ACIT. CIRCLE-3(1)(2), MUMBAI vs. M/S EIPR INDIA PVT LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “E” BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 7471/MUM/2018 (A.Y: 2014-15) ACIT – Circle – 3(1)(2) v. M/s. EIPR India Pvt. Ltd., Room No. 607, 6th Floor G-11, Tulsiani Chambers Aayakar Bhavan, M.K. Road Fress Press Journal Marg Mumbai - 400020 Nariman Point Mumbai - 400021 PAN: AAACE9094M (Appellant) (Respondent) Assessee by : Shri Nitesh Joshi Department by Shri B.K. Bagchi

Date of Hearing : 11.11.2021 Date of Pronouncement : 07.02.2022

O R D E R PER S. RIFAUR RAHMAN (AM)

2 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., “1. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was right in holding that no disallowance u/s 14A is called for in respect of investments which do not earn exempt income which is contrary to CBDT Circular No.5/2014 which clarifies that the Rule 8D r.w.s. 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income? 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in deleting the addition made on account of foreign travelling expenses of Rs.11,92,998/- by admitting additional evidence which was never filed before the AO and adjudicating in favour of Assessee in contravention of Rule 46A of the I.T Rules 1962? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made on account of foreign travelling expenses of Rs.11,92,998/- on the basis of additional evidence filed during the course of appellate proceedings without appreciating that the assessee failed to produce corroborative documentary evidence to prove that the expenditure was incurred wholly and exclusively for the purpose of business during the course of assessment proceedings? 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made on account of informer information expenses of Rs.1,37,95,570/- without appreciating that informer information expenses is unexplained expenditure u/s 69C as the assessee failed to furnish plausible explanation with cogent evidence? 5. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of Assessing Officer be restored 6. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.”

3 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., addition on account of foreign travelling expenses and addition on account of informer information expenses.

4 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., earned any exempt income during the year the disallowance u/s. 14A of the Act cannot be made. Accordingly, he allowed ground raised by the assessee. Aggrieved Revenue is in appeal before us.

5 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., that assessee failed to provide any supporting documents to establish the business purpose of the Singapore visit made during the year to the extent of ₹.11,92,998/-, accordingly, he disallowed the same. Aggrieved assessee preferred an appeal before the Ld.CIT(A).

6 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., are required to travel outside India for performance, meeting, product training and execution of their duties. The reports prepared by investigative officers and senior investigative officers are then presented to the Assessee Company's clients by the CEO, Directors etc. Since the heads of the multinational corporations reside outside India, they are required to travel outside India to present the reports of their investigation, review agreements scout for new business. Subsequent to approval from the Assessee Company's clients, the Assessee Company puts into motion the actions of catching the perpetrators. Therefore on basis of the aforesaid, it is eminent for the business of the Assessee Company that its Officers travel out of India. Such travels are done in the normal course of business and it is not necessary that for every travel there has to be a piece of evidence of emails, invites or minutes of meeting. Such foreign travel is under taken for routine follow up, to review old business and to scout for new business. (d) The Assessing Officer has stated in the assessment order that the assessee company has incurred expenditure on account of two sons (one of them an infant) of Director Mr. Zaheer Khan and his Wife Mrs. Shirina Khan for Singapore Trip. The expenditure has been incurred only for travelling of Mr. Zaheer Khan and Mrs. Shirina Khan for the purpose of business and not for their son and infant as stated by Assessing Officer. The assessee company encloses herewith the details of foreign travelling expenses on Singapore trip vide page no, 44 of the paper book and it is evident from the said details that the said statement is erroneous. The foreign travelling expenses of their son and infant child is separately debited by Mr. Zaheer Khan in his personal books of accounts under the head foreign travelling expenses, the capital account of Mr. Zaheer Khan is enclosed vide page no 89 of the paper book from which it is evident that foreign travelling expenses on the said two children are separately debited in personal books of accounts. (e) Mr. Zaheer Khan is the CEO & director of the company and Mrs. Shirina Khan is providing professional services in the field of operations of the company. Mrs. Shirina Khan has travelled with director Mr. Zaheer Khan for the purpose of meeting with M/s. Hewlett-Packard Asia Pacific Pte. Ltd (Singapore) and therefore the expenses incurred are wholly for the purpose of business. In the circumstances, the Assessee company has discharged the burden of proof that expenses has been incurred for the purpose of business and during the ordinary course of business. The details of professional fees paid has been handed over to the assessing officer

7 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., vide letter dated 13/12/2016 from which it is evident that the professional fees has paid to Mrs. Shirina Khan for the professional services rendered by her. The said professional fees has been accepted as business expenses by the Assessing Officer. (f) Our client M/s. Hewlett-Packard Asia Pacific Pte. Ltd. head office is at Singapore. The address of M/s. Hewlett-Packard Asia Pacific Pte. Ltd is PO Box 200, Alexandra Post Office, 911507 Singapore. We have generated revenue of RS. 15,79,47,218/- in Asst. Year 2014-15 from M/s. Hewlett-Packard Asia Pacific Pte. Ltd and which is borne on the assessment record and not disputed by the Assessing officer. The said sales has been accepted by the Assessing Officer. In the circumstances, revenue has been generated from the place of visit i.e. Singapore. (g) Similar disallowance made by the Assessing Officer on account of travelling expenses including foreign travelling was deleted in principle by the CITA in the earlier asst. year 2012-13. Copy of CIT A order is enclosed vide Page No. 94-144 of the Paper Book. (h) As the foreign travel expenses are genuine expenses incurred wholly and exclusively for the purpose of business and are of revenue in nature the same are deductible expenses u/s 37(1) of the Act and therefore request Your Honour to delete the disallowance made out of foreign travelling expenses.”

