2014 (10) TMI 612 - AT - Income Tax

Tribunal overturns disallowance of sales commission, stresses evidence & expediency.

M/s. Palvi Power Tech Sales Pvt. Ltd. Versus Deputy Commissioner of Income Tax

M/s. Palvi Power Tech Sales Pvt. Ltd. Versus Deputy Commissioner of Income Tax - TMI Issues Involved:1. Disallowance of sales commission of Rs. 23,14,705.2. Addition of Rs. 50,09,855 being foreign sales commission.Issue-wise Detailed Analysis:1. Disallowance of Sales Commission of Rs. 23,14,705:The assessee appealed against the disallowance of sales commission paid to relatives amounting to Rs. 23,14,705. The Assessing Officer (AO) disallowed the commission on the grounds that the assessee failed to prove the services rendered by the relatives, who were the recipients of the commission. The AO noted that the agreement presented was cryptic and duplicate, and there was no evidence of the relatives' involvement in the contract execution. Additionally, the AO highlighted that the relatives did not have passports or had not visited the relevant locations during the contract period, questioning their role in the execution of the contract.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that no evidence was provided to substantiate the services rendered by the relatives. The CIT(A) also pointed out that the net worth of one of the recipients, Mr. Bipinchandra, was not sufficient to provide a financial guarantee for the contract. The CIT(A) referenced several judicial precedents to support the disallowance, emphasizing that the payments appeared to be a distribution of profits rather than genuine business expenses.Upon appeal to the Tribunal, the assessee argued that the commission payments were justified and supported by the profitability of the contract. The assessee provided confirmations and evidence of the relatives' involvement in securing and executing the contract. The Tribunal found that the AO and CIT(A) did not bring any positive material to disprove the assessee's claims. The Tribunal noted that the payments were made through banking channels after deducting tax at source and that the recipients had shown the amounts as income in their tax returns. The Tribunal, therefore, deleted the disallowance of Rs. 23,14,705, allowing the assessee's appeal.2. Addition of Rs. 50,09,855 Being Foreign Sales Commission:The assessee claimed to have paid foreign commission of Rs. 50,09,855 to Mrs. Jigna K. Babla and Mrs. Pramodini R. Babla. The AO disallowed the commission, stating that the role of these individuals in securing the sales to M/s. Carus Chemicals was not established. The AO noted the lack of a contract between the parties and absence of any transactional correspondence or communication to support the commission payments.The CIT(A) upheld the AO's decision, emphasizing that no concrete evidence was provided to substantiate the services rendered by the recipients of the commission. The CIT(A) also highlighted that the commission was paid to individuals rather than the company that allegedly arranged the orders.The Tribunal, upon reviewing the case, found that the assessee had provided a letter from M/s. Tristar Investment Company Ltd., confirming the role of the recipients in securing the orders. The Tribunal noted that the assessee earned significant profits from the sales to M/s. Carus Chemicals and that the commission payments were reasonable and incurred for commercial expediency. The Tribunal also observed that similar commission payments to the same individuals for other contracts during the year were allowed by the AO. Consequently, the Tribunal deleted the addition of Rs. 50,09,855, allowing the assessee's appeal.Conclusion:The Tribunal allowed the appeal of the assessee on both grounds, deleting the disallowance of Rs. 23,14,705 for sales commission and the addition of Rs. 50,09,855 for foreign sales commission. The Tribunal emphasized the necessity of concrete evidence to disprove the assessee's claims and highlighted the importance of commercial expediency in determining the allowability of business expenses.