M/s United Millennium Breweries Ltd., (Since Amalgamated with M/s United Breweries Ltd.,), Visakhapatnam V. THE ACIT, CIRCLE - 4(1), Visakhapatnam

ITA 512/VIZ/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9015 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 09-12-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 05-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R GOVINDARAJAN; M N M NAIK
• Assessee Lawyers: SATENDRA PANDEY
• Keywords: Gift; Business income; Business expenditure; Proportionate interest; Question of law; Non-deduction of tax; Relationship of principal and agent; Commercial expediency; Capital expenditure
• Section: 143(3); 142(1); 14A; 37(1); 201(1); 37

Judgement Text

ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NOS.512, 513 & 514/VIZAG/2014 ( / ASSESSMENT YEARS: 2007-08, 2008-09 & 2009-10) M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULAM ACIT, CIRCLE - 4(1), VISAKHAPATNAM [PAN NO. AABCG4480G ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI K. GOPAL, AR & SHRI SATENDRA PANDEY, AR / RESPONDENT BY : SHRI R. GOVINDARAJAN, DR & SHRI M.N.M. NAIK, DR / DATE OF HEARING : 28.03.2017 / DATE OF PRONOUNCEMENT : 21.04.2017 / O R D E R PER SHRI MANJUNATHA, ACCOUNTANT MEMBER: THESE THREE APPEALS FILED BY THE ASSESSEE ARE DIRE CTED AGAINST, COMMON ORDER PASSED BY THE COMMISSIONER OF INCOME-T AX (APPEALS), VISAKHAPATNAM DATED 10-07-2014 FOR THE ASST. YEAR 2 007-08. 2008-09 AND 2009-10. SINCE, FACTS ARE IDENTICAL AND ISSUES ARE COMMON, THEY ARE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 2 HEARD TOGETHER AND DISPOSED OFF, BY THIS COMMON ORD ER FOR THE SAKE OF CONVENIENCE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF BEER IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE IS A CONTRACT MANUFACTURE FOR M/S UNITED BREWERIES LIMITED AND M/S MILLENNIUM BEER INDUSTRIE S LIMITED. THE ASSESSEE ENTERED INTO A BREWING AGREEMENT WITH M/S UNITED BREWERIES LIMITED AND M/S MILLENNIUM BEER INDUSTRIES LIMITED FOR MANUFACTURE AND SALE OF BEER UNDER THE BRAND NAMES OWNED BY THE PRI NCIPLES IN THE STATE OF ANDHRA PRADESH. THE LIQUOR TRADE INCLUDING MANUF ACTURE AND SALE OF BEER AND IMFL IN THE STATE OF ANDHRA PRADESH HAS BE EN REGULATED BY THE STATE GOVT. THROUGH STATE EXCISE LAWS. THE STATE GO VT. HAS EXCLUSIVE DISTRIBUTION RIGHTS TO BUY AND SELL LIQUORS FROM TH E MANUFACTURERS AND SELL THE SAME TO THE RETAILERS IN THE STATE. THE MANUFAC TURES OF BEER, IMFL AND OTHER LIQUORS SHALL MANUFACTURE ALCOHOLIC BEVER AGES UNDER EXCLUSIVE LICENSE ISSUED BY THE STATE GOVT. IN EXCISE BONDED WAREHOUSE AND SELL THEIR PRODUCTS TO THE RETAILERS THROUGH ANDHRA PRAD ESH STATE BEVERAGE CORPORATION LIMITED UNDER A RATE CONTRACT AGREEMENT ENTERED INTO WITH M/S APBCL. THE ASSESSEE HAS ENTERED IN TO A RATE CO NTRACT AGREEMENT WITH M/S APBCL FOR SUPPLY OF VARIOUS BRAND BEERS MA NUFACTURED UNDER A BREWING AGREEMENT ENTERED INTO WITH M/S UNITED BREW ERIES LIMITED AND ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 3 M/S MILLENNIUM BEER INDUSTRIES LIMITED, THE BRAND O WNERS OF KINGFISHER AND OTHER BRAND BEERS. 3. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE A.Y 2007-08, 2008-09 AND 2009-10, U/S 139(1) OF THE INCOME TAX A CT, 1961 DECLARING TOTAL INCOME/LOSS OF RS. NIL, RS.(-) 2,43,56,045 AN D RS. (-)5,36,69,495/- RESPECTIVELY. THE CASES HAVE BEEN SELECTED FOR SCRU TINY ASSESSMENTS AND ACCORDINGLY, NOTICES U/S 143(2) AND 142(1) OF THE I NCOME TAX ACT, 1961 ALONG WITH QUESTIONNAIRE WERE ISSUED. IN RESPONSE T O NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND PRODUCED BOOKS OF ACCOUNTS AND RELEVANT DETAILS AS CALLED FOR. THE ASSESSMENT FOR THE A.Y. 2007-08 HAS BEEN COMPLETED U/S 143(3) OF THE ACT, ON 29-12-2009, DETERMINING GROSS TOTAL INCOME OF RS. 11,07,14,833/- AND TOTAL INCOME OF RS. NIL, AFTER S ET OFF OF BROUGHT FORWARD LOSSES OF RS. 11,07,14,833/-, INTERALIA MAK ING DISALLOWANCES TOWARDS TRADE SCHEMES AND DISCOUNTS U/S 40(A)(IA) OF THE ACT, FOR FAILURE TO DEDUCT TDS U/S 194H AND DISALLOWANCE OF INTEREST PAID ON BORROWED CAPITAL U/S 14A OF THE ACT, FOR DIVERSION OF INTEREST BEARING FUNDS TO GROUP COMPANIES. SIMILARLY, THE ASSESSMENT FOR THE A.Y. 2008- 09 AND 2009-10, HAS BEEN COMPLETED ON 31-12-2010 AN D 20-12-2011, DETERMINING TOTAL INCOME OF RS. 11,31,67,600/- AND RS. 1,11,64,290/- RESPECTIVELY, INTER ALIA MAKING DISALLOWANCES TOWAR DS TRADE SCHEMES ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 4 AND DISCOUNTS U/S 40(A)(IA), GUARANTEE COMMISSION U /S 40(A)(IA), INTEREST PAID ON BORROWED CAPITAL U/S 14A OF THE AC T, DISALLOWANCES OF DEL-CREDRE AGENTS COMMISSION AND ADDITION TOWARDS D IFFERENCE IN SALES OF OLD BOTTLES. 4. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE, THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSION AND CONTENDED EACH AND EVERY ITEM OF DISALLOWANCE/ADDITIONS MADE BY THE A.O. THE CIT(A), AFTER CONSIDERING THE ASSESSMENT ORDERS AND WRITTEN SUBMISSIONS OF TH E ASSESSEE, ISSUED A ENHANCEMENT NOTICE AND PROPOSED TO DISALLOW EXPENDI TURE INCURRED UNDER THE HEAD TRADE SCHEME AND DISCOUNTS U/S 37(1 ) OF THE ACT, ON THE GROUND THAT THE EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A), ALSO PROPOSED TO ENHANCE THE ASSESSMENT WITH REGARD TO DISALLOWANCE OF DEL-CREDE RE AGENTS COMMISSION FOR THE ASST. YEAR 2007-08 AND 2009-10. THE ASSESSEE FILED ITS OBJECTIONS FOR PROPOSED ENHANCEMENT ON THE GROU ND THAT THE CIT(A) HAS POWER TO ENHANCE THE ASSESSMENT ON THE ISSUES W HICH WERE ALREADY CONSIDERED BY THE A.O., BUT NOT ON THE ISSUES WHICH ARE NOT SUBJECT MATTER OF ASSESSMENT OR DISPUTE. THE CIT(A), AFTER CONSIDERING THE OBJECTIONS FILED BY THE ASSESSEE AND ALSO RELIED UP ON CERTAIN JUDICIAL PRECEDENTS, REJECTED OBJECTIONS FILED BY THE ASSESS EE. IN SO FAR AS ISSUES ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 5 ON MERITS, THE CIT(A), AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE, FOR THE DETAILED DISCUSSION IN HIS ORDER DATED 10-0 7-2014, CONFIRMED ADDITIONS MADE BY THE A.O. TOWARDS DISALLOWANCE OF TRADE SCHEME & DISCOUNTS, DISALLOWANCES OF INTEREST U/S 14A, DISAL LOWANCE OF GUARANTEE COMMISSION AND DISALLOWANCE OF DEL-CREDERE AGENTS C OMMISSION FOR ALL THE THREE ASSESSMENT YEARS. IN SO FAR AS DEL-CREDER E AGENTS COMMISSION, THE CIT(A), ENHANCED THE ASSESSMENT AND DISALLOWED DEL-CREDERE AGENTS COMMISSION FOR THE A.Y. 2007-08 AND 2009-10. THE CI T(A), ALSO MADE 10% AD-HOC DISALLOWANCE OF REIMBURSEMENT OF EXPENDI TURE CLAIMED BY THE DEL-CREDERE AGENTS FOR ALL THE THREE ASSESSMENT YEARS. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL FOR ALL THREE ASST. YEARS. FOR THE SAKE OF BREVITY, THE GROUNDS O F APPEALS AS APPEARED IN ITA.NO. 512/VIZAG/2014, FOR ASST. YEAR 2007-08 I S EXTRACTED BELOW. 1) COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN REJE CTING THE GROUNDS RAISED AGAINST APPLICABILITY OF PROVISIONS OF SECTI ON 40(A)(IA) TO PAYMENTS [RS.9,56,05,833 /-] MADE TOWARDS TRADE SCHEME DISCOUNTS (INCENTIVES ) AND COMMISSIONER (APPEALS) FAILED TO GIVE A SPECIFI C FINDING ON THE DISPUTED ISSUE. 2A) THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THE PROVISIONS UNDER A.P. REGULATION OF WHOLESALE TRADE AND DISTRI BUTION & RETAIL TRADE IN INDIA LIQUOR, FOREIGN LIQUOR, WINE & BEER ACT 1993, WHICH DO NOT JUSTIFY THE DISALLOWANCE OF EXPENDITURE CLAIMED , BY INVOKING EXPLANATION TO SECTION 37 OF THE IT ACT. THE APPELL ANTS CLAIMS OF VARIOUS EXPENDITURES WERE NOT FOR ANY PURPOSE PROHI BITED, WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. 2B) THE COMMISSIONER (APPEALS) FAILED TO REFER TO ANY S PECIFIC PROVISION IN THE RATE CONTRACT AGREEMENT WITH THE A .P.B.C.L., WHICH PROHIBITS INCURRING OF EXPENDITURE BY THE APPELLANT / MANUFACTURER AND ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 6 ON THE CONTRARY THE APPELLANT MANUFACTURER IS JUSTI FIED IN INCURRING VARIOUS EXPENDITURES, IN ORDER TO FULFILL I MEET TE RMS 2.5 B, C, D, 2.8, 2.10 A, B, C, D, 2.11 A, 3.4 & 3.14 MENTIONED IN TH E CONTRACT AGREEMENT / TENDER ENTERED BY THE APPELLANT WITH A.P. BEVERAG ES CORPORATION LTD. 2C) COMMISSIONER (APPEALS) FAILED TO APPRECIATE THE CLA IMS MADE BY THE APPELLANT, WHICH WOULD JUSTIFY THE NECESSITY TO MEET SUCH EXPENDITURE, AND SUCH EXPENDITURES [TRADE SCHEME DI SCOUNTS OF RS.9,56,05,833 /-] ARE INCIDENTAL TO THE BUSINESS CARRIED ON BY TH E APPELLANT MANUFACTURER. 3A) THE APPELLANTS CLAIM AGAINST APPLICABILITY OF PROVISIONS OF SECTION 14A OF THE IT ACT BY THE DEPARTMENT TO INTEREST PAY MENTS TO BANKS [RS.2,42,20,619/-] HAS NOT BEEN PROPERLY APPRECIATE D BY C.I.T.(A), RESULTING IN CONFIRMATION OF ADDITION, WHICH IS ILL EGAL AND UNJUST. 3B) THE COMMISSIONER(APPEALS) ERRED IN REJECTING T HE CLAIM THAT FUNDS WERE PROVIDED BY THE APPELLANT TO M/S. M.B.I.L.(SIST ER CONCERN), ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND COMMISSIONER ( APPEALS) HAS NOT PROPERLY CONSIDERED THE CLAIM RESULTING IN APPLYING PROVISIONS OF SECTION 14A OF THE IT ACT. 4) C.I.T.(A) IS NOT JUSTIFIED TO INVOKE EXPLANATION TO SECTION 37 OF THE IT ACT, TO SUCH PAYMENTS MADE TO DELCREDERE AGENTS BY WAY OF COMMISSION OF RS.2,35,08,110 /- TOWARDS BUSINESS EXPENDITURE LAID OUT OR EXPENDED BY APPELLANT WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS. 4A) THE COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN REJECTING THE CLAIM OF THE APPELLANT THAT ENGAGEMENT OF DEL CREDERE AGENTS BY BRAND OWNER M/S. U.B. LTD., IS MAINLY FOR THE BENEFIT OF THE AP PELLANT / MANUFACTURER, WHICH HAS NOT MAINTAINED SEPARATE ESTABLISHMENT TO MEET THE REQUIREMENTS OF THE BUSINESS. 4B) THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THE SERVICES RENDERED BY DEL CREDERE AGENTS AFTER EXAMINING THE VARIOUS EVIDENCES PRODUCED BY THE APPELLANT IN SUPPORT OF THE CLAIMS. 4C) COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN REJE CTING THE CLAIMS MADE, PARTICULARLY, AFTER UPHOLDING THE ACTION OF A SSESSING OFFICER I.T.O. (TDS) IN RAISING DEMAND U/S.201 & 201(1 A) OF THE I T ACT AND AFTER ACCEPTING THE CLAIMS MADE, TOWARDS REIMBURSEMENT OF EXPENDITURE INCURRED TO DELCREDERE AGENTS. 4D) THE COMMISSIONER (APPEALS) OVER LOOKED THE REQU IREMENT OF THE APPELLANT TO FULFILL THE TERMS AND CONDITIONS LAID DOWN BY THE BUYER A.P.B.C.L. AND THE APPELLANT AVAILED THE SERVICES O F DEL CREDERE AGENTS TO FULFILL / MEET THE CONDITIONS LAID DOWN AND COMMISS IONER (APPEALS) ERRED IN JUSTIFYING THE DISALLOWANCE OF PAYMENTS MADE TO DEL CREDERE AGENTS FOR SERVICES RENDERED. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 7 4E) THE COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN DRAWING ADVERSE INFERENCE WITH REFERENCE TO PAYMENTS OF DISCOUNTS V IDE BILLS / RECEIPT NOS. AS PER THE ANNEXURE ENCLOSED WITHOUT TAKING INTO CO NSIDERATION THE DOCUMENTARY EVIDENCES SUBMITTED IN THE PAPER BOOK I N SUPPORT OF CLAIMS MADE (PAGES 29 TO 159). 4F) THE COMMISSIONER(APPEALS) IN PARA 5.20 IS NOT JUSTIFIED IN OBSERVING THAT PAYMENTS MADE TO DELCREDERE AGENTS U NDER TRADE SCHEME & DISCOUNT IS NOT TOTALLY SUBSTANTIATED WITH EVIDEN CE IN THE LIGHT OF EVIDENCE BROUGHT ON RECORD BY WAY OF BANK ACCOUNTS OF DELCREDERE AGENTS CLEAR BY INDICATING THE AMOUNTS RECEIVED FRO M THE APPELLANT COMPANY. 5) COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN DISAL LOWING 10% OF THE EXPENDITURE REIMBURSED [RS.5,54,127 /-], WITHOUT VALID REASONS AND WITHOUT BRINGING ON RECORD ANY JUSTIFICATION TO RES TRICT SUCH CLAIM. 6A) COMMISSIONER (APPEALS) IS NOT JUSTIFIED IN ISSU ING ENHANCEMENT NOTICE DT:15-02-2013 TO THE APPELLANT ON THE ISSUES WHICH WERE NOT CONSIDERED BY THE ASSESSING OFFICER, AS MENTIONED IN EXPLANATI ON TO SECTION 251 OF THE IT ACT, PARTICULARLY IN VIEW OF DECISIONS OF SUPREM E COURT REPORTED IN 44 ITR 891 & 66 ITR 433 AND DECISION OF DELHI HIGH COU RT IN 240 ITR 556 & 251 ITR 864. 