TMI Blog2014 (10) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... and they assisted the assessee company in entering into contract with M/s. Gunatit Builders also for executing the contract and setting up galvanized plants. Merely because in the legal contract which was directly entered into between the Assessee Company and Azady Trading FZCO and Pioneer Machinery & Equipment Industry LLC, the names of these three persons did not appear, does not evidence that the business proposal was not brought to the assessee company by these three companies - it was not necessary for the three persons to physically visit Iraq before bringing a business proposal in Iraq to the knowledge of the knowledge of the company - In absence of any positive material brought on record by the AO after examining the three recipients of the commission to show that in fact no services were rendered by these three persons, the adverse inference drawn by the AO on the basis of his subjective opinion only cannot be sustained - the genuineness of payment is not in doubt as the payment was made through banking channel after deducting tax at source and the recipients of commission have also shown the same as their income – relying upon Swastik Textile Co. Pvt. Limited v/s CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f party Amount Particulars Relation in Rs Jasmine Bipinchandra Lala 8,72,325 Commission Sister on sales Bipinchandra N Attawala 6,18,750 Commission Father on sales Sejal Dhaval Lala 8,23,630 Commission Sister-in-law on sales (W/o of brother) Total 23,14,705 4. On inquiry by the Assessing Officer, the assessee submitted as under: This has a reference to the last hearing had on the 9th of November' 2011 and further to the same we present herewith point wise submissions. B. Details of the commission paid ₹ 1,49,38,463 shown in Direct Expenses. The summary of the commission amounts paid has been placed on record in the last hearing, in the current submission we place on record sample commission debit notes. (Please refer Annexure B) C. Details of the transaction with Azady Trading and Azady Telecom with reference to the commission paid to Mr. Bipinchandra Sejal and Jasmine amounting to ₹ 23,14,505. (Additional Documents such as contractual Agreement and related papers enclosed in Annexure C) This commission includes an amount of ₹ 23,14,505 paid to the related parties, this commission has been paid on account of total sales amounting to x 4.77 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the turnover and the contract in question is about 10% of the total sales vale. In support of its above submission, the assessee filed samples of debit notes of Bipinchandra N Attawala, Jasmin Bipinchandra Attawala and Sejal Dhaval Lala. 5. The Assessing Officer after considering the submissions of the assessee, disallowed the commission payment observing as under: 3.1. The assessee has submitted a miniature of duplicate copy of agreement for Hot Dip Galvanizing Plants at Dubai and Iraq. Perusal of a cryptic as well as a duplicate copy of 'AGREEMENT NO PPTSPL/07/02' enlighten that the agreement was signed between the assessee company and Pioneer Machinery and Equipment Industry LLC of Dubai-UAE jointly with Azady Trading FZCO of Dubai - UAE dated 13.01.2007. Hence, as per said agreement, M/s. Gunatit Builders had no role to play with. Therefore, a letter dated 21.11.2011 (scanned and pasted above) from Gunatit Builders certifying the role of Mr. Bipinchandra, produced by the assessee is an afterthought and has no sanctity on facts and has no legal sanctity in terms of the surrounding substance or the matrix laid down under the provisions of section 40A(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commission paid was about 5%. (d) It does not matter as to what was the percentage of commission but the issue that matters is what was the role contribution of services. No role in sales, profitability of the company is established. No service of the family members is established as none of the family members were remotely or distantly parties to the contract of UAE based party. No element of proof had been adduced to substantiate their active role in the contractual work undertaken in Iraq. 3.4. It is therefore proved that the assessee paid the purported commission to the parties being father, sister W/o of brother of the director who are Indian Residents and are assessed to tax in India. Hence, the argument of the assessee about deduction of tax on commission and offering of such income to tax by the recipients is not a valid argument in terms of the claim of expense. The issue is not simple as that. The statute has not offered any amnesty to the tax payer to mitigate its tax obligation adhering to illegitimate claims or without paying due tax on the income earned. Hence, it is beyond doubt that the vital elements such as services of the parties, role of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed the contract and entire amount due to sub- contractor has been discharged is by itself evidence that the sub-contractors execution at behest of Bipinchandra and Others was justified. Your Appellant states and submits that these are facts on basis of which the above commission has been paid, the commission is justified and reasonable considering the total turnover of 4.77 crores revenue (10% of total turnover), which Your Appellant has earned, this works out to 5% commission. Your appellant has paid commissions ranging from 2 to 10% on various merchant exports too during the year and the mere fact that this commission has been paid to a related party should not deny your Appellant of its claim of a justifiable expenses. It is also not out of context to humbly convey to Your Honor that during this year the total turnover was ₹ 44,56,10,570.36 as against ₹ 19,68,79,790.34 in the ITA No. 1891/Ahd/2012 M/s. Pallavi Power Tech. Sales Pvt. Ltd., Baroda For A.Y. 2009-10 preceding year and the total number of employees in current year were 8 as against 7 in preceding year, implying the total turnover increase of 126%. Your Appellant submits that this was a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 taxmann.com 6 (Kar), honourable Karnataka High Court has held that where the net worth of the chairman was ₹ 70.47 lakhs and on his alleged personal guarantee, the group companies borrowed ₹ 115.32 crores from banks, then merely because chairmen agreed to stand at a guarantor on payment of certain commission, it would not constitute lawful expenditure so as to claim deduction under section 37(1). This decision is squarely applicable in the present case, as per discussions made above. 4.10 The payments made to these persons is also an attempt to distribute the profits of the appellant company to its directors in the garb of commission payment to their relatives. In fact, the appellant itself in the submission made to the AO, has accepted that though this was the share in profit, but since these 3 individuals were not shareholders in the company, hence payment could not be made to them in form of profit share. Hence the payment was made in form of commission. Thus this project can at best be held as joint venture as the appellant itself had stated that the project was done in its name as it was required to be made in the name of a corporate entity. In such a situati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... happened to be the son-in-law of the principal shareholder and managing director of the company was correct. Some other decisions applicable to the facts of the case are as follows: i) COMMISSIONER OF INCOME TAX vs. CHANDULAL KESHAVLAL CO., 38 ITR 601 (SC):- The cases we have discussed above show that it is a question of fact in each case whether the amount which is claimed as a deductible allowance under s. 10(2)(xv) of the IT Act was laid out wholly and 'exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion. Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under s. 10(2)(xv). The directors did not render any additional service in the accounting year, to justify payment of additional remuneration. iv) COMMISSIONER OF INCOME TAX vs. NAVSARI COTTON SILK MILLS, 135 ITR 546 (QUO) There are positive as well as negative tests for finding out whether a deduction could be claimed under s. 37, subject to the satisfaction of the essential conditions that the expenditure should not be in the nature of capital expenditure and should be laid out or expended, wholly or exclusively for the purpose of the business or profession. The positive tests are if the expenditure is incurred (i) with a view to bring profits or monetary advantage either today or tomorrow; (ii) to render the appellant immune from impending or reasonably apprehended litigation; (Hi) in order to save losses in foreseeable future; (iv) for effecting economy in working which may pay dividends today or tomorrow; (v) for increasing efficiency in working; (vi) for removing inefficiency in the working; (vii) where the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously incur with an eye on promoting h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s length. [Para 10, 11] 4.14 Hence on the basis of these discussions, it is held that the AO's action of disallowing the commission paid to these persons is correct. As a result, this ground of appeal is dismissed. 8. We have heard the rival submissions and perused the orders of lower authorities and material available on record. The assessee company made payment of commission of ₹ 23,34,505/- to the three persons as under: Name of party Amount in Rs Jasmine Bipinchandra Lala 8,72,325 Bipinchandra N Attawala 6,18,750 Sejal Dhaval Lala 8,23,630 Total 23,14,705 The aforesaid payment of commission was made after due deduction of tax at source thereon. The assessee was engaged in the business of chemical exports for last many years. During the year under consideration, the assessee secured the contract for setting up galvanized plants in UAE and Iraq from M/s. Azady Trading FZCO and Pioneer Machinery Equipment Industry LLC which the assessee got executed by av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the project and also assist in arranging finance for the contract. Accordingly, these agents had contacted one Shri llesh Vyas of Gunatit Builders, who was working as Consultant Constructor for hot dip galvanised plant etc; and persuaded him to work with the appellant company in execution of contract with Azady Trading Pioneer Machinery Equipment Industry after removing his apprehension regarding working in UAE and particularly in Iraq and assuring him that his payments would be made on time. Gunatit Builders also agreed to supply material without insisting for advance payments. Thus, the appellant company need not bother about finance for this contract. Copy of confirmation of llesh Vyas is placed at page No. 131 of the paper book. Under this contract the appellant had received a sum of ₹ 4.77 crores from Azady Trading FZCO and Pioneer Machinery Equipment Industry LLC against the purchase cost of plants amounting to ₹ 4.07 crores. Thus a profit of ₹ 70.41 lacs was booked by the assessee company and even after payment of commission amounting to ₹ 23.14 lacs to Mr. Bipin Company, the net profit to the company was ₹ 47.04 lacs. This net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the representatives of Azady Pioneer Machinery on one hand and Shri llesh Vyas of Gunatit Builders on other hand with the appellant company. It was held by the Hon'ble Gujarat High Court in Swastik Textile Co. Pvt. Limited v/s CIT 150 ITR 155 (Guj) that commission was allowable as deduction where the revenue had failed to controvert the broker's statement that he had brought the parties of contract together. 12. The assessee also relied upon the Head Notes in the case of CIT v/s Atma Prakash Batra 340 ITR 177 (Guj) which reads as under: Business Expenditure-Allowability-Export commission- Tribunal, after considering the rival submissions and after appreciating the evidence on record, found that the receipt of commission amount had been duly confirmed by the agents which in turn meant that the amount which had been deducted from the invoice value actually represented commission payments which were finally received by the agent- This had been done in accordance with the terms and conditions agreed upon between the buyers and the seller, even though there was no formal agreement-Thus, once the genuineness of the commission as well as its justification of having been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered view, the disallowance of commission payment of ₹ 23,14,705/- cannot be sustained. We therefore, delete the disallowance of ₹ 23,14,705/- and allow the ground of appeal of the assessee. 17. Ground no. 2 reads as under: 'The learned CIT(A) erred in fact and in law in confirming the action of AO in making addition of ₹ 50,09,855/- being foreign sales commission.' 18. The brief facts of the case are that the assessee claimed to have paid foreign commission of ₹ 50,09,855/- to Mrs. Jigna K. Babla and Mrs. Pramodini R. Babla. In response to the show cause notice, the assessee submitted that the commission was paid on total sale transaction to M/s. Carus Chemicals of ₹ 7.23 crores which yielded a net profit after commission of ₹ 1,14,64,751/- which was about 15.84% of the total value of exports. The commission paid works out to 7.77%. Mr. Kiran Babla is based in Tanzania and is a regular business associate of the assessee and the assessee has executed a number of contracts/sales through his business connections and was having a cordial business relations. Mr. Kiran Bala and his family business concerns have been instrumental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational trading also on commission basis with them. In the year 2008, We had Arranged various orders for Caustic Potash Flakes (Order Referred above) on commission Basis for 'M/s. Carus Chemicals Company USA'. The Commission Agreed was US $ 150,00 Per Ton to be paid to us on Execution of the supply and receipt of payment at their end. Palvi Power Tech Sales Pvt. Ltd. Executed three Purchase Orders referred above successfully and had paid commission to us. The Commission was paid to us in Two Names: 1) MRS. JIGNA K. BABLA (My Wife) and 2) MRS. PRAMODINI R. BABLA (My Mother) against the debit notes Dated 31.03.2009 as requested by us. It may please be noted here that Order No. 43601 43602 were not Executed by Palvi Power Tech Sales Pvt. Ltd as Our Customer M/s. Carus Chemical Company had advised us that not to ship further material. Thanking you, FOR TRISTAR INVESTMENT CO. LTD. KIRAN BABLA TRISTARSINVESTMENTSCO. LTD P.O. Box. 22642 DAR ES SALAAM (a) The letter of M/s. Tristars Invest,ments Co. Ltd. of DAR ES SALAAM does not even support the role of the Mr. Kiran Babla and his family members in the sales made by the company to M/s. Carus Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and extremely resourceful with in depth knowledge in commodity markets, this business lead provided Your Appellant with the opportunity of executing a total contractual sale of 7.33 crores, which accounts for at least 16.25 % of total merchant exports. The role played by Kiran Babla and family was extremely important in the securing of this contract. a) 4.2 page 8/9/10 of 13 , the Letter of confirmation provided by Tristar Investments Co Ltd does not support the role played by Babla family in sales made to Carus Corporation USA, neither is there any correspondence between Carus and M/s Tristar to support. Your Appellant humbly states, that most of the business in chemical trading over the world is sourced with the help of Individuals/Company's have very good contacts and sources in International markets. M/s Tristar Investments Co Ltd (Family Concern of Kiran Babla, Pramodini Babla and Jigna Babla) is one such family enterprise through whom we have been regularly soliciting / sourcing the business. During the year under Appeal, this is not the first business contract executed, during the year there are other contracts also for which commission has been paid to Mrs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch circumstances, the decisions cited above, in relation to ground number 1 are also applicable in the present ground. Hence following these decisions the AO's action of disallowing this commission payment is upheld and this ground of appeal is dismissed. 21. We have heard the rival submissions and perused the orders of lower authorities and material available on record. In the instant case, the assessee paid commission of ₹ 50,09,855/- to Mrs. Jigna K. Babla and Mrs. Pramodini K. Babla on account of sale to M/s. Carus Chemicals of ₹ 7.23 crore. In reply to the show cause notice by the Assessing Officer, the assessee submitted that Mr. Kiran Babla is based at Tanzania who is a regular business associate of the assessee and executed a number of contracts/sales through his business connections and was having cordial business relations with the assessee. Mr. Kiran Babla and family business concern were instrumental in securing Carus contract. The CEO of the company Mr. Himanshu Mehta had a business meeting with Mr. Kiran Babla in Tanzania wherein Mr. Kiran Babla provided the business lead on the Carus contract. He also provided some price indications known to him t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Babla, mother of Mr. Kiran Babla. Thus, this evidences the fact that recipients of the commission were instrumental in getting the sales order from M/s. Carus Chemical Corporation of USA. Further, it is also not in dispute that the assessee company earned gross profit of ₹ 1.71 crores on the sales made to M/s. Carus Chemical Corporation, USA of ₹ 7.23 crores and that the profit after commission was 15.85% and the commission was 7.7% of sales. Further, we observer that Hon'ble Gujarat High Court in the case of Swastik Textile Co. Pvt. Limited v/s CIT (supra) held that commission was allowable as deduction where the revenue had failed to controvert the broker's statement that he had brought the parties of contract together. Thus, on the above facts and circumstances, in our considered view the commission payment was incurred for commercial expediency of the assessee. It is further submitted in the written submissions of the assessee placed on page 147 and 148 of the paper book that during the year under appeal, there were other contracts also for which commission of ₹ 3,05,825/- to Mrs. Jigna K. Bala and ₹ 8,04,693/- was paid to Mrs. Pramodini K. Bal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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