SUN TAN TRADING CO. LTD vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1 (3) (1) MUMBAI AND ANR

1/33 217(i).WP-806-2016.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURI ICTION WRIT PETITION NO.806 OF 2016 WITH WRIT PETITION NO.261 OF 2016 Sun Tan Trading Co. Ltd., 602 Parag Building, 6th Floor, 27 Peddar Road, Mumbai – 400 026 ) ) ) ….Petitioner V/s.

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CORAM : K. R. SHRIRAM & DR. NEELA GOKHALE, JJ.

DATED : 2nd FEBRUARY 2024 ORAL JUDGMENT (PER K.R. SHRIRAM, J.)

: WRIT PETITION NO.806 OF 2016 1 Petitioner is engaged in the business of import and distribution of alcoholic beverages in India. By this petition petitioner is challenging notice dated 28th March 2014 issued by respondent no.1 under Section 148 of the Income Tax Act, 1961 (the Act) to reopen the assessment for the Assessment Year 2007-2008 and an order dated 29th September 2015 passed by respondent no.1 rejecting the objections of petitioner objecting to the reassessment proceedings. 2 Petitioner had entered into Distribution Agreement dated 30th July 2001 with various entities, who are collectively referred to as “Diageo group companies”, for distribution, marketing and sale of imported alcoholic beverages in India. As per the Distribution Agreement, petitioner was under an obligation to distribute, market and sell alcoholic beverages in India. Petitioner was also required to engage or maintain adequate and This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

3/33 217(i).WP-806-2016.doc properly trained personnel, effective distribution network, etc. The Distribution Agreement also provided the rates at which alcoholic beverages would be sold to petitioner. It also provided that petitioner shall undertake appropriate advertisements, merchandising promotion, packing and consumer research with respect to the products sold in India. 3 Petitioner also had entered into an Agreement dated 20th September 2001 with UDV India Limited, now known as Diageo India Pvt. Ltd. (DIPL) by which DIPL was to render services to petitioner with respect to the marketing and sales of imported alcoholic beverages (Bottled in Origin/BIO). 4 As and when the alcoholic beverages were imported by petitioner, petitioner paid the customs duty based on the transaction value of the goods imported. The Customs Authority alleged that the transaction values were under stated and orders were issued to enhance the transaction value of the goods imported by petitioner in India. 5 Aggrieved by the said order, petitioner preferred an appeal before the Commissioner of Customs (Appeals), Mumbai [CC(A)] and Assistant Commissioner of Customs, New Delhi. The CC(A), by an order dated 21st March 2003 and the Assistant Commissioner of Customs, New Delhi, vide order dated 29th August 2005, allowed the appeals of petitioner and concluded that petitioner was justified in paying customs duty on the This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

4/33 217(i).WP-806-2016.doc basis of the transaction price and the same could not be enhanced to the prices at which the other importers are importing similar goods. 6 In the year 2009, an investigation was initiated by the Directorate of Revenue Intelligence (DRI) for redetermination of the assessable value of alcoholic beverages imported by petitioner in India for determination of the customs duty payable on such beverages. Petitioner received a show cause notice from DRI alleging that the customs duty on the imported alcoholic beverages is under assessed. 7 To avoid prolonged litigation and to protect the reputation of the business and for reasons of commercial expediency, petitioner decided not to litigate the matter of valuation of imported goods and approached the Settlement Commission of Customs and Central Excise for the settlement of the dispute (the Settlement Commission). Petitioner made detailed submissions before the Settlement Commission including that it was being made for commercial expediency and to avoid prolonged litigation, the CC(A) and Assistant Commissioner of Customs, New Delhi have accepted that petitioner was justified in payment of the customs duty on the imported price and the same could not be enhanced, petitioner was not in breach of any provisions of law and petitioner is settling only to put a closure to the matter. The Settlement Commission, by an order dated 9th February 2012, settled the dispute of petitioner with the Customs This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

