No TDS deductible on Reimbursement of USA office Expenses

Himalya International Ltd Vs DCIT (ITAT Delhi)

The DR also pointed out that apart from reimbursement of expenses, the payment made to Global Reliance Inc. also contains commission paid to consignment agent, therefore, the assessee is under an obligation to deduct TDS thereon. The DR further pointed out that if TDS has not been deducted by the assessee, then the entire amount of payment as claimed by the assessee was rightly disallowed by the Assessing Officer.

On careful consideration of above contentions, we are of the view that on careful perusal of the agreement/MOU dated 19.9.2002 and additional agreement dated 30.3.2004 between the assessee and Global Reliance Inc., we clearly observe that the expenses incurred on behalf of the assessee by its consignment agent M/s Global Reliance Inc, the entire expenses claimed by the assessee were related to marketing and sales expenses and as per clause 03 of the first agreement dated 19.9.2002, the assessee was responsible for all costs, taxes and other tax expenses relating to the import from India to USA and sale of products made by Global Reliance Inc. including custom duty, ocean freight and land freight of USA, warehousing expenses in USA and other general and administrative expenses including USA Salaries payments, Telephone Expenses, Travelling Expenses, Staff Education and Medical Expenses, Courier Expenses, Web Hosting Expenses, USA Local Expenses, Membership Fees paid to different Associations, Legal & Professional Fees, Car Expenses etc. We also observe that as a prudent business decision and with an aim to restrict and control expenses in USA, the assessee also fixed the selling and administrative expenses remuneration and other incidentals @9.05% of the sales effected in USA. Undisputedly, the amount of remittance or reimbursement made to Global Reliance Inc. also contained an element of commission of consignment agent i.e. Global Reliance Inc. but at the same time, we clearly observe that the consignment agent has not rendered any service in India and, therefore, consignment commission is not taxable in India.

All US expenses incurred by the consignment agent on behalf of the assessee were the responsibility of the assessee as per MOU dated 19.9.2002 and subsequent agreement dated 30.3.2004, which were also certified by CPA audit report, when actual export sale was effected at USA through consignment agent on behalf of the assessee, then expenses claimed by the assessee for the purpose of business can not be treated as post sales expenses and observations and findings of the Assessing Officer are not correct and justified in this regard and we set aside the same to this extent only.

On the basis of above factual matrix emerged from the evidence submitted by the assessee before the authorities below, we clearly observe that the ratio of decision of Hon’ble Supreme Court in the case of GE India Technology Centre P. Ltd. (supra) is applicable to the present case. We also hold that the benefit of the ratio of the decision of Special Bench, Mumbai in the case of Mahindra & Mahindra (supra) is also squarely applicable to the present case in favour of the assessee. Hence, in this situation and above facts and circumstances of the case, Circular No. 715 dated 8.8.95 is not applicable to the present case.

As per Explanation 2 attached to section 9(1)(vii) of the Act in the case of remittance or reimbursement of expenses where no element of taxable income in India is found, then the question of tax deduction at source does not arise.

FULL TEXT OF THE ITAT JUDGEMENT

These appeals have been preferred against the order of the Commissioner of Income Tax (Appeals)-XV, New Delhi vide dated 25.02.2012 in Appeal No- 318/2007-08 for the assessment year 2005-06. Since the appeal of the assessee as well as Revenue have been preferred against the same order therefore, for the sake of convenience and clarity in the observations and findings we are disposing both the appeals by this consolidated order.

2. In the beginning of the arguments the Assessee’s Representative (AR) submitted that the assessee does not want to press ground nos.2 and 3. Therefore, we dismiss the same as not pressed. Ground no.4 of the assessee is general in nature which needs no adjudication and we also dismiss the same. The sole remaining ground of the assessee in ITA No. 1750/Del/2011 reads as under:

“(1). The Ld. CIT (Appeals) erred in law and on facts in confirming disallowance of a sum of Rs.25,85,419/- out of Rs.4,33,78,000/- incurred by the consignee agent in the USA on behalf of the appellant merely because the assessee could not produce the bills for the same and also that the said expenses were paid to the agent through proper banking channels. Therefore, the disallowance so made must be deleted.”

3. The grounds raised by the Revenue In ITA No.2611/Del/2011 read as under:–

“1. On the facts and circumstances of the cases and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.4,07,92,581/- out of total addition of Rs.4,33,78,000/-made by the Assessing Officer on account of ocean freight, Custom duty, warehousing expenses, road freight USA, selling and administrative expenses.

2. The Ld. CIT (A) has erred is deleting the addition of Rs.4,07,92,581/- made on account of following expenses:

being the fact the evidences dues not prove that these expenses pertains to assessee, neither these have been paid by the assessee.

3. The expense claimed by the assesssee are not allowable to the assesssee as no TDS has been deducted by the assessee, on these payment, which as per version of the assessee are contractual payments.

