IN THE ITAT AHMEDABAD BENCH ‘C’
Deputy Commissioner of Income-tax
IT APPEAL NO. 2959 (AHD.) OF 2009
[Assessment Year 2006-07]
Date of Pronouncement- May 11, 2012
Kul Bharat, Judicial Member – This appeal of Revenue is directed against the order passed by Ld. Commissioner of Income-tax (Appeals)-IV, Baroda dated 21-08-2009 for the assessment year 2006-07, whereby the Ld. CIT(A) has deleted the addition of sales commission of Rs. 10,64,461/-. The Revenue has raised single effective ground of appeal which reads as under:-
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of commission of Rs. 10,64,461/- though the job contract was repetitively procured from Sud Chemie India Pvt. Ltd. directly and the assessee could not justify the need to pay the commission to M/s. Rupali Traders.”
2. The facts leading to filing of the present appeal are that assessee is engaged in the business of job work of extrusion an firing process flow and calcinations and the case was selected for scrutiny accordingly, a notice u/s. 143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued and served upon the assessee. During the assessment proceedings, the Assessing Officer sought explanation from the assessee with regard to payment of sale commission of Rs. 10,64,461/- including service tax paid to Rupali Traders a firm which is declared in Form No. 3CD of the audit report enclosed along with income tax return as the specified person covered u/s. 40A(2)(b) of the Act. The assessee vide written submission dated 01-12-2008 submitted that the sale commission to M/s. Rupali Traders of Rs. 10,64,461/- is paid including service tax . It was submitted that M/s. Rupali Traders is a partnership firm consisting of two persons namely Shri Ramesh N Shah having 90% share of profit and loss and Sonaliben J Shukla having 10% share of profit. It was submitted that the commission is paid @ 4% plus service tax which is reasonable and competitive. The marketing services rendered by M/s. Rupali Traders are to obtain order, visiting the parties, collection and payment etc., It was submitted by the assessee that it paid sales commission to that party for inspection of its business. It was submitted that M/s Rupali Traders as well as the assessee- company are partnership-firm. Therefore, there is no question of avoidance of tax. However, the Assessing Officer in order to find out the justification of payment of the sales promotion commission to M/s. Rupali Traders by the assessee- firm a summon was issued to M/s. Sud Chemie Pvt. Ltd. Nandesari. In response to the summon Shri Daxesh Mehta, Asstt. Manager, accounts of Sud Chemie India Pvt. Ltd. attended the proceedings and submitted that M/s Sud Chemie India Pvt. Ltd. is a manufacturing company of catalyst convertor has entered into contract with Ravi Ceramics for job work of calcinations since last ten years. It was submitted that the said company is making payment to M/s. Ravi Ceramics for the job work carried out by it from-time-to-time. It was also submitted that rates of job work were also revised from-time-to-time and copy of ledger account was also filed by the said company. The AO rejected the explanation of the assessee observing that the assessee has been carrying out job work of M/s. Sud Chemie India Pvt. Ltd from the beginning and continuously as per the agreement. It was observed that the job work of any other company was not carried out by the assessee. The receipt of job work was a repetitive process obtaining order from one party namely M/s Sud Chemie India Pvt. Ltd. In such a case, where repetitive job work was being carried particularly as per the agreement therefore, the third party services were not required. The AO observed that the submission of the assessee that the commission was paid to M/s. Rupali Traders for marketing service rendered by them i.e. to obtain order, visiting parties, collection of payment etc., the justification for payment of commission was found quite contradicted in the context of the nature of job work carried out by the assessee of a single company since a number of years. The AO was of the opinion that by this explanation, the assessee could not justify the payment of sales commission made to M/s. Ruali Traders being specified person covered u/s 40A(2)(b) of the Act. The AO also on the basis of the statement of the Asstt. Manager accounts of M/s Sud Chemie India Pvt. Ltd. came to the conclusion that no services in this regard to procure a job work as well as sales commission of company’s collection of payment was required. Therefore, the AO was of the view that the assessee could not justify its claim of payment of sales commission which is also supported by the statement of Shri Daxesh Mehta, asst-manager of accounts of M/s Sud Chemie India Pvt. Ltd. and disallowed the payment of commission for sales promotion expenses of Rs. 10,64,461/- and added the same to the income of the assessee.
