TMI Blog2018 (5) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... e same contract, earlier assessments were completed. However, it is certainly necessary to examine whether the payments are in accordance with the contract. The actual commission paid if the same is in accordance with the terms of the contract has to be allowed. However, in the present case, it is not established that the rate of commission paid is as per the contract. The main contract shows a range of commission and it mentions that the individual rates will be fixed as per the mutual consent. No detail whatsoever as to how the mutual consent have been arrived at for a particular rate in a particular invoice has been submitted before the authorities below. In the absence of necessary details, adverse inference drawn cannot be said to be devoid of cogency. Thus the interest of justice will be served if the issue is remitted to the file of the A.O. The A.O. is directed to examine the documents by which the mutual consent was arrived at for individual invoices of commission. Disallowance of commission expenditure u/s.40(a)(i) - Assessee submitted that the agent has no business connection in India and the commission paid for the services rendered by the foreign agent outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahya, AM These cross appeals have been filed by the assessee and Revenue against the order of the CIT(A)-20, Mumbai dated 21.06.2017 for A.Y. 2014-15. 2. The assessee has raised the following grounds of appeal: - DISALLOWANCE OF COMMISSION EXPENSES OF ₹ 6,67,03,097/-U/S 40A(2) 1. The learned CIT(A) erred in disallowing commission expenses paid to Daga Life Sciences DMCC to the extent of ₹ 6,67,03,097/-u/s 40A(2) on the ground that expense of commission to related party is unreasonable and excessive without appreciating a fact that section 40A(2) is not applicable in our case as Daga life Sciences DMCC, Dubai is not a related party as per section 40A(2)(b) and definition of Associated Enterprises u/s. 92E cannot be resorted to for invoking Sec. 40A(2) and hence, the disallowance of ₹ 6,67,03,097/- ought to be deleted. 2. The learned CIT(A) erred in disallowing commission expenses paid to Daga Life Sciences DMCC to the extent of ₹ 6,67,03,097/- u/s 40A(2) on the ground that expense of commission to related party is unreasonable and excessive without taking into account that commission expenses incurred by Assesse is reasonable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating the fact that the Assessing Officer has established during the assessment proceedings that the payment of commission to Agent (relative) has accrued and arised in India and is subject to TDS under section 195. In absence of TDS, entire amount of commission paid is disallowed under section 40(a)(i). 3. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the appeal of the assessee to carry forward of long term capital loss of ₹ 84,46,103/- on account of loss arose merely investment in Shares without appreciating the facts that the during the assessment proceedings, the Assessing Officer has done depth scrutiny and came to conclusion that such gain or loss is not computed in absence of transfer of capital assets. Apropos the issue of reasonableness of commission paid: ( Cross appeal by Revenue assessee ) 4. The brief facts of the case are that during the course of assessment proceedings, on perusal of the Profit and Loss Account, it was observed by the AO that the assessee had shown sales of ₹ 2,77,28,35,881/- and corresponding purchases were at ₹ 2,35,96,27,687/- and had d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 5% to 50%) of commission be calculated was not mentioned. The AO also observed that the there was no mention of products, value of sale, geographical territories, credit / payment terms by customers, responsibility for payment from parties, warehousing of goods, follow up of delivery schedule, terms of the contract (time for renewal or termination), reimbursement of expenses to agent, compensation for breach of contract etc, service tax liability, income tax liability, arbitration clause in case of dispute (Dispute Resolution Clause) and Legal Enforceability (applicable contract Act India or Dubai). All these important issues, normally find place in any valid contract between two professional parties were NOT mentioned in the contract. Thus contract was silent on almost all these important and basic issues. The AO further observed that the contract was silent on the expected services to be received and provided by the agent situated at Dubai. The contract was absolutely silent on the nature of services to be provided by the Agent i.e. DLS at Dubai or in any other country for international marketing of products for a consideration of 5% to 50% of commission, in value of ₹ 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opined that in view of this discussion the claim of the appellant that DLS Dubai is not a related party of appellant is found to be devoid of any merit and this claim is rejected and the stand of the AO in treating the DLS Dubai as a related party of appellant is upheld. He observed that related party transaction required to be made while filing the return of income but the same was never done. He referred to section 40A(2)(b) of the Income Tax Act, 1961 (hereinafter the Act ) and observed that the assessee has not benchmarked its international transactions of payment of commission to DLS Dubai with any other comparable instance. He observed that it is not established through cogent evidence that the rate of commission paid to DLS Dubai was fair and reasonable having regard to the fair market value of services provided by the agent to the assessee. He observed that the AO has rejected the assessee s claim of commission @22.78% being fair and reasonable after noting that the commission paid to DLS Dubai has no connection with the nature of goods supplied, value of sales made, services rendered in connection with sales made in Iran and service tax, income tax and other tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession or the benefit derived by, or accruing to, the taxpayer from the expenditure. In this light the payment of commission to DLS Dubai by the appellant is to be evaluated. It is seen that commission payment of ₹ 8.09 crores was made to DLS on total sale of ₹ 35.51 crores which comes to a rate of 22.78% which is definitely excessive and in violation of RBI and CBEC guidelines in this regard. Accordingly this payment attracts disallowance under section 40A(2)(b). After carefully considering the appellants contentions and the documents filed before me, I find that the A.O. has rightly held that the commission rate of 22.78% paid to the DLS is far in excess of the prevailing market rate of 2-3% in such cases. The appellant has not filed evidence to justify the excessive claim of commission payment through cogent evidence such as nature of any special services rendered by DLS, expenses incurred by the DLS, and other transaction related facts and circumstances which could justify the payment of commission at a much higher rate to DLS. It is noted that in a similar case of M/s Diamond Tool Industries, 108, Udyog Bhavan, Sonawala Road, Gorregaon (East), Mumbai 400 051. PAN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation of RBI Manual and CBEC circular. He further submitted that the profit for the year has decreased primarily because of foreign exchange losses and not because of payment to foreign agent. He further submitted that the contract between the parties is to be understood and the Assessing Officer cannot give his opinion and interpretation to the contract. The ld. Counsel of the assessee further submitted that in the earlier assessment years, in the scrutiny assessment, the payment of commission has been allowed. Hence, he submitted that for the current year on the same facts, it cannot be said that the commission paid is unreasonable and excessive. In this regard, the ld. Counsel of the assessee placed reliance upon the decision of the Hon'ble Apex Court in the case of Radhasoami Satsang Vs . CIT 193 ITR 321 (SC) and CIT Vs Excel Industries Ltd [2013] 358 ITR 295 (SC). 8. Per contra, the ld. Departmental Representative submitted that the assessee has not provided relevant details before the authorities below. He submitted that no document relating to the services provided and how the rates of commission were fixed were submitted before the Assessing Officer. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fixed by mutual consent between the Principal and the Agent at the time of undertaking the export, transaction, on the FOB {Free on Board) value of such goods/chemicals exported by the Principal for sa!e in international market with the help of the Agent. 2. The commission will be'paid by the Principal to the Agent within 30 days of receipt of Invoice, Bill or any other document from the Agent requiring therein the payment of commission. 3. The commission will be paid by the Principal to the Agent by way of Bank Transfer to the Bank Account of the Agent. 4. In case of default or violation of any of these terms and conditions of this contract committed by either party, the other party who has not committed the default or violation shall have the right to terminate this Contract without any notice. 5. All receipts by the Agent in respect of the payment made by the Principal towards commission for sale of goods/chemicals of the Principal in international market shall be constructed only a payment of commission under this Contract irrespective of whatsoever contained and mentioned therein. M/S DAGA GLOBAL CHEMICALS LTD M/S DAGA LIFE SCIENCES DMCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. However, it is certainly necessary to examine whether the payments are in accordance with the contract. The actual commission paid if the same is in accordance with the terms of the contract has to be allowed. However, in the present case, it is not established that the rate of commission paid is as per the contract. The main contract shows a range of commission and it mentions that the individual rates will be fixed as per the mutual consent. No detail whatsoever as to how the mutual consent have been arrived at for a particular rate in a particular invoice has been submitted before the authorities below. If any rate can be mentioned in the invoice and the payment can be done, without any reference to any document relating to consent of parties in an international transaction, such