9911796707
TMI Blog1980 (10) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on the business of manufacturing and sale of electric transformers. The main share holders of the assessee-company during the previous year were Shri L. H. Patel, Shri N. R. Patel, Shri B. H. Patel and Shri H. R. Patel. The assessee appointed M/s. Voltamp Associates, a registered partnership firm, as the sole selling agents of the assessee-company. The assessee company's name is Voltamp Transformers Private Ltd. In the registered firm of Voltamp Associates, the partners were Srimati Urmilaben L. Patel, wife of Shri L.H. Patel, and Srimati Kusumben N. Patel, wife of Shri N. R. Patel. An agreement of sole selling agency was executed on October 9, 1967. According to the terms and conditions of the sole selling agency, the agreed rate of commission was at the rate of three per cent. in the case of sales made to Government and semi-Government institutions and at the rate of five per cent. in the case of sales to private parties and the commission was to be calculated on the invoice value of the goods sold by the company. Sales tax, general sales tax, excise duty or any other taxes, freight, transport charges, etc., were not to be included in the net invoice value for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence on behalf of the sole selling agency. The Tribunal in its order has observed: " On a careful analysis and appraisement of evidence and materials on record and the submissions made by the learned representatives of the rival parties, we have come to the conclusion that there is no commercial consideration or business expediency for the payment of such an exorbitant commission. The sole reason for paying such a huge commission is that M/s. Voltamp Associates, sole selling agents, consisted of the wives of two directors of the assessee-company. The ladies had rendered no service to the firm. The whole correspondence on behalf of the firm was carried on and conducted by Shri J. P. Patel. " Thereafter, the Tribunal examined the terms and conditions of the sole selling agency agreement and observed.: " It is surprising to find that in spite of the fact that the sole selling agents will get quite a high rate of commission and yet they shall not be personally responsible if any customer does not accept the articles ordered by it or does not pay the amounts of the goods sold and delivered to it, the assessee-company rest contented by providing only that the agents will always ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, commission at the rate of five per cent. was paid by Voltamp Corporation, the predecessor-in-business of the assessee-company, and this has been shown by the correspondence which has been brought on record. The correspondence is in the form of letters exchanged between Escorts Ltd. and Voltamp Corporation. Thus, it cannot be said that the commission paid at the rate of five per cent. to agents for selling the transformers was excessive and it must be borne in mind that under the selling agency agreement entered into between the company and Voltamp Associates, in the case of sales effected to government or semi-Government institutions commission payable to the sole selling agent was at the rate of three per cent. and the commission was to be paid at the rate of five per cent. in the case of sales effected to other bodies. Under these circumstances, it cannot be said that the rate of commission which was agreed upon between the assessee-company and the sole selling agent was excessive or exorbitant. It must be pointed out that the Tribunal has dealt with this aspect of the commission paid to M/s. Escorts Ltd. in a very cursory manner and the Tribunal observes in its order in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2023, that is, in the, subsequent year, the total purchases came, to Rs. 1,74,496 and the total sales came to Rs. 2,11,680 and since the sole selling agency agreement had come into force a short time before the end of the accounting period, there was commission of Rs. 1.900 odd for Samvat year 2023. By that time, the partnership firm had also established a branch at Himatnagar and another branch at Vijapur and the two branches were also yielding profits to the partnership firm and the figures of purchases and sales which we have mentioned above do not reflect the sales and purchases of Himatnagar branch or Vijapur branch because the profit and loss account merely rings in the net profit of the working of Himatnagar branch and the net profit of the working of Vijapur branch. Under these circumstances, it is clear that even before the sole selling agency agreement was entered into in October, 1967, with Voltamp Associates, that partnership firm had considerable experience of dealing in goods and was earning a tidy profit on its own without the benefit of the sole selling agency agreement with the assessee-company. It is not as if a totally new inexperienced concern was being entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices are in fact rendered by the sole selling agent, it is immaterial whether the partners of the sole selling agency firm personally do not attend to the work or get the work attended to by their employees. The question is whether services were in fact rendered by the sole selling agents to the principal, the manufacturer-assessee in this case, and, secondly, whether the remuneration which was paid to them was the fair market value for the services rendered by them. The correct principles in this connection are to be found laid down by the Bombay High Court in CIT v. Hind Commission Agents [1963] 48 ITR 615. There the Bombay High Court has pointed out (p. 625): " It is not necessary that, in order that a business activity may be carried on by a person, he has to carry on transactions by himself only. He can as well carry them out through agents or servants or employees appointed by him for the purpose, himself remaining inactive. The transactions, however, carried out by the agents on behalf of the principal will be business transactions of the principal." In CIT v. Edward Keventer P. Ltd. [1972] 86 ITR 370 (Cal), on the facts before it, the Calcutta High Court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But in the instant case, there was no veil to be pierced for the purpose of arriving at its conclusion. The only question was whether the payment was excessive, unreasonable or exorbitant and, secondly, whether there was commercial expediency in paying Rs. 80,000 odd as commission to the sole selling agents. What we have set out hereinabove clearly shows that as a result of the sole selling agent's efforts, the sales of transformers have jumped from rupees eighteen lakhs to rupees fifty lakhs and a great deal of credit for these larger sales must go to the sole selling agents and the efforts of the firm of sole selling agents in selling the transformers manufactured by the assessee-company. So far as the decision in Bengal Enamel Work's case [1970] 77 ITR 119 (SC) is concerned, there very large amount was being paid by the assessee concerned to a doctor of medicine who was not an expert in enamelware, and the principal business of the assessee was making and selling enamelwares. In such situation, the Supreme Court disallowed the extra expenditure in the shape of the amount of commission paid to the doctor of medicines, who happened to be the son-in-law of the principal shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X
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