5/33 217(i).WP-806-2016.doc Department and held that petitioner was liable for additional customs duty of Rs.58,04,28,400/- and interest of Rs.16,18,89,193/-. The Settlement Commission held that as per the Distribution Agreement provided for marketing and sales promotion expenses to be incurred by petitioner in India, the import price provided in the agreement was not the sole consideration for the import of goods and, therefore, the same is rejected as the transaction value under Rule 12 of the Custom Valuation (Distribution of Value of Imported Goods) Rule, 2007 and Rule 10-A of the Customs Valuation Rules (Distribution of Value of Imported Goods) Rules, 1988. The Settlement Commission further held that the transaction value should be taken as the value at which the other parties are importing identical goods at the same point of time. 8 In the meantime, on 31st October 2007 petitioner filed its return of income for the Assessment Year 2007-2008 declaring a total income of Rs.2,61,31,830/-. Petitioner’s return of income was processed under Section 143 (1) of the Act vide intimation dated 23rd February 2008. Thereafter, petitioner received a notice dated 28th March 2014 under Section 148 of the Act stating that respondent no.1 had reason to believe that income for the Assessment Year 2007-2008, which is chargeable to tax, has escaped assessment within the meaning of Section 147 of the Act. Petitioner was also provided with reason to believe. Petitioner, by a letter This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

6/33 217(i).WP-806-2016.doc dated 1st October 2014, filed its objections to the initiation of reassessment proceedings. The objections were disposed by respondent no.1 without giving any reasons and, therefore, petitioner filed Writ Petition being Writ Petition No.459 of 2015 challenging the reassessment proceedings. By an order dated 23rd July 2015 this Court disposed the petition holding that the order disposing the objection was a perfunctory order. The Court set aside the order dated 15th January 2015 and remanded the matter for denovo consideration. 9 Following that, respondent no.1 passed a fresh order dated 29th September 2015 once again rejecting petitioner’s objections holding that (a) although proceedings were going on before the Customs Departments, petitioner did not disclose such facts before the Income Tax Department, (b) certain expenses allegedly incurred by petitioner, as directed by DIPL, were not allowable as deduction under Section 37(1) of the Act as these expenses are not incurred for the business of petitioner, (c) there is no change of opinion for the relevant assessment year as the return was processed under Section 143(1) of the Act, (d) respondent no.1 rejected the argument of petitioner that there is no nexus between the customs duty paid by petitioner and sales promotion and other related expenses incurred by petitioner. Respondent no.1 held that the Settlement Commission has held that the sales promotion and related expenses were This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

7/33 217(i).WP-806-2016.doc forming part of the cost of the beverage, (e) respondent no.1 also rejected the objection of petitioner that the sales promotion expenses was incurred by petitioner company on its own account. Respondent no.1 held that the said expenditure were incurred as per the direction of the DIPL and, therefore, were not relatable to the business of petitioner and, hence, not allowable under Section 37 of the Act and (f) in view of the aforesaid, respondent no.1 was justified in forming a prima facie belief about the escapement of income after the notice of the Settlement Commission order. It is against this order together with notice originally issued under Section 148 of the Act, this petition has been filed. 10 At the time of admission of the petition, on 10th March 2016, this Court was pleased to pass the following order : xxxxxxxxxxxxxx

8/33 217(i).WP-806-2016.doc Crores for the three years on account of advertisement, sales promotion, product display posters, etc. as not pertaining to the business of assessee and, therefore, not allowable under Section 37 of the Act. The Petitioner filed its objections to the impugned notices inter-alia emphasing the fact that there can be no reason to believe that income chargeable to the tax has escaped assessment. These expenses have been incurred for the purposes of Petitioner's business and any increase in sales would benefit it. The fact that some other person may also benefit, is not determinative for disallowing of expenditure under Section 37 of the Act. The Revenue seek to deny the claim for expenditure by placing reliance upon the order of the Commission which inter-alia indicates that the expenses which have been incurred for advertisement, etc. would form a part of the transaction value for the imported liquor. If it be so, prima-facie the expenses incurred would form a consideration paid for the imported goods. Thus, it would be cost of purchase and allowable as an expenditure.

