M/s. United Spirits Limited, Bengaluru V. Deputy Commissioner of Income Tax, Circle-7(1)(1), Bengaluru

ITA 2701/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5220 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 11-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Charitable institution; International transaction; Earning of tax free income; Additional evidence; Question of law; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside; FORM 26AS
• Section: 37; 15; 92C; 92; 234B; 14A; 40(a)(ia); 37(1); 195; 274; 64; 43; 73; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM IT(TP)A No.2701/Bang/2017 : Asst.Year 2013-2014 M/s.United Spirits Limited UB Towers, No.24 Vittal Mallya Road Bangalore – 560 001. PAN : AACCM8043J. v. The Deputy Commissioner of Income-tax, Circle 7(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.Percy Pardiwala, Senior Advocate Respondent by : Sri.Pradeep Kumar, CIT-DR Date of Hearing : 24.03.2022 Date of Pronouncement : 05.04.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 12.10.2017 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2013-2014. 2. The brief facts of the case are as follows: The assessee is a company engaged in the manufacture and sale of alcoholic beverage. The assessee filed its return of income for the assessment year 2013-2014 on 28.11.2013 which was selected for scrutiny assessment. During the course of assessment, the assessee’s case was also referred to the Transfer Pricing Officer (TPO). The TPO vide order dated 26.10.2016, recommended transfer pricing adjustments. The A.O., thereafter, passed a draft assessment order dated 30.12.2016. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 2 3. Aggrieved by the adjustments proposed in the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 18 th September, 2017 disposed of the assessee’s objections. Pursuant to the DRP’s directions, the AO passed the final assessment order dated 12.10.2017. In the final assessment order, the learned AO made the following adjustments / additions:- Sl. No. Nature of disallowance Amount (Rs.) A. Transfer Pricing 1. Adjustment for interest free loan to Associated Enterprises (AE) 5,48,04,95,014 2. Adjustment towards corporate guarantee fee 1,22,24,28,300 3. Adjustment on purchase of raw materials from Whyte & Mackay 68,60,16,563 B. Corporate Tax 4. Disallowance under section 14A of the I.T.Act r.w.r 8D. 48,04,00,000 5. Disallowance u/s 36(1)(iii) of the Act. 1,40,46,63,276 6. Disallowance of payments for promotion and advertisement expenses. 44,33,55,403 7. Disallowance based on Project Spirits Report 54,49,10,000 As a result, the AO recomputed the total income of the assessee at Rs.15,19,93,90,755 as against the income of Rs.4,93,71,22,200 declared in the return of income. Further, interest u/s 234B of the Act was levied amounting to Rs.1,81,25,18,840 and also interest u/s 234C was recomputed to Rs.2,74,11,513. 4. Being aggrieved by the order passed by the AO, the assessee has preferred this appeal before the Tribunal, raising the following grounds:- IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 3 Interest income imputed on interest free advance made to Associated Enterprises - Rs. 548,04,95,014 Erred in law by imputing interest on interest tree advances made to Associated Enterprises 1.1. The learned TPO / Hon'ble DRP have erred in law by imputing notional interest income on advances made to Associated Entities (' AE ') to the extent of Rs.548,04,95,014 1.2. The learned TPO / Hon'ble DRP has erred in law and facts by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with Rules as well as the justifications given by the Appellant for the advance made to AE. 1.3. The learned TPO / Hon'ble DRP has erred by ignoring the justification provided by the Appellant, with regards to non- charging of interest on loan to AE and proposing an upward adjustment of Rs.548,04,95,014 as notional interest by considering arm's length rate of interest at 14.18%. The learned TPO / Hon'ble DRP ought to have appreciated that the Appellant did not earn any income from the interest free advances made to the AEs. The learned TPOI Hon’ble DRP have erred in computing notional income and in not applying the real income theory as per which taxes are to be levied only on income that has actually accrued to the Appellant. Commercial Expediency [or the advances made 1.4. The learned TPO has erred in not considering the submissions of the Appellant, whereby the commercial reasons for the interest free advances were provided. 1.5. The learned TPO has erred in fact and law by not considering that advances were made by the Appellant to various AE was a matter of commercial expediency as the same was utilized by the AE's for the acquiring the business of various global suppliers of liquors such as Whyte and Mackay, Bouvet Ladubay, Liquidity Inc etc which was ultimately for the furtherance of the Appellant's overseas business. 1.6. The learned TPO has erred in law and on facts by rejecting the Appellant's contention of commercial expediency merely because a loss was suffered on the disposal, though the same .-' was disposed as per Office of Fair Trade in the United Kingdom. Advances made were Quasi-equity in nature IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 4 1.7. The learned TPO/Hon'ble DRP ought to have appreciated that the advances made by the Appellant were in fact quasi- equity and accordingly, no interest should be computed on the same. 1.8. The learned TPO erred in holding that the Appellant is camouflaging the transaction which would otherwise not be justifiable as the transactions were routed through more than one subsidiary. Loans were made in earlier years 1.9. The learned TPO has erred in law by imputing notional interest on advances made in earlier years. 1.10. Notwithstanding and without prejudice to the above, the learned TPO/ Hon'ble DRP has erred in imputing interest at rates prescribed by CRISIL for long term debts but should have rather computed the same based on the borrowing rate prevalent in the recipient's country. 1.11. Notwithstanding and without prejudice to the above, having concluded that the funds given to AE's were diversion of funds the learned TPO has erred treating the transactions as an advance and imputing an interest on the same. 1.12. Notwithstanding and without prejudice to the above, the learned TPO ought have imputed interest at LIBOR +based on judicial precedents. 1.13. Notwithstanding and without prejudice to the above, the learned TPO erred in concluding that the transactions entered into by the Appellant are not in the normal course and not straight forward, hence, UBOR+ shall not be applicable to the Appellant. 2. Commission imputed on issue of Corporate Guarantee ('CG') to USL Holdings Limited - Rs.122,24,28,300 Erred in law by treating corporate guarantee provided as an international transactions 2.1. The learned TPO/ Hon'ble DRP has erred in law in inferring 'Corporate Guarantee' would constitute as an international transaction without appreciating that the same has no bearing on the profits, income, losses or assets of the Appellant. Commercial Expediency 2.2. The learned TPO/ Hon'ble DRP have erred in making IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 5 transfer pricing adjustment to the extent of Rs.122,24,28,300 in relation to Corporate Guarantee provided by the Appellant to its AE, without appreciating the commercial expediency. 2.3. Notwithstanding and without prejudice to the above, the learned TPO/ Hon'ble DRP has erred in law and on facts imputing commission income on corporate guarantees for AE, when no corporate guarantees were made by the Appellant in the financial year under consideration. 2.4. Notwithstanding and without prejudice to the above, the learned TPO erred in assessing the credit rating of the AE equivalent to that of junk bonds and adopting a rate of 3 per cent as ALP for imputing commission income on corporate guarantee. 2.5. Notwithstanding and without prejudice to the above, the learned TPO has erred in law by not providing the basis of considering the rate of 3 per cent on the corporate guarantee provided. 3. Disallowance of purchase of raw materials from W&M- Rs.68,60,16,563 Erred in law by imputing Nil transfer price for purchases of raw-material 3.1. The learned TPO has erred in disallowing towards purchase of raw materials from W &M by rejecting the contentions of the Appellant that an effective opportunity of being heard was not provided to the Appellant. Reliance placed on report covering transactions of earlier years 3.2. The Hon'ble DRP erred in not appreciating the fact that the internal report on fund diversion was in relation to the years 2007 and 2008 and there was no inference in the report with respect to the purchase transaction made in FY 2012-13. 3.3. The learned TPO ought to have appreciated that the purchases made during the year were through proper import channels and not diversion of funds 4. Disallowance of expenditure under section 14A of the Income-tax Act, 1961 ('the Act') - Rs. 48,04,00,000 Erred in law by invoking section 14A read with Rule 8D 4.1. The learned AO/ DRP has erred in law while disallowing a sum of Rs. 48.04 crores under section 14A of the Act read IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 6 with Rule 8D of the Income-tax Rules, 1962 ("Rules") merely for the reason that no separate books of accounts are maintained by the Appellant. Erred in law by considering the entire interest expenditure incurred during the year was for making investments 4.2. The learned AO/ Hon'ble DRP has erred in law and on facts while holding that the interest cost was incurred on account of earning tax free income. 4.3. The learned AO/ Hon'ble DRP failed to appreciate that there is no nexus between the borrowed funds and the funds utilized for investments. 