ITAT AHMEDABAD BENCH ‘C’
Suzlon Energy Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal Nos. 3911(Ahd.) of 2007 & 1367 (Ahd.) of 2008
[ASSESSMENT YEARS 2005-06 & 2006-07]
SEPTEMBER 21, 2012
ORDER
A.K. Garodia, Accountant Member
These are cross-appeals of the assessee and the Revenue for two years which are directed against two separate orders of the learned Commissioner of Income-tax (Appeals)-XIV, Ahmedabad, dated September 27, 2007 for the assessment year 2005-06 and dated March 17, 2008, for the assessment year 2006-07. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First, we take up the appeals of the assessment year 2005-06. Ground No. 1 of the assessee’s appeal and ground No. 1 of the Revenue’s appeal are interconnected as per which the grievance of the Department is regarding deletion of dis allowance of Rs. 9,34,95,200 made by the Assessing Officer on account of sales commission paid under section 37 of the Income tax Act, 1961 and the grievance of the assessee is regarding confirmation of part dis allowance on this account to the extent of Rs. 42,81,600.
3. The brief facts of this issue till the assessment stage are noted by the learned Commissioner of Income-tax (Appeals) in paragraph 2.1 of his order and for the sake of ready reference, the same is reproduced below :
“The first ground is with regard to the dis allowance of sales commission expenditure of Rs. 9,77,76,800. The appellant-company is engaged in the business of manufacturing wind turbine generators (WTGs) at Daman and Pondicherry. During the year, under consideration, the appellant claimed sales commission expense in the sum of Rs. 9,77,76,800 on total sales of Rs. 1917.50 crores. The appellant has paid commission to 27 parties on 137 transactions of sales out of total 451 windmills sales. The Assessing Officer called six customer for personal verification by issuing summons under section 131 of the Act, who were examined and their statements were recorded. The Assessing Officer has discussed these facts in details in the assessment order and concluded that there is no evidence that the assessee- company received inbound services and its claim of payment of commission is not justified, as no services were rendered by the agents. Hence, the Assessing Officer disallowed the entire sales commission expenses of Rs. 9,77,76,800 and added the same to the total income of the assessee.”
4. Being aggrieved, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals) who has deleted the part dis allowance to the extent of Rs. 9,54,95,200 and confirmed the balance dis allowance of Rs. 42,81,600 and now, the Revenue is in appeal for the amount of dis allowance deleted by the learned Commissioner of Income-tax (Appeals) and the assessee is in appeal for the part dis allowance confirmed by the learned Commissioner of Income-tax (Appeals).
5. The learned authorized representative supported the order of the learned Commissioner of Income-tax (Appeals) with regard to ground raised by the Revenue and with regard to the part dis allowance confirmed by the learned Commissioner of Income-tax (Appeals), in respect of six persons, it was submitted that even after initial introduction, the agent carries out many functions and, therefore, even if the sales is initiated by the customers as alleged by the Revenue, remissiors also provided other business information as stated in the agreement so as to justify the allow ability of the commission expenditure. It was the submission that it was a contractual arrangement with remissiors as stated in the contract and the services were rendered to the assessee and there was no provision for rendering any services to the customers. He also submitted that the assessee is eligible for deduction under section 80-IB to the extent of 100 per cent. and, therefore, even after dis allowance of sales commission, there is no impact on the profit of the assessee and the tax effect is revenue neutral. He also submitted that apart from the introduction of customers, the commission agents were rendering other valuable services such as providing other valuable information such as credibility report of the customers and they were also helping in making collection from the customers and therefore, commission paid by the assessee is allowable in full. Reliance was placed on the following judgments :
(a) Pennzol Investment & Trading Co. (P.) Ltd. v. Asst. CIT [1994] 49 ITD 534 (Hyd.);
(b) Swastic Textile Co. (P.) Ltd. v. CIT [1984] 150 ITR 155 (Guj.);
(c) CIT v. Hewitt Robins (New York) [1983] 141 ITR 278 (Cal.);
(d) CIT v. Ishwar Prakash and Bros. [1986] 159 ITR 843;
(e) ITO v. Shakti Cables [1990] 50 Taxman 329 (Delhi);
(f) Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 (Bom.); and
(g) Jt. CIT v. Concept Communication Ltd. [2006] 9 SOT 75 (Mum.).
6. As against this, it was submitted by the learned Departmental representative that only customers had approached the assessee and not the other way that the assessee has approached the customers and, therefore, it did not come out from the record that the customers were introduced to the assessee by some other person. He also submitted that no evidence has been produced regarding rendering of any services by these persons and hence, commission was rightly disallowed by the Assessing Officer. Reliance was placed on the judgment of the Honorable Allahabad court rendered in the case of Laxmi Sugar & Oil Mills v. CIT [1972] 84 ITR 439 (All).
7. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by the learned Commissioner of Income-tax (Appeals) as per paragraph 3.2 of his order which is reproduced below :
“3.2 I have considered the facts of the case and the submissions as advanced by the appellant along with the case law as relied upon. The facts emerged that agreements have been entered into for payment of commission in respect of work done by the agents and for providing information which resulted in maturity of sales. The payments were made as per the agreement. As per the agreement, the scope of services depending on type of customer required to be done by the agents were as under :
(a) The remissior based on their internal resources shall among st its business associates identify the buyers who propose to/have intention to buy and have the capacity to buy the WTGs.
(b) The remissior on identifying the buyers would suggest, inform, indicate, introduce, recommend and/or solicit them to the company so as to facilitate the company in carrying out the sales of WTG as per the requirements of the buyer.
(c) The remissior would function as a silent professional to render inbound services to the company and depending upon the circumstances, looking at his reputation, status, financial standing, the company will not reveal the name of remissior to the party referred to by him but any referred source resulting into successful commercial transaction would make the remissior entitled to the commission at the agreed rate referred to hereinafter.
(d) In majority of circumstances the buyer would prefer no intermediate with a view to control his cost and hence it is in the interest of both the party that the remissior would not come on front line.
In the case of the appellant, it is seen that :
(i) all the payments were made by cheques and parties were genuine. The parties have confirmed the receipt of payments and rendering of services in the form of giving information about its customers ;
(ii) all the agents are tax payers and the commission received by the assessee- company is shown in their income-tax returns and the tax has been paid thereon ;
(iii) for the appellant, there is no motive to save taxes as units of appellant are eligible for deduction under section 80-IB ; and
(iv) all the recipients of the commission are independent persons and they are not related to the appellant-company ;
(v) there is increase in the sales this year, which justifies the payment of commission ;
(vi) as per the Honorable Supreme Court’s decision relied on by the appellant, the Assessing Officer cannot sit in the judgment over commercial wisdom of the appellant and determine the reasonableness of the expenditure, unless the person is a related person to the assessee under section 40A(2)(b).
As the appellant has given the evidence that the recipients provided information in respect of the services, which helped the sales to be matured and realized, the payment of commission is justified. However, at the same time, it is also observed that the entire expenditure of commission cannot be allowed, in view of the specific finding brought on record by the Assessing Officer after inquiry in certain cases, wherein he examined the six customers and brought on record that in respect of these customers, the agents played no role in achieving the sales and these customers directly approached the assessee for the transaction :
