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TMI Blog2006 (12) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... the quantum alone that governs in such cases. Fair market value of the goods, services, legitimate needs of the business or profession of the assessee, would be the guiding factor in terms of section 40A(2) of the Act. In the case on hand, though the Assessing Officer has chosen to give 5 per cent., the Commissioner himself has chosen to increase the same to 6 per cent. and only 4 per cent. is disallowed. Even that 4 per cent. is not absolute and it is after deductions in terms of the agreement. Taking into consideration the long standing relationship and also taking into consideration the reputation of the brand and the agent and also taking into consideration that there is no intention to avoid tax, the Tribunal rightly in our view has chosen to accept the case of the assessee with regard to 4 per cent. commission. We, therefore, do not find any unreasonableness in the given circumstances. In fact this Bench recently has chosen to consider some what a similar case in Recon Machine Tools P. Ltd. v. CIT [ 2006 (5) TMI 70 - KARNATAKA HIGH COURT] and thereafter this court has chosen to hold that reduction from 5 per cent. to 2 per cent. is an arbitrary reduction. An overall view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, is not attracted in respect of the payment of commission made by the respondent-assessee to its own sister concern? 2. Whether, on the facts and circumstances of the case, whether there is evidence on material to hold that the payment of commission made by the respondent-company to its sister concern is not excessive or disproportionate to attract the provisions of section 40A(2) of the Income-tax Act, 1961? I. T. A. No. 66 of 2000 3. The Revenue is before us aggrieved by the order of the Tribunal for the assessment years 1991-92 and 1992-93. 4. In the respondent-assessee' s case, in relation to the assessment years 1991-92 and 1992-93, the Commissioner took up revisional proceedings under section 263 of the Act on the ground that the assessments made by the assessing authority were erroneous and prejudicial to the interests of the Revenue, in that, the assessing authority had erroneously allowed a commission at the rate of 10 per cent. The Commissioner had set aside the assessment and withdrew the allowance of commission as made at 10 per cent. The assessing authority thereafter passed an order allowing the claim of the respondent-assessee relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, in respect of the commission paid by the assessee to its sister concern? 3. Whether, on the facts and circumstances of the case, the Tribunal is correct in law in holding that the appeals preferred by the respondent before the Tribunal are maintainable in law? I. T. A. No. 82 of 2001 6. This appeal is also at the instance of the Revenue. In the course of the assessment proceedings, the assessing authority noticed that the respondent-assessee had claimed commission payable to its sole selling agent, namely, M/s. Accumulator Fabrics, Bangalore, a sister concern at the rate of 10 per cent. on the gross turnover of sales. He was of the view that the commission paid at 10 per cent. is unreasonable and excessive. He, therefore, concluded by adding back the sum of Rs. 4,54,991 under section 40A(2) of the Act. Further appeal filed was partly allowed directing deletion of the sum of Rs. 4,54,999. The Revenue aggrieved by the order of the Commissioner preferred an appeal. Appeal stood rejected. The Revenue is, therefore, before us raising the following questions of law (sic). 7. Heard Sri Indra Kumar, learned senior counsel for the Revenue. He would invite our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osen to hold in the order that the statement of Sri Bavedkar would show that no advertisement has been made to the commission agent in the matter. According to the Assessing Officer, the commission paid at the rate of 10 per cent. is highly excessive and unreasonable in comparison to the meagre services rendered by the commission agents. Thereafter, the assessing authority disallowed the commission to the extent of 5 per cent. and allowed only 5 per cent. commission paid on sales. When the same was challenged before the Appellate Commissioner, the Appellate Commissioner has chosen to say that over a period of five years the price of articles have increased and that the demand for batteries have increased. It is not the case of the appellant that the number of customers have increased drastically during the period as a result of the work of the agent. In these circumstances, the Commissioner was of the view that there is justification in finding that the fair market value of the services and facilities procured from the agent cannot be much higher than the cost of the agent and a reasonable profit margin. This would be served by a commission at 6 per cent. on the sales turnover. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 40A(2) and ruled that as the partners of the firm were admittedly the directors, spouses of two of the directors and the son of a director, section 40A was clearly attracted as all these persons were covered by one or the other sub-clauses of section 40A(2)(b). The disallowance made on the ground that the expenditure was excessive and unreasonable was justified. 16. From the case law what is clear to us is that the Department would be justified in interfering with the claim of commission in the event of no evidence or in the event of the said commission being made over just to benefit the kith and kin in terms of section 40A of the Act. 17. In the case on hand, it is seen that the manager Sri Bavdekar, has chosen to say that some of the directors are related to the company. However, he has expressed his ignorance with regard to marketing, commission rates, etc. The assessing authority has chosen to rely on the statement and the agency agreement. 18. The Supreme Court in Bharat Beedi Works P. Ltd. v. CIT [1993] 201 ITR 1063 has considered that the brand name carried significant business value. The payments were made in consideration of a valuable right parted wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business or profession of the assessee, would be the guiding factor in terms of section 40A(2) of the Act. In the case on hand, though the Assessing Officer has chosen to give 5 per cent., the Commissioner himself has chosen to increase the same to 6 per cent. and only 4 per cent. is disallowed. Even that 4 per cent. is not absolute and it is after deductions in terms of the agreement. Taking into consideration the long standing relationship and also taking into consideration the reputation of the brand and the agent and also taking into consideration that there is no intention to avoid tax, the Tribunal rightly in our view has chosen to accept the case of the assessee with regard to 4 per cent. commission. We, therefore, do not find any unreasonableness in the given circumstances. In fact this Bench recently has chosen to consider some what a similar case in Recon Machine Tools P. Ltd. v. CIT [2006] 286 ITR 637 (Karn) ; [2006] ILR 2006 Karn 2459 and thereafter this court has chosen to hold that reduction from 5 per cent. to 2 per cent. is an arbitrary reduction. An overall view of the matter would compel us to confirm the order of the Tribunal in the given circumstances. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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