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Asst. Commissioner of Income tax Dy. Commissioner of Income-tax Versus M/s. ITW India Ltd.

Deduction allowable under S.80HHC - CIT(A) in confirming the action of the Assessing Officer in excluding interest income while computing the profits of the business for the purpose of determining the deduction allowable - Held that:- This issue is squarely covered in favour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee’s own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others .....

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order of the learned CIT(A) - Decided against assessee.

Allowing deduction under S.80HHC with reference to the eligible profits of the business as reduced by the amount of deduction allowed under S.80IB - Held that:- A similar issue has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of Associated Capsules P. Ltd. V/s. DCIT (2011 (1)787 - BOMBAY HIGH COURT) holding that the amount of profit allowable as deduction under S.80IA of the Act is not .....

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A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in Sudan with the price charged by the assessee company to its AE for the similar products. The AO/TPO shall determine the Arm’s Length Price by taking the arithmetic mean of the prices charged by the assessee company to its non-AEs and app .....

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ough the documentary evidence filed by the assessee in the paper book in support of the claim of the assessee on this issue, and find that the same mainly comprising of e-mails and correspondence exchanged with the concerned tow parties is only self serving evidence, which is not sufficient to establish the claim of the assessee of having received the services from the concerned two parties, especially when there is no third party evidence like any correspondence or communication from M/s. Sudan .....

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ither on evidence or even in the facts of the case, and hence, upholding the order of the CIT(A) confirming the disallowance made by the Assessing Officer on this issue, we dismiss grounds of the assessee’s appeal. - Decided against assessee. - ITA No.206/Hyd/2009, ITA No.190/Hyd/2009 - Dated:- 27-3-2015 - Shri P.M.Jagtap And Shri Saktijit Dey JJ. For the Appellant : Shri Rupesh Jain For the Respondent : Shri D.Sudhakar Rao DR ORDER Per P.M.Jagtap, Accountant Member : These two appeals, one file .....

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uction allowable to the assessee under S.80HHC of the Act. 3. As agreed by the learned representatives of both the sides at the time of hearing before us, this issue is squarely covered in favour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee s own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others wherein it was held by following the decision of Hon'ble Delhi High Court i .....

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ar to that of assessment year 2003-04, we respectfully follow the order of the coordinate bench for the assessment year 2003-04 and uphold the impugned order of the learned CIT(A), confirming the action of the Assessing Officer in excluding the interest income on fixed deposits from the profits of the business for the purposes of computing the deduction allowable to the assessee under S.80HHC of the Act. Grounds No.1 and 2 of the assessee s appeal are accordingly dismissed. 4. In ground No.3, th .....

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d Capsules P. Ltd. V/s. DCIT (332 ITR 42) holding that the amount of profit allowable as deduction under S.80IA of the Act is not required to be reduced from the profits of the business of the undertaking, while computing the deduction under any other provisions under Heading C in Chapter VI-A of the Act, which also includes S.80HHC. It is also observed that a similar issue has been decided even by the Hon'ble Karnataka High Court in favour of the assessee in the case of CIT V/s. Millipore I .....

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Court in the case of Millipore India P. Ltd.(supra), which are in favour of the assessee, relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. Vegetable Products Ltd.(88 ITR 192). This ground is accordingly allowed. 6. Grounds No.4.1 to 4.3 raised in the appeal of the assessee are not pressed by the learned counsel for the assessee, at the time of hearing before us. The same are accordingly dismissed as not pressed. 7. Grounds No.4.4 to 4.11 involve a common issue re .....

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9,33,216. As noted by the Assessing Officer during the course of assessment proceedings, international transactions were entered into by the assessee company with its AE involving inter-alia export of finished goods amounting to ₹ 9,22,35,092. A reference, therefore, was made by him to the Transfer Pricing Officer(TPO) under S.92CA(1) of the Act, to determine the Arm s Length Price (ALP ) of these international transactions as well as other international transactions entered into by the as .....

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thmetic Mean of the Net Margin of the said comparables as worked out at 2.26% was much less than the net margin of 16.09% earned by the assessee company at entity level, the price charged by it to AE in the relevant international transaction was claimed by the assessee to be at Arm s length. 9. The TPO did not dispute that the TNMM adopted by the assessee for benchmarking the international transactions with its AE was the most appropriate method. He however, did not approve the action of the ass .....

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E Export Non-AE Sudan(non AE) Manufacture Total Quantity(MT) 24,608 2,935.67 848.26 885.89 Sales 1,51,54,73,729 8,94,19,590 2,59,09,742 5,01,28,840 1,68,09,31,901 Other Income 1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029 Export Benefit 10,59,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733 Total Income 1,52,96,16,303 10,45,42,465 3,02,80,177 5,48,92,418 1,71,93,31,363 Total Costs 1,25,14,79,317 9,41,56,034 2,92,00,086 5,38,68,988 1,42,87,04,425 Profit/(Loss) 27,81,36,986 1,03,86,731 10,80,0 .....

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ble in the case of the assessee as the said segment manufactured same or similar goods and sold the same in the domestic market. In this regard, the objection raised by the assessee that the margins on account of domestic and export sale should not be compared as the price charged in domestic market was different from the export market on account of various factors was not found sustainable by the TPO. He held by relying on the OECD guidelines on Transfer Pricing that the internal comparables i. .....

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,046 as against ₹ 8,94,19,590 charged by the assessee. The difference of ₹ 2,45,98,456 accordingly was worked out by the TPO as transfer pricing adjustment, which is required to be made in respect of international transaction of the assessee company with its AE involving export of manufactured goods. 11. The alternative contention of the assessee to compare the margin of AE transactions with that of non-resident unrelated parties, being better internal comparable, was also considered .....

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ion at the rate of 24.6% of the sales, however, was considered reasonable by the TPO only to the extent of 12.5% and accordingly, making the adjustments to the sale price charged by the assessee to non-resident entity in Sudan, at US Dollars 1250 per MT, the adjusted price was worked out by the TPO at US Dollars 860.15. As the average price charged by the assessee to its AE was US Dollars 641.00, the transfer pricing adjustment on the basis of this alternative analysis was worked out by the TPO .....

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143(3) vide order dated 29.12.2013., 12. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), challenging inter alia the transfer pricing adjustment made by the Assessing Officer on account of its international transactions with AE involving export of manufactured goods. During the course of appellate proceedings, the said addition was challenged by the assessee by raising the following points- 1. TPO erred in comput .....

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ears. Since the data of the previous year relevant to AY 04-05 was not available at the time of preparing TP documents, the appellant rightly used the data of earlier: years. 4. TPO erred in holding that the domestic sales were the best internal comparables for determining the ALP. The exportisales were necessitated due to unutilized production capacity and therefore the appellant had to export part of its production at whatever price it got, in order to recover its cost and to increase the prof .....

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t of variation of +/-5% as provided in S.92C(2). AR relied on the decision of ITAT, Delhi in the case of Sony India Pvt. Ltd. 13. The learned CIT(A) did not agree with most of the points raised by the assessee and rejected the same. He, however, agreed with the stand of the assessee that while computing the operating profit from exports to AE, export benefits should also be considered and included in the profit as they were directly related to the exports and the export prices were fixed conside .....

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rected the Assessing Officer/TPO to recompute the profit margin on domestic sales, after considering the export benefits and by applying the same on the AE exports including the export benefits to recompute the transfer pricing adjustment required to be made on this count. 14. As regards the alternative analysis made by the TPO, the learned CIT(A) found merit in the contention raised on behalf of the assessee that the TPO was not justified in considering only exports made to Sudan for comparison .....

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an and found from such workings furnished by the assessee that the export price to AE came to US Dollars 641 per MT as against export price to non-AE which came to US Dollars 767.93 per MT after allowing +/-5% variation. By applying the said difference to the total exports of 2,223.693 MTs made by the assessee to its AE, the adjustment required to be made as per this alternative analysis was worked out by the learned CIT(A) at ₹ 1,28,14,302. Since the TP adjustment worked out by him as per .....

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ies, which are engaged in the business of manufacturing packaging material. He submitted that although the TNMM was accepted by the TPO as the most appropriate method for benchmarking the international transactions of the assessee company with its AE involving export of manufactured goods, he took the profit margin of the assessee company from the relevant international transactions with its AE as worked out on the basis of segmental details as PLI and compared the same with the profit margin of .....

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ment to protect domestic market, high freight cost involved in exporting, etc. The learned counsel for the assessee also contended that the assessee had idle capacity during the relevant period and the same was utilised by making exports, since domestic market for its products was practically saturated. He contended that the comparison made by the TPO of the export made by the assessee to AE with domestic sale made to the non-AE itself was not proper and he ought to have compared the exports mad .....

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418)(Mum) 16. In order to substantiate his case that the export made to AE should be compared with exports made to non-AE, the learned counsel for the assessee invited our attention to the relevant details given at pages Nos.323 to 326 and pointed out that two products, namely Magnus and Apex were exported by the assessee company to its AE as well as to Non-AE. He contended that since similar products were exported by the assessee company to its AE as well as to non-AEs, the price charged in the .....

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sfer pricing analysis by comparing the exports made by the assessee to its AE with the exports made to the non-AE, he considered only the exports made by the assessee company to non-AE in Sudan, ignoring the fact brought out by the assessee to its notice that the type of material supplied to the non-AE in Sudan was different. He invited our attention to the copy of the submissions made before the TPO in this regard vide letter dated November 8, 2006 placed at pages 329 to 333 of the paper-book, .....

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and price charged to the AE as claimed by the assessee, adjustment on account of commission was allowed by him only to the extent of 12.5% as against 24.16% claimed by the assessee. He contended that since the commission of 24.6% was actually paid by the assessee and the same was taken into consideration while fixing the price charged to the non- AE in Sudan, there was no justification in the action of the TPO to allow the adjustment on account of commission only to the extent of 12.5%, treating .....

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re other transactions of export of similar products made by the assessee to non-AEs in other countries, the international transactions of the assessee company with the AEs should be compared with the other international transactions with non-AEs. 18. The Learned Departmental Representative on the other hand, strongly supported the order of the TPO comparing the international transactions of the assessee company with its AE with the similar transactions made in domestic segment with non-AEs. He c .....

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ade by the assessee to non-AE, he found that it supports the TP adjustment worked out by him by comparing the international transactions of the assessee company with its AE to the domestic transactions made by the assessee with its non-AE. 19. As regards the adjustment allowed by the TPO on account of commission while making such alternative working only to the extent of 12.5% as against 24.6% claimed by the assessee, the Learned Departmental Representative contended that the rate of 12.5% allow .....

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tured goods made in domestic segment. Although the products sold/exported in these transactions were similar as pointed out by the Learned Departmental Representative, we find merit in the contention of the learned counsel for the assessee that keeping in view the material differences such as the quantum of export incentives, level of competition, corresponding freight cost involved etc., affecting substantially the profitability of export transactions vis-à-vis domestic transactions, it .....

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by the assessee company to the non-AE in Sudan, which in our opinion, was not correct because the material exported by the assessee company to non-AE in Sudan was of different quality and there were other material differences also. This position in fact was accepted even by the TPO, when he allowed adjustment of 158.60 US Dollars per MT to the price charged by the assessee company to the non-AE in Sudan on account of extra material consumption as well as a further adjustment of 75 US Dollars per .....

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rking done by the TPO by comparing these transactions in the course of alternative analysis which entailed adjustments on account of material differences, was not fair and proper. 21. As submitted by the learned counsel for the assessee before us, mainly two products viz. Magnus and Apex were exported by the assessee company to its AE during the year under consideration and similar products were also exported to non-AE in some countries other than Sudan. He has also furnished details of these ex .....

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ase of Magnus and ₹ 556 in the case of Apex as against average price of ₹ 641 in the case of Magnus and ₹ 561 in the case of Apex charged to AE. It is however, observed that these average prices are worked out by the assessee taking all the transactions entered into by the assessee during the year under consideration which is not proper. First of all, taking the average of the prices charged by the assessee to its non-AE in the relevant international transactions for the purpos .....

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ed order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in Sudan with the price charged by the assessee company to its AE for the similar products. The AO/TPO shall determine the Arm s Length Price by taking the arithmetic mean of the prices charged by the assessee co .....

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to the P&L Account should be considered in arriving at the adjustment to be made to the Arms Length Price. Export benefits are indirect benefits and there is no evidence that the export prices are fixed considering these benefits. If the same logic is extended, deduction under VIA and exemption under Sec.10A/B have also to be considered in arriving at the port price. 2. For similar reasons, CIT(A) s direction that profit margin as domestic sales should be reworked after working the deemed ex .....

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r decision rendered above restoring the issue relating to TP adjustment that is required to be made in respect of international transactions of the assessee company with its AE involving export of manufactured goods to the file of the AO/TPO, for deciding the same afresh, as per the specific directions given by us, the issues raised by the Revenue in its appeal have become infructuous. We therefore, do not consider it necessary or expedient to adjudicate upon the same separately. Being infructuo .....

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ssing Officer and confirmed by the learned CIT(A) on account of payment of agency commission to M/s. Agabna Alaraby International Company Ltd.(AAICL). 25 During the year under consideration, the assessee company had paid ₹ 20,60,722 its AE, M/s. Signode System Gmbh, Germany as commission. In this regard, explanation offered in the TP report furnished by the assessee was that in the absence of any marketing executive/manager specifically appointed in Sudan, the supply orders from Sudan coul .....

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ies located in Sudan and Bangladesh. He also noted that the assessee could not produce any cogent evidence to support its claim that the AE in fact had rendered any services in procuring the order from Sudan in order to justify the payment of commission. In the absence of any such evidence, the Arm s Length Price of the relevant transaction of the assessee company with its AE involving payment of commission was taken by the TPO at NIL and the TP adjustment required to be made on this count was w .....

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s, the claim of the assessee for deduction on account of this commission was examined by the Assessing Officer. On such examination, he found that the claim of the assessee for sales commission to the extent of ₹ 1,73,62,347 was duly supported by the relevant documentary evidence, and the balance amount for ₹ 2,70,424 claimed to be paid on account of commission, however, was not supported by proper documentary evidence. He therefore, disallowed the claim or the assessee for commissio .....

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e additions for the following reasons given by the CIT(A) in paras 9.3 to 9.7 of his impugned order- 9.3 I have perused the copies of the relevant agreements and other material placed on record. The facts of the issue are that a tender was floated by Sudan Gezeira Board (SGB) in July, 2003 for supply of Steel strappings. The bid of M/s. Golden Fibre Trade Centre Limited (GFTCL) was accepted by SGB and the order was placed on them. GFTCL entered into a contract with the assessee on 22/10/.2003 by .....

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AICL. The agreement states that AAICL was appointed as the assessee's agent for supplies to SGB for one year effective from 22/10/2003. It further provided for payment of commission of $57.5 per MT against all sales made to SGB. AAICL was supposed to procure orders from SGB and to promote the sale of products of assessee. 9.5 The agreement with M/s. Signode Gmbh, filed by the Id. AR (page.110-111 of paper book) is undated and not signed by anyone on behalf of M/s. Signode Gmbh. In fact the d .....

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to all the three concerns in respect of same export order from SGB. It is evident from the contract with GFTCL that the contract was awarded to GFTCL as an agent of the assessee, hence commission payn;ent can be justified for the services rendered by GFTCL in procuring the order. However, there is no evidence on record that any services were rendered by other two concerns named AACL & Signode Gmbh. During the appeal proceedings, the Id. AR was given a show cause notice that why the payments .....

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cumstantial evidences further indicate that the transactions with these two concerns were not genuine ego agreement with AAICL was signed on 6/3/2004 ie much after the contract was awarded by SGB to GFTCL and in turn to assessee, while no agreement was signed by Signode Gmbh. It is also noticed that the commission was not paid to M/s. Signode Gmbh by transfer of funds by cash or cheque. The same was adjusted at the year end against the imports made by the assessee from M/s. Signode Gmbh. It is a .....

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not a conclusive proof that any services were actually rendered by the commission agent who earned that commission. It has been held by the Hon'ble Supreme Court in the case of Laxmiratan Cotton Mills Co. (73 ITR 634) that the burden is on the assessee to prove that services were rendered by the commission agent. Again in the case of Laxminarayan Madanlal (86 ITR 439 it was held by the Hon ble Supreme Court that the mere existence of an agreement between the assessee and its selling agents o .....

