2017 (7) TMI 994 - AT - Income Tax

Disallowing the commission expenses - genuineness of expenditure - Held that - Disallowance of the claim of payment of commission to the service agent by AO is that, part of the commission is still payable , is not tenable for the reasons that AO has lost sight of the fact that as per terms and conditions of the agreement entered into between assessee and the agent commission is to be paid after receipt of payment by the assessee for the goods exported Second ground for disallowing the claim of payment of commission to the service agent that the agreement does not suggest any specific reference to any specific service rendered to the agent to the assessee company is, also not tenable for the reasons inter alia that in each agreement, the services to be rendered by the commission agents are extensively elaborated. Statement furnished by the assessee company shows that the FOB value of export to the parties where agency commission is payable along with updated statement of commission agent/payable during AY 2006-07 in respect of the export made and as such, the outstanding commission payable continues to be shown as liable in the books of account which have never been rejected by the AO. In these circumstances, genuineness of the business transaction and payment made to the service agent cannot be disputed Observation made by the AO that no invoice below has been raised by the service agents which makes the business transaction doubtful is not tenable because when as per agreement, commission @ 4% or 10% in case of different agents, as the case may be, is already agreed upon between the parties on the goods exported and services have been rendered and export contracts stands executed, we do not find any reason to disallow the claim only because of the fact that invoices have not been raised by the service agents. Even otherwise, when assessee company has categorically spread its income into 3 years then expenditure have also to be spread in 3 years and the disallowance cannot be made on the ground that the amount of agency commission was payable even during 2010. The contention of the ld. DR that no document / correspondence is there on record to prove that as to what services have been rendered by the service agents, is again not tenable for the reason that when intricate projects have been executed by the assessee company as per terms and conditions of the agreement, which could not have been completed without local assistance and only thereafter assessee company has earned turnover of ₹ 167 crores with net profit of 17%, the ld. CIT (A) has rightly concluded that the services have been rendered for a genuine business transaction and payment for the agency services is allowable. - Decided against revenue

Summary

Issues Involved:
1. Legality and correctness of the CIT (Appeals) order.
2. Deletion of the addition of ?7,33,09,398/- made by the AO by disallowing the commission.
3. Genuineness of the business transactions and the evidence provided by the assessee.

Issue-Wise Detailed Analysis:

1. Legality and Correctness of the CIT (Appeals) Order:
The Revenue contended that the CIT (Appeals) erred in deleting the addition made by the AO. The Tribunal examined the order passed by the CIT (Appeals) and found no illegality or perversity. It was noted that the CIT (Appeals) had thoroughly discussed the services rendered by the service agents and the necessity of these services for the execution of export orders. The Tribunal upheld the CIT (Appeals) order, finding it consistent with the facts and circumstances of the case.

2. Deletion of the Addition of ?7,33,09,398/-:
The AO had disallowed the commission paid to service agents, adding ?7,33,09,398/- to the total income of the assessee. The CIT (Appeals) deleted this addition, and the Tribunal upheld this decision. It was observed that the commission payments were in line with the agreements and the mercantile system of accounting. The Tribunal noted that the commission was payable after the receipt of export proceeds, which were to be realized in 36 monthly installments starting from May 2007. The Tribunal found the AO's reasoning for disallowance, including the non-payment of commission within three years, to be untenable.

3. Genuineness of the Business Transactions and Evidence Provided:
The AO questioned the genuineness of the business transactions and the lack of specific evidence of services rendered by the agents. The Tribunal, however, found that the agreements extensively elaborated the services to be rendered by the agents. The Tribunal noted that the assessee had consistently paid commission in previous years, which was allowed by the Revenue. The Tribunal emphasized the rule of consistency and the necessity of local agents for executing overseas projects. It was also noted that the RBI guidelines allowed for the payment of commission through designated banks, ensuring the genuineness of transactions. The Tribunal dismissed the AO's reliance on the Volkar Committee Report, as no exports were made to Iraq during the assessment year.

Conclusion:
The Tribunal concluded that the CIT (Appeals) order did not suffer from any illegality or perversity. The Tribunal found the AO's grounds for disallowance to be unsustainable and upheld the deletion of the addition of ?7,33,09,398/-. The appeal filed by the Revenue was dismissed.