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2007 (10) TMI 322 - AT - Income TaxPayment of Commission - Services rendered by the agent - restricted allowance to 5 per cent as against 12.5 per cent - Disallowance under the provisions of s. 40A(2) or s. 92 - export sales agency agreement - collaboration agreement with GIC, M/s GIC trained personnel of the assessee company in the operation and maintenance of float glass plant and also the manufacturing and marketing of float glass - Nature of Expenses - Capital Or Revenue - Expenditure incurred prior to setting up of the plant - Deduction u/s 43B - Prepayment premium paid to IDBI. Payment of Commission - Services rendered by the agent - HELD THAT:- The services rendered by GGE as part of the Guardian Industries Corporation, USA have already been enumerated in para 14 of this order. At pp. 81 to 91 and 190 to 224 there are several correspondences between the assessee and the various sales agents of the Guardian Group across the world. These correspondences are in the form of emails. The assessee has also placed in the paper book evidence regarding export sales in the form of invoice, shipping bills, etc. There are two realisation certificates of export products. In this realisation certificate issued by the bank the payment of export commission is duly reflected. In the light of the above documentary evidence on record, we are of the view that there was sufficient evidence before the AO regarding services rendered by GGE for which export commission had been paid by the assessee. We, therefore, hold that the assessee has established that services were rendered by the agent justifying payment of commission. Restricting the disallowance to 5 per cent as against 12.5 per cent - HELD THAT:- The submissions on behalf of the assessee have not been properly construed by the AO. We may also add here that once it is held that services have been rendered by the agent the quantum of commission that has to be paid is purely the discretion of the assessee and the Revenue cannot sit in judgment over the same. We, therefore, hold that there was no basis to restrict the Claim of commission at 5 per cent as against 12.5 per cent claimed by the assessee. Application of the Provisions of s. 40A(2) or s. 92 - HELD THAT:- We do not find any evidence as to what is the fair market value of the services for which assessee paid commission. The percentage of 5 per cent agreed between the parties prior to 20th July, 1993 agreement cannot be said to be the fair market value. The CIT(A) has proceeded on the basis that the same was the evidence of fair market value. Even on the question of application of s. 92, we notice that the Transfer Pricing Officer in asst. yrs. 2002-03, 2003-04 and 2004-05 has accepted the percentage of commission paid by the assessee as one at arm's length price. In these circumstances we are of the view that even provisions of s. 92 were not attracted. We, therefore, hold that there was no justification in restricting the allowance of commission at 5 per cent by invoking provisions of s. 40A(2) or s. 92 of the Act. We therefore allow the grounds of appeal of the assessee on this issue and dismiss the grounds of appeal of the Revenue on this issue. We may also add that the Revenue has raised an issue regarding violation of provisions of r. 46A of the Rules. On this issue we find that the CIT(A) has afforded opportunity to the AO and there cannot be any complaint in this regard. The CIT(A) also has given a finding that the documents filed by the assessee were necessary to rebut the observations made by the AO against the assessee in the order of assessment. The CIT(A) has also held that the assessee was prevented by sufficient cause from placing the additional evidence during the course of assessment proceedings. Therefore, the objections of the Revenue in this regard are without any basis. Nature of Expenses - Capital Or Revenue - Expenditure incurred prior to setting up of the plant - HELD THAT:- We are of the view that the item of expenditure in question was admittedly incurred prior to setting up of the plant and, therefore, they were to be capitalized as part of plant and machinery. The fact that the payment was made during the previous year or that tax at source is deducted during the previous year will not convert the capital expenditure into the revenue expenditure. The provisions of s. 40(a)(i) are provisions enabling Revenue to make disallowance. The assessee cannot seek to rely on those provisions when the item of expenditure was admittedly capital expenditure. We, however, direct that the training fee be capitalized as part of plant and machinery, depreciation be allowed thereon. Thus, the above grounds are partly allowed. Deduction u/s 43B - Prepayment premium paid to IDBI - HELD THAT:- The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loans aggregating to Rs. 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of s. 36(1)(iii) r/w s. 2(28A) of the Act prepayment charges being interest paid on moneys borrowed for purposes of business, are to be allowed deduction as revenue expenditure. The prepayment premium being revenue expenditure, is to be allowed deduction in the year of accrual thereof, since the Act does not recognize the concept of deferred revenue expenditure. The decision in the case of Overseas Sanmar Financial Ltd. vs. Jt. CIT [2001 (2) TMI 303 - ITAT MADRAS-C] also supports the plea of the assessee. Besides the above s. 43B(d) also permits claiming deduction on actual payment. Even on this basis the claim of the assessee deserves to be accepted. Ground No. 3 is accordingly allowed. In the result the appeal by the assessee is partly allowed, while the appeal by the Revenue is dismissed.
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