Aston Shoes Private Limited Vs ACIT (ITAT Chennai)
Conclusion: Additions made by attributing the commission income earned by PSPL as undisclosed income of the Assessees were held unsustainable in law and were directed to be deleted across all relevant assessment years as Revenue had failed to establish inflation of purchase prices; accrual of PSPL’s commission income to assessees; any flow back of funds to the Assessees; or that PSPL was a sham or fictitious entity.
Held: During search proceedings conducted in the Farida Group cases at Chennai, Revenue discovered books of account and debit notes relating to Pacific Strides Pvt. Ltd. (“PSPL”), formerly known as Farida Shoes Pacific Pvt. Ltd., Singapore. The seized materials included debit notes raised upon suppliers of the Farida Group towards commission payments and email correspondences allegedly evidencing procurement arrangements. AO observed that PSPL was managed by members of the Mecca family, who were also promoters/directors of assessee companies forming part of the Farida Group. Statements of certain employees connected with accounts and finance functions of the group entities and PSPL were recorded during search proceedings. Based on the seized materials and statements, AO concluded that the commission income earned by PSPL represented inflated purchase costs and diverted profits of assessees. Accordingly, additions aggregating to Rs.4,75,40,690/- were made across various assessment years in the hands of different Farida Group companies by treating the commission income of PSPL as undisclosed income of assessees. Assessees contended thatPSPL was an independently incorporated and legally recognized entity in Singapore carrying on genuine business operations and regularly filing tax returns in Singapore disclosing the comm ission income earned by it; the commission income was directly received by PSPL from overseas suppliers for procurement facilitation services, including vendor identification, price negotiations, sourcing support, quality coordination and related commercial activities; there was no evidence showing any diversion, repatriation or flow back of funds from PSPL to assessees, Revenue had failed to establish that PSPL was a sham, fictitious or conduit entity. Revenue however contended that the common directorship and control between the Farida Group entities and PSPL established that the commission arrangement was merely a device for shifting profits outside India; the commission represented inflated purchases and diversion of taxable profits by the Assessees through the Singapore entity and the seized materials and statements recorded during search sufficiently justified the additions made by the AO. Tribunal held that PSPL was admittedly a legally incorporated entity in Singapore carrying on business operations in its own name and regularly filing tax returns before Singapore tax authorities disclosing the impugned commission income. Revenue failed to establish any money trail, fund diversion, circular routing or repatriation of commission income from PSPL back to the Assessees. Moreso, the allegation of inflated purchases was unsupported by any independent benchmarking or market comparison undertaken by the Revenue. On the contrary, Assessees produced customs import data and comparable pricing material demonstrating that the import prices were at arm’s length. Suspicion, however strong, cannot substitute evidence. Additions under the Income-tax Act must be supported by credible material establishing accrual of income in the hands of the Assessee. Revenue neither invoked nor established applicability of any anti-avoidance or transfer pricing provisions to demonstrate excessiveness of expenditure or non-arm’s-length pricing.