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is properly deductible under section 37(1) of the Act. Similarly, in another decision given in the case of Nund and Samont Co. Pvt. Ltd Vs CIT (78 ITR 268) by Hon'ble Supreme Court, in the absence of evidence relating to duties of the directors and the services rendered by them, the manner in which the profits of the assessee were enhanced and the benefits derived by the assessee in consequence of services rendered by them, the disallowance of remuneration paid to the directors was upheld. .....

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the judgments of the apex court in CIT Vs. Calcutta Agency Ltd. (1951) 19 ITR 19i and CIT Vs. Imperial Chemical Industries [India] (P) Ltd., [1969] 74 ITR 17. The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove, inter alia, that the item of expenditure in question for admissibility to deduction is not in the nature of capital expenditure. Further, mere payment by itself would not entitle th .....

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s for the taxpayer to establish by evidence that a particular allowance is justified. But, as held by the Supreme Court in CIT Vs C. Parekh and Co. (India) Ltd. (1956) 29 ITR 661 whether an assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which he might take of his rights. At the time, the onus is on the assessee to establish that there are facts in existence which entitle it to a deduction and it is for the assessee .....

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[1979} 117 ITR 754 (Ca!), Ramdas Ramlal v. CIT [1983} 139 ITR 620(MP), 149 ITR256(Mad), Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985} 151 ITR 636(P&H) and decision of ITAT Hyderabad in the case of Smt. Pushpa Agarwal(ITA No. 110/Hyd/2005, order dated 30-09- 2005). The ratio of the above decisions makes it clear that the allowability of an expenditure depends not merely on an agreement between the assessee and another party and consequent payments made by the assessee, but on the evidence of .....

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LP in respect of the said international transaction. The AO is directed to make further disallowance in respect of payment made to AAICL over and above the adjustment made in respect of payment made to M/s. Signode Gmbh. 28. The learned counsel for the assessee submitted that the claim of the assessee for commission plaid to its AE amounting to ₹ 20,60,722 was treated by the TPO as not genuine and Arm s Length Price of the same therefore, was taken by him at NIL, working out the TP adjustm .....

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to them cannot be allowed. In this regard, he invited our attention to the submissions made by the assessee before the learned CIT(A) justifying its claim for deduction on account of commission paid to these two parties as well as documentary evidence placed at pages 471 to 489 of its paper-book in the form of e-mail and correspondence exchanged between the assessee company and its two agents. He contended that this documentary evidence filed by the assessee was sufficient to show the exact natu .....

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ee company for finally executing the order received from Sudan and the documentary evidence filed by the assessee company being sufficient to support and substantiate the claim, the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of such commission payments is not sustainable. He also pointed out that the commission paid by the assessee company to both the parties concerned was quite fair and reasonable in the facts and circumstances of the case and the .....

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reasons are given by the learned CIT(A) to come to the conclusion that the claim of the assessee was not established either on evidence or in the facts of the case. As regards the documentary evidence filed by the assessee in support of its claim for commission, the Learned Departmental Representative submitted that the same is only a self serving evidence in the form of correspondence and e-mails exchanged between the interested parties and in the absence of any independent evidence of third pa .....

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udan(SGB). As noted by the learned CIT(A) in his impugned order, against the tender floated by the said party for supply of steel strapping, the bid of M/s. Golden Fibre Trade Centre Limited (GFTCL) was accepted and even the order was placed on the GFTCL. GFTCL thereafter entered into a contract with the assessee company by which the assessee agreed to supply the entire goods to M/s. Sudan Gezeria Board and agreed to pay a commission of US Dollars 200 per MT to GFTCL. As further noted by the lea .....

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the assessee came in picture, and what exactly was the nature of services rendered by them. It is also not understandable as to how and why the assessee company required the services of these two parties when GFTCL was not only the successful bidder in the tender floated by M/s. Sudan Gezeria Board, but also agreed as per Article 9 of the agreement that it had acted as an agent of the assessee company for procuring the said export order. Finally, the said export order was executed by the assesse .....

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