 4. The Ld. CIT (A) has erred in accepting the version of the asessee that a Central Govt. department has granted the subsidy to the assessee on the basis of these expenses. The assessee in the return of income has not declared the subsidy as its income on the other hand it has just netted off the expenses. This very fact proves that the assessee has not intention to declare the income accrued or received by it.”

4. Briefly stated the facts giving rise to these appeals are that the case was selected for scrutiny under compulsory criteria and notices u/s 143(2) and 142(1) of the Income Tax Act 1961 (for short the Act) along with questionnaire were served on the assessee. The assessee is engaged in the business of manufacturing, food processing and infotech.

5. The Assessing Officer made certain additions including impugned addition of Rs.4,33,78,000/-. The Assessing Officer noticed that the assessee has showed and claimed expenses as “USA office expenses” when Assessing Officer asked assessee to justify its claim with supporting evidence then in response, the assessee submitted that M/s Global Reliance Inc. deducted the business expenses amounting to USD 343347/- equivalent to Rs.1,51,07,247/- in the course of the export sales of the goods on behalf of the assessee in the relevant year. The assessee also enclosed the certificates from M/s Global Reliance Inc. and a certificate in respect of selling and administrative expenses claimed to have been verified by the CPA in the USA. The Assessing Officer pointed out that in reality the assessee does not maintain any office in the USA.

6. The Assessing Officer held that the assessee has no substantive evidence in its possession to show that these claimed expenses have actually been incurred for the purpose of business of the assessee and secondly, that the assessee has made its entire export sale of M/s Global Reliance Inc. and all export invoices have been raised in the name of M/s Global Reliance Inc. Therefore, the so called claimed expenses of the assessee, which had been incurred by the M/s Global Reliance Inc. and claimed by the assessee as its “USA office expenses” were in any case in the nature of post sale expenses and the same could not be said to be expenses pertaining to the export business of the assessee. For the sake of clarity in our findings, the relevant operative part of the assessment order is being reproduced below:

“Thus, inspite of the fact that the assessee was asked to justify the so called “USA office expenses” along with necessary supporting evidence, all that the asessee has furnished is a certificate from M/s Global Reliance Inc. that the latter had incurred expenses amounting to Rs.15107247/- as selling and administrative expenses on behalf of the former. In support of this claim the assessee has enclosed a copy oc a so called certificate from the auditor in USA which in any case is unverifiable. It is pertinent to point out that the so called confirmation furnished from is also in respect of only the part of the expenses and not for the entire USA office expenses.

In respect of these so called USA office expenses there are certain interesting points which need to be pointed out. While the assessee claims to have incurred the aforesaid expenses as its “USA office expenses”, in reality the assessee does not maintain any office in USA. The only office which is being run in USA is that of M/s Global Reliance Inc. It is also pertinent to point out that the entire export sales have been made by the assessee to this entity M/s Global Reliance Inc. Further, M/s Global Reliance Inc. is a sister concern of the assesssee company as both these entities have common directors particularly one Sh. Sanjeev Kakkar, who is a non resident based in USA. Further, the only evidence which the assessee has of having incurred the aforesaid expenses is a certificate from M/s Global Reliance Inc. to that effect and a certificate from the so called CPA (Auditor) of USA for part of the expenses. Thus even M/s Global Reliance Inc. has only confirmed expenses amounting to Rs.15107247/- out of the total expenses claimed of Rs.43378000/-. During the course of the assessment proceedings the assessee also furnished a copy of its agreement dated 30/03/2004 with M/s Global Reliance Inc. wherein it is claimed that the assessee would bear all expenses incurred out of India on account of marketing which would include road freight, ocean freight, custom duty, warehousing, selling and administrative expenses, etc. and M/s Global Reliance Inc. will deduct all such expenses out of the sale proceeds and remit the net payables to the assessee in India. This so called agreement has been made between related parties i.e. M/s Himalya International Ltd. and M/s Global Reliance Inc. and has not been made on any non judicial stamp paper and is not registered. It is only a self serving document which has been signed by the two related parties and is clearly in the nature of a sham agreement to avoid payment of taxes in India.

Out of the aforesaid discussion two important points emerge. Firstly, the assessee has no substantive evidence in its possession to show that these expenses have actually been incurred. Secondly, the most important fact which emerges out of the aforesaid discussion is that the assessee has made its entire export invoices issued by the assessee company only bear the name of M/s Global Reliance Inc.Therefore, it is clear that the so called expenses which had been incurred by M/s Global Reliance Inc. and which had been claimed by the assesssee as its USA office expenses were in any case in the nature of post-sale expenses and could not be said to be the expenses pertaining to the assessee. If at all these expenses have actually been incurred, these expenses pertain to M/s Global Reliance Inc. to whom the export sales have been made by the assessee.

Therefore, in view of the above, the assessese vide order sheet entry dated 14.12.2007 was asked to explain the allowability of these expenses as prima facie these were post-sale expenses which could not be said to be pertaining to the assessee.

