TMI Blog2023 (10) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar payment made to the very same AE for similar services under the very same agreement, has been accepted to be at Arm s Length in AY 2017-18 2018-19. We are, therefore, of the view that it would be just and appropriate to set aside the issue with regard to determination of ALP to the AO/TPO for fresh consideration in the light of law as explained above and the other observations in this order. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings, before deciding the issue Additional depreciation on pellets - AO disallowing the claim of additional depreciation made on Pellets by categorizing these assets as Furniture Fixtures - whether the Plastic crates and Wooden pellets used as storage devices are to be classified as Plant Machinery or as Furniture Fixtures for the purpose of claiming depreciation? - HELD THAT:- As decided in the case of Parle Bisleri Pvt. Ltd. [ 2022 (7) TMI 289 - BOMBAY HIGH COURT ] wherein they considered the issue relating to whether bottles and crates could be treated as plant within the meaning of section 32(1)(i) Thus in the interest of justice, we remit the issue in dispute to the file o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195 Disallowance u/s 14A in relation to exempt dividend income - HELD THAT:- As we direct the AO/TPO to restrict the disallowance to the extent of exempted income earned by the assessee in this assessment year under consideration. Disallowance of product promotion expenses and Brand promotion expenses - AO surmised that the Digital media expenses incurred are in violation of Excise laws - HELD THAT:- The assessee has filed additional evidence as above. These additional evidences are produced first time before us and explained that assessee has been prevented by sufficient cause in not filing these additional evidences before the lower authorities. In our opinion, these additional evidences are very important to adjudicate this issue in dispute. Accordingly, we admit these additional evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,09,61,026 The TPO accordingly made TP adjustment of Rs. 38,09,61,026/- in the order passed under section 92CA of the Act. 2.1 The learned Assessing Officer ( AO ) passed the draft assessment order on 17.12.2018 and proposed the following disallowances / additions to the returned income of the assessee: Particulars Amount in Rs. TP adjustment as per section 92CA and protective addition of the same amount under section 37 of the Act 38,09,61,026 Additional depreciation on pellets and cartons 49,25,796 Commission paid to Mr Vijay Mallya 2,04,44,000 Foreign remittance for labels 41,34,952 Foreign remittance for business promotion 5,15,843 Reimbursement of expat salary 43,52,220 Disallowance under section 14A of the Act 59,87,469 Disallowance of digital media expenses 10,12,47,072 Disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TP adjustment on account of Management Service Fee without appreciating the fact that the Management Services have been rendered by the AE to the Appellant based on an agreement between AE and the Appellant; 13 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee by disregarding the agreement between AE and the Appellant on the basis of wrong understanding of certain clauses in the agreement 14 The learned AO/TPO erred in law and on facts in making the IP adjustment on account of Management Service Fee ignoring the fact that the services rendered by the AE to the Appellant resulted in various tangible benefits and further erred in ignoring the submissions and evidence placed by the Appellant before learned TPO. 15 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee ignoring the judicial precedents prevailing on the matter and relied upon by the Appellant before the learned TPO 16 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee adjustment inasmuch as the learned TPO has not undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The ld. A.R. for the assessee submitted as follows: i. While the agreement with HIBV was entered into on 09.04.2014, HIBV has been rendering the services and technical know-how to the Assessee since 01.09.2009. ii. The agreement is for a fixed amount for various services rendered by HIBV to the Assessee. iii. The Assessee submitted that it had submitted before the TPO the details of the areas of business operations in which the services were rendered and the benefits that have accrued to the Assessee. iv. Copious details / evidences were furnished to the TPO which have been totally disregarded. v. The TPO merely says that no evidences were furnished or the evidences are not adequate, without specifying what details were required by him. vi. The TPO accepted the intra-group service payments as being at ALP in the earlier years and no TP adjustment was made in the earlier years. vii. The TPO in the subsequent years i.e. AY 2017-18 and 2018-19 has specifically mentioned that the rendition of service is proved and the payment made is at ALP, on the same set of facts and same agreement. viii. The ld. A.R. submitted that it is settled principle upheld in sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee s wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee s decision to take benefit of expertise of Dresser and US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon ble High Court may not be relevant to the present case. 17. The following aspects would require consideration in order to identify intra group services requiring arm s length remuneration:- * Whether services were received from related party. * Nature of services including quantum of services received by the related party. * Services were provided in order to meet specific need of recipient of the services. * The economic and commercial benefits derived by the recipient of intra group services. * In comparable circumstances an independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the file of AO/TPO for fresh consideration in the light of above order of the Tribunal. 