2017 (8) TMI 226 - AT - Income Tax

Addition on account of excessive commission paid to agents - Held that - Irrespective of the price at which the Assessee sold the soda ash to the customer, the rate of the commission payable to the agent was constant at INR 200/MT. During F.Y. 2010-2011, the Assessee sold a total of 5205 MT of soda ash. During the relevant period of December 2010 to March 2011 (i.e. when agents were hired), the Assessee sold 1085 MT of soda ash and therefore made a total payment of INR 2,17,000 (1085 MT x INR 200/MT) as commission. In F.Y. 2011-2012, the Assessee continued to use the agents it had hired for the entire year as opposed to the 4 month period in the previous year and the Appellant sold 4959 MT of soda ash and continued to make payment at the pre-agreed commission rate of INR 200IMT, which amounts to INR 9,91,800/- as commission. As evident from above, the hiring of agents resulted in an increase of approximately INR 45 Lakhs. In fact, during F.Y. 2010- 2011 (including December 2010 to March 2011), the average return of the Appellant on each MT of soda ash was approximately INR 11,066 (i.e. INR 5.76 Crore earned for the sale of 5205 MT). In contrast, due to the services provided by the agents, the average return of the Appellant on each MT of soda ash was approximately INR 12,522 (i.e. INR 6.21 Crore earned for the sale of 4959 MT). This is an increase of about INR 1,450 per MT of soda ash. From the above, the A.O. used a wholly baseless and erroneous calculation to determine the percentage of commission by dividing the commission paid by the total sales and not take into account the factors mentioned above. In view of the above there is no ground or basis for any disallowance - Decided in favour of assessee.

Issues:
1. Disallowance of excessive commission paid to agents.
2. Interpretation of commission payment as a percentage of sales value.
3. Comparison of commission paid in different assessment years.

Issue 1: Disallowance of Excessive Commission Paid to Agents
The appellant's appeal was against the Ld. Commissioner of Income Tax (Appeals) order regarding the disallowance of Rs. 4,36,684 as excessive commission paid to agents. The appellant argued that the commission was paid based on the volume of sales achieved, not as a percentage of sales value. The AO noted discrepancies in commission expenses compared to sales figures and disallowed the balance commission amount. The Ld. CIT(A) partly allowed the appeal but confirmed the addition of Rs. 4,36,684. The Tribunal, after hearing both parties, examined the sales details and the nature of commission payments. It was observed that the sales of soda ash had increased, and the commission rate was fixed per metric ton regardless of the sales price. The Tribunal concluded that the AO's calculation method for determining the percentage of commission was erroneous and baseless. Consequently, the Tribunal deleted the disputed addition, allowing the appeal filed by the assessee.

Issue 2: Interpretation of Commission Payment as a Percentage of Sales Value
The appellant contended that the commission paid to agents was not based on a percentage of sales value but on the volume of sales achieved. The AO and the Ld. CIT(A) presumed the commission to be a percentage of sales value, leading to the disallowance of part of the commission amount. The appellant argued that the comparison of commission paid in the previous year, where it was paid for a shorter period, with the current year was not valid. The Tribunal analyzed the commission payment structure and the sales data to determine that the commission was fixed per metric ton sold, irrespective of the sales price. This interpretation was crucial in resolving the dispute over the disallowed commission amount.

Issue 3: Comparison of Commission Paid in Different Assessment Years
The assessment involved comparing the commission paid in different assessment years and justifying the increase in commission expense. The appellant explained that the commission paid in the previous year was for a shorter period and that the sales volume had increased in the current year. The AO disallowed a portion of the commission, leading to the appeal before the Ld. CIT(A). The Tribunal scrutinized the sales figures and commission payment details to ascertain the reason for the increase in commission expenses. By considering the fixed commission rate per metric ton and the sales data, the Tribunal found no grounds for the disallowance and consequently allowed the appeal, deleting the disputed addition.

This detailed analysis of the judgment highlights the issues related to the disallowance of excessive commission paid to agents, the interpretation of commission payment structure, and the comparison of commission paid in different assessment years. The Tribunal's decision to delete the disputed addition showcases the importance of accurately interpreting the nature of commission payments and considering sales data while assessing such disputes.

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