In response the assessee vide its reply submitted on 24.12.2007 stated that M/s Global Reliance Inc. was working as a consignee agent of the assessee company and was rendering a host of services like making market survey procuring orders, arranging for warehousing, transport, payment of duty, etc. It was also submitted that M/s Global Reliance Inc. was collecting the payments from the market on behalf of the assesssee and remitting the same to the assessee after deducting the aforesaid expenses. It was pleaded that these expenses had been incurred by M/s Global Reliance Inc. on behalf of the assessee company and as such the said expenses had not been incurred after sales.

The reply of the assessee has been duly considered and found to be unacceptable. As already mentioned above, the assesssee does not have in its possession any evidence to prove that the aforesaid expenses have actually been incurred. All that it has been able to furnish is a certificate from the Auditor in USA and that too only for a part of these expenses. Therefore, it can be reasonably held that no such expenses have actually been incurred by the assessee. Without prejudice to the above, even if we, for arguments sake, accept that such expenses have been incurred these are purely in the nature of post-sale expenses pertaining to the purchaser M/s Global Reliance Inc. and not pertaining to the assessee. It is again pertinent to point out that all the export invoices issued by the assessee bear the name of M/s Global Reliance Inc. as the purchaser of the assessee’s export product and it is clear that the assesssee has made export sales to M/s Global Reliance Inc. Therefore, if at all any expenses have been incurred by M/s Global Reliance Inc. it is for the purpose of its own business and not for the business of the assessee. Further, the assessee’s plea that M/s Global Reliance Inc. is its consignment agent is also an after thought as the assessee has not furnished any evidence to show that M/s Global Reliance Inc. was its consignment agent. Even the so called agreement entered into by the assessee with M/s Global Reliance Inc. (Which in any case has been proved to be a sham agreement) does not mention that M/s Global Reliance Inc. is a consignment agent of the assessee.

In view of the detailed discussion made above, the aforesaid claim of the assessee amounting to Rs.43378000/- is hereby disallowed and added to the income of the assessee.”

7. The aggrieved assessee preferred an appeal before Commissioner of Income Tax (appeals), which was partly allowed. The CIT (A) allowed the major part of the claim of the assessee and deleted the part addition amounting to Rs.4,07,92,581/- but remaining part of the disallowance amounting to Rs.25,85,419/- was upheld and confirmed. Now being aggrieved by this order, the assessee as well as Revenue is before this Tribunal in these appeals with the grounds as mentioned hereinabove.

8. The relevant observations and findings of CIT (A) read as under:

“I have considered the submissions of the appellant, the findings of the Assessing Officer and the facts on record. I have also considered the remand report of the Assessing Officer and the appellant’s rejoinder thereon. Perusals of the facts on record show that the appellant had entered into an agreement with M/s Global Reliance Inc. USA on 30.03.2004 which was effective from 01.04.2004 to31.03.2005. AS per the agreement it is seen that the appellant was to bear all the expenses incurred out of India on account of marketing which would include road freight, ocean freight, custom duty, warehousing charges etc. on actual basis. In addition to’ the above it was also a part of the agreement that the appellant would pay an amount @ 9.05% of the total sales on account of selling and administrative expenses, remuneration and other incidental. It was also agreed to that all the above expenses would be deducted by Global Reliance Inc. out of the sale proceeds and the net amount payable would be credited to the account of the appellant. One of the important contentions in the appellant’s argument ‘is that all the payments have been made to Global Reliance Inc under a mutual agreement and since the counter parties to the agreement had not made any misgivings about the genuineness or the reasonableness of the payment, therefore, the AO could not disregard the payment made by virtue of the above agreement. The AO has’ observed that the agreement was not registered and it was only in the nature .of a self serving document between .two related parties and therefore, the agreement” was a sham agreement only for the purpose of avoidance of payment of taxes.

The appellant has also claimed expenses by way of selling and administrative expenses of Rs.15651000/-under the USA offices expenses. As per the agreement the liability of the appellant towards selling and administrative expenses was to an extent of maximum of 9.05% of the sales as fixed by the agreement discussed above. The Assessing Officer has observed that these expenses were being disallowed since the appellant had not submitted any evidence regarding the above expenditure. Perusals of the facts on record show that the appellant had filed the details of the major expenses incurred under the head selling and administrative expenses. The bills and vouchers regarding the above were also sent to the Assessing Officer. The Assessing Officer has not made any observation regarding the above expenses in the remand report.

As regards the agreement with Global Reliance Inc. entered into by the appellant, it is a fact that parties to the agreement have discharged their part of the agreement, principally supplied by the appellant and receipt of supplies and sale by Global Reliance Inc.. Now, a contract can be oral or written. An agreement resulting in a contract need not be in writing unless there is specific provision in law that the contract should be in writing i.e. sale of immovable property contracts needing registration, bill of exchange or promissory note, creation of trust promise to pay a time barred loan, contract made without consideration on account of natural love and affection etc. A verbal agreement or a contract is equally enforceable it can be provide. Existence of an oral contract can be proved in law by evidence. The fact that the appellant made shipments of its products namely mushroom, vegetables, spinach, and baby potatoes to USA and Global received the consignments, sold and remitted the proceeds back to the appellant before and after the agreement dated 30.03.2004 prove by implication that the parties to the agreement have discharged part of their obligations elaborated in the agreement, even before the date of the agreement. The terms of the agreement having been traversed by the parties, both identifiable by law, in line with s 186/187 of the contract Act, I hold that the terms of the agreement as regards payment of expenses and other specified charges would equally be applicable for shipments after the agreement dated 30.03.2004.

Thus, in accordance with clause 2 of the agreement, the appellant is responsible for all costs, taxes (direct and indirect), duties, charges or other expenses associated with the manufacture of the product. In clause 2 of the agreement it has been made explicit that the appellant would be responsible for all the costs, taxes, and other expenses relating to the import and sale of the product. The expenses referred to in clause 2 of the agreement are customs duties, ocean, freight inland freight, warehousing etc. on actual basis. Global is entitled to selling and administrative expenses at the rate of 9.05% of the total sales. No where in the agreement is thereby any suggestion that Global will not be entitled for reimbursement of any expenses under custom duties, Ocean, freight, warehousing and brokerage. The Assessing Officer refers to the invoices of the expenses made in the letter head of third parties and refuse the claim of the appellant. The view is without merits. Shipping bills are in the name of the appellant and the consignee’s name and destination port have been clearly mentioned. Once the consignee takes charges of the shipment, the warehousing and inland road carriers would only recognize the consignee. Since it is the consignee who would direct the subsequent processes upon receipts of goods in USA. Here it is also pertinent to note that after accepting the ocean freight expenses of Rs.16488000/- the appellant was allowed a subsidy of Rs.3607000/- by APEDA Ministry of Commerce under the transport assistance scheme which shows that the expenses had been incurred by the appellant only. Moreover, it is also pertinent to note that the agreements entered into by the appellant were also accepted by the Assessing Officer in A. Y. 2002-03 and 2004-05 wherein the expenses claimed by the appellant on the basis of similar agreements were allowed by the department.

In the case of ACIT vs Valvoline Cummins Ltd. in ITA Nos. 1026 & 1059/Del/2009 and ITA No.1159 & 1451/Del/2009 wherein the Assessing Officer has held that agreements were sham, the Hon’ble Delhi ITAT has held as under:

“The Assessing Officer has not made any enquiry either from CASL or its appointed dealers or its overall network to find out as to whether the assessee had used the marketing network and other related infrastructural services of CASL as so agreed by the parties vide agreement dated 01.01.2001. The Assessing Officer has also not made any enquiry in this regard to disprove the assessee’s claim that the assesee used the marketing network and other related infrastructural services of CASL with a view to increase or promote the assessee’s sales of various items such as lubricants, greases and industrial oils through the marketing network, and other related infrastructural services already set up by CASL. The Assessing Officer has taken a view that the agreement dated 01.01.2001 was merely a device to give a colour of genuineness so that the income of the assessee can be diverted or pass over to another company but the Assessing Officer has failed to bring any iota of evidence to establish that the agreement in question is merely a colourable device to pass over the assessee’s income to another company. It is not the case of the Assessing Officer that the CASL is not an income tax assessee or has not included the amount of service charges received from the assessee in its income declared to the department. The Assessing Officer has merely drawn assumption and presumption as to the genuineness of the agreement in question without there being any iota of evidence or material to say so. During the course of hearing of these appeals before ITAT the assessee has successfully been able to demonstrate the various activities in the course of making sales of its product were carried out through the dealers/ distribution network of CASL and as a result thereof, the assessee’s turnover has also been considerably increased from year to year. Thus the assessee’s claim of payment of Rs.52,00,000/- in each year on account of service charges paid to CASL is to be allowed as a business expenditure.

In the instant case also no evidence have been brought on record by the Assessing Officer which show that the agreement in question was not genuine or was the sham agreement. In view of the findings above and as per the agreement I hold that custom duties of Rs.4385000/- ocean freight of Rs.12,881000/- warehousing expenses of Rs.1183000/- and road freight in USA of Rs.9822000/- incurred by Global/Him infotech DBA Trans Atlantic Marketing on behalf of the appellant is allowable as an expenditure in the hands of the appellant since there is correlation between the appellant’s export of mushroom, vegetables and baby potatoes and expenses incurred by the above parties in connection with the appellant’s export.

A part of the claim under USA office expenses is by way of selling and administrative expenses. The claim if for Rs.15107247/-. The claim are under advertisement, AQL exam, automobile expenses, bank charges, business flex, computer repair, courier and warehousing credit card expenses custom brokerage custom exam demurrage discount and rate difference, fees, and membership, insurance, leases rent, legal and professional fees, misc. expenses, postage and delivery, quality testing, salary, taxes telephone expenses, traveling and advertisement. The Assessing Officer in his remand report contends that no bills have been submitted in support of the claim of selling and administrative expenses and if at all, the expenses pertain to Global or Trans Altantic and the expenditure does not befall in the hands of the appellant.