8 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., revenue is in appeal before us raising grounds in respect of Rule 46A and on merit of allowing the foreign travelling expenses by the Ld.CIT(A).

9 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., 12. Considered the rival submissions and material placed on record, we observed that assessee has submitted capital account of the Directors and other relevant information before the Ld.CIT(A) as the additional evidences which clearly indicates that the expenses relating to two sons who were travelled with the Directors were not charged to Profit and Loss Account and were charged to personal account of the Directors. Further, he brought to notice that there is business connection in Singapore for the Directors to visit there. These are all details relating to the expenses and disallowed by the Assessing Officer. Ld.CIT(A) having coterminous powers is empowered to verify the simple documents submitted before him. Therefore, it need not be remitted to Assessing Officer for further verification. Hence, the information placed before the Ld.CIT(A) and before us clearly indicate that assessee has not claimed personal expenditure relating to the family travelled in foreign trip and also there is business connection for the directors to visit Singapore. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, grounds raised by the revenue are dismissed.

10 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., debited ₹.1,37,95,570/- in its Profit and Loss Account on account of informer information expenses under the head other expenses. When the assessee was asked to submit the details along with the proof of payment and justify the expenditure, assessee filed submissions vide letter dated 13.12.2016 in which assessee had submitted the details of names of receivers against the various raids. Assessing Officer observed that no other details were filed like addresses etc., to allow the authorities to verify or cross check assessee’s claim of expenditure. During the assessment proceedings for the A.Y. 2013-14 also assessee has expressed its inability to produce supporting documents submitting that it is difficult to build a trail and supporting for these payouts. Assessing Officer rejected the submissions of the assessee in the absence of any supporting documentary evidences or explanation, according to AO, the expenses cannot be allowed in absence of evidence for such expenditure and he relied on various sections of Indian Evidence Act to disallow the expenditure claimed by the assessee. Aggrieved assessee preferred an appeal before the CIT(A) and before the Ld.CIT(A) assessee submitted the following submissions: - “3. Ground No. (iii): (a) The Assessing Officer has erred in disallowing Rs.1,37,95,570/- on account of expenditure on Informer Information Expenses on the following grounds.

11 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., i. The assessee has failed to provide any supporting documentary evidence or explanation, which suggest that the expenditure are genuine. ii, The assessee has not even submitted the proof of payment of such expenses. (b) At the outset, we state that the statement of the Assessing Officer in respect of the assessee failed to provide any supporting documentary evidence or explanation, which suggest that the expenditure are genuine is erroneous since the assessee had provided the details along with the reconciliation of the income generated vis-a-vis the expenses incurred on informer expenses and were same submitted in the course of the assessment proceedings vide letter dated 13/12/2016. The said details are enclosed vide page no. 45 to 57 of the paper book. c. The Assessee company submitted complete details of the Informer Information expenses vide letter 13/12/2016 enclosed vide page no. 45 to 56 of the paper book stating the details of date of payment, name of person, cheque details, name of client, invoice no and date and location where the expenses are incurred which relevant letter is also enclosed vide Page No. 38-43 of the Paper Book. The assessee company has explained the details of payments made along with revenue generated. The Assessing Officer stating that “the assessee has failed to provide any supporting documentary evidence or explanation, which suggest that the expenditure are genuine and the assessee has not even submitted the proof of payment of such expenses” is wholly erroneous. In view of the above, the assessee company has submitted full details of Informer Information Expenses. (d) The Assessee Company has already explained hereinabove the nature of business carried on by it i.e. to bring perpetrators / violators to book for violation of Intellectual Property Rights, etc. (e) The meaning of an informant is as under. (i) An informant, especially one who informs against others for compensation or a person who informs against another, esp. for money or other reward.

12 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., (ii) An informant (also called an informer) is a person who provides privileged information about a person or organization to an agency. The term is usually used within the flaw enforcement world, where they are officially known as confidential or criminal informants, and can often refer pejoratively to the supply of information without the consent of the other parties with the intent of financial gain. (iii) By its very nature, organized crime involves many people who are aware of each other’s guilt, in a variety of activities. Quite frequently, confidential informants will provide information in order in return for money. Quite often, someone will become an informant following their arrest (iv) Informants are also extremely common in every-day investigations work, police work, including homicide. Any citizen who aids an investigation by offering helpful information to the agency is by definition an informant. (v) It is likely to feel strong hostility toward any known informers, regard them as threats and inflict punishments ranging from social ostracism and/or death. Informers are therefore generally protected, either by being segregated or, if they are not incarcerated, relocated under a new identity. (f) The investigations made by the Assessee Company is crucial on the basis of the information provided by the informants as subsequent to receipt of such information, the Assessee Company in alliance with the police force carries out raids. The resultant effect of such raids is that the perpetrators / violators are put behind bars and criminal prosecution against them is commenced. FIR of the raids are lodged with the police station. The crucial information which converts an investigation into a successful raid and criminal prosecution against the wrongdoers is the information which the Assessee Company receives from the informers. (g) The Assessee Company vide letter dated 13/12/2016 provided the following explanation to substantiate the informer information expenses incurred by it: “Our client submits that they are in the business of investigation, due diligence, market survey and conducting raids on suspicious target’s

