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TMI Blog2016 (9) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... igh court in the case of United Breweries [2011 (10) TMI 443 - KARNATAKA HIGH COURT ] are clearly applicable in the assessee’s case. Accordingly, we hold that the payment of commission to guarantors is not wholly and exclusively incurred for the purpose of business and is not allowable deduction u/s. 37(1) of income tax act. Accordingly, the addition made by the AO is confirmed - decided against assessee. Addition u/s 40A(2)(a) - commission paid to John Bruce (UK) LTD. - the expenditure was not incurred wholly and exclusively for the purpose of business - Held that:- The paper book submitted by the AR is not certified by either assessee or the AR. Therefore, we are of the opinion that the material placed before the Bench is not made available to the AO. The assessee had submitted the details of commission paid, and the invoice amounts, but not placed the copies of invoices to verify whether the sales were made through the JBUK or not? CIT(A) examined the agreements and came to conclusion that the expenditure was incurred for the purpose of business but he has not given any opportunity to the AO. This issue requires further verification to examine the genuiness of expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Assessee by : Mr.S.Sundaraman, C.A 21-09-2016 O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER These three cross appeals are filed by the Assessee in ITA Nos. 2259, 2260 2261/Mds./2015 the Revenue in ITA Nos. 126, 125 130/Mds./2016 are directed against the common order of the Learned Commissioner of Income Tax(A)-8, Chennai dated 30.10.2015 pertaining to the assessment years 2010-11,2011-12 2012-13. Since issues involved in all these Revenue s appeals as well as assessee s appeal are common in nature, these appeals are clubbed together, heard together, disposed off by this common order for the sake of convenience. Revenue Appeals: (i) ITA No.126/Mds./12(Revenue s Appeal: 2010-11) (ii) ITA No.125/Mds./12(Revenue s Appeal: 2011-12) (iii)ITA No.130/Mds./12(Revenue s Appeal: 2012-13) 2. Revenue has taken altogether three grounds of which Ground Nos.1 3 are general in nature, requiring no specific adjudication. 3. The common ground in all these Revenue s appeal are related to the disallowance made by the AO U/s.40A(2) of the Act as payments of commission were considered excessive, which were deleted by the Ld.CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Further Ld.CIT (A) observed that Shri E.K. Pathasarathy is assessed to tax and the commission paid by the company was admitted as income in his Income tax Returns for the relevant assessment years and paid the resultant taxes. Consequently there is no revenue loss. Aggrieved with the order of Ld.CIT(A), the Department is in appeal before the Tribunal. 4.2. Before us, Ld.D.R argued that Shri E.K. Pathasarathy and family are holding shares of 60.4% in the company s equity and the services rendered by him were compensated by remuneration paid to him and there is no need to make further payment in the form of profit commission since no such commission was paid to any of the employees or staff members who are working in the company. Since it is a private limited company, the Ld.D.R has argued that the profit of the company is distributed among the family members depriving other shareholders of their share in the kitty. 4.3. On the other hand, Ld.A.R submitted that Shri E.K. Parthasarathy was the Chairman and Managing Director(CMD) of the company and was responsible for leading the company for long term strategy with a view to creating share holder value. His leadership ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the goods/services. In the process, the AO has disallowed the entire commission paid to Shri E.K. Parthasarathy, Managing Director. However, the AO has not brought on record any comparable cases and quantified the reasonable amount. The AO has not disputed the fact that the Shri E.K. Parthasarathy, Managing Director was rendering the valuable services and because of all his efforts, the company has progressed in it s ventures and gained the profits made it s image in the business. The AO is not disputing the fact that the expenditure was laid out for the purpose of business and not doubted genuineness of the payment. As per section 40A(2) of income tax Act the expenditure in excess of the fair market value of the services rendered by the specified person comes under the scanner. In this case the AO has disallowed the entire commission paid to Mr. Parthasarathy without bringing any tangible evidence to suggest that the commission paid was in excess of services rendered by him. Therefore the is no case for making any addition u/s 40A(2) of Income tax act. 4.5 The assessee company is making the payment of commission to Shri E.K. Parthasarathy, right from the assessment year 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rthasarathy, the Chairman and the Managing Director and Smt Radha Partha Sarathy,Director @ ₹ 41,20,000/- each. 6. During the assessment year 2010-11, the assessee claimed the guarantee commission paid to the directors, Mr.E.K.Parthasarathy, ₹ 41,20,000/- and Mrs. Radha Parthasarathy ₹ 41,20,000/- aggregating to ₹ 82,40,000/- towards the personal guarantees given by the directors for the Bank loans as expenditure. The commission was paid @ 2% on the sanctioned limit by the SBI. Both Mr.Parthasarathy and Mrs.Radha Parthasarathy are the directors of the company holding 45.78% of shares in the company, apart from the shares held by HUF and family Members in the assessee s company. During the assessment proceedings, the AO held that the expenditure falls under the ambit of Sec.40A(2)(a) of the Act. The AO disallowed the guarantee commission holding that the company has not availed any additional services from the Directors more than what is expected of from the Directors and the expenditure was not incurred wholly and exclusively for the purpose of business and it was paid for the benefit of the Directors. On appeal, the Ld.CIT(A) allowed the expenditure hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the decision of Hon ble Calcutta High Court in the case of India Jute Co. Ltd., Vs. CIT (178 ITR 649) wherein it was held that the payment of guarantee commission is a normal and accepted practice and Delhi High Court in the case of Controls Switchgear Contractors Ltd. Vs. DCIT (W.P.(C) 2845/2014/CM APPL 5898/2014) wherein it was held that act of the directors in providing their personal guarantees and undertaking the attendant risks is clearly beyond the scope of their services as directors and that the transactions in consideration for which commissions were paid by the assessee to it s Directors are real. It further stated that the directors having provided their personal guarantee have acted beyond the call duty and the fact that the assessee in its commercial wisdom has agreed to pay commission for the furnishing of such guarantees cannot be flawed, as it is well settled that it is assessee s discretion as to which expenditure is necessary and to what extent and it is not within the jurisdiction of the AO to impose his views with regard to the necessity or the quantum of the expenditure undertaken by an assessee for the AO has only to determine whether the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed was not furnished by the assessee and in any case the securities cover the entire credit limits satisfactorily. As per the balance sheet against the sanctioned limits of ₹ 20.60 crores by banks, the outstanding loans were ₹ 7,83,34,832/- and the company s reserves and surplus was ₹ 39.85 crores and book value of current and fixed assets offered as security was ₹ 58.73 crores which clearly shows the financial soundness of the company against which the banks have granted the credit facilities. In this financial background of the company and the value of assets offered as primary and collateral security to the loans, it is only mere formality to give personal guarantee of the directors. In case of default though the liability of the guarantor coterminus with that of the borrower the banks proceed to recover from primary and collateral securities first instead of proceeding on the guarantors. Though the ld. Counsel argued vehemently that there was personal risk on the assets of the directors and the joint liability for repayment of loan there was no evidence produced regarding any personal assets given as security. The assessee also has not furnished the evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o questionable as to why Mr.John Bruce was paid commission when the assessee company claims to be a beneficiary of JBUK Ltd., a company in which he is interested in. iii) It was also noted that huge commissions were paid to both Mr.John Bruce and Mr.Parthasarathy who hold substantive stake in the assessee company and nothing prevented them from gaining personal benefits from the assessee. iv) The assessee failed to produce details with regard to copies of agreement and correspondence between the assessee and JBUK Ltd.,/ Mr.John Bruce, approval of Board/shareholders, financial interest of Mr.John Bruce in JBUK Ltd., and share of sale to KAMAZ, Russia, of JBUK Ltd., along with purchase and sale price of JBUK to KAMAZ of theproducts supplied bythe assessee. v) Without prejudice to the above the commission paid to JBUK Ltd., falls under the definition of Fees for technical services. 8.3 Aggrieved by the order of the AO, Department carried the appeal before the Ld.CIT(A). On appeal, the Ld.CIT(A) deleted the addition. The Ld.CIT(A) in his order observed that the assessee produced copies of agreement with M/s.John Bruce (UK) Ltd. JBUK Ltd. was appointed as the authorized agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of invoices and proof of payment and submitted Board resolutions evidencing the payment. JBUK has also researched all the markets for ASAs outside India, both after market and Original Equipment (OE), and developed the necessary marketing material including, but not limited to, a website, catalogue, brochures, fitting and servicing instructions. JBUK exhibited the ASAs at appropriate international trade fairs all around the world - and continues to do so. In the international trade fairs JBUK provides printed brochures, price list, new product briefings, etc. JBUK maintains communication with the existing arid potential customers to explain the product and also check the customer s future requirements and gathers market intelligence for future products. JBUK also offers full product liability insurance and flexible banking arrangements to all its customers. Although these can now be provided by the assessee themselves, they were not available in India until relatively recently. Thus JBUK factually has shaped the overall direction of the assessee with regard to exports - from making recommendations helping in further technological advances, suggesting new products, proposing new m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -up its own contacts. 8.8 The following annexure were filed by the A.R before us (i) Some of the marketing literature developed by John Bruce (UK) Ltd (JBUK) in Russian language for the Russian Market. (ii) A copy of product brochure displaying the assessee s products. (iii) A sample e-mail to the assessee which is typical of the kind of input and support JBUK offered during the negotiations. (iv) Sample copies of assessee s invoices to JBUK for the original patterns and tooling. (v) A print-out of the JBUK s website in Russian http://www.slacks.ru/ (vi) Sales Invoice wise details of commission paid to JBUK. In view of above submission the ld.A.R. contended that the payment of commission to JBUK is justified and the ld.CIT(A) orders be up held. 9. We have heard both the parties and perused the material on record. The commission was paid for sale of its products to KAMAZ, Russia and BOOWAN, South Korea. As per agreements dated 09.02.2008 and 01.10.2008, services rendered by John Bruce (UK) Ltd., to promote the sale of the assessee company s products. The assessee company has paid the commission to JBUK Ltd. The assessee has supplied these products directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion in the company, though the number of employees are working in the company for years to gether in various senior capacities. Therefore the AO viewed that only reason for payment of commission was she is being a daughter of the CMD and there was no business expediency. Further the AO observed that the she has not done any special services to the company and accordingly disallowed the expenditure of ₹ 1,15,67,203/- commission paid to Mrs. Priya Sriraman. 10.2 The Assessee went on appeal before the CIT(A) and ld. CIT (A) deleted the addition holding that AO can make disallowances under section 40A(2)only when warranted and when conditions of the section are satisfied. The ld.CIT(A) viewed that the payments made to her are to be seen from a prudent business man s view point and the case does not warrant any such disallowance and the Ld. CIT(A) held that commission expenditure incurred by the appellant is reasonable and allowed the assessee s appeal. Aggrieved by the order of the Ld.CIT(A) the Department is in appeal before us. 11. The Ld. DR supported the assessment order and argued that the company has engaged the services of Priya Sriraman(PS) from the A.Y 2008-09 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities. Further A.R has explained in great detail the professional qualifications and the contribution made by the director Priya Sriram(PS) in managing the affairs successfully of the appellant company. The explanation submitted by the A.R is in general in nature but not specific, how the company got the incremental benefit. The AO disallowed the expenditure holding that the commission was paid because she is the daughter of the Managing Director E.K.Parthasarathy and she has not rendered any special services to the company which require payment of profit commission. The Board has passed the resolution on 01/02/2011 just before completion of the year ending. In the Board resolution there was no mention of additional responsibilities given to her or rendered by her. The A.R has not furnished the appointment order of Mrs.Priya Sriram specifying the job given to her and the responsibilities entrusted to her for payment of commission. Even the Paper book filed by the A.R does not specify the extra services rendered by her. She is employed in the company from the A.Y 2008-09 and paid fixed salary and commission as follows: A.Y salary Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 237.81 75.73 23.27 13.1 Careful analysis of the information shows that though there was increase in sales during the A.Y 2011-12 to the extent of 63.13 crores increase manly due to jump in export sales from ₹ 37.50 crores to ₹ 68.11 crores which was mainly due to foreign agents i.e JBUK and Mr. Sergey Prokhorov who were compensated separately. There was a marginal increase in domestic sales front which can be attributed to general business trend, and increase in price rise. Similarly for the A.Y under consideration sales have increased from ₹ 206.31 crores to ₹ 237.81 crores giving rise to increase in sales to the extent of 7.62 crores in export sales and 23.88 crores in domestic sales aggregating to ₹ 31.50 crores and profit before tax has reduced from ₹ 24.72 crores to ₹ 23.27 crores. In the circumstances it is evident from the above trading results that there were no additional efforts or services rendered by Mrs.Priya Sriram to make the payment of profit commission over and above the fixed salary. Since the fixed was already increased from ₹ 35.50 lacs in 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure was incurred wholly and exclusively for the purpose of the business. Thus, AO disallowed the rent paid to Mr.Sriram Sivaram in the respective assessment years mentioned herein above. Aggrieved by the order of ld. Assessing Officer, the assessee carried appeal before Ld.CIT(A). 16. On appeal, Ld.CIT(A) observed that the assessee company has taken on rent, the residential premises owned by Mr.Sriram Sivaram, Director of the company at 1,Parthasaathy Garden, Kasturi Rangan Road, Alwarpet, Chennai-18, which is in a prime area of Chennai having built-up area of 7,500 sq.ft. The Ld.CIT(A) observed that the rent works out to ₹ 46 per sq. ft. Ld.CIT(A) observed that Mr.Sriram Sivaram has been provided with company leased accommodation as per the terms of contract with Mr.Sriram Sivaram. According to Ld.CIT(A), the AO was of the opinion that there is no business exigency or necessity to hire the house of Mr.Sriram Sivaram and again let the same to be used by him as a company leased accommodation. The Ld.CIT(A) observed that this transaction involves leakage of revenue as the company leased accommodation is taxed as a perquisite in the hands of Mr.Sriram Sivaram ..... X X X X Extracts X X X X X X X X Extracts X X X X
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