IN THE HIGH COURT OF KARNATAKA, BENGALURU<\/p>\n
DATED THIS THE 25TH DAY OF SEPTEMBER 2018<\/strong><\/p>\n PRESENT<\/strong><\/p>\n THE <\/strong>HON<\/strong>‘BLE Dr.JUSTICE VINEET KOTHARI<\/strong><\/p>\n AND<\/strong><\/p>\n THE HON’BLE Mrs.JUSTICE S.SUJATHA<\/strong><\/p>\n I.T.A.No.155\/2016<\/u><\/strong><\/p>\n C\/W<\/u><\/strong><\/p>\n I.T.A.No.458\/2013, I.T.A.No.467\/2015<\/u><\/strong><\/p>\n I.T.A.No.173\/2017, I.T.A.No.172\/2017<\/u><\/strong><\/p>\n I.T.A.No.155\/2016<\/u><\/strong><\/p>\n Between: <\/p>\n C.R. Building, Queens Road <\/p>\n Bangalore-560001.<\/p>\n Ward-4(3), Bangalore.<\/p>\n …Appellants<\/p>\n (By Mr. E.R. Indrakumar, Sr. Counsel for<\/p>\n Mr. E.I. Sanmathi, Advocate)<\/p>\n And:<\/p>\n M\/s. Chamundi Winery and Distillery<\/p>\n 1313, 9th Cross, 27th Main, 1st Phase<\/p>\n J.P. Nagar, Bangalore-560 078 <\/p>\n PAN; AAEFC5505C. <\/p>\n<\/p>\n …Respondent<\/p>\n (By Mr. A. Shankar & Mr. M. Lava, Advocates)<\/p>\n ****<\/p>\n This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to: 1. Decide the question of law and\/or such other questions of law as may be formulated by the Hon’ble Court as deemed fit. 2. Set aside the appellate order dated 26\/08\/2015 passed by the ITAT, ‘C’ Bench, Bengaluru, as sought for, in the respondent-assessee’s case, in Appeal proceedings in ITA No.908\/Bang\/2014 dated 26\/08\/2015 for A.Y. 2010-2011 & etc. <\/p>\n I.T.A.No.458\/2013<\/u><\/strong><\/p>\n Between: <\/p>\n C.R. Building, Queens Road <\/p>\n Bangalore.<\/p>\n Ward-4(3), C.R. Building <\/p>\n Queens Road, Bangalore.<\/p>\n …Appellants<\/p>\n (By Mr. E.R. Indrakumar, Sr. Counsel for<\/p>\n Mr. K.V. Aravind, Advocate)<\/p>\n And:<\/p>\n M\/s. Chamundi Winery and Distillery<\/p>\n No.1313, 9th Cross, 27th Main <\/p>\n 1st Phase, J.P. Nagar<\/p>\n Bangalore-560 078. <\/p>\n …Respondent<\/p>\n (By Mr. A. Shankar, Mr. M. Lava &<\/p>\n Mr. K. Kiran Kumar, Advocates)<\/p>\n ****<\/p>\n This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to: 1. formulate the substantial questions of law stated therein. 2. allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.1260\/Bang\/2012 dated 05\/04\/2013 and confirm the order of the Appellate Commissioner confirming the order passed by the Income Tax Officer, Ward-4(3), Bangalore.<\/p>\n I.T.A.No.467\/2015<\/u><\/strong><\/p>\n Between: <\/p>\n Central Revenue Buildings<\/p>\n Queens Road, Bangalore-560 001.<\/p>\n Ward-4(3), Bangalore.<\/p>\n …Appellants<\/p>\n (By Mr. E.R. Indrakumar, Sr. Counsel for<\/p>\n Mr. E.I. Sanmathi, Advocate)<\/p>\n And:<\/p>\n M\/s. Chamundi Winery and Distillery<\/p>\n No.1313, 9th Cross, 27th Main <\/p>\n 1st Phase, J.P. Nagar, Bangalore-560 078<\/p>\n PAN No.AAAEFC 5505C. <\/p>\n …Respondent<\/p>\n (By Mr. A. Shankar & Mr. M. Lava, Advocates)<\/p>\n ****<\/p>\n This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to decide the foregoing question of law and\/or such other questions of law as may be formulate by the Hon’ble Court as deemed fit and set aside the appellate order dated 17\/04\/2015 passed by the ITAT, ‘B’ Bench, Bangalore, in appeal proceedings in ITA No.1149\/Bang\/2014 for assessment year 2011-12, as sought for in this appeal and grant such other relief as deemed fit, in the interest of justice. <\/p>\n **** <\/p>\n I.T.A.No.173\/2017<\/u><\/strong><\/p>\n Between: <\/p>\n 1. The Pr. Commissioner of Income Tax(4)<\/p>\n BMTC Complex, Kormangala<\/p>\n Bangalore-560 001.<\/p>\n 2. The Income Tax Officer<\/p>\n Ward-4(3)(3), Bangalore.