M/S. UNITED SPIRITS LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “ C ” BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A No.489/Bang/2017 (Assessment Year: 2012-13) M/s. United Spirits Limited, UB Towers, No.24, Vittal Mallya Road, Bangalore-560 001 ….Appellant Vs. Dy. Commissioner of Income Tax, Circle 7(1)(1), Bangalore. ……Respondent. Assessee By: Shri Perci Pardiwala, Senior Advocate and Shri Ketan Ved, C.A. Revenue By: Shri Bipin C.N, JCIT (D.R) Date of Hearing : 06.03.2020. Date of Pronouncement : 29.05.2020. O R D E R PER SHRI B.R. BASKARAN, A.M. : The assessee has filed this appeal challenging the assessment order dated 31-01-2017 passed by the assessing officer for assessment year 2012-13 passed u/s 143(3) r.w.s 144C(13) of the Act.

2 IT(TP)A No.489/Bang/2017 . 3. The assessee has raised a legal issue in Ground No.1 and the same is addressed first. The ground no.1.1, extracted below, is the legal ground and the ground no.1.2 to 1.5 support the ground number 1.1:-. “1.1 The order passed by the learned Assessing officer (“AO”) is bad in law and liable to be quashed for the reason that the same is not in conformity with the directions of the Hon'ble Dispute Resolution Panel (“DRP”) and has been passed by the learned AO without application of mind.”

In the final assessment order, referred above, the AO did not make 5. following adjustments/additions, which were directed to be made by the Ld DRP:- (A) Transfer Pricing matters:- 1.Adjustment for interest free loan to AE - Rs. 45,69,73,626/-

(B) Corporate Tax matters:- 2. Disallowance u/s 14A of the Act - Rs. 94,97,00,000/- 3. Disallowance u/s 36(1)(iii) - Rs.348,72,00,000/

3 IT(TP)A No.489/Bang/2017 . 4. Disallowance of payments for Promotion and advertisement exp. - Rs. 32,65,55,926/- 5. Delay in payment of PF/ESI -Rs. 1,51,904/- Hence, the assessing officer determined total income of the assessee in the final assessment order at Rs.990.14 crores, which was the same as determined in the draft assessment order. However, the assessing officer suo motu passed a rectification order on 06th February, 2017 u/s 154 of the Act rectifying the final assessment order in respect of items mentioned in Serial no.1 to 4 above. However, he did not comply with the directions of Ld DRP in respect of item mentioned in Serial No.5 above in the rectification order also.

4 IT(TP)A No.489/Bang/2017 . Accordingly he contended that the final assessment order passed by the AO should be quashed. In this regard, the ld A.R placed his reliance on the following case law:- (a) Software Paradigms Infotech P Ltd vs. ACIT (IT(TP)A No.150/Bang.2014) (b) July Systems & Technologies P Ltd vs. DCIT (IT(TP)A No.479/Bang.2016) (c) Addl. CIT vs. Oracle India (P) Ltd (2018)(93 taxmann.com 8)(Delhi – Trib.)

5 IT(TP)A No.489/Bang/2017 . order of the Transfer Pricing officer only and he has totally ignored the directions issued by Ld DRP, which could not have been done by him, in view of the mandatory provisions of sec.144C(13), which requires him to pass the final assessment order in conformity with the directions issued by Ld DRP.

6 IT(TP)A No.489/Bang/2017 . 12. We notice that the facts prevailing in the above said three cases are different from the facts prevailing in the instant case. The assessing officer, in the instant case, has passed the final assessment order u/s 143(3) r.w.s 144C(13) of the Act after the receipt of directions of Ld DRP. The very fact that the assessing officer has mentioned that the assessment order has been passed u/s 143(3) r.w.s 144C(13) of the Act would show that the AO has intended to comply with the directions issued by Ld DRP. However, the assessing officer has omitted to comply with the directions issued by Ld DRP. Hence the AO, on noticing the mistake, has corrected his mistake by passing a rectification order u/s 154 of the Act suo-moto. It was contended that the rectification order was passed beyond the time limit prescribed for passing the final assessment order. However, the fact would remain that the final assessment order was passed within the prescribed time limit and the rectification order u/s 154 of the Act was also passed within the time limit prescribed for the purpose.

7 IT(TP)A No.489/Bang/2017 . (b) Similar is the position in the case of July Systems & Technologies P Ltd (supra). In addition, the final assessment order was passed beyond the limitation period.