6B) THE APPELLANT SUBMITS THAT C.I.T.(A) IS NOT JUST IFIED IN RELYING ON DECISIONS WHERE IN THE FACTS CONSIDERED BY THE COUR TS ARE ENTIRELY DIFFERENT AND THE APPELLANT PRAYS FOR DELETION OF ADDITIONS C ONSIDERED BY COMMISSIONER (APPEALS), BASED ON THE ENHANCEMENT NO TICES ISSUED. 7) FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS FOR NECESSARY RELIEF. 6. THE ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL FOR THE A.YS 2007-08, 2008-09 AND 2009-10. FROM THESE GROUNDS OF APPEAL, THE ASSESSEE HAS AGITATED FOLLOWING FIVE ISSUES. (I) DISALLOWANCE OF TRADE SCHEME AND DISCOUNTS U/S 37(1) AND 40(A)(IA) OF THE ACT. (II) DISALLOWANCE OF DEL-CREDERE AGENTS COMMISSION U/S 37(1) OF THE ACT. (III) DISALLOWANCE OF INTEREST U/S 14A OF THE ACT. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 8 (IV) DISALLOWANCE OF GUARANTEE COMMISSION. (V) AD-HOC DISALLOWANCE OF 10% REIMBURSEMENT OF EXP ENDITURE INCURRED BY THE DEL-CREDERE AGENTS. 7. THE ISSUE OF DISALLOWANCE OF TRADE SCHEME AND DI SCOUNTS AND DEL- CREDERE AGENTS COMMISSION IS INTERCONNECTED AND HEN CE, WE SHALL, FIRST TAKE UP THE ISSUE OF DISALLOWANCE OF DEL-CREDERE AG ENTS COMMISSION. THE BRIEF FACTS WHICH LEAD TO DISALLOWANCE OF EXPENDITU RE ARE THAT THE ASSESSEE IS A CONTRACT MANUFACTURE FOR M/S UNITED B REWERIES LIMITED AND M/S MILLENNIUM BEER INDUSTRIES LIMITED FOR THE TERR ITORY OF STATE OF ANDHRA PRADESH. M/S UNITED BREWERIES LIMITED AND M/ S MILLENNIUM BEER INDUSTRIES LIMITED ARE BRAND OWNERS OF KINGFISHER A ND OTHER BRAND BEERS, HAD ENTERED IN TO BREWING AGREEMENT WITH THE ASSESSEE FOR MANUFACTURE AND SALE OF THEIR BEERS IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE MANUFACTURES BEER IN A EXCISE BONDED WAREH OUSE UNDER LICENSE FROM STATE EXCISE DEPARTMENT AND SUPPLIES T O ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED, A STATE OWNED PSU, WHICH HAD EXCLUSIVE RIGHTS TO PURCHASE FROM MANUFACTURES AND SELLS TO RETAIL TRADERS IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE HAD EN TERED INTO A BREWING AGREEMENT DATED 4 TH MARCH 2005 WITH M/S INERTIA INDUSTRIES LIMITED FOR BREWING AND DISTRIBUTION OF CERTAIN BRA NDS OF BEERS. THE ASSESSEE ALSO ENTERED INTO AMENDED BREWING AGREEMEN T DATED 31 ST ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 9 OCTOBER 2007 WITH M/S UNITED BREWERIES LIMITED FOR AMENDING CLAUSE 7 OF THE AGREEMENT TO FIX RATE OF SERVICE CHARGES AND OTHER EXPENSES. AS PER CLAUSE 7 OF THE AGREEMENT, ANY PROMOTIONAL SPEN DS INCLUDING DEL- CREDERE COMMISSION ETC., SHALL BE BORNE BY THE BREW ER. THE PRINCIPLES M/S UNITED BREWERIES LIMITED HAS ENTERED INTO DEL-C REDERE AGREEMENT WITH FOUR DEL-CREDERE AGENTS, I.E. (I) ANUPAMA DIST RIBUTORS PVT LTD, (II) M/S SHRIRAM MARKETING, (III) M/S PRAYAG ENTERPRISES PVT LTD AND (IV) M/S VITARI DISTRIBUTORS PVT LTD FOR MARKETING ITS PRODU CTS IN THE STATE OF ANDHRA PRADESH AND AGREED TO PAY COMMISSION AND ALS O REIMBURSE EXPENDITURE. THE SAID AGREEMENTS ARE ENTERED IN WRI TING WITH SPECIFYING THE TERMS AND CONDITIONS AND ALSO DUTIES AND RESPON SIBILITIES OF THE DEL- CREDERE AGENTS. 8. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. CALLED UPON THE ASSESSEE TO JUSTIFY THE PAYMENT OF DEL-CRE DERE AGENTS COMMISSION AND TO FURNISH RELATED AGREEMENTS. THE A SSESSEE HAS FILED COPIES OF AGREEMENTS AND EXPLAINED THAT DEL-CREDERE AGENT COMMISSION IS PAID FOR RENDERING SERVICES TO THE COMPANY FOR M ARKETING ITS PRODUCTS IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE FURTHE R SUBMITTED THAT IT HAD SOLD ITS PRODUCTS TO ANDHRA PRADESH STATE BEVER AGES CORPORATION LIMITED, IN TURN IT HAS SOLD TO RETAIL DEALERS. THE APBCL DOES NOT TAKE ANY RESPONSIBILITY OF PROMOTING THE BRANDS AND IT I S THE PRIMARY ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 10 RESPONSIBILITY OF THE MANUFACTURE TO PROMOTE ITS OW N BRAND WITH VARIOUS MARKETING STRATEGIES INCLUDING TRADE DISCOUNTS ETC. THE COMPANY SHALL MAKE ITS OWN ARRANGEMENTS INCLUDING PROMOTIONAL ACT IVITIES BY EMPLOYING MARKETING STRATEGIES TO BE COMPETITIVE WI TH OTHER BRAND MANUFACTURERS. THE ASSESSEE IS A SUBSIDIARY OF UNIT ED BREWERIES LIMITED ENTERED INTO BREWING AGREEMENT WITH ITS HOLDING COM PANY FOR MANUFACTURE AND SALE OF ITS BRANDS IN THE STATE OF ANDHRA PRADESH UNDER A RATE CONTRACT AGREEMENT. M/S UBL, HOLDING COMPANY IS HAVING ITS PRESENCE ALL OVER INDIA, ENTERED IN TO DEL-CREDERE AGREEMENT WITH AGENTS FOR PROMOTING BRANDS TO BOOST UP ITS SALES, HOWEVER ANY SPENDING ON PROMOTIONAL EXPENDITURE INCLUDING DEL-C REDERE AGENTS COMMISSION SHALL BE BORNE BY THE CONTRACT MANUFACTU RERS. THE DEL- CREDERE AGENTS DUTY IS TO EMPLOY REQUIRED STAFF AND MEET RETAIL TRADERS AND ENCOURAGE THEM TO BUY THEIR PRODUCTS. THE DEL-C REDERE AGENTS HAVE BEEN PAID COMMISSION BASED ON THE TOTAL SALES ACHIE VED BY THEM WHICH IS SUPPORTED BY DATA COLLECTED FROM ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED. DEL-CREDERE AGENTS COMMISSION IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, THEREFORE, REQUESTED TO ALLOW THE DEL-CREDERE AGENTS COMMISSIO N. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 11 9. THE A.O. AFTER CONSIDERING THE EXPLANATION OF T HE ASSESSEE, OBSERVED THAT THE DEL-CREDERE AGENTS AGREEMENTS WER E ENTERED INTO WITH DEL-CREDERE AGENTS BY M/S UNITED BREWERIES LIM ITED, BUT NOT BY THE ASSESSEE COMPANY. THE A.O. FURTHER OBSERVED THAT IN THE STATE OF ANDHRA PRADESH, WHOLE SALE TRADE OF ALL ALCOHOLIC B EVERAGES IS CONTROLLED BY M/S ANDHRA PRADESH STATE BEVERAGES CORPORATION L IMITED. M/S APBCL PROCURES ALL ALCOHOLIC BEVERAGES AND DISTRIBUTE THE SAME TO THE LICENSED RETAIL TRADERS. THE RETAIL TRADERS DIRECTLY PURCHAS E GOODS FROM M/S APBCL. THE ASSESSEE DOES NOT HAVE ANY DIRECT NEXUS WITH THE RETAIL TRADERS AND NO MIDDLEMEN ARE INVOLVED IN PURCHASE A ND SALE, THEREFORE OPINED THAT THERE IS NO NECESSITY TO INCUR DEL-CRED ERE AGENTS COMMISSION AND WHICH IS NOT INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF THE BUSINESS. ACCORDINGLY DISALLOWED COMMISSION PAID TO DEL-CREDERE AGENTS ALONG WITH REIMBURSEMENT OF EXPENSES AND ADDED BACK TO TOTAL INCOME. 10. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFOR E THE CIT(A). THE CIT(A), FOR THE DETAILED DISCUSSION IN HIS ORDER IN PARA NO. 8.2 TO 8.13 UPHELD THE FINDINGS OF THE ASSESSING OFFICER. THE C IT(A), FURTHER OBSERVED THAT THE ASSESSEE FAILED TO JUSTIFY PAYMEN T OF DEL-CREDERE AGENTS COMMISSION WITH NECESSARY EVIDENCES. THE AGR EEMENT COPIES FILED BY THE ASSESSEE SHOWS THAT THESE AGREEMENTS H AVE BEEN ENTERED INTO WITH EFFECT FROM FINANCIAL YEAR 2006-07 AND TH E ASSESSEE FAILED TO ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 12 OFFER ANY EXPLANATION FOR PAYMENT OF COMMISSION PRI OR TO 1 ST APRIL 2007. THE CIT(A) FURTHER OBSERVED THAT SUCH EXPENDITURE I S NOT ALLOWABLE UNDER SECTION 37 OF THE ACT, AS IT WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THOUGH THE ASSESSEE CL AIMS TO HAVE PAID COMMISSION FOR SERVICES RENDERED FOR PROMOTION OF S ALES, FAILED FURNISH NECESSARY DETAILS AS TO HOW THE SERVICES OF DEL-CRE DERE AGENTS HELPS THE COMPANY TO INCREASE ITS SALES VOLUME. AS CLAIMED BY THE ASSESSEE, IT IS THE RESPONSIBILITY OF THE PARENT COMPANY TO PROMOTE AND MARKET ITS PRODUCTS AND ALSO FACT THAT THESE DEL-CREDERE AGENT S AGREEMENTS HAVE BEEN ENTERED INTO BY M/S UNITED BREWERIES LIMITED, IT WAS NOT CLARIFIED HOW THE ASSESSEE WHICH WAS A CONTRACT MANUFACTURER WOULD BE REQUIRED TO BEAR THE PROMOTION EXPENSES. THE CIT(A), FURTHER OBSERVED THAT SUCH EXPENDITURE IS AGAINST THE OBJECTIVES OF SECTION 4 OF THE AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. THEREFORE , UPHELD DEL- CREDERE AGENTS COMMISSION DISALLOWED BY THE A.O. FO R THE A.Y. 2008-09 AND DIRECTED THE A.O. TO DISALLOW SUCH EXPENDITURE FOR THE A.Y. 2007-08 AND 2009-10. IN SO FAR AS REIMBURSEMENT OF EXPENDIT URE TO DEL-CREDERE AGENTS, THE CIT(A) FOR THE DETAILED DISCUSSION IN H IS ORDER IN PARA NO. 8.13, DIRECTED THE A.O. TO DISALLOW 1/10 TH OF TOTAL EXPENSES CLAIMED TOWARDS REIMBURSEMENT OF EXPENDITURE. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 13 11. THE LD. A.R. FOR THE ASSESSEE SUBMITTED THAT TH E LD. A.O. AS WELL AS THE LD. CIT(A) ERRED IN PRESUMING THAT THE PAYMENTS WERE MADE IN CONTRAVENTION OF SECTION 4 OF THE AP (REGULATION O F WHOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOR EIGN LIQUOR, WINE AND BEER) ACT, 1993, AS THERE IS NO SUCH CONDITION IN T HE ACT FOR PROMOTION OF TRADE. THE ACT IMPOSES A TOTAL BAN ON ALL PERSONS T O DEAL IN ALL ALCOHOLIC BEVERAGES BYPASSING THE CORPORATION ESTABLISHED FOR THIS PURPOSE IN WHOLE STATE. THE CIT(A) MISCONSTRUED THE SAID PROVI SIONS TO COME TO THE CONCLUSION THAT THE ASSESSEE HAS VIOLATED SAID PROV ISIONS. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE IS A SUBSIDIARY OF M/S. UNITED BREWERIES LIMITED ENTERED INTO A BREWING AGREEMENT WITH ITS HOLDING COMPANY FOR MANUFACTURE AND SALE OF ITS BRAND IN TH E STATE OF ANDHRA PRADESH. THE ASSESSEE ALSO ENTERED INTO A RATE CON TRACT AGREEMENT FOR SUPPLY OF BEER WITH M/S. A.P. STATE BEVERAGE CORPOR ATION LIMITED. AS PER THE BREWING AGREEMENT ENTERED INTO WITH M/S. UN ITED BREWERIES LIMITED, THE PRINCIPLES WILL APPOINT DEL-CREDERE AG ENTS FOR PROMOTION AND MARKETING OF ITS PRODUCT THROUGHOUT THE COUNTRY INC LUDING THE STATE OF ANDHRA PRADESH. ANY EXPENDITURE ON PROMOTIONAL ACT IVITIES INCLUDING DEL-CREDERE AGENTS COMMISSION SHALL BE BORNE BY TH E CONTRACT MANUFACTURERS. THE DEL-CREDERE AGENTS DUTY IS TO EMPLOY REQUIRED STAFF AND MEET THE RETAIL TRADERS TO ENCOURAGE THEM TO BU Y THEIR PRODUCTS. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 14 THE DEL-CREDERE AGENTS HAVE BEEN PAID COMMISSION BA SED ON THE TOTAL SALES ACHIEVED BY THEM, WHICH IS SUPPORTED BY DATA COLLECTED FROM M/S. A.P. STATE BEVERAGE CORPORATION LIMITED. THE DUTIE S AND RESPONSIBILITIES OF DEL-CREDERE AGENTS HAS BEEN SPECIFIED IN THE DEL -CREDERE AGENTS AGREEMENT. THE COMMISSION HAS BEEN PAID FOR RENDER ING SERVICES IN THE FIELD OF MARKETING, PROMOTION AND ITS BRANDS AND AL SO COLLECTIONS OF CERTAIN DOCUMENTS TO COMPLY WITH STATE EXCISE LAWS. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS PAID DEL-CREDERE AG ENT COMMISSION FOR RENDERING SERVICES IN THE FIELD OF SALES PROMOTION ACTIVITIES AND TDS HAS BEEN DEDUCTED ON SUCH COMMISSION, THEREFORE, THE A. O. AS WELL AS THE CIT(A) WERE ERRED IN HOLDING THAT SUCH EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS OF THE ASSESSEE. 12. THE LD. D.R. STRONGLY SUPPORTED ORDER OF THE C IT(A). THE D.R. REFERRING TO PARA. 8.5 AND 8.6. OF ORDER OF THE CIT (A), SUBMITTED THAT THE CIT(A) BROUGHT OUR CLEAR FACTS TO THE EFFECT THAT T HE ASSESSEE FAILED TO JUSTIFY PAYMENT OF COMMISSION FOR THE PERIOD PRIOR TO 1 ST APRIL 2007, AS ALL DEL-CREDERE AGENTS AGREEMENT HAVE BEEN ENTERED INTO FROM THE FINANCIAL YEAR 2006-07 ONWARDS. THE D.R. FURTHER SU BMITTED THAT IN THE STATE OF ANDHRA PRADESH, WHOLE SALE TRADE OF ALL AL COHOLIC BEVERAGES IS CONTROLLED THROUGH M/S ANDHRA PRADESH STATE BEVERAG ES CORPORATION LIMITED, WHICH PROCURES ALL ALCOHOLIC BEVERAGES AND DISTRIBUTE THE SAME ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 15 TO THE LICENSED RETAIL TRADERS. THE RETAIL TRADERS DIRECTLY PURCHASE GOODS FROM M/S APBCL AND THE ASSESSEE DOES NOT HAVE ANY D IRECT NEXUS WITH THE RETAIL TRADERS AND NO MIDDLEMEN ARE INVOLVED IN PURCHASE AND SALE, THEREFORE THERE IS NO NECESSITY TO INCUR DEL-CREDER E AGENTS COMMISSION AND HENCE, THE A.O. AS WELL AS THE CIT(A) RIGHT IN OBSERVING THAT EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS ON RECORD. THE A.O. AS WELL AS THE CIT(A) DISALLOWED D EL-CREDERE AGENTS COMMISSION ON THE GROUND THAT SUCH EXPENDITURE IS N OT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND ALSO SUCH EXPENDITURE IS AGAINST THE OBJECTIVES OF SECTI ON 4 OF THE AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTION AND R ETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. TH E CIT(A) HAS GIVEN MANY REASON FOR COMING TO THE CONCLUSION THAT SAID EXPENDITURE IS NOT INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDING TO THE CIT(A), THE ASSESSEE FAILS TO JUSTIFY PAYMENT OF DEL-CREDERE AG ENTS COMMISSION WITH NECESSARY EVIDENCES. THE AGREEMENT COPIES FILED BY THE ASSESSEE SHOWS THAT THESE AGREEMENTS HAVE BEEN ENTERED INTO WITH E FFECT FROM FINANCIAL YEAR 2006-07 AND THE ASSESSEE FAILED TO OFFER ANY E XPLANATION FOR PAYMENT OF COMMISSION PRIOR TO 1 ST APRIL 2007. THEREFORE, OPINED THAT ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 16 DEL-CREDERE AGENTS COMMISSION IS NOT ALLOWABLE U/S 37 OF THE INCOME TAX ACT, 1961. 