9/33 217(i).WP-806-2016.doc (c) the sales promotion expenses have been incurred by petitioner at its own discretion for the purpose of its own business as per the Distribution Agreement entered into by petitioner with Diageo group companies. The fact that additional customs duty has been paid by petitioner can in no way lead to the conclusion that the sales promotion expenses, etc. do not pertain to the business of petitioner and are not allowable as deduction on account of violation of any law. Petitioner is engaged in the business of distribution of alcoholic beverages and the sales promotion and other expenses are incurred for the purpose of such business and, therefore, the same is clearly relatable to the business of petitioner. Moreover, in the affidavit in reply, in paragraph 3.1 itself it has been admitted that petitioner was engaged in the business of importing and trading in foreign made foreign liquors. Even the reasons recorded says petitioner was engaged in import of alcoholic beverages from M/s. Diageo Brands BV and petitioner was in the business of importing and trading in foreign made foreign liquors. Therefore, the expenses proposed to be disallowed under Section 37 of the Act certainly pertains to the business of petitioner; (d) petitioner has undertaken the obligation to incur the sales promotion expenses as per the distribution agreement and, therefore, the expenditure is clearly incurred for the purpose of the business of petitioner. Merely because the Settlement Commission has revalued the purchase price This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

10/33 217(i).WP-806-2016.doc of the goods to determine the value of the customs duty on account of petitioner’s undertaking the obligation to incur the sales promotion expense, cannot lead to a conclusion that sales promotion expenditure has not been incurred for the purpose of the business of petitioner; (e) respondent no.1 erred in holding in the impugned order that the sales promotion expenses were incurred by petitioner as per the direction of DIPL, and, therefore, was not related to the business of petitioner. The sales promotion expenses are admittedly related to the business of petitioner and, merely because the same has been incurred at the direction of another company, does not mean that the same will cease to be expenditure relatable to the business of petitioner. If there is an undervaluation of the import duty, the consequence of that will be that petitioner would be liable to pay additional import duty but the same can in no way lead to the conclusion that the expenditure incurred by petitioner for selling the imported goods were incurred in violation of any law. Therefore, respondent no.1 cannot have any reason to believe that income chargeable to tax has escaped assessment; (f) even on demurer, if it is accepted that the sales promotion expenses are incurred by petitioner on behalf of Diageo, there is no reason to believe that any income chargeable to tax has escaped assessment. In such situation, the income of petitioner would be reduced to that extent as it must follow that the purchase cost of petitioner was higher to that extent. This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

11/33 217(i).WP-806-2016.doc Therefore, there is no question of any reason to believe that any income chargeable to tax has escaped assessment; (g) Respondent no.1 in the impugned order has accepted that the sales promotion expenses should form part of the sale price of the beverage sold by the Diageo Group to petitioner. Therefore, it is clear that even if it is held that the sales promotion expenses are not allowable as deduction under Section 37(1) of the Act on the ground that the same is not incurred for the purpose of the business of petitioner, the same would be allowed as cost of the purchases made by petitioner. Reliance by respondent no.1 on the decision of the Madras High Court in the case of Commissioner of Income Tax V/s. India Cements Ltd.1 is completely wrong as the facts in the said case are distinct from the facts in the present case. In the said case, the assessee had paid remuneration to the managing agent in contravention of the Companies Act and had claimed the same as an allowable deduction under Section 37 of the Act. This Court has held that remuneration payable to the managing agent was in excess of the limits prescribed under Section 348 read with Section 349 of the Companies Act and, therefore, to the extent of the excess remuneration, the same would not be allowable as deduction under Section 37 of the Act. In the present case, it is nobody's claim that the expenditure incurred by petitioner on sales promotion, etc. is in contravention of any provision or statute and, 1 (2000) 241 ITR 62 This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

12/33 217(i).WP-806-2016.doc therefore, there is no question of disallowing the said expenditure incurred by petitioner. 12 Mr. Pardiwalla also relied upon the following judgments : (i) The Commissioner of Income Tax, Central - II V/s. M/s. Multi Screen Media Pvt. Ltd.2 (ii) The Commissioner of Income Tax V/s. M/s. Star India P. Ltd.3 (iii) The Commissioner of Income Tax – 11 V/s. M/s. Star India (P) Ltd.4 (iv) Commissioner of Income Tax V/s. N.G.C. Network (India) P. Ltd.5

(v) Sassoon J. David and Co. P. Ltd. V/s. Commissioner of Income Tax, Bombay6 (vi) Prashant S. Joshi & Anr. V/s. Income Tax Officer & Anr.7 (vii) Neetu M. Chandaliya V/s. Income Tax Officer 14(2)(3)8 (vii) Ramona Pinto V/s. Deputy Commissioner of Income Tax9 (viii) Vaman Prestressing Co. Pvt. Ltd. V/s. Additional Commissioner of Income Tax and Ors.10 2 Income Tax Appeal No.2057 of 2013 dated 16.11.2015 3 Income Tax Appeal No.165 of 2009 dated 24.03.2009 4 Special Leave Petition (Civil) No.14850 of 2010 dated 16.2.2022 5 (2014) 368 ITR 738 (Bom) 6 (1979) 118 ITR 261 (SC) 7 (2010) 324 ITR 154 (Bom) 8 (2023) SCC Online Bom 2046 9 (2023) 156 taxmann.com 282 (Bombay) 10 (2023) SCC Online Bom 1947 This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

13/33 217(i).WP-806-2016.doc 13 Mr. Chhotaray submitted as under : (a) petitioner cannot be stated to be engaged in the business of distribution of alcoholic beverages; (b) the Settlement Commission has revalued the purchase price of the goods to determine the value of the customs duty on account of petitioner’s undertaking the obligation to incur the sales promotion expense and, therefore, sales promotion expenditure has not been incurred for the purpose of the business of petitioner; (c) the sales promotion expenses were incurred by petitioner as per the direction of DIPL, and, therefore, was not related to the business of petitioner; (d) there is undervaluation of import duty in violation of Custom Rule. Therefore, as held in India Cements Ltd. (Supra), the expenses having been incurred, in violation of law, the same were not allowable as deduction under Section 37 of the Act; (e) in determining whether the commencement of reassessment proceedings was valid, it has to be only seen whether there was prima facie material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage (Raymond Woollen Mills Ltd. V/s. Income Tax Officer and Ors.11). Since there is no assessment under Section 143(1) of 11 (1999) 236 ITR 34 (SC) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

14/33 217(i).WP-806-2016.doc the Act, the question of change of opinion does not arise. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (Assistant Commissioner of Income Tax V/s. Rajesh Jhaveri Stock Brokers P. Ltd.12). Since the Settlement Commission has made observations against petitioner, it cannot be stated that the report of the Settlement Commission does not constitute relevant material or that on that basis, the Assessing Officer could not have reasonably formed the requisite belief (Income Tax Officer V/s. Selected Dalurband Coal Co. Pvt. Ltd.13); (f) where detailed reasons have been recorded by the Revenue in the satisfaction note, it could not be said that the reasons recorded did not satisfy the prerequisite conditions of Section 132(1) of the Act (Principal Director of Income Tax, Investigation V/s. Laljibhai Kanjibhai Mandalia14). In Maddi Venkataraman and Co. (P.) Ltd. V/s. Commissioner of Income Tax15, the Apex Court held that the asseesee had indulged in transactions in violation of the provision of Foreign Exchange (Regulation) Act. The assessee's plea was that unless it entered into such a transaction, it 12 (2007) 291 ITR 500 (SC) 13 (1996) 217 ITR 597 (SC) 14 (2022) 140 taxmann.com 282 (SC) 15 (1998) 229 ITR 534 (SC) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

15/33 217(i).WP-806-2016.doc would have been unable to dispose of the unsold stock of inferior quality of tobacco. In other words, the assessee would have incurred a loss. The Court held spur of loss cannot be a justification for contravention of law. The Apex Court observed that the asseessee was expected to carry on the business in accordance with law and that the expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. This judgment, in our view, is not applicable because in that case and also in India Cements Ltd. (Supra), the expenditure incurred were in violation of the provisions of the FERA and Company Law and hence, the Court held that it would be against public policy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions another stature or any penalty imposed under another statute. In the case at hand, the expenditure claimed under Section 37 of the Act was not for evading the Customs Act but admittedly was for the sales promotion expenses incurred at its own discretion for the purpose of its own business as per the Distribution Agreement with DIPL. Even if the sales promotion expenses have been incurred at the direction of another company, it does not mean that the same will cease to be expenditure relatable to the business of petitioner; This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

16/33 217(i).WP-806-2016.doc (g) Mr. Chhotaray also relied upon Income Tax Officer V/s. Biju Patnaik16 to submit that even if the notice or the reason to believe does not disclose the satisfaction of the requirement of Section 147 of the Act, if from the averments in the counter affidavit it is clear that the Income Tax Officer had applied his mind to the facts and after prima facie satisfying himself of the existence of two conditions reached the conclusions for reopening the assessment, it being an administrative action, the notice or order does not per se become illegal. It is open to the assessee to place all necessary material facts and the Income Tax Officer is free to consider the material and make a decision in that regard. Relying on Sri Krishna Pvt. Ltd. V/s. Income Tax Officer17, it was submitted that the enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the Income Tax Officer to believe and not whether the omission/failure and the escapement of income is established. It was also submitted that as was done in that case, this Court can call for the records and proceedings to verify the veracity of the reasons recorded by the Assessing Officer. FINDINGS : 14 On a proper reading of the reasons recorded for alleged escapement of income, it emanates that the sole basis on which the Assessing Officer seeks to disallow expenditure in the aggregate of Rs.58.42 16 188 ITR 247 17 221 ITR 538 (SC) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

17/33 217(i).WP-806-2016.doc Crores for the three years (Rs.6,73,73,981/- for Assessment Year 2007- 2008) on account of advertisement, sales promotion, product display posters, etc. was it did not pertain to the business of assessee and, therefore, not allowable under Section 37 of the Act. 15 What we need to consider is, (a) whether there was any basis for respondent no.1 to form a belief that any income chargeable to tax has escaped assessment within the meaning of substantive provisions of Section 147 of the Act? (b) Whether the expenditure incurred for promoting the business to earn profits can be claimed as deduction under Section 37 of the Act even though somebody other than assessee is also benefited by the expenditure? (c) Whether the Assessing Officer in the reassessment proceedings can disallow the expenditure to the extent of Rs.58.42 Crores for the three years (Rs.6,73,73,981/- for Assessment Year 2007-2008) out of the advertisement and sales promotion expenses even if it is incurred on the directions of Diageo? The fact that the expenses incurred by petitioner were for advertisement and sales promotion, is not in dispute. 16 In Prashant S. Joshi (Supra) the Division Bench of this Court held that the Assessing Officer must have reasons to believe that income This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

18/33 217(i).WP-806-2016.doc has escaped assessment and at that stage an established fact that income has escaped assessment is not required. The only question, at the stage of issuing notice is whether there was relevant material on which a reasonable person could have formed a requisite belief and whether the materials would conclusively prove the escapement is not the concern at that stage because formation of belief by the Assessing Officer is within the realm of subjective satisfaction. The Court held at the same time the touchstone to be applied is whether there was reason to believe that income had escaped assessment. The Division Bench also held that the act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. In the facts and circumstances of that case, the Division Bench held that it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. In Commissioner of Income Tax V/s. Kelvinator of India Ltd.18 the Hon'ble Apex Court held that the Assessing Officer has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment. The reasons must have a live link with the formation of the belief. 18 (2010) 320 ITR 561 (SC) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

19/33 217(i).WP-806-2016.doc In Export Credit Guarantee Corporation of India Ltd. V/s. Additional Commissioner of Income Tax and Ors.19, the Court held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment years, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. An Assessing Officer who has plainly ignored the relevant material and arrived at an assessment acts contrary to the law. If there is an escapement of income in consequence, the juri ictional requirement of Section 147 of the Act would be fulfilled on the formation of a reason to believe that income has escaped assessment. Did the Assessing Officer have any tangible material to reopen the assessment in this case is a question which we have to answer. Having considered the reasons recorded, the only basis to disallow expenditure in the aggregate of Rs.58.42 Crores for the three years on account of advertisement, sales promotion, product display posters, etc. was it was not pertaining to the business of assessee and, therefore, not allowable under Section 37 of the Act. It is evident that there was absolutely no basis to respondent no.1 to form a belief that any income chargeable to tax has escaped assessment within the meaning of substantive provisions of Section 147 of the Act. As held by this Court in Prashant S. 19 (2013) 350 ITR 651 (Bom) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

20/33 217(i).WP-806-2016.doc Joshi (Supra), Explanation 2 to Section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation “where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.” For the purpose of Clause (b) to Explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return and taking of such notice must be consistent with the provisions of the applicable law. It cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. Paragraph 20 of Prashant S. Joshi (Supra) reads as under :

