2016 (7) TMI 19 - AT - Income Tax

Appellate Tribunal rules foreign buyer's commission not taxable income, emphasizing commercial justifications.

Manish H Agarwal Versus Assistant Commissioner of Income Tax, Central Circle 4, Surat

The Appellate Tribunal overturned the addition of the foreign buyer's agency commission amount to the assessee's total income. The Tribunal emphasized the ... Addition in respect of foreign buyer’s agency commission which is deducted at source from the invoice amount, by the importer at the time of making the payment - Held that:- Even though the de facto export price for the assessee is the gross invoice value minus the commission, the exporters do not bill the de facto export prices, but show the gross amount and the buyer’s commission separately, so as to be entitled to the export incentives on the gross amounts even though these gross amounts never reach the assessee, and what the assessee gets is only the net export price. The billing pattern by the assessee is thus fully justified, on account of commercial exigencies, and that is how any commercially rationale person would behave. If the assessee does not show the break up on the invoice itself, and shows only the net amount, his export entitlements will be computed on the net amount, and will thus be lower. The assessee has forgone a part of the invoice amount, i.e. to the extent of the agreed commission paid by the foreign agent to his agent, but that is a part of the understanding at the time of negotiating the price and, therefore, the export price, for all practical purposes except for the export incentive entitlements, must stand reduced to that extent. We are not really concerned with, nor is it necessary to deal with, ethical aspect of this practice. This accounting jugglery may seem to be ex facie unethical but even if that be so, addition of the impugned amount cannot be justified for that reason. The amount deducted on account of buying agent’s commission is not part of export sales, and it cannot be added to the exports. It is not an expenditure of the assessee, and, therefore, it cannot be disallowed either. As evident from the documents regarding exchange control regulations, i.e. through the bankers in accordance with the FEDAI/RBI guidelines, there are no exchange control objections with regard to the net realizations. There is no reason to come to the conclusion that it is a case of under-invoicing to the extent of commission amount. The commission amount was not paid by the assessee, though, to the extent of commission amount, the gross export price stood reduced in effect and, accordingly, importer paid the net amount to the assessee. The gross amount is rather symbolic and must not, and has not been, even be treated as the value of exports. Thus we are of the considered view that the authorities below were in error in making the impugned addition - Decided in favour of assessee. Issues:Challenge to correctness of assessment order under section 143(3) for assessment year 2005-06 regarding addition of foreign buyer's agency commission.Analysis:The appellant challenged the order passed by the Commissioner (Appeals) confirming the addition of a specific amount in respect of foreign buyer's agency commission deducted at source from the invoice amount. The Assessing Officer observed that the exporter had not realized the entire invoiced amount due to the deduction of the commission. The AO concluded that the netting off of the commission with sales led to suppression of sales, which was incorrect accounting treatment. The AO added the commission amount to the total income of the assessee. The CIT(A) upheld this addition, stating that the appellant had not shown gross sales amount in the profit and loss account, and the onus to prove the expenses was not satisfactorily met. The CIT(A) emphasized the lack of evidence regarding payment of expenses to the commission agents by the foreign buyers and the absence of any agreement between the appellant and the foreign buyers regarding payment of expenses.Upon hearing the contentions and examining the material, the Appellate Tribunal noted that the deduction from the invoice was the foreign buyer's agency commission, which represented consideration for services rendered by the agent to the foreign buyer. The Tribunal highlighted the commercial practice of reducing the selling price by the buyer's agency commission. The Tribunal referenced a policy circular by the Directorate General of Foreign Trade supporting the inclusion of the commission in the FOB value for calculation purposes. It was clarified that the de facto export price for the assessee was the gross invoice value minus the commission. The Tribunal emphasized that the billing pattern by the assessee, showing the gross amount and the buyer's commission separately, was justified for export incentives. The Tribunal concluded that the addition made by the authorities was erroneous, directing the Assessing Officer to delete the same.In conclusion, the Appellate Tribunal allowed the appeal, overturning the addition of the foreign buyer's agency commission amount. The Tribunal emphasized the commercial justifications for the billing pattern and the understanding at the time of negotiating the price, leading to the reduction of the export price by the commission. The Tribunal highlighted that the commission amount was not part of export sales and was not an expenditure of the assessee, therefore, it could not be disallowed. The Tribunal's decision was based on commercial practices and principles, leading to the deletion of the addition.