14. THE QUESTION NEEDS TO BE ANSWERED IS WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, DEL-CREDERE AGENTS C OMMISSION, IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND SUCH EXPENDITURE IS AGAINST THE OBJECT IVES OF SECTION 4 OF THE AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTIO N AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1 993. THERE IS NO DISPUTE WITH REGARD TO GENUINENESS OF PAYMENT AND B OTH LOWER AUTHORITIES NEVER DOUBTED GENUINENESS OF PAYMENT OF COMMISSION. BOTH THE AUTHORITIES QUESTIONED THE RELEVANCE OF SUCH EX PENDITURE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND THEY CAME TO A CONCLUSION THAT THERE IS NO NEED TO INCUR DEL-CREDERE AGENTS C OMMISSION. WE DO NOT FIND ANY MERITS IN THE OBSERVATIONS OF THE LOWE R AUTHORITIES FOR THE REASON THAT THE PROVISIONS OF SECTION 37 OF THE ACT , NOWHERE PRESCRIBES THAT THERE SHOULD BE NECESSITY TO INCUR EXPENDITURE , BUT IT ONLY SAYS SUCH EXPENDITURE SHOULD BE INCURRED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS. THE REVENUE AUTHORITIES CANNOT QUESTION T HE RELEVANCE OF SUCH EXPENDITURE AND IT IS FOR THE ASSESSEE TO DECIDE WH ETHER PARTICULAR EXPENDITURE IS REQUIRED TO BE INCURRED OR NOT DEPEN DING UPON ITS BUSINESS NECESSITY AND IF SUCH EXPENDITURE IS PROVE D WITH NECESSARY ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 17 EVIDENCES, THEN IT CANNOT BE SAID THAT SUCH EXPENDI TURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 15. THE ASSESSEE HAS EXPLAINED THE REASONS FOR PAYM ENT OF COMMISSION TO DEL-CREDERE AGENTS AND ALSO FURNISHED AGREEMENT COPIES. THE A.R. REFERRING TO THE DEL-CREDERE AGENTS AGREEMENTS SUBM ITTED THAT THE BRAND OWNER HAS ENTERED IN TO AGREEMENTS TO PROMOTE THE BRANDS TO COMPETE WITH OTHER MANUFACTURES. THE A.R. REFERRING TO THE AGREEMENTS LISTED OUT THE DUTIES AND RESPONSIBILITIES ENTRUSTE D TO THE DELCREDERE AGENTS. THE AGENTS ARE RESPONSIBLE FOR MARKETING AN D PROMOTION OF BRANDS BY EMPLOYING REQUIRED STAFF AND THEY ARE RES PONSIBLE FOR SUCH OTHER DUTIES AS LISTED IN THE AGREEMENT. THE ASSESS EE HAS FILED COPIES OF DEL-CREDERE AGENTS AGREEMENT ENTERED INTO BY M/S UB LIMITED. ON PERUSAL OF AGREEMENTS, WE FIND THAT FEW AGREEMENTS ARE ENTERED INTO WITH EFFECT FROM 1 ST APRIL 2006 AND ONE AGREEMENT ENTERED INTO WITH EFFECT FROM 1 ST JUNE 2006. THE AGREEMENT SPECIFIES THE TERMS AND CONDITIONS AND ALSO DUTIES AND RESPONSIBILITIES OF AGENTS. AS PER THE SAID AGREEMENTS, IT IS THE DUTY OF THE AGENTS TO PROMOTE BRANDS IN THE TERRITORY FOR WHICH THEY HAVE BEEN APPOINTED. THEY ALSO ACT AS FACILITATOR BETWEEN THE ASSESSEE AND RETAIL TRADERS. THOUGH, TH E LOWER AUTHORITIES STATED THAT WHOLE SALE TRADE OF ALL ALCOHOLIC BEVER AGES IN THE STATE OF ANDHRA PRADESH IS CONTROLLED THROUGH M/S ANDHRA PRA DESH STATE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 18 BEVERAGES CORPORATION LIMITED, WHICH PROCURES ALL A LCOHOLIC BEVERAGES AND DISTRIBUTE THE SAME TO THE LICENSED RETAIL TRAD ERS AND THE RETAIL TRADERS DIRECTLY PURCHASE GOODS FROM M/S APSBCL AND ALSO THE ASSESSEE DOES NOT HAVE ANY DIRECT NEXUS WITH THE RETAIL TRAD ERS AND NO MIDDLEMEN ARE INVOLVED IN PURCHASE AND SALE, IT IS A FACT THA T THE ASSESSEE REQUIRED TO MARKET ITS PRODUCTS THROUGH ITS OWN STRATEGIES, BECAUSE THE APBCL IS NOT RESPONSIBLE FOR MARKETING ANY PRODUCTS. WE FURT HER OBSERVED THAT BECAUSE OF PECULIAR NATURE OF BUSINESS AND STRINGEN T POLICES, THE ASSESSEE CANNOT PROMOTE ITS BRAND THROUGH NORMAL PR INT AND ELECTRONIC MEDIA, NECESSARILY GOES FOR OTHER MARKETING STRATEG IES INCLUDING DEL- CREDERE AGENTS WHO SUPPORT THE ASSESSEE TO IMPROVE ITS BUSINESS. THEREFORE, THE LOWER AUTHORITIES WERE ERRED IN COMI NG TO THE CONCLUSION THAT SAID EXPENDITURE IS NOT INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 16. COMING TO THE SECOND ALLEGATION OF THE LD. CIT( A). THE LD. CIT(A) OBSERVED THAT SUCH EXPENDITURE IS AGAINST THE OBJEC TIVES OF SECTION 4 OF THE AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTIO N AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1 993. AS PER SECTION 4 OF THE SAID ACT, THE ASSESSEE OR ITS AGENTS DOES NOT HAVE THE AUTHORITY OR PRIVILEGE TO ENGAGE IN WHOLE SALE TRADE OR RETAI L TRADE OF ANY IMFL PRODUCTS IN THE STATE OF AP, AND IF ANY PERSON ENGA GED IN SUCH TRADING, ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 19 THEN IT IS CERTAINLY VIOLATION OF SECTION 4 OF AP ( REGULATION OF WHOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQ UOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993, AND ANY EXPENDITURE INCURR ED IN VIOLATION OF SAID ACT IS NOT ALLOWABLE UNDER SECTION 37 OF THE A CT. WE DO NOT FIND ANY MERITS IN THE FINDINGS OF THE CIT(A), FOR THE REASO N THAT ON PERUSAL OF SECTION 4 OF SAID ACT, WE FIND THAT THE ACT, EMPOWE RS THE ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED, EXCLUS IVE RIGHTS IN THE WHOLE SALE TRADE IN ALCOHOLIC BEVERAGE BUSINESS AND PROHIBITS ALL PERSONS FROM INVOLVING IN ANY KIND OF TRADING IN WHOLE STAT E. BUT, THERE IS NO SUCH RESTRICTION ON THE MANUFACTURES FOR PROMOTION AND MARKETING THEIR PRODUCTS TO KEEP THEMSELVES IN COMPETITION WITH OTH ER COMPETITORS. THE ASSESSEE BEING A PRUDENT BUSINESS PERSON, EMPLOYED ITS OWN MARKETING STRATEGIES INCLUDING PROMOTION THROUGH DEL-CREDERE AGENTS, WHICH CANNOT BE SAID TO BE VIOLATION OF SECTION 4 OF THE AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. 17. THE LD. CIT(A), FURTHER OBSERVED THAT SECONDARY SALE PROMOTED BY THE ASSESSEE THROUGH DEL-CREDERE AGENTS IS AGAINST THE SPIRIT OF ARTICLE 47 OF THE INDIAN CONSTITUTION AND WHICH GOES AGAINS T THE PUBLIC POLICY AND FURTHER SUCH SECONDARY SALES PROMOTED THROUGH T HE AGENTS IS ILLEGAL IN VIEW OF SECTION 4 OF AP (REGULATION OF WHOLESALE TRADE & DISTRIBUTION ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 20 AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993, CONSEQUENTLY ANY EXPENDITURE INCURRED IN VIOL ATION OF SAID PROVISIONS IS A EXPENDITURE INCURRED FOR ILLEGAL PU RPOSE WHICH CANNOT BE ALLOWED AS DEDUCTION. WE DO NOT AGREE WITH THE FINDI NGS OF THE CIT(A), FOR THE REASON THAT ONCE A PERSON IS ALLOWED TO MAN UFACTURE ALCOHOLIC BEVERAGES WITH VALID LICENSE, IT CANNOT BE SAID THA T THE PERSON IS CARRYING ON BUSINESS IN CONTRAVENTION OF ARTICLE 47 OF THE I NDIAN CONSTITUTION. WE FURTHER NOTICED THAT ARTICLE 47 OF THE INDIAN CONST ITUTION SPEAKS ABOUT LARGER PUBLIC POLICY OF STATES TO IMPOSE PROHIBITIO N ON SALE OF INTOXICATING DRINKS AND DRUGS WHICH ARE INJURIOUS TO HEALTH WHIC H IS SUBJECT MATTER OF STATES TO TAKE A CALL ON BAN MANUFACTURE AND SALE O F INTOXICATING DRINKS. THE CIT(A) TOTALLY MISCONSTRUED THE SAID PROVISIONS TO COME TO THE CONCLUSION THAT THE BUSINESS OF THE ASSESSEE IS OPP OSED TO ARTICLE 47 OF THE CONSTITUTION OF INDIA, IGNORING THE FACT THAT T HE ASSESSEE IS CARRYING OUT ITS BUSINESS WITH A VALID LICENSE FROM THE STAT E. WE FURTHER OBSERVED THAT THE ASSESSEE BEING PRUDENT BUSINESS MAN ALWAYS TRY TO IMPROVE ITS BUSINESS BY ENHANCING ITS SALES AND ALSO TO BUILD A STRONGER BRAND TO COMPETE WITH OTHER MANUFACTURES BY EMPLOYING ITS OW N MARKETING STRATEGIES WHICH CANNOT BE CALLED ILLEGAL AND OPPOS ED TO PUBLIC POLICY, MORE SO WHEN HE WAS ALLOWED TO DO THE SAME BUSINESS BY THE STATE. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 21 18. IN THIS CASE, THE ASSESSEE BEING A CONTRACT MAN UFACTURE FOR M/S UNITED BREWERIES LIMITED AND M/S MILLENNIUM BEER IN DUSTRIES LIMITED, SUBJECTED TO CERTAIN TERMS AND CONDITIONS WHICH MAN DATES THE ASSESSEE TO SPEND ON THE SALES PROMOTION EXPENSES INCLUDING DEL-CREDERE AGENTS COMMISSION. THOUGH, THE AGREEMENTS ARE ENTERED INTO BY THE PRINCIPLES, BUT NOT THE ASSESSEE, THE BREWING AGREEMENT WITH BR AND OWNERS SPECIFICALLY PROVIDES FOR SPENDING ON SALES PROMOTI ON EXPENDITURE. THE ASSESSEE HAS PROVED WITH NECESSARY EVIDENCES, SAID EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF BUSINESS. THE EVIDENCES FILED BY THE ASSESSEE NEGATES ALL OBSERVA TIONS OF THE A.O. AS WELL AS THE CIT(A). THEREFORE, WE ARE OF THE VIEW T HAT EXPENDITURE TOWARDS DEL-CREDERE AGENTS COMMISSION IS INCURRED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE AND WHICH IS ALLOWABLE UNDER SECTION 37 OF THE ACT. HENCE, WE DI RECT THE A.O. TO ALLOW DEL-CREDERE AGENTS COMMISSION FOR THE A.Y. 2007-08, 2008-09 AND 2009-10. 19. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF TRADE SCHEME AND DISCOUNTS U/S 37(1) AND U/S 4 0(A)(IA) OF THE ACT. THE FACTS WHICH LEAD TO DISALLOWANCE OF EXPENDITURE ARE THAT THE ASSESSEE IS A CONTRACT MANUFACTURE FOR M/S UNITED B REWERIES LIMITED AND M/S MILLENNIUM BEER INDUSTRIES LIMITED FOR THE TERR ITORY OF STATE OF ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 22 ANDHRA PRADESH. M/S UNITED BREWERIES LIMITED AND M/ S MILLENNIUM BEER INDUSTRIES LIMITED ARE BRAND OWNERS OF KINGFISHER A ND OTHER BRAND BEERS HAD ENTERED IN TO BREWING AGREEMENT WITH THE ASSESS EE FOR MANUFACTURE AND SALE OF THEIR BEERS IN THE STATE OF ANDHRA PRAD ESH. THE ASSESSEE MANUFACTURES BEER IN A EXCISE BONDED WAREHOUSE UNDE R LICENSE FROM STATE EXCISE DEPARTMENT AND SUPPLIES TO ANDHRA PRAD ESH STATE BEVERAGES CORPORATION LIMITED, A STATE OWNED PSU, W HICH HAD EXCLUSIVE RIGHTS TO PURCHASE FROM MANUFACTURES AND SELLS TO R ETAIL TRADERS IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE HAD ENTERED I NTO A BREWING AGREEMENT DATED 4 TH MARCH 2005 WITH M/S INERTIA INDUSTRIES LIMITED FOR BREWING AND DISTRIBUTION OF CERTAIN BRANDS OF BEERS . THE ASSESSEES ALSO ENTER INTO A RATE CONTRACT AGREEMENT ON 30-06-2005 WITH M/S ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED FOR SUP PLY OF ITS PRODUCTS AS PER THE TERMS AND CONDITIONS OF AGREEMENT. THE PRICING OF PRODUCTS IS FIXED BY M/S APBCL IN TERMS OF OFFER NOTIFICATIO N NO. APBCL/I/2007- 08/1,2,3,,4 & 5 DATED 21-02-2007. AS PER THE RATE C ONTRACT AGREEMENT, THE ASSESSEE SUPPLIES ITS PRODUCTS TO M/S APBCL, IN TURN IT WILL SELL TO LICENSED RETAIL TRADERS. THE ASSESSEE MANUFACTURES PRODUCTS AS PER INTENDS RECEIVED FROM M/S APBCL WHICH IS BASED ON I NTENDS RECEIVED FROM THE RETAILERS. THE CORPORATION SHALL MAKE THE PAYMENTS AFTER 45 DAYS FROM THE DATE OF SUPPLY. AS PER CLAUSE 2.11(D) OF THE RATE CONTRACT ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 23 AGREEMENT, M/S APBCL CHARGES STORAGES CHARGES(DEMUR RAGES) OF RS. 2/- PER CASE PER MONTH ON UNSOLD PRODUCTS BEYOND 90 DAY S AND THE STOCK UNSOLD WILL BE DRAINED OUT. THE ASSESSEE HAS COME O UT WITH A TRADE SCHEME TO CLEAR THE STOCK TO AVOID PAYMENTS OF STOR AGE CHARGES AND TO BOOST SALES, ACCORDING TO WHICH IT OFFERS TRADE DIS COUNT TO CUSTOMERS BASED ON TOTAL SALES ACHIEVED WHICH WILL BE COMMUNI CATED THROUGH ITS MARKETING AGENTS. THE TRADE SCHEME AND DISCOUNTS WI LL BE PASSED ON TO THE RETAIL DEALERS THROUGH DEL-CREDERE AGENTS APPOI NTED FOR THIS PURPOSE. 20. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E A.O. NOTICED THAT THE ASSESSEE HAS INCURRED EXPENDITURE UNDER TH E HEAD TRADE SCHEME & DISCOUNTS, THEREFORE, CALLED UPON THE ASS ESSEE TO JUSTIFY EXPENDITURE INCURRED UNDER THE HEAD TRADE SCHEMES AND DISCOUNTS AND TO FURNISH NECESSARY DOCUMENTS. IN RESPONSE, THE AS SESSEE HAS FILED A WRITTEN SUBMISSION ON 18-11-2009 AND STATED THAT TH E COMPANY WILL COME OUT WITH A TRADE SCHEME FROM TIME TO TIME TO I MPROVE THE SALES. THE TRADE SCHEME WILL BE LAUNCHED BASED ON THE TOTA L BUSINESS TARGET TO BE ACHIEVED IN THE FINANCIAL YEAR AND THE DISCOUNTS IF ANY TO BE OFFERED TO THE CUSTOMERS WILL BE DECIDED BY THE SALES TEAM IN CHARGE OF THE CONCERNED STATES. THE DETAILS OF TRADE SCHEME WILL BE COMMUNICATED TO THE RETAILERS THROUGH DEL-CREDERE AGENTS APPOINTED FOR THIS PURPOSE. THE INTENTION OF TRADE SCHEME IS TO ENCOURAGE THE RETAI LERS TO GIVE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 24 PREFERENCE TO OUR PRODUCTS THEN OTHER PRODUCTS AVAI LABLE IN THE MARKET. DURING THE FINANCIAL YEARS RELEVANT TO ASSESSMENT Y EARS 2007-08 TO 2009-10, THE COMPANY LAUNCHED MANY TRADE SCHEMES BY OFFERING TRADE DISCOUNTS BASED ON THE PURCHASES MADE THROUGH M/S A PBCL. THE SCHEME WILL BE MARKETED BY DEL-CREDERE AGENTS WHO W ILL PROCESS THE CLAIMS FROM THE RETAILERS. THE COMPANY WILL PASS ON TRADE DISCOUNTS THROUGH DEL-CREDERE AGENTS, IN TURN, THE AGENTS MAK E PAYMENT TO RETAILERS. IN SUPPORT OF ITS ARGUMENTS, FILED NECES SARY SAMPLE COPIES OF AGREEMENTS WITH DEL-CREDERE AGENTS, DETAILS OF CLAI MS FROM RETAILERS AND BANK ACCOUNT COPIES OF DEL-CREDERE AGENTS. 21. THE A.O. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE, OBSERVED THAT WHOLE SALE TRADE OF ALL ALCOHOLIC BEV ERAGES IN THE STATE OF ANDHRA PRADESH IS CONTROLLED BY M/S ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED. M/S APBCL PROCURES ALL ALCOHOL IC BEVERAGES AND DISTRIBUTE THE SAME TO THE LICENSED RETAIL TRADERS. THE RETAIL TRADERS DIRECTLY PURCHASE GOODS FROM M/S APBCL AND THE ASSE SSEE DOES NOT HAVE ANY DIRECT NEXUS WITH THE RETAIL TRADERS. NO M IDDLEMEN ARE INVOLVED IN PURCHASE AND SALE, THEREFORE OPINED THAT THERE I S NO NECESSITY TO INCUR TRADE SCHEME & DISCOUNTS. THE A.O. FURTHER OBSERVED THAT ENTIRE TRANSACTION IS ROUTED THROUGH M/S APBCL. ANY DISCOU NT TO BE GIVEN SHOULD BE GIVEN THROUGH M/S APBCL ONLY AND WHICH WI LL PASS ON TO THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 25 RETAILERS. BUT, ON VERIFICATION OF DETAILS FILED BY THE ASSESSEE, IT WAS NOTICED THAT SUCH DISCOUNT IS PAID THROUGH DEL-CRED ERE AGENTS AND THE BENEFIT HAS NOT BEEN PASSED ON TO THE CONSUMERS. TH E AGREEMENT ENTERED INTO WITH M/S APBCL DOES NOT PERMIT TO MAKE ANY SUCH PAYMENTS. IN THESE CIRCUMSTANCES, THE PAYMENT MADE TO THE RETAILERS IS NOTHING BUT COMMISSION PAID TO ENCOURAGE SALES OR I T CAN BE TREATED AS CASH GIFTS GIVEN TO THE RETAILERS WHICH WILL COME U NDER SALES PROMOTION EXPENSES. THE A.O. FURTHER OBSERVED THAT SINCE, THE EXPENDITURE IS IN THE NATURE OF COMMISSION, THE ASSESSEE OUGHT TO HAVE DE DUCTED TDS AS PER THE PROVISIONS OF SEC. 194H, WHEREVER SUCH PAYMENT EXCEEDS RS. 2500/- . SINCE, THE ASSESSEE FAILED TO FURNISH DETAILS OF TDS ON SAID PAYMENTS, THE ENTIRE EXPENDITURE INCURRED UNDER THE HEAD TRA DE SCHEME & DISCOUNTS HAS BEEN DISALLOWED U/S 40(A)(IA) OF THE ACT, FOR FAILURE TO DEDUCT TAX AT SOURCE U/S 194H OF THE ACT, FOR THE A SST. YEARS 2007-08 TO 2009-10. 22. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFOR E THE FIRST APPELLATE AUTHORITY (FAA). THE ASSESSEE HAS RAISED GROUNDS CHALLENGING THE A.O.S ACTION ON MAKING THE IMPUGNED DISALLOWAN CE U/S 40(A)(IA), FOR ALL THE YEARS. THE ASSESSEE HAS FILED ELABORATE WRI TTEN SUBMISSION IN WHICH IT WAS CONTENDED THAT IMPUGNED PAYMENTS WERE IN THE NATURE OF TRADE DISCOUNTS AND INCENTIVES WOULD NOT CONSTITUTE COMMISSION UNDER ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 26 SECTION 194H OF THE ACT, SO AS TO INVOKE THE PROVIS IONS OF SECTION 40(A)(IA) OF THE ACT. THE ASSESSEE FURTHER SUBMITTE D THAT THE TDS OFFICER HELD ASSESSEE AS AN ASSESSEE IN DEFAULT U/S 201(1) AND 201(1A) OF THE ACT, FOR FAILURE TO DEDUCT TDS ON TRADE SCHEMES AND DISCOUNTS U/S 194H OF THE ACT. THE TDS OFFICER HAS OBSERVED THAT THE I MPUGNED PAYMENTS WERE IN THE NATURE OF BROKERAGE AND COMMISSION AS D EFINED U/S 194H, WHICH LIABLE FOR TDS. THE TAX AUTHORITIES CANNOT TA KE DIVERGENT VIEWS IN RESPECT OF SINGLE PAYMENT TO SAY THAT IT IS IN THE NATURE OF COMMISSION FOR THE PURPOSE OF TDS PROCEEDINGS AND OBSERVED THA T THE IMPUGNED PAYMENTS ARE NOT INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS AND NOT ALLOWABLE U/S 37 OF THE ACT IN ANO THER PROCEEDINGS. THE ASSESSEE ALSO FILED A DETAILED WRITTEN SUBMISSI ON TO CLAIM THAT THE IMPUGNED PAYMENT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND FILED NECESSARY EVIDEN CES. THE ASSESSEE ALSO FILED A ADDITIONAL GROUND CHALLENGING THE ACTI ON OF THE CIT(A)S ENHANCEMENT PROPOSAL. 23. THE CIT(A), AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, TECHNICALLY UPHELD THE FINDINGS OF THE A.O. WITH RE GARD TO DISALLOWANCE OF IMPUGNED PAYMENTS U/S 40(A)(IA) OF THE ACT, HOWEVER WENT AHEAD TO DISALLOW THE IMPUGNED PAYMENTS U/S 37(1) OF THE ACT , BY HOLDING THAT THE IMPUGNED EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 27 PURPOSE OF BUSINESS OF THE ASSESSEE. THE CIT(A) FUR THER OBSERVED THAT THE ASSESSEE IS UNDER OBLIGATION TO DEDUCT TDS ON I MPUGNED PAYMENTS, HOWEVER FURTHER OBSERVED THAT THE ISSUE IS MERE ACA DEMIC IN VIEW OF THE FINDINGS ON ALLOWABILITY OF THE IMPUGNED TRADE SCHE ME AND DISCOUNTS U/S 37(1) OF THE ACT AND REJECTED PLEA OF THE ASSESSEE. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE FAILED ON PROVE THE IMPU GNED EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS WITH EVIDENCES. IT WAS FURTHER OBSERVED THAT UBL IS THE OWNER OF BRANDS AND ADMITTEDLY IT IS THE RESPONSIBILITY OF UBL TO PROMO TE ITS BRANDS, BUT NOT THE ASSESSEE. THE BREWING AGREEMENT ENTERED INTO WI TH UBL DOES NOT SHOW ANY LIGHT ON SUCH OBLIGATION ON THE ASSESSEE T O SPEND ON SALES PROMOTION. THE EVIDENCES FILED BY THE ASSESSEE DOES NOT SHOW ANY LIGHT ON SUCH EXPENDITURE INCURRED BY THE ASSESSEE, THERE FORE THE IMPUGNED EXPENDITURE CANNOT BE SAID TO BE INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 24. THE CIT(A) FURTHER OBSERVED THAT SUCH EXPENDITU RE IS NOT ALLOWABLE UNDER SECTION 37 OF THE ACT, AS IT WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THOUGH, THE ASSESSEE C LAIMS TO HAVE INCURRED TRADE SCHEME AND DISCOUNTS FOR PROMOTION O F SALES, FAILED TO FURNISH NECESSARY DETAILS AS TO HOW THE TRADE SCHEM E AND DISCOUNTS HELPS THE COMPANY TO INCREASE ITS SALES VOLUME. AS CLAIMED BY THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 28 ASSESSEE, IT IS THE RESPONSIBILITY OF THE PARENT CO MPANY TO PROMOTE AND MARKET ITS PRODUCTS AND ALSO FACT THAT THESE INCENT IVES ARE PAID THROUGH DEL-CREDERE AGENTS APPOINTED BY M/S UNITED BREWERIE S LIMITED, IT WAS NOT CLARIFIED HOW THE ASSESSEE WHICH WAS A CONTRACT MANUFACTURER WOULD BE REQUIRED TO BEAR THE PROMOTION EXPENSES. IT WAS FURTHER OBSERVED THAT COMPLETE WHOLE SALE AND RETAIL TRADE IN ALCOHO LIC BEVERAGES IS CONTROLLED THROUGH STATE LEGISLATION, WHICH EMPOWER S THE ANDHRA PRADESH STATE BEVERAGES CORPORATION LIMITED TO REGU LATE WHOLE SALE TRADE IN WHOLE STATE. AS PER THE SCHEME, ALL MANUFA CTURES WOULD SUPPLY THEIR PRODUCTS TO M/S APBCL UNDER A RATE CONTRACT A GREEMENT, IN TURN M/S APBCL WILL DISTRIBUTE TO RETAIL DEALERS. THE AP BCL WILL FIX THE RATE IN CONSULTATION WITH THE STATE GOVT. AND ALL RETAILERS SHALL PURCHASE THE GOODS FROM THE CORPORATION ON THE FIXED RATES. THER E IS NO DIRECT NEXUS BETWEEN THE ASSESSEE AND THE RETAILERS. UNDER THES E CIRCUMSTANCES, THERE NO OBLIGATION ON THE ASSESSEE TO PAY ANY TRAD E DISCOUNTS. 25. THE CIT(A), FURTHER OBSERVED THAT SUCH EXPENDIT URE IS AGAINST THE OBJECTIVES OF SECTION 4 OF THE AP (REGULATION OF W HOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOR EIGN LIQUOR, WINE AND BEER) ACT, 1993 AND ARTICLE 47 OF THE INDIAN CONSTI TUTION. THE CIT(A) HAS GIVEN HIS OWN REASONS AND ANALYSIS TO COME TO THE C ONCLUSION THAT THE IMPUGNED EXPENDITURE IS NOT DEDUCTIBLE U/S 37 OF TH E ACT. ACCORDING TO ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 29 THE CIT(A), THE ASSESSEE IS INVOLVED IN UNFAIR TRAD E PRACTICES TO INDIRECTLY INDUCE THE CONSUMER FOR CONSUMPTION OF LIQUOR, WHIC H IS OPPOSED TO THE SPIRIT OF ARTICLE 47 OF THE INDIAN CONSTITUTION. IN THE LIGHT OF THE ABOVE DISCUSSION, THE IMPUGNED PAYMENTS WOULD FALL WITHIN THE PURVIEW OF EXPLANATION TO SECTION 37(1) AND ACCORDINGLY IT IS NOT ALLOWABLE AS EXPENDITURE INCURRED FOR THE ASSESSEES BUSINESS. H ENCE, DISALLOWED TRADE SCHEME AND DISCOUNTS U/S 37(1) OF THE ACT FOR THE ASST. YEARS 2007-08, 2008-09 AND 2009-10. 26. THE LD. A.R. FOR THE ASSESSEE SUBMITTED THAT TH E LD. A.O. AS WELL AS THE LD. CIT(A) WERE WRONG IN PRESUMING THAT THE TRA DE SCHEMES AND DISCOUNTS IS NOT INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE LD. A.R. FURTHER SUB MITTED THAT THE ASSESSEE HAS INCURRED TRADE SCHEMES AND DISCOUNTS W HICH IS SPENT FOR THE PURPOSE OF SALES PROMOTION ACTIVITIES TO BOOST UP THE SALES AS WELL AS TO REDUCE THE STOCK HELD IN THE GODOWNS OF M/S. A.P . STATE BEVERAGES CORPORATION LIMITED AND ALSO TO REDUCE THE STOCK HO LDING COST. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE BEING A CONTRAC T MANUFACTURER FOR M/S. UNITED BREWERIES LIMITED IS BOUND BY THE BREWI NG AGREEMENT ENTERED INTO WITH THE PRINCIPLES, AS PER WHICH THE ASSESSEE REQUIRED TO MANUFACTURE MINIMUM QUANTITY OF BEER. THE ASSESSEE ALSO REQUIRED TO SUPPLY BEER AS PER THE INDENT RECEIVED FROM M/S. A. P. STATE BEVERAGES ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 30 CORPORATION LIMITED, IN TURN WHICH IS BASED ON THE INDENTS RECEIVED FROM THE RETAILERS. M/S. A.P. STATE BEVERAGE CORPORATIO N LIMITED ACTS AS A CUSTODIAN OF THE STOCK BUT DOES NOT TAKE ANY RESPON SIBILITY OF MARKETING AND PROMOTION OF ITS BRANDS. IF THE STOCK SUPPLIED TO M/S. A.P. BEVERAGES CORPORATION LIMITED IS NOT SOLD WITHIN 90 DAYS FROM THE DATE OF SUPPLY, THEN THE CORPORATION SHALL CHARGE STORAG E CHARGES (DEMURRAGE) OF RS.2/- PER CASE PER MONTH ON UNSOLD STOCKS BEYOND 90 DAYS AND ALSO THE SAME WILL BE DRAINED OUT. THE AS SESSEE TO CLEAR THE STOCK LYING IN THE GODOWNS OF M/S. A.P. BEVERAGE CO RPORATION LIMITED HAS COME OUT WITH A TRADE SCHEME TO AVOID PAYMENT O F STORAGE CHARGES AND TO BOOST SALES. ACCORDING TO WHICH IT OFFERS T RADE DISCOUNTS TO CUSTOMERS BASED ON TOTAL SALES ACHIEVED, WHICH WILL BE COMMUNICATED THROUGH ITS MARKETING AGENTS. THE BENEFITS OF TRAD E SCHEME ARE ANNOUNCED BY THE LOCAL MARKETING TEAM FROM TIME TO TIME DEPENDING UPON THE MOVEMENT OF STOCKS. IF THE STOCK MANUFACT URED IS UNSOLD, THE MARKETING TEAM WILL COME OUT WITH A TRADE SCHEME TO ENCOURAGE THE RETAILERS TO BUY THEIR PRODUCT. THEREFORE, THE LOW ER AUTHORITIES WERE ERRED IN HOLDING THAT THE EXPENDITURE INCURRED UNDE R THE HEAD TRADE SCHEME AND DISCOUNTS IS NOT INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 31 27. THE A.R. FURTHER SUBMITTED THAT IN SO FAR AS TH E A.OS OBSERVATIONS WITH REGARD TO THE DISALLOWANCE OF IMPUGNED EXPENDI TURE U/S 40(A)(IA) OF THE ACT, FOR FAILURE TO DEDUCT TAX AT SOURCE U/S 194H OF THE ACT, THE ITAT VISAKHAPATNAM BENCH IN THE PROCEEDINGS U/S 201 (1A) OF THE ACT, HAS HELD THAT THE IMPUGNED PAYMENTS UNDER THE HEAD TRADE SCHEMES AND DISCOUNTS DOES NOT FALL UNDER THE DEFINITION O F BROKERAGE AND COMMISSION AS DEFINED U/S 194H OF THE ACT, AS THERE IS NO RELATIONSHIP OF PRINCIPAL AND AGENT BETWEEN THE ASSESSEE AND THE RE TAILERS. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS PAID INCENT IVES IN THE FORM OF DISCOUNTS TO THE RETAILERS, WHICH IS PAID THROUGH D EL-CREDERE AGENTS BASED ON THE TOTAL QUANTITY OF STOCK PURCHASED. TH EREFORE, THE A.O. WAS ERRED IN HOLDING THAT THE IMPUGNED PAYMENTS ARE IN THE NATURE OF BROKERAGE AND COMMISSION AS DEFINED U/S 194H OF T HE ACT. 28. THE LD. D.R. STRONGLY SUPPORTED ORDER OF THE CI T(A). THE D.R. FURTHER REFERRING TO THE CIT(A) ORDER SUBMITTED THA T THE CIT(A) CLEARLY BROUGHT OUT THE FACTS TO THE EFFECT THAT EXPENDITUR E INCURRED UNDER THE HEAD TRADE SCHEMES AND DISCOUNTS IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE. THE D.R. FURTHER SUBMITTED THAT UNDER THE GIVEN FACTS AND CI RCUMSTANCES OF THE CASE, THERE IS NO NECESSITY FOR THE ASSESSEE TO INC UR SUCH EXPENDITURE AS THE PRODUCT MANUFACTURED BY THE ASSESSEE ARE SOLD T O M/S. A.P. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 32 BEVERAGES CORPORATION LIMITED, IN TURN THE CORPORAT ION WILL DISTRIBUTE THE SAME TO THE RETAILERS. THERE IS NO DIRECT RELATION SHIP BETWEEN THE ASSESSEE AND THE RETAILERS SO AS TO CLAIM THAT THE ASSESSEE HAS MARKETED ITS PRODUCTS AND ENCOURAGE RETAIL TRADERS TO BUY IT S PRODUCT. THE D.R. FURTHER SUBMITTED THAT AS PER THE PREVAILING LAWS D EALING WITH ALCOHOLIC BEVERAGES, THE STATE GOVERNMENT HAS EXCLUSIVE PRIVI LEGES OVER WHOLESALE AND RETAIL TRADE OF ALCOHOLIC BEVERAGES T HROUGH M/S. A.P. BEVERAGES CORPORATION LIMITED, WHICH IS HAVING EXCL USIVE PRIVILEGE OF BUYING GOODS FROM THE MANUFACTURERS AND DISTRIBUTE IT TO THE RETAILERS. IF AT ALL, ANY DISCOUNT IS TO BE GIVEN, THE SAME HA S TO BE GIVEN TO THE BUYER M/S. A.P. BEVERAGES CORPORATION LIMITED, BUT NOT TO THE RETAILERS. THE ASSESSEE FAILS TO PROVE THE PAYMENT OF TRADE DI SCOUNTS TO THE RETAILERS. ALL THE EVIDENCES FILED BY THE ASSESSEE TO PROVE THE TRADE SCHEME AND DISCOUNTS ARE NEGATED BY THE CIT(A), BY STATING THAT THE ASSESSEE HAS FAILED TO PROVE THE TRADE SCHEMES AND DISCOUNTS WITH NECESSARY EVIDENCES. THOUGH ASSESSEE CLAIMS TO HAV E FURNISHED CLAIM SHEET FILED BY THE RETAIL TRADERS, THE EVIDENCES FI LED BY THE ASSESSEE SHOWS THAT THESE PAYMENTS ARE MADE BY M/S. UNITED B REWERIES LIMITED, BUT NOT THE ASSESSEE. THE D.R. FURTHER SUBMITTED T HAT THE EXPENDITURE INCURRED UNDER THE HEAD TRADE SCHEMES AND DISCOUNT S IS AGAINST THE OBJECTIVE OF SECTION 4 OF THE A.P. (REGULATION OF W HOLESALE TRADE AND ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 33 DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOR EIGN LIQUOR, WINE AND BEER) ACT, 1993. AS PER THE SAID ACT, EXCEPT M/S. APBCL, NO OTHER PERSON HAS ANY RIGHT IN WHOLESALE TRADING IN LIQUOR IN THE STATE OF A.P. THE SAID SECTION TOTALLY PROHIBITS ALL PERSONS FROM WHOLESALE TRADING IN INDIAN MADE FOREIGN LIQUOR AND BEER, OTHER THAN THR OUGH M/S. A.P. STATE BEVERAGES CORPORATION LTD. UNDER THESE CIRCUMSTANC ES, THERE IS NO MERIT IN THE CLAIM OF THE ASSESSEE THAT IT HAS PAID TRADE SCHEMES AND DISCOUNTS TO RETAILERS FOR IMPROVEMENT OF ITS SALES . 29. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIAL S ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE FACTUAL MATRIX WHICH LEADS TO DISALLOWANCE OF IMPUGNED EXPENDITURE IS NARRATED IN PARA. 19 OF THE ORDER. THE ASSESSEE CLAIMS TO HAVE INCURRED TRADE SCHEME AND DISCOUNTS FOR THE PURPOSE OF INCREASE SA LES AND REDUCE CARRYING COST OF STOCK HELD IN THE BUSINESS. ACCORD ING TO THE ASSESSEE, IT HAS LAUNCHED VARIOUS TRADE SCHEME FROM TIME TO TIME TO CLEAR THE STOCK SO AS TO REDUCE STOCK HOLDING COST AND INCREASE PRO FITABILITY OF BUSINESS. THE ASSESSEE FURTHER CONTENDED THAT SUCH TRADE SCHE MES ARE ANNOUNCED FROM TIME TO TIME AND CONVEYED TO RETAILERS THROUGH DEL-CREDERE AGENTS APPOINTED BY THE BRAND OWNERS FOR THIS PURPOSE. THE TRADE SCHEME AND DISCOUNTS IS PASSED ON TO THE RETAILERS THROUGH DEL -CREDERE AGENTS. TRADE SCHEME AND DISCOUNT EXPENDITURE IS INCURRED I N PURSUANCE OF ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 34 BREWING AGREEMENT ENTERED INTO WITH BRAND OWNERS M/ S UNITED BREWERIES LIMITED AND M/S MILLENNIUM BEER INDUSTRIE S LIMITED. CLAUSE 7 OF AMENDED AGREEMENT SPECIFIES THE PAYMENT OF BRAND FEE AS WELL AS PROMOTIONAL SPENDING INCLUDING DEL-CREDERE AGENTS C OMMISSION. THE ASSESSEE BEING A CONTRACT MANUFACTURER BOUND BY BRE WING AGREEMENT AND ITS TERMS AND CONDITIONS. THE IMPUGNED PAYMENTS IS MADE IN PURSUANCE OF TERMS OF BREWING AGREEMENT WITH PRINCI PLES. THE ASSESSEE MANUFACTURERS AND SUPPLIES ITS PRODUCTS UNDER A RAT E CONTRACT AGREEMENT WITH M/S APBCL. THE ASSESSEE MANUFACTURES PRODUCTS AS PER INTENDS RECEIVED FROM THE M/S APBCL WHICH IS BASED ON INTENDS FROM THE RETAILERS. THE CORPORATION SHALL MAKE THE PAYMENTS AFTER 45 DAYS FROM THE DATE OF SUPPLY. AS PER CLAUSE 2.11(D) OF THE RA TE CONTRACT AGREEMENT, M/S APBCL CHARGES STORAGES CHARGES(DEMUR RAGES) OF RS. 2/- PER CASE PER MONTH ON UNSOLD PRODUCTS BEYOND 90 DAY S AND THE STOCK UNSOLD WILL BE DRAINED OUT. THE ASSESSEE HAS COME O UT WITH A TRADE SCHEME TO CLEAR THE STOCK TO AVOID PAYMENTS OF STOR AGE CHARGES AND TO BOOST SALES, ACCORDING TO WHICH IT OFFERS TRADE DIS COUNT TO CUSTOMERS, THEREFORE, THE IMPUGNED EXPENDITURE IS ESSENTIALLY INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, ALLOWABLE U/S 37 OF THE ACT. 30. THE A.O. AS WELL AS THE CIT(A), DISALLOWED IMPU GNED TRADE SCHEME AND DISCOUNTS ON TWO GROUNDS. THE A.O. DISALLOWED E XPENDITURE ON THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 35 GROUND THAT THE IMPUGNED EXPENDITURE IS IN THE NATU RE OF BROKERAGE AND COMMISSION AS DEFINED U/S 194, CONSEQUENTLY IT IS NOT DEDUCTIBLE U/S 40(A)(IA), FOR FAILURE TO DEDUCT TDS U/S 194H OF TH E ACT. THE CIT(A), TECHNICALLY CONCURRED WITH THE FINDINGS OF THE A.O. , HOWEVER, PROCEED TO DISALLOW THE IMPUGNED EXPENDITURE U/S 37 OF THE ACT , ON THE GROUND THAT IT IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE P URPOSE OF THE BUSINESS. THEREFORE, THE ISSUE NEEDS TO EXAMINED ON THE FOLLO WING TWO QUESTIONS. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE WHETHER TRADE SCHEME AND DISCOUNTS IS IN THE NATURE OF BROK ERAGE AND COMMISSION AS DEFINED U/S 194H, LIABLE FOR DISALLO WANCE U/S 40(A)(IA), FOR FAILURE TO DEDUCT TDS?. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE WHETHER OR NOT TRADE SCHEME AND DISCOUNTS IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WHICH IS D EDUCTIBLE U/S 37 OF THE ACT? 31. WE SHALL FIRST, TAKE UP QUESTION NO.(I), I.E. WH ETHER TRADE SCHEMES AND DISCOUNTS IS IN THE NATURE OF BROKERAGE AND COM MISSION AS DEFINED U/S 194H, LIABLE FOR DISALLOWANCE U/S 40(A)(IA) FOR FAILURE TO DEDUCT TDS. THE FACTS WHICH LEADS TO DISALLOWANCE OF TRADE SCHE ME AND DISCOUNTS U/S 40(A)(IA) OF THE ACT ARE THAT THERE WAS A TDS SURVE Y IN THE ASSESSEES PREMISES, THROUGH WHICH THE ASSESSEE WAS ASKED TO E XPLAIN WHY THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 36 PAYMENTS MADE UNDER THE TRADE SCHEME AND DISCOUNTS WAS NOT SUBJECTED TO TDS AND WHY THE ASSESSEE SHOULD NOT BE HELD TO BE AN ASSESSEE IN DEFAULT IN TERMS OF SECTION 201(1) & 20 1(1A) OF THE ACT. THE TDS OFFICER WAS NOT CONVINCED WITH THE ASSESSEES C ONTENTION THAT THESE PAYMENTS WERE IN THE NATURE OF DISCOUNTS OR REBATE AND CAME TO THE CONCLUSION THAT THE PAYMENTS WERE IN THE NATURE OF COMMISSION AND BROKERAGE WITHIN THE PURVIEW OF SECTION 194H OF THE ACT, THEREFORE, HELD THE ASSESSEE AS AN ASSESSEE IN DEFAULT U/S 201(1) & 201(1A) OF THE ACT AND COMPUTED TAX AND INTEREST. ASSESSEE CARRIED TH E MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, BUT COULD NOT SUCCEED. THE ASSESSEE CARRIED THE MATTER IN FURTHER APPEAL BEFORE THE ITA T. THE ITAT, IN ITA NOS.103, 104 & 105/VIZAG/2014 DATED 10.8.2015 FOR T HE ASSESSMENT YEAR 2008-09 TO 2010-11 OBSERVED THAT THE EXPENDITU RE INCURRED BY THE ASSESSEE UNDER THE HEAD TRADE SCHEME AND DISCOUNTS COULD NOT FALL UNDER THE CATEGORY OF COMMISSION AS DEFINED U/S 194 H OF THE ACT. THE ITAT, FURTHER OBSERVED THAT THERE SHOULD NOT BE ANY DOUBT THAT THE SALE BETWEEN THE ASSESSEE AND M/S. A.P. BEVERAGES CORPOR ATION LIMITED AND THE SALE BETWEEN M/S. A.P. BEVERAGES CORPORATION LI MITED AND RETAIL DEALERS WAS ON PRINCIPAL TO PRINCIPAL BASIS SINCE, THE PROPERTY AND RISK ATTACHED WITH THE GOODS GOT TRANSFERRED FROM SELLER TO BUYER UNDER BOTH OCCASIONS. THE TRADE DISCOUNT SCHEME WAS ANNOUNCED BY THE ASSESSEE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 37 IN ORDER TO PROMOTE ITS SALES AND HENCE, IT IS A SA LES PROMOTION SCHEME, BUT NOT A COMMISSION TO ATTRACT THE PROVISIONS OF S ECTION 194H OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS EXTRACTE D BELOW: 17. IN THE INSTANT CASE, THE ASSESSEE APPARENTLY PA ID INCENTIVES UNDER ITS SALES PROMOTION SCHEME TO THE RETAIL DEALERS. WE HAVE ALREADY NOTICED THAT THE ASSESSEE HAS SOLD GOODS TO APBCL AND THE R ETAIL DEALERS HAVE PURCHASED GOODS FROM APBCL. THERE SHOULD NOT BE AN Y DISPUTE THAT THE SALE BETWEEN THE ASSESSEE AND APBCL AND THE SALE BE TWEEN APBCL AND RETAIL DEALERS WAS ON PRINCIPAL TO PRINCIPAL BASI S, SINCE THE PROPERTY AND RISK ATTACHED WITH THE GOODS GOT TRANSFERRED FROM S ELLER TO BUYER UNDER BOTH OCCASIONS. FURTHER, IT CANNOT ALSO BE SAID TH AT RETAIL DEALERS HAVE PROVIDED ANY SERVICE TO THE ASSESSEE HEREIN, SINCE THERE IS NO DIRECT CONNECTION BETWEEN THE ASSESSEE AND RETAIL DEALERS. THE TRADE DISCOUNT SCHEME WAS ANNOUNCED BY THE ASSESSEE IN ORDER TO PR OMOTE ITS SALES AND HENCE IT IS A SALES PROMOTION SCHEME ONLY. UNDER T HE SCHEME, THE ASSESSEE HAS DISBURSED THE ELIGIBLE AMOUNT OF INCEN TIVE OR REBATE OR DISCOUNT TO THE RETAIL DEALERS THROUGH ITS DEL-CRED ERE AGENTS. HENCE THE DEL-CREDERE AGENTS CANNOT BE CONSIDERED TO PAYEES IN THESE TRANSACTIONS AS INTERPRETED BY LD CIT(A), SINCE THEY HAVE ACTED ONLY AS CONDUITS. THE PAYMENT IS ACTUALLY MADE TO THE RETAIL DEALERS. AC CORDINGLY, WE ARE OF THE VIEW THAT THE PAYMENT MADE BY THE ASSESSEE UNDER SU CH SCHEME WOULD CONSTITUTE SALES PROMOTION EXPENSES AND IT WOULD NO T FALL UNDER THE CATEGORY OF COMMISSION FALLING WITHIN THE SCOPE OF SECTION 194 H OF THE ACT. 32. THE REVENUE HAS CHALLENGED THE ORDER OF THE TRI BUNAL, BEFORE THE HONBLE HIGH COURT OF TELENGANA & A.P. THE HIGH CO URT OF A.P. & TELENGANA, IN THE CASE OF CIT(TDS) VS. UNITED BREWE RIES LIMITED (2016) 387 ITR 150 (T&AP), DISMISSED APPEAL FILED BY THE R EVENUE AND CONFIRMED THE ORDER OF THE TRIBUNAL. THE HONBLE H IGH COURT, FURTHER OBSERVED THAT IT WAS EVIDENT THAT BEER WAS SOLD BY THE ASSESSEE TO THE CORPORATION, AND THE CORPORATION, IN TURN, SOLD THE BEER TO THE RETAILERS. THE TWO TRANSACTIONS WERE INDEPENDENT OF EACH OTHER AND WERE ON A PRINCIPAL TO PRINCIPAL BASIS. NO SERVICES WERE REN DERED BY THE RETAIL ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 38 DEALER TO THE ASSESSEE AND THE INCENTIVE GIVEN BY T HE ASSESSEE TO THE RETAILERS AS TRADE DISCOUNT WAS ONLY TO PROMOTE THE IR SALES. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW: HELD, DISMISSING THE APPEAL, THAT IT WAS EVIDENT T HAT BEER WAS SOLD BY THE ASSESSEE TO THE CORPORATION, AND THE CORPORATION, I N TURN, SOLD THE BEER PURCHASED BY IT FROM THE ASSESSEE, TO RETAIL DEALER S. THE TWO TRANSACTIONS WERE INDEPENDENT OF EACH OTHER, AND WERE ON A PRINC IPAL TO PRINCIPAL BASIS. NO SERVICES WERE RENDERED BY THE RETAIL DEA LER TO THE ASSESSEE, AND THE INCENTIVE GIVEN BY THE ASSESSEE TO THE RETAILER S AS TRADE DISCOUNT WAS ONLY TO PROMOTE THEIR SALES. THE TRIBUNAL RIGHTLY HELD THAT IN THE ABSENCE OF A RELATIONSHIP OF PRINCIPAL AND AGENT, AND AS TH ERE WAS NO DIRECT RELATIONSHIP BETWEEN THE ASSESSEE AND THE RETAILER, THE DISCOUNT OFFERED BY THE ASSESSEE TO THE RETAILERS COULD ONLY BE TREA TED AS SALES PROMOTION EXPENSES, AND NOT AS COMMISSION, AS NO SERVICES WER E RENDERED BY THE RETAILERS TO THE ASSESSEE. 33. IN THIS VIEW OF THE MATTER AND ALSO CONSIDERING THE RATIO OF THE A.P. & TELENGANA HIGH COURT, IN ASSESSEES OWN CASE, IN THE PROCEEDINGS U/S 201(1) OF THE ACT, WE ARE OF THE VIEW THAT THE EXPE NDITURE INCURRED UNDER THE HEAD TRADE SCHEMES AND DISCOUNTS WOULD NOT FALL UNDER THE DEFINITION OF BROKERAGE AND COMMISSION AS DEFINED U/S 194H OF THE ACT, LIABLE FOR DISALLOWANCE U/S 40(A)(IA), FOR FAILURE TO DEDUCT TDS U/S 194H OF THE ACT. ACCORDINGLY, WE ANSWER THE QUESTION NO .1 IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 34. THE NEXT QUESTION THAT NEEDS TO BE ANSWERED IS WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, TRADE SCHEME AND DISCOUNTS IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WHICH IS DEDUCTIBLE U/S 37 OF THE ACT. THE CIT(A) DISALLOWED IMPUGNED EXPENDITURE ON THE GROUND THAT IT IS NOT EXPENDED ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 39 WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND SUCH EXPENDITURE IS AGAINST THE OBJECTIVES OF SECTION 4 OF THE AP (R EGULATION OF WHOLESALE TRADE & DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQ UOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. THERE IS NO DISPUTE WITH R EGARD TO GENUINENESS OF PAYMENT AND BOTH LOWER AUTHORITIES N EVER DOUBTED GENUINENESS OF PAYMENT OF TRADE SCHEME AND DISCOUNT S. BOTH THE AUTHORITIES QUESTIONED THE RELEVANCE OF SUCH EXPEND ITURE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND THEY CAME T O A CONCLUSION THAT THERE IS NO NEED TO INCUR IMPUGNED EXPENDITURE. WE D O NOT FIND ANY MERITS IN THE OBSERVATIONS OF THE LOWER AUTHORITIES , FOR THE REASON THAT THE PROVISIONS OF SECTION 37 OF THE ACT, NOWHERE PR ESCRIBES THAT THERE SHOULD BE NECESSITY TO INCUR EXPENDITURE, BUT IT ON LY SAYS SUCH EXPENDITURE SHOULD BE INCURRED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS. THE REVENUE AUTHORITIES CANNOT QUESTION T HE RELEVANCE OF SUCH EXPENDITURE AND IT IS FOR THE ASSESSEE TO DECIDE WH ETHER PARTICULAR EXPENDITURE IS REQUIRED TO BE INCURRED OR NOT DEPEN DING UPON ITS BUSINESS NECESSITY AND IF SUCH EXPENDITURE IS PROVE D WITH NECESSARY EVIDENCES, THEN IT CANNOT BE SAID THAT SUCH EXPENDI TURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 35. HAVING SAID, LET US EXAMINE, WHETHER IMPUGNED E XPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. BEFORE WE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 40 GO IN TO FACTS, LET US UNDERSTAND THE PROVISIONS OF SECTION 37(1) OF THE ACT, WHICH READS AS FOLLOWS. 37 (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CA PITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHO LLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALL OWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION. [EXPLANATION 1] 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 ALLOWANC E SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE]. 36. THE PROVISIONS OF SECTION 37(1), PROVIDES FOR DEDUCTION OF EXPENDITURE, IF SUCH EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE, WHICH IS NOT IN THE N ATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE AND IT SHOULD BE INCURRED IN THE PREVIOUS YEAR AND ALSO IT SHOULD NO T HAVE BEEN INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR IS PROHIBITE D BY ANY LAW. A PLAIN READING OF SECTION 37(1) OF THE ACT, MAKES IT CLEAR THAT FOR CLAIMING DEDUCTION OF AN EXPENDITURE U/S 37(1) OF THE ACT, I T SHOULD BE ENSURED THAT THE EXPENDITURE IS NOT IN THE NATURE DESCRIBED U/S 30 TO 36 AND IT SHOULD BE WHOLLY AND EXCLUSIVELY INCURRED FOR THE P URPOSE OF BUSINESS OF THE ASSESSEE. ANY EXPENDITURE INCURRED FOR THE PUR POSE WHICH IS AN OFFENCE OR IS PROHIBITED BY LAW, THEN SUCH EXPENDIT URE IS NOT DEDUCTIBLE U/S 37(1) OF THE ACT. THE ASSESSEE CLAIMS THAT TRA DE SCHEMES AND DISCOUNTS HAS BEEN INCURRED TO PROMOTE SALES AND AL SO TO REDUCE STOCK HOLDING COST LEVIED BY M/S. A.P. BEVERAGES CORPORAT ION LIMITED. THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 41 ASSESSEE HAS FURNISHED DETAILS OF TRADE SCHEMES AND DISCOUNTS, ACCORDING TO WHICH IT HAS COME OUT WITH A TRADE SCH EME FROM TIME TO TIME TO CLEAR THE STOCKS HELD BY M/S. A.P. BEVERAGE S CORPORATION LIMITED TO AVOID PAYMENT OF STORAGE CHARGES LEVIED BY THE C ORPORATION ON UNSOLD STOCK BEYOND 90 DAYS FROM THE DATE OF SUPPLY . THE ASSESSEE FURTHER CLAIMS THAT THESE TRADE SCHEMES HAVE BEEN M ARKETED THROUGH DEL-CREDERE AGENTS APPOINTED FOR THIS PURPOSE, WHO WILL COMMUNICATE THE DETAILS OF TRADE SCHEME TO THE RETAILERS AND IN DUCE THE RETAILERS TO PREFER THEIR PRODUCT. THE ASSESSEE ALSO CONTENDED THAT M/S. A.P. BEVERAGES CORPORATION LIMITED DOES NOT TAKE ANY RES PONSIBILITY OF MARKETING AND PROMOTION OF PRODUCTS, AND IT IS THE RESPONSIBILITY OF THE MANUFACTURERS TO PROMOTE THEIR BRANDS BY WAY OF THE IR OWN MARKETING STRATEGIES. THE ASSESSEE BEING A CONTRACT MANUFACT URER FOR M/S. UNITED BREWERIES LIMITED, AS PER THE TERMS AND CONDITIONS OF BREWING AGREEMENT, INCURRED PROMOTIONAL EXPENDITURE TO BOOS T UP THE SALES. THEREFORE, THE LOWER AUTHORITIES WERE INCORRECT IN HOLDING THAT THE EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 37. THE ASSESSEE HAS EXPLAINED THE REASONS FOR PAY MENT OF TRADE SCHEMES AND DISCOUNTS. ACCORDING TO THE ASSESSEE, THE BASIC PURPOSE OF LAUNCHING TRADE SCHEME FROM TIME TO TOME IS THAT AS PER THE BREWING ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 42 AGREEMENT ENTERED INTO WITH M/S. UNITED BREWERIES L IMITED, THE ASSESSEE REQUIRED TO MANUFACTURE MINIMUM QUANTITY O F BEER EVERY MONTH. SIMILARLY, THE ASSESSEE NEEDS TO SUPPLY REQ UIRED QUANTITY OF BEER AS PER THE INDENT RECEIVED FROM M/S. A.P. BEVE RAGES CORPORATION LIMITED. THOUGH, M/S. A.P. BEVERAGES CORPORATION L IMITED PURCHASES GOODS AS PER THEIR INDENT, IT DOES NOT TAKE ANY RES PONSIBILITY OF MARKETING THE GOODS. AS PER THE RATE CONTRACT AGRE EMENT, ENTERED INTO WITH M/S. A.P. BEVERAGES CORPORATION LIMITED, THE A SSESSEE NEEDS TO PAY STOCK STORAGE CHARGES OF RS.2/- PER CASE PER MONTH ON UNSOLD STOCK BEYOND 90 DAYS AND ALSO THE SAME SHOULD BE DRAINED OUT. THEREFORE, TO AVOID PAYMENT OF DEMURRAGE CHARGES AND ALSO LOSS OF STOCK, THE ASSESSEE LAUNCHES TRADE SCHEMES BY OFFERING TRADE D ISCOUNTS TO RETAILERS TO BUY THEIR PRODUCT TO BE IN COMPETITION IN THE MA RKET WITH OTHER MANUFACTURERS. THE TRADE SCHEMES AND DISCOUNTS HAS BEEN ROUTED THROUGH DEL-CREDERE AGENTS APPOINTED FOR THIS PURPO SE. THE RETAILERS FILED THEIR CLAIMS WITH SPECIFIC DETAILS THROUGH DE L-CREDERE AGENTS. THE DEL-CREDERE AGENTS COMPILE THE DATA COLLECTED FROM THE RETAILERS AND THEN COMPARE WITH THE TOTAL SALES FIGURES COLLECTED FROM M/S. A.P. BEVERAGES CORPORATION LIMITED BEFORE PAYING THE TRA DE DISCOUNTS. THE TOTAL AMOUNT OF TRADE DISCOUNT HAS BEEN PAID TO DEL -CREDERE AGENTS, IN TURN, THEY HAVE DISTRIBUTED THE SAME TO THE RETAILE RS AS PER THEIR CLAIM. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 43 IN SUPPORT OF HIS ARGUMENTS, FURNISHED SAMPLE COPIE S OF CLAIMS MADE BY THE RETAILERS, BANK ACCOUNT COPY OF DEL-CREDERE AGE NTS AND ALSO SALES REPORT GENERATED BY M/S. A.P. BEVERAGES CORPORATION LIMITED. 38. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS MA NUFACTURED ITS PRODUCT IN A EXCISE BONDED WAREHOUSE UNDER THE LICE NSE ISSUED BY THE STATE GOVERNMENT. AS PER THE PREVAILING RULES APPL ICABLE FOR THE BUSINESS, THE ASSESSEE CANNOT PROMOTE ITS BRANDS TH ROUGH NORMAL PRINT AND ELECTRONIC MEDIA. IT IS ALSO AN ADMITTED FACT THAT M/S. A.P. BEVERAGES CORPORATION LIMITED DID NOT TAKE ANY RESP ONSIBILITY OF MARKETING PRODUCTS. THEREFORE, THE ASSESSEE NECESS ARILY GO FOR OTHER MARKETING STRATEGIES INCLUDING ALLOWING TRADE DISCO UNTS TO RETAILERS TO BOOST UP ITS SALES AND ALSO TO AVOID STOCK HOLDING COST LEVIED BY M/S. A.P. BEVERAGES CORPORATION LIMITED. THE ASSESSEE H AS FILED A PAPER BOOK CONTAINING NECESSARY DETAILS FILED BEFORE THE LOWER AUTHORITIES EXPLAINING THE BASIS FOR PAYMENT OF TRADE SCHEME AN D DISCOUNTS. ON PERUSAL OF THE DETAILS FILED BY THE ASSESSEE, WE FI ND THAT THE ASSESSEE HAS FILED SAMPLE COPIES OF CLAIMS MADE BY THE RETAI LERS, BANK STATEMENTS OF DEL-CREDERE AGENTS APPOINTED FOR THIS PURPOSE AN D SALES REPORT GENERATED BY M/S. A.P. BEVERAGES CORPORATION LIMITE D. ON FURTHER VERIFICATION OF THE DETAILS FILED BY THE ASSESSEE, WE NOTICED THAT TRADE DISCOUNT HAS BEEN ROUTED THROUGH DEL-CREDERE AGENTS TO THE RETAIL ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 44 TRADERS. THE ALLEGATION OF THE LD. CIT(A) IS THAT ALL THE EVIDENCES FILED BY THE ASSESSEE SHOWS THAT THE TRADE SCHEME AND DIS COUNT EXPENDITURE HAS BEEN BORNE BY THE PRINCIPALS M/S. UNITED BREWER IES LIMITED AND ALL DOCUMENTS ARE IN THEIR NAME AND NOWHERE THE ASSESSE E NAME IS APPEARED. THE ASSESSEE HAS EXPLAINED THE REASONS F OR PAYING TRADE DISCOUNTS THROUGH DEL-CREDERE AGENTS. AS PER THE A SSESSEE, THE BRAND OWNERS WILL APPOINT DEL-CREDERE AGENTS TO PROMOTE T HEIR BRANDS, HOWEVER, ANY SPENDING ON PROMOTIONAL ACTIVITIES HAS TO BE BORNE BY THE ASSESSEE. THE ASSESSEE FILED COPIES OF AGREEMENT E NTERED INTO WITH M/S. UNITED BREWERIES LIMITED. AS PER THE SAID AGREEMEN T, CLAUSE (7) SPECIFIED FOR PAYMENT OF BRAND FEE AS WELL AS PROMO TIONAL EXPENDITURE AND ACCORDINGLY THE ASSESSEE NEED TO INCUR ALL PROM OTIONAL EXPENDITURE INCLUDING DEL-CREDERE AGENTS COMMISSION. THEREFOR E, WE ARE OF THE VIEW THAT THERE IS NO MERITS IN THE FINDINGS OF THE CIT(A) THAT ALL THE DOCUMENTS FILED BY THE ASSESSEE DOES NOT SHOW ANY E VIDENCES OF PAYMENT OF TRADE SCHEME AND DISCOUNTS. 39. COMING TO THE SECOND ALLEGATION OF THE LD. CIT( A). THE LD. CIT(A) OBSERVED THAT EXPENDITURE INCURRED UNDER THE HEAD TRADE SCHEME AND DISCOUNTS IS AGAINST THE OBJECTIVE OF SECTION 4 OF A.P. (REGULATION OF WHOLESALE TRADE AND DISTRIBUTION AND RETAIL TRADE I N INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. AS PER SECTION 4 OF THE SAID ACT, THE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 45 ASSESSEE OR ITS AGENTS DOES NOT HAVE THE AUTHORITY OR PRIVILEGE TO ENGAGE IN WHOLESALE OR RETAIL TRADE OF ANY IMFL PRODUCTS I N THE STATE OF A.P. AND IF ANY PERSON ENGAGED IN SUCH TRADING, THEN IT IS C ERTAINLY VIOLATION OF SECTION 4 OF A.P. (REGULATION OF WHOLESALE TRADE AN D DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993 AND ANY EXPENDITURE INCURRED IN VIOLATION OF SAID ACT, IS NOT ALLOWABLE U/S 37(1) OF THE ACT. WE DO NOT FIND ANY MERITS IN THE FINDINGS OF THE CIT(A), FOR THE REASON THAT ON PERUSAL OF SECTION 4 OF SAID ACT, WE FIND THAT THE ACT, EMPOWERS THE A.P. STATE BEVERAGE CORP ORATION LIMITED EXCLUSIVE RIGHTS IN WHOLESALE TRADE IN ALCOHOLIC BE VERAGE BUSINESS AND PROHIBITS ALL PERSONS FROM INVOLVING IN ANY KIND OF TRADING IN WHOLE STATE. BUT, THERE IS NO SUCH RESTRICTION ON THE MANUFACTUR ERS FOR PROMOTION AND MARKETING THEIR PRODUCTS TO KEEP THEMSELVES IN COMP ETITION WITH OTHER COMPETITORS. THE ASSESSEE BEING A PRUDENT BUSINESS MAN EMPLOYED ITS OWN MARKETING STRATEGIES, INCLUDING PROMOTION BY LA UNCHING TRADE SCHEME FROM TIME TO TIME TO BOOST ITS SALES AND ALS O TO AVOID STOCK CARRIAGE COST, WHICH CANNOT BE SAID TO BE VIOLATION OF SECTION 4 OF A.P. (REGULATION OF WHOLESALE TRADE AND DISTRIBUTION AND RETAIL TRADE IN INDIAN LIQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993. ONCE, THE ASSESSEE IS LICENSED TO MANUFACTURE THE PRODUCTS, THE ASSESSEE IS EMPOWERED TO PROMOTE ITS BRANDS AND ALSO BOOST SALES BY WAY OF V ARIOUS MARKETING ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 46 STRATEGIES, WHICH CANNOT BE FIND FAULT WITH BY THE REVENUE AUTHORITIES. WE FURTHER OBSERVED THAT THE SAID SECTION REGULATES ONLY THE TRADE AND GIVE EXCLUSIVE PRIVILEGE TO M/S. A.P. BEVERAGES COR PORATION LIMITED, BUT DOES NOT PROHIBIT THE LICENSED MANUFACTURERS OF BEE R AND IMFL PRODUCTS TO PROMOTE THEIR BRANDS WITHIN THE PURVIEW OF SAID SECTION TO BE COMPETITIVE IN THE MARKET. THE ASSESSEE BEING A PR UDENT BUSINESS PERSON NATURALLY TRIED TO ENHANCE ITS BUSINESS WITH A PROFIT MOTIVE, WHICH CANNOT BE CONSIDERED AS VIOLATION OF SAID ACT. 40. THE LD. CIT(A) FURTHER OBSERVED THAT SECONDARY SALE PROMOTED BY THE ASSESSEE BY WAY OF TRADE SCHEMES AND DISCOUNTS IS AGAINST THE SPIRIT OF ARTICLE 47 OF THE INDIAN CONSTITUTION, AND WHICH GOES AGAINST THE PUBLIC POLICY AND FURTHER SUCH SECONDARY SALES PROM OTED THROUGH THE AGENTS IS ILLEGAL IN VIEW OF SECTION 4 OF A.P. (REG ULATION OF WHOLESALE TRADE AND DISTRIBUTION AND RETAIL TRADE IN INDIAN L IQUOR, FOREIGN LIQUOR, WINE AND BEER) ACT, 1993, CONSEQUENTLY ANY EXPENDIT URE INCURRED IN VIOLATION OF SAID PROVISIONS IS AN EXPENDITURE INCU RRED FOR ILLEGAL PURPOSE, WHICH CANNOT BE ALLOWED AS DEDUCTION. WE DO NOT AG REE WITH THE FINDINGS OF THE CIT(A), FOR THE REASON THAT ONCE A PERSON IS ALLOWED TO MANUFACTURE ALCOHOLIC BEVERAGES WITH A VALID LICENS E, IT CANNOT BE SAID THAT THE PERSON IS CARRYING ON BUSINESS IN CONTRAVE NTION OF ARTICLE 47 OF THE INDIA CONSTITUTION. WE FURTHER NOTICED THAT ART ICLE 47 OF THE INDIAN ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 47 CONSTITUTION SPEAKS ABOUT LARGER PUBLIC POLICY OF S TATES TO IMPOSE PROHIBITION ON SALE OF INTOXICATING DRINKS AND DRUG S, WHICH ARE INJURIOUS TO HEALTH, WHICH IS A SUBJECT MATTER OF STATES TO T AKE A CALL ON BANNING MANUFACTURE AND SALE OF SUCH DRINKS. THE CIT(A) TO TALLY MISCONSTRUED THE SAID PROVISIONS TO COME TO THE CONCLUSION THAT THE BUSINESS OF THE ASSESSEE IS OPPOSED TO ARTICLE 47 OF THE INDIAN CON STITUTION, IGNORING THE FACT THAT THE ASSESSEE IS CARRYING OUT ITS BUSINESS WITHIN THE FRAMEWORK OF STATE EXCISE LAWS AND ALSO WITH A VALID LICENSE FROM THE STATE. WE FURTHER OBSERVED THAT THE ASSESSEE BEING A PRUDENT BUSINESS MAN ALWAYS TRIED TO IMPROVE ITS BUSINESS BY ENHANCING I TS SALES AND ALSO TO BUILD A STRONGER BRAND TO COMPETE WITH OTHER MANUFA CTURERS BY EMPLOYING ITS OWN MARKETING STRATEGIES INCLUDING LA UNCHING TRADE SCHEMES, WHICH CANNOT BE CALLED ILLEGAL AND OPPOSED TO PUBLIC POLICY, MORE SO WHEN HE WAS ALLOWED TO DO THE SAME BUSINESS BY THE STATE. 41. IN THIS CASE, THE ASSESSEE BEING A CONTRACT MAN UFACTURER FOR M/S. UNITED BREWERIES LIMITED AND M/S. MILLENNIUM BEER I NDUSTRIES LIMITED SUBJECT TO CERTAIN TERMS AND CONDITIONS, WHICH MAND ATES THE ASSESSEE TO SPEND ON SALES PROMOTION EXPENSES. THE ALLEGATION OF THE REVENUE AUTHORITIES IS THAT THE AGREEMENTS WITH DEL-CREDERE AGENTS ARE ENTERED BY THE BRAND OWNERS, BUT NOT THE ASSESSEE. BUT, TH E FACT REMAINS THAT THE SAID BREWING AGREEMENT WITH BRAND OWNERS SPECIF ICALLY PROVIDES FOR ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 48 SPENDING ON SALES PROMOTION EXPENDITURE, ACCORDING TO WHICH, THE ASSESSEE IS LAUNCHING TRADE SCHEMES FROM TIME TO TI ME TO ENHANCE ITS BUSINESS AND ALSO TO REDUCE THE STOCK HOLDING COST LEVIED BY M/S. A.P. BEVERAGES CORPORATION LIMITED, THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE UNDER THE HEAD TRADE SCHEMES AND DISCOUNTS IS INCURRED WHOLLY AND EXCLU SIVELY FOR THE BUSINESS OF THE ASSESSEE. THE CIT(A) WAS TOTALLY E RRED IN COMING TO THE CONCLUSION THAT THE SAID EXPENDITURE IS NOT INCURRE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE. THEREFORE, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS T RADE SCHEMES AND DISCOUNTS U/S 37(1) OF THE ACT FOR THE ASSESSMENT YEAR 2007-08, 2008- 09 & 2009-10. 42. THE NEXT ISSUES THAT CAME UP FOR OUR CONSIDERAT ION IS DISALLOWANCE OF INTEREST PAID ON TERM LOAN U/S 14A OF THE ACT, F OR DIVERSION OF INTEREST BEARING FUNDS AND DISALLOWANCE OF GUARANTEE COMMISS ION PAID TO M/S UNITED BREWERIES LIMITED FOR SIMILAR REASONS. THE F ACTS WHICH LEADS TO DISALLOWANCE OF INTEREST U/S 14A OF THE ACT, ARE TH AT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE A SSESSEE HAS BORROWED RS. 67.50 CRORES LOAN FROM AXIS BANK LTD, OUT OF WHICH RS. 35 CRORES HAS BEEN INVESTED IN M/S MILLENNIUM BREWERIE S (INDIA) LIMITED TOWARDS SUBSCRIPTION TO 1% NON-CONVERTIBLE CUMULATI VE REDEEMABLE ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 49 PREFERENCE SHARES OF 35,00,000 WITH FACE VALUE OF R S. 100/- EACH. THE ASSESSEE HAD INCURRED INTEREST LIABILITY ON SUCH LO AN. THE A.O. FURTHER OBSERVED THAT THE ASSESSEE HAD BORROWED INTEREST BE ARING FUNDS FROM BANK AND DIVERTED INTEREST BEARING FUNDS TO ITS GRO UP COMPANIES WITHOUT CHARGING NAY INTEREST, THEREFORE ISSUED A SHOW CAUS E NOTICE AND ASKED TO EXPLAIN AS TO WHY PROPORTIONATE INTEREST SHOULD NOT BE DISALLOWED, IN RESPONSE, THE ASSESSEE HAS FILED A LETTER DT. 18-11 -2009 AND EXPLAINED THE REASON FOR INVESTMENT IN ITS SUBSIDIARY COMPANY AND SAID THAT NO DISALLOWANCE IS CALLED FOR. THE A.O. AFTER CONSIDER ING EXPLANATION OF ASSESSEE, OBSERVED THAT THERE IS A CLEAR DIVERSION OF INTEREST BEARING FUNDS TO SUBSIDIARY COMPANY TOWARDS SUBSCRIPTION OF PREFERENCE SHARES. THE A.O. FURTHER NOTED THAT THE ASSESSEE DID NOT RE CEIVED ANY INCOME FROM SUCH INVESTMENTS, THEREFORE, DISALLOWED PROPOR TIONATE INTEREST U/S 14A OF THE ACT, AND ADDED BACK TO TOTAL INCOME FOR THE A.Y. 2007-08, 2008-09 AND 2009-10. 43. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFOR E THE FIRST APPELLATE AUTHORITY. THE ASSESSEE HAS FILED DETAILE D WRITTEN SUBMISSION AND CONTENDED THAT THE ASSESSEE HAS MADE INVESTMENT IN FELLOW SUBSIDIARY OUT OF COMMERCIAL EXPEDIENCY TO BAIL OUT DEBT TRAPPED GROUP COMPANY WHICH SUPPLIES RAW MATERIALS TO OUR BUSINES S. THE ASSESSEE FURTHER SUBMITTED THAT THE COMPANY IS GETTING RAW M ATERIALS SUPPLIES ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 50 FROM THE SISTER COMPANY. THE INVESTMENT IN PREFEREN CE SHARES OF SUBSIDIARY IS STRATEGIC INVESTMENT TO GET BUSINESS ADVANTAGES OF GETTING UNINTERRUPTED RAW MATERIALS SUPPLIES WHICH CANNOT B E CONSIDERED AS DIVERSION OF FUNDS. THE ASSESSEE HAS FILED NECESSAR Y DETAILS OF RAW MATERIALS PURCHASES FROM SUBSIDIARY COMPANY AND ITS SHARE HOLDING IN THE COMPANY. THE ASSESSEE ALSO RELIED UPON THE DECI SION OF HONBLE SUPREME COURT, IN THE CASE OF S.A. BUILDERS LTD VS. CIT, (2007) 288 ITR I (SC) AND SUBMITTED IF THE FUNDS ARE INVESTED ON A CCOUNT OF COMMERCIAL EXPEDIENCY, EVEN IF SUCH INVESTMENT DOES NOT FETCHE D ANY INCOME, NO DISALLOWANCE CAN BE MADE FOR INTEREST PAID ON THE G ROUND THAT INTEREST BEARING FUNDS ARE DIVERTED IN TO NON-BUSINESS PURPO SES. 44. THE CIT(A) AFTER CONSIDERING EXPLANATION OF THE ASSESSEE AND ALSO ANALYSIS OF RAW MATERIALS PURCHASES FROM THE SUBSID IARY COMPANY, OBSERVED THAT THERE IS NO ELEMENT OF COMMERCIAL EXP EDIENCY IN INVESTMENT IN SUBSIDIARY COMPANY. THE CIT(A) FURTHE R OBSERVED THAT THE TOTAL RAW MATERIALS PURCHASES FROM THE COMPANY TO T HE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE WORKS OUT TO MEA GRE 4.17% TO 10.4%. THE ASSESSEE HAS NOT GIVEN ANY MATERIAL EVID ENCE TO SHOW THAT PURCHASES FROM MBIL WERE COMMERCIALLY ADVANTAGEOUS THAN PURCHASES FROM OTHER PARTIES. THE SUBSTANTIAL INVESTMENT OF R S. 35 CRORES IS IN NO WAY COMMENSURATE TO THE VALUE OF PURCHASES FROM THE SUBSIDIARY, FOR ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 51 WHICH THERE IS NO NEED TO INVEST HUGE INTEREST BEAR ING FUNDS AND PAY INTEREST LIABILITY OF APPROXIMATELY RS. 3 CRORES EV ERY YEAR. THEREFORE, OPINED THAT THE ASSESSEE FAILED TO ESTABLISH COMMER CIAL EXPEDIENCY FOR INVESTING SUCH A HUGE FUNDS IN SUBSIDIARY COMPANY A ND HENCE CONFIRMED DISALLOWANCE MADE BY THE A.O. TOWARDS PROPORTIONATE INTEREST U/S 14A, FOR THE ASST. YEARS 2007-08 TO 2009-10 AND DIRECTED THE A.O. TO RE COMPUTE THE CORRECT AMOUNT OF DISALLOWANCES AFTER V ERIFYING RECORDS AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE. 45. IN SO FAR AS GUARANTEE COMMISSION PAID TO M/S U NITED BREWERIES LIMITED, THE A.O. FILED A LETTER DATED 21-03-2013 A ND REQUESTED THE CIT(A) TO ENHANCE THE ASSESSMENT TO THE EXTENT OF R S. 1,13,79, 452/-, AS THE SAME HAS NOT BEEN CONSIDERED IN THE ASSESSME NT. THE A.O. OBSERVED THAT THERE WAS A DIVERSION OF INTEREST BEA RING FUNDS TO NON BUSINESS PURPOSES, HENCE, THE GUARANTEE COMMISSION PAID TO M/S UBL ON SUCH LOAN SHOULD BE PROPORTIONATELY DISALLOWED. THE CIT(A), DURING APPELLATE PROCEEDINGS, ISSUED A ENHANCEMENT NOTICE AND ASKED TO EXPLAIN AS TO WHY PROPORTIONATE GUARANTEE COMMISSIO N SHALL NOT BE DISALLOWED FOR DIVERSION OF FUNDS TO NON BUSINESS P URPOSES. IN RESPONSE, THE ASSESSEE HAS FILED ITS OBJECTION FOR PROPOSED E NHANCEMENT NOTICE AND ALSO CONTENDED THE ISSUE ON MERITS. THE CIT(A), FOR THE DETAILED DISCUSSION IN HIS ORDER IN PARA. 7.1.(PAGE NO.33), REJECTED OBJECTIONS ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 52 FILED BY THE ASSESSEE AND HELD THAT THE A.O. IS JUS TIFIED IN DISALLOWANCE OF INTEREST IN REGARD TO THE AMOUNT INVESTED IN PREFER ENCE SHARES OF M/S MBIL, A SISTER CONCERN OF THE ASSESSEE, CONSEQUENTL Y, BANK GUARANTEE COMMISSION PAID IN CONNECTION WITH THE SAID LOAN SH OULD ALSO BE PROPORTIONATELY DISALLOWED, AS IT CANNOT BE CONSIDE RED AS INCURRED FOR THE ASSESSEES BUSINESS. ACCORDINGLY, CIT(A) DIRECT ED THE A.O. TO DISALLOW PROPORTIONATE BANK GUARANTEE COMMISSION PA ID TO M/S UB LIMITED FOR OBTAINING LOAN FROM THE AXIS BANK. 46. THE LD. A.R. FOR THE ASSESSEE, SUBMITTED THAT, THE LD. A.O. AS WELL AS THE LD. CIT(A) WERE ERRED IN DISALLOWING INTERES T U/S 14A OF THE ACT TOWARDS INVESTMENT IN SUBSIDIARY COMPANY IN 1% NON- CONVERTIBLE, REDEEMABLE PREFERENCE SHARES. THE A.R. FURTHER SUB MITTED THAT THE ASSESSEE HAS MADE INVESTMENT IN GROUP COMPANY OUT O F COMMERCIAL EXPEDIENCY TO BAIL OUT DEBT TRAPPED GROUP COMPANY W HICH SUPPLIES RAW MATERIALS TO OUR BUSINESS. THE ASSESSEE FURTHER SU BMITTED THAT THE COMPANY IS GETTING RAW MATERIAL SUPPLIES FROM THE S ISTER COMPANY AND THE INVESTMENT IN PREFERENCE SHARES IS A STRATEGIC INVESTMENT TO GET BUSINESS ADVANTAGE, WHICH CANNOT BE CONSIDERED AS D IVERSION OF FUNDS. THE ASSESSEE FURTHER SUBMITTED THAT ANY INVESTMENT IN SISTER CONCERN MADE WITH A COMMERCIAL EXPEDIENCY AND THE SAME IS A STRATEGIC INVESTMENT FOR UNINTERRUPTED SUPPLY OF RAW MATERIAL S, THEN NO PART OF ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 53 INTEREST EXPENDITURE CAN BE DISALLOWED U/S 14A OF T HE ACT. THE ASSESSEE BEING A HOLDING COMPANY OF M/S. MILLENNIUM BEER IND USTRIES LIMITED HAS INVESTED IN THE SHARE CAPITAL OF THE COMPANY TO GET BUSINESS ADVANTAGES, THEREFORE, THE A.O. AND CIT(A) ARE TOTA LLY INCORRECT IN DISALLOWING INTEREST PAID ON TERM LOANS U/S 14A OF THE ACT. IN SUPPORT OF HIS ARGUMENTS, RELIED UPON THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF HERO CYCLES PRIVATE LIMITED VS. CIT (20 15) 379 ITR 347 (SC) AND ALSO HONBLE DELHI HIGH COURT IN THE CASE OF CI T VS. ORIENTAL STRUCTURAL ENGINEERS PRIVATE LIMITED (2013) 216 TAX MAN 92 (DELHI) (MAG). 47. THE LD. D.R. STRONGLY SUPPORTED THE CIT(A) ORDE R. THE D.R. FURTHER SUBMITTED THAT, THOUGH THE A.O. AS WELL AS THE CIT( A) STATED THAT INTEREST IS DISALLOWED U/S 14A, OF THE ACT, THE SUB STANCE OF THE DISCUSSION IS EXPENDITURE IS DISALLOWED FOR DIVERSI ON OF INTEREST BEARING FUNDS TO SISTER CONCERNS, FOR NON BUSINESS PURPOSE, THEREFORE, THERE IS NO MERITS IN THE ARGUMENTS OF THE LD. A.R. THAT THE PR OVISIONS OF SECTION 14A HAS NO APPLICATION. THE D.R. FURTHER SUBMITTED THAT IT IS A FACT THAT HUGE INTEREST LIABILITY IS INCURRED ON SUCH LOAN AND INT EREST BEARING FUNDS HAS BEEN INVESTED IN NON- INCOME GENERATING INVESTMENTS IN GROUP CONCERNS, THEREFORE, PROPORTIONATE INTEREST LIABILITY WHICH A TTRIBUTES TO DIVERSION OF FUNDS SHALL NOT ALLOWED AS DEDUCTION. THOUGH, THE A SSESSEE ADVANCED ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 54 COMMERCIAL EXPEDIENCY THEORY, FAILED TO SUBSTANTIAT E ITS CLAIM WITH NECESSARY FACTS AND FIGURES. IN FACT, TOTAL PURCHAS ES FROM SUBSIDIARY COMPANY TO TOTAL RAW MATERIALS CONSUMED BY THE ASSE SSEE IS VERY NOMINAL, THEREFORE, THERE IS NO ELEMENT OF COMMERCI AL EXPEDIENCY AND HENCE, THE A.O. HAS RIGHTLY DISALLOWED PROPORTIONAT E INTEREST AND DISALLOWANCE SHOULD BE UPHELD. 48. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIAL S ON RECORD AND ALSO CONSIDERED RELEVANT PROVISIONS OF SECTION 14A. THE A.O. DISALLOWED INTEREST U/S 14A, ON THE GROUND THAT INTEREST BEARI NG FUNDS HAS BEEN DIVERTED TO NON BUSINESS PURPOSES, THEREFORE PROPOR TIONATE INTEREST LIABILITY CANNOT BE CONSIDERED AS INCURRED FOR THE PURPOSE OF BUSINESS. THE ASSESSEE CLAIMS THAT IT HAD MADE STRATEGIC INVE STMENT IN SUBSIDIARY COMPANY WITH A COMMERCIAL INTENT TO BAIL OUT DEBT T RAPPED GROUP COMPANY, WHICH IS COMMERCIALLY ASSOCIATED WITH THE COMPANY FOR SUPPLY OF RAW MATERIALS. THE DECISION TO INVEST IN THE COM PANY HELPS UNINTERRUPTED SUPPLY OF RAW MATERIALS WHICH HELPS T HE COMPANY THEREFORE, INVESTMENTS IN GROUP COMPANY CANNOT BE C ALLED DIVERSION OF FUNDS FOR NON BUSINESS PURPOSE. ONE HAS TO SEE THAT TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT O F VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER T HE AMOUNT IS ADVANCED FOR EARNING PROFIT. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 55 49. HAVING HEARD BOTH SIDES, WE FIND FORCE IN THE A RGUMENTS OF THE ASSESSEE FOR THE REASON THAT INVESTMENTS IN A SUBSI DIARY COMPANY WAS MADE WITH A COMMERCIAL EXPEDIENCY AND THE SAME IS A STRATEGIC INVESTMENT FOR GETTING RAW MATERIALS SUPPLY, THEREF ORE IT CANNOT BE CONSIDERED AS DIVERSION OF FUNDS FOR NON BUSINESS P URPOSES. WE FURTHER OBSERVED THAT IF THE ASSESSEE HAS MADE INVESTMENTS WITH A COMMERCIAL EXPEDIENCY, EVEN IF SUCH INVESTMENT DOES NOT YIELD DESIRED RESULTS, WHICH CANNOT BE VIEWED NEGATIVELY TO DISALLOW INTER EST, BECAUSE, ALL INVESTMENTS MAY OR MAY NOT YIELD DESIRED RESULTS. W HAT IS IMPORTANT IS BUSINESS INTENT. ONCE, IT IS ESTABLISHED THAT THERE IS A NEXUS BETWEEN INVESTMENT AND BUSINESS PURPOSE, THEN, THE REVENUE CANNOT QUESTION THE INVESTMENT WITH A VIEW POINT OF PROFIT MOTIVE A LONE, BECAUSE, ALL BUSINESS DECISIONS CANNOT BE TAKEN WITH A PROFIT MO TIVE. THE REVENUE CANNOT SIT IN THE ARM CHAIR OF THE BUSINESSMAN AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE INVESTMENT HAVING REG ARD TO THE FACTS AND CIRCUMSTANCES AND IT IS FOR THE BUSINESSMAN TO TAKE A CALL TO MAKE INVESTMENT OR NOT. THE TAX AUTHORITIES MUST NOT LOO K THE MATTER AT THEIR VIEW POINT, BUT THAT OF A PRUDENT BUSINESSMAN. ONE HAS TO SEE THE INVESTMENT IN SUBSIDIARY FROM THE POINT OF COMMERCI AL EXPEDIENCY, BUT NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT IS AD VANCED FOR EARNING PROFIT. THEREFORE, IF THE ASSESSEE PROVES THAT INVE STMENT IN SUBSIDIARY IS ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 56 MADE WITH A COMMERCIAL INTENT AND WHICH HELPS THE A SSESSEE IN ITS BUSINESS, EVEN IF SUCH BUSINESS ASSOCIATION IS COMM ERCIALLY VIABLE OR NOT, TAX AUTHORITIES CANNOT EXAMINE THE INVESTMENT WITH PROFIT MOTIVE ALONE. IF THE ASSESSEE PROVES THAT IT HAS MADE STRATEGIC I NVESTMENT IN SISTER COMPANY AND SUCH INVESTMENT IS MADE OUT OF COMMERCI AL EXPEDIENCY, THEN NO PART OF INTEREST EXPENDITURE CAN BE DISALLO WED UNDER SECTION 14A OF THE ACT. 50. THE ASSESSEE RELIED ON THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF HERO CYCLES PVT. LTD VS. CIT (2015) 379 ITR 347(SC). THE HONBLE SUPREME COURT, IN THE SAID CASE OBSERVED TH AT, THE INVESTMENTS IN SISTER CONCERN WAS MADE OUT OF COMMERCIAL EXPEDI ENCY AND THE SAME IS A STRATEGIC INVESTMENT FOR UNINTERRUPTED RAW MAT ERIALS SUPPLY TO THE ASSESSEE, THEN NO PART OF INTEREST CANE BE DISALLOW ED U/S 14A OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED BEL OW. DELHI HIGH COURT IN 'CIT V. DALMIA CEMENT (B.) LTD .' /2002 (254) ITR 377] WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS ESTABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDI TURE AND THE PURPOSE OF BUSINESS THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN TH E POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE CO MPELLED TO MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORI TIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOO K AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUD ENT BUSINESSMAN ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 57 ADVANCE TO M/S. HERO FIBRES LIMITED BECAME IMPERATI VE AS A BUSINESS EXPEDIENCY IN VIEW OF THE UNDERTAKING GIVEN TO THE FINANCIAL INSTITUTIONS BY THE ASSESSEE TO THE EFFECT THAT IT WOULD PROVIDE ADDITIONAL MARGIN TO M/S. HERO FIBRES LIMITED TO ME ET THE WORKING CAPITAL FOR MEETING ANY CASH LOSES. ASSESSEE COMPANY HAD OFF-LOADED ITS SHARE HOLDING I N THE SAID M/S. HERO FIBRES LIMITED TO VARIOUS COMPANIES OF OSWAL G ROUP AND AT THAT TIME, THE ASSESSEE COMPANY NOT ONLY REFUNDED B ACK THE ENTIRE LOAN GIVEN TO M/S. HERO FIBRES LIMITED BY THE ASSES SEE BUT THIS WAS REFUNDED WITH INTEREST, IN THE YEAR IN WHICH THE AF ORESAID INTEREST WAS RECEIVED, SAME WAS SHOWN AS INCOME AND OFFERED FOR TAX. ASSESSEE HAD A CREDIT BALANCE IN THE BANK ACCOUNT W HEN THE SAID ADVANCE OF RS. 34 LAKHS WAS GIVEN. COMPANY HAD RESE RVE/SURPLUS TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD IN ANY CASE, UTILISE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. 51. THE ASSESSEE HAS RELIED UPON THE DECISION OF HO NBLE DELHI HIGH COURT, IN THE CASE OF CIT VS. ORIENTAL STRUCTURAL E NGINEERS PRIVATE LIMITED (2013) 216 TAXMAN 92 (DELHI), WHEREIN THE H ONBLE HIGH COURT, HAS HELD THAT NO DISALLOWANCE U/S 14A OF THE ACT, C AN BE MADE ON INVESTMENT MADE IN SUBSIDIARY COMPANY, OUT OF COMME RCIAL EXPEDIENCY. RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW: 2. IT WAS THE CONTENTION OF THE REVENUE THAT RULE 8D OF THE INCOME TAX RULES, 1962 HAD NOT BEEN APPLIED PROPERLY IN RESPEC T OF THE ASSESSMENT YEAR 2008-09. THIS ASPECT HAS BEEN CONSIDERED BY TH E TRIBUNAL IN DETAIL AND IT HAS OBSERVED AS UNDER: - '6.3 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS A ND PERUSED THE RECORDS. WE FIND THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN A FINDING THAT ONLY INTEREST OF RS.2,96,731/- WAS PAID ON FUNDS UTILIZED FOR MAKING INVESTMENTS ON WHICH EXEMPTED I NCOME WAS RECEIVABLE. FURTHER, LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS OBSERVED THAT IN RESPECT OF INVESTMENT OF RS.6,07,7 75,000/- MADE IN SUBSIDIARY COMPANIES AS PER DOCUMENTS PRODUCED BEFO RE HIM, THEY ARE ATTRIBUTABLE TO COMMERCIAL EXPEDIENCY, BECAUSE AS P ER SUBMISSION MADE BY THE ASSESSEE, IT HAD TO FORM SPECIAL PURPOSE VEH ICLES (SPV) IN ORDER TO OBTAIN CONTRACTS FROM THE NHAI AND THE SPVS SO FORME D ENGAGED THE ASSESSEE COMPANY AS CONTRACT TO EXECUTE THE WORKS A WARDED TO THEM (I.E. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 58 SPVS) BY THE NHAI. IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR, THE ASSESSEE HAS SHOWN THE TURNOVER FROM EXECUTION OF T HESE CONTRACTS AND THEREFORE NO EXPENSE AND INTEREST ATTRIBUTABLE TO T HE INVESTMENTS MADE BY THE APPELLANT IN THE PSVS CAN BE DISALLOWED U/S 14A R.W. RULE 8D BECAUSE IT CANNOT BE TERMED AS EXPENSE/INTEREST INC URRED FOR EARNING EXEMPTED INCOME. UNDER THE CIRCUMSTANCES, LD. COMMI SSIONER OF INCOME TAX (APPEALS) IS CORRECT IN HOLDING THAT DISALLOWAN CE OF A FURTHER SUM RS.40,556/- CALCULATED @ 2% OF THE DIVIDEND EARNED IS SUFFICIENT. UNDER THE CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), HENCE WE UPHO LD THE SAME.' 3. ON GOING THROUGH THE ABOVE OBSERVATIONS WE ARE O F THE VIEW THAT THIS IS MERELY A QUESTION OF FACT AND DOES NOT INVOLVE ANY QUESTION OF LAW MUCH LESS A SUBSTANTIAL QUESTION OF LAW, AS THE TRIBUNAL HELD THAT THE EXPENSES WHICH HAVE BEEN CLAIMED BY THE ASSESSEE WERE NOT TO WARDS THE EXEMPTED INCOME. THE DISALLOWANCE, THEREFORE, WAS RIGHTLY LI MITED TO A SUM OF RS.40,556/-. THE QUESTION OF INTERPRETING RULE 8-D IS NOT IN DISPUTE AND THE ONLY DISPUTE IS WITH REGARD TO FACTS WHICH HAVE BEEN SETTLED BY THE TRIBUNAL. 52. IN THIS VIEW OF THE MATTER AND ALSO RESPECTFULL Y FOLLOWING THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF H ERO CYCLES PRIVATE LIMITED VS. CIT (SUPRA), WE ARE OF THE VIEW THAT IF INVESTMENT IN SISTER CONCERN WAS MADE OUT OF COMMERCIAL EXPEDIENCY AND T HE SAME IS A STRATEGIC INVESTMENT FOR SUPPLY OF RAW MATERIALS, N O PART OF INTEREST EXPENDITURE CAN BE DISALLOWED U/S 14A OF THE ACT. IN THIS CASE, THE ASSESSEE HAS PROVED WITH NECESSARY DETAILS, THE NEX US BETWEEN THE INVESTMENT AND BUSINESS NECESSITY. THEREFORE, WE A RE OF THE VIEW THAT THE A.O. WAS ERRED IN DISALLOWING INTEREST U/S 14A OF THE ACT. HENCE, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS IN TEREST U/S 14A OF THE ACT, FOR THE ASSESSMENT YEARS 2007-08, 2008-09 & 20 09-10. 53. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF GUARANTEE COMMISSION PAID TO M/S. UNITED BREWERI ES LIMITED FOR ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 59 OBTAINING TERM LOAN FROM AXIS BANK BY INVOKING PROV ISIONS OF SECTION 14A OF THE ACT. THE CIT(A) DIRECTED THE A.O. TO DISALL OW BANK GUARANTEE COMMISSION PAID IN CONNECTION WITH THE LOAN BORROWE D FROM AXIS BANK ON THE GROUND THAT THE SAID LOAN HAS BEEN DIVERTED TO SUBSIDIARY COMPANY FOR NON-BUSINESS PURPOSE, THEREFORE, PROPOR TIONATE BANK GUARANTEE COMMISSION PAID SHALL NOT BE ALLOWED AS D EDUCTION. THE ASSESSEE CLAIMS THAT LOAN BORROWED FROM AXIS BANK H AS BEEN PARTLY USED FOR INVESTMENT IN PREFERENCE SHARES OF SUBSIDIARY C OMPANY WITH AN INTENT TO COMMERCIAL EXPEDIENCY AND HENCE, BANK GUA RANTEE COMMISSION PAID TO M/S. UNITED BREWERIES LIMITED CANNOT BE DIS ALLOWED. 54. HAVING HEARD BOTH THE SIDES, WE FIND THAT THE C IT(A) HAS DISALLOWED BANK GUARANTEE COMMISSION FOR THE SIMILA R REASONS FOR WHICH INTEREST PAID ON SUCH LOAN HAS BEEN DISALLOWED U/S 14A OF THE ACT FOR DIVERSION OF INTEREST BEARING FUNDS TO NON BUSINESS PURPOSE. SINCE, WE HOLD THAT INVESTMENT IN PREFERENCE SHARES OF SUBSID IARY COMPANY IS A STRATEGIC INVESTMENT MADE FOR THE PURPOSE OF BUSINE SS EXIGENCY AND NO PART OF INTEREST SHALL BE DISALLOWED U/S 14A OF THE ACT, FOR THE SIMILAR REASONS, WE DIRECT THE A.O. TO DELETE ADDITIONS MAD E TOWARDS PROPORTIONATE DISALLOWANCE OF BANK GUARANTEE COMMIS SION PAID TO M/S. UNITED BREWERIES LIMITED. ITA NOS.512, 513 & 514/VIZAG/2014 M/S. UNITED MILLENNIUM BREWERIES LIMITED, SRIKAKULA M 60 55. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS ADHOC DISALLOWANCE OF 10% REIMBURSEMENT OF EXPENDITURE IN CURRED BY THE DEL- CREDERE AGENTS. THE LD. A.R. FOR THE ASSESSEE, AT THE TIME OF HEARING, SUBMITTED THAT HE DID NOT PRESS THE GROUND CHALLENG ING ADHOC DISALLOWANCE OF EXPENDITURE INCURRED BY THE DEL-CRE DERE AGENTS FOR ALL THE ASSESSMENT YEARS. THEREFORE, THE GROUND RAISED BY THE ASSESSEE, CHALLENGING ADHOC DISALLOWANCE OF EXPENDITURE HAS B EEN DISMISSED AS NOT PRESSED FOR THE ASSESSMENT YEARS 2007-08, 2008- 09 & 2009-10. 56. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E IN ITA NOS.512, 513 & 514/VIZAG/2014 FOR THE ASSESSMENT YEARS 2007- 08, 2008-09 & 2009-10 ARE PARTLY ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT O N 21 ST APR17. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 21.04.2017 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT M/S. UNITED MILLENNIUM BREWERIES PRIVATE LIMITED 2. / THE RESPONDENT THE ACIT, CIRCLE-4(1), VISAKHAP ATNAM 3. + / THE CIT-2, VISAKHAPATNAM 4. + ( ) / THE CIT (A), VISAKHAPATNAM 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY //