IT : Where assessee paid certain amount as agency commission and overseas commission and Assessing Officer had disallowed overseas commission on ground that no services had been rendered by overseas agents, since overseas commission represented a discount given to purchasers and not a business commission, impugned disallowance was not justified
IT : Where assessee purchased goods from a company 'P', which was specified under section 40A(2)(b), and Assessing Officer had disallowed a certain payment made to 'P' considering it as excessive and unreasonable, since Assessing Officer had not given a finding that payment was excessive or unreasonable having regard to fair market value of goods, impugned disallowance was not justified
IT : Where assessee paid interest to creditors as well as trade parties upto 30 days at rate of 18 per cent and beyond 30 days at rate of 21 per cent and explained same, Assessing Officer was wrong in disallowing interest exceeding 18 per cent
■■■
[2013] 38 taxmann.com 392 (Jodhpur - Trib.)
IN THE ITAT JODHPUR BENCH
Income-tax Officer, Ward -1, Bhilwara
v.
Axon Global (P.) Ltd.*
HARI OM MARATHA, JUDICIAL MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER
IT APPEAL NO. 195 (JODH.) OF 2013
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
SEPTEMBER 27, 2013
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Discount] - Assessment year 2009-10 - Assessee-company was engaged in business of manufacturing and trading of fabric - During year, it paid certain amount as agency commission and overseas commission and claimed deduction of same - It stated that (i) agency commission had been paid to local agents for their services provided for introducing to overseas parties, to whom it sold goods on principal to principal basis, (ii) in invoices from gross amount of sales deduction upto 12.5 per cent had been given in name of commission, and (iii) in books after recording gross sales, deduction was separately recorded as overseas commission - Assessing Officer accepted local commission paid, but disallowed overseas commission on ground that no services had been rendered by overseas agents - Whether in peculiar facts of case overseas commission represented a discount given to purchasers and not a business commission - Held, yes - Whether Assessing Officer was wrong in disallowing overseas commission without appreciating real nature of entries made in books of account - Held, yes [Para 3] [In favour of assessee]
II. Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments [Finding as to excessive payment] - Assessment year 2009-10 - Assessee-company purchased goods from a company 'P', which was specified under section 40A(2)(b) - Assessing Officer disallowed a certain payment made to 'P' by considering it as excessive and unreasonable - Whether since Assessing Officer had not given a finding that payment made by assessee was excessive or unreasonable having regard to fair market value of goods, impugned disallowance was not justified - Held, yes [Para 4] [In favour of assessee]
III. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Interest rate] - Assessment year 2009-10 - Assessee paid interest to creditors as well as trade parties upto 30 days at rate of 18 per cent and beyond 30 days at rate of 21 per cent and claimed deduction of same - Assessing Officer disallowed interest exceeding 18 per cent - Assessee explained that where payment was made within 30 days interest was paid at rate of 18 per cent and in other cases interest was paid at rate of 21 per cent - Whether in peculiar facts of case disallowance of interest exceeding 18 per cent was wrong - Held, yes [Para 5.1] [In favour of assessee]
FACTS-I
| ■ | The assessee-company was engaged in the business of manufacturing and trading of synthetic fabric. During the year, it paid certain amount as agency commission and overseas commission and claimed deduction of the same. It stated that (i) the agency commission had been paid to the local agents for their services provided for introducing to overseas parties, to whom it sold the goods on principal to principal basis, (ii) in the invoices from the gross amount of sales deduction upto 12.5 per cent had been given in the name of commission, and (iii) in the books after recording gross sales, the deduction was separately recorded as overseas commission. | |
| ■ | The Assessing Officer accepted the local commission paid, but disallowed the overseas commission under section 37(1) on the grounds that (i) no services had been rendered by the overseas agents inasmuch as no details/documents of further sales by these agents had been furnished by the assessee, (ii) from the perusal of sample contract notes furnished by the assessee with overseas agents it was evident that the same was a contract for purchase and sale of goods and commission had been merely deducted from the sales invoice at a flat rate without rendering of any services by these overseas agents, and (iii) in all such contract notes name of the Indian agents who introduced the assessee to these overseas parties had been written for which commission had already been paid by the assessee to the Indian agents. Thus, for the same invoice, commission had been paid to local agents as well as overseas agents. He, therefore, added the amount of overseas commission to the income of the assessee. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the impugned addition made by the Assessing Officer. | |
| ■ | On second appeal: |
HELD-I
| ■ | The assessee has been exporting its goods to the non-residents introduced to it by local agents on commission basis. In fact, the commission represents a discount given to the purchasers and not a business commission. Once the export invoice is raised and the goods are delivered, the sale transaction is complete. These transactions are found to be on principal to principal basis. The overseas parties do not sell the goods as agents of the assessee-company. The assessee is not crediting the personnel accounts of the overseas parties. It is a settled principle of law that existence or absence of entries in the books of account is not a decisive or a conclusive factor in ascertaining the income or claiming the expenditure. Therefore, no such disallowance under section 37(1) can be made without appreciating the real nature of the entries made in the books of account. Therefore, the Commissioner (Appeals) had correctly deleted the impugned addition. [Para 3] |
FACTS-II
| ■ | The assessee-company had purchased yarn and finished fabric from a company 'P', which was specified under section 40A(2)(b). | |
| ■ | The Assessing Officer demanded justification of these transactions of purchases with proof. The assessee filed a reply and also furnished a comparative rate chart at which yarn was purchased from 'P' vis-a-vis from other parties. As per this chart, the average rate of Rs. 125 per kg. at which yarn was purchased from 'P' was comparable with the rate ranging between Rs. 121.15 per kg. to Rs. 163.84 per kg. at which purchases were made from the unrelated parties. Regarding finished fabric, the assessee produced its own manufacturing sheet showing the percentage of shrinking and value of loss to justify the reasonableness of rate paid to P. The Assessing Officer did not agree with the assessee. He, accordingly, disallowed a certain payment made to 'P' by considering it as excessive and unreasonable. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. | |
| ■ | On second appeal: |
HELD-II
| ■ | The yarn purchased from 'P' at an average rate of Rs. 125 per kg. is supported by copies of invoices. It is noticed that the purchase from 'P' is at the prevailing market rate. Thus the rate at which purchase of yarn is made from 'P' is comparable to the rate at which purchases are made from third/other parties. The ad hoc disallowance at the rate of one per cent cannot be approved in the given facts and circumstances of the case. The Assessing Officer has not given a finding that the payment made by the assessee is excessive or unreasonable having regard to the fair market value of the goods. This opinion has to be framed before invoking section 40A(2)(a). Therefore, the order of the Commissioner (Appeals) deserved to be upheld. [Para 4] |
FACTS-III
| ■ | During the year, the assessee paid interest to creditors as well as trade parties upto 30 days at the rate of 18 per cent and beyond 30 days at the rate of 21 per cent and claimed deduction of the same. | |
| ■ | The Assessing Officer had disallowed the interest exceeding 18 per cent. He also observed that the assessee had failed to furnish the policy of the payment of interest, etc. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. | |
| ■ | On second appeal: |
HELD-III
| ■ | The assessee-company has explained that where payment is made within 30 days interest is paid at the rate of 18 per cent and in other cases, interest is paid at the rate of 21 per cent. The rate of interest chargeable for delayed payments is mentioned in the invoices itself. This clearly establishes payment policy of the assessee-company. Accordingly, there is no fallacy in the order of the Commissioner (Appeals). [Para 5] |
CASE REVIEW - I
Sanjay Jain v. Dy. CIT [IT Appeal No. 1533 (Ahd.) of 2008, dated 16-12-2009 (para 3)]; Narendra D. Modh v. Asstt. CIT [IT Appeal No. 453 (Ahd.) of 2009] and Asstt. CIT v. Rachna Exports [IT Appeal No. 3791(Ahd.) of 2007, dated 24-3-2010] (para 3) followed.
CASE REVIEW - II
Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC) (para 4) followed.
CASES REFERRED TO
Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC) (para 4.2).
P.C. Parwal for the Appellant. N.A. Joshi for the Respondent.
ORDER
Hari Om Maratha, Judicial Member - This appeal of the revenue for A.Y. 2009-10 is filed against the order of ld. CIT(A), Ajmer, dated 31/01/2012.
2. Briefly stated, the facts of the case are that the assessee company derived its income from trading and manufacturing of synthetic fabric. For the A.Y. 2009-10, it e-filed its Return of Income [ROI] on 8.8.2009 declaring total income of Rs. 10,39,330/-. However, the assessment was made at a total income of Rs. 89,33,945/-. In arriving at the above computation of income, the A.O. has made the following additions:—
| Income as per return of income | Rs. 10,39,330/- | |||
| Add | 1. | Disallowance of overseas commission | Rs. 76,81,286/- | |
| 2. | Disallowance u/s 40A(2)(b) | Rs. 1,18,014/- | ||
| 3. | Disallowance of packing material expenses | Rs. 43,392/- | ||
| 4. | Disallowance of loan commission | Rs. 32,370/- | ||
| 5. | Disallowance of interest | Rs. 19,553/- | Rs. 78,94,615/- | |
| Assessed income | Rs. 89,33,945/- | |||
2.1 Aggrieved, the assessee preferred first appeal and the ld. CIT(A) allowed part relief. The assessee-company is further aggrieved and has raised the following grounds in its second appeal:—
'In view of the facts and circumstances of the case, the Id.CIT(A), Ajmer has erred in :—
| 1. | Treating the overseas parties (to whom the assessee sold goods) as "overseas commission agents" without appreciating the assessee's own reply dated 02.12.2011; | |
| 2. | Treating the overseas parties (to whom the assessee sold goods) as "overseas commission agents" without appreciating the copies of contracts/sale invoices properly; | |
| 3. | Treating the overseas parties (to whom the assessee sold goods) as "overseas commission agents" when the assessee failed to explain as to how the buyers of goods could also be the commission agents; | |
| 4. | Allowing the overseas commission to the local agents as well as overseas buyers on the same sale invoice when it is a simple transaction of sale / purchase; | |
| 5. | In holding that there was no liabilities for TDS u/s 195 of the I.T. Act, 1961 as the services were rendered outside India. Amount was not taxable as it did not accrue or arise in India whereas there were no so called overseas agent and no services were rendered. The so called overseas agents were nothing but these were overseas buyers of assessee's goods; | |
| 6. | In deleting the addition made by the AO on account of commission paid to the so called overseas commission agent relying upon the decision of Sanjay Jain v. DCIT, Special Bench of the Hon'ble ITAT, Ahmedabad in ITA No. 1533/Ahm/2008 dated 16.12.2009 and Narendra D. Modh v. ACIT, Circle - 2 in ITA No. 453/Ahd/2009 and ACIT v. Rachna Exports in ITA No. 3791/Ahm/2007. When these decisions are not applicable in the instant case. In the cited cases, commission was treated as additional income of the assessee but instant case is related to the bogus claim of commission. In the cited cases, .commission was decided at the time of sale contract itself, but in the instant case nothing mentioned on the contracts; | |
| 7. | Deleting the addition of Rs. 1,18,014/- made by the AO u/s 40A(2)(b) holding that the assessee as well as its sister concern are falling in the similar tax brackets which is irrelevant to the issue; | |
| 8. | Deleting the addition made by the AO u/s 40A(2)(b) of the I.T. Act, 1961 of Rs. 1,18,014/- observing that the AO did not cite any instances that on similar market conditions of similar quality of the yarn higher price was paid to the sister concern than the outsiders without remanding the case to the AO; | |
| 9. | In deleting the addition of Rs. 19,553/- on account of disallowance of excess interest paid to trade creditors ignoring the fact that the assessee failed to furnish the payment policy to the creditors in support of payment of interest @ 18% to some trade parties and @ 21% to other parties; | |
| 10. | The appellant craves to add, amend, alter, delete or modify the above grounds of appeal before or at the time of hearing.' |
2.2 We have heard the rival submissions and have carefully perused the entire material on record with reference to the facts emerging from the records. Both the parties have reiterated their earlier stand. The ld. A.R. has filed a lengthy paper book alongwith a written submission, whose copies were provided to the ld. D.R. as per rules.
2.3 The first inter-connected issue has been raised vide Ground Nos. 1 to 6. The facts of this issue are that during the year, in the profit and loss account, the assessee has debited agency commission of Rs. 23,35,975/- and overseas commission of Rs. 76,81,286/-. The agency commission is stated to have been paid to the local agents for their services provided for introducing to overseas parties who are big adatias, to whom assessee-company sells goods on principal to principal basis. In the invoices from the gross amount of sales a deduction upto 12.5% has been found given in the name of 'commission'. The assessee received net of the invoice price. In its books after recording gross sales, the deduction is separately recorded as 'overseas commission'. The A.O. has accepted local commission paid but has disallowed overseas commission of Rs. 76,81,286/- u/s 37(1) of the Act with the following reasons:
| (i) | No services have been rendered by the overseas agents in as much as no details/documents of further sales by these agents have been furnished by the assessee. | |
| (ii) | From the perusal of sample contract notes furnished by the assessee with overseas agents it is evident that the same is a contract for purchase and sale of goods and commission has been merely deducted from the sales invoice at a flat rate without rendering of any services by these overseas agents. | |
| (iii) | In all such contract notes, name of the Indian agents who introduced the assessee to these overseas parties have been written for which commission has already been paid by the assessee to the Indian agents. Thus, for the same invoice, commission has been paid to local agents as well as overseas agents. |
The A.O. has not accepted the declaration of the overseas parties that they do not have any permanent establishment [PE] in India.
2.4 As against the above, the ld. CIT(A) has allowed this claim of the assessee with the aid of the following reasons:
| "(i) | It is apparent that the sale proceeds have been received net of the commission expenses and overseas commission agent/buyer is no more liable to make any payments to the assessee against the sales. The assessee is concerned only with the amount received against the sale and not with further sales made by the overseas commission agent/buyer. | |
| (ii) | In similar circumstances, where the net sales (after deducting overseas commission) was shown by the assessee, addition made on account of commission income was deleted by Hon'ble IT AT Ahmedabad in ITA No. 1533/Ahd./2008 order dt. 16.12.2009 in case of Sh. Sanjay Jain Vs. DCIT. This decision was followed by Hon'ble ITAT in ITA No. 453/Ahd./2009 in case of Sh. Narendra D. Modh Vs. ACIT and in ITA No. 3791/Ahd./2007 in case of ACIT Vs. Rachna Exports as cited by the appellant. | |
| (iii) | As regard the disallowance on account of non deduction of tax at source, AO has not accepted the claim of the assessee that overseas payments were made to NR's. However, as per the assessment order itself, it is apparent that assessee had submitted the proof of the residential status of the overseas agents like bank payment advice of the foreign banker, telephone bill, commercial register etc. The rejection of the said documents cannot be upheld without any contrary findings by way of enquiry particularly when contracts for sale, copy of shipping bills for export, bank certificate of export and realization are on record. Assessee has also submitted the certificates attested by the Synthetics & Rayons Textile Export Promotion Council and The All India Exporters Chambers stating that the importers/overseas agents are not registered with the ROC and do not have PE in India. All these documents cannot be rejected merely by stating that residency certificates have not been submitted. | |
| (iv) | The commission income of the non-resident is not chargeable to tax in view of Circular No. 23 dt. 23.07.1969 and Circular No. 786 dt. 07.02.2000. Circular No. 7 dt. 22.10.2009 cannot be applied retrospective to make it applicable to payments made before that date. Further, it is clear from the decision of Hon'ble Supreme Court in case of G.E. Technology Centre v. CIT dt. 09.09.2010 that TDS liability arises only when any sum chargeable to tax under the Act i.e. u/s 4, 5 and 9 of the I.T. Act is paid to a non resident. In the present case, the services are rendered outside India and amount is not taxable as it does not accrued or arise in India. Thus, it is held that there was no liability for deduction of tax at source u/s 195 of the I.T. Act on the overseas payments made to the NR commission agents. Accordingly, no disallowance u/s 40(a)(ia) for non deduction of tax at source can be made in the appellant's case." |
3. After considering the rival submissions we are in agreement with the finding of the ld. CIT(A). The assessee has been exporting its goods to the non-residents introduced to it by local agents on commission basis. The modus of drawing invoices and recording the transaction in the books has been stated above. In fact, this amount represents a discount given to the purchases and not a business commission. Once the export invoice is raised and the goods are delivered, the sale transaction is complete. These transactions are found to be on principal to principal basis. There is no element of 'agency' to attract the provisions of section 194H. The overseas parties do not sell the goods as agents of the assessee-company. The assessee is not crediting the personal accounts of the overseas parties. It is a settled principle of law that existence or absence of entries in the books of account is not a decisive or a conclusive factor in ascertaining the income or claiming the expenditure. Therefore, no such disallowance u/s 37(1) can be made without appreciating the real nature of the entries made in the books of account. The decisions relied on by the ld. CIT(A) are on the identical facts and are applicable to the facts of this case. Therefore, the ld. CIT(A) has correctly deleted the impugned addition. Thus, Ground Nos. 1 to 6 cannot be allowed and are dismissed.