8. Ground Nos.19 to 27 of the assessee s appeal reads as under: II. Grounds relating to payment of Brand Promotion Fee: 19 The learned AO/TPO erred in law and on facts in determining the ALP at NIL in respect of the payment made towards Brand Promotion expenses amounting to INR 22,84,61,026 to Force India Formula One Team Limited; 20 The learned AO/TPO erred in law and on facts in treating payment towards Brand Promotion expenses to Force India Formula One Team Limited as international transaction under the provisions of the Act without appreciating the fact that Force India Formula One Team Limited is not an Associated Enterprise under section 92A of the Act and therefore TP provisions are not applicable to the alleged transaction; 21 The learned AO/TPO has failed to appreciate that in order to invoke the provisions of section 92C the transaction should not only be an international transaction but also has to be with an Associated Enterprise and thus erred in invoking the provisions of section 92C of the Act in respect of Brand Promotion expenses paid to Force I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us other incidental services; All image rights of identified Race and Test drivers like TV rights, etc. Two personal appearances of such drivers anywhere in the world; and One day attendance of such driver for advertisement and communication purposes. 8.2 Force India was not an AE as per section 92A of the Act however, the Assessee as a matter of precaution included the transaction with Force India as an international transaction in the Form 3CEB. Since the benefits accruing to the Assessee was more than the price paid for the service, the international was held to be at arm s length adopting Other method as MAM. 8.3 The TPO observed that the Assessee had associated with lesser known brand than itself i.e., Force India and no third parties will associate their brands with lesser known brands, no benefit accrued to the Assessee. The TPO relied on its order for earlier AY and treated the ALP of the brand promotion expenses as Nil adopting CUP as the MAM. The TPO made downward adjustment of Rs. 22,84,61,026/- towards brand promotion expenses. 8.4 The DRP relied on its order passed in Assessee s case for AY 2013-14 and 2014-15, and upheld the order passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 92A of the Income Tax Act. The relationship between United Breweries Limited (UBL) and Force India is not one of those relationships mentioned in 5.92A (2) of the Act. There is no dispute that neither United Breweries Ltd. nor Force India Formula One Team Ltd hold directly or indirectly 26% of the shares having the voting powers in the other entity. Shareholding details of UBL and Force India are appended in Annexure1. It is clear from Annexure-1 details furnished along with this note, that, none of the common directors of UBL and Force India hold more than 26% shares in UBL. So the relationship mentioned in S.92A(2)(b) where the same person or enterprise holds directly or indirectly, shares carrying not less than 26% of the voting power in each of such enterprise, is also not present. Further, it is necessary to appreciate the scheme of section 92A. A plain reading of this statutory provision makes the legal position quite clear. The, basic rule for treating the enterprises as an associated enterprises is set out in section 92A(1). The illustrations in which basic rule finds application are set out in section 92A(2). Section 92A(1) lays down the basic rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/TPO to examine this issue as laid down by the Tribunal in the judgement cited (supra). 11. Next ground Nos.28 to 36 of the assessee s appeal reads as under: III. Grounds relating to Sales Promotion Expenses: 28 The learned AO/TPO erred in law and on facts in determining the ALP at NIL in respect of the payment made towards Sales Promotion expenses amounting to INR 9,25,00,000 to United East Bengal Football Pvt Ltd; 29 The learned AO/TPO erred in law and on facts in making transfer pricing adjustment in respect of the payment made to United East Bengal Football Pvt Ltd without a specific reference made by the Learned A.0 to the learned TPO in respect of Specified Domestic Transaction and therefore the adjustment made lacks jurisdiction 30 The learned AO/TPO erred in law and on facts in making the TP adjustment in respect of payment towards Sales Promotion expenses ignoring the commercial and economic rationale of the business