2009 (11) TMI 81 - AT - Income Tax

Disallowance of commission expenses - allowable business expenditure or not? - HELD THAT - In the instant year, M/s Aswad Steels Alloys (P) Ltd. had provided leads and out of which, nine parties were specifically converted into orders. The appellant has stated that seven parties pertained to sale/purchase transactions and two parties were commission based transactions. As regards sale/purchase transactions, according to the appellant, the total income earned was Rs. 27.36 lacs and, commission paid was Rs. 11.92 lacs and thus, there was net income of Rs. 15.45 lacs. So far as the commission based transactions are concerned, the appellant has submitted that it has earned commission of Rs. 46.54 lacs and paid commission of Rs. 25.58 lacs and thus, there is a net income of Rs. 20.96 lacs. Once the fundamental fact of payment of commission and allowability of commission as referral fee has been permeated through all the assessment years including the instant assessment year then the hypothesis adopted by the authorities below to hold that commission is not an eligible deduction is not tenable solely on the principles of consistency alone. It is settled law that in absence of any change either in facts or in law, principles of consistency itself can be made a basis to uphold the claim of the appellant company. As decided in the case of CIT vs. J.K. Charitable Trust 2008 (11) TMI 8 - SUPREME COURT if the fact situation changes then the Revenue can certainly prefer an appeal notwithstanding the fact that for some years no appeal was preferred. In our considered opinion, the payment by account payee cheque as per business agreement dt. 1st Aug., 2003, confirmation from payee is sufficient proof of rendering of services. The fact that providing leads is not their core line of activities or they have not stated such activity in its tax audit report cannot be a basis to suggest that they have not rendered services to the appellant company. Merely because the recipients of commission were also engaged in different line of business, was not a sufficient ground to hold that no services have been rendered as has also been held by the Tribunal in the case V.I.P. Industries Ltd. vs. IAC 1991 (1) TMI 187 - ITAT BOMBAY . The factum of rendering of services is not explained by date of supplies or invoices raised. What has to be seen is whether services have been rendered, which has duly been established in the instant case. In our considered opinion, it is a case where disallowance has been made on surmises, conjectures and suspicion and it is settled law that no addition can be made on the basis of surmises, suspicion and conjectures - we hold that, appellant has duly established that services were rendered by M/s Aswad Steels Alloys (P) Ltd. and hence is eligible for claim of deduction. Commission paid to M/s Shakumbhari Pulp Paper Mill Ltd.- As there was no justification to suggest that payment of commission was not for services rendered. The objection regarding financial statement of M/s Shakumbhari Pulp Paper Mill Ltd. is wholly irrelevant consideration and cannot be basis to disallow the claim of deduction. In our considered opinion here too, the authorities below have failed to appreciate the factual matrix of the case and proceeded on considerations which are wholly irrelevant to disallow the claim of commission made by the appellant company and, therefore the same is held to be untenable. We hold that the CIT(A) was incorrect in law and on facts in upholding the disallowance of claim of deduction and therefore, the same is directed to be deleted.

Summary

Issues Involved:
Disallowance of commission expenses of Rs. 75,80,000 out of the total commission paid of Rs. 1,11,52,457.

Issue-Wise Detailed Analysis:

1. Facts and Background:
The appellant company, an authorized distributor of Motorola India Ltd., filed a return of income declaring Rs. 26,96,640. During assessment, the AO directed the appellant to provide details of the commission paid. The appellant disclosed the commission paid to six parties, with two parties (M/s Aswad Steel & Alloys (P) Ltd. and M/s Shakumbhri Pulp & Paper Mill Ltd.) receiving a substantial amount without TDS due to certificates from the IT Department.

2. AO's Observations and Disallowance:
The AO disallowed Rs. 75,80,000 of the commission paid to M/s Aswad Steel & Alloys (P) Ltd. and M/s Shakumbhri Pulp & Paper Mill Ltd., citing:
(a) Orders for defense supplies are through open bidding, and middlemen are not allowed.
(b) Agreement with Aswad Steels for procurement of orders and post-contract services with a commission of 4.5%.
(c) Discrepancies in audit reports and the nature of business not disclosed.
(d) Different commission rates for similar services without detailed justification.
(e) Companies showing losses despite receiving commissions.
(f) Lack of evidence of these companies being liaison agents for defense deals.

3. Appellant's Contentions:
The appellant argued that:
(a) The identity of the parties and proof of services rendered were established through business agreements and service-tax challans.
(b) Payments were made by account payee cheques, and both parties confirmed services to the AO.
(c) Similar expenditures were allowed in past and current assessment years.
(d) Section 40(a)(ia) was incorrectly invoked as certificates for no TDS were issued.
(e) Referral fees are permissible even in defense deals, and service-tax payments corroborate services rendered.

4. CIT(A)'s Findings:
The CIT(A) upheld the disallowance, concluding the expenses were not incurred wholly and exclusively for business purposes. Key points included:
(a) Discrepancies in commission rates and agreements.
(b) Suspicion about the roles of referrals/commission agents.
(c) Financial statements of the companies not reflecting the nature of services.
(d) Service-tax challans not being conclusive evidence of services rendered.
(e) No reference to commission agents in purchase orders.
(f) The role of referrals being insignificant given the mandatory tender publication by government organizations.

5. Tribunal's Analysis and Decision:
The Tribunal found the disallowance unsustainable based on:
(a) Consistency in allowing similar commissions in past and subsequent years.
(b) The appellant's business model involving commission payments for referrals.
(c) Detailed evidences like agreements, confirmations, service-tax challans, and bank statements supporting the commission payments.
(d) The AO's failure to summon the parties or rebut the evidence provided.
(e) The principle of consistency as upheld by the Supreme Court and Delhi High Court, emphasizing that similar facts should lead to similar conclusions across assessment years.
(f) The Tribunal's reliance on prior judgments supporting the allowability of commission payments for business purposes.

6. Conclusion:
The Tribunal directed the deletion of the disallowance of Rs. 75,80,000, holding that the appellant had sufficiently proved that the commissions were paid for services rendered and were thus eligible for deduction under Section 37(1) of the IT Act. The appeal was allowed, and the levy of interest under Section 234B was deemed consequential.

Final Judgment:
The appeal filed by the appellant is allowed, and the disallowance of Rs. 75,80,000 is directed to be deleted.