Perusal of the records show that the expenses had been certified by the auditor. Moreover the details show that lease rent was paid for office space hired by M/s Global Reliance . Perusal of the bills also show that it was clearly mentioned there that the payment was made for and on behalf of Himalaya International Ltd. Similarly bills relating to other expenses were also filed by the appellant, and many of the expenses were related to the sales of the products of the appellant. The Assessing Officer has not brought any facts on records to prove that the expenses were not genuine or not related to the business the expenses were filed by the appellant, therefore, it was the responsibility of the Assessing Officer to verify the expenses instead of observing that if deemed fit they may be verified through FTD.”

Ground no. 1 to 4 of the Revenue

9. Apropos these grounds, we have heard submissions and contentions of both the parties and carefully perused the record, inter alia, paper book filed by the assessee spread over 143 pages. During the arguments, the assessee’s representative submitted a copy of decision of ITAT Delhi ‘C’ Bench in assessee’s own case for AY 2003-04 dated 14.10.2009 passed in assessee’s appeal in ITA No.228/Del/2009 and revenue’s appeal for the same assessment year in ITA No. 815/Del/2009 wherein the entire controversy was restored to the file of Assessing Officer with a direction to examine assessee’s claim afresh. The AR has also filed a copy of the order of Commissioner of Income Tax(A) dated 30.3.2013 for AY 2003-04 by which appeal of the assessee has been allowed by deleting impugned addition in respect of expenses incurred by M/s Global Reliance Incorporated, USA on behalf of the assessee.

10. Ld. DR submitted that the Commissioner of Income Tax(A) erred in law and on facts in deleting the addition of Rs.4,07,92,581 out of total addition of Rs.4,33,78,000 made by the Assessing Officer on account of ocean freight, custom duty, warehousing expenses, road freight of USA and selling and administrative expenses. The DR further contended that the Commissioner of Income Tax(A) has erred in deleting above addition being the fact that the evidences submitted by the assessee could not prove that these expenses actually pertain to assessee’s business. The DR further contended that the expenses claimed by the assessee are not allowable to the assessee as no TDS has been deducted by the assessee on these payments which as per version of the assessee were contractual payments. The DR also contended that the Commissioner of Income Tax(A) grossly erred and was not justified in accepting the explanation of the assessee that the Central Government department has granted subsidy to the assessee on the basis of these expenses. The DR also pointed out that in the return of income, the assessee has not declared any subsidy as its income and, on the other hand, it has just netted off the expenses which proves that the assessee has no intention to declare the income actually accrued or received by it. The DR finally submitted that the Assessing Officer made disallowance and addition on reasonable and cogent grounds which was wrongly deleted by the Commissioner of Income Tax(A), therefore, the impugned order may be set aside in this regard by restoring that of the Assessing Officer.

11. Replying to the above, assessee’s representative pointed out notarized MOU dated 19.09.2002 between the assessee and M/s Global Reliance Inc. (Paper Book page no. 1 to 6) and submitted that this agreement was submitted before the Assessing Officer as well as before the Commissioner of Income Tax(A) and on the basis of which yearly agreements were made by the assessee and M/s Global Reliance Inc. but the Assessing Officer has not made any reference of the same in the assessment order. The AR submitted that the assessee produced all supporting evidence but furnished these in respect of major expenses only as desired by the Assessing Officer during the assessment proceedings and the same set of supporting vouchers and evidence was also furnished before the Commissioner of Income Tax(A) to avoid furnishing of any fresh evidence. The AR further submitted that a certificate issued by CPA in USA was also produced in respect of all expenses incurred at USA and reimbursed by the assessee, therefore, even in absence of all supporting evidence, the same should have been considered for allowability.

12. The AR also contended that the claimed expenses were restricted to the extent of fixed percentage as agreed beforehand by the parties in the agreement dated 30.03.2004 with bonafde intention to regulate and monitor the same to remain within the budgeted allocation. This prudent business decision and agreement cannot be used against the assessee by disallowing of those expenses. The AR vehemently contended that as per adopted procedure, the assessee raises the invoices by estimating net realizable value (i.e. gross sales value in US – US expenses) and under the relevant customs rules, an Annual Return of Exports (ARE) is filed on ARE-I in respect of all goods leaving the Indian Custom boundaries. The AR further pointed out that the said invoice value was duly declared in ARE-I by the assessee also and the total amount for the same came to Rs. 9.65 crores. The AR also pointed out that gross sales realized in USA was declared as turnover by the assessee in the P& L account and US expenses were also claimed separately therein. The AR pointed out that the Assessing Officer followed two views which are self-contradictory because on one hand, the Assessing Officer has considered gross sales realized in the USA as sales of the assessee, while on the other hand, the Assessing Officer has averred that the export sale was completed at the time when goods left the Indian customs borders and all expenses incurred thereafter were post sales expenses.