13 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., selling counterfeit products of various clients, they needs information about infringement of the counterfeit products been sold at various markets. For conducting this business activity they have to setup an investigation, sourcing network to procure the confidential information about counterfeiting activities for which they identify and appoint informers and reliable persons from whom they can seek information as well as they have to be dependent on some other personnel whose identity has to kept confidential in order to protect them. The information thus collected from various personnel, such personnel are called as Informers. The informer helps the company in collecting the information about infringement of the rights of Intellectual property rights from various part of the country. This information is collected by surveying the dealers place in the market and purchasing the products from the market for various verification tests to conclude that the products is genuine or not. The payment made towards Informer expenses are wholly in nature of business expenses, as by incurring the said expenses our client gets tips of suspicious activity. activities from around the country which is starting point of their business activity. The identity of the informer has to be kept confidential in order to protect their life from the potential threats from offenders. The informers are the whistleblowers for detection of counterfeit activities going around the country. Mostly the informers are reformed culprits, chargesheeters. The informers get patronage, cover under the Informers Act. The Act provide that the person using the informers needs to protect that the person using an informer needs to protect the identity of the Informer and need to protect the informer for the information shared. These informers provide important information about the offenders, the proof of the fake and counterfeit products or violations, etc. The payment made to these informers is the most important expenses of our client’s business as they provide most important link towards various investigations and raids on target offenders selling counterfeit products of their clients. Your assessee has provided the details of informer expenses incurred as required by you as Annexure 3. Further we would like to submit that the whole business is linked with the informer expenses and we have enclosed the statement of correlation of informer expenses with the revenue earned by the assessee. However as required by you,

14 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., the identity of the informers cannot be disclosed as it might detrimentally affect the business and our relations with Informer.” (h) The payments are made to informers to receive tips / information etc., which results in criminal raids on violators of intellectual property rights, etc. The said payments to informers for obtaining information is a business requirement and necessity on the basis of information. After the information is received from the informers, the assessee prepares a detailed report which contains documentary evidence of IPR violations, counterfeit, fraud etc. which in turn is submitted to the client indicating the source of the violations to IPR. The Assessee on approval of the client, approaches and submits a detailed report to the jurisdictional police force who in conjunction with the Assessee company carries out raids on the violators and ensures that they are booked under the relevant civil and criminal laws. The fact that the perpetrators are criminals etc. and caught on basis of the information received from informers, they pose a threat to the life and livelihood of the informers and their family and hence the Assessee Company has to ensure security of the informer's identity for their safety and protection. The practice of payment to informers in the field of investigation and prosecution is an established fact. The Assessee would not be able to bill its clients and perform its investigative services if it had not paid informers to release confidential information pertaining to the said violations. It is well established that the concept of payment to informers and keeping their names a secret is followed not only by other companies who practice tin the same field but also by Income Tax Authorities who pay informers who are able to provide information on tax evaders leading to collection of evaded taxes. The assessee states that payments made to informers in the field of investigations and keeping their names and identity a secret is not an unknown concept and the said payments to informers is a general practice in assessee companies line of business. The payments made to informers are directly related to its business activities. The Assessee would not be able to have such voluminous turnover if not for information received from informers. (i) Nevertheless, the details of payment made to informer along with correlation with details of revenue received by the assessee company from its clients submitted to the Assessing Officer are re- enclosed herewith vide page no 57 of the paper book. It is evident

15 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., from the said details that assessee has earned high revenue in relation to the said small informer information expenses. The percentage of the said expenses as compared to the revenue is reasonable and allowable considering the nature of the assessee Company's business. No disallowance has been made in earlier ear which is evident from the details annexed vide Pg.no. 45 of paper book except disallowance made for the first time in the asst. year 2012-13. The said disallowance for asst. year 2012-13 was wholly deleted by the your predecessor in appeal vide CIT A order dated 17/07/2017. Copy of the CITA order is enclosed vide Page no 94 to 144 of the Paper book. (j) Many businessmen incur such expenditure in the private sector by paying employees of the concerns with which they deal with for (i) getting orders; (ii) ensuring continuation of the business dealings; (ili) ensuring early payment of the bills. Obviously, such practices is not be illegal or prohibited by law or not against public policy. (k) The Assessee Company relies on the following case laws to support the above contentions: - (I) The Assessee Company relies on the decision of the Hon’ble High Court of Bombay in the case of CIT v. GoodlassNerolac Paints Ltd (1990) 188 ITR 1 where it was held as follows: “4. It cannot, perhaps, be disputed that in order to be entitled to deduction of payments to persons whose names are not disclosed, the assessee has to establish the practice prevailing in that line of business for making such payments; it has to adduce satisfactory evidence to establish the payments; and has also to Satisfy the authorities that the payments were made for the purpose of business. No doubt, for the earlier year the matter came up before this Court. The Tribunal had come to the conclusion that the assessee had not proved the payments by way of secret commission and as such, was not entitled to deduction. This being a finding of fact, our Court declined to interfere as the view taken by the Tribunal was a possible view. In the present case the Tribunal it appears had to consider some new facts and aspects of the matter. it found that the assessee was carrying on business in the line in which payments were made to the employees of the customers to keep them on right side and to ensure the flow of orders quick payments and smooth