a proposition can by no stretch of imagination be considered to be genuine. In the absence of necessary details, adverse inference drawn cannot be said to be devoid of cogency. By no stretch of imagination, it can be said that because commission has been allowed in earlier year, the Revenue authorities need not examine the correctness of the commission paid for this year in accordance with the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income is in India. Further the assessee itself paid Service Tax in India. The A.O. noted that the Indian Service Tax is payable in India for availing and utilizing services of foreign concern in India. Having regard to the facts of the case it is seen that the appellant has deducted service tax on the commission paid but failed to deduct TDS as required. In absence of TDS, entire amount of commission paid of Rs. 7,38,05,757/- was disallowed by the A.O. Having regards to facts and circumstances of the case, I find myself in agreement with the A.O. that the payment of commission to Agent had accrued and arisen in India and was required to be subjected to TDS under section 195. It is seen that this addition is already discussed in para 6.4 above and no separate addition would be required to be made as the issue stands covered in para 6.4 above while deciding ground nos. 2 to 6 of appeal. However on technical grounds this ground of appeal is dismissed. 14. Against this order the assessee is in appeal before us. 15. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that no disallowance can be made u/s.40(a)(i). He subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondence, etc. between the assessee and the agent in justification of the transaction. The assessee has not provided the details, rather it has been contended that the Assessing Officer has not called for communication between the assessee and the agent as emanating out of the ground raised before the ld. CIT(A). We find that the position taken by the Assessing Officer and the assessee are contradictory. In our considered opinion, the interest of justice will be served if the issue is remitted to the file of the Assessing Officer. The Assessing Officer shall examine the correspondence between the assessee and the Agent and thereafter decide the issue regarding the nature of the services rendered. Furthermore, the claim that the payee is a resident of UAE also needs to be established by reference to the relevant documents, regulations and treaty. Needless to add, the assessee should be granted adequate opportunity of being heard. Apropos ground no. 5 regarding the disallowance of service tax : 18. We find that the grounds raised in this regard reads as under: DISALLOWANCE OF SERVICE TAX 5. The learned CIT(A) while computing commission to be disallowed erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company had wiped out investment of assessee company and in June 2014, the assessee company passed a resolution for closure of the company. The claim of the assessee that the investment in WOS was written off in the previous year be allowed as Long Term Capital Gain (Loss), was not found acceptable by the AO. The AO noted that the assessee company had not transferred any of its capital asset during the impugned year under consideration. The condition under section 48 for calculation of Capital Gain arises only on Transfer of Capital Asset. The AO observed that there were no new arguments furnished by the assessee company. The assessee reiterated its stand that the loss was not due to sale of shares of wholly owned subsidiary but on account of write off of share investment from books of accounts, therefore in the absence of Transfer of Capital Asset and for reasons mentioned in the show cause, Capital Loss on share investment written off was not found to be allowable by the AO. Hence, in view of the same, the claim of assessee to allowing carry forward of Long Term Capital Loss of ₹ 84,46,013/- was rejected by the A.O. and the same was added to the total income. 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the ld. CIT(A). He submitted that the assessee had claimed long term capital loss of ₹ 84,46,013/- on write off of investment in Wholly Owned Susidiary (WOS) Company at China. Hence, in view of the above, the assessee is entitled to carry forward loss of ₹ 84,46,013/-. Without prejudice, he submitted that there is a capital loss of ₹ 84,46,013/- as the entire investment is wiped off and the assessee is entitled to carry forward the capital loss. He further submitted that the assessee has not claimed the Revenue losses. The ld. Counsel of the assessee placed reliance upon the decision of the Hon'ble Bombay High Court in the case of CIT vs. Wackhardt International Ltd. [2009] 314 ITR 11 (Bom). 25. Per contra, the ld. Departmental Representative relied upon the orders of the Assessing Officer. 26. Upon careful consideration, we note that the assessee in this case has written off its investment in its wholly owned subsidiary in China as there was persistent loss and the net worth was eroded. The assessee has claimed this to be allowed as long term capital loss to be carried forward. We find that the Assessing Officer is quite correct in holdin ..... 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