3. The assessee feeling aggrieved by the assessment order passed u/s 143(3) of the Act filed appeal before the Ld. CIT(A). Before Ld. CIT(A), the submissions of the assessee were that the Assessing Officer failed to appreciate the nature and type of services being rendered by M/s Rupali Traders. It was submitted that the expenditure was genuine business expenditure and same was disallowed without giving reasonable opportunity to explain or to furnish necessary evidences. It was submitted that the assessee was carrying on business of job work and sale of ceramic catalyst items since 1996 and in view of establishment of full-fledged unit, the assessee requested its agent M/s. Rupali Traders at Anand to secure a party which would like to get job work done by the assessee. It was submitted that M/s. Rupali Traders is a partnership firm having qualified and experienced partner, Shri Rameshbhai H Shah, a ceramic engineer from Banaras Hindu University in the year 1957 as per assessee submitted M/s. Rupalai Traders secured job work facility of M/s Sud Chemie India Pvt. Ltd., Nandesari and since then job work consisting alumina rings, magnesia big, gears, RWH, AGG etc. was carried out at assessee’s factory at Kanjari regularly and continuously It was submitted that M/s. Rupali Traders looked after and managed entire technical aspects like size, specification, weight, bulk density, crushing strength etc., and other yardsticks to survive and compete in the market. In addition to M/s Rupali Traders gave necessary advice, suggestions and other technical aspects of catalysts manufactured by the assessee on job work basis. The assessee submitted before Ld. CIT(A) that commission was allowed in the A.Y. 1996-97 and 2002-03 completed under scrutiny assessments. Assessee also filed a confirmatory letter dated 07-04-2009 from M/s. Sud Chemie India Pvt. Ltd.. The assessee also filed the assessment orders for A.Y. 1996-97 and 2002-03. Since assessee had filed additional evidence and same were forwarded to the Assessing Officer for comments. In her report dated 07-04-2009, it was submitted by the AO before Ld. CIT(A) that the payment was covered u/s. 40A (2)(b) of the Act and it was the contention of the assessee that commission was paid to M/s Rupali Traders for rendering marketing services whereas the job contract was repetitively procured from M/s. Sud Chemie India Pvt. Ltd. directly and in the case of revision of charges, the company passed the commission. As per the AO in these circumstances the claim of commission was rightly disallowed. The report of the AO was supplied to the assessee in response thereto, the assessee made further submission. It was submitted that AO did not allow any opportunity during remand proceedings as well as and ignored all the proof and evidences submitted and also the production-cum-marketing agreement between the assessee and M/s. Rupali Traders since the inception of business and considered at the time of scrutiny assessment of the assessee in two years i.e. A.Ys. 1996-97 & 2003-04. It was submitted that AO had neither gone through the confirmatory letter dated 07-04-2009 from M/s Sud Chemie India Pvt. Ltd. nor through the profit and loss account and balance sheet of M/s Rupali Traders though the confirmatory letter it was clearly mentioned nature of services provided by M/s. Rupali Traders various expenses such as salary, traveling, vehicle etc. were debited. The assessee submitted before ld. CIT(A) that such income cannot be earned without incurring the relevant expenditure and the income vis-à-vis expenditure had been correlated in respect of M/s Rupali Traders. It was submitted that the assessee-firm had seven partners, out of which four were women partner and even Shri Rupesh Shah, who was managing partner did not have necessary qualifications in the field of ceramic engineering and salary was paid only to one partner, namely Shri Rupesh Shah. It was submitted by assessee that technical process involved was extremely intricate which could not have run without production-cum-marketing agreement with M/s. Rupali Traders having Shri Ramesh Shah, a ceramic engineer as its partners. It was further submitted that the assessee as well as M/s Rupali Traders were partnership firm having basic exemption limit of nil income tax was chargeable at the flat rate of 33.66% of total income for the assessee as well as M/s Rupali Traders. M/s Rupali Traders had accordingly paid tax of Rs. 89,798/- in A.Y. 2006-07 and partner of M/s. Rupali Traders Shri Rameshbhai H Shah had also paid tax on total income of Rs. 16,76,320/- for A.Y. 2006-07. The assessee also relied upon the CBDT Circular No. 6P dated 06-07-1968 that no dis allowance is to be made u/s. 40A(2) in respect of payment made to relatives and sister concerns where there is no attempt to evade tax. The assessee also relied upon the judgment of Hon’ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd.  310 ITR 306. The Ld. CIT(A) after considering the submissions made by the assessee allowed the appeal. In this background the Revenue feeling aggrieved by the order of Ld. CIT(A) is before this Tribunal.
