up etc. in order to carryout business operations smoothly, that the parent company had allocated a certain amount to the account of the assessee in the ratio of its turnover. He finally held that expenditure had to be allowed as revenue expenditure. 3.2. Before us, the DR supported the order of the AO and the AR relied upon the order of the FAA. We find that the assessee group had entered into an agreement with India Win, that it was a co- sponsor of Mumbai Indian IPL team, that it had incurred similar expenditure in the subsequent two years, that out of the total expenditure the assessee had claimed a very

30 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. small proportion under the head sponsorship expenses. Such an expenditure is for advertising the brand name of the Group. Being a recurring expenditure, it had to be allowed as revenue expenditure. We find that in the case of Delhi Cloth and General Mills Co.Ltd.(supra)the Hon'ble Court had held that expenditure incurred for organizing sports events are allowable items of revenue expenditure as such events publicise the names of the sponsor. The AO was not justified in capitalising the expenses. The entire expenditure was rightly allowed by the FAA as revenue expenditure. After going through the details of expenditure incurred by assessee under the head managerial expenses, we are of the opinion that it had not got any enduring benefit from the expenditure incurred nor did the expenditure create any capital asset. Therefore, we do not want to interfere with the order of the FAA. Considering the above, we decide second ground of appeal against the AO.” 46. The Delhi bench of Tribunal has also examined an identical claim in the case of M/s Pepsico India Holdings Pvt Ltd (supra) and the same was allowed as revenue expenditure with the following observations:- “Re: Disallowance of INR 3,85,15,497/- being sponsorship fees paid to ICC 87. In Grounds No. 7 to 7.3 in I.T.A. No. 1044/DEL/2014 for AY 2009-10, the assessee has challenged the disallowance of INR 3,85,15,497/- being sponsorship fees paid by the assessee to ICC. Our attention was drawn to paras 4 to 4.3 of the final assessment order wherein the said issue has been discussed by the AO. It has been submitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amount was proposed to be disallowed by the AO in the Draft Assessment Order, for the following reasons: - (i) Similar expense has been disallowed in the earlier years as part of the Transfer Pricing Adjustment on account of AMP expenses.

31 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. (ii) Assessee has been bearing substantial portion of the fees paid to ICC for acquiring sponsorship rights even though benefit of the same is derived by the other entities of the world. 88. Aggrieved by the addition proposed by the AO, the assessee had filed objections before the DRP. The DRP vide directions dated 20.12.2013 upheld the action of the AO, on the ground, that the expenditure was benefitting all the entities across the globe and hence, it could not be said to have been incurred wholly and exclusively for the business of the assessee. 89. The learned counsel for the assessee submitted that the said disallowance was unwarranted since the said expense was incurred in view of the fact that major viewership of cricket is in the Indian subcontinent. He also referred to various newspapers reports which demonstrated the popularity of the sport in India to support the aforesaid contentions. It was also submitted that the assessee company has consistently promoted its range of products using cricket as an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax at source as instructed by the Income Tax Department. Further, the assessee had obtained the approval of the Ministry of Youth Affairs and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper- book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon'ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC). He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it.

32 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions. 91. After considering the rival submissions and on perusal of the impugned orders, we find that, here the disallowance of Rs.3,85,15,497/- has been made on account of sponsorship fee by the assessee to the ICC on the ground that similar expenditure was disallowed in the earlier years as part of Transfer Pricing Adjustment on account of AMP expenses; and secondly, assessee has been bearing substantial portion of the fees to the ICC for acquiring the sponsorship rights even though benefit of the same is derived by either entity of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian subcontinent looking to its mass popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and after deducting TDS u/s.195. Once the expenditure has been incurred wholly and exclusively for the purpose of business which fact has not been disputed by the Department, then even if some incidental benefit which may arise to any other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for promotion of business only and hence, no disallowance is called for.

33 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed.” 47. We notice that the co-ordinate benches are consistently holding the view that the expenditure incurred on sponsoring of sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon'ble Delhi High Court in the case of Modi Revelon P Ltd (supra) and the relevant discussions made by the High Court are extracted below:- “22. As far as the second aspect, i.e. expenditure for promotion of the brand is concerned, there is no doubt that the dealer's functions extend to advertising the products of the assessee, manufactured by the sister concern. On this aspect, Section 37 of the Income-tax Act would be relevant. The said provision reads as follows: "SECTION 37 GENERAL: (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2B) Notwithstanding anything contained in sub- section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. The applicable test as to what constitutes expenses "laid out or expended wholly and exclusively for the purposes of the business or profession" was explained in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] Supp. (2) SCR 211. The correct approach, said

34 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. the Court, which has to be taken in all such cases is to see whether: "was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business" Again, in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/ 1 Taxman 485 (SC) the Supreme Court outlined the correct test of commercial expediency as the guiding principle to decide whether the expenditure was to facilitate profits, as follows: (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee" In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that in normal commercial sense and in common parlance sales promotion and publicity are activities aimed at gaining goodwill in the market. They need not be confined to media propaganda but can involve indirect approaches. The judgment of a Division Bench of this Court in CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi) has recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. The necessity (or lack of it) is not something which income tax authorities can go into; as long as it is voluntarily undertaken by the business enterprise for profit earning, it would be entitled to claim relief under section 37(1). 23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredient in marketing strategies. Therefore, he allowed about 50 per cent of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal's approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances

35 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue's arguments on this point too are insubstantial.” 48. The observations made by the Hon’ble jurisdictional Karnataka High Court in the case of CIT vs. ITC Hotels (2014)(47 taxmann.com 215) on the concept of “enduring benefit” is relevant here and the same is extracted below:- “6. The first substantial question of law relates to a sum of Rs.10 lakhs, which were paid by the assessee as a license fee for the use of central court yard, having marble, (for short "Court Yard") in Lallgarh Palace (for short 'Palace'). It appears that there was a Memorandum of Understanding (for short 'MOU') between the Assessee and Maharaja Ganga Sinhji Charitable Trust (for short the "trust"). The assessee, as per the MOU, had acquired a right to use the court yard for their business of hotel, being run in the palace, more efficiently and profitably. The question is whether the expenditure of Rs.10 lakh resulted in any addition to the fixed capital of the assessee. According to the Revenue, the assessee had acquired right to use the court yard apart from the palace, and thus, had acquired an advantage of enduring benefit of a trade. In other words, the expenditure incurred by the assessee for the use of court yard is in the capital field and it cannot be said to have been incurred to facilitate trading operation of the assessee. 7. Learned Counsel appearing for both the sides placed reliance upon the judgment of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69, in support of their contentions. Mr. Aravind, learned counsel for the Revenue tried to distinguish the ratio laid down by the Supreme Court in this case on the basis of factual matrix involved therein. As against this, learned counsel appearing for the respondent/assessee placed reliance upon the principle laid down by the Supreme Court in the said judgment. 8. We have perused the judgment. We find ourselves in agreement with the learned counsel appearing for the

36 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. respondent/assessee. It would be relevant to reproduce the relevant observation made by the Supreme Court, in the said judgment, which, in our opinion, support the case of the respondent/assessee to contend that the expenditure of Rs. 10 lakhs would be on revenue account. The relevant observation in the case of Empire Jute Co. Ltd. (supra) reads thus: 'The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated : "...when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite condition) for treating such an expenditure as properly attributable not to revenue but to capital". This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) : TC16R.991, it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is

37 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case'. 9. It is clear that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, except the right to use the court yard, no other rights were created in favour of assessee. In other words, the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future, and therefore, it would be on revenue account. In other words merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue. The advance of Rs. 10,00,000/-, in the present case, consists merely in facilitating the assessee's business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee and against the Revenue is correct and deserve no interference by this Court.” 49. Respectfully following the above cited decisions, we set aside the order passed by AO on this issue and direct him to allow the impugned sponsorship expenses as revenue expenditure.”

38 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 12.6.2 Following the above order the ITAT in assessee’s own case for assessment year 2012-2013 (supra), we allow deduction of sales promotion and advertisement expenses of Rs. 44,33,55,403. As the entire expenses are allowed as revenue expenditure, the question of depreciation does not arise. 12.7 Hence grounds 6.1 to 6.7 and grounds 7.1 to 7.7 are allowed.”

11.1 In view of the above order of the Tribunal for assessment year 2013-2014 and 2012-2013 (supra), we direct the A.O. to grant deduction of sales promotion and advertisement expenses as a revenue expenditure. It is ordered accordingly.

11.2 In the result, ground 6 is allowed.

Disallowance of payment on Project Spirit Report (Ground 7) (Corporate Tax Issue)

“13.4 We have heard rival submissions and perused the material on record. The AO made an addition of Rs.54,49,10,000 for the reason that the funds of the assessee has been diverted for various non business purposes. The AO relied on the ‘Project Spirit Report’ prepared by M/s Ernst and Young (E&Y) vide letter dated 14.10.2016 for the purpose of arriving at the impugned finding that the funds of the assessee have been diverted in many ways and hence the revenue expenditure claimed as deduction amounting to Rs.48,14,00,000 is to be disallowed. The AO further held that the

39 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. diversion of funds to various entities would not be returned back to the assessee. The AO therefore charged an interest of Rs. 6,35,10,000 calculated at 14.5% on Rs. 43.8 crores. The DRP confirmed the AO’s additions. Referring to the DRP objections, the learned AR argued that out of disallowance of Rs. 48.14 crores, a sum of Rs. 15.23 crores pertain to other entities and hence the same cannot be disallowed in assessee’s case. Similarly, it was argued that the entirety of Rs. 43.8 crores on which interest income of Rs.6,35,10,000 is imputed did not pertain to the assessee and hence the impugned addition of Rs. 6,35,10,000 is bad in law. These arguments have not been considered properly by both AO and DRP. The assessee’s claims in the DRP objections [Page 128 to 134 of the appeal memo] regarding deduction under section 28 on account of fraud committed on the company has also not been considered by the AO/DRP. It appears that the AO has made the addition only on the basis of ‘Project Spirit Report’ without properly examining the claim of the assessee that certain transactions and the addition made thereto does not relate to the assessee. Considering the material on record and for the aforesaid reasoning, we set aside the impugned addition and restore this issue to the file of the AO for proper examination of all the facts relating to the said issue. The assessee shall provide all documentary evidence relating to its claim and the AO also shall make a proper enquiry in this regard. All contentions are left open to be considered by the AO in accordance with the law. 13.4.1 Hence grounds 8.1 to 8.8 are allowed for statistical purposes.”

12.1 In the light of the above order of the Tribunal in assessee’s own case for assessment year 2013-2014, which is identical to the facts of the instant case, we restore the matter to the A.O. The A.O. is directed to examine the issue afresh taking into consideration the directions issued by the Tribunal for assessment year 2013-2014 (supra). It is ordered accordingly.

12.2 In the result, ground 7 is allowed for statistical purposes.

Short credit of TDS / TCS (Ground 8)

40 IT(TP)A No.3091/Bang/2018 M/s.United Spirits Limited. 13. The A.O. had not granted TDS / TCS credit to the extent of Rs.37,78,149.

13.1 After hearing rival submissions, we direct the A.O. to verify the TDS credit and grant the same as per law. It is ordered accordingly.

13.2 In the result, ground 8 is allowed for statistical purposes.

Levy of Interest u/s 234 of the I.T.Act (Ground 9) 14. The above ground is consequential and the same is dismissed.

Order pronounced on this 22nd day of November, 2022.

Sd/- Sd/- (Laxmi Prasad Sahu) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 22nd November, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP-2, Bangalore. 4. The DCIT (TP)-2, Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore