2014 (10) TMI 612 - AT - Income Tax

Sales commission disallowed contractual obligation with family members of Director - Held that - The payment of commission was made after due deduction of tax at source - The assessee was engaged in the business of chemical exports for last many years - During the year under consideration the assessee secured the contract for setting up galvanized plants in UAE and Iraq from M/s. Azady Trading FZCO and Pioneer Machinery & Equipment Industry LLC which the assessee got executed by availing services of M/s. Gunatit Builders - The assessee claimed to have incurred commission expenses in respect of this business and setting up of galvanized plants at UAE and Iraq - the confirmation of M/s. Gunatit Builders filed by the assessee shows that Mr. Bipinchandra N. Attawala was instrumental in entering of contract between the assessee company and M/s. Gunatit Builders - the assessee company claimed that the business proposal of setting up of galvanized plants in UAE and Iraq was brought to it by Mr. Bipinchandra N. Attawala Ms. Jasmine B. Lala & Ms. Sejal Dhaval Lala and they assisted the assessee company in entering into contract with M/s. Gunatit Builders also for executing the contract and setting up galvanized plants. Merely because in the legal contract which was directly entered into between the Assessee Company and Azady Trading FZCO and Pioneer Machinery & Equipment Industry LLC the names of these three persons did not appear does not evidence that the business proposal was not brought to the assessee company by these three companies - it was not necessary for the three persons to physically visit Iraq before bringing a business proposal in Iraq to the knowledge of the knowledge of the company - In absence of any positive material brought on record by the AO after examining the three recipients of the commission to show that in fact no services were rendered by these three persons the adverse inference drawn by the AO on the basis of his subjective opinion only cannot be sustained - the genuineness of payment is not in doubt as the payment was made through banking channel after deducting tax at source and the recipients of commission have also shown the same as their income relying upon Swastik Textile Co. Pvt. Limited v/s CIT 1984 (1) TMI 29 - GUJARAT High Court - commission was allowable as deduction where the revenue had failed to controvert the broker s statement that he had brought the parties of contract together - the disallowance of commission payment cannot be sustained Decided in favour of assessee. Addition of foreign sales commission Held that - The assessee paid commission to Mrs. Jigna K. Babla and Mrs. Pramodini K. Babla on account of sale to M/s. Carus Chemicals of Rs. 7.23 crore the evidences the fact that recipients of the commission were instrumental in getting the sales order from M/s. Carus Chemical Corporation of USA - the assessee company earned gross profit of Rs. 1.71 crores on the sales made to M/s. Carus Chemical Corporation USA of Rs. 7.23 crores and that the profit after commission was 15.85% and the commission was 7.7% of sales relying upon Swastik Textile Co. Pvt. Limited v/s CIT 1984 (1) TMI 29 - GUJARAT High Court - commission was allowable as deduction where the revenue had failed to controvert the broker s statement that he had brought the parties of contract together - the commission payment was incurred for commercial expediency of the assessee - there were other contracts also for which commission to Mrs. Jigna K. Bala and Mrs. Pramodini K. Bala is paid and the same has been allowed by the AO - the AO was not justified in disallowing the commission payment and the CIT(A) was not justified in confirming the same thus the order of the CIT(A) is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of sales commission of Rs. 23,14,705.
2. Addition of Rs. 50,09,855 being foreign sales commission.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Commission of Rs. 23,14,705:

The assessee appealed against the disallowance of sales commission paid to relatives amounting to Rs. 23,14,705. The Assessing Officer (AO) disallowed the commission on the grounds that the assessee failed to prove the services rendered by the relatives, who were the recipients of the commission. The AO noted that the agreement presented was cryptic and duplicate, and there was no evidence of the relatives' involvement in the contract execution. Additionally, the AO highlighted that the relatives did not have passports or had not visited the relevant locations during the contract period, questioning their role in the execution of the contract.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that no evidence was provided to substantiate the services rendered by the relatives. The CIT(A) also pointed out that the net worth of one of the recipients, Mr. Bipinchandra, was not sufficient to provide a financial guarantee for the contract. The CIT(A) referenced several judicial precedents to support the disallowance, emphasizing that the payments appeared to be a distribution of profits rather than genuine business expenses.

Upon appeal to the Tribunal, the assessee argued that the commission payments were justified and supported by the profitability of the contract. The assessee provided confirmations and evidence of the relatives' involvement in securing and executing the contract. The Tribunal found that the AO and CIT(A) did not bring any positive material to disprove the assessee's claims. The Tribunal noted that the payments were made through banking channels after deducting tax at source and that the recipients had shown the amounts as income in their tax returns. The Tribunal, therefore, deleted the disallowance of Rs. 23,14,705, allowing the assessee's appeal.

2. Addition of Rs. 50,09,855 Being Foreign Sales Commission:

The assessee claimed to have paid foreign commission of Rs. 50,09,855 to Mrs. Jigna K. Babla and Mrs. Pramodini R. Babla. The AO disallowed the commission, stating that the role of these individuals in securing the sales to M/s. Carus Chemicals was not established. The AO noted the lack of a contract between the parties and absence of any transactional correspondence or communication to support the commission payments.

The CIT(A) upheld the AO's decision, emphasizing that no concrete evidence was provided to substantiate the services rendered by the recipients of the commission. The CIT(A) also highlighted that the commission was paid to individuals rather than the company that allegedly arranged the orders.

The Tribunal, upon reviewing the case, found that the assessee had provided a letter from M/s. Tristar Investment Company Ltd., confirming the role of the recipients in securing the orders. The Tribunal noted that the assessee earned significant profits from the sales to M/s. Carus Chemicals and that the commission payments were reasonable and incurred for commercial expediency. The Tribunal also observed that similar commission payments to the same individuals for other contracts during the year were allowed by the AO. Consequently, the Tribunal deleted the addition of Rs. 50,09,855, allowing the assessee's appeal.

Conclusion:

The Tribunal allowed the appeal of the assessee on both grounds, deleting the disallowance of Rs. 23,14,705 for sales commission and the addition of Rs. 50,09,855 for foreign sales commission. The Tribunal emphasized the necessity of concrete evidence to disprove the assessee's claims and highlighted the importance of commercial expediency in determining the allowability of business expenses.