16 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., running of business in all respects including quick payment of bills. The Tribunal also found that the assessee was maintaining proper accounts and records regarding these payments in that payments were made under the instructions and directions of the top executives of the company and were approved by the Board of Directors at the end of every month. According to the Tribunal, the facts that the assessee was a public limited company that the accounts were not merely audited but were also placed before the general body of the shareholders. that the assessee's turnover was increasing year after year and that such payments claimed as deduction had dropped from 1.34 per cent for one of the years to 0.22 per cent in the year in question, were very relevant. On the basis of these and other evidence, the Tribunal concluded that the fact of payment of commission was established even though the names and addresses of the recipients were not given and that the payments were made for the purpose of business. 5. As observed by our High Court in the assessee’s own case for the earlier year, it was perfectly open to the Tribunal to accept or not to accept the assessee’s claim for payment. It was for the Tribunal to decide as a final Judge of the facts as to whether the case of the assessee that the amounts claimed to have been paid were actually paid, should or should not be accepted in the absence of the names and addresses of the persons to whom the amounts were paid. Having then regard to the material referred to and relied upon by the Tribunal for coming to the conclusion in favour of the allowability of the claim for deduction, we decline to interfere as the conclusion of the Tribunal is a finding of fact and is based on cogent material.” ………… The second question is, accordingly, answered in the affirmative and in favour of the assessee.” (II) The Assessee relies on the decision of the Hon’ble High Court of Bombay in the case of CIT v. Sigma Paints Ltd (1990) 188 ITR 6 where it was held as follows: “…….. He has further invited our attention to paragraphs 24 to 28 of the judgment in that case to show that the assessee had produced various details and the records maintained by the company relating to the secret commission payments. Vouchers for the amounts received by the sales officer or other responsible persons for the payment of secret commission were available. The details of sales transactions entered into with various mill-companies in respect of

17 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., which secret commission had to be paid were available. There was a completely tally between the commission paid, the extent of business done by the mill-company etc. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission said from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available. They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made. This the Tribunal held could not be supplied without detriment to the business of the assessee in the very nature of things. Shri Patel then pointed out that in paragraph 29 of the judgment the Special Bench of the Tribunal noted that the position was the same in the case of Indochem Ltd. (supra) and the assessee. 3. On the above stated facts, our judgment in the case of CIT v. GoodlasNerolac Paints Ltd. [IT Reference No. 606 of 1976, dated 21- 8-1990] squarely applies. Accordingly we agree with the Tribunal. that its conclusion is based on a finding of fact arrived at on the basis of good and cogent material. 4. Rule stands discharged with no order as to costs.” (iii) The Assessee also relies on the decision of the Hon’ble High Court of Gujarat in the case of Dr. G.G. Joshi v. CIT (1993) 209 ITR 324 where it was held as follows: “3. After hearing both the parties, the Tribunal partly allowed the appeal filed by the assessee by holding that the expenses should be allowed at 1 1/2 per cent. of the sales made through the assessee. The Tribunal also partly allowed the appeal filed by the Department by holding that the period from April 1, 1965, to March 31, 1966, which is the basis, should be taken into consideration for calculation of the commission. For this purpose, the Tribunal relying upon its earlier decisions rendered in I. T. A. No. 796 (Ahd) of 1970-71 and I. T. A. Nos. 1485 and 1466 (Ahd) of 1970-71 held that payments of such commission, howsoever undesirable or against public policy and good morality, had to be faced as a fact of life and these were

18 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., necessary expenses for the smooth running of sales canvassed by the assessee. The Tribunal rejected the contention of the Department that the expenses made by the assessee should be disallowed, as the assessee refused to give the names of the persons who had received the secret commission during the relevant years or failed to produce any receipt for the said amount. Therefore, the Tribunal held that it would be reasonable to allow the expenses at the rate of 1 1/2 per cent. of sales made through the assessee. 4. In our view, the aforesaid questions are based on a finding of fact arrived at by the Tribunal. For this purpose, it would be worthwhile to refer to the decision of this court in the case of Addl. CIT v. Moolchand Jaikishandas and Co. [1977] 108 ITR 500. Dealing with a similar question of payment of secret commission, this court declined to interfere with the finding given by the Tribunal on the ground that it satisfied the test of commercial expediency. The relevant observation is as under (at page 510) : “The Tribunal has further held that in this particular trade of dye- stuffs and colour chemicals which are being sold to the textile mills it is the usual practice to pay secret commission to dyeing masters, printing masters, etc., in order to secure orders and in order to see that the supplier concerned increases his sales. The Tribunal has also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm." The court further held (at page 511) : "So did the quantum of sales effected by the assessee-firm. Further, the finding of the Tribunal is that in this particular trade in order to maintain the level of business and in order to secure large business, such secret commissions have to be paid. The real case of the assessee is that the assessee has paid these amounts of commission to its employees but the employees in their turn had to part with some amount of the commission coming to them in order to secure business or in order to continue the business with these different textile mills and, if one may say so, that is the fact of life with which this particular trade is faced. In view of these conclusions of the Tribunal in the light of the test of commercial expediency we can say that all the amounts of commission paid by the assessee-firm to its employees were reasonable because these amounts of commission