21/33 217(i).WP-806-2016.doc such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circumstances, the petition shall have to be allowed by set- ting aside the notice under section 148. 17 In N.G.C. Network (India) P. Ltd. (Supra), the following two questions of law were considered : (a) Whether in the facts and circumstances of the case and in law, the Hon'ble ITAT is justified in confirming the order of the Commissioner of Income Tax (Appeals) deleting the disallowance of Rs.4,14,20,843/- made by the Assessing Officer out of advertisement and publicity expenses incurred by the Assessee? (b) Whether in the facts and circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal was justified in not taking cognizance of the transfer pricing provisions because, the expenditure incurred by the Assessee by way of advertisement and publicity expenses, substantially benefited the two foreign principals and the Assessee did not receive any compensation on that account from the foreign principals and whether upon the aforesaid consideration, the Hon'ble Income Tax Appellate Tribunal was justified in not upholding the order of the Assessing Officer?

In that case during the assessment proceedings, the Assessing Officer observed that the assessee's expenditure under head “Advertising and Publicity Expenses” of Rs.6,21,31,262/- was claimed as deduction under Section 37(1) of the Act. The Assessing Officer noted that respondent This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

22/33 217(i).WP-806-2016.doc had incurred expenses towards advertising and publicity which benefited not only the assessee but also the foreign principals and held that the entire amount was not allowable as deduction under Section 37(1) of the Act. The Assessee submitted that the amount spent for the benefit of the assessee but for the promotion of channel, the distribution rights will not generate sufficient returns since the promotion and publicity alone help garner higher income and, therefore, the deduction under Section 37 of the Act could not be affected. Relying on the decision of Sassoon J. David and Co. P. Ltd. (Supra), it was submitted that merely because foreign principal was benefited by advertising, promotion and publicity it will not prevent respondent-assessee from claiming benefit of deduction under Section 37(1) of the Act. The Court held that the assessee was entitled to the deductions even though foreign principal has also benefited by the expenditure. Paragraphs 19, 21, 22 and 23 of the said judgment read as under :

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24/33 217(i).WP-806-2016.doc not expect the revenue to determine the sufficiency of the compensation received by the agent and as such we do not find any justification in this ground either. In the circumstances we answer questions of law (a), (b) and (c) in the affirmative in favour of the assessee and against the revenue. In the result the appeal is dismissed. No order as to costs. (emphasis supplied) 18 The Apex Court in Sassoon J. David and Co. P. Ltd. (Supra) held that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the Act if it satisfies otherwise the tests laid down by law. The relevant portions read as under : xxxxxxxxx It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2) (xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure....laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed ...." The introduction of the word 'necessarily' in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word 'necessarily' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2) (xv) of the Act if it This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

25/33 217(i).WP-806-2016.doc satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in The Commissioner of Income-tax, Madras v. Chandulal Keshavlal & Co. "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. The Commissioner of Income-tax, West Bengal). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." (emphasis supplied) 19 Therefore, even if petitioner has incurred any expenditure towards advertisement, sales promotion, product display posters, etc. on the direction of the DIPL and these expenditures might have benefited Diageo as well, does not entail right to deny deduction under Section 37(1) of the Act. It is unacceptable to even suggest that the expenses were not incurred for the purpose of business of petitioner. This is because in the affidavit in reply itself it is admitted that petitioner was engaged in the business of importing and trading in foreign made foreign liquors. Even the This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

26/33 217(i).WP-806-2016.doc reasons recorded states petitioner was engaged in import of alcoholic beverages from M/s. Diageo Brands BV and petitioner was in the business of importing and trading in foreign made foreign liquors. It is unacceptable to even suggest that just because the DIPL directed how to conduct the advertisement or sales promotion or that Diageo also benefited by the advertisement and sales promotion would mean the expenses were not incurred for the purpose of the business of petitioner. It is common knowledge that advertising and sales promotion will ensure higher sales and higher sales will ensure higher profitability to petitioner. There is no doubt that there is a direct nexus between the expenditure incurred and the business of petitioner. 20 In Biju Patnaik (Supra), that Mr. Chhotaray had relied upon in the case before the Apex Court, the reasons were recorded by the Assessing Officer in the order-sheet on 2nd July 1965 to state that although the assessee had claimed that the transfer of business was made on 31st March 1956, however, from the information available with the Assessing Officer, it appears that the transfer of business took place on 3rd November 1956. Thus, the assessee was liable to be taxed on the capital gain earned by the assessee in the accounting year ending on 31st March 1957. The Assessing Officer had, thereafter, issued a notice dated 31st July 1965 requiring the assessee to deliver within 30 days the return of income in the prescribed This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

