M/S. Esveeaar Distilleries Pvt.Ltd.,, ... vs Department Of Income Tax

I.T.A. No. 1040/Hyd/2012 Assessment Year: 2009-10 Asst. Commissioner of M/s. Esveeaar Distillers Pvt. Income Tax, Vs Limited, Circle-I, Magunta Layout, NELLORE NELLORE [PAN: AABCE 5784 F] (Appellant) (Respondent)

For Revenue : Shri Rajat Mitra, DR For Assessee : Shri A.V.Raghu Ram, AR

Date of Hearing : 06-01-2015 Date of Pronouncement : 28-01-2015

ORDER

PER SMT. ASHA VIJAYARAGHAVAN, J.M. :

The appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-Guntur dated 07-05-2012.

2. The brief facts of the case are that the assessee-company is engaged in manufacture of Indian Made Foreign liquor. It filed the e- return of income for the Assessment Year (AY) 2009-10 on 19-09-2010, admitting total income of Rs.5,11,99,970/-. During the course of assessment proceedings, the assessee was asked to explain as to why the interest attributable to the loan from ICICI Bank should not be dis- allowed as the same has not been put to business use. The assessee vide letter dt.21-12-2011 submitted that the loan from ICICI Bank has been fully utilized for the business purposes of the assessee and that no part of the loan was diverted for non-business purposes. It is seen from the assessment order that Prayag Enterprises Ltd., is rendering services :- 2 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited as delcredere agent to the assessee for a long time and it is also rendering similar services to other distilleries bottling the brands of UB Group in the state of Andhra Pradesh. During the year under consideration, the assessee has paid an amount of Rs.2,43,12,028/- to Prayag Enterprises Ltd., as delcredere commission and therefore, the Assessing Officer opined that the trade advance of Rs.43.60 Crores cannot be said to have any connection to the existing business relationship with the assessee and the Assessing Officer stated that it is difficult to believe existence of business prudency especially when huge amount of Rs.43.60 Crores of interest bearing borrowed funds are given as interest free trade advance.

3. Before the CIT (A), it was submitted by the assessee as follows:

Trade advance of Rs.43.60 Crores to M/s.Prayag Enterprises Limited: M/s.Prayag Enterprises P. Ltd., is the delcredore agent for the assessee and other distilleries in Andhra Pradesh bottling the brands of United Spirits Limited (USL). This advance had been given to enable M/s.Prayag Enterprises Ltd., to strengthen its marketing and distribution net work in the state of Andhra Pradesh and also to scout for acquisition of distilleries in the name of the assessee. In view of the fact that the assessee already has business relationship with M/s.Prayag and also due to the close proximity of M/s.Prayag to the USL top brass (the assessee's principles) it is submitted that the advance of Rs.43.60 Crores to M/s.Prayag has been made only during the course of assessee's business and is out of commercial expediency.

4. It was further submitted as under:

a) The appellant's business relationship with PRAYAG commenced since April 1, 2003 when M/s.Prayag Enterprises P. Ltd., was appointed as the appellant's Sale promotion agent/Representative throughout the state of Andhra Pradesh for the sale of IML products of UB Group of companies, manufactured by the appellant. At that time, the appellant was a partnership firm and later on converted into a limited company.

b) This relationship has been continued through the agreements dated Oct 28, 2004, April 1, 2006, April 1, 2009 and April 1, 2010 and is continuing as on date. Copies of these agreements are enclosed for kind consideration. During this period, the business relationship of the appellant with M/s.Prayag has been very extensive both in volume and :- 3 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited value. Ledger extracts of the account of PRAYAG in the books of the appellant are enclosed in support of the submission.

c) PRAYAG has very efficient and vast marketing network in the state of A.P. and therefore many IML manufacturers in the state of AP including the UB Group of companies engaged their services for marketing their products. Relevant copies of the P&L A/c of PRAYAG since the financial year 2002-03 are enclosed in support of the submission. By virtue of such long association, PRAYAG had attained considerable clout and influence among the IML manufacturers in the state of AP including the UB group of companies.

d) The appellant intended to strengthen its market reach and also enhance its manufacturing capacity. With these observations, the appellant approached ICICI Bank for a term loan and the bank, vide their Credit Agreement Letter dt. March 26, 2008 sanctioned a term loan of Rs.130.00 crores to the appellant for the purposes stated therein.

e) As per the terms of the sanctioned loan, the appellant applied the funds;

• Rs.57.42 crores was paid to M/s.Pearl Distilleries Ltd., • Rs.22.00 crores was paid to M/s.Diadem Enterprises P. Ltd., and • Rs.43.60 crores was paid to M/s.Prayag Enterprises P. Ltd.,

f) The appellant intended to strengthen its market reach and enhance its manufacturing capacity by acquiring more Distilleries and approached PRAYAG with a mandate to look for acquisitions for its. PRAYAG agreed to undertake the assignment provided it is given certain amount as advance which could be used immediately if an attractive opportunity arises.

g) The Assessing Officer accepted the appellant's submission that the advances to M/s.Pearl Distilleries P. Ltd., and M/s.Diadem Enterprises P. Ltd., were made during the course of and for the purpose of the appellant's business.

