TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 352
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Sec. 40A(2) and hence, the disallowance of Rs. 6,67,03,097/- ought to be deleted. 2. The learned CIT(A) erred in disallowing commission expenses paid to Daga Life Sciences DMCC to the extent of Rs. 6,67,03,097/- u/s 40A(2) on the ground that expense of commission to related party is unreasonable and excessive without taking into account that commission expenses incurred by Assesse is reasonable and not excessive and that the Ld. AO has not discharged his onus of bringing on record the fair market value of services as required u/s 40A(2)(a) and that the Ld. CIT(A) wrongly interpreted RBF's Exchange Control Manual for Import and export and Customs circular No. 64/2003 dated 21.7.2003 for benchmarking rate of commission and hence, the disallowance of Rs. 6,67,03,097/- ought to be deleted. 3. The learned CIT(A) failed to appreciate that identical commission was paid to Daga Life Sciences DMCC, Dubai in earlier assessment year and there is no change in facts in the current year and hence, on the ground of consistency, entire foreign commission paid to Daga Life Sciences DMCC, Dubai ought to be allowed. DISALLOWANCE OF COMMISSION EXPENSES OF Rs. 7,38,05,757/-U/S 40(a)(i) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oss appeal by Revenue & assessee) 4. The brief facts of the case are that during the course of assessment proceedings, on perusal of the Profit and Loss Account, it was observed by the AO that the assessee had shown sales of Rs. 2,77,28,35,881/- and corresponding purchases were at Rs. 2,35,96,27,687/- and had debited Rs. 8,47,56,071/- as commission and brokerage paid under the head "Other expenses". Further it was observed by the AO that Sales Commission of Rs. 7,47,82,152/- was paid to M/s. Daga Life Science DMCC (DLS), Dubai. The AO also noted management of the DLS Dubai, the recipient of commission was having close relationship with the directors of the assessee company and the commission payment transaction was between related parties. The director of DLS, Shri Kirti Krishna Daga is the brother of director Shri Satyen Daga of the assessee company. During the course of hearing for assessment proceedings, the assessee was asked by the AO to produce the breakup along with supporting details and also further required to provide information and justify the payment of commission to related party. The assessee was asked to file details of basis of commission paid to relatives of Rs. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be received and provided by the agent situated at Dubai. The contract was absolutely silent on the nature of services to be provided by the Agent i.e. DLS at Dubai or in any other country for international marketing of products for a consideration of 5% to 50% of commission, in value of Rs. 7.47 crores for the year under consideration. It is also a matter of fact that the parties to contract were resident of two different countries. The transactions were involving cross border transaction which demand strict compliance of domestic law on respective countries and international laws. The AO found that the contract placed on record in support of payment of commission was not up to the mark and it was too vague and general. Therefore, the AO found it to be not a reliable piece of evidence. The assessee had no explanation to offer on the subject matter. Hence, the AO restricted the commission to 1% of turnover (i.e. 35,51,33,000 x 1% = 35,51,330) and balance commission expenses of Rs. 7,73,57,087/- (i.e. Rs. 8,09,08,417 - Rs. 35,51,330) was disallowed by the AO. 5. Before the learned CIT(A) the assessee made elaborate submission informing that the assessee has engaged in the busine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....im of commission @22.78% being fair and reasonable after noting that the commission paid to DLS Dubai has no connection with the nature of goods supplied, value of sales made, services rendered in connection with sales made in Iran and service tax, income tax and other tax liability of agent in India, etc. The learned CIT(A) further noted that the RBI in its Exchange Control Manual for Import and Export has set an upper ceiling of 12.5% for agent commission on exports. He further stated that the CBEC has issued a Customs Circular wherein it has been directed that RBI ha not revised its earlier instructions as regards the limit of payment of agency commission and it was clarified that the field formations may continue to permit export benefits on FOB value without deducting agency commission if such commission is up to the limit of FOB value. From these RBI Manual and CBEC circular the learned CIT(A) opined that these authorities have held that the ceiling of 12.5% for agency commission on export is applicable. Against this, in the present case the payment of commission by the assessee to DLS Dubai varied between 5 to 50% of sales value and the average rate was worked out @22.78% of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and other transaction related facts and circumstances which could justify the payment of commission at a much higher rate to DLS. It is noted that in a similar case of M/s Diamond Tool Industries, 108, Udyog Bhavan, Sonawala Road, Gorregaon (East), Mumbai 400 051. PAN NO. AAAFD4673L Vs J.C.I.T. Circle 24(3), Pratyaksha Kar Bhavan, C-11 Bandra Kurla Complex, Bandra (East), Mumbai 400 051, the INCOME TAX APPELLATE TRIBUNAL MUMBAI 'D' BENCH in ITA No. 136/Mum/2009, A.Yr. 2005-6 vide order dated 14.12.2011 has held that the payment of commission @3% to the related party as against 2.5% allowed by the A.O. is reasonable and will meet the ends of justice. The A.O. has adopted the rate of 1% commission being reasonable and thereby 'holding that the payment of commission @ 21.78% is excessive having regards to the nature and quantum of services received by the appellant. In view of this discussion and having regard to full facts of the case and order of the Hon'ble Mumabi Tribunal in the case of M/s Diamond Tool Industries it would be fair and reasonable if instead of the rate of commission of 1% as taken by the A.O., the allowable commission rate is taken @ 3% of turnover of R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee has not provided relevant details before the authorities below. He submitted that no document relating to the services provided and how the rates of commission were fixed were submitted before the Assessing Officer. Hence, the ld. Counsel of the assessee submitted that the assessee has not provided all the relevant details. He further submitted that the nature of the services has not been properly explained. He submitted that the Revenue is very much justified in examining the nature of the services. Just because commission has been allowed in the earlier year, cannot justify the payment in subsequent years without any examination. Hence, he submitted that the nature of the commission and the rates thereof has not been properly explained. Hence, the authorities have rightly considered it as excessive. 9. We have carefully considered the submissions and perused the records. We note that the assessee has paid commission to the Daga Life Sciences DMCC, Dubai, which is controlled and managed by brother in law of the Managing Director of the assessee company. We find that it is the settled issue that the Revenue cannot seat into the businessman's shoes and decide what is r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l market shall be constructed only a payment of commission under this Contract irrespective of whatsoever contained and mentioned therein. M/S DAGA GLOBAL CHEMICALS LTD M/S DAGA LIFE SCIENCES DMCC Sd/- Sd/- (KOKILA A. GADHIYA) (KIRTI KRISHNA DAGA) Director Managing Director 10. The above agreement has been found by the Assessing Officer as to be not comprehensive warranting the commission of payment as excessive. We find that in the above contract, the range of commission has been mentioned from 5% to 50%. However, it has been mentioned that the commission @ 5% to 50%, as may be fixed by mutual consent between the Principal and the Agent at the time of undertaking the export, transaction. In this regard, we note that no detail/correspondence/agreement regarding the fixation of individual rates in particular invoice has been produced before the authorities below. To examine the payment of commission, in accordance with the above contract, it is necessary to go into the correspondence wherein a particular rate of commission was fixed. In this regard, the assessee has submitted before the ld. Commissioner of Income Tax (Appeals) that during the course of assessment proceed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ommission paid for this year in accordance with the relevant consent. Hence, in our considered opinion, the interest of justice will be served if the issue is remitted to the file of the A.O. The A.O. is directed to examine the documents by which the mutual consent was arrived at for individual invoices of commission. If the rates fixed are in accordance with the relevant documents, the commission payment will need to be allowed. The assessee is also directed to cooperate with the Assessing Officer and provide the necessary details. Other ground in Assessee's appeal Apropos the issue of disallowance of commission expenditure u/s.40(a)(i): 12. The brief facts of the case are that the A.O. in the assessment order has noted that the right to receive commission income arises in India, since the source of Income is in India. Further he noted that the assessee itself paid service tax in India on this commission. The A.O. noted that Indian Service Tax is payable in India for availing and utilizing services of foreign concern in India. The A.O. has observed in its order that it would not be out of place to mention that the Agent was having a business connection in India. The Agent was....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... He submitted that the agent has no business connection in India and the commission paid for the services rendered by the foreign agent outside India and further as per India- UAE treaty, foreign Agent has no permanent establishment. He further submitted that the services rendered by the Agent outside India is not liable for deduction of tax at source. 16. Per contra, the ld. Departmental Representative relied upon the orders of the authorities below. 17. Upon careful consideration, we note that the Assessing Officer on this issue has noted that the contract between the parties was executed in India. He has further noted that the right to receive commission income arises in India since the source of income is in India. Further, it has been noted that the assessee itself has paid service tax in India on this commission. The Assessing Officer further observed that the agent is close relative of the director of the assessee company, it did not provided sufficient information on the nature of service that so called agent has provided to the assessee company before the Assessing Officer. The rate of commission was varying. Hence, whether the payments are for services or managerial or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng purported reasonable commission allowable of Rs. 1,06,53,990/- being 3% of export turnover from Rs. 7,73,57,087/- and thereby disallowing service tax paid which is an allowable expense u/s 37 r.w.s 43B." 19. We find that this ground is not emanating out of the orders of the authorities below. However, since we have already remitted the issue of examination of commission paid to the file of the Assessing Officer, the Assessing Officer shall examine this issue also. Furthermore, it is noted here that the said service tax has been paid by the assessee on the services rendered by the Dubai based agent. Firstly, how can the service tax arises when the services has been rendered outside India and secondly, under what limb of contract the assessee was to incur the said expenses instead of the agent, also needs to be examined. The Assessing Officer while examining this issue shall bear in mind our above observations. Other ground in Revenue's appeal: Apropos the issue of allowing of carry forward of long term capital loss: 20. Brief facts are that in this regard the AO noticed that the assessee had claimed Long Term Capital Loss in the return of income. The same was claimed on wri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the assessee's claim of carry forward of capital loss was found to be in order. The learned CIT(A) observed in this regard as under: - "I have gone through the assessment order of the A.O. and the submissions made by the assessee. It seen that the AO observed from the submissions made by the assessee that the assessee had claimed Long Term Capital Loss of Rs. 84,46,013/- on write off of investment in Wholly Owned Subsidiary Company at China. The claim of assessee and reply was closely scrutinized by the A.O. The assessee company replied that the assessee company had not sold these shares. The assessee company had invested in its WOS at China. The WOS had incurred losses since inception in year 2009 till the previous year. Losses of the company had wiped out investment of assessee company and in June 2014, the assessee company passed a resolution for closure of the company. The claim of the assessee that the investment in WOS was written off in the previous year be allowed as Long Term Capital Gain (Loss), was not found acceptable by the A.O. The appellant has vehemently opposed the additions made and submitted that the Learned AO erred in not allowing carry forward of long ....