4.4. The learned AO/ Hon'ble DRP ought to have appreciated that the Appellant's internal accruals far exceeds the value of the investments made. Erred in not considering the additional evidences made 4.5. The Hon’ble DRP has erred in not considering the additional evidences submitted by the Appellant on 10 August 2017. Inclusion o{investments that did not yield exempt income during the year 4.6. Notwithstanding and Without prejudice to the above, learned AO/ Hon'ble DRP erred in law and facts by not excluding investments which did not yield any exempt income while arriving at the disallowance under section l4A of the Act read with Rule 80 of the Rules. Inclusion of interest incurred for loans taken for specific purposes unrelated to investments and earning exempt income 4.7. Notwithstanding and without prejudice to the above, the learned AO/ Hon'ble DRP erred in law and on facts, in not excluding the interest on term loans and interest on bill discounting for the purpose of determining disallowance under section 14A of the Act. The learned AO / ORP ought to have appreciated that such term loans were obtained for specific purpose and were not taken for the purpose of earning exempt Income. Consideration of gross interest expenditure for the year 4.8. Notwithstanding and without prejudice to the above, the learned AO/ Hon'ble DRP erred in law and on facts, in not IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 7 considering the net interest expenditure (net of interest earned) instead of gross interest expenditure incurred by the Assessee while applying Rule 8D. Restricting the disallowance to the exempt income earned during the year 4.9. Notwithstanding and without prejudice to the above, the learned AO/ Hon'ble DRP have erred in law by not restricting the disallowance to the extent of exempt income earned during the year. Investments were made for strategic purpose 4.10. Notwithstanding and without prejudice to the above, the learned AO/ Hon'ble DRP erred in law and on facts, in not appreciating that investments are made with a strategic intent and not for the purpose of earning dividend income; consequently, such investments fall beyond the realm of section 14A. Exclusion of interest disallowed under section 36(1)(iii) 4.11. Notwithstanding and without prejudice to the above, the learned AO/ Hon'ble DRP has erred in law and facts by considering interest on borrowed funds while computing disallowance under section 14A of the Act, when the subject interest is already a matter of disallowance under section 36(1)(iii) and the interest disallowed in relation to Project Spirit report. Investments arising on restructuring included 4.12. Notwithstanding and without prejudice to the above, the learned AO / Hon'ble DRP erred failed to appreciate that the investments which arose as a result of corporate restructuring and not involving the usage of borrowed funds ought to be excluded for computing disallowance under section 14A. 5. Disallowance of interest payments on borrowing under section 36(1)(iii) of the Act - Rs.140,46,63,276 Erred in law by invoking provisions of section 36(1 )(iii) 5.1. The learned AOI Hon'ble DRP has erred in law and on facts by disallowing interest incurred by the Assessee to the extent of Rs. 140,46,63,276 under section 36(1)(iii) of the Act by concluding that borrowed funds had been utilized for the purpose of advancement of interest free loans to related parties. 5.2. The learned AO / Hon'ble DRP has erred in concluding IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 8 that the borrowings made by the Assessee were not utilized for the purpose of business. 5.3. The learned AO / Hon'ble DRP erred in concluding that advances made for acquisition and expansion of the Appellant's business and to ensure smooth supply of raw material qualify as commercial expediency. Commercial Expediency for loans and advances made to related parties 5.4 The learned AO / Hon'ble DRP has erred in not observing that the loans and advances were made to related parties were for the reason of commercial expediency. 5.5 The learned AO / Hon'ble DRP has failed to observe that the advances made to the related parties / subsidiaries has been utilized for their business purposes, which is furtherance of the business interest of the Appellant and squarely covered by the decision of the Hon'ble Supreme Court in the case of S.A Builders Limited reported in 288 ITR I. 5.6 The Learned AO /Hon'ble DRP has erred in law and facts while distinguishing the Appellant's case against SA builders merely on the ground that in the case of SA Builders the advances were made within India. However, the 'Learned AO has himself considered the advances made to subsidiaries in India while arriving at the subject disallowance. Own funds were in excess of borrowed funds 5.7 The learned AO / Hon'ble DRP has erred in law and on facts, in not appreciating that the Assessee had sufficient own funds to lend advances to related parties / subsidiaries. 5.8 The learned AOI Hon'ble DRP has erred in law and on facts, in making the disallowance of interest expenditure amounting to Rs. 140,46,63,276 based on State Bank of India's prime lending rate ('PLR') even when the Assessee had sufficient internal funds to lend advances to subsidiaries. Judicial precedents relied upon by learned AO have been overruled / distinguishable on facts 5.9. The learned AO/ Hon'ble DRP has erred in relying on the decisions of the Hon'ble Punjab & Haryana HC in the case of CIT v. Abhishek Limited reported in 286 ITR 1 which has been overruled by the Hon'ble Supreme Court in the case of Munjal Sales Corporation reported in 298 ITR 298 5.10. The Hon'ble DRP has erred in placing reliance on the IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 9 decision of the Kerala High Court in the case of Harrisons Malayalam Limited reported in 25 taxmann.com 546 as the same is distinguishable on facts that in the Appellant' case as the advances were not made out of borrowed funds 5.11. Notwithstanding and without prejudice to the above grounds, the learned AO has erred in computing the amount of disallowance of interest under section 36(1)(iii) of the Act by including non-interest free loans to related parties. 5.12. Notwithstanding and without prejudice to the above grounds, the learned AO has erred in not computing the interest from the date of advancement of loans to related parties/ subsidiaries. 5.13. Notwithstanding and without prejudice to the above grounds, the methodology adopted by the learned AO to disallow interest expenditure is in fact imputing an interest income in the hands of the Appellant and accordingly incorrect 5.14. Notwithstanding and without prejudice to the above grounds, the learned AO has erred in law and on facts in making a protective assessment and computing disallowance on loans granted to certain related parties, as the learned TPO has already imputed notional interest income on these loans granted to such related parties during the year under consideration resulting in double taxation of the same income. 6. Disallowance of payments made to Royal Challengers Sports Private Limited, United Racing & Bloodstock Breeders and United Mohun Bagan Football Team Private Limited for promotion and advertisement - Rs 36,91,12,995 6.1. The learned AO/ Hon'ble DRP has erred in law and on facts in disallowing payments made on sales promotion and advertisement expenditures, by treating the same as capital in nature. 6.2 The learned AO/ Hon'ble DRP has erred in considering that the incurrence of such expenditure results in enduring benefit to the Appellant and accordingly capital in nature. 6.3. The learned AO/ Hon'ble DRP has erred in not observing that the Appellant had already an established brand logo and the expenditures were only incurred towards maintenance of the brand logo by the way of enhanced visibility among the customers. 6.4. The learned AO / Hon'ble DRP has erred in concluding that the payment to the above entities have been incurred for brand promotion and consequently provides an enduring IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 10 benefit of brand identity. 6.5. The learned AO / Hon'ble DRP has erred in not appreciating the fact that the expenditure was to be incurred on year on year basis and hence purely revenue in nature. The learned AO has erred in law in concluding that the subject expenditure is not allowable under section 37(1) of the Act. 6.6. The learned AO / Hon'ble DRP have erred in law by not accepting jurisdictional High Court ruling 6.7. Notwithstanding and without prejudice to the above grounds, the learned AO and the DRP has erred in not granting depreciation on the aforesaid expenditure, merely because no asset was recorded in the books of the accounts of the Appellant. 7. Disallowance of payments made to Force India F 1 team Limited - Rs. 7,42,42,408 7.1. The learned AO / Hon'ble DRP has erred in law and on facts in disallowing payments made on sales promotion and advertisement expenditures, by treating the same as capital in nature. 7.2. The learned AO / Hon'ble DRP has erred in considering that the incurrence of such expenditure results in enduring benefit to the Assessee and accordingly capital in nature. 7.3. The learned AO / Hon'ble DRP has erred in not observing that the Assessee had already an established brand logo and the expenditures were only incurred towards maintenance of the brand logo by the way of enhanced visibility among the customers. 7.4. The learned AO / Hon'ble DRP has erred in concluding that the payment to the above entity has been incurred for brand promotion and consequently provides an enduring benefit of brand identity. 7.5. The learned AO / Hon'ble DRP has erred in not appreciating the fact that the expenditure was to be incurred on year on year basis and hence purely revenue in nature. The learned AO has erred in law in concluding that the subject expenditure is not allowable under section 37(1) of the Act. 7.6. The learned AO / Hon'ble DRP have erred in law by not accepting jurisdictional High Court ruling 7.7. Notwithstanding and without prejudice to the above grounds, the learned AO and the DRP has erred in not granting depreciation on the aforesaid expenditure, merely IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 11 because no asset was recorded in the books of the accounts of the Appellant. 8. Disallowance of payments based on Project Spirit report- Rs.54,49,10,000 8.1. The learned AO has erred in making disallowance without giving any reasons for the same without appreciating the contents of the said report and making an arbitrary disallowance. 8.2. The Hon'ble DRP has failed to adjudicate on this objection filed by the Appellant. 8.3. The Hon'ble DRP and the learned AO erred in making the disallowance of the revenue expenditure without appreciating the fact that the said transactions are not recorded in the books of the Appellant and consequently no expenditure is claimed in the return of income. 8.4. The Hon'ble DRP erred in confirming the disallowance made by the learned AO based on Project Spirits Report under section 37 of the Act without taking cognizance of the provisions of the section, which provides for disallowance of expenditures laid out only by an assessee. In the given case, no such revenue expenditure of Rs.48, 14,00,000 was claimed by the Appellant. 8.5. The Hon'ble DRP/ the learned AO has erred by disallowing the expenditure pertaining to other entities in the hands of the Appellant without making a prima facie analysis of whether the Appellant is a party to the transaction or not. 8.6. The Hon'ble DRP erred in confirming the addition made by the learned AO of Rs.6,35,10,000 as interest on Rs.43,80,00,000 considering the amount as advances/ loan made to subsidiary without appreciating that the said transactions are not recorded in the books of the Appellant. 8.7. Notwithstanding and without prejudice to the above, the Hon'ble DRP/ the learned AO has erred by not appreciating that the Appellant was a victim of fraud by the erstwhile key managerial personnel of the company and that the Appellant was unaware of the diversion of the funds done by the said key managerial personnel and as such, such sums should be an allowable business loss in the hands of the Appellant. 8.8. Notwithstanding the above, the Hon'ble DRP has erred in confirming the addition towards interest made by the learned AO by applying the State Bank of India's PLR rate of 14.5% IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 12 without any basis. 9. Levy of interest under section 234B of the Act - Rs. 181,25,18,840 9.1. The learned AO has erred in computing interest under section 234B which is consequential to the above grounds of appeal. 10. Excess levy of interest under section 234C of the Act - Rs.402,730 10.1. The learned AO has erred in computing interest under section 234C of the Act without appreciating the fact that the same is to be computed on the tax due on the returned income. 11. Short Credit of TDS/ TCS - Rs. 17,23,384 11.1. The learned AO has erred in granting credit of TDS / TCS of Rs. 24,02,13,490 as against the credit of Rs. 24,19,36,874 claimed by the Appellant, resulting in a short credit of Rs. 17,23,384 without providing any reasons for the same. 11.2. The learned AO ought to have appreciated that the TDS/TCS claimed by the Appellant was as per Form 26AS. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided” 5. The assessee has also raised additional grounds, which reads as follows:- “Ground no. 12: Claim of deduction in respect of 'education cess on income-tax' and 'secondary and higher education cess on income-tax' for the year under consideration 12.1. The learned AO has erred in not allowing a deduction for the 'education cess on income-tax' payable for the year under consideration. 12.2. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 13 subject, 'education cess on income-tax' for the year under consideration, ought to be allowed as a deduction while assessing its income for the year under consideration. 12.3. The Appellant submits that the learned AO be directed to re-compute its total income and tax thereon after allowing deduction for 'education cess on income-tax.” 6. We shall adjudicate the issue / grounds as under: Notional interest imputed on interest-free advances extended by the assessee to its AE (Ground 1) (TP Adjustment) 7. From the year 2007, the assessee had advanced interest free funds to its AE. It is stated that the amount was advanced for the purpose of acquisition of business of various global suppliers of liquor namely Whyte & Mackay, Bouvet Ladubay, Liquidity Inc. It was submitted that these loans were for the furtherance of the business of the assessee and no interest was charged on advances made. Further, it was stated that the funds given by the assessee was in fact quasi- equity in nature and it was the intention of the company to convert the loan into equity at a later point of time. 7.1 The TPO, however, proceeded to impute interest on the advance made by the assessee and decided that the interest is to be imputed at the rate of 14.18% i.e., the SBI prima Lending Rate (SBI PLR) (para 2 on internal page 41 to 242 of the paper book) as being the alleged arm’s length price and imputed an interest income of Rs.548,04,95,014 by following the CUP method. 7.2 Aggrieved, the assessee filed objection before the DRP. The DRP upheld the view of the TPO and held that based on IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 14 the retrospective amendment made to the definition of the term `international transaction’ by the Finance Act, 2012 with effect from 01 st April, 2012, the advance made by the assessee would qualify as an `international transaction’ and interest is to be imputed on the same. Further, the DRP also upheld the action of the TPO of applying interest at the rate of 14.18% being the SBI PLR. 7.3 Based on the directions of the DRP, the addition in respect of the transfer pricing adjustment of Rs.548,04,95,014 towards interest on loans extended to the AEs was retained by the AO in the final assessment order. 7.4 Aggrieved by the final assessment order, the assessee has raised this issue before the ITAT. The learned AR at the outset fairly submitted that a similar issue had arisen in assessee’s case for A.Y. 2012-2013, wherein the Tribunal in IT(TP)A No.489/ Bang/2017 (order dated 29.05.2017) has upheld the view of the TPO / DRP that interest needs to be imputed on the loans in question. However, the Bangalore Bench of the Tribunal directed the TPO to examine the claim of the assessee as to the computation of arm’s length price by considering the judgment of the Hon’ble Apex Court in the case of Vaibhav Gems Limited (Civil No.30849/2018). 7.5 The learned AR reiterated the submission that Chapter X cannot be invoked in absence of real income. Without prejudice it was submitted that when a loan is extended with intend of converting the same to equity, interest is not to be imputed. In this context, it was contended that the loan IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 15 advanced had in fact been converting to equity on 21.09.2020 (The evidence of same was placed as additional evidence). Further, the learned AR relied on the order of Bennett Coleman & Co. Ltd. reported in (2021) 129 taxmann.com 397 and contended that notional interest cannot be computed when loan transaction was for the purpose of acquiring share of another entity so as to further the assessee’s business interest. Without prejudice to all the above contentions, it was submitted that interest ought to be restricted to LIBOR. 7.6 The learned DR submitted that the issue in question was decided by the ITAT in assessee’s own case (supra) for assessment year 2012-2013 in favour of the Revenue. 7.7 We have heard rival submissions and perused the material on record. In the instant case the admitted facts are that the assessee provided interest free loans to AEs. These loans were given for the purposes of acquisition of business of various global suppliers of liquor. The TPO made an adjustment of Rs. 548,04,95,014 computed as per Annexure 1 to order passed under section 92CA and the DRP confirmed the same. As mentioned earlier, the learned AR argued at length on the following points. (i) No TP adjustment can be made in the absence of any income arising from the international transactions i.e., concept of real income. (ii) Interest free loans was given for the purpose of acquisition of business overseas. Hence, no TP adjustment is to be made. Relies on the decision Bennett Coleman & Co Ltd v DCIT [2021] 129 taxmann.com 398 (Mumbai Trib) IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 16 (iii) Interest free advances given to USL Holdings Ltd, BVI are converted to shares vide Board resolution dated 27.7.2020 and hence no TP adjustment should be made. (iv) Without prejudice, computation of interest is not correct. Libor plus 162 basis points to be adopted. 7.7.1 It is to be mentioned that the above arguments were also made before the Tribunal in assessee’s own case for the AY 2012-13. The co-ordinate bench in IT(TP)A No 489/Bang/2017 (order dated 29.05.2020) considered all the arguments and held that TP adjustment on interest free advances is to be made. As regards the computation of TP adjustment based on LIBOR, the Tribunal restored the said issue to the file of AO/TPO with a direction to examine the claim of the assessee by duly considering the decisions relied on by the assessee in the set aside proceedings. The relevant finding of the Tribunal on identical facts in assessee’s own case for assessment year 2012-2013, read as follows:- “26. We heard the parties on this issue and perused the record. Admitted fact is that the assessee has given interest free loans to its AE located in British Virgin Islands. It is stated that, in the earlier years also, the assessee has given such kinds loans, but no adjustment was made by the TPO. However, the principle of res- judicata shall not apply to the income tax proceedings and hence there cannot be any bar on the AO to examine the applicability of the transfer pricing provisions to the loan transactions in this year. Further, the Finance Act, 2012 has amended the provisions of sec.92B by inserting an Explanation under it, wherein the definition of the expression “International transactions” has been inserted. The same is defined in an inclusive manner and was also given retrospective effect from1.4.2002. As per the definition of the expression “International Transaction”, it shall include capital financing, including any type of long-term or short-term borrowing, lending or guarantee etc. Hence, TPO has examined the interest free loan given by the assessee to its AE, as the same falls under the IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 17 definition of “International Transaction” and made Transfer Pricing adjustment in this year. 27. We shall now deal with various arguments advanced by the assessee. The Ld A.R submitted that Chapter X dealing with determination of Arms Length price of international transactions is a machinery provision and the same cannot acquire primacy over the charging provisions like sec.4,5, 15 etc. Accordingly, he submitted that the “income” should have accrued to the assessee and then only the provisions of Chapter X can be applied to international transactions, i.e., it was submitted that the provisions of sec.92(1) could be invoked only when there arises any “income” from the international transaction, since the provisions of sec.92(1) uses the expression “Any income arising from an international transactions shall be computed having regard to the arms length price”. Accordingly, it was contended that existence of “income” is sine qua non for invoking the provisions of sec.92(1) of the Act. It was contended that the assessee does not have any contractual right to receive any income from the interest free loan given by the assessee to its AE. Hence, no “income” arises to the assessee from the interest free loan given by it to its AE and hence provisions of sec.92(1)/Chapter X should not be applied. It was also contended, by placing reliance on certain case laws, that the Courts cannot be invited to supply the omission made by the Legislature. 28. There is no doubt that real income principle should be followed under the Income tax Act. However, under the Income tax Act, the tax is levied on “total income”. The expression “total income” is defined u/s 2(45) of the Act as under:- “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act.” Though section 5 defines “Scope of total income”, yet the total income has to be computed in the manner laid down in the Act. The term “income” is defined in sec. 2(24) in an inclusive manner. The said income, when computed in the manner laid down in the Act becomes “total income”. Hence there is difference between the expression “income” and “total income”. The Income tax Act contains certain legal fictions/deeming provisions like sec. 40A(3), 40(a)(ia) etc., The Ld A.R, during the course of arguments also pointed out that sec. 50CA, 50D, 45(4) contain 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, IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 18 the Income tax Act has introduced a legal fiction/deeming provision. As stated earlier, while computing “total income”, the legal fictions/deeming provisions included under the Act should be given effect to. 29. The Chapter X is titled as “Special Provisions relating to Avoidance of Tax” and same includes sec. 92 to 94A. We have earlier noticed that the expression “international transactions” has been defined to include capital financing, loan transactions etc. Hence there should not be any dispute that the impugned interest free loan given by the assessee to its AE shall fall under the definition of “International transaction”. However, it is the case of the assessee that there is no requirement of determining ALP of transactions, when there is no “income” at all from the international transactions. This argument was rejected by the Ld DRP by following the decision rendered by the Special bench of ITAT in the case of Instrumentarium Corporation Ltd (supra) and the Ld DRP has extracted following observations made by the Special bench dealing with the above said contentions of the assessee:- “37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. (supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 19 interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions. 38. As for the assessee' s claim that the loan being extended free of interest was in the nature of shareholder service, this plea is being taken up for the first time before us and the assessee has not even furnished basic evidences for the factual elements embedded in this proposition. Such facts cannot be inferred or assumed; there has to be some material on record to demonstrate, or even indicate, the existence of these facts. The references to OECD report and BEPS report is in the context of benefit test, but then the benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re- characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 20 India and other regulatory bodies, was disregarded by questioning its need, and it was in this context that the Tribunal observed that legally binding joint venture arrangements cannot be disregarded by the revenue authorities. This observations, taken out of the context, cannot be interpreted to mean that an arm's length price of an interest free loan cannot be adopted for ascertaining income from loan transaction. 39. In our considered view, the assessee is not really correct in contending that when the assessee has not reported any income from a particular international transaction, the ALP adjustment cannot compute the same. The computation of income on the basis of arm's length price does not require that the assessee must report some income first, and only then it can be adjusted for the ALP. Section 92(1) is not an adjustment mechanism; it is a computation mechanism. The arm's length price principle requires that an arm's length price is assigned to the transactions between the associated enterprise, and if the income in computed, if any, on the basis of the arm's length price so assigned. As regards reliance on the Vodafone India Services (P.) Ltd.'s case (supra), that deals with a situation in which the international transaction was inherently incapable of producing the income chargeable to tax as it was in the capital field. This is evident from the observation of Hon'ble Bombay High Court to the effect that, "In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax". Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 21 nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law.” 30. The contention of the assessee that there should arise some “income” from the international transaction in order to invoke the provisions of sec. 92 has been duly addressed by the Special bench in Paragraph 39 of the order. The loan transactions have been included in the definition of the term “International transactions”. If the loan is given at free of interest, the same should be construed as having been given at “Zero interest”. Hence the income relating to loan transactions with the AE is required to be tested under Arms length principles u/s 92(1) of the Act, even if no interest income is contemplated between the parties. It can be noticed that the Special bench has specifically addressed the case of charging of Zero interest or no interest and held that so long as the transactions fall under the category of “international transactions”, the arms length principle has to be applied. We may look at another instance also. The new definition of “International transaction” shall also include “the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing” The purchase transaction is in the nature of expenditure and the same, per se, does not produce any income. Yet the purchase transaction is included under the definition of “International transaction”. The purpose of the same is explained hereafter. The product purchased by an assessee from its AE shall produce income, only when it is sold. However, if an assessee purchases certain article or product from its AE, then the said purchase transaction is reported as an International Transaction and the same is also tested under Arms length principle. If it is found that the price paid by the assessee for the said purchase is not at arms 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 22 income. However, if the said claim for any expense falling under international transaction is not at arms’ length, then the same shall produce “income” to the extent of payment made in excess of arms’ length price. As observed by the Special bench, if the transaction falls under the definition of “international transaction, then the same is required to be tested under arms length principle even if it did not produce any real income to the assessee. Suppose the income that arose to the assessee from an international transaction is Rs.100/- and the arms length price is Rs.125/- For computing total income, the AO shall adopt Rs.125/- only as income arising from the said international transaction. The real income principle fails here, since Chapter X brings in a legal fiction/deeming provision and the same is required to be complied with in order to arrive at the total income. As explained by Hon’ble Supreme Court in the case of DIT vs. Morgan Stanely & Co. (292 ITR 416), the object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Hence, the interest free loan should be taken as a case of Zero interest and accordingly the impugned loan transactions should also be examined under arms’ length principles. 31. We notice that the decisions rendered by the Mumbai bench of Tribunal in the case of Shilpa Shetty (supra) and M Suresh Company P Ltd (supra) did not consider binding decision rendered by the Special bench of ITAT, Kolkatta and hence the above said decisions so rendered by the Mumbai bench are per-incurium and cannot be followed. Various other decisions relied upon by Ld A.R are related to the computation of income under general provisions of the Act, whereas Chapter X is Special provision relating to Avoidance of Tax. As held by the Special bench, the general provisions have to give way to the special provisions. The Special bench has also observed that the decision rendered by Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd (supra) has been rendered in a different context. So is the case with the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd (supra). 32. In view of the above, we hold that the tax authorities are justified in invoking the provisions of Chapter X to the impugned loan transactions. 33. The Ld A.R also argued that the loan transactions are in the nature of quasi equity, since the impugned loans are intended to be converted into equity capital. The fact remains that, during the year under consideration, the impugned transactions remained as loan transactions only. The loan has been given to a holding company and the proposed acquisition of a foreign company was proposed to be executed through Special Purpose Vehicles. Thus we notice that there appears to be multiple layers in the proposed scheme. There was no contractual obligation or option for converting the loan into IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 23 equity as existed in the case of Cadila healthcare Ltd (supra). It is a fact that the TPO/DRP did not deal with the contentions of the assessee regarding quasi-equity. However, it is stated that the assessee has intended to convert the loan into equity. When the loan transactions remained as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee. 34. The Ld A.R submitted that the AO/TPO was not right in adopting yield rate applicable to bonds rated by CRISIL agency. He submitted that the impugned loan has been given to a foreign AE and hence the LIBOR rate should have been applied by the TPO. He also placed his reliance on the decision rendered by Hon'ble Rajasthan High Court in the case of Vaibhav Gems Ltd (supra). He also submitted that the LIBOR has been accepted by the co-ordinate bench of Bangalore ITAT in the case of M/s Sasken Technologies Ltd vs. DCIT (IT(TP)A 550/Bang./2016). In view of these judicial rulings, we restore this issue to the file of AO/TPO with the direction to examine this claim of the assessee by duly considering the decisions referred above and also that may be relied upon by the assessee in the set aside proceedings.” 7.7.2 The assessee has filed the additional evidence for conversion of loan to shares subsequent to the year under consideration. However, as the issue of shares was not made during the year under consideration, the additional evidence filed is not relevant and hence not considered. 7.7.3 During the course of hearing, the learned AR extensively relied on the order of the Mumbai Bench of ITAT in the case of Bennett Coleman & Co Ltd v DCIT [2021] 129 taxmann.com 398 (Mumbai Trib) and argued that TP adjustment should not be made. The Tribunal in the above order held that there cannot be a transaction of interest free debt funding of an overseas SPV by its sponsorer. It was further held by the Mumbai ITAT that if such a transaction between independent enterprises is at all hypothetically possible, the arm's length interest on such funding will be 'nil' under the CUP method. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 24 Further, it was held that if there has to be an arm's length consideration under the CUP method, other than interest, for such funding, it has to be net effective gains (direct and indirect), attributable to the risks assumed by the sponsorer of the SPV, of the SPV in question. The said decision rendered was on its peculiar facts and the Tribunal decided the issue on first principles without relying on any of the decided cases. The Hon’ble Mumbai ITAT has come to a categorical finding that when borrower has no discretion of using funds gainfully, commercial interest rates do not come into play at all, whereas in the instant case, assessee has not been able to establish that borrower has no discretion of using funds gainfully. In the present case, as mentioned earlier, the co-ordinate bench in assessee’s own case for the earlier assessment year has considered all the facts, arguments, decisions and passed a very elaborate order. It is not in dispute that the facts are same in this year as compared to earlier year. Therefore, we bound to follow the co-ordinate bench decision in assessee’s own case in IT(TP)A No 489/Bang/2017 for the AY 2012-13 and confirm the action of the AO/TPO in making TP adjustment in respect of interest free advances to its AEs. 7.7.4 As regards the applicability of LIBOR, the assessee relied on the judgment of the Rajasthan High Court in the case of CIT v Vaibhav Gems Ltd [2017] 88 taxmann.com 12. The SLP was dismissed by the Supreme Court. The applicability of LIBOR has also been restored by the Tribunal to the file of the AO for the AY 2012-13. Following the ITAT’s order in assessee’s own case for assessment year 2012-2013, we restore this issue to IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 25 the file of AO/TPO. The TPO is directed to follow the direction given at para 34 of decision in assessee’s own case in IT(TP)A No 489/Bang/2017 for the AY 2012-2013. The TPO shall ascertain the applicable LIBOR during the year under consideration and make the adjustment. 7.8. In the result, ground 1.1 to 1.13 are partly allowed for statistical purposes. Fee imputed on corporate guarantee extended to subsidiaries (ground 2) (TP Adjustment) 8. The assessee had extended corporate guarantee during the financial year 2007-2008 to its subsidiaries, i.e., USL Holdings UK Limited, which had obtained funds from Banks for the acquisition of Whyte & Mackay Group. It was stated that the said guarantees continued during the year under consideration too. It was submitted that since corporate guarantee was given for the expansion of the company’s business, no fee was charged on the same. Further, it was submitted that no guarantee commission was charged / imputed by the AO / TPO up to assessment year 2012-2013. 8.1 The TPO, however, held that giving a guarantee is an `international transaction’ and has computed a guarantee fee at Rs.122,24,28,300 by contending that the test of commercial expediency is not satisfied by the assessee and also concept of prudence would not be applicable for international transactions. While doing so, the TPO has adopted a rate of 3% considering the credit rating of the subsidiaries equivalent to that of junk bonds. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 26 8.2 Aggrieved, assessee filed objection before the DRP. The DRP has affirmed the addition made by the TPO, by relying on the decisions of various Tribunals to hold that corporate guarantee is an international transaction and `nil’ guarantee fee is not at arm’s length. As regards to the rate adopted, the DRP has accepted the contentions of the TPO and confirmed the rate of 3%. 8.3 Based on the directions of the DRP, the final assessment was passed retaining the addition in respect of corporate guarantee fee at Rs.122,24,28,300. 8.4 Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that `corporate guarantee’ would constitute as international transaction under the provisions of the Act, if issuance of such guarantee has bearing on the profits, income, losses or assets of the assessee. The learned AR submitted that Chapter X cannot be invoked in absence of real income. It was further submitted that the TPO has in fact imputed commission on corporate guarantee by the assessee, which were not extended by the assessee in the year under consideration but in prior years. Further, during the year of extending the corporate guarantee and upto assessment year 2012-2013, no commission was imputed by the tax department. Notwithstanding any and without prejudice to the above contentions, the learned AR submitted that the TPO has erred in considering the rate of corporate guarantee fee at 3%. In this context, the learned AR relied on various judicial pronouncements wherein the corporate guarantee fee was IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 27 determined in range of 0.5% instead of 3% as arrived by the TPO in the instant case. 8.5 The learned Departmental Representative supported the orders of the TPO and DRP. 8.6 We have heard rival submissions and perused the material on record. The assessee provided corporate guarantee to USL Holdings Ltd, BVI and USL Holdings UK Ltd without charging any guarantee commission. The TPO computed the TP adjustment of Rs. 122,24,28,300 calculated at 3% of corporate guarantee given amounting to Rs. 4074,76,10,000. The DRP confirmed the TP addition made by the TPO. The learned AR argued that corporate guarantee was not an international transactions, it was given out of commercial expediency and as a part of shareholder activity. It was thus argued that TP adjustment should not be made for the corporate guarantee given. It was also argued that without prejudice, the TP adjustment should be restricted to 0.5% of the corporate guarantee given. The assessee also relied on the decision of the Bombay High Court in CIT v Asian Paints India Ltd [2016] 75 taxmann.com 152 and contended that the adjustment if any should be restricted to 0.2% as held in the above decision. The learned DR relied on the TPO, DRP orders and justified the addition. 8.6.1 The Bombay High Court in CIT v Everest Kento Cylinders Ltd [2015] 378 ITR 57 dismissed the revenue’s appeal and upheld the charging of guarantee commission at 0.5% on the corporate guarantee. Thus, the contention of the learned AR IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 28 that TP adjustment should not be made cannot be accepted. The co-ordinate bench in the case of Manipal Global Education Services Pvt. Ltd ITA No 388/Bang/2016 and recently in Medreich Ltd ITA No 1574 to 1576/Bang/2019 (order dated 12.4.2021) has followed the Bombay High Court decision mentioned above and confirmed the TP addition at 0.5%. Following the above decisions, we direct the AO/TPO to restrict the TP addition on corporate guarantee at 0.5% of the corporate guarantee. 8.7 In the result, ground 2.1 to 2.5 are partly allowed. Adjustment in respect of purchase of raw material from Shyte & Mackay (Ground 3) (TP adjustment) 9. During the year under consideration, it is stated that the assessee had purchased raw materials from Whyte & Mackay to the extent of Rs.68,60,16,563. For the purpose of transfer pricing, the assessee adopted the Comparable Uncontrolled Price method (CUP) in respect of the said purchase (para 2 page 274 of the paper book; page 330 to 331 of the paper book, being the relevant extracts of the Transfer Pricing Study Report). 9.1 During the course of proceeding before the TPO, the sample copies of invoices evidencing the purchases made from Whyte & Mackay was made available to him (page 704 of the paper book). The TPO relying upon an internal report on funds diversion pertaining to transactions for financial year 2007- 2008, recomputed the arm’s length price in respect of the said purchase transaction entered into by the assessee during the IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 29 year under consideration, i.e., assessment year 2013-2014 at `Nil’. (page 249 of the paper book). 9.2 Aggrieved the assessee filed objection before the DRP. The assessee has furnished detailed submissions along with the sample copies of invoices before the DRP (page 172 to 173 of the paper book; page 988 of paper book). The DRP confirmed the addition made by the TPO (para 8.2; page 64 of the paper book). Pursuant to the DRP’s directions, final assessment order was passed incorporating the above TPO adjustment. 9.3 Aggrieved by the final assessment order, the assessee has raised this issue before the ITAT. The submission of the learned AR are summarized as follows:- (i) The TPO has erred in relating the findings in the internal funds diversion report with the international transaction of purchase of raw material from Whyte & Mackay. The TPO has relied on the data which pertains to the years 2007 and 2008 and has no relevance to transactions undertaken during the relevant financial year 2012-2013 (page 172 of the paper book). (ii) The assessee further submits that as per the audited financial statements for assessment year 2013-2014, the outstanding balance of Whyte & Mackay as on 31st March, 2013 was Rs.10,428 million, whereas, the value of the impugned transaction is only Rs.686.02 million (refer page 1088 of the paper book capturing the relevant page of the annual report for the year). Therefore, the allegation of the TPO that the assessee has not purchased the raw materials was incorrect and accordingly the disallowance made is not in line with the facts of the case. (iii) The assessee also submits that the purchases made during the year were stored in the warehouse for maturation and hence, at the end of the year, the same was considered in the closing stock. Accordingly, if the purchases are disallowed, the closing stock also ought to be reduced from the taxable income resulting in no tax impact. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 30 (iv) Notwithstanding and without prejudice to the above, we wish to submit that the TPO has not applied any of the six methods as prescribed under section 92C of the Act to determine the arm’s length price of the transaction. In this regard, reliance is placed on the following rulings wherein Courts have held that not adopting one of the mandatorily prescribed methods to determine the arm’s length price makes the entire transfer pricing proceedings unsustainable in law. (a) CIT v. Kodak India (P) Ltd. (2017) 79 taxmann.com 362 (Bombay High Court). (b) CIT v. Merck Ltd. (2016) 73 taxmann.com 23 (Bombay High Court). 9.4 The learned Departmental Representative supported the order of the TPO and the DRP. 9.5 We have heard rival submissions and perused the material on record. The TPO made an addition of Rs. 68,60,16,563 for the reason that the payments made to W&M for stock purchase has been diverted for onward remittance to Ultra Dynamix and other third parties. The TPO relied on the internal report of the taxpayer submitted to him and held that the international transaction with W&M is same as indicated in the internal report. The TPO therefore determined the ALP of this transaction to be NIL by such other method prescribed by the CBDT and the entire amount of Rs. 68,60,16,563 was determined as the adjustment under section 92CA. Before the DRP, assessee assailed the impugned findings of the TPO on various factual reasons as incorporated at page 23 and 24 of the DRP directions. The assessee also argued that proper opportunity of hearing was not provided to the assessee in this regard. The DRP however relied on the TPOs impugned findings and confirmed the above adjustment. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 31 9.5.1 On a perusal of the material on record, we find that the assessee was not allowed sufficient opportunity of hearing in connection with the impugned addition. The submissions of the assessee before the DRP has also not been considered and addressed on merits. We thus set aside the impugned TP adjustment of Rs. 68,60,16,563 and restore the issue to the file of the AO/TPO for proper consideration of facts and to decide as per law after allowing sufficient opportunity of hearing to the assessee. 9.6 In the result, grounds 3.1 to 3.3 are allowed for statistical purposes. Disallowance under section 14A of the Act (Ground 4) (Corporate Tax Issues) 10. Brief facts in relation to the issue are as follows: During the relevant assessment year 2013-2014, the assessee had earned dividend income from the following sources:- Source Amount ( Rs. In crore) Remarks Overseas subsidiary 2.539 Offered to tax Mutual Funds / Dividend from domestic companies 2.299 Exempt by virtue of section 10(34) and 10(35) of the Act. Total 4.838 10.1 During the course of assessment proceedings, the AO proposed to apply the provisions of section 14A read with IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 32 rule 8D. The AO had proposed to make the subject disallowance of Rs.90,89,00,000. 10.2 Aggrieved, the assessee filed objection before the DRP. The DRP upheld the proposed disallowance, however, with specific directions to exclude overseas investments, the income from which was offered to tax in India (para 2.12 page 45 of the paper book). 10.3 Based on the DRP’s direction, the AO excluded the investments in overseas subsidiaries and recomputed the disallowance at Rs.48,04,00,000 in the final assessment order. 10.4 Aggrieved by the final assessment order, the assessee has raised this issue before the ITAT. The learned AR submitted that the issue stands covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2012-2013 (supra), wherein the Tribunal has given the following directions:-  Disallowance u/s 14A of the Act is not attracted when the own funds are in excess of the value of the investments.  Disallowance u/s 14A of the Act cannot exceed the exempt income earned by the assessee.  Disallowance u/s 14A of the Act cannot be made on investments where no dividend income has been earned. 10.5 The learned Departmental Representative supported the findings of the A.O. and the DRP. 10.6 We have heard rival submissions and perused the material on record. In the final assessment order, following IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 33 the DRP directions, the AO made the disallowance under section 14A as per rule 8D at Rs. 48,04,00,000. The Tribunal in assessee’s own case for the AY 2012-13 in IT(TP)A No. 489/Bang/2017 order dated 29.5.2020 considered the arguments made on similar disallowance and remanded the issue to the AO with various directions. The arguments of the learned AR are similar to the arguments considered by the Tribunal in the above order. The findings of the ITAT for the earlier year are as under:- “36. We heard the parties on this issue and perused the record. The Ld A.R made various contentions and hence this issue requires to be restored to the file of the AO for examining it afresh in the light of various contentions of Ld A.R, which are summarized below:- (a) It is the contention of Ld A.R that the own funds available with it is in excess of the investments. The jurisdictional Hon'ble Karnataka High Court in the case of CIT vs. Microlabs Limited (2016)(383 ITR 490) has dealt with an identical issue. The High Court extracted following decision rendered by the Tribunal:- ........ Accordingly, we direct the AO to examine the claim of the assessee and if it is found that the own funds available with the assessee is in excess of the value of investments, then no disallowance u/r 8D(2)(ii) out of interest expenditure is called for. (b) In the alternative, the assessee has also submitted that the loan funds were taken for specific purposes and utilised the same for those purposes. Accordingly, it was contended that, when the assessee would be able to show the nexus between the interest expenditure and its utilization for specific purposes, no interest disallowance is called for. In this regard, it is stated that it has paid interest on security deposits, cash credits/overdrafts, working capital demand loan, bill discounting facilities. When the disallowance is worked out under rule 8D(2)(ii), this contention of the assessee would loose its significance. (c) The Ld A.R submitted that, for the purpose of computing average value of investments, the AO should consider only IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 34 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.” 10.6.1 Following the above order of the ITAT in assessee’s own case for assessment year 2012-2013, we set aside the disallowance under section 14A of the I.T.Act and restore the issue to the file of the AO. The AO shall follow the above directions of the ITAT and recompute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. 10.7 In the result, ground 4.1 to 4.12 are allowed for statistical purposes. Disallowance of interest u/s 36(1)(iii) of the I.T.Act (Ground 5) (Corporate Tax Issue) 11. Brief facts in relation to the above ground are as follows: The assessee had advanced loans to certain related parties / subsidiaries, wherein the rate of interest varied from 0 to 16 per cent. During the course of assessment proceedings, the AO has sought information with respect of loans and advances made towards related parties. In the draft IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 35 assessment order passed by the AO, disallowance was made to the extent of Rs.1,38,05,93,276 by applying SBI’s Prima Lending Rate on the amount of outstanding loans as on 31 st March, 2013. 11.1 Aggrieved by the draft assessment order, the assessee filed objection before the DRP. The DRP retained the disallowance proposed by the AO, but directed to exclude notional interest income imputed by the TPO with respect to the advances made to AE’s outside India but upheld the disallowance under section 36(1)(iii) on a protective basis. 11.2 In the final assessment order, the AO has computed the disallowance u/s 36(1)(iii) at an amount of Rs.140,46,63,276 being higher than the proposed disallowance in the draft assessment order, out of which Rs.26,77,06,867 was on protective basis. 11.3 Aggrieved by the final assessment order, the assessee raised this issue before the ITAT. At the outset, the learned AR submitted that in assessee’s own case for assessment year 2012-2013, the Bangalore Bench of the Tribunal following the decision of the Hon’ble Apex Court in Reliance Industries reported in (2019) 102 taxmann.com 52 (SC) have held that no disallowance shall be made u/s 36(1)(iii) of the Act when own funds are in excess of the loans extended (para 42 page 28 of the order). The learned AR reiterated the submissions that the loans have been extended out of commercial expediency and out of own interest free funds. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 36 11.4 The learned Departmental Representative relied on the findings of the AO and the DRP. 11.5 We have heard rival submissions and perused the material on record. The AO made a disallowance of Rs.138,05,93,276 under section 36(1)(iii) for the reason that the interest bearing funds have been given as interest free loans to various related parties including AEs. The DRP upheld the disallowance made by the AO with a direction that the disallowance of interest by the AO to the extent of TP adjustment in relation to this interest free loan should be only on protective basis. Following the directions, the AO in the final assessment order, made an addition of Rs.140,46,63,276 and a protective addition of Rs. 26,77,06,867 under section 36(1)(iii) of the I.T.Act. 11.5.1 The Tribunal in appellant’s own case for the AY 2012-13 in IT(TP)A No. 489/B/2017 order dated 29.5.2020 considered similar issue and held as follows:- “42. We heard Ld D.R and perused the record. From the arguments of the ld A.R, we notice that the own funds available with the assessee is in excess of the aggregate amount of interest free advances and hence the decision rendered by Hon'ble Supreme Court in the case of Reliance Industries Ltd (supra) shall apply to the facts of the present case, in which event, no interest disallowance is called for. 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 37 any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings.” 11.5.2 Following the above order of the ITAT, we set aside the substantive and the protective addition made under section 36(1)(iii) and restore the issue to the file of the AO to follow similar directions as given above. 11.5.3 Hence grounds 5.1 to 5.14 is allowed for statistical purposes. Disallowance of payments for promotion and advertisement expenses (Ground 6 and 7) (Corporate Tax Issue) 12. Brief facts in relation to the above grounds are as follows: During the assessment year 2012-2013, the assessee had made payments to the following parties amounting to Rs.44,33,55,403 for promotion of its brand logo and claimed it as revenue expenditure on advertisement and promotion. Party name Amount in Rs. Royal Challengers Sports Pvt.Ltd. 10,00,00,000 United Racing & Bloodstock Breeders 16,07,37,530 United Mohun Bagan Football Team Pvt. Ltd. 10,83,75,465 Force India F1 Team Limited 7,42,28,408 Total 44,33,55,403 12.1 The AO in draft assessment order held that the payments made on the account of brand promotion results in enduring benefit to the assessee and accordingly treated the said payments as a capital expenditure. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 38 12.2 Aggrieved by draft assessment order, the assessee filed objection before the DRP. The DRP agreed with the view of the AO that the subject expenditure gives enduring benefit to the assessee and upheld the disallowance proposed by the AO. Further, the DRP also held that no capital asset has been created in the books by the assessee, and unless asset is recognized and no depreciation is claimed, no depreciation can be allowed. 12.3 The final assessment order was passed by the AO in accordance with the directions of the DRP. 12.4 Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for A.Y. 2012-2013 wherein the Tribunal has held that payment of these expenses on sponsorship are revenue expenditure. The said issue has been discussed by the Tribunal in para 43 to para 49 on page 28 to page 38 of its order. (The findings of the Tribunal are recorded in para 45 to para 49 on page 30 to 38 of the order). In view of the foregoing, the AR submits that the brand promotional expenses be allowed as business expenditure u/s 37(1) of the Act. 12.5 The learned Departmental Representative supported the finding of the AO and the DRP. 12.6 We have heard rival submissions and perused the material on record. The AO disallowed the sales promotion and IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 39 advertisement expenses totally amounting to Rs. 44,33,55,403 [36,91,12,995 + 7,42,42,408] for the reason that these expenses are brand promotion expenditures of USL logo, it promotes the brand the assessee, gives enduring benefit and hence capital in nature. The DRP confirmed the action of the AO. 12.6.1 Similar issue has been considered by the Tribunal in assessee’s own case for the AY 2012-13 in IT(TP)A No. 489/B/2017 order dated 29.5.2020 wherein it was held as under:- “45. We have heard Ld D.R on this issue and perused the record. We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd (ITA 5974/Mum/2013 dated 26- 04-2017) and it was held that the same is allowable as revenue expenditure. For the sake of convenience, we extract below the operative portion of the order passed by Mumbai bench of Tribunal on an identical issue:- “3. Second ground of appeal pertains to deleting the disallowance on account of sponsorship fees and management fees. In the earlier part of our order, we have mentioned the facts about the various disallowances made by the AO including the capitalisation of sponsorship. Treating it as an intangible asset, he allowed depreciation on it @25%. 3.1. The FAA after considering the elaborate submissions of the assessee,held that it had entered into an agreement with the sports company namely India-Win in the month of March, 2010, that the assessee-group became cosponsor of Mumbai Indian IPL cricket team as an associate partner, that as per the agreement the ground logo of the assessee group was displayed permanently in the cricket stadium is also on the playing gear of the players,that in the terms of the agreement and amount of Rs.4.50 crores was paid towards sponsorship fees during the year under consideration, that the sponsorship fees for IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 40 different years had been apportioned and allocated to 3 entities of the assessee group which were using the brand logo in the ratio of their respective turnovers during the year, that out of the expenditure of Rs. 2.50 crores and amount of Rs. 21.61 lakhs was allocated to the assessee, that the expenditure incurred on IPL sponsorship did not provide it any benefit of enduring nature, that the expenditure had been incurred year after year by the assessee group with a view to get visibility, that it was in nature of some kind of advertisement expenditure, that same should be allowed as revenue expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court, the FAA allowed the appeal filed by the assessee. 3.1.a. With regard to management fee, the FAA observed that there was no doubt about the genuineness of expenditure, that the expenditure was incurred for availing infrastructure facilities administrative support, like manpower recruitment, HR services, uses of computer, telephone, photo copiers, infrastructure set up etc. in order to carryout business operations smoothly, that the parent company had allocated a certain amount to the account of the assessee in the ratio of its turnover. He finally held that expenditure had to be allowed as revenue expenditure. 3.2. Before us, the DR supported the order of the AO and the AR relied upon the order of the FAA. We find that the assessee group had entered into an agreement with India Win, that it was a co- sponsor of Mumbai Indian IPL team, that it had incurred similar expenditure in the subsequent two years, that out of the total expenditure the assessee had claimed a very 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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 41 not got any enduring benefit from the expenditure incurred nor did the expenditure create any capital asset. Therefore, we do not want to interfere with the order of the FAA. Considering the above, we decide second ground of appeal against the AO.” 46. The Delhi bench of Tribunal has also examined an identical claim in the case of M/s Pepsico India Holdings Pvt Ltd (supra) and the same was allowed as revenue expenditure with the following observations:- “Re: Disallowance of INR 3,85,15,497/- being sponsorship fees paid to ICC 87. In Grounds No. 7 to 7.3 in I.T.A. No. 1044/DEL/2014 for AY 2009-10, the assessee has challenged the disallowance of INR 3,85,15,497/- being sponsorship fees paid by the assessee to ICC. Our attention was drawn to paras 4 to 4.3 of the final assessment order wherein the said issue has been discussed by the AO. It has been submitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amount was proposed to be disallowed by the AO in the Draft Assessment Order, for the following reasons: - (i) Similar expense has been disallowed in the earlier years as part of the Transfer Pricing Adjustment on account of AMP expenses. (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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 42 said expense was incurred in view of the fact that major viewership of cricket is in the Indian subcontinent. He also referred to various newspapers reports which demonstrated the popularity of the sport in India to support the aforesaid contentions. It was also submitted that the assessee company has consistently promoted its range of products using cricket as an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax at source as instructed by the Income Tax Department. Further, the assessee had obtained the approval of the Ministry of Youth Affairs and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper- book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon'ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC). He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it. 90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions. 91. After considering the rival submissions and on perusal of the impugned orders, we find that, here the disallowance of Rs.3,85,15,497/- has been made on account of sponsorship fee by the assessee to the ICC on the ground that similar expenditure was disallowed in the earlier years as part of Transfer Pricing Adjustment on account of AMP expenses; and secondly, assessee has been bearing substantial portion of the fees to the ICC for acquiring the sponsorship rights even though benefit of the same is derived by either entity of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian subcontinent looking to its mass IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 43 popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and after deducting TDS u/s.195. Once the expenditure has been incurred wholly and exclusively for the purpose of business which fact has not been disputed by the Department, then even if some incidental benefit which may arise to any other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for promotion of business only and hence, no disallowance is called for. Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed.” 47. We notice that the co-ordinate benches are consistently holding the view that the expenditure incurred on sponsoring of sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon'ble Delhi High Court in the case of Modi Revelon P Ltd (supra) and the relevant discussions made by the High Court are extracted below:- “22. As far as the second aspect, i.e. expenditure for promotion of the brand is concerned, there is no doubt that the dealer's functions extend to advertising the products of the assessee, manufactured by the sister concern. On this aspect, Section 37 of the Income-tax Act would be relevant. The said provision reads as follows: IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 44 "SECTION 37 GENERAL: (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2B) Notwithstanding anything contained in sub- section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. The applicable test as to what constitutes expenses "laid out or expended wholly and exclusively for the purposes of the business or profession" was explained in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] Supp. (2) SCR 211. The correct approach, said the Court, which has to be taken in all such cases is to see whether: "was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business" Again, in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/ 1 Taxman 485 (SC) the Supreme Court outlined the correct test of commercial expediency as the guiding principle to decide whether the expenditure was to facilitate profits, as follows: (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee" In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 45 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 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, IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 46 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 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. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 47 (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 IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 48 right to use the court yard, no other rights were created in favour of assessee. In other words, the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future, and therefore, it would be on revenue account. In other words merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue. The advance of Rs. 10,00,000/-, in the present case, consists merely in facilitating the assessee's business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee and against the Revenue is correct and deserve no interference by this Court.” 49. Respectfully following the above cited decisions, we set aside the order passed by AO on this issue and direct him to allow the impugned sponsorship expenses as revenue expenditure.” 12.6.2 Following the above order the ITAT in assessee’s own case for assessment year 2012-2013 (supra), we allow deduction of sales promotion and advertisement expenses of Rs. 44,33,55,403. As the entire expenses are allowed as revenue expenditure, the question of depreciation does not arise. 12.7 Hence grounds 6.1 to 6.7 and grounds 7.1 to 7.7 are allowed. Disallowance of payments based on Project Spirit Report (ground 8) (Corporate Tax Issue) 13. Brief facts of the issue raised in the above ground are as follows: During the financial year 2014-2015, the Board of Directors of the assessee had mandated an inquiry in relation IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 49 to matters connected with audit qualifications made in the assessee’s financial statements for the financial year 2013- 2014. The inquiry identified references to certain additional parties / additional matter which also potentially dealt with transactions of similar nature in which the documents identified raised concerns as to the propriety of the underlying transactions / matters. It is stated that based on the above, the assessee wanted to identify whether the additional parties / matter involved any impropriety, or the transactions were improper. The report namely Project Spirit Report dated 29 th June, 2016 was submitted with the AO during the course of assessment proceedings. On analysis of the report, the AO identified the transactions relating to the year under consideration and classified them into capital and revenue transactions. The AO disallowed an amount of Rs.48,14,00,000 u/s 37 of the Act treating them as revenue transactions. Further, an amount of Rs.6,35,10,000 has been treated as interest income on alleged interest free loans / advances provided to the subsidiary at an adhoc rate of 14.5%. 13.1 Aggrieved by the draft assessment order, the assessee filed objection before the DRP. The DRP had confirmed the disallowance proposed by the AO. The final order was passed in accordance with the DRP’s directions thereby making an addition of Rs.54,49,10,000. 13.2 Aggrieved, the assessee has raised this issue before the ITAT. The learned AR’s submissions are summarized below:- IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 50  At the outset, it is submitted that assessee has not debited the profit and loss account / claimed deduction in relation to expenses amounting to Rs.21.58 crore disallowed pursuant to the Project Spirit Report. The above fact was highlighted to the lower authorities in the submissions furnished by the assessee (page 128 to 130 of the paper book). Given that the expenses were not claimed by the assessee, the disallowance of the expenses is unwarranted and bad in law.  With respect to the remaining transactions, the assessee submitted that the disallowance based on the Project Spirit Report has been made without providing the reasons for making such disallowance and on an arbitrary basis without adjudicating on the objections filed by the assessee. In this connection, it was submitted that various Courts have repeatedly held that there must be something more than bare suspicion to support an addition or disallowance in an assessment. No disallowance can be made which are based on mere conjectures and surmises. In this context, it was submitted that the assessee being a victim of such fraud would in fact be eligible to claim such sums a deductible bonafide business loss as highlighted in the following judicial pronouncements:- (i) Baridas Daga v. CIT (34 ITR 10 (SC) (ii) Sassoon J David & Co. P. Ltd. v. CIT (1975) 98 ITR 50 (Bom.) (iii) CIT v. Parmanand Makhan Lal (1983) 15 Taxman 12 (Patna) (iv) Kothari & Sons v. CIT (1966) 61 ITR 23 (Madras) (v) Ramchandar Shivnarayan v. CIT (1978) 111 ITR 263 (SC) (vi) Khaitan & Co. v. CIT (1979) 1 Taxman 280 (Calcutta) (vii) Churakulam Tea Estates (P) Ltd. v. CIT (1995) 81 Taxman 214 (Kerala) (viii) CIT v. India United Mills Ltd. (1978) 112 ITR 129 (Bombay).  The CBDT vide its undernoted circular (Circular No.35-D (Xivii- 20) (F.No.10/48/65-It(A-1)], dated 24.11.1965 has accepted the above ruling of the Hon’ble Apex Court in the case of Badridas Daga (supra) and has held that any loss sustained due to embezzlement of employees would be available as a business loss u/s 28.  According, it was submitted that the disallowance is against the principles enunciated by the Hon’ble Apex Court and the Circular issued by the CBDT and the same needs to be deleted. 13.3 The learned Departmental Representative supported the finding of the AO and the DRP. IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 51 13.4 We have heard rival submissions and perused the material on record. The AO made an addition of Rs.54,49,10,000 for the reason that the funds of the assessee has been diverted for various non business purposes. The AO relied on the ‘Project Spirit Report’ prepared by M/s Ernst and Young (E&Y) vide letter dated 14.10.2016 for the purpose of arriving at the impugned finding that the funds of the assessee have been diverted in many ways and hence the revenue expenditure claimed as deduction amounting to Rs.48,14,00,000 is to be disallowed. The AO further held that the diversion of funds to various entities would not be returned back to the assessee. The AO therefore charged an interest of Rs. 6,35,10,000 calculated at 14.5% on Rs. 43.8 crores. The DRP confirmed the AO’s additions. Referring to the DRP objections, the learned AR argued that out of disallowance of Rs. 48.14 crores, a sum of Rs. 15.23 crores pertain to other entities and hence the same cannot be disallowed in assessee’s case. Similarly, it was argued that the entirety of Rs. 43.8 crores on which interest income of Rs.6,35,10,000 is imputed did not pertain to the assessee and hence the impugned addition of Rs. 6,35,10,000 is bad in law. These arguments have not been considered properly by both AO and DRP. The assessee’s claims in the DRP objections [Page 128 to 134 of the appeal memo] regarding deduction under section 28 on account of fraud committed on the company has also not been considered by the AO/DRP. It appears that the AO has made the addition only on the basis of ‘Project Spirit Report’ without properly examining the claim IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 52 of the assessee that certain transactions and the addition made thereto does not relate to the assessee. Considering the material on record and for the aforesaid reasoning, we set aside the impugned addition and restore this issue to the file of the AO for proper examination of all the facts relating to the said issue. The assessee shall provide all documentary evidence relating to its claim and the AO also shall make a proper enquiry in this regard. All contentions are left open to be considered by the AO in accordance with the law. 13.4.1 Hence grounds 8.1 to 8.8 are allowed for statistical purposes. Interest u/s 234B of the I.T.Act (ground 9) 14. The above ground is only consequential and the same is dismissed. Interest u/s 234C of the I.T.Act (ground 10) 15. The limited submission of the assessee is that interest u/s 234C of the I.T.Act should be calculated on the return income and not on the assessed income of the assessee. In this context, the learned AR relied on the Bangalore Bench order of the Tribunal in the case of SAP India Private Limited reported in (2014) 41 taxmann.com 7 (Bangalore – Trib.). 15.1 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of SAP India Private Limited (supra) had held that interest u/s 234C of the I.T.Act shall apply on the returned income and not on the assessed income. Following the co- IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 53 ordinate Bench order of the Tribunal, we direct the A.O. to calculated interest u/s 234C of the I.T.Act accordingly. 15.2 In the result, ground 10 is allowed for statistical purposes. Short credit of TDS / TCS (Ground 11) 16. The assessee had claimed TDS / TCS credit of Rs.24,19,36,874 in the return of income filed. The A.O., however, restricted the credit to Rs.24,02,13,419. Thereby not granting credit for TDS of a sum of Rs.17,23,384. 16.1 We have heard rival submissions and perused the material on record. We direct the AO to verify the TDS credit and grant the same as per law. Allowability of education cess paid as a tax deductible expenditure (Additional Ground 12) 17. The above ground relates to the claim of deduction of education cess including secondary and higher educational cess as deduction while computing the total income. 18. We have heard rival submissions and perused the material on record. The Kolkata Bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd Vs. Addl. CIT (ITA No.2184/Kol/2018dated 26.10.2021) has held that the education cess is an additional surcharge levied on income tax and hence it partakes the character of income tax. Accordingly it held that the education cess is not allowable as deduction. The Tribunal also noted the decision rendered by IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 54 Hon’ble Bombay High Court in the case of Sesagoa Ltd. 117 Taxmann.com 96 and by Hon’ble Rajasthan High Court in the case of Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), wherein it was held that the education cess is allowable as deduction. However, the Tribunal observed that the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. K. Srinivasan (1972) 83 ITR 346 was not brought to the notice of the above said Hon’ble High Courts. Accordingly, the Tribunal has expressed the view that the decision rendered by Hon’ble Supreme Court in the case of K. Srinivasan (supra) shall prevail on this issue and accordingly held that the education cess is not allowable as deduction. 18.1 Following the above said decision of Kolkata bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd (supra), we hold that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, we reject this ground of the assessee. 19. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on this 05 th day of April, 2022. Sd/- (Padmavathy S) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 05 th April, 2022. Devadas G* IT(TP)A No.2701/Bang/2017 M/s.United Spirits Limited. 55 Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-14, Bangalore. 4. The Pr.CIT- (Exemption), Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore