2023 (3) TMI 762 - AT - Income Tax

Addition of commission paid - Disallowing commission expenses - Transactions with Related Parties - HELD THAT - AO was guided by the fact that since the payment have been made to related parties and the assessee has not furnished any satisfactory justification for payment to related parties, the same has been disallowed - AO was also guided by the fact that the initial agreement entered into by the assessee with M/s. UPL Ltd. does not allow any appointment of sub-agent by the assessee. On perusal of the order passed by the CIT(A), he has stated that the assessee has not filed any supporting evidence as to whether the commission has been paid through banking channel or whether any TDS has been deducted thereof and he therefore has gone ahead and confirmed the findings of the AO. Whether the initial agreement entered into between the assessee and M/s. UPL allows the appointment of sub agent or not? - In our view, irrespective of the terms of the said agreement which is a matter inter se between the two parties as to whether there is a breach of terms and condition of the agreement entered into, so long as the same is not considered as a breach of law of the land, what is relevant to consider is the factum of actual rendering of services by these three related entities and the corresponding payments made by the assessee and I find that there is no findings recorded by the lower authorities challenging the factum of rendering of services by these entities. All documentation are on record in terms of the copies of the agreement entered into, the invoices raised, the payments made through the banking channel, TDS done while making the payment, filing of the TDS returns and also the fact that the related entities have confirmed the same in their communication to the AO and have also the fact that they have offered the same in their respective tax returns. None of these documentation have been questioned by the lower authorities. Quantum of commission paid to these entities is concerned, the assessee has reasonably demonstrated before the lower authorities through third party data that these are comparable transaction and where the Revenue is to dispute the same, the evidence produced by the assessee needs to be rebutted by the bringing positive evidence on record and we find that there is no other comparable data which has been brought on record by the Revenue. Assessee has provided reasonable explanation alongwith supporting documentation to justify the incurrence of the commission expenses and therefore the addition so made by the AO and sustained by the Ld. CIT(A) is hereby directed to be deleted. Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of commission paid amounting to Rs. 27,50,000/- to three entities.
2. Presumption that the amount paid was not commission but sales.
3. Presumption that the payments were not through banking channels and no TDS was effected.
4. Disallowance of commission expenses by the Assessing Officer and its sustenance by the CIT(A).

Issue-Wise Detailed Analysis:

1. Sustaining the Addition of Commission Paid Amounting to Rs. 27,50,000/- to Three Entities:

The assessee, engaged in trading and service of agrochemicals, filed a return declaring total income of Rs. 16,00,320/- and showed commission income of Rs. 91,34,077/- with commission expenses of Rs. 27,50,000/-. The Assessing Officer (AO) disallowed the commission expenses paid to M/s. United Pest Management Services, M/s. Mahadev Industries, and M/s. A.K. Associates, totaling Rs. 27,50,000/-, citing lack of satisfactory justification and relation to the assessee. The CIT(A) upheld this disallowance, emphasizing the failure of the assessee to substantiate the claim with material evidence.

2. Presumption that the Amount Paid was Not Commission but Sales:

The AO observed that the bills raised by the three entities were for sales and not commission. The assessee contended that the term "sale" was used interchangeably for commission and provided agreements and invoices demonstrating the commission was based on sales volume. The CIT(A) noted the AO's observation that the agreements and Profit and Loss Accounts indicated the earnings were for services executed and not sales or supply of material.

3. Presumption that the Payments were Not Through Banking Channels and No TDS was Effected:

The CIT(A) raised a presumption that the payments were not through banking channels and no TDS was effected, although this observation did not emanate from the assessment order. The assessee provided evidence of payments through banking channels and TDS returns, which were placed on record.

4. Disallowance of Commission Expenses by the Assessing Officer and its Sustenance by the CIT(A):

The AO disallowed the commission expenses on the grounds that the payments were made to related parties without satisfactory justification and the initial agreement with M/s. UPL Ltd. did not allow the appointment of sub-agents. The CIT(A) upheld the AO's findings, noting the assessee's inability to substantiate the claim with sufficient evidence. However, the Tribunal found that the assessee had provided reasonable explanation and supporting documentation, including agreements, invoices, banking channel payments, and TDS returns. The Tribunal noted that the lower authorities did not challenge the factum of rendering services by the entities, and the assessee demonstrated that the payments were at comparable market prices. Consequently, the Tribunal directed the deletion of the addition made by the AO and sustained by the CIT(A).

Conclusion:

The Tribunal allowed the appeal of the assessee, finding that the assessee had provided sufficient evidence and reasonable explanation to justify the commission expenses. The addition made by the AO and sustained by the CIT(A) was directed to be deleted. The order was pronounced in open court on 02/03/2023.