9911796707
TMI Blog2007 (10) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... as also placed in the paper book evidence regarding export sales in the form of invoice, shipping bills, etc. There are two realisation certificates of export products. In this realisation certificate issued by the bank the payment of export commission is duly reflected. In the light of the above documentary evidence on record, we are of the view that there was sufficient evidence before the AO regarding services rendered by GGE for which export commission had been paid by the assessee. We, therefore, hold that the assessee has established that services were rendered by the agent justifying payment of commission. Restricting the disallowance to 5 per cent as against 12.5 per cent - HELD THAT:- The submissions on behalf of the assessee have not been properly construed by the AO. We may also add here that once it is held that services have been rendered by the agent the quantum of commission that has to be paid is purely the discretion of the assessee and the Revenue cannot sit in judgment over the same. We, therefore, hold that there was no basis to restrict the Claim of commission at 5 per cent as against 12.5 per cent claimed by the assessee. Application of the Provisions of s. 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of plant and machinery, depreciation be allowed thereon. Thus, the above grounds are partly allowed. Deduction u/s 43B - Prepayment premium paid to IDBI - HELD THAT:- The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loans aggregating to Rs. 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of s. 36(1)(iii) r/w s. 2(28A) of the Act prepayment charges being interest paid on moneys borrowed for purposes of business, are to be allowed deduction as revenue expenditure. The prepayment premium being revenue expenditure, is to be allowed deduction in the year of accrual thereof, since the Act does not recognize the concept of deferred revenue expenditure. The decision in the case of Overseas Sanmar Financial Ltd. vs. Jt. CIT [ 2001 (2) TMI 303 - ITAT MADRAS-C] also supports the plea of the assessee. Besides the above s. 43B(d) also permits claiming deduction on actual payment. Even on this basis the claim of the assessee deserves to be accepted. Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst disallowance made by the AO at 12.5 per cent without considering the reasonableness and commercial expediency for the outlay. 2. On the facts and in the circumstances of the case and in law, the CIT (A) has erred in admitting the additional evidence during the appellate proceedings disregarding the objection raised by the AO in the remand report that the assessee was provided several opportunities at the assessment stage to authenticate its claim of the expense claimed but failed to do so and, therefore, the additional evidence filed may not be accepted in view of Rule 46A(1). Furthermore, the CIT (A) has also erred in not complying with the provisions of Rule 46A(2) of IT Rules, 1962 and not passing a speaking Order. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing. 3. The assessee is a company. It is engaged in the business of manufacture and sale of float glass and mirror glass. The assessee claimed deduction of a sum of Rs. 10, 07, 22,625 being commission paid to Guardian Glass Export Ltd. (GGE) @ 12.5 per cent of the export sales. The AO disallowed the claim for deduction on the ground that ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was accorded subject to the assessee agreeing to fulfil its export obligations as contemplated under the aforesaid scheme. 6. According to the assessee export sales had to be effected by the assessee in view of the aforesaid conditions. The assessee entered into export sales agency agreement dt. 20th July, 1993 with GGE an associate of GIC under which the later was appointed as the sales agent of the assessee's products in countries of the world other than India. The percentage of commission agreed was 12.5 per cent of the invoice price of all export sales of product sold through GGE. Consequent to change in the law 12.5 per cent commission was permissible at this point of time. 7. We have already noticed that there was a foreign collaboration agreement between GIC, MRL and GACL. Under this agreement and approvals to this agreement, assessee had to pay royalty to GIC at 3 per cent on internal sale and 4 per cent on export. The assessee had entered into a loan agreement with IDBI, IFCI, ICICI, LIC, GIC and UTI. In October, 1992, GIC gave an undertaking to tire financial institutions that it will not claim royalty during the repayment period of loan and interest to these fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding procuring export Orders, customer service, follow up etc. (b) The AO called upon the assessee to furnish details of parties to whom exports were made through the services of intermediaries, complete documentary evidence like correspondence details of sales personnel of the export agent etc. (c) The AO held that the assessee has given a general reply about services rendered which are normally rendered by any agent. That no evidence to identify the nature of services rendered by the agent with regard to the export business of the assessee was produced by the assessee. (d) Export obligation of the assessee was not a new phenomenon and it existed even when the agreement to pay 5 per cent commission was in vogue. (e) The assessee did not give any valid explanation for the upward revision of commission from 5 per cent to 12.5 per cent. (f) The assessee failed to demonstrate that the percentage of commission charged was reasonable compared with international practice. (g) The assessee had managed affairs in such a way that there is no tax incidence on payment to the joint venture partner. Had the assessee paid monies in the form of dividend or royalty, there would have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... op four float glass manufacturers in the world with 20 plants in various parts of the world and offices in several countries. The assessee company being a new entrant in the field and having no expertise in marketing of float glass in the overseas market, did not establish any office abroad nor recruited any employees to look after such marketing. The assessee solely relied on the Guardian Group for promotion of export. (b) In the aforesaid factual background, the assessee pointed out that the commission paid to GGE was out of business necessity and was justified on grounds of commercial expediency and that the action of the AO in disallowing deduction for payment of export commission is based only on conjectures and surmises and is not sustainable both in law and on facts. (c) That Guardian Group rendered, inter alia, the following services: (i) regular contact with customers and responding to their enquiries; (ii) procurement of Orders and assistance in establishing the letter of credits wherever required; (iii) informing customers on Order status/delivery; (iv) attending to customers complaints regarding breakage, quality, etc. and settlement of customers claims; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of commission. The exports made by the assessee were to unrelated third parties and were not at a price lower than the prevailing international market prices. There is, therefore, no question of invoking provisions of Section 92 of the Act. 10. The assessee also explained as to why it had to effect exports sales and as to how such export sales contributed to recovery of fixed costs to the assessee. The assessee highlighted the fact that after payment of commission exports contributed Rs. 34.25 crores. The assessee also drew attention of CIT(A) to its letters dt. 4th March, 1999, and 11th March, 1999 wherein the reasons for revision of export commission was duly explained by the assessee. 11. Before the CIT(A), the assessee sought to file certain additional evidence in terms of Rule 46A(c) and (d) of the IT Rules. These documents are with reference to the plea of the assessee that there was slack demand for float glass in local market and with a view to recover fixed costs the assessee had to resort to export sales even at less than cost price., Certain documents regarding payment of royalty to GIC after financial year 1999-2000 and financial position of other glass manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the appellant's case. As far as payment of commission is concerned, the AO cannot bring any identical comparable case as in each case the nature of services to be rendered for earning such commission varies from case to case. Under the given facts and circumstances of the case, the AO is directed to allow commission to the extent of 5 per cent and disallow the balance amount in view of the provisions of Section 40A(2) and for the various reasons mentioned by the AO in his Order. 13. In this appeal before the Tribunal submissions as were made before CIT (A) were reiterated by the learned Counsel for assessee. The learned departmental Representative relied on Order of AO. In particular, the learned Departmental Representative highlighted the timing of the sales agency agreement in June, 1993 which, coincided with the condition by financial institutions regarding non-payment of royalty. She also highlighted facts with regard to existence of adverse conditions and necessity for export sales even prior to the signing of the sales agency agreement of 1993 and when commission of 5 per cent was thought justified between the assessee and GIC. It was submitted by her that the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and the various sales agents of the Guardian Group across the world. These correspondences are in the form of emails. The assessee has also placed in the paper book evidence regarding export sales in the form of invoice, shipping bills, etc. There are two realisation certificates of export products. In this realisation certificate issued by the bank the payment of export commission is duly reflected. In the light of the above documentary evidence on record, we are of the view that there was sufficient evidence before the AO regarding services rendered by GGE for which export commission had been paid by the assessee. We, therefore, hold that the assessee has established that services were rendered by the agent justifying payment of commission. On the question whether the CIT(A) was justified in restricting the disallowance to 5 per cent as against 12.5 per cent made by the AO, we notice that the assessee in its submissions before the AO had clearly explained the necessity for making export sales. These facts have already been narrated while discussing the basis of disallowance made by the AO. 17. The assessee has explained in its submissions before AO about the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against 5 per cent originally agreed, while signing the export sales agency agreement in 1993. The export commission paid was as per the limits prescribed by RBI. (iv) Others: The exports made by the assessee even after reducing the export commission during the relevant previous year contributed Rs. 34.25 crores towards meeting the fixed cost. The assessee compared to other float glass manufacturers has the highest export sales, as borne out from the statistics for the financial year 1995-96. The assessee during the year under appeal sustained a loss of Rs. 0.01 crore only as against loss of Rs. 51.27 crores sustained by Float Glass India Ltd., another competing glass manufacturer with similar capacity. The lower loss for the assessee was due to higher exports to the tune of Rs. 90 crores as compared to Rs. 33 crores by Float Glass India Ltd. Net realisation/profit from export of glass/mirror of GGI, even after considering the payment of export commission, is higher than that of the industry. (The fact is also borne out from the enquiries conducted by the Transfer Pricing Officer in asst. yr. 2002-03). By carrying on the exports, the assessee saves Rs. 67 crores in customs duty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the evidence of fair market value. Even on the question of application of Section 92, we notice that the Transfer Pricing Officer in asst. yrs. 2002-03, 2003-04 and 2004-05 has accepted the percentage of commission paid by the assessee as one at arm's length price. In these circumstances we are of the view that even provisions of Section 92 were not attracted. We, therefore, hold that there was no justification in restricting the allowance of commission at 5 per cent by invoking provisions of Section 40A(2) or Section 92 of the Act. We therefore allow the grounds of appeal of the assessee on this issue and dismiss the grounds of appeal of the Revenue on this issue. We may also add that the Revenue has raised an issue regarding violation of provisions of Rule 46A of the Rules. On this issue we find that the CIT(A) has afforded opportunity to the AO and there cannot be any complaint in this regard. The CIT(A) also has given a finding that the documents filed by the assessee were necessary to rebut the observations made by the AO against the assessee in the Order of assessment. The CIT(A) has also held that the assessee was prevented by sufficient cause from placing the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the same to the credit of the Central Government and, therefore, the deduction of the said sum as an expenditure should be allowed in view of the provisions of Section 40(a)(i) of the Act. The AO was of the view that since these expenses were prior to the setting up of the plant they were capital expenditures and were to be capitalized. Since the assessee failed to establish the nexus between the assets and the training fee, even capitalization of these expenses could not be permitted. On the question of the expenditure having crystallised during the previous year, the CIT(A) held that under the mercantile system which the assessee follows this item of expenditure could be considered only as expenditure during the period in which it was incurred and claim of the assessee for deduction by virtue of making payment relying on provisions of Section 40(a)(i) cannot be allowed. The CIT(A) upheld the Order of the AO. Hence, the aforesaid ground of appeal by the assessee before the Tribunal. 22. The learned Counsel for the assessee reiterated submissions as were made before the AO. We are of the view that the item of expenditure in Question was admittedly incurred prior to setting up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red or in respect of any credit facility which has not been utilised. Lump sum repayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loan aggregating to Rs. 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. Even under Section 43B(d) of the Act deduction of interest payable to any public financial institution only in the year in which such sum is actually paid is allowed, irrespective of the year in which the liability to pay such sum was incurred according to the method of accounting followed by the assessee. Since the payment of lump sum prepayment premium, which is in the nature of interest, has been made during the previous year relevant to the asst. yr. 1996-97, the same is clearly admissible deduction in terms of Section 43B(d) of the Act. 24. The AO, however, rejected the contention on behalf of the assessee and held that the expenditure was of a capital nature because it was made to reduce the rate of interest payable in future and the same would confer a ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee did not claim allowance of depreciation under Section 32 of the Act. The return of income was assessed under Section 143(3) of the Act at nil income, without allowing depreciation. In the course of the hearing of the appeal for asst. yr. 1996-97 before the CIT(A)-X, the AO, vide letter dt. 28th March, 2000, requested that depreciation be allowed to the assessee even though the same was not claimed by the assessee in the return of income. In the course of appellate proceedings, the CIT (A)-X had made available a copy of letter dt. 28th March, 2000, received from the AO to the assessee for comments thereon. The assessee vide letter dt. 11th May, 2000, objected to the AO's request for depreciation being thrust on the assessee in the absence of a claim made in that regard. Subsequently, however, vide letter dt. 28th Oct., 2003, the assessee withdrew the aforesaid objection to the grant of depreciation and accepted the contention of the AO for allowance of depreciation. The CIT (A) while disposing of the appeal for asst. yr. 1996-97, did not adjudicate on the request of the AO. The assessee filed application under Section 154 of the Act dt. 20th Oct., 2003 before the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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