Alivira Animal Health Limited Vs ACIT (ITAT Mumbai)
Commission on Repeat Export Orders Cannot Be Rejected Merely Because Customers Were Existing: ITAT Sends ₹1.17 Crore Claim Back for Verification
The Dispute
Alivira Animal Health Limited, a manufacturer of pharmaceutical and related products, claimed ₹1,17,08,355 as commission expenditure for procuring sales orders. The Assessing Officer disallowed the entire amount under section 37(1) of the Income-tax Act, questioning why commission was needed when the company already had regular dealings with the customers concerned.
The officer also referred to a cost audit report that, in his reading, indicated that exports were restricted to associated enterprises. The company disputed that reading. In a clarification submitted during assessment, it stated that the majority of its exports were to entities other than its associated enterprises.
The disagreement therefore had two parts. One concerned the commercial reason for using agents to obtain orders from existing customers. The other concerned the evidence that the agents had actually performed services for which commission was paid.
Why the Claim Was Disallowed
In the Assessing Officer’s view, customers with whom the company already had regular transactions did not require an agent to generate sales. He concluded that the company had failed to justify the commission paid, whether within or outside India, and disallowed the full amount.
The company argued that appointing agents and paying commission for orders is a regular practice in pharmaceutical exports, including where the customer is already known. It also submitted party-wise details of the agents and pointed out that its overall commission expense was less than one per cent of sales.
The Commissioner (Appeals) nevertheless upheld the disallowance. According to the appellate order, the company had to establish the nature and extent of the agents’ services and the business purpose of the payments. The Commissioner (Appeals) found that the material produced did not sufficiently establish those matters and considered the judicial decisions cited by the company distinguishable on the facts.
What Changed Before the Tribunal
Before the Tribunal, the company identified the split in the disputed expenditure: ₹35,68,075 was paid to Indian agents and ₹81,40,280 to foreign agents. More significantly, its counsel acknowledged that the company had not filed evidence showing the services rendered by the agents or correlating their work with the relevant sales invoices.
The company sought an opportunity to submit the necessary documents, including email correspondence from the relevant year. It said this material would show that the agents helped obtain orders and pursue recovery of sale proceeds from importers.
That request shaped the Tribunal’s decision. The Bench did not decide, on the existing record, that the commission was allowable. Nor did it affirm the disallowance as final. It set aside the Commissioner (Appeals)’s order and restored the issue to the Assessing Officer for a fresh decision after considering the company’s submissions. The officer was also given liberty to make any inquiries considered appropriate.
The appeal was accordingly allowed for statistical purposes. This means the company secured a fresh examination of its claim, not an immediate deduction of ₹1.17 crore.
What the Order Establishes
The order leaves the central factual question open: what did the agents do in return for the commission? An existing customer relationship may prompt scrutiny of an agent’s role, but the result of that scrutiny depends on the evidence. In this case, the company itself accepted that the link between agents’ services and sales invoices had not yet been demonstrated through the documents it proposed to file.
The reassessment will therefore turn on whether the company can support its account of the agents’ work. The proposed emails, along with the relevant orders, invoices and payment records, may help the Assessing Officer evaluate the services claimed and their connection with the business. The Tribunal did not prescribe a particular result after that exercise.
The distinction matters. The company’s argument that commission on repeat orders can serve a business purpose remains available to it. But the Tribunal’s order does not hold that every commission payment on an existing customer’s order qualifies for deduction. It gives the company an opportunity to prove this claim on a fuller record.
Author’s Comments
This case illustrates the gap between a plausible commercial explanation and proof of a particular expense. Agents may continue to assist with orders, customer coordination or collections after the first sale. Equally, the existence of an agent agreement or a commission entry in the accounts does not, by itself, show what work was performed during the year.
The decisive development here was the company’s request to produce contemporaneous evidence that had not been filed earlier. The Tribunal responded by directing a fresh inquiry, with freedom for the Assessing Officer to test that evidence. Taxpayers claiming export commission should be able to connect each agent’s role with identifiable business activity and the payments claimed.
The ₹1.17 crore deduction remains undecided. Alivira has another opportunity to establish it; the Assessing Officer must decide the matter afresh on the evidence presented.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order dated 6th March 2026 passed by learned National Faceless Appeals Centre (NFAC), Delhi [hereinafter shall be referred as ‘the learned CIT(A)’] for A.Y. 2018-19, raising following grounds:
“1. On the facts and in the circumstances of the case and also in law, the learned CIT(A) erred in confirming disallowance of commission expenses of Rs.1,17,08,355 under section 37(1). without appreciating that the expenditure was incurred wholly and exclusively for the purpose of business. The learned CIT(A) also erred in not appreciating the fact that appointment of agents and payment of commission to them for sales order procured is a regular trade practice in pharmaceutical exports, irrespective of whether customers are new or regular.”
