Evidence of services rendered by brokers and agents some suggestions particularly when brokers and agents are unorganized free lancers and old regular agents.

[C.A. DEV KUMAR KOTHARI]

Link         DCIT Vs. Navketan P. Ltd.

Services of brokers and agents:

Services of brokers and agents are availed for the purpose of gathering market information and keeping updates about requirement of goods at customers end. The brokers and agents also act as mediator between buyers and sellers. They also provide information about financial and physical capacity of parties to execute business transactions. Brokers and agents also ensure or try to ensure compliance of terms and conditions between parties and performance of contracts. 

Organized vis a vis  unorganized /individual brokers:

In case of big brokerage firms they have system of maintaining records of dealing and most of matters are made out in writing. There are standard documents executed. In such cases, therefore, it is not difficult to establish the service aspect. For example in case of Tea auctioneers, share brokers, public auctioneers etc.

However, in case of unorganized brokers who are individuals or small firms, difficulty arises. This is because most of work is done verbally. In such cases, it is advisable to maintain some record for such services.

Regular and old  agents:

In case of regular and old agents many times verbal agreement take place for renewal of service or service is obtained as and when required and normal terms and conditions and trade practice are flowed. In such circumstances, in case of small and medium organization formal communications in writing is rare and most of work is done verbally. However, it is advisable to make some correspondence and agreement or MOU and also written communications about services provided agents. This may be required by the tax authorities.

The businessman can pay to any  service provider  on satisfaction of services availed. The businessman’s  satisfaction is about the result which he got and it is based on real time evaluation. However,  the AO  may require satisfactory evidence after few years when he assessee or reassess the income and scrutinize  expenses. At a later point of time evidence in form of written documents can only help to derive at satisfaction. In absence of satisfactory evidence and explanation the AO may disallow expenses if he is not satisfied about evidence. Therefore, it is desirable that some documents about services should be prepared, even if amount to translating verbal conversations in meeting with agents, joint meeting with  sellers, buyers and agents, telephonic conference etc.

Examples of correspondence and documents:

Depending on nature of business, transactions, manner of execution of deals, period covered for such execution etc. there can be different type of correspondence. In this write-up some illustrative correspondence and evidences are discussed. 

Introduction of parties and initiation of business:

Brokers and agents introduce parties and causes commencement of business between two parties. The reference, recommendations and information provided by brokers and agents act as confidence building factor between parties. Over a period of time the relations between buyer and seller also develops, yet the role and  importance of brokers and agents remain. The same may be some time on as and when required, yet it is important.

Evidence of services:

In era of fast communication and when relations between parties is stable and confidence is developed the business is done even on phone calls. Brokers also introduce parties verbally. Sometimes even physical meeting and get together is not required. Introduction and issue of orders can be based on telephonic calls, informal meetings in morning and evening walk or in social gatherings. The service of broker and agent is impressing parties to have mutual confidence and transact business.

Some services are physically rendered however, the broker may act verbally and physical work like receiving order and payments may be performed by the concerned parties. The broker’s role may be limited to telephonic calls to perform any work or take any action promptly.      

Evidence of services:

It is ground reality that a lot of business is done in informal manner. Brokers and agent introduces parties and take follow-up actions by verbal communications. Sometimes broker and agent do not show identity as a broker or agent but as a representative of concerned party. In such circumstances it is difficult to have concrete documentary evidence of services. However, tax authorities are not aware of ground realities and many times ignore ground realities and insist for definite documentary evidence of services rendered. Therefore, it is advisable to prepare and keep documentary evidences for future reference.

In case of developed and old relations the role of brokers is to maintain mutual confidence and to keep abreast to the concerned parties about any adverse development. In such cases the work is carried as a routine and sometimes the brokerage and commission may be considered to some extent as brokerage in nature of overriding commission.

The correspondence:

Correspondence with the brokers and agents can be in respect to the following matters:

1. Introduction of parties,
2. Minutes of meetings amongst parties.
3. Agreement with agents.
4. Confirmatory correspondence about verbal discussions.
5. Keeping informed about changes in financial, and physical capabilities  and other status of parties. On some issues agent may not put things in writing – e.g.  about slightly falling credit worthiness or some minor troubles at place of parties. They need to keep confidentiality. However, in case of major trouble, they become duty bound to keep the client informed.
6. Informing requirement or likely requirement of goods.
7. Information about availability and increasing availability of goods and services.
8. Changes in market prices, market parameters etc.
9. Meetings and discussions.
10. Obtaining orders.
11. Follow-up about execution of orders.
12.  Obtaining   inspection report, rejection reports and  suggesting corrective measures,
13. Obtaining sales tax and other tax forms.
14.  Obtaining payments.
15. Avoiding and resolving disputes.
16. Correspondence for other incidental services.

