9911796707
TMI Blog2014 (10) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... sales (W/o of brother) Total 23,14,705 4. On inquiry by the Assessing Officer, the assessee submitted as under: "This has a reference to the last hearing had on the 9th of November' 2011 and further to the same we present herewith point wise submissions. B. Details of the commission paid Rs. 1,49,38,463 shown in Direct Expenses. The summary of the commission amounts paid has been placed on record in the last hearing, in the current submission we place on record sample commission debit notes. (Please refer Annexure B) C. Details of the transaction with Azady Trading and Azady Telecom with reference to the commission paid to Mr. Bipinchandra Sejal and Jasmine amounting to Rs. 23,14,505. (Additional Documents such as contractual Agreement and related papers enclosed in Annexure C) This commission includes an amount of Rs. 23,14,505 paid to the related parties, this commission has been paid on account of total sales amounting to x 4.77 crores to Azady Telecom and Azady Trading copies of the Profitability statement have already been placed on your record in the last hearing. During the current submission we are placing on record the copy of the contract which has been entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer after considering the submissions of the assessee, disallowed the commission payment observing as under: 3.1. The assessee has submitted a miniature of duplicate copy of agreement for Hot Dip Galvanizing Plants at Dubai and Iraq. Perusal of a cryptic as well as a duplicate copy of 'AGREEMENT NO PPTSPL/07/02' enlighten that the agreement was signed between the assessee company and Pioneer Machinery and Equipment Industry LLC of Dubai-UAE jointly with Azady Trading FZCO of Dubai - UAE dated 13.01.2007. Hence, as per said agreement, M/s. Gunatit Builders had no role to play with. Therefore, a letter dated 21.11.2011 (scanned and pasted above) from Gunatit Builders certifying the role of Mr. Bipinchandra, produced by the assessee is an afterthought and has no sanctity on facts and has no legal sanctity in terms of the surrounding substance or the matrix laid down under the provisions of section 40A(2)(b) of the Act. 3.2 The details of passports of all the three family members namely Shri Bipinchandra N Attawala, Smt. Jasmin Bipinchandra Attawala and Smt. Sejal Dhaval Lala were called for Shri Bipinchandrabhai has authenticated that he does not have any passp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished as none of the family members were remotely or distantly parties to the contract of UAE based party. No element of proof had been adduced to substantiate their active role in the contractual work undertaken in Iraq. 3.4. It is therefore proved that the assessee paid the purported commission to the parties being father, sister & W/o of brother of the director who are Indian Residents and are assessed to tax in India. Hence, the argument of the assessee about deduction of tax on commission and offering of such income to tax by the recipients is not a valid argument in terms of the claim of expense. The issue is not simple as that. The statute has not offered any amnesty to the tax payer to mitigate its tax obligation adhering to illegitimate claims or without paying due tax on the income earned. Hence, it is beyond doubt that the vital elements such as services of the parties, role of the parties, contribution to the profitability and etc were not proved. 3.5. The assessee has failed to establish rationality, feasibility, reasonability, commercial expediency etc. and claimed deduction on such commission expenses to relatives. The expenses so incurred are therefore not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is justified and reasonable considering the total turnover of 4.77 crores revenue (10% of total turnover), which Your Appellant has earned, this works out to 5% commission. Your appellant has paid commissions ranging from 2 to 10% on various merchant exports too during the year and the mere fact that this commission has been paid to a related party should not deny your Appellant of its claim of a justifiable expenses. It is also not out of context to humbly convey to Your Honor that during this year the total turnover was Rs. 44,56,10,570.36 as against Rs. 19,68,79,790.34 in the ITA No. 1891/Ahd/2012 M/s. Pallavi Power Tech. Sales Pvt. Ltd., Baroda For A.Y. 2009-10 preceding year and the total number of employees in current year were 8 as against 7 in preceding year, implying the total turnover increase of 126%. Your Appellant submits that this was a special contract outside its comfort zone of regular Merchant export activity. Your Appellant also relies on the decision in the case of Voltamp Transformers P Ltd v Commissioner of income Tax, 1981 129 ITR 102 Guj. Your Appellant also relies in the case of DCIT vs. M/s Haldiram BhujiawalIOL-538-ITAT-KOL" 7. The Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture so as to claim deduction under section 37(1). This decision is squarely applicable in the present case, as per discussions made above. 4.10 The payments made to these persons is also an attempt to distribute the profits of the appellant company to its directors in the garb of commission payment to their relatives. In fact, the appellant itself in the submission made to the AO, has accepted that though this was the share in profit, but since these 3 individuals were not shareholders in the company, hence payment could not be made to them in form of profit share. Hence the payment was made in form of commission. Thus this project can at best be held as joint venture as the appellant itself had stated that the project was done in its name as it was required to be made in the name of a corporate entity. In such a situation, as per the ratio laid down by Hon'ble Supreme Court in its decision in the case of Commissioner of Income-tax v. Panipat Woollen & General Mills Co. Ltd, [1976] 103 ITR 66 (SC), the payment made by the appellant to these 3 persons as their share of the profit cannot be allowed as a deduction under section 37 (1). 4.11 The appellant's AR has placed rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is claimed as a deductible allowance under s. 10(2)(xv) of the IT Act was laid out wholly and 'exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion. Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the appellant it does not matter that the payment may inure to the benefit of a third party: Usher's Wilt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al conditions that the expenditure should not be in the nature of capital expenditure and should be laid out or expended, wholly or exclusively for the purpose of the business or profession. The positive tests are if the expenditure is incurred (i) with a view to bring profits or monetary advantage either today or tomorrow; (ii) to render the appellant immune from impending or reasonably apprehended litigation; (Hi) in order to save losses in foreseeable future; (iv) for effecting economy in working which may pay dividends today or tomorrow; (v) for increasing efficiency in working; (vi) for removing inefficiency in the working; (vii) where the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits; (viii) where it is incurred solely by way of a civil duty owed by the appellant to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious Inconvenience to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,505/- to the three persons as under: Name of party Amount in Rs Jasmine Bipinchandra Lala 8,72,325 Bipinchandra N Attawala 6,18,750 Sejal Dhaval Lala 8,23,630 Total 23,14,705 The aforesaid payment of commission was made after due deduction of tax at source thereon. 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 Assessing Officer disallowed the above claim of the assessee by disbelieving the claim of the assessee that these three persons rendered assistance to the assessee in securing the said business and in executing the said business. The Assessing Officer disbelieved that any services were rendered by the three persons to whom commission was paid because the said three persons were related to one of the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant company need not bother about finance for this contract. Copy of confirmation of llesh Vyas is placed at page No. 131 of the paper book. Under this contract the appellant had received a sum of Rs. 4.77 crores from Azady Trading FZCO and Pioneer Machinery & Equipment Industry LLC against the purchase cost of plants amounting to Rs. 4.07 crores. Thus a profit of Rs. 70.41 lacs was booked by the assessee company and even after payment of commission amounting to Rs. 23.14 lacs to Mr. Bipin & Company, the net profit to the company was Rs. 47.04 lacs. This net profit was without incurring any cost on manpower and interest. (The total staff members employed by the company last year were seven as against this years' eight members and Interest cost had come down to Rs. 60,676/- during the year as a against last year's Rs. 4,23,352/-, as per details filed by the assessee at page No. 15 of the Paper Book. As per the chart submitted during the course of hearing, it may kindly be seen that higher commission payment during the year under consideration (from Rs. 59.38 lacs to Rs. 399.48 lacs) resulted in increasing the Gross Profit of the assessee company i.e. six times and simult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and after appreciating the evidence on record, found that the receipt of commission amount had been duly confirmed by the agents which in turn meant that the amount which had been deducted from the invoice value actually represented commission payments which were finally received by the agent- This had been done in accordance with the terms and conditions agreed upon between the buyers and the seller, even though there was no formal agreement-Thus, once the genuineness of the commission as well as its justification of having been wholly and exclusively incurred for the purpose of the assessee's business is established, the same becomes admissible as deduction u/s 37(1)" 13. The Departmental Representative supported the orders of lower authorities. 14. We find that the confirmation of M/s. Gunatit Builders which is placed at page no. 131 of the paper book 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. Further, we find that the assessee company claimed that the business proposal of setting up of galvanized plants in UAE and Iraq was brought to it by Mr. Bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction to M/s. Carus Chemicals of Rs. 7.23 crores which yielded a net profit after commission of Rs. 1,14,64,751/- which was about 15.84% of the total value of exports. The commission paid works out to 7.77%. Mr. Kiran Babla is based in Tanzania and is a regular business associate of the assessee and the assessee has executed a number of contracts/sales through his business connections and was having a cordial business relations. Mr. Kiran Bala and his family business concerns have been instrumental in securing the Carus contract, the CEO of the company Mr. Himanshu Mehta had business meeting with Mr. Babla in Tanzania where Mr. Kiran Babla provided business lead on the Carus contract. Mr. Kiran Babla not only provided the business lead but as there were some price indications known to him through his business connections which were conveyed the bidding indications for the contract. This has led to the company deriving profit from the contract and therefore the assessee was required to pay commission for this lead. The business provided by Mr. Kiran Babla contributed to company's turnover of 16.25%. Therefore, commission paid to Mr. Kiran Babla and his family members is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot Executed by Palvi Power Tech Sales Pvt. Ltd as Our Customer M/s. Carus Chemical Company had advised us that not to ship further material. Thanking you, FOR TRISTAR INVESTMENT CO. LTD. KIRAN BABLA TRISTARSINVESTMENTSCO. LTD P.O. Box. 22642 DAR ES SALAAM (a) The letter of M/s. Tristars Invest,ments Co. Ltd. of DAR ES SALAAM does not even support the role of the Mr. Kiran Babla and his family members in the sales made by the company to M/s. Carus Corporation, USA. (b) The assessee has not put anything on record to establish that there was any transactional correspondence or communication between M/s. Tristars Investments Co. Ltd and M/s. Carus Corporation for placing the orders of purchase for the assessee company or in behalf of the assessee company. (c) The invoices no. 126,127,128,130,131 and 135 do not possess any mention of either M/s: Tristars Investments Co. Ltd or mention of Mr. Kiran Babla and his family members as acting agents. Therefore, the debit note no. 03/08-09 raised on 31.03.2009 by Mrs. Jigna K. Babla requesting to settle commission has no sanctity. Hence, the confirmation dated 18.11.2011 of M/s. Tristars Investments Co. Ltd. of DAR ES SALAAM is an after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s have very good contacts and sources in International markets. M/s Tristar Investments Co Ltd (Family Concern of Kiran Babla, Pramodini Babla and Jigna Babla) is one such family enterprise through whom we have been regularly soliciting / sourcing the business. During the year under Appeal, this is not the first business contract executed, during the year there are other contracts also for which commission has been paid to Mrs Jigna Babla and Mrs Pramodini Babla amounting to Rs. 305,825.00 and 804,693.00 the same have been allowed. Your Appellant submits that these are facts on basis of which the above commission has been paid, the commission is justified and reasonable considering the turnover of 7.33 crores revenue (16.25% of total turnover), which Your Appellant has earned, their commission works out to 7.77%. It is important to state here that the Commission paid is a cost to the company, what is a reasonable commission based on a transaction would be appropriately judged by Your Appellant, during the Year under Appeal, Your Appellant has paid several parties a commission ranging from 2 to 10% on various merchant exports too during the year and the same has been allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s through his business connections and was having cordial business relations with the assessee. Mr. Kiran Babla and family business concern were instrumental in securing Carus contract. The CEO of the company Mr. Himanshu Mehta had a business meeting with Mr. Kiran Babla in Tanzania wherein Mr. Kiran Babla provided the business lead on the Carus contract. He also provided some price indications known to him through his business connections as well as he conveyed the bidding indications for the contract to the assessee. These informations were translated in terms of the profitability with the company derived from this contract and as per the regular commercial terms of contract, the assessee had to pay the commission for this lead. From the business lead provided by Mr. Kiran Babla, the turnover of the company increased by 16.25% and the net profit after commission of Rs. 1,14,64,751/- was earned by the assessee which was 15.84% of the total contractual value of the exports. Therefore, the assessee paid the commission of Rs. 50,09,885/- which was 7.77% of the sales. The Assessing Officer was not convinced with the explanation of the assessee on the ground that role of Mrs. Jigna Bab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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