2019 (2) TMI 110 - AT - Income Tax

TDS u/s 194H - Addition of commission expenditure paid on purchases made by the assessee - Held that - Statement of one commission agent has been recorded who has categorically explained the entire nature and process of the chemicals procured; how he has introduced purchases for providing quality material used in the paper industry; what is the effect if material fails during the trial period; and how the responsibility for losses is to be owned. He has also explained that there is high risk of failure of the product on the basis of quality and why he has paid high commission for the assured quality so that the risk of failure is minimum. Without their being any discrepancy or any inconsistency in his statement, AO cannot discard the said statement and proceeded to make the disallowance of such a claim of payment of commission. Under the facts and circumstances the reasoning given by the authorities below cannot be upheld and accordingly, the disallowance is deleted. TDS u/s 194H - Disallowance of salary paid by the assessee under the head incentives to an ex employee on the ground that no TDS was deducted by the assessee - Held that - Shri Amit Kumar was an employee of the assessee till last year and in this year he was not employee for the whole time. Assessee has decided to pay him performance based salary instead of regular salary and the salary was paid in the form of incentive based on his support provided to the assessee by visiting the industries on behalf of the assessee during use of the products by the paper industry. AO has held that such an incentive has to be treated as commission and therefore, assessee was liable to deduct TDS u/s 194H. How the said incentive has been treated to be as commission is not clear, because once assessee has said that the incentive given to his ex employee was in the nature of salary, then simply rejecting the contention without any basis cannot be sustained. Even if any commission is paid in addition of any salary or wages that also falls in the category of Salary in terms of clause (iv) of section 17. Since the assessee has only made payment of ₹ 62,000/- to Shri Amit Kumar and his income was below taxable limit, therefore, there was no requirement to deduct TDS - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of ?20,33,762/- out of commission expenditure paid on purchases made by the assessee.
2. Disallowance of salary paid under the head incentives of ?62,000/- to an ex-employee due to non-deduction of TDS.

Issue-Wise Detailed Analysis:

1. Disallowance of ?20,33,762/- out of commission expenditure:

The assessee, a trader in chemicals used in paper industries, showed sales of ?2,67,45,976/- and purchases of ?1,73,06,954/- for the relevant financial year. The assessee debited ?26,50,000/- under the head "Commission account," which the AO found excessive, noting that the commission rate was more than 10%. The assessee explained that the commission was paid to various agents for introducing parties to purchase contracts and ensuring product quality. The AO, however, deemed the commission payments excessive and unreasonable, especially since the items purchased were non-monopolistic and widely available. The AO summoned three persons under section 131(1), and despite one person, Shri Anuj Sharma, providing a detailed statement on the services rendered, the AO disallowed ?20,33,762/- of the commission payments, allowing only 3% as reasonable.

The CIT (A) confirmed the AO’s disallowance, stating that the inquiries made under section 131 did not substantiate the high commission rates, and agreements produced by the assessee were not genuine. The CIT (A) upheld the AO's decision to allow only 3% commission.

The assessee argued that the commission payments were consistent with previous years, which were accepted in scrutiny proceedings, and that the high commission was justified due to the sensitive nature of the chemicals and the need for quality assurance. The ITAT found that the payment of commission was a genuine transaction and a regular feature of the assessee’s business. The ITAT noted that the revenue had accepted similar rates in previous years and that the agents were unrelated persons under section 40A(2)(b). The ITAT concluded that the revenue could not disallow the expenditure as excessive without evidence of comparable cases or material showing the payments were unreasonable. The ITAT deleted the disallowance of ?20,33,762/-.

2. Disallowance of salary paid under the head incentives of ?62,000/-:

The AO observed that the assessee debited ?1,78,000/- on account of sales incentives, with ?62,000/- paid to Shri Amit Kumar, an ex-employee. The AO treated this payment as commission, requiring TDS deduction under section 194H, and disallowed it under section 40A(ia).

The CIT (A) upheld the AO’s disallowance, agreeing that the incentive payment was in the nature of commission and required TDS deduction.

The assessee contended that Shri Amit Kumar was an ex-employee who received performance-based salary, not commission, and his total income was below the taxable limit, thus not requiring TDS deduction. The ITAT found that the payment was indeed in the nature of salary and not commission. Since the payment was only ?62,000/- and below the taxable limit, no TDS was required. The ITAT directed the deletion of the disallowance of ?62,000/-.

Conclusion:

The ITAT allowed the appeal of the assessee, deleting both the disallowance of ?20,33,762/- out of commission expenditure and the disallowance of ?62,000/- paid as incentives to the ex-employee due to non-deduction of TDS. The order was pronounced in the open court on 31st January 2019.