As per section 36(1)(iii) of the Income Tax Act, 'the amount of interest paid in respect of capital borrowed for the purpose of business or profession' has to be allowed as deduction. In the preceding paragraph the appellant has unambiguously demonstrated as to how the amount paid to PRAYAG is relevant for its business.

The decision of the Hon'ble Supreme Court in S.A.Builders Vs. CIT(A) [288 ITR 1] perfectly fits to the facts of the appellant's case.

5. The CIT (A) held as under:

:- 4 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited "I have considered the submissions made by the appellant, gone through the order of the Assessing Officer and also citation relied on by the appellant. It is seen from the records that the appellant-company is engaged in manufacture of Indian Made liquor. It is also seen from the records that Prayag Enterprises Ltd., has been rendering services to the appellant as delcredere agent for a long time for which commission has been paid year after year, on which there is no dispute. It is also important to note here that PRAYAG has very efficient and vast marketing network in the state of AP and therefore many IML manufacturers in the state of AP including the UB Group of companies engaged their services for marketing their products. At this point of time the appellant intended to strengthen its market reach and enhance its manufacturing capacity by acquiring more Distilleries and approached PRAYAG with a mandate to look for acquisitions for it. PRAYAG agreed to undertake the assignment provided it is given certain amount as advance which could be used immediately if an attractive opportunity arises. Precisely, this is the stage where the appellant has approached ICICI Bank for a term loan and the bank sanctioned term loan of Rs.130.00 crores to the appellant for the purposes stated there in. These funds were advanced to three parties for the purpose for which the loan has been obtained, like Rs.57.42 crores was paid to M/s.Pearl Distilleries Ltd; Rs.22.00 crores was Paid to M/s Diadem Enterprises P. Ltd. Now at the end of the financial year 2008-09, the appellant has paid interest to ICICI bank, on which also there is no dispute. Now, the Assessing Officer has dies-allowed proportionate interest in as much as the advance given to PRAYAG is concerned by observing that interest bearing borrowed funds have been given as interest free trade advance and that there is no business prudence. It is also observed by the Assessing Officer that the appellant has failed to produce any evidence that PRAYAG has rendered any of the services during the year for which huge advance has been given, which is protested by the appellant.

Given the facts, circumstances and the judicial opinion, the appellant should succeed. There is no dispute that PRAYAG is an expert in marketing of the appellant's product. Appellant and the PRAYAG are having long relationship as business partners. The appellant wanted to expand its market reach including acquisitions, for which PRAYAG has readily accepted with a condition that it needed the advance for the job. From the term loan obtained, the advance was paid, on which also there is no dispute. Now probably, the Assessing Officer wanted tangible evidence to be shown to him for the services rendered by PRAYAG, which could not be presented before the Assessing Officer in the shape that might have impressed him. Nonetheless, it is a fact that PRAYAG has been helping the appellant in marketing its products for the last many years. Now, in as much as the new job given to PRAYAG by the appellant is concerned also, there is no dispute. There is also no dispute that part of the term loan has been given to PRAYAG for :- 5 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited the new job assigned. Now, it appears that the Assessing Officer was not satisfied with the job done by the PRAYAG and as such not allowed the interest on term loan proportionately. A moot question that arises here is that who has to be satisfied with the job of PRAYAG, whether it is the appellant or the Assessing Officer? The answer is the appellant. In case, the Assessing Officer is not satisfied, then what has to be the consequence? The answer is no consequence, because, it is for the appellant to decide but not the Assessing Officer. As per the appellant, the services rendered so far are satisfactory; hence no interference should be tolerated from the Assessing Officer, without assigning cogent reasons. Since, no reasons were assigned by the Assessing Officer for his decision, or any material was brought on record to counter the claim of the appellant, the addition made by the Assessing Officer has to be deleted and the Assessing Officer is directed accordingly. The Apex Court's decision in the case of SA Builders is on the point as the business nexus has been established as the advance given was to help the appellant for better reach to the clients and also helping in acquisitions by way of outright purchase or long term lease of manufacturing facilities".

6. Aggrieved, the Revenue is in appeal before us. The ld DR argued that the reasons advanced by the assessee are very vague and do not justify the claim that the amount has been given for business purposes. The ld DR pointed out that huge amount of Rs.43.60 crores has been given as interest free advance from the interest bearing borrowed funds. Further the assessee has not produced evidence of M/s. Prayag Enterprises Ltd having rendered services for which the trade advance is taken.

7. We have heard both the parties. The short point for consideration is whether the advance of Rs.43.60 crores paid to M/s Prayag Enterprises Ltd can be considered to be in the course of business or for the purpose of the assessee and therefore, the interest payable on the loans obtained by the assessee for making these advances is to be allowed u/s 36(1)(iii). It is not disputed that the advance given to M/s Prayag Enterprises Ltd was directly out of the borrowing from the Bank. According to the assessee M/s Prayag Enterprises Ltd was appointed as assessee's sales promotion agent/representative throughout the state of Andhra Pradesh for the sale of IML products of UB Group of Companies, manufactured by the assessee. At that time, the assessee was a :- 6 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited partnership firm and later on converted into a limited company. This relationship has been continued through the agreements dated 28.10.2004, 1.4.2006, 1.4.2009 and 1.4.2010 and is still continuing. During the period the business relationship of the assessee with M/s Prayag Enterprises Ltd has been very extensive both in volume and value. M/s Prayag Enterprises Ltd has very efficient and vast marketing network in the state of Andhra Pradesh including the UB Group of Companies and is engaged in the services for marketing their products.

8. The assessee in the course of hearing submitted that M/s Prayag Enterprises Ltd has lot of clout and influence among the IML manufacturers in the State of Andhra Pradesh and the assessee had intended to strengthen its market reach and also enhance its manufacturing capacity. The assessee approached M/s Prayag Enterprises Ltd with a mandate to look for acquisitions on behalf of the assessee. It was stated that M/s Prayag Enterprises agreed to undertake the assignment provided it is given certain amount as advance which could be used immediately if an attractive opportunity arises.

9. We find that the company has borrowed a total of Rs.130.00 crores out of which Rs.57.42 crores was paid to M/s Pearl Distilleries Ltd; Rs.22 crores to M/s. Diadem Enterprises P Ltd and Rs.43.60 crores to M/s Prayag. While the AO found that the loans to M/s Pearl Distilleries Ltd and M/s Diadem Enterprises (P) Ltd were for the purpose of business, the AO did not find any direct discernible reason for granting the advance to M/s Prayag Enterprises Ltd. The AO held that the reasons for advance as explained by the assessee is very vague and does not justify the claim of the assessee that it is for the business purposes. The AO also held that the assessee failed to establish the commercial expediency and disallowed the interest and advance given to M/s Prayag Enterprises Ltd.

:- 7 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited

10. On appeal, the CIT (A) concluded that there can be no dispute that M/s Prayag Enterprises Ltd is an expert in marketing the assessee's products and the assessee had a long relationship with M/s. Prayag Enterprises Ltd, therefore, the CIT (A) was convinced of the commercial expediency. The CIT (A) even stated that the person to be satisfied about the reasonableness is the assessee and not the AO and even if the AO is not satisfied with the services rendered by M/s Prayag Enterprises Ltd to the assessee, it is of no consequence. The CIT (A) concluded that the AO has disallowed without assigning any cogent reasons and deleted the disallowances.

11. In our opinion M/s Prayag Enterprises Ltd may have continued its relationship with the assessee in the course of business of the assessee, but there should be a valid reason and expectation that the amount advanced is for the purpose of the business and the recipient is expected to carry out some specific activities to improve the business of the assessee. In the present case it has been stated that the assessee expected to expand the market reach. It was further stated that the assessee was looking out for fresh acquisition of additional manufacturing facility. The assessee has not explained elaborately as to how Prayag Enterprises Ltd is expected to expand its market reach and also not brought out any details of specific direct companies which have been identified in connection with fresh acquisition. Hence, a mere statement that advances have been made for these purposes cannot be accepted. Further examination as to the specific services expected to be done either for expanding the market reach or for making fresh acquisition do not appear to have been made by the lower authorities.

12. The reliance on the decision of the Hon'ble Supreme Court in the case of S.A. Builders (288 ITR 1) is not correct. In that case the advance were made by the holding company to its subsidiary company and hence the Apex Court held that as the holding company has a deep interest in the subsidiary, the loan given to subsidiary for being used in subsidiary's business should be considered as being for the purpose of :- 8 -: I.T.A. No. 1040/Hyd/2012 M/s. Esveeaar Distilliers Pvt. Limited the holding company's business. In this case no such loan has been given by the holding company to its subsidiaries. Further in SA Builders (Supra) it has been held that the borrowed funds, if advanced to a third party, it should be for commercial expediency if it is sought to be allowed u/s 36()(iii) of the Act. Hence commercial expediency should be established more specifically in this case which requires further examination. The assessee is to be more specific as to what they expect M/s Prayag Enterprises Ltd to do and what exactly M/s Prayag Enterprises has achieved by granting of these advances of Rs.43.60 crores to the assessee. In these circumstances, we are of the opinion that the matter should be set aside to the file of the AO and the assessee should be given another opportunity to explain in detail the specific reasons and purposes for which the trade advance of Rs.43.60 crores has been given and what has resulted from the utilisation of the advance. Thereafter the AO shall decide the issue de nova in accordance with law.

13. In the result, Revenue's appeal is allowed for statistical purposes.

Order pronounced in open Court on 28-01-2015.

Sd/- Sd/- (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated 28th January, 2015 TNMM/vinodan Copy to :

1. Asst. Commissioner of Income Tax, Circle-I, 24-2-438, GNT Road, Dargamitta, Nellore

2. M/s.Esveeaar Distilliers Pvt. Limited, D.No.24-2-2023, IInd Floor, Plot No.791, Magunta Layout, Nellore

3. CIT(A), Guntur

4. CIT, Guntur

5. D.R. ITAT, Hyderabad.

By Order