(c) In the case of Oracle India (P) Ltd also, the final assessment order was passed beyond the limitation period. In all the above said cases, the action of the AO would show that he has consciously omitted to comply with or completely disregarded the provisions of sec.144C of the Act by either ignoring the directions issued by Ld DRP or they have passed the final assessment order beyond the limitation period. However, in the instant case, we have noticed that the assessing officer has actually passed the order u/s 143(3) r.w.s 144C(13) of the Act, meaning thereby, he has intended to comply with the directions issued by Ld DRP. However, by inadvertence, he has omitted to incorporate the directions in the final assessment order, which was duly rectified by passing a rectification order u/s 154 of the Act. There should not be any dispute that the Act visualizes committing of mistakes apparent from record either by the assessee or by the assessing officer and hence the provisions of sec. 154 of the Act have been incorporated in the Act. The mistakes apparent from record can be either pointed out by the assessee or it can be noticed by the assessing officer himself. Accordingly he may pass the rectification order suo-motu or on the application filed by the assessee in order to rectify the said mistake apparent from record. The Act also prescribes a time limit of four years for rectifying such mistakes. In the instant case, the assessing officer has passed the rectification order within one week from the date of passing of final assessment order. Accordingly, we are of the view that there was inadvertent omission on the part of the AO in not complying with the directions issued by Ld DRP, which has been duly rectified by him by passing the rectification order u/s 154 of the Act. The Ld A.R submitted that the AO has only partially complied with the directions, i.e., he has not followed the direction in respect of addition relating to belated payment of PF/ESI. In our view, this omission should also be treated as mistake apparent from record, which could have been brought to the notice of the

8 IT(TP)A No.489/Bang/2017 . AO by the assessee himself. Hence the said omission, in our view, would not be fatal to the final assessment order.

9 IT(TP)A No.489/Bang/2017 . its AE. The TPO has observed that the assessee did not respond to the show cause notice. However, it is the contention of the Ld A.R that the assessee has furnished a reply on 22.01.2016, which was not considered by the TPO. Accordingly, the TPO proceeded to determine the interest on the “interest free loan” given by the assessee to its AE. The TPO adopted the Comparable Uncontrolled Price (CUP) method for benchmarking the loan transactions. For that purpose, the TPO took guidance from the rating given by CRISIL on corporate bonds, since the yield on the bonds would depend upon rating given by CRISIL. He noticed that the bonds are given ratings from “AAA” to “D”. The AAA denotes highest safety and “D” lowest rating, i.e. it denotes “default on scheduled payments”. Accordingly the interest yield will be lower for AAA rated companies in view of highest safety and the interest yield shall tend to increase on the basis of down grading of rating. The TPO noticed that the yield on BBB rated corporate bond was 12.06% for 5 years period. The TPO took the view that the risk is very high for the tax payer and its AE. Accordingly, he adopted yield rate of 14.47% and applied the same to the impugned loan transaction. Accordingly, he made Transfer pricing adjustment of Rs.45.69 crores on the interest free loan given by the assessee to its AE.

10 IT(TP)A No.489/Bang/2017 . & M Group is one of the leading scotch producers in the World and the acquisition of the above said group will enable the assessee to have access to Scotch, an ingredient used for manufacturing IMFL. For this purpose, various Special Purpose Vehicles (SPV) were incorporated, which acquired W & M Group by availing external loans. The interest free loan given by the assessee was used for repayment of above external loans. Since the loans were given for expansion of assessee’s business, no interest was charged and further, it was the intention of the assessee to convert the loan into equity at a later point of time. This fact was highlighted in the Annual Report at page 47 (Page 31of paper book). Hence there was no contractual obligation to pay interest to the assessee. Further, the interest free loan was in the nature of quasi-equity also, as it was intended to be converted into equity. He submitted that both the TPO and Ld DRP have disregarded the submissions made by the assessee in respect of quasi-equity. He further submitted that the Ld DRP had directed the AO to compute interest on time basis, but the AO has retained the T.P adjustments as proposed by the TPO by not complying with the directions of Ld DRP.

11 IT(TP)A No.489/Bang/2017 . received, there is no question of paying any tax on income which the respondents (department) think should have been received, but was in fact not received. Accordingly he submitted that, in the absence of any income from international transaction, no transfer pricing adjustment u/s 92(1) could be made.

12 IT(TP)A No.489/Bang/2017 . The Hon'ble Supreme court has upheld above decision in 40 ITR 142 by further observing that the Courts cannot be invited to supply the omission made by the Legislature. Accordingly, he submitted that sec. 92(1) should be interpreted strictly and Courts should not supplement the language of section. The Ld A.R submitted that Sec.92(1) states that any “income” arising from an international transaction shall be computed having regard to the arms’ length price. Accordingly, he submitted that, in order to attract the provisions of sec.92(1), an income should arise from an international transaction. He submitted that the assessee did not have any contractual right to receive “income” from the interest free advance given to the AE and hence there does not arise any income to the assessee from this transaction. In the absence of any income from the international transaction, the provisions of sec.92(1) shall not apply and hence no T.P adjustment could have been made. He submitted that the provisions of Chapter X have been held to be machinery provisions in the cases of Vodafone India Services (P) Ltd vs. UOI (2014)(368 ITR 1)(50 taxmann.com 300)(Bom) and Maruti Suzuki India Ltd vs. CIT (2015)(64 taxmann.com 150)(Delhi). The Ld A.R invited our attention to the following observations made by Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd (supra) at paragraph 45 of its order:- “Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital Gains) and 56 (Income from other sources). Even income arising from international transactions between AE must satisfy the test of income under the Act and must find its home in one of the above heads i.e., charging provisions.” Accordingly, the Ld A.R submitted that the provisions of Chapter X cannot be given primacy over the charging sections. Under charging sections, the income should accrue to the assessee. He submitted that the concept of real income theory has been accepted by the Mumbai bench of Tribunal in the following cases in the context of sec.92(1) of the Act:-

13 IT(TP)A No.489/Bang/2017 . (a) Shilpa Shetty vs. ACIT (2018)(96 taxmann.com 443)(Mum- Trib.) (b) M. Suresh Company P Ltd (ITA No.1853/Mum/2016)

14 IT(TP)A No.489/Bang/2017 . submitted that the substance of transaction should be seen over its legal form. The Ld A.R submitted that the assessee has furnished a detailed submission before TPO on 27th January, 2016, but the same was not considered by him. The assessee also submitted it before ld DRP also, but the same was not considered or dealt with by it also.

15 IT(TP)A No.489/Bang/2017 . term or short-term borrowing, lending or guarantee etc. Hence, TPO has examined the interest free loan given by the assessee to its AE, as the same falls under the definition of “International Transaction” and made Transfer Pricing adjustment in this year.

16 IT(TP)A No.489/Bang/2017 . defined in sec. 2(24) in an inclusive manner. The said income, when computed in the manner laid down in the Act becomes “total income”. Hence there is difference between the expression “income” and “total income”. The Income tax Act contains certain legal fictions/deeming provisions like sec. 40A(3), 40(a)(ia) etc., The Ld A.R, during the course of arguments also pointed out that sec. 50CA, 50D, 45(4) contain deeming provisions. While computing total income, the real income is adjusted by including therein various legal fictions/deeming provisions incorporated in the Income tax Act. After this process only, the total income is arrived at. Sec.92(1) states that any “income” arising from an international transaction shall be computed having regard to the arms’ length price. U/s 92C(4), the AO may compute the total income of the assessee having regard to the arms’ length price so determined. Hence, if the income arising from an international transaction is not at arms length, the AO is entitled to compute the total income by substituting the actual income with the arms length income. In effect, under Chapter X also, the Income tax Act has introduced a legal fiction/deeming provision. As stated earlier, while computing “total income”, the legal fictions/deeming provisions included under the Act should be given effect to.

17 IT(TP)A No.489/Bang/2017 . “37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. (supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm's length price of loan given to an associated enterprise. Similarly, learned counsel's contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co.'s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions.

18 IT(TP)A No.489/Bang/2017 . on record to demonstrate, or even indicate, the existence of these facts. The references to OECD report and BEPS report is in the context of benefit test, but then the benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re- characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the transaction, inasmuch as it continues to be a loan transaction and inasmuch as the substitution of zero interest by arm's length interest does not alter the basic character of transaction. The question of re characterization arises only when the very nature of transaction is altered, such as capital subscription being treated as loan or such a trade advance received being treated as a borrowing. There is no change in the character of transaction in this case. Learned counsel's reliance on EKL Appliances Ltd.'s case (supra) and Cotton Naturals India (P.) Ltd. case (supra) is thus irrelevant. In the case of Abhishek Auto Industries Ltd. (supra), what was done was that of the joint venture agreement, which was duly approved by the Reserve Bank of India and other regulatory bodies, was disregarded by questioning its need, and it was in this context that the Tribunal observed that legally binding joint venture arrangements cannot be disregarded by the revenue authorities. This observations, taken out of the context, cannot be interpreted to mean that an arm's length price of an interest free loan cannot be adopted for ascertaining income from loan transaction.

