TMI Blog1984 (11) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessment for 1979-80, the accounting year being the period ended 30-6-1978. For this period, the agreement dated 1-7-1977 was in force. As per this agreement, the obligations of the company given in clause 2 are : " 2. The company shall, as such selling agents, carry out and/or undertake the following : (a) canvass for orders for the products manufactured by the firm ; (b) secure orders on a firm basis and accept them subject to the directions of the firm including directions as to the prices at which and to the terms and conditions on which the orders are to be accepted and pass on the same to the firm ; (c) do its best to increase the sales of the products of the firm including all measures necessary for promotion of sales, organization of sales campaigns in various areas and territories, etc. ; (d) after prior consultation with the firm, arrange to issue necessary advertisements in newspapers, magazines, on cinema slides, posters or by any other means/media and organize publicity campaigns in various territories in accordance with the directions of the firm ; (e) discuss from time to time and settle with the firm various steps which the company proposes to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these products was Rs. 2,39,10,396 for the accounting year. The commission paid was Rs. 52,60,287. The turnover of 'Promise Toothpaste' was Rs. 58.24 lakhs, which is part of the total turnover. The advertisement expenses shared by the assessee, as per clause 6 of the agreement, was Rs. 4,84,806. 5. The assessing authority held that the commission payment was excessive under section 40A(2). His reasoning was : (1) no market survey had been done by the company, although this was one of its obligations and part of the commission was paid for this service ; (2) the normal market rate of commission is not more than 5 per cent ; (3) the assessee's products are more or less without any competition in the field, therefore, the services of procuring orders, sales promotion and assistance in realisation of bills are really illusory and it cannot justify a high rate of commission ; (4) if the assessee had incurred the expenses on advertisement and publicity, the assessee itself would be subject to disallowance under section 37(3A) of the Act. 6. Apart from these reasonings, the assessing authority also pointed out that even without the application of section 40A(2), the commission paid is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed disallowance) is Rs. 2,14,570. If the firm were to take over the entire expenses, then the tax payable would be only Rs. 2,10,250. Therefore, it cannot be considered as a method of tax avoidance. 5. For the assessment year 1973-74, the products were sold outright at a discount of 35 per cent. A part of the advertisement expenses was, however, shared by the assessee. These assessments had been considered by the Tribunal in appeal and the assessee's submissions have been accepted. If the assessee had the same arrangement with the company for the assessment years 1973-74 and 1974-75, i.e., instead of trade discount, a commission was payable, the assessee would have to pay a commission of 29 per cent for both the years. Compared to it, the commission of 22 per cent is very essential for maintenance of the sales. 6. Under section 40A(2), the department has to see not only the market value of the services rendered but also the benefits derived and the needs of the business. These three are interrelated concepts. The department has seen only one aspect of it. 7. The profits of the assessee have not shown any stagnation or downward trend under this arrangement. From Rs. 16, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent is being allowed. 9. Whether the rates of commission are reasonable, could also be tested by looking into the figures of the years ended 30-6-1980 and 30-6-1981. On 'Promise Toothpaste' on a turnover of Rs. 3 crores, the assessee incurred a loss of Rs. 21 lakhs for the year ended 30-6-1980 because of the commission payment of Rs. 35 lakhs. For the year ended 30-6-1981, there is no commission payment and profits shot up to Rs. 87 lakhs on a turnover of Rs. 5.5 crores of the toothpaste account alone. 11. We have considered the facts of the case. The only point we have to decide is, whether the selling agency commission paid by the assessee is excessive and, therefore, a part of it has to be disallowed. Both the assessee as well as the department have objections to the findings of the Commissioner (Appeals). The department's case is that the disallowance made in the assessment order should be restored, whereas the assessee's case is that the entire amount should be allowed as a deduction. 12. Selling agency is a matter of contract. Either of the contracting parties would be entering into this contract only if it is commercially profitable for them. This being a business con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany as relating to non-business purposes of the company. For the accounting year under consideration, the company had incurred a total expenditure of Rs. 47 lakhs, the break-up of which is given below : Rs. Staff expenditure 17,83,362 Administrative expenditure 10,17,794 Travel business promotion 17,96,211 Interest 31,253 Depreciation 72,573 We have further analysed these expenses. Out of the staff expenditure, we find that the salaries paid to the staff account for more than Rs. 15 lakhs. The remuneration paid to the directors is only Rs. 66,000. The other expenses are the contribution to the provident funds, gratuity funds and staff welfare expenditure. There are three employees, who were getting a remuneration of more than Rs. 3,000 per month. Their salary and provident fund contributions account for nearly Rs. 1.65 lakhs. It cannot be said to be excessive, considering that the company is running a business effecting a turnover of nearly Rs. 2.5 crores and having 350 dealers. 14. The advertisement and business promotion expenditure, as stated above, accounts for nearly Rs. 18 lakhs. Considering the fact that these expenses have to be incurred to promote the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have the basis for making the sales themselves. 18. The rate of commission paid is reasonable, is supported by a scrutiny of the accounts for the assessment years 1973-74 and 1974-75. It may be recalled that for these two years, there was no selling agency. The goods were sold outright to the company at a discount of about 35 per cent. Supposing instead of giving a discount there were arrangements to effect sales on commission basis, then the commission the assessee will have to pay is worked out at about 29 per cent. This shows that the rate of commission, as given by the assessee for the year under consideration, is reasonable. 19. Shri Roongta for the department had submitted that there were four types of obligations on the company and none of these was discharged fully by the company. In other words, according to him, the assessee-company itself was associated in discharging these functions. Therefore, the case of the department is that the commission payment is excessive. We are unable to find any factual basis for this submission. It may be true that in respect of certain matters, the assessee had also taken some steps. But we cannot say that no canvassing for orders wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alt with the issue whether the commission payment was excessive or unreasonable. What is reasonable, will depend on the facts of each case. We are unable to agree, on the basis of the comparative cases to the submission that the expenditure is excessive. 23. We must finally deal with a submission made on the basis of the computation of profits in respect of 'Promise Toothpaste'. The department's case is that for the year ended 30-6-1981, no commission had been paid and the profit was Rs. 87 lakhs. Now, we have checked up the figures. These figures have been taken from the statement given by the assessee for deduction under section 80J of the Act. The assessee has not shown the commission payments in respect of the sales. But that does not mean that no commission was payable on the sales of the toothpaste. Commission had been paid on that turnover also but, for some reason or other, in the computation for section 80J, the assessee had not shown it in the statement. This error had been pointed out to the assessee's chartered accountant. 24. On the above facts, we are of the opinion that no disallowance need be made under section 40A(2). 25 to 31. [These paras are not reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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