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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of Pr. Commissioner of Income Tax-2; Mumbai (for short ‘PCIT’) dated 31.03.2021 under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for A.Y. 2016-17. The assessee has raised the following grounds of appeal: (A) Grounds on validity of proceedings under section 263:
1. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in making a revision under section 263 to set aside the assessment order dated 28 December 2018 passed under section 143(3) of the Income-tax Act, 1961 (the Act).
2. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in holding that the assessment order dated 28 December 2018 passed under section 143(3) of the Act is erroneous in so far as it is prejudicial to the interests of the revenue. 3. on the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that the issues which formed a part of revision under section 263 were already examined during the course of the assessment proceedings after considering the details/ submissions filed by the appellant. (B) Grounds on Merits: (I) Allowability of deduction under section 80G in respect of contributions towardsCorporate Social Responsibility (CSR): Rs. 52, 56,437: 4. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in directing the Assessing Officer to examine the allowability of deduction under section 80G in respect of donations made to eligible institutions and shown as part of CSR contributions, and to frame a fresh assessment in this regard.
5. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in observing that deduction under section 80G ought to have been disallowed in respect of contributions made towards CSR.
6. On the facts and in the circumstances of the case and in law, in making the above observations, the Principal Commissioner of Income-tax erred in simply relying on the provisions of Explanation 2 to section 37(1) and the legislative intention behind introducing such provisions.
7. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that the provisions relating to disallowance of CSR expenditure have been introduced only in connection with allowability of deduction under section 37(1), and do not apply to allowability of deduction under section 80G of the Act
8. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that the provisions of section 80G [in clauses (mhk) and (th)] specifically provide for disallowance of deduction only in respect of certain specific: CSR contributions, viz. Swachh Bharat Kosh and Clean Ganga Fund, and deduction is allowable under section 80G in respect of other eligible CSR contributions: 9. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that the CSR contributions claimed as deduction under section 80G were eligible contributions which is evidenced by the details of donees (including PAN and addresses) and donation receipts filed on record during the course of the assessment proceedings. (II) Allowability of commission paid on sales to Canteen Stores Department ('CSD'): Rs. 24, 03, 65,153: 10. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in directing the Assessing Officer to examine the allowability of deduction in respect of commission paid on sales to CSD and to frame a fresh assessment in this regard. 11. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in observing that the Assessing Officer has not examined the relevant and material facts and circumstances in respect of the appellant's claim for deduction of the aforesaid expenditure. 12. On the facts and in circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that the Assessing Officer, during the course of the assessment proceedings, had already made a disallowance in respect of 5% of the commission expenditure incurred in connection with sales to CSD, after going through the details/ documents furnished by the appellant, including party-wise details, ledger extracts, income-tax returns. T.D.S certificate, etc. 13. On the facts and in circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not appreciating the fact that similar disallowance as made in the assessment order for the year under consideration has been made on a consistent basis since AY 2009-10 after verification of similar set of facts and documentation
14. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in not taking into considering the facts and submissions made during the course of the proceedings under section 263 on each point raised in the notice under section 263.
15. On the facts and in the circumstances of the case and in law, the notice issued by the Principal Commissioner of Income-tax had several factual errors. And incorrect assumptions which were duly rebutted by the appellant in the submissions filed during the course of the proceedings under section 263. 16. On the facts and in the circumstances of the case and in law, the Principal Commissionerof Income-tax erred in observing that there is no role of middlemen in CSD sales, therebynot appreciating the fact that the parties to whom commission is paid provide a host ofservices with respect of CSD sales which is one of important segments of the company. 17. On the facts and in the circumstances of the case and in law, the Principal Commissioner of Income-tax erred in relying on several decisions of the Hon'ble Courts and the Hon'ble Tribunal which are distinguishable considering the facts in the case of the appellant.”
Order of PCIT dated 31.3.2021 was received by assessee on 30.03.2021 as per Form 36 but appeal was filed only on 15.07.2021. It is noticed that the appeal is barred by limitation by 46 days. The Hon'ble Supreme Court of India to mitigate the hardship caused by pandemic took suo-moto cognizance for Extension of Limitation reported as 441 ITR 722. In term of the aforesaid decision of Hon'ble Supreme Court, we condone the delay in filing of this appeal by assessee and admit the appeal for adjudication.