Making out some correspondence between principal and agent and the concerned third party that is customer or supplier is suggested to meet the test of services rendered and to satisfy the concerned authorities about services rendered with some documentary evidence.

  A recent case before ITAT.

In case of Navketan P. Ltd the matter came about allowability of commission paid on purchase and sale of goods. During scrutiny the AO only asked about details of payments and services. Which were filed before the AO. During course of discussion the A/R of assessee also explained the nature of services. It was verbally  informed to the AO that the agents were old and regular agents of assessee and commission was paid for services in earlier year and subsequent years as well. However, while framing assessment order learned AO took view that any evidence of services has not been produced so as to establish that expenditure is incurred exclusively  for the business. Therefore he disallowed the commission paid. Before the CIT(A) the assessee took the following ground of appeal in this regard:

1. For that learned A.O. was wrong in disallowing commission payment of Rs.8,70,807/- the same may kindly be allowed.

In written submission the following explanation was given before the CIT(A):

In normal course of business assessee paid commission for services for procuring and execution of orders while carrying business activities.

The details and evidence as required by the A.O. were furnished/ produced, the matter was discussed. In the written submission, as noted by the A.O. it is also submitted that “Commission was paid on sales of these welders (welding Gensets) and hence is allowable as business expenditure”. Without asking any further question from the assessee or examining agents, the learned A.O. disallowed commission payment. This is not proper.

Learned A.O. had made query only in respect of two commission payments of Rs.3,50,100/- and Rs.4,16,625/- aggregating to Rs.7,66,725/-. The nature of payment and expediency for payment was explained.

Without making any query for another payment of Rs.1,04,082/-, which has been disallowed on assumption that this pertained to Pig Iron procured from Tata Metalliks Ltd. and sold to RSI Ltd. This presumption is incorrect and based on wrong facts. This payment was for procurement of other items of Iron & Steel about which learned AO did not ask any question or explanation during whole assessment proceedings. Agents are regular agents working for the company. Commission payment has been allowed in past and future also.

Learned AO disallowed commission on certain presumptions and conjecture, without any finding as to the same not having been incurred for the purpose of business.

The assessee being a company paid commission when the concerned officer of the company approved the bills.  Assessee deducted tax at source from commission paid wherever applicable. Copy of bills and TDS certificates are enclosed. All payments were made by A/c payee cheques.

Learned A.O. also did not provide reasonable opportunity to explain case of assessee after expressing his views.

Copy of written submission and other documents as  filed before the CIT(A) were also filed before the AO. However, the AO did not make any representation or objection on the same before the CIT(A).

Learned CIT(A) allowed the claim on the ground and reasoning based on the written submission and his finding are recorded in the relevant portion of the order of the Tribunal in appeal preferred by the revenue In Para 10-13 reproduced from the order of ITAT. Before the Tribunal also it was emphasized that learned AO asked details and those were furnished. He never asked to produce evidence of services. He has not established that payment was not for business requirements. Assessee company having introduced reasonable internal check and control the payments made after due verification by concerned officers of company is actual expenditure incurred for the purpose of business . That payments were also made in two or more tranches to agents on  different stage of completion of their work and final payment was made after full payment was received and earnest money and retention money was released by customer and the officers of company were satisfied about the serviced rendered by agents. Therefore it was submitted   that the learned  CIT(A) has rightly allowed commission payment and his order be confirmed.

From Order of ITAT in  ITA No. 2111/Kol/2010 (Revenue’s appeal)

The revenue’s ground of appeal in respect to commission, as reproduced by the Tribunal in para 2 of  the order reads as follows:

“ (iii) That on the facts and in the circumstances of the case Ld. CIT (Appeals) has erred in deleting the addition of Rs. 8,70, 807/- on account of commission under irrelevant considerations when there is no evidence brought in record to prove that the commission agents provided genuine services which are wholly and exclusively related to the commercial need of the business.”

The observations and order of the ITAT are in paragraph 10- 13 of the order which read as follows:

“ 10, Ground No. 3 is relating to deletion of addition of Rs.8,70,807/- on account of commission. The facts of the case are that the Assessing Officer disallowed the expenses of Rs.8,70,807/- on account of commission payment as the submissions of the assessee was found to be not acceptable as it was not stated anything about the nature and extent of services rendered by commission agents to effect sale of welding generator set. There was also nothing mentioned in the sale hills that assessee procured certain services from those agents to justify commission payment. In appeal, the Ld. CIT (A) deleted the addition. Aggrieved by the said order, the revenue is in appeal before us.