4. Ld. Departmental Representative vehemently argued that order of Ld. CIT(A) is erroneous since the Assessing Officer has categorically came to the conclusion that there was a contract between M/s Sud Chemie India Pvt. Ltd. and assessee- firm M/s. Rupali Traders. It was further argued that the AO has recorded the statement of Shri Daxesh Mehta, asstt. Manager (accounts) of M/s Sud Chemie India Pvt. Ltd. who has stated that M/s Sud Chemie India Pvt. Ltd. is a manufacturing of catalysts convertor and noted contract with M/s Sud Chemie India Pvt. Ltd. since last ten years. It was also stated that the company has been paying for the job work carried out with M/s. Rupali Traders from-time-to-time. It was also stated that the rates of job work were revised from-time-to-time. She submitted that AO has rightly come to the conclusion that there was no justification for making payment of such sales promotion commission. On the contrary, Ld. Authorized Representative for the assessee submitted that the order of Ld. CIT(A) is sound and there is no error. Ld. AR submitted that the Revenue has itself accepted such expenditure in assessment proceedings for A.Y. 1996-97 and 2002-03. The assessee has been claiming such expenditure throughout only in this year such expenses are disallowed. Ld. AR reiterated the submission made before the Ld. CIT(A) and submitted that there is no loss of revenue as there is no tax evasion. Ld. AR relied upon CBDT Circular No. 6P dated 06-07-1968 and also placed reliance on the judgment of Hon’ble Bombay High Court in the case of Indo Saudi Services (Travel) (P.) Ltd. (supra).
5. We have heard the rival submissions, perused the material on record and the Judgments cited. On our query to the Ld. DR about the acceptance claim of assessee of expenditure as sale promotion commission for the A.Ys. 1996-97 & 2002-03 under scrutiny assessment she was not in a position to comment on the same. Admittedly, there is no rebuttal of the fact the expenditure with regard to the sales promotion commission paid to M/s. Rupali Traders was allowed in earlier years. The relevant contents of the order of the Ld. CIT(A) are reproduced herein below:-
“4. I have carefully considered the facts of the case, Assessing Officer’s findings and appellant’s submissions. The Assessing Officer disallowed commission paid to M/s Rupali Traders not by invoking provisions of section 40A(2) but on the ground that the appellant could not justify need to pay commission. As per the Assessing Officer, there was no need to pay the commission. Assessing Officer’s conclusion was based on the fact that appellant was doing job work only for one party mainly Sud-Chemie India Pvt. Ltd., under a contract and thus needed nobody to procure orders, payments etc., The Assessing Officer also based her decision on statement of Shri Daxesh Mehta, Asst. Manager (Accounts) of Sud Chemie India Pvt. Ltd., before making the dis-allowance of commission, the Assessing Officer did not provide opportunity to the appellant to submit full facts or explanation. No show cause notice was issued before making the dis allowance. The nature of services rendered by Rupali Traders and its role in appellant’s business was explained in detail during appellate proceedings along with documentary evidences, including a confirmatory letter from Sud Chemie India Pvt. Ltd., In report dated 14.7.2009, A.O has not made any comments on appellant’s submissions but has only reiterated the reasons for making the dis allowances in the assessment order. As confirmed by General Manager (Operations), Sud Chemie (India) Pvt. Ltd, the job contract was awarded to the appellant in the year 1996, on the basis of personal approach and commitment of quality supply by Rupali Traders through its partner Shri Ramesh H Shah, an experienced Ceramic Engineer. Sud Chemie (India) Pvt. Ltd. has further submitted that Rupali Traders took the responsibility to guide the appellant in adhering to standards of manufacturing. Shri Daxesh Mehta, Asst. Manager (A/cs) had not been questioned about role of Rupali Traders in the statement recorded by the Assessing Officer. On other hand, role of Rupalai Traders in appellant’s business is acknowledged by the General Manager (Operations) of Sud Chemie (India) Pvt. Ltd., now. The fact that Rupalai Traders had Shri Ramesh Shah, an experienced Ceramic Engineer as is partner, whereas appellant firm’s partners were either ladies or non-technical persons, some of them residing elsewhere, further corroborates role of Rupali Traders in guiding the appellant in manufacturing process and quality assurance. It is also relevant to note that commission to M/s. Rupalai Traders has been paid by the appellant firm since last more than 10 years at the same percentage and on the same basis and the same has been allowed as a deduction all along, including twice under scrutiny assessments. There is a production-cum-marketing agreement as well between appellant and M/s. Rupali Traders, as per which, M/s. Rupali Traders is to assist in production and offer technical expertise to ensure job work quality. The fact that M/s. Rupali Traders incurred various kinds of expenses to earn the commission income also supports the genuineness of transactions between appellant and M/s Rupali Traders. Moreover, M/s. Rupali Traders is assessed to tax in the same tax slab and Shri Ramesh Shah pays tax in the highest rate slab by including interest of Rs. 1,50,512/- received from M/s Rupali Traders. As such, no case of tax evasion is made out. CBDT’s Circular No.6P and decision of Bombay High Court in the case of Indo Saudi Services (Travel) Pvt. Ltd.,  310 ITR 306 are applicable to this extent. The Hon’ble Supreme Court in the case of CIT v. Dharamraj Giriji Riya Narsingiriji 91 ITR 544 held that “it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows its interest best” Appellant has been able to demonstrate that without involvement of M/s. Rupali Traders and its technically qualified partner, appellant could not have successfully carried out or retained the job work contract from M/s. Sud-Chemie India Pvt. Ltd. The commission was therefore paid to M/s. Rupali Traders by the appellant for its business and is an allowable expense. Addition of commission of Rs. 10,64,461/- is deleted.”
We find that the Revenue has not rebutted the fact that in the earlier years the expenditure qua the sales promotion commission was allowed and assessee has placed on record a copy of each of the assessment orders for A.Ys. 1996-97 and 2002-03, it is evident there from that no disallowance has been made in respect of expenditure claimed for sale promotion commission. It is also not disputed that the assessee as well as M/s Rupali Traders are partnership firm and as such there is no avoidance of tax. In view of the fact that Revenue has not disputed the fact that in earlier years such expenditure was allowed and also not disputed the fact that both the assessee as well as M/s Rupali Traders are partnership firm. It is also not pointed out by the Revenue as to how the expenditure claimed by the assessee is not justified in this year when same is allowed in earlier years. It is not the case of the revenue is that the practice adopted under the garb of payment of sales promotion commission is a mechanism for avoidance of tax thereby causing prejudice/loss to the Revenue. It is also not pointed out as to how the expenses incurred are excessive or unreasonable therefore, such expenditure can be disallowed by invoking the provisions of Section 40(A)(2) of the Act. In view of this matter, we do not find any infirmity into the order passed by Ld. CIT(A). Therefore the appeal filed by the Revenue is dismissed.
6. In the result, Revenue’s appeal is dismissed.