Brief facts of the case are that the assessee filed its return of income on 15- 10-2016 declaring total income of Rs. 1,63,74,04,350/- under normal provisions and Rs. 1,62,18,41,285 under sec 115 JB of Income tax act 1961. Thereafter case of the assessee was selected for scrutiny vides notice dated 28-09-2017. Subsequently assessee revised its return of income on 29-03-2018 declaring total income at Rs. 1,66,09,24,030/- under normal provisions and Rs. 1,62,04,66,343/- under sec 115JB of the act. The case was again selected under CASS and accordingly notice u/s 143(2) dated 19-09-2018 was issued.
Income was assessed at Rs. 177, 54, 16,350/- under the normal provisions of the act and Rs. 1, 64, 34, 26,565/- under the provisions of sec 115JB of the act. Thereafter a show-cause notice under sec. 263 vide dated 25-09-2021 was issued by the office of ld.PCIT-2, Mumbai. 4. As per this notice u/s. 263 order of the AO passed u/s. 143(3), dated 28-12- 2018., ld. PCIT found the same to be erroneous in so far as it is prejudicial to the interest of the revenue due to the following reasons During the year under consideration assessee incurred CSR expenses of Rs. 135.95 lakhs and the same is disallowed by assessee itself but part of the same was claimed u/s 80G amounting to Rs. 1,05,12,873/-. As per ld. PCIT the deduction claimed by the assessee u/s 80G can’t be allowed and AO was failed to examine the issue hence, the order passed is erroneous in so far as it is prejudicial to the interest of the revenue Another objection of the ld. PCIT pertains to commission paid to agents on sale to CSD (canteen stores department). Assessee claimed commission of Rs. 24, 03, 65,153/- on sale to canteen stores Department (CSD). AO disallowed the 5% of commission claim as perlast year.Sales to CSD was about 300 Crores against which commission works out to about 8%. The services stated to have been rendered by commission agents for canvassing and procurement of order, educate CSD staff etc. CSD's are defence ministry establishments where they purchases in a transparent method directly. There cannot be any middlemen in sales to CSD. Therefore AO should have examined some of the commission parties on actual services rendered. Also CSD's should have been asked for confirming the role/ involvement of commission agents. If there is no third-party evidence of rendering of services, there is no question of allowing any commission payment. Even otherwise 7.8% commission is so high in assessee's business where net profit is not even 3% of sales. By giving 7.8% commission on CSD sales alone, assessee has in fact incurred loss on CSD sales which is not a business proposition. On entire sales of over 4000 Crores, commission is not even 20 crores which show the incorrect nature of such commission on CSD sales. AO should have examined role of such commission agents when there can't beany agent involved in CSD sales. Accordingly, the entire commission on CSD sales should have been treated as non-business expense after thorough examination. Failure of the assessing officer to examine these aspects has rendered the assessment order dated 28.12.2018 as erroneous in so far as it is prejudicial to the interests of the revenue.
We have gone through the notice issued u/s. 142(1) dated 14-11-2018 vide page-no. 25-28 of the paper-book along with reply of the assessee vide page no. 29 to 36 of the paper-book. It is observed that the assessee furnished relevant details pertaining to claim u/s. 80G vide point no. 9 of its submission on page no.
36 of the paper-book. Assessee furnished vides annexure XXV details of parties along with there PAN No. and addresses and copies of donation received.
Vide point no. 30 of notice u/s.142 (1) AO specifically enquired about the commission paid during the year. In response to this assessee submitted its reply vides para-10 on page no. 36-to 38 of the paper-book. Other relevant details relating to parties like ledger extracts, copy of ITR, TDS certificates etc are filed as per annexure XXVI.
While going through the various notices, orders, submissions, factual and legal paper-book we observed that as far as the issue pertaining to deduction u/s. 80G is concerned the same was not included in the enquiry notice issued u/s. 142(1). Although the details of the same have been Suo moto provided by the assessee vide para-9 of its submissions with annexures XXV. Here we are agree with the objection of the Ld. PCIT that the same is not examined by the AO, so to that extent order of the AO is erroneous but not prejudicial to the interest of the revenue, As the same has been duly explained with facts and law applicable on the same by the assessee before the Ld. PCIT itself we found based on the legal position in favour of assessee the same has been duly taken care of. This objection of Ld. PCIT no more stands against the assessee as erroneous in so far as prejudicial to the interest of the revenue. In this regard we rely upon the following decisions in favour of assessee as under: 1). CIT, Central Circle vs. Infosys Technologies Ltd. (2014) 43 taxmann.com 251 (Kar.) 2) FNF India Pvt. Ltd. vs. ACIT (2021) 133 taxmann.com 251 (Bang.-Trib.)
3). JMS Mining Pvt. Ltd. vs. PCIT (2021) 130 taxmann.com 118 (Kol.-Trib.) 4.) Nayak Sea Food Pvt. Ltd. vs. PCIT ITA No. 490/Mum. /2021 8. In the light of above it can be said that issue was not examined by the AO and on this front order is erroneous but not necessarily prejudicial to the interest of the revenue. Power of Ld. PCIT on the one hand empowers to verify any order on the criteria of being erroneous in so far as prejudicial to the interest of the revenue. On the other hand, the same section cast a responsibility on the Ld. PCIT that if during the proceedings before him u/s. 263 if assessee is able to substantiate that issue is not verified by the AO but the same is not prejudicial to the interest of the revenue, Ld. PCIT being guardian of law should evaluate and consider the fact of the case based on settled legal position. As in this case as mentioned supra honourable high court Karnataka in the case of Infosys Technologies Ltd. and benches of ITAT including jurisdictional bench have held that a claim of assessee which is not allowable under sec. 37 for CSR expenses can still be allowed u/s 80G. We find that assessee has already furnished the details relevant to sec. 80G deductions and same is in order, Ld. PCIT ought to have dropped objection on this front. In these terms we find that as far as issue of deduction u/s. 80G is concerned, the order of AO is not erroneous.
As far as second objection of the Ld. PCIT is concerned we observed that it’s a regular practice of the assessee and there is nothing new specifically in this year. We have gone through the copies of agreements with the agents to whom commission has been paid against CSD sales vide page no. 178 to 217 of the paper-book. All these papers were submitted to the record of AO also vide para- 10 of the submission in response to notice u/s 142(1) [annexure XXVI]. This disallowance of 5% of commission by the AO is in line with previous years. Clearly establishes that he has gone through the practice of assessee, amount of commission paid and thereafter he disallowed certain percentage of commission. This can’t be done without proper enquiry and application of mind.
For better appreciation of the matter we are reproducing herein below the relevant extracts of assessee submissions:- “3.7 As stated earlier, the assessee is in the business of manufacturing of fans, telecommunications, transmission line towers, hot dip galvanizing and trading in electrical appliances, lamps, lighting engineering and project services and generation of wind energy The assessee primarily recognises its revenue under the following four segments: Lighting Consumer Durables, Engineering & Projects and Others. The Consumer Durables business of the company, comprising of fans and appliances, is the largest segment with revenue of over Rs. 2000 Crores during the year under consideration. The Consumer Durables business operates in a highly competitive market with several players operating in the said segment The Company typically operates in this segment through its distributors/ dealers, and in certain areas directly through the retailers. The company has a chain of 2350 distributors and 5500 dealers across the country that help in procuring orders from institutions, housing projects, malls, municipalities, etc. besides maintaining a retailer network. 3.8 In addition, the company also makes sales to Canteen Stores Department (CSD'), a Government of India enterprise under the Ministry of Defence. Sales to CSD are one of the major sources of revenue under the Consumer Durable segment, accounting for 15% of the revenue in the said segment. This coupled with the fact that CSD is a Government enterprise, the company is required to incur additional efforts on this stream. The company makes sales to 34 CSD depots which cater to 4000+ canteens, many of which are in the remote locations in various parts of the country. Despite the company's reach in several states through its regional offices, it is difficult to have focused teams dealing with the needs to CSD. Therefore, the agents play an important role in addressing these needs. These agents are more like services providers for the company to ensure proper merchandising of the company's products, maintaining availability of products, managing company's schemes, ensuring after sales services, following-up for timely payments etc. These agents play a critical role in ensuring that the brand of the company is not lost as a result of lack/ excess of stock or damages or defects to products, which is important considering that CSD sales account for 15% of the revenue from consumer durables segment. We have enclosed herewith at page nos. 65-67 a list of parties to whom CSD commission was paid during the year. 3.9 The services provided by the agents include the following: ▪ Conducting survey for collection of information and feedback from customers ▪ Proper merchandise of company's products ▪ ensuring that company's maximum products are available at all times to meet the market requirement ▪ Providing necessary support for planning, procurement of seasonal items like fans, room heaters, room coolers, etc. ▪ Arranging to canvass company-run Sales Promotion Schemes to promote sales of company's products. ▪ facilitating faster unloading of products at CSD Depots ▪ providing support in terms of repair and replacement of defective products ▪ Organising free after-sales service camps at periodic intervals ▪ Following-up for collection of payments. ▪ arranging to collect defectives and delivery thereof to the nearest business location of the company. ▪ arranging for time order servicing to avoid late delivery charges (LDCs). 3.10 Your good self may appreciate that these services are critical to the sales of the company and maintaining the brand value for future business. It is for these services that commission is paid to these agents, that too considering the fact that in many cases, they operate in the remote parts of the country. 3.11 In the notice issued by your good self, it has been mentioned that "CSD's are defence n establishments where purchases are made through tender or other transparent method ministry directly. There cannot be any middlemen in sales to CSD... AO should have examined role of such commission agents when there can't be any agent involved in CSD sales." In this regard, it is submitted as under (a) There is no process of tenders in the case of CSD sales. The company is required to it its products on the designated portal along with the price at which the sales are proposed to be made. Pursuant to such listing, the CSD may place orders basis the average sales made in the past 3 months. Thus, there is no system of floating tenders in case of sales to CSDS. (b) The role of the agents may not be relevant at the time of listing the products on the CSD portal, but the same is relevant to understand the feedback, likely sales, stocks, so that the pricing can be listed accordingly. Further, the role of these agents is not restricted to sales, but goes much beyond. As stated above, these agents provide services in relation to ensuring proper merchandising of the company's products, maintaining availability of products, managing company's schemes, ensuring after sales services, following-up for timely payments etc. It is for these services that the agents are paid commission (c) Further, as regards the mention in the notice that the Assessing Officer should have examined role of such commission agents, it is submitted that the Assessing Officer in fact had undertaken such an examination. The details of services provided by these agents were already submitted by the company during the course of the assessment proceedings. 3.12 Considering the above, it is submitted that the presence of agents is important even in respect of CSD sales. In fact, several compete companies in the consumer space also take services of agents/ services providers for making sales to CSD. 3.13 Further, in the notice issued by your good self, it has been mentioned that commission payment cannot be allowed as a deduction in the absence of third party evidence of rendering of services. In this regard, it is submitted as under: (a) We understand that during the course of the assessment proceedings, notices under section 133(6) (sample copy enclosed herewith at page nos. 68) were already issued on sample basis to certain agents. Further, similar exercise was also undertaken in the assessments for past years. In any case, commission expenses cannot be disallowed merely on the basis of suspicion in the absence of any communication from the agents denying their role and services.
(b) As regards confirmation from CSD is concerned, the agents represent the company (Bajaj Electricals Limited) before the customers (including before CSD). The CSD identify them as representatives of Bajaj Electricals.
3.14 In view of the above, it is submitted that commission expenditure ought not to be disallowed merely on the suspicion that it is too high or merely on the ground that there is no confirmation from the parties. 3.15 Further, in the notice issued by your good self, it has been mentioned that "On entire sales of over 4000 Crores, commission is not even 20 Crores which shows incorrect nature of such commission on CSD sales." In this regard, we wish to submit the details of commission paid on sales during the year under consideration, as is evident from the table at para 13 of the assessment order: Commission in respect of Amount of commission CSD Sales 24,03,65,153 E&P division 17,96,34,365 BPCL, IOCL, HPCL and Abhay Ispat 1,29,04,387 Sales to other dealers in respect NIL of lighting and consumer durables business Total 43,29,03,905
3.16 It is however submitted that out of the sum of Rs. 24, 03, 65,153 shown as CSD commission. a sum of Rs. 3,83,96,225 actually relates to the EPC business and the same has erroneously being clubbed into the CSD commission. Accordingly, the correct amounts are as under: Commission in respect of Amount of commission CSD Sales 20,19,68,928 E&P division 21,80,30,590 BPCL, IOCL, HPCL and Abhay 1,29,04,387 Ispat Sales to other dealers in respect NIL of lighting and consumer durables business Total 43,29,03,905
3.17 In this regard, it is submitted that commission is not paid in respect of all sales. It is payable only in cases where the sales are not made to distributors/ dealers. Where sales of consumer durables are made to distributors/ dealers of the company, the above services provided by them (which are similar to the services provided by agents in CSD sales) are compensated in the price at which the goods are sold to such distributors/ dealers and hence no separate commission is required to be paid to them. In the case of sales to CSD, there is no Involvement of dealers and distributors. Hence, the services relating to proper merchandising of products, maintaining availability of products, managing company's schemes, ensuring after sales services, etc., are required to be undertaken by service providers/ agents, that too since the CSD canteens are in many cases located at remote places across the country. Hence, the comparison made above that the balance sales of the company account for less than Rs. 20 Crores commission may not be correct considering the above facts: 3.18 Further, in the notice issued by your good self, it has been mentioned that "Even otherwise 7.8% commission is so high in assessee's business where net profit is not even 3% of sales By giving 7.8% commission on CSD sales alone, assessee has in fact incurred loss on CSD sales which is not a business proposition.”In this regard, it is submitted that the profit of 3% on sales mentioned in the said notice is the company-level margin which is computed w Profit before tax (Rs 153.58 Crores) divided by Net Sales (Rs. 4591.74 Crores) which amounts to 3.34% However, one may actually require to compare the EBITDA e the fact that company has debited interest and depreciation costs. The EBITDA for the ye considering is computed at 6.15% It may be noted that the said margin has been arrived at after considering the amount debited in respect of commission paid on sales. Thus, a case where the company has incurred a loss after paying commission at the rate of 75% The EBITDA is 6.15% at company-level after debiting the aforesaid commission expenditure. 3.19 It may also be noted that the gross profit margin (i.e. Turnover minus Cost of goods sold) CSD sales is approx. 32% thus, the CSD sales which form 15% of the Consumer Durable Segment earns a gross profit margin of 32%. This clearly establishes the company's needs focus on this segment, and hence it is critical to have agents/ service providers to provide several critical tasks in respect of CSD sales to maintain the said levels. 3.20 It may also be noted that the company was in the initial phase of adoption of Theory of Constraints model (TOC model) where the focus was on increasing the volume of secondary sales in Consumer Durables business, and the company had started building capacity and infrastructure for a much higher volume Being in initial phase, such volume was yet to be reached during the year under consideration, and hence the fixed cost as a percentage turnover was higher during the year under consideration. In the subsequent years, as and when the volumes increased, the fixed cost percentage came down as the company started reaping benefits of the TOC model thereby increasing the margins in subsequent your Hence, the margin for the year under consideration is not comparable. 3.21 In view of the above, it is submitted that the commission paid on sales to CSD are genuine business expenses and ought not to be disallowed. 3.22 Without prejudice to the above, the company wishes to state that the expenditure on CSD commission incurred during the year includes provisions amounting to Rs. 6,01,77,085, out of which. (a) Provision of Rs. 2, 17, 80,859 is reversed on the first day of the next financial year they reducing the amount of expenditure claimed for that year. If the said provisions disallowed in the year under consideration, it will result in double disallowance of be same amount over a period of two years. (b) Provision of Rs. 3, 83, 96,225 which relates to the EPC business and the same ha erroneously being clubbed into the CSD commission.”
In the light of assesses submission and copy of agreements with sales agent for CSD sales we find that the concern of Ld. PCIT is not on valid premises. Payments to agents were being made for number of services in the form of certain field work, logistics co-ordination and handling of the goods. These services are essential part of any FMCG company. We do not find any error in the order of AO and that is to there is complete transparency at the end of the assessee. Following the principle of consistency assessee and AO both are following the established norms of the industries and assessment procedures respectively. In view of above appeal of the assessee is allowed and order of Ld. PCIT is set aside on above terms. 12. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 2nd day of January, 2023.