19 IT(TP)A No.489/Bang/2017 . enterprise, and if the income in computed, if any, on the basis of the arm's length price so assigned. As regards reliance on the Vodafone India Services (P.) Ltd.'s case (supra), that deals with a situation in which the international transaction was inherently incapable of producing the income chargeable to tax as it was in the capital field. This is evident from the observation of Hon'ble Bombay High Court to the effect that, "In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax". Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm's length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm's length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law.”

20 IT(TP)A No.489/Bang/2017 . Special bench has specifically addressed the case of charging of Zero interest or no interest and held that so long as the transactions fall under the category of “international transactions”, the arms length principle has to be applied. We may look at another instance also. The new definition of “International transaction” shall also include “the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing” The purchase transaction is in the nature of expenditure and the same, per se, does not produce any income. Yet the purchase transaction is included under the definition of “International transaction”. The purpose of the same is explained hereafter. The product purchased by an assessee from its AE shall produce income, only when it is sold. However, if an assessee purchases certain article or product from its AE, then the said purchase transaction is reported as an International Transaction and the same is also tested under Arms length principle. If it is found that the price paid by the assessee for the said purchase is not at arms length, i.e., if it is more than the arms length price, then the AO is required to substitute actual purchase price with the arms length price. By substituting so, the total income of the assessee under the Income tax Act gets increased by such excess amount. In fact, the purchase transaction, being international transaction, has not produced any income. At this stage, it is relevant to refer to the Explanation below sec.92(1), which reads as under:- “Explanation:- For the removal of doubts, it is hereby clarified that the allowance for any expenses or interest arising from an international transaction shall also be determined having regard to the arms’ length price.” The argument of the assessee that income should arise out of the international transaction contradicts the above said Explanation, because “allowance for any expenses” per se cannot produce any income. However, if the said claim for any expense falling under international transaction is not at arms’ length, then the same shall produce “income” to the extent of

21 IT(TP)A No.489/Bang/2017 . payment made in excess of arms’ length price. As observed by the Special bench, if the transaction falls under the definition of “international transaction, then the same is required to be tested under arms length principle even if it did not produce any real income to the assessee. Suppose the income that arose to the assessee from an international transaction is Rs.100/- and the arms length price is Rs.125/- For computing total income, the AO shall adopt Rs.125/- only as income arising from the said international transaction. The real income principle fails here, since Chapter X brings in a legal fiction/deeming provision and the same is required to be complied with in order to arrive at the total income. As explained by Hon’ble Supreme Court in the case of DIT vs. Morgan Stanely & Co. (292 ITR 416), the object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Hence, the interest free loan should be taken as a case of Zero interest and accordingly the impugned loan transactions should also be examined under arms’ length principles.

22 IT(TP)A No.489/Bang/2017 . 33. The Ld A.R also argued that the loan transactions are in the nature of quasi equity, since the impugned loans are intended to be converted into equity capital. The fact remains that, during the year under consideration, the impugned transactions remained as loan transactions only. The loan has been given to a holding company and the proposed acquisition of a foreign company was proposed to be executed through Special Purpose Vehicles. Thus we notice that there appears to be multiple layers in the proposed scheme. There was no contractual obligation or option for converting the loan into equity as existed in the case of Cadila healthcare Ltd (supra). It is a fact that the TPO/DRP did not deal with the contentions of the assessee regarding quasi-equity. However, it is stated that the assessee has intended to convert the loan into equity. When the loan transactions remained as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee.

23 IT(TP)A No.489/Bang/2017 . earned dividend income, which included dividend received from Overseas subsidiary of Rs.3.38 crores, which was taxable. The remaining dividend income was received from domestic companies and mutual funds. The assessee claimed the same as exempt. As per the assessment order, aggregate amount of dividend received during the year was Rs.8.98 crores. However, in the written submissions, the assessee has stated that it has received dividend income of Rs.4.46 crores only. This difference requires to be examined. Be that as it may, the fact remains that the assessee did not disallow any expenditure u/s 14A of the Act, even though it claimed exemption of dividend income received from domestic companies and mutual fund. The AO, hence, computed disallowance by applying provisions of Rule 8D of I.T Rules at Rs.94.97 crores. The Ld DRP directed the AO to exclude the dividend received from foreign subsidiaries, as they are taxable. Otherwise, in principle, it confirmed the disallowance made by the AO u/s 14A of the Act.

24 IT(TP)A No.489/Bang/2017 . 41. The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly." Thereafter, it was held by Hon’ble Karnataka High Court as under:- “The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335 . When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.” Accordingly, we direct the AO to examine the claim of the assessee and if it is found that the own funds available with the assessee is in excess of the value of investments, then no disallowance u/r 8D(2)(ii) out of interest expenditure is called for. (b) In the alternative, the assessee has also submitted that the loan funds were taken for specific purposes and utilised the same for those purposes. Accordingly, it was contended that, when the assessee would be

25 IT(TP)A No.489/Bang/2017 . able to show the nexus between the interest expenditure and its utilisation for specific purposes, no interest disallowance is called for. In this regard, it is stated that it has paid interest on security deposits, cash credits/overdrafts, working capital demand loan, bill discounting facilities. When the disallowance is worked out under rule 8D(2)(ii), this contention of the assessee would loose its significance. (c) The Ld A.R submitted that, for the purpose of computing average value of investments, the AO should consider only those investments which have actually yielded exempt dividend income. We notice that this argument of the assessee finds support from the decision rendered by the Special bench in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi- SB). Accordingly, we direct the AO to exclude investments, which did not yield exempt income, while computing average value of investments. (d) The Ld A.R also contended that the disallowance should not exceed the amount of exempt income. In this regard, he placed his reliance on the decision rendered by jurisdictional High Court in the case of Pragathi Krishna Gramin Bank vs. JCIT (2018)(95 taxmann.com 41). We direct the AO to take into consideration above said binding decision while examining this issue. Accordingly, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra.

26 IT(TP)A No.489/Bang/2017 . observing that the submissions are very general and not supported by any verifiable evidence. The AO further observed that the assessee was not able to demonstrate how such interest free advances given to related parties is in the interest of business carried on by the assessee, i.e., commercial expediency in giving interest free advances was not shown. The AO also placed his reliance on the decision rendered by Hon’ble Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd (2006)(286 ITR 1) and C.R Auluck and Sons P Ltd (2014)(360 ITR 193) and accordingly held that proportionate interest expenses should be disallowed. Accordingly he computed the interest disallowance by considering PLR (Prime Lending Rate) and the return on Loans/advances, which worked out to Rs.348.72 crores. The Ld DRP noticed that the interest free loans included the loan given to the AE of the assessee named USL Holdings Ltd. The AO has already made Transfer pricing adjustment in respect of interest free advance given to its AE and the said advance has again been included while computing the present interest disallowance. Accordingly, the Ld DRP observed that the disallowance on the loan given to AE is not warranted. Accordingly the Ld DRP held that the disallowance of interest expenditure to the extent of transfer pricing adjustment should only be made on protective basis and confirmed the disallowance of remaining interest expenditure on substantive basis.

27 IT(TP)A No.489/Bang/2017 . enterprise for the purpose of acquiring W & M Group and hence there was commercial expediency in giving the loan to USL Holdings Ltd. The above said W & M group is major producer of Scotch, which is the ingredient used in production of alcoholic beverages by the assessee. Hence the acquisition of the above said group has actually promoted the business interests of the assessee. Accordingly he submitted that there is commercial expediency in giving interest free advances to its AE. The Hon'ble Supreme Court has held in the case of S.A Builders Ltd (2007)(158 Taxman 74) that no interest disallowance is called for when there exists commercial expediency in giving interest free loans to subsidiary companies. Accordingly he submitted that interest disallowance in respect of the loan given to the AE of the assessee is not called for and hence the Ld DRP was not justified in confirming the disallowance pertaining to this loan on protective basis.

28 IT(TP)A No.489/Bang/2017 . 42. We heard Ld D.R and perused the record. From the arguments of the ld A.R, we notice that the own funds available with the assessee is in excess of the aggregate amount of interest free advances and hence the decision rendered by Hon'ble Supreme Court in the case of Reliance Industries Ltd (supra) shall apply to the facts of the present case, in which event, no interest disallowance is called for. We notice that this contention of the assessee has not been examined by the AO in the light of decision of Hon'ble Supreme Court referred above. Accordingly, we restore this issue to the file of the AO to examine the factual aspects and for deciding this issue following the decision rendered by Hon'ble Supreme Court, referred above. If the disallowance gets deleted on this ground, then other contentions of the assessee would be rendered academic in nature. However, if any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings.

29 IT(TP)A No.489/Bang/2017 . disallowed the above said claim of the assessee. Ld DRP also confirmed the same.

30 IT(TP)A No.489/Bang/2017 . it is revenue expenditure. Similarly, it has been held in the case of Pepsico India Holdings P Ltd (ITA No.4517/Del/2016 & others) that sponsorship payments made by Pepsi to ICC for the World Cup event was to be allowed as deduction u/s 37(1) of the Act, as those expenses are for promotion of business and sporting events are generally used by companies as a platform to advertise.

31 IT(TP)A No.489/Bang/2017 . expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court,the FAA allowed the appeal filed by the assessee. 3.1.a.With regard to management fee,the FAA observed that there was no doubt about the genuineness of expenditure,that the expenditure was incurred for availing infrastructure facilities administrative support,like manpower recruitment, HR services, uses of computer, telephone, photo copiers, infrastructure set up etc. in order to carryout business operations smoothly, that the parent company had allocated a certain amount to the account of the assessee in the ratio of its turnover. He finally held that expenditure had to be allowed as revenue expenditure. 3.2. Before us, the DR supported the order of the AO and the AR relied upon the order of the FAA. We find that the assessee group had entered into an agreement with India Win, that it was a co- sponsor of Mumbai Indian IPL team, that it had incurred similar expenditure in the subsequent two years, that out of the total expenditure the assessee had claimed a very small proportion under the head sponsorship expenses. Such an expenditure is for advertising the brand name of the Group. Being a recurring expenditure, it had to be allowed as revenue expenditure. We find that in the case of Delhi Cloth and General Mills Co.Ltd.(supra)the Hon'ble Court had held that expenditure incurred for organizing sports events are allowable items of revenue expenditure as such events publicise the names of the sponsor. The AO was not justified in capitalising the expenses. The entire expenditure was rightly allowed by the FAA as revenue expenditure. After going through the details of expenditure incurred by assessee under the head managerial expenses, we are of the opinion that it had not got any enduring benefit from the expenditure incurred nor did the expenditure create any capital asset.Therefore, we do not want to interfere with the order of the FAA.Considering the above,we decide second ground of appeal against the AO.”

32 IT(TP)A No.489/Bang/2017 . 87. In Grounds No. 7 to 7.3 in I.T.A. No. 1044/DEL/2014 for AY 2009- 10, the assessee has challenged the disallowance of INR 3,85,15,497/- being sponsorship fees paid by the assessee to ICC. Our attention was drawn to paras 4 to 4.3 of the final assessment order wherein the said issue has been discussed by the AO. It has been submitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amount was proposed to be disallowed by the AO in the Draft Assessment Order, for the following reasons: - (i) Similar expense has been disallowed in the earlier years as part of the Transfer Pricing Adjustment on account of AMP expenses. (ii) Assessee has been bearing substantial portion of the fees paid to ICC for acquiring sponsorship rights even though benefit of the same is derived by the other entities of the world. 88. Aggrieved by the addition proposed by the AO, the assessee had filed objections before the DRP. The DRP vide directions dated 20.12.2013 upheld the action of the AO, on the ground, that the expenditure was benefitting all the entities across the globe and hence, it could not be said to have been incurred wholly and exclusively for the business of the assessee. 89. The learned counsel for the assessee submitted that the said disallowance was unwarranted since the said expense was incurred in view of the fact that major viewership of cricket is in the Indian subcontinent. He also referred to various newspapers reports which demonstrated the popularity of the sport in India to support the aforesaid contentions. It was also submitted that the assessee company has consistently promoted its range of products using cricket as an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax at source as instructed by the Income Tax Department. Further, the assessee had obtained the approval of the Ministry of Youth Affairs and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper-book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee

33 IT(TP)A No.489/Bang/2017 . company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon'ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC. He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it. 90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions. 91. After considering the rival submissions and on perusal of the impugned orders, we find that, here the disallowance of Rs.3,85,15,497/- has been made on account of sponsorship fee by the assessee to the ICC on the ground that similar expenditure was disallowed in the earlier years as part of Transfer Pricing Adjustment on account of AMP expenses; and secondly, assessee has been bearing substantial portion of the fees to the ICC for acquiring the sponsorship rights even though benefit of the same is derived by either entity of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian sub- continent looking to its mass popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and after deducting TDS u/s.195. Once the expenditure has been incurred wholly and exclusively for the purpose of business which fact has not been disputed by the Department, then even if some incidental benefit which may arise to any other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for

34 IT(TP)A No.489/Bang/2017 . promotion of business only and hence, no disallowance is called for. Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed.”

35 IT(TP)A No.489/Bang/2017 . "was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business" Again, in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/ 1 Taxman 485 (SC) the Supreme Court outlined the correct test of commercial expediency as the guiding principle to decide whether the expenditure was to facilitate profits, as follows: (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee" In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that in normal commercial sense and in common parlance sales promotion and publicity are activities aimed at gaining goodwill in the market. They need not be confined to media propaganda but can involve indirect approaches. The judgment of a Division Bench of this Court in CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi) has recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. The necessity (or lack of it) is not something which income tax authorities can go into; as long as it is voluntarily undertaken by the business enterprise for profit earning, it would be entitled to claim relief under section 37(1). 23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredient in marketing strategies. Therefore, he allowed about 50 per cent of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal's approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue's arguments on this point too are insubstantial.” 48. The observations made by the Hon’ble jurisdictional Karnataka High Court in the case of CIT vs. ITC Hotels (2014)(47 taxmann.com 215) on the

36 IT(TP)A No.489/Bang/2017 . concept of “enduring benefit” is relevant here and the same is extracted below:- “6. The first substantial question of law relates to a sum of Rs.10 lakhs, which were paid by the assessee as a license fee for the use of central court yard, having marble, (for short "Court Yard") in Lallgarh Palace (for short 'Palace'). It appears that there was a Memorandum of Understanding (for short 'MOU') between the Assessee and Maharaja Ganga Sinhji Charitable Trust (for short the "trust" ). The assessee, as per the MOU, had acquired a right to use the court yard for their business of hotel, being run in the palace, more efficiently and profitably. The question is whether the expenditure of Rs.10 lakh resulted in any addition to the fixed capital of the assessee. According to the Revenue, the assessee had acquired right to use the court yard apart from the palace, and thus, had acquired an advantage of enduring benefit of a trade. In other words, the expenditure incurred by the assessee for the use of court yard is in the capital field and it cannot be said to have been incurred to facilitate trading operation of the assessee. 7. Learned Counsel appearing for both the sides placed reliance upon the judgment of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69, in support of their contentions. Mr. Aravind, learned counsel for the Revenue tried to distinguish the ratio laid down by the Supreme Court in this case on the basis of factual matrix involved therein. As against this, learned counsel appearing for the respondent/assessee placed reliance upon the principle laid down by the Supreme Court in the said judgment. 8. We have perused the judgment. We find ourselves in agreement with the learned counsel appearing for the respondent/assessee. It would be relevant to reproduce the relevant observation made by the Supreme Court, in the said judgment, which, in our opinion, support the case of the respondent/assessee to contend that the expenditure of Rs. 10 lakhs would be on revenue account. The relevant observation in the case of Empire Jute Co. Ltd. (supra) reads thus: 'The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to

37 IT(TP)A No.489/Bang/2017 . arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated : "...when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite condition) for treating such an expenditure as properly attributable not to revenue but to capital". This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) : TC16R.991, it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case'. 9. It is clear that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, except the right to use the court yard, no other rights were created in

38 IT(TP)A No.489/Bang/2017 . favour of assessee. In other words, the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future, and therefore, it would be on revenue account. In other words merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue. The advance of Rs. 10,00,000/-, in the present case, consists merely in facilitating the assessee's business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee and against the Revenue is correct and deserve no interference by this Court.”

39 IT(TP)A No.489/Bang/2017 . 53. In the result, the appeal of the assessee is partly allowed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (PAVAN KUMAR GADALE) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 29.05.2020. *Reddy GP Copy to 1. The appellant 2. The Respondent 3. CIT (A) 4. Pr. CIT 5. DR, ITAT, Bangalore. 6. Guard File By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore