TMI Blog2007 (10) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raining 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT (A) has erred in restricting the export commission to 5 per cent as against disallowance made by the AO at 12.5 per cent without considering the reasonableness and commercial expediency for the outlay. 2. On the facts and in the circumstances of the case and in law, the CIT (A) has erred in admitting the additional evidence during the appellate proceedings disregarding the objection raised by the AO in the remand report that the assessee was provided several opportunities at the assessment stage to authenticate its claim of the expense claimed but failed to do so and, therefore, the additional evidence filed may not be accepted in view of Rule 46A(1). Furthermore, the CIT (A) has also erred in not complying with the provisions of Rule 46A(2) of IT Rules, 1962 and not passing a speaking Order. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing. 3. The assessee is a company. It is engaged in the business of manufacture and sale of float glass and mirror glass. The assessee claimed deduction of a sum of Rs. 10, 07, 22,625 being commission paid to Guardian Glass Export Ltd. (GGE) @ 12.5 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imported capital goods under the Export Promotion Capital Goods (EPCG) Scheme. Such permission was accorded subject to the assessee agreeing to fulfil its export obligations as contemplated under the aforesaid scheme. 6. According to the assessee export sales had to be effected by the assessee in view of the aforesaid conditions. The assessee entered into export sales agency agreement dt. 20th July, 1993 with GGE an associate of GIC under which the later was appointed as the sales agent of the assessee's products in countries of the world other than India. The percentage of commission agreed was 12.5 per cent of the invoice price of all export sales of product sold through GGE. Consequent to change in the law 12.5 per cent commission was permissible at this point of time. 7. We have already noticed that there was a foreign collaboration agreement between GIC, MRL and GACL. Under this agreement and approvals to this agreement, assessee had to pay royalty to GIC at 3 per cent on internal sale and 4 per cent on export. The assessee had entered into a loan agreement with IDBI, IFCI, ICICI, LIC, GIC and UTI. In October, 1992, GIC gave an undertaking to tire financial insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s personnel to look after sales and that Guardian Group located across the world provides services including procuring export Orders, customer service, follow up etc. (b) The AO called upon the assessee to furnish details of parties to whom exports were made through the services of intermediaries, complete documentary evidence like correspondence details of sales personnel of the export agent etc. (c) The AO held that the assessee has given a general reply about services rendered which are normally rendered by any agent. That no evidence to identify the nature of services rendered by the agent with regard to the export business of the assessee was produced by the assessee. (d) Export obligation of the assessee was not a new phenomenon and it existed even when the agreement to pay 5 per cent commission was in vogue. (e) The assessee did not give any valid explanation for the upward revision of commission from 5 per cent to 12.5 per cent. (f) The assessee failed to demonstrate that the percentage of commission charged was reasonable compared with international practice. (g) The assessee had managed affairs in such a way that there is no tax incidence on payment to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of export, as against 5 per cent mentioned in the collaboration agreement of 1990. The Guardian Group is amongst the top four float glass manufacturers in the world with 20 plants in various parts of the world and offices in several countries. The assessee company being a new entrant in the field and having no expertise in marketing of float glass in the overseas market, did not establish any office abroad nor recruited any employees to look after such marketing. The assessee solely relied on the Guardian Group for promotion of export. (b) In the aforesaid factual background, the assessee pointed out that the commission paid to GGE was out of business necessity and was justified on grounds of commercial expediency and that the action of the AO in disallowing deduction for payment of export commission is based only on conjectures and surmises and is not sustainable both in law and on facts. (c) That Guardian Group rendered, inter alia, the following services: (i) regular contact with customers and responding to their enquiries; (ii) procurement of Orders and assistance in establishing the letter of credits wherever required; (iii) informing customers on Order status/d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act clothes the AO with power to disallow deduction for any expenses claimed if the AO is of the opinion that the same is excessive having regard to the fair market value of such services and the legitimate needs of the business. The AO has not brought any material on record to show how Section 40A(2) was applicable to the present case. The provisions of Section 92 provide that where the business between a resident and a non-resident is so transacted that no profits or less than ordinary profits accrue to the resident, then, the AO may determine the amount of profits which may be deemed to have been derived from such business and include the same in the total income of the resident. The provisions of Section 92 of the Act have no relevance to the allowance of claim of deduction of commission. The exports made by the assessee were to unrelated third parties and were not at a price lower than the prevailing international market prices. There is, therefore, no question of invoking provisions of Section 92 of the Act. 10. The assessee also explained as to why it had to effect exports sales and as to how such export sales contributed to recovery of fixed costs to the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collaboration agreement itself its foreign collaborator was aware of the export obligation imposed by the Government of India while approving the collaboration agreement. Moreover, there was hardly any profit arising out of the exports and the appellant was not able to recover even the cost price through exports. Under the circumstance enhancing the commission from 5 per cent to 12.5 per cent to the nominee/affiliates of its collaborator is unreasonable. The AO's reference to Section 40A(2) and Section 92 is, therefore, justified to the extent of disallowance of 6.5 (sic-7.5) per cent (i.e. difference between 5 per cent and 12.5 per cent) as the assessee has failed to establish with any supporting evidences that the payment of commission at 12.5 per cent is reasonable considering the facts of the appellant's case. As far as payment of commission is concerned, the AO cannot bring any identical comparable case as in each case the nature of services to be rendered for earning such commission varies from case to case. Under the given facts and circumstances of the case, the AO is directed to allow commission to the extent of 5 per cent and disallow the balance amount in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forma invoice are available at pp. 92 to 102 of the assessee's paper book. At pp. 374 to 378 the assessee has given the list of customers to whom export sales were made during the previous year. The assessee has also listed communication between the assessee and the sales executives of the Guardian Group and the Orders procured by them. Guardian Industries Corporation, USA is amongst the top four float glass manufacturers in the world and it has 20 float glass plants in the various parts of the world and have wide marketing network having sales executives based in over 40 countries. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance remained in the inventory. The assessee had to depend on exports for disposal of the inventory that was piling up, apart from carrying out exports to fulfill the export obligation (i) imposed by Government while approving the collaboration agreement, and (ii) undertaken under the EPCG Scheme. The assessee being a new entrant in the field did not have any infrastructure or set up for procuring/facilitating export sales. The assessee solely relied on the Guardian Group for promotion of export. All the export Orders/contracts are procured by GGE. The emphasis on exports warranted a much larger role for Guardian in promotion of exports than envisaged at the time of signing the collaboration agreement in 1990. Guardian, therefore, renegotiated export commission to 12.5 per cent of net FOB value of exports as against 5 per cent originally agreed, while signing the export sales agency agreement in 1993. The export commission paid was as per the limits prescribed by RBI. (iv) Others: The exports made by the assessee even after reducing the export commission during the relevant previous year contributed Rs. 34.25 crores towards meeting the fixed cost. The assessee compared to other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 92 of the Act. We are of the view that the action of the CIT(A) in this regard cannot be sustained. Provisions of Section 40A(2) contemplate a disallowance subject to the condition that the Revenue establishes that the expenditure was excessive or unreasonable having regard to the fair market value of the goods and services or facilities for which the payment has been made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom. 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 Section 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 Section 92 were not attracted. We, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company underwent training at different locations between 21st Sept., 1991 and 16th Dec, 1992. This period was admittedly before the plant was set up. In September, 1995 that is the previous year relevant to asst. yr. 1996-97 the assessee received invoice from GIC in respect of amounts payable for imparting training prior to the period when the plant was set up. The amount payable was shown as a deferred revenue expenditure in the balance sheet for the financial year relevant to asst. yr. 1996-97. In the return of income for asst. yr. 1996-97, the entire sum was claimed as deduction as a revenue expenditure. The assessee claimed that because the invoice was received from GIC during the previous year the liability crystallised only during the previous year. That the assessee deducted tax at source and deposited the same to the credit of the Central Government and, therefore, the deduction of the said sum as an expenditure should be allowed in view of the provisions of Section 40(a)(i) of the Act. The AO was of the view that since these expenses were prior to the setting up of the plant they were capital expenditures and were to be capitalized. Since the assessee failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. The AO called upon the assessee to explain as to how the pre-payment premium is allowable deduction in its entirety during the asst. yr. 1996-97, more so in view of the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. C.A.T. (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). In response thereto the assessee submitted that Section 36(1)(iii) of the Act allows deduction for interest paid on moneys borrowed for purposes of business. That Interest is defined in Section 2(28A) of the Act as under: Section 2(28A)--Interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. Lump sum repayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loan 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nize the concept of deferred revenue expenditure. 26. The decision of the Chennai Bench of the Tribunal in the case of 'Overseas Sanmar Financial Ltd. v. Jt. C.I.T. (2004) 87 T.T.J. (Che) 556 : (2003) 86 I.T.D. 602 (Chennai) also supports the plea of the assessee. Besides the above Section 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. 27. Ground No. 4 raised by the assessee reads as follows: 4. That on the facts and circumstances of the case the CIT (A) erred in not allowing/directing the AO to allow depreciation in terms of Section 32 of the Act. For the relevant previous year the return of income was filed by the assessee declaring nil income (after set off of brought forward business loss). The assessee did not claim allowance of depreciation under Section 32 of the Act. The return of income was assessed under Section 143(3) of the Act at nil income, without allowing depreciation. In the course of the hearing of the appeal for asst. yr. 1996-97 before the CIT(A)-X, the AO, vide letter dt. 28th March, 2000, requested that depreciation be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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