11. At the time of hearing before us. the Ld. DR placed heavy reliance on the order of the Assessing Officer and submitted that the Id. CIT(A) was unjust in deleting the addition of Rs.8,70,807/- on account of commission under irrelevant considerations a when there is no evidence brought in record to prove that the commission agents provided genuine services which are wholly and exclusively related to the commercial need of the business. He, therefore, urged before the bench to set aside the order of the Ld. CIT(A) and restore that of the Assessing Officer.

12. On the other hand, the Ld. Counsel for the assessee placed heavy reliance on the order of the Ld, CIT(A) and urged before the bench to confirm the same.

13. We have heard the rival submissions and perused the material available on record, We find that the Assessing Officer made the disallowance on account of payment of commission as the assessee was unable to justify the payment of commission which was wholly and exclusively related to business purposes. We also found that while allowing the assessee’s claim the Ld. CIT(A) has held as under:

“I have carefully gone through the submission of the appellant as well as the order of the A.O. The payments were made against bills duly passed by the officers of company. The payees are assessed to income tax. As explained before A.O. and before me different nomenclature is used and there is no difference in welder” ‘welding plant and welding genset. All these are machines in which the assessee deals.

Further as explained by the appellant P.V. Sharat Babu and Deejay Industries are regular agents of the company for several years and commission paid to them had always been allowed. This has not been disputed by the A. O. Commission of Rs. 1, 04,082/- paid to Krishna Kumar Mundra HUF had been paid for services as agent It appears that the A.O. did not consider the submissions of the assessee and made the additions on certain presumptions. In case the assessee (being a company) the discretion of ifs officers have to be relied upon by the assessee. The payment being made in the normal course of business’ and after proper authorization by officers of company and when the accounts of assessee company being approved by the Board of Directors and shareholders under the companies Act there should generally be no reason to doubt the appellant.

This ground of (assessee ) is allowed and the disallowance of the commission payment of Rs.8,70,807/- is deleted.

Since the above finding of the Ld. CIT(A) remained uncontroverted before us by adducing any cogent material on behalf of the revenue authorities, we do not find any necessity to interfere with the order of the Ld. CIT (A) and the same is hereby upheld. This ground of appeal of the revenue also fails.”

Author’s  observations and analysis:

The author appeared before the Tribunal and relied on decision of CIT(A) and written submissions and evidences produced  before him. He also pointed out that in the requisition issued by the AO, the AO only asked for details of (a) agents to whom commission was paid  (b) amount paid and (c) details of services. Accordingly assessee filed these details along with TDS certificates issued in respect of tax deducted from commission paid.  It was also pointed out that at no time AO asked to verify service aspect, and he never asked to produce evidence of services. It was also pointed out that commission was paid to agents in stages on completion of work. He pointed out that, in absence of any written or even verbal requisition to produce evidence of services the Authorized Representative  of assessee who appeared before the AO  did not produce the same. Referring to bills of agents it was pointed out that they were duly verified and passed for payment by concerned officers of company in terms of internal check and control which is in place in the system of verification of claims for payment, eligibility of claimant and then only payment was made. Referring to TDS certificates it was pointed out that  two or payments were made to agent in stages on completion of work by them.

Though some of above contentions  are not noted in the order of the CIT(A) and  Tribunal, however, they have  considered the same also while considering the allowability of commission. Thus in this case the payments on account of commission were  allowed as the same were paid to regular agents in many earlier years and subsequent years also, and the payments were authorized by concerned officers of company and the payments were normal expenditure of business, and the same were approved by officers of company who can approve only on satisfaction of services rendered by the agent and similar payments have been allowed in other years including some earlier years and some subsequent years.  

Desirability of producing evidence:

Many times the AO  makes requisitions and ask for details and may not require evidence.  However, while framing orders, they mention that the assessee had not furnished some things or evidence. Therefore, wherever, there is some chance that AO may  need  further evidence  or explanations it is desirable that the assessee should  himself give explanations, details and some evidences so that disallowance due to  an after though of the AO does not take place.

 A general letter at the time of or after last hearing:

A noted earlier many times AO makes additions and disallowances and in the order mentions many things which are his after thoughts. The AO do not require many things during hearing however, while passing order he presumes that the assessee should have filed many more documents and explanations. Therefore, at the time of last hearing preferably when last installments of documents is being filed a paragraph on the following lines can be added in the covering letter:

We believe that in view of requisitions issued by you and discussions which we had from time to time we have filed all details and evidences** as required by you to be filed and explained various issues. In case any further documents , explanations, or evidences are required, kindly inform us the same and allow us the opportunity to furnish the same.

** { Add if anything is pending  “ Excepting details/ evidence of …. For which kindly allow us  further time}