2. Briefly stated facts of the case are that the assessee company is a subsidiary of Holding Company Sequent Scientific Ltd. and was engaged in manufacturing of pharmaceutical, medicinal chemicals and botanical products. The assessee filed return of income on 30th November 2018 declaring total loss for current year at Rs (-) 4,65,98,067/-. Along with the return of income, the assessee also filed audit report in Form 3CEAC and International/ domestic transactions report in Form number 3CEB. The assessee also filed report for deduction under section 10AA in Form number 56F in respect of undertakings located at SEZ Visakhapatnam. The return of income filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) on 5/11/2019 wherein the current year loss was computed at Rs.(-) 2,63,89,316/-. Thereafter, the return of income was selected for scrutiny and notice under section 143(2) was issued on 22/09/2019.
During the course of the assessment proceedings the Assessing Officer observed that assessee paid commission of Rs.1,17,08,355/- for procuring sales order. The Assessing officer based on the cost audit report noted that export of the assessee was restricted to its Associated Enterprises having related party transaction. However, the assessee explained that for in a clarification dated 03/04/2021, the assessee explained that the majority of the export was directed to the entities, other than the Associated Enterprises. Further, the Assessing officer observed that assessee could not justify as why the commission was paid to the customers who were having regular transaction with the assessee. According to him the entities which were not new, were not warranted the commission of sales, accordingly he was of the opinion that assessee could not justify the commission expenditure paid outside India or paid in India. The Assessing officer in the assessment order passed on 17/04/2021 made disallowances of the commission of Rs1,17,08,355/-, in invoking section 37(1) of the Act and reduced the claim of the current year loss to Rs (-) 34,88,9712/-.
2.1 On further appeal, the learned CIT(A) noted that commission expenses were not incurred wholly and exclusively for purpose of the business and nature and extent to the services rendered was not established. The relevant finding of the learned CIT(A) is reproduced as under:
“7. It is noted that the principal reason for the addition w.r.t. the commission expenses has been recorded as the majority of exports of the appellant has been made to associated enterprises of the appellant and not to independent parties. It makes sense to question the appropriateness of such expenses in the event of major exports being made to the related parties or associated ones. It was incumbent on the appellant to establish not only the business exigencies and rationale behind such payments but also establish that the expenses have been made wholly and exclusively for the purposes of business. It is recorded in the assessment order that the same has not been done. It is also noted that vide query no. 6 of the notice issued u/s 142(1) on 27.12.2020, various details were inter alia requisitioned by the AO during the assessment proceedings.
8.1. On the other hand, the appellant argues that it is a subsidiary company of M/s Sequent Scientific Ltd and orders placed by it with/for the appellant and it submitted party wise details of the agents along with other documents before the AO. With regard to the argument of requirement of commission expenses to the related parties/associate enterprises, the appellant argued that the agents are required as commercial expediency for getting sales orders and therefore, the conclusion of the AO is contrary to the facts.
8.2. The appellant, further, argues that overall commission expenses are below 1% of the sales and therefore, the same cannot be stated to be against the market practice. The appellant, relying on various judicial precedents argued that the AO cannot disallow expenditure merely for the reason that the expenses were not warranted.
8.3. Having considered the rival arguments at length, I am unable to convince myself with the defense extended by the appellant. If the business promotion expenses have been claimed by the appellant, the onus rests on it to establish the nature and extent of services obtained, as well as the impact or benefit derived from such services of the alleged commission agents. Not having done so during the assessment proceedings, despite being questioned, leaves limited scope at the appellate level to elicit relief.
8.4. As regards the judicial pronouncements cited by the appellant, it is noted that the facts of the case at hand are quite distinct. While the judgments cited by the Appellant do bear some thematic relevance to the issues involved; particularly on the aspect of business expediency; their applicability to the present case stands materially diluted in view of the specific factual matrix brought out by the Assessing Officer on page 4 of the order. Therefore, the legal propositions advanced by the Appellant, though not without academic merit, do not sufficiently dislodge the cogent findings recorded in the assessment order based on a broader conceptual foundation and commercial principles. Accordingly, I find that the case laws are not able to assist the appellant.
9. In view of the aforementioned observations and discussions, I am constrained to confirm the addition and to dispose of the ground of appeal. In result, the appeal is dismissed”.
3. We have heard rival submissions of the parties and perused the relevant material on record. The sole issue and dispute in the case is disallowance of the commission expenditure of Rs1,17,08,355/-. Before us, the learned counsel for the assessee referred to paper book containing pages 1 to 125. He referred to the paper book page 58 and submitted that out of total commission expenses Rs. 35,68,075/- was paid to the Indian nationals whereas Rs. 81,40,280/- was paid to the foreign nationals. The learned counsel for the assessee submitted that assessee could not file evidence in support of services rendered by those commission agents and co-relate their corresponding sales invoices. The learned counsel for the assessee submitted that assessee is seeking to file all necessary documentary evidences including the e-mail correspondence during year under consideration to demonstrate that actual service were rendered by those commission agent for obtaining orders and perusing recovery of sale proceeds from the importers
4. In view of the above facts and circumstances, we feel appropriate to set aside the order of learned CIT(A) and restore the issue and dispute back to the Assessing officer for deciding afresh after considering the submission of the assessee. The Assessing officer is at liberty to carry out any inquiries as deemed fit in the circumstances.
5. In the result the appeal of the assessee is allowed for the statistical purposes
Order pronounced in the open Court on 24/09/2026.