of the Appellant; 31 The learned TPO has erred in disregarding the commercial contractual agreement between the parties without giving any cogent reason 32 The learned AO/TPO erred in law and on facts in determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act year excluding days of travel as and when desired by the Assessee or the marketing agency; v. Grant to the Assessee facilities for all ground signage on grounds owned / leased by the AE; vi. Endorsement by Player(s) of sponsors / co-sponsor brands as per FIFA rules and regulations; vii. Merchandizing opportunities, all digital rights for the AE, Intra club promotional football tournaments and Exhibition matches in India and abroad will be facilitated by the AE; viii. The Assessee will have the exclusive digital rights for the AE s website address / content generated will be owned by the Assessee. The Assessee will have all IPR related to web including and not limited to such content / application developed; ix. Branding or players gears (jerseys, shorts, etc) as required by the Assessee or its marketing agency. All such branding including but not limited to design, logo positions, etc will be mutually agreed; x. Such other advertisement and marketing opportunities that may arise in such sponsorship but not specified above; xi. The AE will support and facilitate all branding, marketing and promotion initiatives including but not limited to cheerleaders, fan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 1.6.2022 wherein held as under: 31. We have carefully considered the rival submissions. The issue with regard to whether the transaction of payment of sale promotion expenses to UBEF can be said to be an SDT, we find that the decision of the ITAT in the case of Textport Overseas Pvt.Ltd. (supra) has been confirmed by the Hon ble Karnataka High Court in the very same case of Texport Overseas Pvt. Ltd. in ITA No.392/2018 order dated 12.12.2019, with the following observations:- 5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular it is clearly noticeable that Clause (i) of Section 92BA of the Act came to be omitted w.e.f. 01.04,2019 by Finance Act, 2014. As to whether omission would save the acts is an issue which is no more res-integra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of KOBLAPUR CANESUGAR WORKS LTD. v. UNION OF INDIA reported in AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute visa-vis deletion/addition of a provision in an enactment and its effect thereof. The import of Section 6 of General Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O and. DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s.GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not ITA No.2936/Bang/20180 M/s. Sobha City, Bangalore arise for consideration particularly when the said issue being no more res Integra. 32. Since the decision rendered by the Hon'ble High Court of Karnataka is binding on this bench of Tribunal sitting in Bengaluru, we follow the same. Accordingly, we hold that the reference to the TPO in respect of specified domestic transactions mentioned in clause (i) of Sec. 92BA is not valid, as the said provision has been omitted. Accordingly, we direct the AO to delete the addition relating to specified domestic transactions made u/s 92CA of the Act. 33. We notice that the co-ordinate bench in the case of Textport Overseas (supra) has restored ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of a generic brand which does not belong to any specific company, which is contrary to the facts 41. Having held thus the expenses are towards the generic brand, the learned AO erred in holding that such an expenditure is a capital expenditure not attributable to the assessee's sales. 42. The learned AO erred in holding that only those expenses which are relatable to sales can be treated as revenue expenses and has erred in surmising that these expenses are not allowable u/s 37. 15.1 Facts of the case are that the AO disallowed the expenses under section 37 of the Act, by holding that the expenses are for promotion of Brand and the brand promotion expenses are Capital expenditure. Further, the AO also opined that the expenses cannot be directly attributable to the Assessee s sales and hence it is to be disallowed. 15.2 The DRP confirmed the protective addition made by the AO. 16. The ld. A.R. submitted as follows: i) As regards the disallowance of sale promotion expenses made to United East Bengal Football Club, under section 37 of the Act, the Tribunal in the case of United Spirits Limited [IT(TP)A No. 2701/B/2017, AY 2013-14] has allowed simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the case are that the AO has disallowed the expenses under section 37 of the Act by holding that the expenses are for promotion of Brand and the brand promotion expenses are Capital expenditure. Further, the AO has also opined that the decision rendered by the Tribunal in the case of GMR Projects is squarely applicable to the facts of the Assessee s case. 19.1 The ld. DRP confirmed the protective addition made by the AO. 20. The ld. A.R. for the assessee submitted as follows: i) As regards the disallowance of Brand Promotion expenses made to Force India Formula One Team, under section 37 of the Act, the Hon ble Tribunal in the case of United Spirits Limited [IT(TP)A No. 2701/B/2017, AY 2013-14] has allowed similar payments made to Force India Formula One, as allowable expenses. ii) The Assessee submitted that similar issue had come up before this Tribunal in Assessee s case for AY 2012-13 [IT(TP)A No.481/Bang/2018] wherein the disallowance of brand promotion fees paid to Force India Formula One Team was made by the AO under section 37 of the Act. The Tribunal has allowed the deduction in respect of brand promotion expenses. 