4. Ground Nos. 7 and 8 of the revenue's appeal can be decided in one go. The facts of these grounds are that the assessee-company had purchased yarn worth Rs. 63,45,267/- and finished fabric worth Rs. 54,56,083/- totaling to Rs. 1,18,01,350/- from a company named M/s PSL International. This is a company as specified u/s 40A(2)(b) of the Act. Therefore, the A.O. demanded justification of these transactions of purchases with proof. The assessee-company replied vide letter dated 24.8.2011 and also furnished a comparative rate chart at which yarn in purchased from M/s PSL International vis a vis from other parties. As per this chart the average rate of Rs. 125/- per kg at which yarn is purchased from M/s PSL International is comparable with the rate ranging between Rs. 121.15 per kg to Rs. 163.84 per kg. at which purchases were made from the unrelated parties. Regarding finished fabric the assessee produced its own manufacturing sheet showing the percentage of shrinking and value of loss to justify the reasonableness of rate paid to M/s PSL International P. Ltd. But the A.O. has rejected the assessee's submissions by observing as under:
| "(i) | Purchases of yarn from M/s PSL International @ Rs. 125/kg is at a higher rate as compared to few purchases made from other parties at lower rates i.e. @Rs. 124.04/kg and Rs.121.15/Kg. | |
| (ii) | In respect of finished fabric, assessee has not submitted any evidence to substantiate the % of shrinkage taken by it in the cost sheets @6.75%. If the % of actual shrinkage would come less than 6.75% as taken by the assessee, then surely the cost arrived through the cost sheet will be reduced resulting in the fact that the rate charged by the sister concern is higher than the rate as per assessee's sheet." |
Thus he has disallowed a sum of Rs. 1,18,014/- being 1% of purchases of Rs. 1,18,01,350/- made from M/s PSL International P. Ltd by considering it as excessive and unreasonable to that extent.
4.1 As against the above, the ld. CIT(A) has held as under:
"I have considered the contentions of the appellant as well as assessment order. It is seen that as regarding the yarn purchase of Rs. 63,45,267/-, it was explained by the assessee that from the outside parties assessee has purchased yarn @ Rs. 121.15 to Rs. 163.84 per kg while average rate of purchases from sister concern is Rs. 125 per kg. The AO himself has accepted that purchase rate from outside parties it was found to be on the higher side in various cases. There are no instances cited that on similar market conditions for similar quality of the yarn, higher price has been paid to the sister concern than the outsiders. So, no adhoc disallowance in this account is sustainable.
Further, as regarding the finished fabric purchase, assessee had furnished its own cost working for the cost of the fabric showing shrinkage @ 6.57% based on the challans. The AO has rejected the figure of shrinkage without any basis or comparative case. In above circumstances, it cannot be held that assessee has paid higher price to its sister concern than what was the cost to the assessee for producing the similar quality of the finished fabric. The assessee's contentions are also supported by the fact that assessee as well as assessee's sister concern i.e. PSL International are falling in the similar tax bracket."
4.2 After hearing both the parties who have reiterated their arguments we have found that the comparative chart of yarn purchased from M/s PSL International at an average rate of Rs. 125/-per kg is supported by copies of invoices. It is noticed that the purchases from M/s PSL International is at the prevailing market rate. Thus the rate at which purchase of yearn is made from M/s PSL International P. Ltd is comparable to the rate at which purchases are made from third/other parties. The adhoc disallowance at the rate of 1% cannot be approved in the given facts and the circumstances of the case. The A.O. has not given a finding that the payment made by the assessee is excessive or unreasonable having regard to the fair market value of the goods. This opinion has to be framed before invoking section 40A(2)(a) of the Act. In this regard, the judgment of the Hon'ble Apex Court in the case of Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 is relevant. In view of this observation, we have to dismiss Ground Nos. 7 & 8 of revenue's appeal.
5. The facts apropos Ground No. 9 of revenue's appeal are that during the year, the assessee-company has debited interest expenses of Rs. 46,18,426/- under the head 'interest paid to others' which also include interest paid to the trade parties [upto 30 days] @ 19% amounting to Rs. 2,06,172/- and interest paid to trade parties [beyond 30 days @ 21% amounting to Rs. 1,36,874/-. The A.O. has disallowed the interest exceeding 18% which comes to Rs. 19,533/- with the reasoning that interest @ 18% had been paid to some of the trade parties. He has also observed that the assessee-company has failed to furnish the policy of the payment of interest etc. to creditors, and therefore, has drawn support from this instance. However, the ld. CIT(A) has deleted this addition.
5.1 Before us, both the parties have reiterated their earlier arguments. We have found that the assessee-company has explained that where payment is made within 30 days interest is paid @ 18% and in other cases, interest is paid @ 21%. This fact has not been disputed by the revenue. The rate of interest chargeable for delayed payments are mentioned in the invoices itself. So, in our considered opinion, this clearly establishes payment policy of the assessee-company. Accordingly, we do not find any fallacy in the finding of the ld. CIT(A) which warrants approval by us. We confirm his finding and cannot allow Ground No. 9 of this appeal.
6. In the result, appeal of the revenue is dismissed.
S.K.JRegards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment