2018 (11) TMI 1902 - AT - Income Tax

Disallowance of commission and annual maintenance expenses - AO issued notices u/s 133(6) to the two commission agents as well as the three service providers who were appointed by the assessee and the notices went uncomplied - as notices went un-served the AO disbelieved the genuineness of the payments made by the assessee and accordingly disallowed the commission expenditure and annual maintenance expenses - HELD THAT - As the nature of services being provided by the service providers is abundantly clear. The fact that the services were indeed provided is evident from the fact that the assessee was able to generate corresponding revenues in the form of annual maintenance service fees from their customers. We note that before the lower authorities the assessee had sufficiently demonstrated the linkage between the revenues earned and the payments made to the service providers. On these facts and circumstances we find that even in respect of the payments made to the service providers the assessee had duly substantiated the commercial as well as business expediency of such expenses before the lower authorities. We thus agree with assessee that when the revenues derived in the form of income from sale of telecommunication equipments and annual maintenance fees were accepted and not disputed by the Revenue then it was unjustified on their part to disbelieve the corresponding expenses incurred to derive such income. When the entire sequence of transactions starting from importing of telecommunication equipment soliciting of orders tendering process delivering products after sales support provided to customers annual maintenance services provided to the customers realization of payments etc. has not been disputed nor disbelieved by the lower authorities then they could not disbelieve or doubt the genuineness of the commission and service fees paid to the agents service providers respectively and treat it as bogus expenses only because the notices issued to the payees went un-served. Assessee had discharged the onus cast by law in proving identity and creditworthiness of the payees as well as the genuineness of the agreements entered into with them - assessee has placed all the relevant details documents which the assessee was required to maintain in the ordinary course of its business. Like any other item of expense the relevant details such as copies of the agreements tax invoices service tax registration certificates confirmation of accounts details of payments details of tax deducted along with the lower withholding tax certificates provided by the payees etc. were furnished before the lower authorities which sufficiently proved the genuineness of the payments made. It is further noted that the assessee had also demonstrated the linkage between the revenues earned from the customers and the commission paid to the agents as well as service fees paid to annual maintenance service providers. The extracts of bank statement of the assessee and the confirmation furnished by the payeesare also available on record. Furthermore we note that the parties to whom the payments were made were not associates or related enterprises of the assessee. Nothing has been brought on record that the payments made by the assessee had come back to it. In the circumstances even the creditworthiness of the customer and the genuineness of the transaction was duly established by the appellant. Commission was paid to for procuring sales orders and the service fees was paid towards the annual maintenance contracts obtained from telecom companies sub-contracted to the payees. We note that the copies of invoices provide the complete details of orders for which the payments were made. The payees had also set out its PAN STRN in the invoices which was duly signed stamped. The service tax registration certificate of M/s Bhumi ConsultantsPvt Ltd established that they were in the business of providing business auxillary services and therefore it had charged service tax @ 12.36% on the commission as well as service fees billed to the assessee. We note that similar information about the nature of business is also discernible from the service tax registration certificates of other payees which corresponded with the services rendered by them to the assessee. The service tax liability charged by the payees was also duly paid discharged by the assessee. We further find that the assessee has furnished its relevant bank statements which substantiate the actual payment of commission service fees was received by the payees through normal banking channel. We particularly note that the assessee deducted deposited TDS in accordance with withholding tax certificates provided to the payees u/s 197 of the Act by ITO (TDS) at Kolkata. The correctness and/or genuineness of the certificates issued by the Department u/s 197 of the Act has not been denied or disputed by any of the lower authorities. We understand that the payees had made the applications u/s 197 of the Act.It is after due examination of their accounts estimate of income past history etc. that the lower withholding tax certificates were issued by the TDS Department. This certificate is therefore an important piece of evidence which clearly substantiated the identity and creditworthiness of the payees. In the instant case the assessee had made commission payments to certain North Eastern Indian residents. In the course of assessment the AO had issued notices u/s 133(6) to the brokers which were returned unserved. The AO thus observed that the assessee could not establish the identity of the brokers and accordingly disallowed the commission payments. On appeal the High Court held that mere fact that the broker were not found at the address furnished by the assessee did not prove the fact that the payments were ingenuine. The Court observed that in this modern era it may not be possible for the assessee to know the brokers personally or be aware about their whereabouts. The High Court noted that whatever addresses was furnished to the assessee by the brokers had been disclosed to the Income-tax Department. The Court noted that the payments were admittedly made by cheque after deduction of tax. In this background the Court rejected the Revenue s case and held that when the payment of commission is properly recorded in the books maintained by the assessee in the ordinary course of business the payments are made by account payee cheques after deduction of tax then such commission payments could not be disallowed. The assessee has furnished complete details of payees including copies of invoices PAN ST certificate confirmation and certificate u/s 197 of the Act. We note that the AO was unable to point out any specific defect or infirmity in the details furnished by the assessee. In our considered view mere non-service of notice u/s 133(6) does not make an assessee bogus or an entry operator. Further the fact that the correctness genuineness of the certificate u/s 197 has not been doubted by the AO it cannot be said that certificate u/s 197 was issued by the Department to bogus or non-existent entities. Instead it went on to establish the identity of the payees and that they were regular income-tax assessees. We therefore note that the assessee had duly discharged its onus of substantiating the genuineness and business expediency behind the payments as well as the identity creditworthiness of the payees. We therefore hold that the lower authorities were not justified in disallowing the expenses incurred towards commission and annual maintenance fees - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Disallowance of annual maintenance expenses.

Detailed Analysis:

1. Disallowance of Commission Expenses:
The main grievance of the assessee was the disallowance of commission expenses amounting to Rs.1,92,65,164/- by the AO, which was confirmed by the CIT(A). The assessee, engaged in the business of selling and maintaining imported telecommunication equipment, had appointed liaison agents to provide marketing services. The AO disbelieved the genuineness of the payments as notices issued u/s 133(6) to the commission agents went un-served. The Ld. AR substantiated the genuineness of the expenditure with extensive documentation, including agreements, correspondence, tax invoices, confirmations, lower tax deduction certificates, and bank statements. The tribunal noted that the assessee had discharged its onus by providing all relevant documents and that mere non-service of notices could not make the payments bogus. The tribunal held that the role of agents in the business was undeniable and that the payments were made through proper banking channels with TDS deducted as per lower withholding tax certificates issued by the department.

2. Disallowance of Annual Maintenance Expenses:
The AO also disallowed annual maintenance expenses amounting to Rs.4,40,58,520/- due to the non-compliance of notices issued to the service providers. The Ld. AR provided evidence such as appointment letters, tax invoices, confirmations, and service tax registration certificates to substantiate the payments. The tribunal noted that the assessee had provided substantial servicing solutions to reputed telecom companies and that the payments were made through proper banking channels with TDS deducted as per lower withholding tax certificates. The tribunal found that the assessee had sufficiently demonstrated the linkage between the revenues earned and the payments made to the service providers. The tribunal held that the non-service of notices alone was not sufficient to disallow the expenses and that the lower authorities failed to bring any material evidence to prove the payments were bogus.

Conclusion:
The tribunal concluded that the lower authorities were not justified in disallowing the expenses incurred towards commission and annual maintenance fees. The tribunal directed the AO to allow the deduction for the expenses in arriving at the profits of the business. The appeal of the assessee was allowed.