19 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., were, as found by the Tribunal, paid by the assessee-firm to its employees in the interest of the assessee's business and the payment of commission under the circumstances was necessary in the interest of the assessee's business. In our opinion, this satisfies the test of commercial expediency laid down by this High Court and once that test is applied in the light of the findings of the Tribunal which we have summarized above, it must be held that the case of the assessee-firm falls fairly and squarely within section 36(1)(ii) of the Income-tax Act, 1961." 6. Further, a similar view is taken by the Bombay High Court in the case of CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1. The Bombay High Court, relying upon its earlier decision rendered in the case of Goodlass Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58, held that it cannot, perhaps, be disputed that, in order to be entitled to deduction of payments to persons whose names are not disclosed, the assessee has to - (i) establish the practice prevailing in that line of business for making such payments; (ii) adduce satisfactory evidence to establish the payments; (iii) satisfy the authorities that the payments were made for the purpose of business. 7. It is further held that this would be a finding of fact and the court would normally decline to interfere with the view taken by the Tribunal. It is also held therein that the High Court would not interfere with the finding of fact unless such finding is perverse or is such that no reasonable person can give such finding. 8. As stated above, in the present case, the Tribunal has relied upon its previous decisions with regard to the same company for holding that it was a practice prevailing in the trade of dye-stuffs and colour chemicals which are being sold to the textile mills to pay secret commission. This aspect is also considered by this court in the case of Moolchand Jaikishandas and Co. [1977] 108 ITR 500. Considering the aforesaid facts and the established trade practice, it cannot be said that the finding given by the Tribunal of upholding partial disallowance can be interfered with by this court. In this view of the

20 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., matter, as all these questions referred to this court are based upon a finding of fact, they are required to be answered accordingly. 9. In the result, questions Nos. 1 and 2, referred at the instance of the assessee, are answered in the affirmative, in favour of the assessee and against the Revenue. Similarly, questions Nos. 1 and 2, referred at the instance of Revenue, are also answered in the affirmative. Accordingly, we answer all the four questions in the affirmative. The reference stands disposed of accordingly with no order as to costs. (IV) The decision of the Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co v CIT (1997) 223 ITR 101, has put the issue in the right perspective, when considering such payments as deductible drawing a line only as between bribe opposed to public policy and other payments motivated by commercial considerations after review of a number of decisions on the subject, throwing considerable light on the issue. Explanation 1 to section 37 should not make a difference, since payment of such secret commission by itself does not constitute an offence. The object of the Legislature was only to disallow payment by way of extortion moneys obviously given to terrorists for protection. The Finance Minister's speech refers to the intention to avoid controversy relating to deductibility of extortion moneys. Secret commission, which is voluntarily paid to promote business, cannot be treated on par with such extortion money, nor could the payment of such commission be treated as an offence in every case, where, as is usual, it is paid to employees of buying organisations or middlemen, who would not acknowledge the receipt, but all the same the amount is paid and particulars are available with the payer (V) The Madras High Court in the case of CIT v Rathinasamy Nadar (A S K) (1995) 212 ITR 527 deliberated the issue related to payment of secret commission by a firm doing business in timber. The High Court found that it is true that it is for the assessee to establish an expenditure and that it has been made wholly and exclusively for the purpose of his business as laid down by the Supreme Court in Swadeshi Cotton Mills Co Ltd v CIT (No. 1). But it also found that where there is a trade practice to pay secret commission and there is no ground to warrant that the payment is not genuine, the law is settled that such amount to the extent, that it can be considered reasonable, has to be allowance has a deduction.

21 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., (VI) Allahabad High Court in DCIT v Super Tannery (India) Ltd (2005) 274 ITR 338 held that Commission by way of speed money paid to an agent to get credit for duty drawback due from the Government was held to be deductible under section 37. If the payment had been directly made to the officers of the Government, it would have been certainly disallowable as bribe. Apparently, the payment of the commission was proved, but the Assessing Officer found that the payment was excessive. The High Court found that it 1s obliged to take judicial notice of the difficulties in getting even lawful amounts from the Government without incurring avoidable expenses besides harassment caused to the person entitled to such refund. Hence, a payment to avoid delay and harassment, to a third person or middleman cannot be said to have been laid out for purposes other than business Such claim should be understood from the point of view of the assessee and not the Assessing Officer who “has neither the expertise of running business nor has any specialization to sit in judgment over the assessee as to whether such expenditure was incurred for commercial expediency or not.” It was found there was no provision to disallow business expenditure, when it is found to be proved. The High Court, therefore, took judicial notice of the need for incurring such heavy expenditure for getting a legitimate refund from the Government. (Vii) The Assessee Company relies on an additional case law enclosed herewith for your ready reference in the case of CIT vA.S.K. Rathinaswamy Nadar 75 Taxmann 638 (Madras High Court) in which an identical issue has been allowed. (Viii) The decision of the Hon'ble High Court of Allahabad in the case of CIT v. Pt. Vishwanath Sharma (2008) 216 CTR 281 where it was held as follows: “2. The assessee is dealing in Ayurvedic medicines. For the assessment year 19891990, he claims that he spent Rs. 2,46,254/- as business expenditure by paying commission to various Doctors at the rate of 25/who were prescribing his medicines to the patients. The said Doctors/Vaids were both private as well as Government Doctors. The Assessing Officer disallowed the aforesaid amount as business expenditure, but Commissioner, Income Tax (Appeal) allowed payment made to private Doctors/Vaids but disallowed a sum of Rs. 1,08,678/as business expenditure claimed to have been paid to Government Doctors. The assessee claimed that payment of

22 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., said commission was a business necessity and was followed by him over the years. The Tribunal upheld the contention of assessee with respect to claim of Rs. 1,08,678/- to be treated as business expenditure observing that the payment was not disputed by the Revenue, and since it was evident that such amount was paid over the years, it was a business necessity and was allowable as business expenditure.” (l) Assessee States that its entire informer information expense has been paid non-government individuals and hence in view of the aforesaid case law, since commission is paid to non-governmental individuals as per business practice and the same was allowed in previous years as business expenditure, the same is required to be allowed as qualified business expense and such expense cannot be considered as against public policy. (m) The Assessee Company also relies on the directly applicable order of The Hon'ble Supreme Court in the case of SumatiDayal vs. CIT (214 ITR 801) where it has been held that for considering whether the apparent is real, matter has to be considered by applying the test of human probabilities’. Applying the ratio, it has to be concluded that the nature of business of the appellant is such that payment of secret nature to informants cannot be avoided. Moreover, the source of informant fees is out of the business receipts from clients on which tax has been paid. In the alternative, as per section 69C the explanation, offered by assessee is not, in the opinion of the Assessing Officer, satisfactory. In the instant case, there is no such finding but merely a conclusion which is not based on any evidence. There is nothing to indicate that the payment to informants was from unaccounted sources or from out of the books of accounts. The law requires more than mere opinions or presumptions to make an assessment of income. (n) The ratio of the following cases also have direct bearing on the facts and circumstances in the instant appeal i. In Rajesh P. Soni v. ACIT (2006) 100 TTJ 464 (Ahd.) (Trib.) it was held addition under section 69 was not justified merely because suppliers could not be located and were not produced for examination

23 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., ii. In Balaji Textile industries (P.) Ltd. v. ITO (1994) 49 ITD 177 (Mum.)(Trib.), it was held that there was no allegation or proof that the amount was received back by assessee. Sales were accepted ~ No sales can be made without purchases. Addition was deleted. iii. Rajesh P. Soni v. ACIT (2006) 100 TTJ 892 (Ahd.)(Trib.) The sales against purchases are not doubted. It is not the case of AO that amounts paid for purchases had come back to the assessee. AO had made addition merely on the ground that the suppliers are not located and they were not produced for examination. This is not a relevant factor. (o) The assessee has claimed "Informer Information Expenses" since inception of its business i.e. Asst. Year 2001-02 and no portion of the said expenses has been ever disallowed in past assessments including scrutiny assessments except in asst. year 2012-13 (since fully deleted). The said expenses are regularly incurred by the assessee 'pany which is inherent in this line of business. Without Informer Information Expenses the assessee company cannot run / function its business. The business of Assessee Company is dependent upon the information received from the informers. Therefore, the assessee cannot carry on its business without the informers and the consequent Informer Information Expenses. Therefore, the said expenses are incurred wholly and exclusively for the purpose of business and therefore wholly allowable u/s. 37 of Income Tax Act, 1961. (p) The commentaries on Income Tax and the case laws on allowability of such expenses have laid down the following criteria's which are enumerated below: (i) Payment of such expenses is required to be established even though names and address of the recipients may not be given. (ii) The payment of the said expenses is made wholly for the purpose of business i.e. on account of commercial consideration. (iii) Such payments are incurred in similar line of business and is a trade practice. (iv) The expenses claimed are reasonable. (V) Voucher are made in relation to these expenses.

24 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., (Q) In our case, all the aforesaid criteria's have been satisfied (i) The payment of commission has been established in terms of payment accounted in books of accounts and vouchers maintained. The address of such recipients need not be given due to protection of the life of the informant. (ii) It is established that the payment has been made wholly for the purpose of business Without incurring such expenditure, the Assessee would not get information in related to counterfeit product in the nook and corner of India and without which we would not be able to make investigation, report to the clients, carry out the raid and book the culprit. It is therefore wholly for commercial consideration (iii) Such payments are incurred in this line of business and is a common trade practice without which, such information would not be forthcoming. Certain web cuttings are enclosed to show that various other agencies carrying on similar business also rely on such informants (iv) The Assessee has proved beyond doubt the reasonableness of expenditure incurred by comparing the revenue to the expenditure incurred and the said expenditure forms minuscule part of the revenue earned (v) Vouchers are prepared stating full details of the work done i.e. the name of the clients, the nature of work and the nature of information. It is therefore evident that all the conditions enumerated above have been fulfilled for allowing such kind of expenditure (r) The informer information expenses has been allowed by the department year to year after due scrutiny. Though resjudica does not apply to Income Tax cases, matter which is permeating year to year and which matter has been accepted by both the sides, the same cannot be disturbed in the subsequent years. In this respect we rely on the (a) Supreme Court decision in case of Radhasoami Satsang v CIT(1992) 193 ITR 321.

25 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., (b) Navabharat Tobacco Company V. ITO 14 77 J 26 (HYD ITAT) 1982 (c) DCIT V Gujarat Narmada Valley Fertilizers company ltd., 42 taxmann.com 438 (Gujarat High Court) 2014 and, (d) ACIT versus Hindustan Fertiliser Corporation Ltd. ITA No. 2045 of 3318 (Delhi) - C Bench (2013) and (s) In view of the above, assessee company requests you honour to direct the Assessing Officer to delete the addition made in toto similar to the deletion of disallowance made by the Hon. CIT(A) in asst. year 2012-13”