<\/p>\n …Appellants<\/p>\n (By Mr. E.R. Indrakumar, Sr. Counsel for<\/p>\n Mr. E.I. Sanmathi, Advocate)<\/p>\n And:<\/p>\n M\/s. Chamundi Winery and Distillery<\/p>\n 1313, 9th Cross, 27th Main <\/p>\n 1st Phase, J.P. Nagar, Bangalore-560 078<\/p>\n PAN No.AAEFC 3505C. <\/p>\n …Respondent<\/p>\n (By Mr. A. Shankar & Mr. M. Lava, Advocates)<\/p>\n ****<\/p>\n This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to: 1. decide the question of law and\/or such other questions of law as may be formulate by the Hon’ble Court as deemed fit. 2. set aside the appellate order dated 16\/09\/2016 passed by the ITAT, ‘C’ Bench, Bengaluru, as sought for, in the respondent-assessee’s case, in Appeal proceedings in ITA No.47\/Bang\/2016 for A.Y.2012-13 & etc.<\/p>\n <\/p>\n I.T.A.No.172\/2017<\/u><\/strong><\/p>\n Between: <\/p>\n 1. The Pr. Commissioner of Income Tax(4)<\/p>\n BMTC Complex, Kormangala<\/p>\n Bangalore-560 001.<\/p>\n 2. The Income Tax Officer<\/p>\n Ward-4(3)(3), Bangalore.<\/p>\n …Appellants<\/p>\n (By Mr. E.R. Indrakumar, Sr. Counsel for<\/p>\n Mr. E.I. Sanmathi, Advocate)<\/p>\n And:<\/p>\n M\/s. Chamundi Winery and Distillery<\/p>\n 1313, 9th Cross, 27th Main <\/p>\n 1st Phase, J.P. Nagar, Bangalore-560 078<\/p>\n PAN No.AAEFC 3505C. <\/p>\n …Respondent<\/p>\n (By Mr. A. Shankar & Mr. M. Lava, Advocates)<\/p>\n ****<\/p>\n This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to: 1. decide the foregoing question of law and\/or such other questions of law as may be formulate by the Hon’ble Court as deemed fit. 2. set aside the appellate order dated 16\/09\/2016 passed by the ITAT, ‘C’ Bench, Bengaluru, as sought for, in the respondent-assessee’s case, in Appeal proceedings in ITA No.46\/Bang\/2016 for A.Y.2008-09 & etc.<\/p>\n These I.T.As. having been heard and reserved on 21-08-2018<\/strong>, <\/strong>coming on for Pronouncement of Judgment, this day, Dr Vineet Kothari, J<\/em><\/strong>, delivered the following: <\/p>\n J U D G M E N T<\/u><\/strong><\/p>\n Mr E.R. Indrakumar,<\/strong> Sr. Counsel for<\/p>\n Mr. E.I. Sanmathi<\/strong>, Adv. for Appellants – Revenue<\/strong><\/p>\n Mr. A. Shankar, Mr. M. Lava.<\/strong> & <\/p>\n Mr. K. Kiran Kumar,<\/strong> Adv. for Respondent- Assessee<\/strong><\/p>\n 1. The Revenue has filed these five Appeals under Section 260-A<\/strong> of the Income Tax Act, 1961<\/strong> (‘Act’<\/strong> for short) against the Respondent Assessee m\/S. CHAMUNDI WINERY AND DISTILLERY, <\/strong>BANGALORE<\/strong> <\/strong>(hereinafter referred to as “CHAMUNDI”<\/strong> for short) for A.Y.2008-09 to 2012-13<\/strong> raising the Substantial Questions of law, which we have re-framed.<\/p>\n 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”<\/strong> paid by the Respondent Assessee CHAMUNDI<\/strong> to DIAGEO INDIA PRIVATE LIMITED <\/strong>(hereinafter referred to as ‘DIAGEO’ <\/strong>for short), a subsidiary and Group Company of DIAGEO Plc,<\/strong> a United Kingdom based Liquor Conglomerate, was an ‘allowable expenditure’ in the hands of the Respondent Assessee under Section 37<\/strong> of the Act.<\/p>\n 3. The following Substantial Questions of law do arise in the present set of appeals which we have reframed as below:-<\/p>\n [1] Whether the Tribunal was justified in holding that the Distributable Surplus paid by the Respondent Assessee M\/s. CHAMUNDI WINERY AND DISTILLERY<\/strong> to DIAGEO INDIA PRIVATE LIMITED<\/strong> in pursuance of the Agreement dated 30\/10\/2007<\/strong> between these two parties was not ‘application of income’, but an ‘allowable expenditure’ in the hands of the Respondent Assessee under Section 37 <\/strong>of the Act ?<\/em><\/p>\n [ii] Whether the terms and conditions of the Agreement dated 30\/10\/2007<\/strong> between M\/S. CHAMUNDI WINERY AND DISTILLERY<\/strong> and DIAGEO INDIA PRIVATE LIMITED<\/strong> amount to ‘Diversion of Income at source by over riding title’ in favour of DIAGEO INDIA PRIVATE LIMITED<\/strong> even though the Excise Licence under the provisions of the Karnataka Excise Act, 1965 <\/strong>during the relevant period was taken in the name of Respondent Assessee CHAMUNDI<\/strong> and therefore, such profits and gains from the said business of manufacture and sale of liquor by M\/S. CHAMUNDI WINERY AND DISTILLERY<\/strong> was not assessable in its hands ?<\/em><\/p>\n [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<\/strong> will determine the taxability of business income in the hands of DIAGEO INDIA PRIVATE LIMITED <\/strong>who under the said Agreement dated 30\/10\/2007<\/strong> 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<\/strong> ?<\/em><\/p>\n 4. The brief factual matrix of the case is as under:-<\/p>\n 5. The Assessing Authority in the first instance in all these five Assessment Years, A.Y.2008-09 to 2012-13, <\/strong>disallowed the said “Distributable Surplus” paid by the Respondent Assessee CHAMUNDI<\/strong> to DIAGEO<\/strong> under Section 37<\/strong> 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<\/strong> to DIAGEO<\/strong> by overriding title and the Respondent Assessee CHAMUNDI<\/strong> 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<\/strong> with DIAGEO.<\/strong><\/p>\n 6. The first Appellate Authority however, allowed the Appeal of the Assessee CHAMUNDI<\/strong> 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 260-A<\/strong> of the Act, raising the substantial questions of Law.<\/p>\n 7. The crux of the matter revolves round the Terms of the Conditions of the Agreement dated 30\/10\/2007 <\/strong>and therefore, a brief extraction of the relevant terms and conditions and its background are necessary to understand as the said Agreement has held the field throughout the aforesaid five Assessment Years. The DIAGEO<\/strong> is a Subsidiary and Group Company of DIAGEO Plc.,<\/strong> a UK based Corporate entity and it owns several Trade Marks and Brands specified in the Schedule III of the said Agreement and the popular amongst them are SMIRNOFF (Vodka), VAT 69 (Scotch Whisky), CAPTAIN MORGAN (Rum), SMIRNOFF ORANGE TWIST (Vodka), SHARK TOOTH(Vodka) and HAIG GOLD LABEL (Scotch Whisky) and the Preamble of the said Agreement dated 30\/10\/2007<\/strong> is quoted below:-<\/p>\n “WHEREAS:<\/em><\/strong><\/p>\n A.<\/em><\/strong> DIAGEO INDIA <\/strong>is engaged inter alia in the manufacture and marketing of alcoholic beverages and is a subsidiary of Diageo Plc.<\/strong><\/em><\/p>\n [<\/strong><\/em><\/p>\n <\/em><\/p>\n <\/em><\/p>\n <\/em><\/p>\n 8. The said Agreement therefore, clearly rules out the Contract between the parties to be that of a Partnership, Agency or even a Quasi partnership because, the concept of mutuality is specifically negatived in the said Agreement. <\/p>\n 9. The relevant Parties’ Obligations contained in para 3 of the said Agreement to the relevant extent are also quoted below for ready reference:- <\/p>\n “3. PARTIES’ OBLIGATIONS<\/em><\/strong><\/p>\n <\/em><\/p>\n <\/em><\/p>\n 10. The responsibilities of DIAGEO<\/strong> to provide the Working Capital, Raw Materials and to take important commercial decisions about the quality, quantity, price, delivery schedule, etc. as given in para 7.1 with no right to CHAMUNDI WINERY AND DISTILLERY<\/strong> to use the Intellectual Property of DIAGEO<\/strong> are also quoted below for ready reference:-<\/p>\n “7. DIAGEO INDIA RESPOSIBILITIES<\/em><\/strong><\/p>\n 7.1 DIAGEO INDIA<\/strong> shall be responsible for:<\/em><\/p>\n <\/em><\/p>\n\n
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