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2018 Supreme(Kar) 341
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
VINEET KOTHARI, S.SUJATHA, JJ.
The Pr. Commissioner of Income Tax - Appellants
Vs.
M/s. Chamundi Winery and Distillery 1313 – Respondent
I.T.A.No.155 of 2016 C/W I.T.A.No.458 of 2013, I.T.A.No.467 of 2015 I.T.A.No.173 of 2017, I.T.A.No.172 of 2017
Decided on : 25-09-2018
For the Appellant :Mr. E.R. Indrakumar, Sr. Counsel for Mr. E.I. Sanmathi, Advocate
For the Respondent:Mr. A. Shankar & Mr. M. Lava, Advocates
Headnote:
[MAIN LEGAL POINT] The method of accounting or entries made in the books of accounts by the assessee or maintaining the bank accounts under the close control and supervision of DIAGEO INDIA PRIVATE LIMITED will determine the taxability of business income in the hands of DIAGEO INDIA PRIVATE LIMITED who under the said Agreement dated 30/10/2007 supplied the Working Capital, Raw Materials and concentrates and right of user of Trade Marks and Brands to the assessee on whether the income earned out of the said liquor business will still be taxable in the hands of the assessee CHAMUNDI.
Fact of the Case:
The assessee, a company engaged in the manufacture and sale of liquor under the exclusive license granted to it by the State Excise Department under the provisions of the Karnataka Excise Act, 1965, entered into an agreement with DIAGEO INDIA PRIVATE LIMITED (hereinafter referred to as ‘DIAGEO’) for providing manufacturing facilities, raising purchase orders, supplying and delivering the products as per Delivery Orders, completing excise formalities in relation to import of raw materials and despatches of the products, obtaining necessary approval from the requisites authorities, raising necessary invoice in respect of sales effected, making Sales Tax/VAT payments, making payments of all other expenses relating to the manufacturing of the products, as per the directions of DIAGEO. The assessee was entitled to receive certain amount subject to fulfilling its obligations under the agreement while DIAGEO would take all the commercial decisions with regard to selling price of the products and communicate to the assessee. The assessee was also responsible for engaging/ providing staff at their cost for providing the above information/reports and including maintenance of book of accounts related to DIAGEO INDIA operations.
Finding of the Court:
The Tribunal was justified in holding that the assessee was entitled for a sum of Rs.45 per Case produced as a consideration for its manufacturing obligations under the agreement. The sums as mentioned in Clause 16.1 shall remain in force for the period upto 31st May, 2010 unless otherwise mutually agreed by the parties. DIAGEO INDIA’s entitlements under this Agreement shall be calculated on the following basis: Gross Sales (On the basis of sales invoices raised) Gross Sales as determined in (a) above xxx Less Excise duty xxx Sales Tax/VAT xxx Cost of Excise Adhesive labels xxx Cost of all Raw Materials and Packaging Materials (including the wastages as per norms provided in clause 12 above) used in the Manufacturing of the Products; xxx Distribution cost including freight, transit, insurance, bond/depot charges incurred by CHAMUNDI in respect of the Products; xxx Any other expenses (including debts written off) if and when agreed upon by DIAGEO INDIA in writing as deductible; xxx Balance before the sum as entitled under Clause 16 xxx Less The sum as entitled under Clause 16. xxx DIAGEO INDIA Entitlements xxx If CHAMUNDI is unable to produce and service the Delivery Orders, CHAMUNDI shall compensate DIAGEO INDIA for a sum equal to the Gross Contribution lost on account of such failure. For this purpose, “Gross Contribution” means the difference between the then current selling price of the Products and the cost of Raw Materials and Packaging Materials in relation to the quantity not delivered timeously by CHAMUNDI. It is agreed to between the Parties that the Gross Contribution is a preestimate of genuine liquidated damages and is not by way of penalty. Additionally, in the event the various state excise permits have to be sent for revalidation due to failure on the part of CHAMUNDI to deliver the Products in accordance with the permit, then CHAMUNDI shall be liable to compensate DIAGEO INDIA the cost of such revalidation. However, if due to Force Majeure or reasons attributable to DIAGEO INDIA (like delayed supply of raw or packing material) CHAMUNDI is unable to produce/service the orders, then CHAMUNDI would not be liable to compensate DIAGEO INDIA.
Issues: Whether the assessee is entitled to claim deduction of the amount paid to DIAGEO INDIA PRIVATE LIMITED under Section 37 of the Income Tax Act, 1961? Whether the terms and conditions of the agreement dated 30/10/2007 between the assessee and DIAGEO INDIA PRIVATE LIMITED amount to ‘diversion of income at source by overriding title’ in favour of DIAGEO INDIA PRIVATE LIMITED? Whether the method of accounting or entries made in the books of accounts by the assessee or maintaining the bank accounts under the close control and supervision of DIAGEO INDIA PRIVATE LIMITED will determine the taxability of business income in the hands of DIAGEO INDIA PRIVATE LIMITED who under the said Agreement dated 30/10/2007 supplied the Working Capital, Raw Materials and concentrates and right of user of Trade Marks and Brands to the assessee on whether the income earned out of the said liquor business will still be taxable in the hands of the assessee CHAMUNDI?
Ratio Decidendi: The assessee is not entitled to claim deduction of the amount paid to DIAGEO INDIA PRIVATE LIMITED under Section 37 of the Income Tax Act, 1961. The terms and conditions of the agreement dated 30/10/2007 between the assessee and DIAGEO INDIA PRIVATE LIMITED do not amount to ‘diversion of income at source by overriding title’ in favour of DIAGEO INDIA PRIVATE LIMITED. The method of accounting or entries made in the books of accounts by the assessee or maintaining the bank accounts under the close control and supervision of DIAGEO INDIA PRIVATE LIMITED will not determine the taxability of business income in the hands of DIAGEO INDIA PRIVATE LIMITED who under the said Agreement dated 30/10/2007 supplied the Working Capital, Raw Materials and concentrates and right of user of Trade Marks and Brands to the assessee on whether the income earned out of the said liquor business will still be taxable in the hands of the assessee CHAMUNDI.
Final Decision: The appeals filed by the Revenue are allowed.
1. The Revenue has filed these five Appeals under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) against the Respondent Assessee M/s. CHAMUNDI WINERY AND DISTILLERY, BANGALORE (hereinafter referred to as “CHAMUNDI” for short) for A.Y.2008-09 to 2012-13 raising the Substantial Questions of law, which we have reframed.
2. The Tribunal as well as the first Appellate Authority, Commissioner of Income Tax (Appeals) decided in favour of the Respondent Assessee that the “Distributable Surplus” paid by the Respondent Assessee CHAMUNDI to DIAGEO INDIA PRIVATE LIMITED (hereinafter referred to as ‘DIAGEO’ for short), a subsidiary and Group Company of DIAGEO Plc, a United Kingdom based Liquor Conglomerate, was an ‘allowable expenditure’ in the hands of the Respondent Assessee under Section 37 of the Act.
3. The following Substantial Questions of law do arise in the present set of appeals which we have reframed as below:
[i] Whether the Tribunal was justified in holding that the Distributable Surplus paid by the Respondent Assessee M/s. CHAMUNDI WINERY AND DISTILLERY to DIAGEO INDIA PRIVATE LIMITED in pursuance of the Agreement dated 30/10/2007 between these two parties was not ‘application of income’, but an ‘allowable expenditure’ in the hands of the Respondent Assessee under Section 37 of the Act ?
[ii] Whether the terms and conditions of the Agreement dated 30/10/2007 between M/S. CHAMUNDI WINERY AND DISTILLERY and DIAGEO INDIA PRIVATE LIMITED amount to ‘Diversion of Income at source by over riding title’ in favour of DIAGEO INDIA PRIVATE LIMITED even though the Excise Licence under the provisions of the Karnataka Excise Act, 1965 during the relevant period was taken in the name of Respondent Assessee CHAMUNDI and therefore, such profits and gains from the said business of manufacture and sale of liquor by M/S. CHAMUNDI WINERY AND DISTILLERY was not assessable in its hands ?
[iii] Whether the method of Accounting or entries made in the Books of Accounts by the Respondent Assessee or maintaining the Bank Accounts under the close control and supervision of DIAGEO INDIA PRIVATE LIMITED will determine the taxability of business income in the hands of DIAGEO INDIA PRIVATE LIMITED who under the said Agreement dated 30/10/2007 supplied the Working Capital, Raw Materials and concentrates and right of user of Trade Marks and Brands to the Respondent Assessee on whether the income earned out of the said liquor business will still be taxable in the hands of the Respondent Assessee CHAMUNDI ?
4. The brief factual matrix of the case is as under:
5. The Assessing Authority in the first instance in all these five Assessment Years, A.Y.2008-09 to 2012-13, disallowed the said “Distributable Surplus” paid by the Respondent Assessee CHAMUNDI to DIAGEO under Section 37 of the Act and also held that the said income earned out of manufacture and sale of liquor by the Respondent Assessee which held the Excise Licence from the State Government, which has the monopoly and exclusive privilege of carrying on the trade of liquor and gives only licences under the provisions of the Karnataka Excise Act to certain persons upon the terms and conditions stipulated in the Licence under the said Act and there is no ‘diversion of such income’ from the Respondent Assessee CHAMUNDI to DIAGEO by overriding title and the Respondent Assessee CHAMUNDI has to meet its Income-tax obligations under the Act before applying the net income after tax in meeting its contractual obligations under the Agreement dated 30/10/2007 with DIAGEO.
6. The first Appellate Authority however, allowed the Appeal of the Assessee CHAMUNDI and the Revenue’s second Appeal before the Income Tax Appellate Tribunal also failed and hence, the Revenue has preferred these Appeals before this Court under Section 260A of the Act, raising the substantial questions of Law.
7. The crux of the matter re