26 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., to informants and their families and, therefore, supporting documentary evidence is not available. The Assessing Officer rejected the explanation offered by the appellant and added the impugned amount as unexplained expenditure u/s. 69C of Income Tax Act, 1961. 5.2.2 At the outset, it is pertinent to note the nature of business of the appellant on which tax has been offered and paid. The appellant company is engaged in the field of investigation for violations of IPR (intellectual Property Rights), apprehending the perpetrators / violators through a system of informants and carrying out raids on counterfeit businesses with the help of jurisdictional police force. EIPR (India) Pvt. Ltd. is India’s largest investigation agency specializing in anti-counterfeiting solution. The appellant company is engaged by large international/multinational corporations to prevent or identify such theft and violation of Intellectual Property of its clients. 5.2.3. During the financial year ending 31/03/2012, it is noted that the appellant has shown service charges received of Rs. 9.73 crores. As against that informer expenses have been booked at Rs. 57.36 lakhs, which is approximately 7% of service fees received. Analysis of comparative figures provided by the appellant in the course of appeal proceedings show that informer expenses have varied between 5.79% — 7.19 % in past 5 years starting from AY 2009-10. From the details of clients provided it is noted that the list includes major MNCs in different sectors such as Aventists Pharma Ltd, Casio, Dabur India Ltd, Hindustan Unilever Ltd, L&T, Procter & Gamble, Tata Global Beverages Ltd, among many others. 5.2.4 The Assessing Officer has not disputed either the receipts of service fees or the nature of service rendered or the fact that the declared services were actually rendered by the appellant company to clients. It is also a fact that the appellant has been in the same business since 2000 and is regularly assessed to tax. It is also noted that informant expenses were accepted by the Assessing Officer in the past as is evident from order u/s. 143 (3) for AY 2009-10. There is no change in the nature of business or any other material fact during the instant year under appeal. 5.2.5 Once the nature of business is accepted, the unique aspect of informer expenses also has to be accepted. As with official

27 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., investigation agencies, any private investigator examining IPR infringements would have to rely on informants who will demand compensation. Without making such expenses the appellant company will not be able to provide effective service and do its business or earn any income. 5.2.6 In the instant case, the Assessing Officer has rejected the explanation offered by the appellant in context of the unique nature of its business and exigencies requiring the informer expenses and applied section 69C of the Act. A plain reading of section 69C of the Act, shows that there is an onus cast upon the Assessing Officer for the deeming fiction of the provision to apply. Section 69C of the Act reads as follows: “Unexplained expenditure, etc. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the? Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.” 5.2.7. Thus, as per the section, the Assessing Officer must first come to a finding of fact that the assessee has incurred expenditure and he offers no explanation about the source of such expenditure. This is not the situation in the instant case. The source of payments is from the audited books of accounts and bank account of the appellant. The appellant also offered explanation as to the nature and reason for payment and also supplied corroborative details of the clients in connection with whose cases such payments were made. 5.2.8 The Hon’ble Supreme Court in the case of SumatiDayal vs. CIT (214 ITR 801) has held that ‘for considering whether the apparent is real, matter has to be considered by applying the test of human probabilities’. Applying the ratio, it has to be concluded that the nature of business of the appellant is such that payment of secret nature to informants cannot be avoided. Moreover, the source of informant fees is out of the business receipts from clients on which tax has been Paid.

28 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., In the alternative, as per section 69C the explanation, offered by assessee is not, in the opinion of the Assessing Officer, satisfactory. In the instant case, there is no such finding but merely a conclusion which is not based on any evidence. There is nothing to indicate that the payment to informants was from unaccounted sources or from out of the books of accounts. The law requires more than mere opinions or presumptions to make an assessment of income. 5.2.9 The ratio of the following cases also have direct bearing on the facts and circumstances in the instant appeal: • In Rajesh P. Son! v. ACIT (2006) 100 TTJ 464 (Ahd.) (Trib.) it was held addition under section 69 was not justified merely because suppliers could not be located and were not produced for examination. • In Balaji Textile Industries (P.) Ltd. v. ITO (1994) 49ITD 177 (Mum.)(Trib.), it was held that there was no allegation or proof that the amount was received back by assessee. Sales were accepted - No sales can be made without purchases. Addition was deleted. • Rajesh P. Soni v. ACIT (2006) 100 TTJ 892 (Ahd.)(Trib.) The sales against purchases are not doubted. It is not the case of AO that amounts paid for purchases had come back to the assessee. AO had made addition merely on the ground that the suppliers are not located and they were not produced for examination. This is not a relevant factor. 5.2.10. In the instant case, there is also no evidence that the appellant received back the money paid to informants. The Assessing Officer has also not disputed receipt of income for the appellant from utilization of Informant reports. It has been held by jurisdictional courts that once sales of the assessee are accepted purchase cannot be doubted. In the case of G. G. Diamond International v Dy. CIT (2006) 104 TTJ 809 (Mum.) (Trib.) it was observed that it is not case of the Revenue that the assessee is not maintaining books of account. The purchases are recorded in the books of account. They accepted and confirmed the sale. To hold otherwise, there should be some evidence in the possession of the Revenue. Suspicion, however strong, cannot take the place of evidence and that alone cannot be the criteria for deciding the matter.

29 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., 5.2.11 Thus, if the expenditure has been made out of funds reflected in the books of accounts and if the Assessing Officer has not rejected the books or disputed the receipts related to the expenditure, addition u/s. 69C cannot be sustained. In the instant case, all payments to informants have been made out of the books and hence, the "source" cannot be said to be unexplained. In IT A No. 338/Mum/2011, ITO vs Growel Energy Co. Ltd., Hon'ble IT AT Mumbai observed: "A careful perusal of the relevant provision shows that when an assessee incurs expenditure from known sources section 69C does not get attracted; in order to invoke the section it has to be shown that the assessee had not explained about the source of such expenditure or part thereof. In the instant case there is no dispute with regard to the source of expenditure and it is also not in dispute that the assessee incurred expenditure." 5.2.12 It is noted also that in the course of assessment proceedings, the appellant had submitted ledger account of informant fees giving details of payments made from its declared bank account. Therefore, the question of applicability of section 69C does not arise. On this conclusion alone, this ground of appeal succeeds. It could be that the payment was not related to business but that is not the case. The ratio of decision of Hon’ble Bombay High Court in CIT vs GoodlassNerolac Paints Ltd, 188 ITR 1 is also in support of the appellant in as much as if it is established that business practice prevents the appellant from disclosing the names of persons to whom payment was made then the expense is allowable. It is also noteworthy that the expenses were directly relatable to work done for specified clients. The payment to informants constitutes only 5- 7% of the revenue earned from operations. It is also noted that in the unique nature of business of the appellant, such payments are not only extremely probable but also unavoidable. The explanation given for not having details of persons to whom payments were made averred this is done to ensure safety of the informants and their families. This explanation is also reasonable in context of the nature of business. In their order pronounced on 13/01/2015 in ACIT vs Shri Ratansingh M Rathod, ITA Nos. 3717 & 5297/Mum/2013, Hon’ble ITAT Mumbai had allowed cash payments to labour on the ground that the accounts were audited and the Assessing Officer had not found any discrepancy in the audit report or the accounts. 5.2.13 Specifically with regard to payment of “secret commission reliance is placed on the jurisdictional High Court’s

30 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., decision in the case of Commissioner Of Income-Tax vs Sigma Paints Ltd. on 18 September, 1990, 188 ITR 6 Bom. Relevant extract is reproduced "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the secret commission amounting to Rs. 1,41,346 paid by the assessee was an allowable deduction within the meaning of section 37(1) of the Income-tax Act, 1961 ?” 2. The proceedings relate to the assessment year 1979-80. The Income-tax Appellate Tribunal has held that the secret commission involved herein is allowable under section 37 of the Income-tax Act, 1961, following the Tribunal's Special Bench decision in the case of First ITO v. French Dyes and Chemicals (l.) (P.) Ltd. in Income-tax Act Appeals Nos. 182 to 194 and others (Bom) of 1982 dated July 31, 1984. Shri Patel, learned counsel for the respondent assessee, has invited our attention to the fact that the assessee had appeared as an intervener before the Special bench of the Tribunal when it was considering the appeals relating to French Dyes and Chemicals (I.) (P.) Ltd. He has further invited our attention to paragraphs 24 to 28 of the judgment in that case to show that the assessee had produced various details and the records maintained by the company relating to the secret commission payments. Vouchers for the amounts received by the sales officer or other responsible persons for the payment of secret commission were available. The details of sales transactions entered into with various mill-companies, in respect of which secret commission had to be paid, were available. There was a complete tally between the commission paid and the extent of business done by the mill-company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available, They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business of the assessee in the very nature of things. Shri Patel then

31 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., pointed out that, in paragraph 29 of the judgment, the Special Bench of the Tribunal noted that the position was the same in the case of Indochem Ltd. and that of the assessee. 3. On the above stated facts, our judgment in the case of CIT v. GoodlassNerolac Paints Ltd. [1991] 188 ITR 1 (Income-tax Reference No. 606 of 1976) dated August 21, 1990, squarely applies. Accordingly, we agree with the Tribunal that its conclusion is based on a finding of fact arrived at on the basis of good and cogent material.” 5.2.14 The payment to informants in the instant case is in the nature of “secret commission”, therefore, the ratio of the above decision of Bombay High Court applies to the facts and circumstances of the case. Accordingly, this ground of appeal is allowed.” 3.4.3 Since the facts and circumstances are the same for this assessment year, except for the amount involved, following the decision of Ld. Predecessor for assessment year A.Y.2012-13 above, the A.O. is directed to delete the disallowance of informer information expenses of Rs.1,37,95,570/-. These grounds of appeal is allowed.”

32 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., various raids based on the information collected from the various parties and the information relating to the informants cannot be disclosed or put the information in public domain. He submitted that similar disallowances were made in A.Y. 2012-13 and due to low tax effect the appeal of the revenue was dismissed. In this regard he brought to our notice details of the informer information expenses claimed by the assessee during the year which is placed at Paper Book from Page No. 97 to Page No. 130. Further he brought to our notice the monthly revenue received by the assessee during this year to the extent of ₹.23.09 crores whereas assessee has claimed 1.38 crores during this year on informer information expenses which is 5.97% of the total revenue. He also brought to our notice details of raids conducted by the assessee during the year which is placed at Page No. 132 of the Paper Book and assessee has carried out total 407 raids during the year. He also brought to our notice historical information relating to this expenditure from A.Y: 2009-10 to A.Y.2014-15 which is in and around 6% of the total revenue. Further he submitted that department has raised ground equating this expenditure under unexplained expenditure u/s. 69C of the Act. He submitted that the section 69C of the Act has no application. These expenses are incurred in carrying the business of the assessee and these information is placed

33 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., on record, therefore, section 69C has no application. He prayed that this ground may be dismissed.

34 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., takes services of informants certainly they will demand compensation without incurring such expenses assessee will not be able to provide effective services and continue similar services to other clients. In this case, details of informants have to kept secret and the assessee has supplied enough information to substantiate the actual payment but only kept the identity of the informants. After going through detailed finding of the Ld.CIT(A) we do not find any reason to interfere with the finding of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed and also involvement of provisions of section 69C of the Act in the case of the assessee is farfetched and accordingly, this aspect also dismissed. Ground raised by the revenue is dismissed.

Order pronounced on 07.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.

Sd/- Sd/- (C.N. PRASAD) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 07/02/2022 Giridhar, Sr.PS

35 ITA NO. 7471/MUM/2018 (A.Y: 2014-15) M/s. EIPR India Pvt. Ltd., Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum