2013 (10) TMI 873 - AT - Income Tax

Overseas Commission Agent - Liability For TDS u/s 195 - Applicability of Section 194H Held that - The assessee has been exporting its goods to the non-residents introduced to it by local agents on commission basis - The modus of drawing invoices and recording the transaction in the books has been stated - the amount represents a discount given to the purchases and not a business commission - Once the export invoice is raised and the goods are delivered, the sale transaction is complete - These transactions are found to be on principal to principal basis - There is no element of agency to attract the provisions of section 194H - The overseas parties do not sell the goods as agents of the assessee-company - The assessee is not crediting the personal accounts of the overseas parties - existence or absence of entries in the books of account is not a decisive or a conclusive factor in ascertaining the income or claiming the expenditure - Therefore, no such disallowance u/s 37(1) can be made without appreciating the real nature of the entries made in the books of account - the CIT (A) has correctly deleted the addition Decided against Revenue. Deletion u/s 40A (2)(b) - There are no instances on similar market conditions for similar quality of the yarn, higher price has been paid to the sister concern than the outsiders - So, no adhoc disallowance in this account is sustainable - it cannot be held that assessee has paid higher price to its sister concern than what was the cost to the assessee for producing the similar quality of the finished fabric. The comparative chart of yarn purchased from M/s PSL International at an average rate of Rs. 125/- per kg is supported by copies of invoices - It is noticed that the purchases from M/s PSL International is at the prevailing market rate - the rate at which purchase of yearn is made from M/s PSL International P. Ltd is comparable to the rate at which purchases are made from third/other parties - The adhoc disallowance at the rate of 1% cannot be approved - The A.O. has not given a finding that the payment made by the assessee is excessive or unreasonable having regard to the fair market value of the goods - This opinion has to be framed before invoking section 40A(2)(a) of the Act Relying upon Upper India Publishing House P Ltd Vs. CIT 1978 (12) TMI 2 - SUPREME Court - Decided against Revenue. Disallowance of Excess Interest Held that - The assessee-company has explained that where payment is made within 30 days interest is paid @ 18% and in other cases, interest is paid @ 21% - This fact has not been disputed by the revenue - The rate of interest chargeable for delayed payments are mentioned in the invoices itself - this clearly established payment policy of the assessee-company Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of overseas commission.
2. Disallowance under section 40A(2)(b).
3. Disallowance of packing material expenses.
4. Disallowance of loan commission.
5. Disallowance of interest.

Issue-wise Detailed Analysis:

1. Disallowance of Overseas Commission:
The assessee company debited an overseas commission of Rs. 76,81,286/- in its profit and loss account. The Assessing Officer (A.O.) disallowed this amount under section 37(1) of the Act, citing reasons such as lack of service rendered by overseas agents, and the commission being merely deducted from the sales invoice without actual services. The A.O. also did not accept the declaration that the overseas parties had no permanent establishment in India.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, citing that the sale proceeds were received net of commission expenses and that the commission was essentially a discount given to the purchasers. The CIT(A) referenced similar cases from ITAT Ahmedabad where such commissions were allowed. It was also noted that the non-resident commission agents' income was not chargeable to tax in India, and thus, no tax deduction at source (TDS) was required.

The Tribunal agreed with the CIT(A), stating that the transactions were on a principal-to-principal basis and did not attract the provisions of section 194H. The overseas parties were not acting as agents of the assessee-company, and the disallowance under section 37(1) was not justified. Consequently, Ground Nos. 1 to 6 were dismissed.

2. Disallowance under Section 40A(2)(b):
The assessee purchased yarn and finished fabric from a related party, M/s PSL International, amounting to Rs. 1,18,01,350/-. The A.O. disallowed 1% of these purchases, considering them excessive and unreasonable. The CIT(A) found that the purchase rates from the related party were comparable to those from unrelated parties and that the assessee and its sister concern fell in similar tax brackets. The Tribunal upheld the CIT(A)'s decision, noting that the A.O. did not provide evidence that the payments were excessive or unreasonable. Therefore, Ground Nos. 7 and 8 were dismissed.

3. Disallowance of Packing Material Expenses:
The judgment does not provide specific details on the disallowance of packing material expenses. It appears that this issue was not a significant point of contention in the appeal.

4. Disallowance of Loan Commission:
Similarly, details on the disallowance of loan commission are not elaborated in the judgment, indicating it was not a primary issue in the appeal.

5. Disallowance of Interest:
The assessee debited interest expenses, including interest paid to trade parties at different rates (18% for payments within 30 days and 21% for payments beyond 30 days). The A.O. disallowed the interest exceeding 18%, amounting to Rs. 19,533/-. The CIT(A) deleted this addition, and the Tribunal confirmed this finding, noting that the assessee's payment policy was clearly established and not disputed by the revenue. Thus, Ground No. 9 was dismissed.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all contested grounds. The judgment emphasized the importance of substantiating claims with proper documentation and the necessity of the A.O. providing concrete evidence when disallowing expenses. The order was pronounced on 27th September, 2013.