2022 (8) TMI 851 - AT - Income Tax

Disallowance of commission expenses paid by the assessee to its related concern - As per AO no basis whatsoever for paying anything to MCPL, especially in view of the fact that even without the payment of such commission the assessee company was showing a healthy growth and no documentary or even circumstantial evidence has been produced to prove that any service was rendered by MCPL - HELD THAT - In the present case, it has not been denied by the assessee that MCPL is a related entity. The assessee has only claimed that the commission payment to MCPL is not excessive and unreasonable and tax was deducted at source as well as both the companies are falling under maximum marginal rate of tax, thus there is no tax evasion. It is pertinent to note that as per the provision of section 40A(2), if the AO is of the opinion that payment made by the assessee to its related entity is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom, so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as a deduction to the assessee. In the present case, we find that the AO did not summon the Directors of MCPL despite the fact that their identity was known to the AO. We also find that the AO has also not examined whether MCPL was rendering similar services to entities other than the assessee and the commission charged from such entities. From the record, it is also evident that the AO treated the entire commission expenditure of Rs. 2,39,45,501, as commission paid to MCPL, on the other hand, assessee s claim is that only Rs. 2,13,10,818, is commission paid to MCPL and the balance is 26,34,683, was paid to an individual (Mr. J. Kamdar), thus, in view of the above, the transaction with Mr. J. Kamdar was neither examined by the Assessing Officer nor the details pertaining to same are available on record. It is also pertinent to note that though MCPL has claimed to be having experience of 40 years, however, it cannot be denied that till assessment year 2012 13 the said entity was engaged in manufacturing activities and the said activity was discontinued thereafter. Therefore, we are of the considered view that it is also to be examined as to how an entity who has been in manufacturing business till assessment year 2012 13 became experienced in rendering marketing activities of the nature mentioned by the assessee before the AO. Also the fact that the assessee deducted tax at source and both the companies are falling under maximum marginal rate of tax, does not satisfy the requirement of reasonableness of expenditure qua the services alleged to be received by the assessee. All the above aspects were neither examined by the AO nor by the CIT(A) and appeal filed by the assessee was allowed vide impugned order without even calling for any remand report, in this regard, from the AO. In view of the above, the impugned order passed by the CIT(A) is set aside and matter is remanded to the AO for de novo adjudication after examination of all the aspects as highlighted above. The assessee is directed to produce all the documents/details necessary to prove rendition of service for which commission expenditure is incurred. Accordingly, grounds raised by the Revenue are allowed for statistical purpose.

Summary

Issues Involved:
1. Deletion of disallowance of commission expenses.
2. Payment of commission to a related party under section 40A(2)(b).
3. Lack of evidence for services rendered by the related party.
4. Reasonableness and necessity of commission payments.

Detailed Analysis:

1. Deletion of Disallowance of Commission Expenses:
The Revenue challenged the deletion of disallowance of commission expenses paid by the assessee to its related concern. The Assessing Officer (AO) disallowed the entire commission expense of Rs. 2,39,45,501 on the grounds that no substantial evidence was provided to demonstrate that services were rendered by Manohar Canisters Private Ltd (MCPL). The AO observed that the assessee's business showed healthy growth even without such commission payments, indicating no necessity for the commission.

2. Payment of Commission to a Related Party under Section 40A(2)(b):
The AO noted that MCPL and the assessee company are related parties within the meaning of section 40A(2)(b) of the Income Tax Act. The AO questioned the legitimacy of the commission payments, especially since the payments were made for the first time in the relevant assessment year. The AO required the assessee to provide agreements, lists of services, and details of personnel involved from MCPL, which the assessee failed to substantiate adequately.

3. Lack of Evidence for Services Rendered by the Related Party:
The AO found no documentary or circumstantial evidence proving that MCPL rendered any services warranting the commission payments. The assessee mentioned various services like negotiating prices, discussing technical issues, and managing deliveries, but failed to provide concrete evidence. The learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal by the assessee based on the agreement and board resolution appointing MCPL as the marketing and commission agent, along with the long-standing business reputation of MCPL.

4. Reasonableness and Necessity of Commission Payments:
The CIT(A) considered the lack of a separate sales and marketing department in the assessee company and the necessity of marketing activities for sales. The CIT(A) found the commission of 2.5% reasonable and prevailing in many industries. The CIT(A) also noted that the commission paid was declared as income by MCPL and taxed accordingly, making the transaction revenue-neutral. However, the AO did not examine whether MCPL rendered similar services to other entities or the commission charged from them.

Conclusion:
The Tribunal found that the AO did not summon the directors of MCPL or examine whether MCPL rendered similar services to other entities. The AO also treated the entire commission expenditure as paid to MCPL, while part of it was paid to another individual. The Tribunal noted that the CIT(A) allowed the appeal without calling for a remand report from the AO. Consequently, the Tribunal set aside the order of the CIT(A) and remanded the matter to the AO for de novo adjudication, directing the assessee to produce all necessary documents to prove the rendition of services. The appeal by the Revenue was allowed for statistical purposes.