PAYMENT OF COMMISISON – some aspects as to allowability

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Relevant provisions: Section 28, 37, and 145 of the Income Tax Act, 1961.

Recent judgments referred and analysed:

COMMISSIONER OF INCOME TAX-II Versus PARTH LABORATORIES PVT LTD -2013 (4) TMI 137 - GUJARAT HIGH COURT

Deputy Commissioner of income-tax, Versus M/s. Navketan Pvt. Ltd. -2011 (2) TMI 10 - ITAT, KOLKATA

This judgment has been analyzed in earlier article.

Commission:

Commission is paid in business to get regular information about markets, credibility of parties (customers and /or suppliers), requirement of customes, availability of material with suppliers, market prices and expectations etc.

And for services like helping in obtaining orders, execution of contracts, inspection and approval of goods, approval of bills and receiving of payments and related documents.

Agents are also expected to intervene in matters as and when required and also in settling disputes.

Employed persons vis a vis agents:

In case a person is employed say as marketing manager, some of such work is done by him and he is paid salary. Payment of salary to marketing team is allowed without much enquiry and requirement of evidences. The payment made on basis of payroll is allowed without much fuss by the tax authorities. However, when same work is done by a free launcher agent and brokerage or commission is paid to him, the AO insist on positive documentary evidence, though positive documentary evidences is not a usual practice in such activities. However, it appears that for satisfaction of authorities and courts, one should have recorded what has been done verbally preferably on real time basis. Thus what you have spoken to agent should also be communicated in writing in one or other suitable form of communication.

Allowability:

Allowability of remuneration like salary to marketing team or brokerage or commission is considered under section 37 or section 28 read with S. 145 that is method of accounting. Method of accounting, should include internal check and control and process of accounting and payments.

Therefore, for allowability of any payment, internal check and control and payment procedure are also important aspects and can be considered as primary evidences. If a payment o salary to marketing team or commission payment to agent is properly claimed, checked, passed and paid after due diligence then there should not be a doubt by tax authorities.  

Earlier article on same subject:

Evidence of services rendered by brokers and agents some suggestions particularly when brokers and agents are unorganized free lancers and old regular agents. -http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1193

Commission payments:

Commission payments are made to agents or other service providers for helping in getting market information and executing sales and realization of payments etc. For marketing, reference of known persons is useful in building confidence and maintaining confidence. This is reasons that many times after introduction of a party / customer, dealing may takes place directly between seller and buyer, still the existence and importance of the agent (introducer) is not forgone and the parties understand that the agent is still a mediator and his services can be needed any time. This is reason that two parties who may be dealing directly also keep the mediator who introduced parties and who has influence over both parties. In case of expediting any mater connected with deal, and to resolve disputes, the mediator is very important. Most of work of mediator can be done over phone still his services are important for the business. Therefore, in each case extent of services may not be exactly ascertainable, yet commission is payable to mediator whose service have been availed and can be availed as and when required.

The tax authorities must understand business aspects:

The tax authorities must also understand business aspects and consider expenses in a reasonable manner considering ground realities of business. However, many times they either do not try to understand or even after understanding the same, do not give proper credence to business aspects. Just with a view to disallow expenses they hold that evidence of services have not been established or that there is no evidence of services to justify payment of commission or services are not commensurate with business etc.

Internal check and control in case of companies and large organizations:

In case of companies management is looked after by human agencies headed by the Board of Directors of company and team of officers including directors. In other large organization also business is looked after by employees. The management of any organizations introduces reasonable system of internal check and control and all payments are suitably verified by officers of company or organization. Once a payment is verified and paid after due compliance of internal check and control, the tax authorities should generally not disbelieve payments. However, as a tendency, many officers just look on all deals with suspicion and consider business man as chor. This may be due to environment in which they work and therefore, ignore that business cannot be run without trust and honesty amongst dealing parties and persons.

CIT Versus PARTH LABORATORIES PVT LTD - 2013 (4) TMI 137 - GUJARAT HIGH COURT

In this case the AO and CIT(A) both disallowed commission paid by assessee to its agent. They took view that the assessee failed to prove that the alleged commission agent rendered any service , no evidence was adduced by the assessee that any amount of assistance was actually rendered by the said agent. The agreement was filed before the CIT(A) as an additional evidence. The CIT(A) disbelieved the agreement and payment made in pursuance of the same for the reasons given by the AO.

Tribunals finding:

Assessee preferred appeal against the order of CIT(A) before the Tribunal. Tribunal found that the assessee gave evidence in the form of copy of the agreement, the bank cheque clearance statement, contra copies of ledger account and copies of correspondence with M/s.Mehta Trading Co., Surat, which would sufficiently indicate that the payments in question were genuine payments.

The Tribunal accepted the genuineness of agreement and payment of commission and set aside the addition of commission.

Observations and order of the High Court:

While discussing the order of CIT(A) in paragraph 3 of the reported judgment, the High Court observed that “It appears that there was an agreement with the said agent in helping in securing information from various companies from their own sources and intimating the assessee before hand giving him time to manufacture material as per companies' specifications, quantity and to enable them to deliver the same as expeditiously as possible. It appears that the assessee is a small scale manufacturer and it depended on consistent order so that the plant remained busy in working. According to the assessee, it was also the responsibility of the agent to get the payment order released in time by using his influence in various companies through his contacts.

In paragraph 6 – 8 the Court has observed and ordered as follows:

After hearing Mr.M.R. Bhatt, learned Senior Counsel appearing on behalf of Revenue and after going through the materials on record, we find that the nature of assistance indicated in the agreement cannot be proved by any positive evidence in that sense.

When the agent was engaged for influencing various parties for early release of payment and for giving information and it appears that the payments were actually made to them by account payee cheque, in our view, in absence of any evidence that the alleged agent was a fake person, the same should not be disbelieved. In the case before us, the Revenue could not place any evidence before us to the extent that the actual payment was not genuine or that the agent has not disclosed such payment in its Return. In absence of such evidence, once it is proved that there existed a written agreement and consequent to such agreement payments were actually made from time to time by account payee cheques, having regard to the nature of work the agent was required to perform, in our opinion, the Tribunal below was quite justified in deleting the addition.

8. We find no reason to interfere with the said finding recorded by the Tribunal. Thus, no substantial question of law is involved in this appeal and consequently, the same is summarily dismissed.

Conclusion:

In this case there was a written agreement, agent was appointed for influencing customers for obtaining information, orders and timely payment, payment was made by a/c payee cheques and there was no evidence that agent was a fake person.Theu even if there was no positive evidence of services rendered, the Tribunal was justified in allowing commission paid by assessee.

Earlier article:

In earlier article the author had discussed the decision of ITAT in case of Case of Navketan P. Ltd. -2011 (2) TMI 10 - ITAT, KOLKATA In that case besides service aspects, severl other contentions were also raised, which found favorable consideration by the Tribunal.

In the article the author had also suggested that it is desirable to keep written evidences to prove services rendered by agent. Though ground reality is that most of work of agent is done verbally by holding conversations in meetings, or over telephone. It is desirable that the same should also be recorded in written communications by way of letters, emails and SMS, record of phone calls, and written notes in form of information exchanged, minutes of meetings with customers, and references in correspondence.

It is truth that businessman generally work in good faith and with ‘honesty is best policy’ in mind. In small and medium sized business most of transactions are carried on basis of words spoken and there is no dispute. Even if some disputes arise, the same are settled mutually. Considering the volume of business and number of business transactions we find that there are hardly any disputes related with business. The disputes are also settled amicably and mutually with help of agents or reference parties. Such settlements are also verbally in case of small organization. This is ground reality.

However tax authorities generally do not believe on such ground reality. The courts want evidence. Therefore, to satisfy tax authorities (they are also a court or tribunal), and courts it is desirable that even when work is mostly carried verbally, communications should be exchanged so that requirements as to evidence can be satisfied.