27/33 217(i).WP-806-2016.doc form. The Hon'ble Apex Court held that : It is undoubtedly true that the notice does not prima facia disclose the satisfaction of the two conditions precedent enjoined under section 147(a), but in the counter – affidavit filed by the Income–tax Officer in the High Court, he stated all the material facts. The Respondent had inspected the record and the record also bears out the existence of the material fact. The proceedings drawn upon which are abstracted earlier also show that Income–tax Officer has applied his mind to the facts on record and was prime facie satisfied that the reopening of the assessment for the assessment year 1957 – 58 was needed due to those stated facts. The Hon’ble Apex Court further held that : We reject the contention of Dr. Pal that the Income–tax Officer has no reason to believe that income has escaped assessment for the relevant accounting year for the reasons mentioned by the Income–tax Officer in the proceedings drawn on July 2, 1965. It is clear therefrom that the escapement of assessment was on account of omission or failure on the part of the Respondent to disclose the material fact truly and fully. 21 In our view, Mr. Chhotaray has wrongly relied on the aforesaid decision to suggest that this Court must look beyond the reasons recorded to determine the validity of the notice issued under Section 148 of the Act. The finding of the Hon’ble Apex Court, as extracted above, is that the notice issued under Section 148 of the Act does not show the fulfillment of the condition under Section 147 of the Act. However, to decide on the issue of belief of the Assessing Officer, the Hon’ble Apex Court has referred to the noting made by the Assessing Officer on 2nd July 1965, which is equivalent This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

28/33 217(i).WP-806-2016.doc to the reasons recorded by the Assessing Officer. The Hon’ble Apex Court has on the basis of the said noting (reasons) concluded that the said reasons reflect application of mind by the Assessing Officer and, hence, the reopening was justified. It is not possible to interpret the decision of the Hon’ble Apex Court as sought to be done by Mr. Chhotaray, i.e., to say that the validity of the reopening is to be decided on the basis of not only the reasons recorded but other material as well. If the interpretation as sought by the Revenue is given then, it would lead to the recording of reasons being an empty formality as the Assessing Officer would always be able to justify the reopening by not only referring to the reasons but also surrounding material and circumstances. The same can never be the intention of the provisions of Section 147 of the Act, which specifically provides that the Assessing Officer must have reason to believe that income has escaped assessment. The approval is required under Section 151 of the Act from the superior authority on the “reasons recorded” by the Assessing Officer. This means that the superior authority under Section 151 of the Act is giving the sanction/approval to reopen the assessment based on the reasons recorded. If the view is taken that the validity of the reopening can be considered beyond the reasons, the process of seeking the approval as well as the approval which is based on the reasons would be rendered invalid and otiose. This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

29/33 217(i).WP-806-2016.doc 22 Further, the Hon'ble Apex Court in the case of GKN Driveshafts (India) Ltd. V/s. Income Tax Officer20 has held that the process to be followed in reopening cases is that once a notice under Section 148 of the Act is issued, the assessee must file the return of income and, thereafter, the reasons recorded by the Assessing Officer would be provided to the assessee. The assessee can file its objection and the Assessing Officer is thereafter bound to dispose of the objections by passing a speaking order. The process prescribed by the Hon’ble Apex Court also proceeds on the footing that the objections are required to be filed on the basis of the “reasons recorded” by Assessing Officer and the Assessing Officer is required to pass order justifying the reopening on the basis of the said reasons. Therefore, if the Assessing Officer is allowed to justify the reopening beyond the reasons, the whole process prescribed by the Hon’ble Apex Court will also be rendered nugatory and infructuous. 23 Moreover, the Hon’ble Delhi High Court in the case of Alcatel – Lucent France V/s. ADIT21 has held that the decision of the Hon’ble Apex Court in the case of Biju Patnaik (Supra) was considering the pre-amendment, i.e., before 1989 provision and the post amendment provision has been explained by the Hon'ble Apex Court in the case of Commissioner of Income Tax V/s. Kelvinator of India Ltd.22 and, therefore, 20 259 ITR 19 (SC) 21 69 Taxmann.com 379 (Delhi) 22 320 ITR 561 (SC) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

30/33 217(i).WP-806-2016.doc the decision of Biju Patnaik (Supra) cannot be relied upon by the Revenue post amendment. 24 As regards, Sri Krishna Pvt. Ltd. (Supra) relied upon by Mr. Chhotaray to allege that it is open to the Courts to go beyond the reasons to consider the validity of the reopening of the assessment, the interpretation canvassed is also based on the misinterpretation of the decision of the Hon’ble Apex Court. In this case, reasons were recorded to the effect that a large number of loans obtained by the assessee were bogus loans and an amount of Rs.11,51,275/- was added to the income of the assessee in the assessment year 1960-1961. Similar loans were noticed for the assessment year 1959–1960 amounting to Rs.8,53,298/- as per the balance sheet and, therefore, Assessing Officer has reason to believe that there was omission or failure on the part of the assessee – company to disclose fully and truly all material fact necessary for assessment for the assessment year 1959-1960. The case records were called for by the Hon’ble Apex Court to verify the veracity of the reasons recorded by the Assessing Officer, i.e., the reference to the term “similar loans” in the reasons means loan from same persons as in the assessment year 1960-1961. Therefore, the case records were called for by the Hon’ble Apex Court to verify the fact mentioned in the reasons and not to justify the reopening beyond the reasons as has been contended by the Revenue in the present case. This is This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

31/33 217(i).WP-806-2016.doc further clear from the finding in placitum D at page 546, where the Hon’ble Apex Court held that “We must presume that the Income–tax Officer did find that a large number of alleged lenders who were found to be bogus during the assessment year 1960–1961 were also put forward as lenders during assessment year 1959–1960 as well. Evidently, this is what he meant in the context, when he spoke of “similar loans” being noticed for the year in question as well. In such a situation, it is impossible to say that the Income–tax Officer had no reasonable grounds to believe that there has been no full and true disclosure of all material fact by the assessee during the relevant assessment year and that on that account, income chargeable to tax has escaped assessment.” It is nobody's case that the case records can be called to verify the fact mentioned in the reasons to consider the validity of the reasons but, certainly, in our view, the case records cannot be looked at, to supplement the reasons to justify the reopening of the assessment. 25 In view of what is discussed above, when we apply the touchstone as to whether there was reason to believe that income had escaped assessment, in our view, it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons, which have been recorded, could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act. This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

32/33 217(i).WP-806-2016.doc 26 In these circumstances, the petition shall have to be allowed by setting aside the notice dated 28th March 2014 issued under Section 148 of the Act as well as the impugned order dated 29th September 2015 passed under Section 148 of the Act, which we hereby do. 27 Rule is made absolute accordingly. There shall be no order as to costs. WRIT PETITION NO.261 OF 2016 WITH WRIT PETITION NO.271 OF 2016

28 In these two petitions also the reasons recorded are identical to the reasons recorded in Writ Petition No.806 of 2016. Therefore, our findings above in Writ Petition No.806 of 2016 will squarely apply to these two petitions as well. 29 Further in Writ Petition No.261 of 2016, where notice under Section 148 of the Act has been issued after the expiry of four years from the end of the relevant assessment year and where assessment under Section 143(3) of the Act had also been completed, the proviso to Section 147 of the Act would apply in as much as reopening of assessment is permissible only where there has been failure to truly and fully disclose material facts for the assessment. In the reasons recorded for reopening, there is not even an allegation that there was failure on the part of the assessee to truly and fully disclose material facts. On this ground also the This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad

33/33 217(i).WP-806-2016.doc notice issued and the order rejecting objections have to be quashed and set aside. 30 Both petitions disposed. (DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.) This judgment has been modified by speaking to the minutes of the order dated 29.2.2024. Gauri Gaekwad Signed by: Gauri A. Gaekwad Designation: PS To Honourable Judge Date: 04/03/2024 18:22:51