13. The AR has drawn our attention towards order of Commissioner of Income Tax(A) dated 30.3.2013 in assessee’s own case for AY 2003-04 and submitted that the Commissioner of Income Tax(A) has accepted the claim of the assessee in the second round after remand of the case from ITAT and submitted that as per discussions made in this order from para 8 to 8.7.2, the Commissioner of Income Tax(A) has accepted the claim of the assessee in consonance with the MOU dated 19.09.2002 wherein the nature of expenses embedded in the head of administrative and general expenses was clarified. The AR vehemently contended that when the department has taken a particular stand about the claim of the assessee which is in favour of the assessee, then the department is not permitted to take a deviated stand against the assessee pertaining to the same claim during the subsequent assessment years. The AR placed reliance on the recent decision of Hon’ble Supreme  Court  in  the  case  of  Commissioner  of  Income  Tax  vs  Excel Industries 358 ITR 295(SC) wherein it has been held that the department should cautiously follow the rule of consistency unless and until the department has found or discovered new facts and circumstances for taking a different stand or view.

14. On careful consideration of above rival submissions and contentions of both the parties and careful perusal of the record, at the outset, we find it appropriate to reproduce the terms and conditions in regard to marketing and sales expenses stipulated in para 03 of the MOU dated 19.09.2002 signed and notarized between the assessee and M/s Global Reliance Inc. (consignment agent of the assessee in USA) which read as under:-

“03. Marketing and Sales: Global shall have the exclusive right to market, distribute and sell product throughout the United States. Himalya shall be responsible for all the costs, tax and other expenses relating to the import and sale of products made by Global Reliance Inc (e.g. custom duties, ocean freight, inland freight, warehousing, other administrative and General Expenses including USA Salaries payments, Telephone Expenses, Travelling Expenses, Staff Education and Medical Expenses, Courier Expenses, Web Hosting Expenses, USA Local Expenses, Membership Fees paid to different Associations, Legal & Professional Fees, Car Expenses, USA Transportation Expenses, Insurance Expenses, Quality Testing Expenses, Prepayment discounts, Finance charges, Supplies Office, Mortgage Expenses, Lease Rent, Computer Expenses, Postage Delivery, Taxes etc. throughout the United States on ACTUAL BASIS. Global shall be responsible for complying with all applicable and federal, state and/or local laws and regulation relating to the marketing, sale and distributors of products throughout the United States. As a consideration Himalya shall pay a commission @3% of the sales to Global, over and above actual expenses incurred by Global as above mentioned.”

15. In view of above, it is evident that as per terms of the agreement (MOU) dated 19.9.2002 between the assessee and M/s Global Reliance Inc., the expenses in the nature of selling and administrative expenses were clearly the responsibility of the assessee and the assessee had to reimburse the same to its consignment agent i.e. M/s Global Reliance Inc. It is a well accepted proposition that in case of a standard consignment, sale is effected by the consignment agent on behalf of the consignor and the agent is not responsible for any expenses incurred for such sale and expenses actually incurred or paid on behalf of the consigner is reimbursed to the consignment agent. The AR’s contention on this point is that apart from actual ocean freight, custom duty paid in USA, warehousing expenses in USA, road freight in USA, selling and administrative Expenses in USA and other incidental expenses and the remuneration of the consignment agent was fixed @9.05% of the sales made in USA by Global Reliance Inc. as per terms of the subsequent agreement dated 30.03.2004 (Paper Book page No. 7)to regulate and monitor the same remain within the budgeted cost allocation which is a prudent business decision of the assessee to control the expenses incurred by consignment agent. The AR also contended that the department should follow the rule of consistency as per decision of Hon’ble Supreme Court in the case of Excel Industries (supra).

16. The AR also placed reliance on the decision of Hon’ble Supreme Court of India in the case of GE India Technology Centre P. Ltd. vs Commissioner of Income Tax (2010) 327 ITR 456(SC) and decision of Special Bench of ITAT Mumbai in the case of Mahindra & Mahindra Ltd. vs DCIT (2009) 313 ITR AT 263 (Mumbai ITAT)(SB). The AR pointed out that in the case of GE India Technology Centre P. Ltd. (supra), Hon’ble Apex Court has held that mere remittance to non-resident and the duty of the assessee to deduct tax at source does not arise unless remittance contains wholly or partly taxable income. The AR further contended that as per decision of ITAT Mumbai (SB) in the case of Mahindra & Mahindra Ltd. (supra), Explanation 2 attached to section 9(1)(vii) of the Act in the case of remittance or reimbursement of expenses where no element of taxable income in India is found, then the question of tax deduction at source does not arise.

17. Replying to the above, ld. DR submitted that Circular No. 715 dated 8.8.1995 is applicable to the case of the assessee and TDS should be deducted on reimbursement. The DR also pointed out that apart from reimbursement of expenses, the payment made to Global Reliance Inc. also contains commission paid to consignment agent, therefore, the assessee is under an obligation to deduct TDS thereon. The DR further pointed out that if TDS has not been deducted by the assessee, then the entire amount of payment as claimed by the assessee was rightly disallowed by the Assessing Officer.

