2021 (10) TMI 1042 - AT - Income Tax

Addition of commission paid to overseas agent - assessee was unable to prove the need for commission @ 25% paid to M/s. Khadlaj Perfumes LLC, whereas commission incurred with other parties was @ 0.5% to 5.85% - HELD THAT - Assessee in this case has paid commission to its overseas commission agent. Agreement has been duly submitted. Payment has been duly made to the overseas commission agents. The same is duly approved by the RBI. AO has questioned necessity of high rate of commission. In his opinion lower commission was to be paid. No case has been made out that the payment is bogus. In fact there was search and seizure operation at the premises of the assessee and no evidence was unearthed that the payments were bogus and non-genuine. Names and address of the overseas commission agents were very much there with the Assessing Officer. He insisted the assessee to produce principal officer of the overseas entity. Assessing Officer has made no effort whatsoever to make any independent examination of his own. He sits in the shoes of the businessman and decided that lower rate of interest should have been charged. In our considered opinion this is legally totally unsustainable. CIT(A) has elaborately examined the issue and after detailed analysis of the factual data has come to the conclusion that the assessee s performance has hugely increased pursuant to support from the commission agents. In this view of the matter in our considered opinion learned CIT(A) has passed a correct order. Addition made by the Assessing Officer is solely based upon surmises and conjecture without any cogent independent verification on record. See RAJARANI EXPORTS PVT LTD 2013 (5) TMI 410 - CALCUTTA HIGH COURT . TP Adjustment - transfer of fund for equity capital - assessee advanced interest free loan to its subsidiary - HELD THAT - As assessee has given funds to its subsidiary initially which has been converted later on into equity capital. For the intervening period the Assessing Officer has charged 10% notional interest. The Revenue was relied upon the case of Perot System TSI India Ltd. 2009 (10) TMI 638 - ITAT DELHI . There was no issue of conversion of fund into equity in the case of Parot System TSI India Ltd. (supra). However in the present case the plea is that fund transferred was for conversion into equity and there was some procedural delay. This has been accepted by learned CIT(A) on the touchstone of the ITAT Ahmedabad decision in the case of Micro Inks Ltd. 2009 (10) TMI 638 - ITAT DELHI We find that the proposition that transfer of fund for equity capital does not attract transfer pricing adjustment. Assessment u/s 153A - addition when no incriminating material was found and these were completed assessment - HELD THAT - Hon'ble Bombay High Court in the case of CIT Vs. Continental Warehousing Corporation (Nhava Sheva) Ltd. 2015 (5) TMI 656 - BOMBAY HIGH COURT has held that in the case of completed assessment no addition can be made under section 153A of the Act dehorse any incriminating material found. It is not disputed that upto A.Y. 2006-07 these were completed assessment and no incriminating material was found. To this extent this ground raised by the Revenue stands dismissed. Addition of staff welfare expenses - AO also disallowed expenses on account of purchase of goats for distributing it to its employees for Eid celebration - CIT(A) has upheld the addition by holding that there is nothing to indicate that this expenditure was incurred specifically on the employees of the assessee company and there is no detail available as to the number of employees of the assessee company, the number of employees who are Muslims and the reasonableness of the said expense - HELD THAT - We find that learned CIT(A) has passed reasonable order. In the absence of necessary details in this regard expenditure involved cannot be allowed as business expenditure. The decision of Borsad Tobacco Co. P. Ltd. 2019 (9) TMI 1600 - ITAT MUMBAI referred by learned Counsel of the assessee are not applicable on the facts of this case. Hence, we uphold the order of learned CIT(A) Expense for obtaining special number for car - as per AO there is no benefit to business in any way and therefore he disallowed the expenses - HELD THAT - We find that the orders of the authorities below are appropriate that expenditure for obtaining fancy number for the car is not at all business expenditure. Hence, there is no question of allowing the same as revenue expenditure or capitalizing the same and allowing depreciation thereon. Hence, we uphold the order of learned CIT(A). Excess physical stock found in search - HELD THAT - We find that the addition in this regard is based upon the excess stock found during search and we do not find any infirmity in the order of the authorities below. Even the assessee is taking shifting stand partly accepting and partly denying the veracity of findings. This is not sustainable. Hence, we uphold the same. Excess cash found - amount of the seized cash would be added to the Total Income u/s. 69A - We find that the assessee has contended that it was never a case the assessee has not pressed for this ground. Hence, in our considered opinion this issue has been left unadjudicated by learned CIT(A). Moreover the Assessing Officer has rejected the assessee s explanation without mentioning as to what was the explanation. Hence, in the interest of justice we remit this issue to the file of learned CIT(A). The learned CIT(A) is directed to consider this issue afresh and decide as per law. Addition of commission paid to overseas agent - HELD THAT - As decided in own case commission on export activity had been fully disclosed in all correspondences and activities in relation to export, the commission was paid through banking channel of RBI approval and it was paid pursuant to an agreement approved by Government of India and UN. The payment of commission was for business consideration and there was apparently no illegality in making payment of commission. Besides this, nothing has brought on record to show that the transactions relating to payment of commission are non-genuine or are excessive and unreasonable. Unexplained purchases - HELD THAT - We find that the addition has been made by the Assessing Officer without any cogent material. The assessee has supplied all purchase/evidence. This has been rejected by the Assessing Officer without any reasoning whatsoever. Moreover learned CIT(A) has also given finding that the said purchase was not routed through profit and loss account as expenditure. For all these reasons we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same.

Summary

Issues Involved:
1. Disallowance of commission paid to overseas agent.
2. Addition in respect of loan advanced to associated enterprises at arm's length price.
3. Disallowance of staff welfare expenses.
4. Disallowance of expenditure for obtaining a special number for a motor car.
5. Addition due to excess physical stock and excess book stock.
6. Addition of cash seized during search proceedings.
7. Deletion of addition by treating unexplained purchases as genuine.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Overseas Agent:
The Revenue appealed against the CIT(A)'s order allowing commission paid to M/s. Khadlaj Perfumes LLC. The AO disallowed the commission citing lack of evidence for services rendered and questioned the necessity of high commission rates. The CIT(A) found the commission payment justified based on business expediency, increased sales, and market share. The CIT(A) noted that the commission agreement was authenticated, and payments were approved by RBI. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's disallowance was based on conjecture without independent verification.

2. Addition in Respect of Loan Advanced to Associated Enterprises at Arm's Length Price:
The AO added notional interest on interest-free loans given to a subsidiary, treating it as a loan requiring arm's length pricing. The CIT(A) deleted the addition, noting the advances were intended for equity investment, delayed due to procedural approvals, and eventually converted to equity. The Tribunal upheld the CIT(A)'s decision, agreeing that the advances were quasi-equity and not subject to interest adjustments.

3. Disallowance of Staff Welfare Expenses:
The AO disallowed expenses incurred on Ramzan celebrations and Eid gifts, questioning their business relevance. The CIT(A) upheld the disallowance, noting the lack of specific details and reasonableness. The Tribunal agreed with the CIT(A), finding the expenses disproportionate and unsupported by necessary details.

4. Disallowance of Expenditure for Obtaining a Special Number for a Motor Car:
The AO disallowed the expense for obtaining a special number for a car, deeming it non-business-related. The CIT(A) upheld the disallowance, considering it a personal expense of the directors. The Tribunal agreed, rejecting the claim for depreciation on the expenditure.

5. Addition Due to Excess Physical Stock and Excess Book Stock:
The AO added amounts for excess physical stock and gross profit on excess book stock found during search. The CIT(A) upheld the addition, noting the item-wise discrepancy analysis. The Tribunal found no infirmity in the CIT(A)'s decision, emphasizing the validity of the stock discrepancies identified.

6. Addition of Cash Seized During Search Proceedings:
The AO added seized cash as unexplained, rejecting the assessee's explanation. The CIT(A) treated the issue as infructuous due to the absence of a specific ground in the appeal. The Tribunal remitted the issue back to the CIT(A) for fresh consideration, noting the need for proper adjudication.

7. Deletion of Addition by Treating Unexplained Purchases as Genuine:
The AO added amounts for alleged bogus purchases, which the assessee claimed were genuine. The CIT(A) deleted the addition, noting the supporting evidence provided and the lack of independent inquiry by the AO. The Tribunal upheld the CIT(A)'s decision, finding the addition unjustified and unsupported by evidence.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, emphasizing the need for evidence-based disallowances and proper verification by the AO. The Tribunal remitted the issue of seized cash back to the CIT(A) for fresh adjudication.