2011 (3) TMI 674 - AT - Income Tax

Justification of commission to its group concerns abroad - The disallowance was made for two reasons by the AO. First one was that assessee could not prove the business purpose since the involvement of the group company in the related transactions was not demonstrated. According to AO there was no written agreement between the group concerns and assessee and neither the percentage of commission and who fixed the commission were known. - Secondly AO relied on section 40(a)(i) of the Act considering such payment to be for technical services. - Held that - Just because group concern also produced same product in the respective country, would not be sufficient to come to a conclusion that assessee need not have made any exports to such country but the supply ought have been made only by the group concern in the said country. There could have been a myriad of reasons for the assessee and assessee s group concerns abroad, to source its supplies from assessee, to its ultimate customers and such a decision taken by a businessman could not have been question by an Assessing Officer without conclusively proving that such sourcing was a colourable exercise. The order the TPO mentioned above clearly prove that there was no colourable exercise nor excessive billing. - Decided in favor of assessee. Nature of commission - fee for technial services - No doubt technical service would definitely include managerial services. However in our opinion canvassing of orders abroad could not be for managerial services nor can it be said to be for any consultation. Thus definitely technical services as per Explanation 2 to section 9(1)(vii) of the Act would have no application. When an assessee is not obliged to deduct tax on a payment made to non-resident, then in view of the decision of Hon ble Apex Court in the case of GE India Technology Cent. (P.) Ltd. (2010 -TMI - 77380 - SUPREME COURT OF INDIA ) there was no question of any failure to deduct such tax being fastened on it. - Decided in favor of assessee.

Summary

Issues:
Disallowance of commission payment to group concerns abroad. Deduction of tax at source on commission payments.

Analysis:
1. The Revenue appealed against the deletion of the disallowance of commission payment by the CIT(A). The Assessing Officer disallowed the claimed commission payment of Rs. 1,46,16,995 as the business need was not proven, and tax was not deducted at source under section 40(a)(i) of the Income-tax Act, 1961.

2. The assessee, part of a group called Mainetti, justified the commission payment as a standard practice for orders canvassed by group concerns abroad. The CIT(A) accepted the explanation, noting that the payments were not for technical services or royalty, and deleted the disallowance.

3. The Revenue contended that the commission payment constituted technical services, requiring tax deduction at source. The assessee argued that the payment was commission based on genuine belief, citing relevant case law.

4. The Tribunal observed that the Assessing Officer's conclusions lacked merit. The involvement of group companies in transactions was substantiated by credit notes issued by the assessee. The Transfer Pricing Officer also confirmed the legitimacy of international transactions.

5. Regarding tax deduction, the Tribunal differentiated between domestic and overseas commission payments. While upholding the deletion of disallowance for overseas commission, it remitted the issue of domestic commission back to the Assessing Officer for further examination.

6. The Tribunal held that the commission payment to group concerns abroad was justified, as evidenced by credit notes and legitimate business practices. It also clarified the tax deduction requirements for domestic and overseas commission payments, ensuring compliance with the law.

7. In conclusion, the Tribunal partially allowed the Revenue's appeal for statistical purposes, maintaining the deletion of disallowance for overseas commission while remitting the issue of domestic commission for reevaluation.