18. On careful consideration of above contentions, we are of the view that on careful perusal of the agreement/MOU dated 19.9.2002 and additional agreement dated 30.3.2004 between the assessee and Global Reliance Inc., we clearly observe that the expenses incurred on behalf of the assessee by its consignment agent M/s Global Reliance Inc, the entire expenses claimed by the assessee were related to marketing and sales expenses and as per clause 03 of the first agreement dated 19.9.2002, the assessee was responsible for all costs, taxes and other tax expenses relating to the import from India to USA and sale of products made by Global Reliance Inc. including custom duty, ocean freight and land freight of USA, warehousing expenses in USA and other general and administrative expenses including USA Salaries payments, Telephone Expenses, Travelling Expenses, Staff Education and Medical Expenses, Courier Expenses, Web Hosting Expenses, USA Local Expenses, Membership Fees paid to different Associations, Legal & Professional Fees, Car Expenses etc. We also observe that as a prudent business decision and with an aim to restrict and control expenses in USA, the assessee also fixed the selling and administrative expenses remuneration and other incidentals @9.05% of the sales effected in USA. Undisputedly, the amount of remittance or reimbursement made to Global Reliance Inc. also contained an element of commission of consignment agent i.e. Global Reliance Inc. but at the same time, we clearly observe that the consignment agent has not rendered any service in India and, therefore, consignment commission is not taxable in India.

19. On very careful perusal of assessment order, impugned order of the Commissioner of Income Tax(A) and entire record and material placed before us, we observe that the authorities below have not disputed the procedure adopted by the assessee and its consignment agent i.e. M/s Global Reliance Inc. that the assessee raises bills/invoices by estimating net realizable value (i.e. gross sales value in US minus US expenses) and under the relevant custom rules an ARE-1 was field by the assessee in respect of all goods leaving Indian custom boundaries and same detail was duly declared in ARE-I by the assessee and total amount for the same was amounting to Rs. 9.65 crores. We also observe that the authorities below have also not disputed rather accepted the accounting method of the assessee that out of the gross sales realized in USA was declared as turnover by the assessee in the final account and US expenses were also claimed separately therein.

20. In view of our above observation made in earlier para, we hold that the Assessing Officer concluded the assessment n contradictory finding because on the one hand, the Assessing Officer has considered gross sales realized value in USA as sales of the assessee for the financial year under consideration and on the other hand the AO held that the export sale was completed when the consigned goods left the Indian Customs Border and all expenses incurred thereafter were post sale expenses. Accordingly, we are inclined to hold that first part of findings of the Assessing Officer are correct that the gross sales realized value in USA is the export sales of the assessee but export sales was not completed when the goods left the Indian Custom Borders because it was consignment which was intended to be sold through consignment agent of the assessee i.e. M/s Global Reliance In. in USA.

21. We further clearly observe that as per above set of facts, all US expenses incurred by the consignment agent on behalf of the assessee were the responsibility of the assessee as per MOU dated 19.9.2002 and subsequent agreement dated 30.3.2004, which were also certified by CPA audit report, when actual export sale was effected at USA through consignment agent on behalf of the assessee, then expenses claimed by the assessee for the purpose of business can not be treated as post sales expenses and observations and findings of the Assessing Officer are not correct and justified in this regard and we set aside the same to this extent only.

22. On the basis of above factual matrix emerged from the evidence submitted by the assessee before the authorities below, we clearly observe that the ratio of decision of Hon’ble Supreme Court in the case of GE India Technology Centre P. Ltd. (supra) is applicable to the present case. We also hold that the benefit of the ratio of the decision of Special Bench, Mumbai in the case of Mahindra & Mahindra (supra) is also squarely applicable to the present case in favour of the assessee. Hence, in this situation and above facts and circumstances of the case, Circular No. 715 dated 8.8.95 is not applicable to the present case.

23. Coming to the issue of consistency, we clearly observe that the Commissioner of Income Tax(A) has granted relief to the assessee in the AY 2003-04 pertaining to the same claim of the assessee and we are unable to see any valid reason to interfere with the same in the impugned order. Under these circumstances, we are inclined to hold that the department does not have any valid reason to take a different stand on this issue which the Commissioner of Income Tax(A) has taken in favour of the assessee for AY 2003-04.

24. In the result, we hold that the Commissioner of Income Tax(A) has granted relief for the assessee on reasonable, justified and cogent grounds which were again followed by Commissioner of Income Tax(A) in assessee’s own case for AY 2003-04 vide its order dated 30.03.2013 (supra). We are unable to see any ambiguity, perversity or any other valid reason to interfere with the same. Accordingly, all grounds of the Revenue being devoid of merits are dismissed.

