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TMI Blog1991 (5) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... e agents the articles manufactured and produced by them at their factory to the agents for sale and distribution by the agents for and on behalf of the said principals'. During the course of discussion while the sales of the assessee were examined the assessee was asked to show sales vouchers, delivery challans of the delivery made to M/s. BIPCO Sales Corporation through whom sales have been effected. However it is stated by the assessee that such delivery challans have not been made. On enquiring about the actual practice being adopted by the assessee it was stated that deliveries are sent straight from the factory of the assessee to outside parties and the challans are made directly in the name of the sole selling agents BIPCO Sales Corporation. This is obviously a clear contravention of the clause mentioned above. (ii) To verify the fact further a survey was conducted under section 133A on the assessee's premises as well as the premises of M/s. BIPCO Sales Corporation. It was found that both the offices are situated in the same room. Detailed statements were recorded of Shri Lalit Kumar C. Shah, Partner of M/s. B.P.L. and Shri Umakant Shah, Partner in the firm of M/s. BIPCO Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of securing payment of dues by customers and to pay rent, taxes, insurance of goods in transit and other charges for storage and disposal of the goods. In the case of Bipco, the assessment order showed that the income by way of commission was assessed in its hands after making allowance for expenses incurred by it on rendering the abovementioned services. Next, it was argued that the fact that the wives of some of the partners of the assessee were also partners of Bipco did not alter or affect the fact that Bipco was a separate entity possessing a separate Food & Drugs Authority licence, separate licence from Municipal Authorities had a separate registration under Labour Welfare Fund Act, received separate bills of electricity, rent, etc., and was separately registered with the Sales-tax authories. It also did not make any difference to the fact that the commission expended by the assessee was actually paid to Bipco in view of the services rendered by Bipco. Further, there were other partners in Bipco who looked after substantial portion of the administrative, financial and other responsibilities. 11. All these submissions were accepted by the first CIT(A), who, in para-3 of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85. In the course of such examination, it transpired that as regards the nature of services rendered it was stated by Mr. Sheth that they were procuring orders from local as well as upcountry customers by correspondence and travelling. It also transpired that the statement given by Mr. Umakant Sheth on 23-4-85 gave a true picture of the state of affairs and that there was no difference between the statement given by Mr. Sheth on 23-4-85 and 21-2-85. Here again, it came to light that M/s. British Pharmaceutical Laboratories, the assessee herein, are the owners of the premises; that the premises of Bipco and B.P.L. for storing the goods are the same and that part of the premises has been given to Bipco on leave & licence. At this stage, it may be stated that there was a survey operation under section 133A on 23-4-1985 when the Income-tax Inspector visited the office premises and found that the employees of B.P.L. and Bipco were utilised for writing each other's books, and although the delivery of goods was taken not from the factory but straight from the office, it was not a violation of the original agreement clause which specifically required that the delivery would be taken from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Sales Corpn. were kept in the same godown and that the accounts of both the concerns were written by the same account. These substantial evidence, according to the CIT(A), suggested that no genuine commission agency existed. The CIT(A) observed that when huge commission was paid to a sister concern, whose books are written by the assessee's accountant, who stores their goods in the assessee's godown and who has common employees with the assessee and who cannot show what service was rendered for earning this handsome commission, the IAC would be entitled to draw adverse inference. The CIT(A) relied on the principles laid down by the Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 and the observations of the Supreme Court in the case of Collector of Customs v. B. Bhoormal [1974] CTR (SC) 175. The CIT(A) finally observed that the entire exercise of having a commission agency agreement suddenly stopped after the survey under section 133A; all the so-called difficulties in getting upcountry orders seemed to have suddenly ceased and, in CIT(A)'s opinion, the sudden termination of the commission agency itself tended to support the IAC's conclusion that the claim for commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e insurance, etc. He relied in this context on the decision of the Calcutta High Court in J.K. Steel & Industries Ltd. v. CIT [1978] 112 ITR 285. He also relied on the Delhi High Court decision in the case of Mahalaxmi Sugar Mills Co. Ltd. v. CIT [1986] 157 ITR 683. Shri Tandon argued that as per the agency agreement the list of services to be rendered by the sole selling agent included procuring and soliciting orders from all over India through its 120 authorised stockists, sorting and packaging of goods received from B.P.L. and forwarding them to the stockists, undertaking insurance of goods in transit, collection of dues from stockists and servicing the customers. Shri Tandon took us through the sole selling agency agreement dated 16-2-1974 between B.P.L. and M/s. Bipco Sales Corporation. Clause 3 of the agreement provided that the principals shall hand over to the agents the articles manufactured and produced by them at their factory to the agents for sale and distribution by the agents for and on behalf of the said principals. Clause 13 provided that the principals agree with the agents that they shall spend on advertisements and canvassing as suggested by the agents for furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 365 (SC) and a decision of the Bombay High Court in Velji Deoraj & Co. v. CIT [1968] 68 ITR 708. Shri. Agarwal further argued that the partners were inter-related and the transactions flowing out of the commission agreement were not at arm's length. Several statements were made consequent to the survey operation which falsify the claim of the assessee that independent services were rendered. Shri Agarwal relied on three decisions of the Supreme Court in Durga Prasad More's case, Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439, Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 and the decision of the Bombay High Court in W.T. Suren & Co. (P.) Ltd. v. CIT [1971] 80 ITR 602. He pointed out that most of the partners of Bipco were closely related to the partners of the assessee. They were either wives or brothers of the partners of the assessee firm and this was a device on the part of the assessee to divert the profits of this firm. The goods were received not in the factory but in the office. Shri Agarwal, in particular, relied on the statement of Mr. Umakant H. Sheth, partner of Bipco Sales Corporation, recorded in the course of action under section 133A on 23-4-85 and his cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -16 of our order hereinabove, is whether the impugned expenditure on commission was incurred for services rendered or conversely whether there is evidence to establish that Bipco Sales Corpn. had rendered any service to justify payment of commission to them. Such commission was being paid in the past and its genuineness was never questioned during the last several years and we must note that Bipco Sales Corpn. was assessed to tax on such commission. It would appear that when the issue came before the first CIT(A), that CIT(A) was impressed by the various arguments that were advanced before him. a brief summary of which has been recorded by us in para-10 of our order above. The pith and substance of these arguments was that there was no contravention of clause 3 of the agreement between the assessee and Bipco Sales Corpn. but only a slight modification that Bipco secured order from customers, undertook to sort the goods customerwise and undertook the responsibility of securing payment of dues by customers and to incur expenditure on rent, taxes, insurance of the goods in transit etc. The argument that such income was assessed to tax in the hands of Bipco in several years has been fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le selling agents, the said Umakant Sheth stated as follows : " We are procuring orders from local as well as upcountry by correspondence or travelling then we after consulting BPL for stock position BPL prepares invoices in our name after allowing 10% discount, then we prepare our challans of different parties and pack the goods for despatch then we get the L/R and we prepare invoices & despatch to different parties. We get the payment through bank or 30 days and for payments we have to correspond with the parties & after the payment is received the other formalities of accounts as well as C form is done by us. " We find that Bipco Sales Corpn. have an independent set of employees who do different jobs. They have their own accountant, packing supervisor, typist, person in charge of correspondence, filing and those doing packing and despatching work. There are 11 members of staff who are in no way connected with the assessee who has its own set of employees (24 in number). We also find that Bipco Sales Corpn. is an independent firm doing sole selling agency and has incurred a total expenditure of Rs. 9,75,201 which includes packing charges of Rs. 80,600, insurance of Rs. 13,753, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits as per the books than the assessee and has been assessed as such on the income from commission. It is an independent taxable entity with a separate establishment which has been carrying on business of sole selling agency for the last more than 10 years. It has separate licences under the Sales-tax Act and Shop & Establishment Act. In view of these facts, we are not at all convinced by the stand of the revenue authorities that no services were rendered and that the commission paid was only to divert the income to a sister concern. The first CIT(A), who set aside the order, was impressed by the arguments advanced and directed certain enquiries to be made. The survey under section 133A that was carried on and the statement recorded in the course of such survey have not, in our opinion, brought on record any material that would jeopardise the case of the assessee that it had paid commission to Bipco, the sole selling agents, for services rendered. The fact that such agency was terminated in S.Y. 2040 cannot be held against the assessee while determining this issue. The present issue cannot be decided on events which have occurred post facto. We have to see whether there is evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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