20. The ld. D.R. relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. 22.3 The DRP confirmed the disallowance made by the AO. 24. The Assessee submitted that the decision of the AO is wrong, on facts, principles and procedure. i) The AO is wrong in stating that the crates are used only to store empty bottles. As can be seen from the picture reproduced in the DAO, the crates and wooden pellets are used for the storage of finished goods and movement of goods within the production area. These are not mere storage devices but are essential for stacking empty bottles and finished goods in proper manner to avoid breakages. Accordingly, it is integral to the production process and hence, it should be considered as plant. ii) The AO is wrong in stating that these pellets and crates were classified by the Assessee under Furniture Fixtures in the earlier years, which is contrary to facts. iii) The AO has stated that he has relied on the report of the team of officials to make an usage test, without furnishing the report to the Assessee or revealing the contents therein, thereby violating the principles of natural justice. iv) Further, it is settled principle that the definition of Plant is an inclusive definition. The Courts have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as plant within the meaning of section 32(1)(i) of the Act. While answering this question they have observed as under: 7. We have heard Mr. Jeet Kamdar, the learned Counsel for the Appellant and Mr. Arvind Pinto, learned Counsel for the Respondent. 8. Section 43(3) of the Act as it stood at the relevant time, i.e., assessment year 1989- 90 reads thus: 43(3) plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession. 9. Mr.Kamdar, the learned Counsel for the Appellant submitted that the Tribunal had not followed the decisions of the Andhra Pradesh High Court and Rajasthan High Court, which are directly on the point as to the definition of Plant in Section 43(3) of the Act and has erroneously relied on the decision of Supreme Court in the case of Steel City Beverages Ltd., which is on the bare perusal of the same, is distinguishable and is rendered in the context of different enactment having different ambit. Mr Kamdar submitted that for the assessment years 1985-86, 1986-87 and 1988-89, the Tribunal has held in favour of the Appellant/Assessee holding that the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the same has to be construed in a wide manner. In Taj Mahal Hotel, the Supreme Court construed the definition of Plant as occurring in Section 10(5) of the Indian Income-tax Act, 1922 ( the 1922 Act ), which corresponded to Section 43(3) of the 1961 Act. It was held that had the definition of Plant was an inclusive definition, and the intention of the Legislature was to give it a wide meaning which is evident from the fact that articles like books and surgical instruments were expressly included in the definition of Plant . The Rajasthan High Court also followed the decision of the Supreme Court in Scientific Engineering House (P.) Ltd., wherein while construing the definition of Plant in Section 43(3), the question of whether drawings, designs, charts, plans, etc., were within the definition of Plant where the assessee's business was to manufacture scientific instruments was answered in favour of the assessee. The tests to be applied was also laid down by the Supreme Court in this decision. The Rajasthan High Court in Jai Drinks (P.) Ltd. held that applying the above test indicated by the Supreme Court, there is no escape from the conclusion that the bottles a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arts can be treated as separate units having different purposes. (8) The functional test is a decisive test. Bearing these principles in mind, we shall approach the facts of the present case. The bottles containing the soft drink cannot be stock-in-trade inasmuch as the bottle by itself is not the subject of sale. The customer or the retailer returns back the bottle to the assessee after the soft drink is consumed. Likewise, the shells which are sent to the customer or dealer also come back with the empty bottles, and they cannot also be stock-in-trade. What is the function these bottles and shells perform in the assessee's trade? Are they essentially tools in the assessee's business? In our opinion, yes. The bottles are essential tools of the trade for it is through them that the soft drink is passed on from the assessee to the customer. Without these bottles, the soft drink cannot be effectively transported, like the silos in Schofield v. R. and H. Hall Ltd. [1974] 49 TC 538 (CA), which are used to store grain and to empty the same, performing a trade function. As pointed out in Dixon v. Fitch's Garage Ltd. [1975] 50 TC 509 (Ch D), the bottles and the contents a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tools, and apparatus used in carrying on a mechanical operation or an industrial process. This Court in C.I.T. v. Taj Mahal Hotel [1971] 82 ITR 44 and Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 referred to with approval the observations of Lindley LJ In Yarmouth v. France [1887] 19 QBD 647 that in its ordinary sense plant includes whatever apparatus is used by a businessman for carrying on his business - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business. In that case, this Court further held that the test to decide whether a particular thing is plant would be: Does the article fulfil the function of a plant in the assessee's trading activity? Is it a tool of his trade with which he carries on his business? If the answer is in the affirmative, it will be a plant . Learned counsel for the respondents, heavily relying upon this decision, submitted that the High Court was right in interpreting the word plant in the Deferment Rules as including bottles and crates also as they are used by the Company for carrying on its business. We cannot agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tles and crates could not be included in the definition of the Plant because they have no reference to the categories mentioned therein; therefore, cannot be accepted. 17. As regards the contention of the learned Counsel for the 7 (1998) 232 ITR 270 (Guj) 8 (2004) 266 ITR 573(All) 9 (2001) 113 Taxman 511 Respondent based on the Income Tax Rules and Depreciation Table is concerned, the Table is only states that certain categories, which are Machinery and Plants, will have particular rate and rest which fall under the Machinery and Plant will have different rate. Therefore, merely because the bottles and crates do not fall under the categories listed in Item 2 of the Schedule, it cannot be said that they need to be excluded from the definition of Plant , if they, otherwise fall within the definition of Plant . It has to be noted that, however, this question had arisen for the assessment year 1989-90 based on the situation therein, and therefore, the question is whether the Tribunal was right in holding against the Appellant for that particular assessment year. As noted in the decision of Sri Krishna Bottlers Pvt. Ltd., as to what would happen if plastic bottles were used or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned AO erred in making the addition without granting an opportunity to the assessee on the issue; 27.1 The facts of the issue are that during the year, the Assessee passed a Special Resolution in the AGM authorizing payment of Commission to its Directors, up to One percent of the net profits of the Company. Out of this, it was resolved that 60% will be paid to the Non-executive Chairman, Mr Vijay Mallya and the balance 40% will be paid to the other Directors, who are Independent Directors. 27.2 The AO invoked the provisions of Section 40A(2) and restricted the commission payable to Mr Mallya to the extent paid to independent directors and disallowed the balance amount of Rs. 2,04,44,000/- out of Rs. 2,29,00,000/- paid to Mr Mallya. 27.3 The ld. DRP confirmed the disallowance made by the AO. 28. The Assessee submitted that the decision of the AO is wrong, on facts, principles and procedure on the following lines: i) The commission payment is legally valid as it is as per the Special Resolution passed by the AGM of the Company. ii) The total quantum of Commission is restricted to 1% of net profits of the Company, which is as per Companies Act. Hence the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mallya to assessee company. In such circumstances, it is not possible to allow any commission payment in the hands of assessee as a business expenditure. Accordingly, addition made by lower authorities on this count is sustained and these grounds of appeal of the assessee are dismissed. 30. Ground Nos. 63 to 65 of the assessee s appeal are reproduced as under: VIII. Grounds relating to default u/s 40(a)(i) and or u/s 37 on foreign remittances towards designing of labels: 63. The learned AO erred in disallowing the expenditure under 40(a)(i) for non-deduction of TDS by holding it as Payments towards Royalty. 64. The learned AO erred in holding that the labels designed by the foreign party for the appellant is the intangible property of the foreign party and the appellant has got the right to use the design and therefore qualifies as a Royalty. 65. The learned AO erred in not appreciating that the remittance made is the business income of the foreign party which as no PE or business connection in India 30.1 The Assessee got its label designed by a UK based company, M/s Claessens International Ltd., and made payment amounting to Rs.41,34,952/- towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our opinion, payment towards getting designing the labels of the assessee is just business expenses and there was no make available to the assessee and the recipient have no permanent establishment in India or any business connection in India, hence, in our opinion, foreign entity is not liable for taxation in India. Being so, the question of deduction of TDS u/s 40(a)(i) of the Act is not applicable. Accordingly, we direct the AO to delete this addition. 34. Ground Nos.66 to 67 of the assessee s appeal are reproduced as under: IX. Grounds relating to default u/s 40(a)(i) and or u/s 37 on foreign remittances towards business promotion: 66. The learned AO erred in disallowing the expenditure under 40(a)(i) for non-deduction of TDS by holding it as Payments towards brand development and therefore capital in nature. 67. The learned AO after having held the expenditure to be capital in nature as erroneously invoked the provisions of Sec 40(a)(i) of the Act 34.1 Fact of the issue are that as per the facts recorded in the draft assessment order, the Assessee made a payment of Rs. 5,15,843 for managing an event. It is the contention of the Assessee that this bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. For the sake of convenience, we extract below the operative portion of the order passed by Mumbai bench of Tribunal on an identical issue:- 3. Second ground of appeal pertains to deleting the disallowance on account of sponsorship fees and management fees. In the earlier part of our order, we have mentioned the facts about the various disallowances made by the AO including the capitalisation of sponsorship. Treating it as an intangible asset, he allowed depreciation on it @25%. 3.1. The FAA after considering the elaborate submissions of the assessee, held that it had entered into an agreement with the sports company namely India-Win in the month of March, 2010, that the assessee-group became cosponsor of Mumbai Indian IPL cricket team as an associate partner, that as per the agreement the ground logo of the assessee group was displayed permanently in the cricket stadium is also on the playing gear of the players, that in the terms of the agreement and amount of Rs.4.50 crores was paid towards sponsorship fees during the year under consideration, that the sponsorship fees for different years had been apportioned and allocated to 3 entities of the assessee group wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred nor did the expenditure create any capital asset. Therefore, we do not want to interfere with the order of the FAA. Considering the above, we decide second ground of appeal against the AO. 46. The Delhi bench of Tribunal has also examined an identical claim in the case of M/s Pepsico India Holdings Pvt Ltd (supra) and the same was allowed as revenue expenditure with the following observations:- Re: Disallowance of INR 3,85,15,497/- being sponsorship fees paid to ICC 87. In Grounds No. 7 to 7.3 in I.T.A. No. 1044/DEL/2014 for AY 2009-10, the assessee has challenged the disallowance of INR 3,85,15,497/- being sponsorship fees paid by the assessee to ICC. Our attention was drawn to paras 4 to 4.3 of the final assessment order wherein the said issue has been discussed by the AO. It has been submitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC). He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it. 90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions. 91. After considering the rival submissions and on perusal of the impugned orders, we find that, here the disallowance of Rs. 3,85,15,497/- has been made on account of sponsorship fee by the assessee to the ICC on the ground that similar expenditure was disallowed in the earlier years as part of Transfer Pricing Adjustment on account of AMP expenses; and secondly, assessee has been bearing substantial portion of the fees to the ICC for acquiring the sponsorship rights even though benefit of the same is derived by either entity of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian subcontinent looking to its mass popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. The applicable test as to what constitutes expenses laid out or expended wholly and exclusively for the purposes of the business or profession was explained in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] Supp. (2) SCR 211. The correct approach, said the Court, which has to be taken in all such cases is to see whether: was the sum of money expended on the ground of commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his point too are insubstantial. 48. The observations made by the Hon ble jurisdictional Karnataka High Court in the case of CIT vs. ITC Hotels (2014)(47 taxmann.com 215) on the concept of enduring benefit is relevant here and the same is extracted below:- 6. The first substantial question of law relates to a sum of Rs.10 lakhs, which were paid by the assessee as a license fee for the use of central court yard, having marble, (for short Court Yard ) in Lallgarh Palace (for short 'Palace'). It appears that there was a Memorandum of Understanding (for short 'MOU') between the Assessee and Maharaja Ganga Sinhji Charitable Trust (for short the trust ). The assessee, as per the MOU, had acquired a right to use the court yard for their business of hotel, being run in the palace, more efficiently and profitably. The question is whether the expenditure of Rs.10 lakh resulted in any addition to the fixed capital of the assessee. According to the Revenue, the assessee had acquired right to use the court yard apart from the palace, and thus, had acquired an advantage of enduring benefit of a trade. In other words, the expenditure incurred by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) : TC16R.991, it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed. 37. Ground Nos.68 to 70 of the assessee s appeal are reproduced as under: X. Grounds relating to Expat payment to Heineken Czech Republic: 68. The learned AO erred in dis-allowing the payment made towards re- imbursement of Salary of expatriate experts seconded by the AE by holding it as Fees for Technical services 69. The learned AO erred in relying on the decision in the case of Centrica India Offshore (P.) Ltd V CIT, without appreciating that the facts of the case are different from the facts of the assessee 70. The learned AU erred in making the dis-allowance without appreciating the nuances between Article 7 of the DTAA and Article 12 of the DTAA 37.1 Facts of the issue are that during the year, the Assessee reimbursed an amount of Rs.43,52,220/- to its AE towards reimbursement of part of the salary costs of a seconded employee. The AO has treated these payments as Fees for Technical Services (FTS) liable for TDS and since TDS has not been done, the AO has disallowed these payments, by invoking the provisions of section 40(a)(i) of the Act. 37.2 The DRP confirmed the disallowance made by the AO 38. The Assessee submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference: 9(i)(vii) income by way of fees for technical services13 payable by-- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.--For the purposes of this clause, fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the case in hand. From perusal of the relevant clauses of the agreement as well as the nature of services provided by the assessee under the agreement, it is evident that the assessee had entered into a secondment agreement for securing services to assist assessee in its business. The expenses incurred by the seconded employees which were reimbursed by the assessee is not liable to deduction to tax at source and the aforesaid amount could not be considered as 'fees for technical services'. It is also pertinent to note that secondment agreement constitutes an independent contract of services in respect of employment with assessee. From the perusal of the key features of the agreement, which have been reproduced by the Commissioner of Income Tax (Appeals), it is evident that the seconded employees have to work at such place as the assessee may instruct and the employees have to function under the control, direction and supervision of the assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing the expenses of INR 59,87,469/- as against the exempt dividend income of INR 9,25,000 which is substantially higher than the exempt income ignoring the various judicial precedents relied upon by the Appellant; 75. The learned AO has erred in not appreciating that there is no direct nexus between the interest bearing funds and the investments made from which dividend income is earned and thereby erred in making disallowance towards interest expenditure 76. The learned AO has erred in law and on facts by adding strategic investments made for business while computing expenditure for disallowance; 77. The learned AO has erred in law and on facts by considering both investments, generating taxable and non-taxable income, while computing disallowance under section 14A of the Act; 78. Notwithstanding the above, the Learned A.0 erred in not appreciating that the disallowance u/s 14A cannot exceed the amount of exempt income earned; 79. The learned AO has erred in law and on facts in concluding that INR 59,87,469 should be added back to the book profits for the purpose of 115JB of the Act, without appreciating that for computing profit u/s 115JB, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:- (i) Joint Investments Pvt. Ltd. v. CIT (59 Taxmann.com 295) it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRV-ITAT- MUM-123) has held that disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. (iii) M/s.Pinnacle Brocom Pvt. Ltd. v. ACIT (ITA No.6247/M/2012) has held that disallowance u/s 14A cannot exceed the exempt income. (iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) held that the disallowance u/s 14A of the Act cannot exceed the exempt income. 3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187. 3.6 However, in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84. The learned AO erred in dis-allowing the payments made towards advertisements aggregating to INR 26,1.6,12,490 by erroneously holding that these expenses are in violation of law and public policy 85. The learned AO erred in holding that these payments are in violation of law and public policy by wrongly surmising that it promotes an alcoholic product 86. The learned AO erred in holding that the company cannot claim deduction on these expenses, as they are not relatable to business sales, contrary to facts 87. The learned AO has erred in making the addition merely on the surmise that these expenses are in violation of law and public policy, without showing as to how these payments are in violation of the Income Tax Act. 46. With regard to ground Nos.80 to 83, facts of the issue are that the AO disallowed the payments made towards advertisements in Digital Media aggregating to Rs.10,12,47,072/- by erroneously holding that these expenses are in violation of law and public policy, only based on surmises and without showing how these payments are in violation of the Income Tax Act. 46.1 The AO held that these payments are in violation of the Excise laws, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and public policy as alleged. The Assessee submitted that Digital media is governed by the Central Board of Film Certification ( CBFC ) and Advertising Standards Council of India ( ASCI ). iii) In India, the Ministry of Information and Broadcasting ( I B ) through The Cable Television Networks (Regulation) Act, 1995 ( Cable Television Act ) and The Cable Television Networks Rules, 1994 ( Cable Television Rules ) as well as other policies and guidelines issued from time to time, have been regulating content on private satellite channels, network of multi system operators, and local cable operators ( LCOs ). iv) Rule 7 of the Cable Television Rules prescribes the advertising code which has to be conformed to by cable operators while broadcasting advertisements through their cable service. Rule 7(2) specifically enlists advertisements that cable operators would not be allowed to broadcast. Rule 7(2) prohibits advertisements that promotes directly or indirectly production, sale or consumption of cigarettes, tobacco products, wine, alcohol, liquor or other intoxicants. v) A proviso to the above Rule was inserted through an amendment on 09.08.2006 [G.S.R. 469 (E)][1], which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has yet again been notified in a Press Release issued by ASCI on 02.11.2020. The Press Release reiterated that advertisements for brand extensions could not feature anything prohibited by law or that pertained to banned products nor could it refer to or hint at such products. The Press Release was issued to keep a check on advertisements that were being broadcasted during the IPL. Further, the IPL broadcaster also confirmed that all advertisements were checked for CBFC clearance so that they are not in violation of the Act. iv) Therefore, the assessee submitted that the advertisements on TV are governed by CBFC and ASCI and the advertisements of the Assessee are cleared / certified by both CBFC and ASCI before it is aired on TV. Under these circumstances, the contention that the advertising done by the Assessee is in violation of law and public policy is wrong, baseless and based on your wrong understanding of law and facts related to the issue. The summary of our submissions of the assessee are that: i) The AO has wrongly surmised that the Digital media expenses incurred are in violation of Excise laws, when the Excise department has not said so and has not initiated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remark or penalties levied by the broadcasting authorities the Assessing Officer need not go into verification of regular expenditure which assessee was regularly claiming over the years. 49. We have heard the rival submissions and perused the materials available on record. The assessee has filed additional evidence as above. These additional evidences are produced first time before us and explained that assessee has been prevented by sufficient cause in not filing these additional evidences before the lower authorities. In our opinion, these additional evidences are very important to adjudicate this issue in dispute. Accordingly, we admit these additional evidences for adjudication after admitting for adjudication. In our opinion, it is appropriate to remit the issue in dispute to the file of AO and AO has to see whether assessee has made any direct advertisement with regard to sale and marketing of liquor or assessee made any surrogate advertisement in this respect. If the assessee has made any surrogated advertisement or indirect advertisement not mentioning anything relating to the liquor, the claim of assessee is to be allowed. With these observations, we remit the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot correct and relied on the detailed analysis / reasoning provided in the assessment for AY 2007-08 wherein the claim of the Assessee was rejected. The AO accordingly disallowed depreciation of Rs.1,57,73,310/- claimed by the Assessee on goodwill . 51.2 The ld. DRP followed the decision of this Tribunal in Assessee s cases for AY 2007-08 to 2009-10 vide order dated 30.09.2016 in ITA No. 722, 801 and 1065/Bang/2014, and dismissed the grounds of appeal of the Assessee. The CIT(A) upheld the disallowance made by the AO. 52. The assessee submitted that this Tribunal has decided the issue against the Assessee in the cases for AY 2007-08 to 2009-10 (supra) and the decision will apply to the present AY also. The Assessee submitted that it has preferred appeal on the allowability of claim of depreciation before the Hon ble High Court of Karnataka in ITA No. 61/2017 and the same is pending adjudication. 52.1 The Assessee also submitted that a similar issue had also come up before this Tribunal in the Assessee s case of AY 2013-14 where the ground of appeal has been dismissed relying on the earlier decision rendered by this Tribunal for AY 2007-08 to 2009-10. 53. The ld. D.R. r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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