Sole Ground No. 1 of the assessee

25. Apropos ground no.1 of the assessee, the assessee’s representative submitted that when a major part of the expenditure incurred by the assessee has been accepted by the Commissioner of Income Tax(A), then another minor part of the claimed expenditure cannot be disallowed. The AR placed reliance on the judgment of Hon’ble Supreme Court of India in the case of GE India Technology Centre Pvt. Ltd. vs C.I.T. (2010) 327 ITR 456 (SC) and judgment of Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. vs DCIT (2009) 313 ITR AT (263) (Mumbai) (SB). The AR pointed out that in the case of GE India Technology Centre Pvt. Ltd. (supra) the Hon’ble Apex Court has held that mere remittance to non-resident duty to deduct tax at source does not arise unless remittance contains wholly or partly taxable income. In the case of Mahindra & Mahindra Ltd.(supra) ITAT Mumbai (SB) interpreting the provisions of section 9(1)(vi) Explanation 2 held that in case of remittance or reimbursement expenses where no element of income taxable of India is found, then the same is not taxable in India and question of tax deduction at source does not arise.

26. The AR has drawn our attention towards Paper Book filed by the assessed containing 143 pages and submitted that when a major part of expenses has been allowed by the Commissioner of Income Tax(A), then the remaining small amount cannot be disallowed without ay basis. The AR submitted that the entire expenses claimed by the assessee were pertaining to “USA, office expenses” which were reimbursed to M/s Global Reliance Inc. and there was no element of income taxable in India. Therefore, the duty to deduct TDS cannot be fastened on the assessee and entire claim of the assessee deserves to be allowed.

27. Replying to the above, ld. DR submitted that without prejudice to the submission made in support of Revenue’s appeal, it is also contended that if the Commissioner of Income Tax(A) has allowed major part of the expenses claimed by the assessee considering the same as reimbursement of “USA, office expenses”, then remaining part of claim may be disallowed in absence of any details or evidence regarding the expenditure like car expenses, donation, membership fee, newspapers and periodicals and legal and professional fees not related to the sales.

28. The DR pointed out that the onus is on the assessee to prove and establish his claim related to the expenses incurred only and exclusively for the purpose of business u/s 37(1) of the Act. The DR vehemently contended that when the assessee is unable to substantiate his claim for a part expenditure and no details or evidence had been filed regarding the same, then such claim deserves to be disallowed and the authorities below rightly disallowed a part of expenses for which the assessee could not discharge his onus to prove.

29. We have heard rival arguments of both the parties and carefully perused the record inter alia decisions and judgments relied by both the parties. At the outset, we find it appropriate to consider the ratio of the judgment of Hon’ble apex court in the case of GE India Technology Centre (supra) wherein it has been held that mere remittance to non-resident, out of deduct tax at source does not arise unless remittance contains wholly or partly taxable income. In the case in hand, Commissioner of Income Tax(A) has given benefit to the assessee by accepting the claim of the assessee that a major amount of expenditure reimbursed to M/s Global Reliance Inc. was acceptable and assessee got relief in this regard. ITAT Mumbai Special Bench in the case of Mahindra & Mahindra (supra) has held the same legal proposition that reimbursement of expenses where no element of income taxable in India is found, then question of TDS by the payer does not arise.

30. The Commissioner of Income Tax(A) partly allowed appeal of the assessee granting relief and deleting the addition of Rs.4,07,92,581 but a part of claimed expenditure amounting to Rs.25,85,419 was confirmed and upheld with following observations and findings:-

“Perusal of the above shows that no details or evidences have been filed regarding the remaining expenses of 151.07247 (-) 12521828 = 2585419/-. In the absence of any details or evidences regarding the expenditure of Rs. 2585419/- the above expenses are being disallowed. Moreover it is also seen that the expenses claimed for which no evidences were filed like car expenses, donations, membership fees, newspaper and periodicals legal and professional fees are also not relating to the sales and therefore, they can not be allowed as business expenditure under the provisions of section 37(1). In view of the findings above the expenditure of Rs. 2585419/- is being disallowed. The expenditure of Rs. 43378000/- (-) 2585419/- = 40792581/- is allowed. These grounds of appeal are partly allowed.”

31. In the present case, the Commissioner of Income Tax(A) has given benefit to the assessee after detailed examination of the claim of the assessee but a minor part of the claim has been disallowed in absence of any details or evidence regarding the expenditure of Rs.25,85,419 and the same has been disallowed by the Commissioner of Income Tax(A) partly confirming the addition made by the Assessing Officer. From the detailed paper book spread over 143 pages we are unable to see any cogent or relevant details or evidence which could substantiate or establish the claim of the assessee related to the part disallowance made by the Commissioner of Income Tax(A).

32. Thus, we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings of the Commissioner of Income Tax(A) pertaining to part disallowance confirmed and upheld by the Commissioner of Income Tax(A) and we decline to take a different view in this regard. Accordingly, sole remaining ground of the assessee is dismissed by holding that the assessee miserably failed to substantiate its claim of Rs.25,85,419/- with cogent and reliable evidence and the assessee could not discharge its onus in this regard. Therefore, the impugned order is also upheld in regard to confirmation of part disallowance and sole remaining ground of the assessee is dismissed.

33. In the result, the appeals of the Revenue as well as of the assessee are dismissed as discussed above.

Order pronounced in open court on  14.03.2014.