ALIVIRA ANIMAL HEALTH LIMITED,THANE vs. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 1, THANE, THANE

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against order dated 6th March 2026 passed by learned National Faceless Appeals Centre (NFAC), Delhi [hereinafter shall be referred as ‘the learned CIT(A)’] for A.Y. 2018-19, raising following grounds:

“1. On the facts and in the circumstances of the case and also in law, the learned CIT(A) erred in confirming disallowance of commission expenses of Rs.1,17,08,355 under section 37(1). without appreciating that the expenditure was incurred wholly and exclusively for the purpose of business. The learned CIT(A) also erred in not appreciating the fact that appointment of agents and payment of commission to them for sales order procured is a regular trade

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practice in pharmaceutical exports, i practice in pharmaceutical exports, irrespective of whether customers are new or rrespective of whether customers are new or regular.” 2. Briefly stated facts of the case are that Briefly stated facts of the case are that the assessee company he assessee company is a subsidiary of Holding Company S Holding Company Sequent Scientific Ltd Scientific Ltd. and was engaged in manufacturing was engaged in manufacturing of pharmaceutical of pharmaceutical, medicinal chemicals and botanical products. T botanical products. The assessee filed return of he assessee filed return of income on 30th November 2018 declaring total loss for current year income on 30th November 2018 declaring total loss for current year income on 30th November 2018 declaring total loss for current year at Rs (-) 4,65,98,067 4,65,98,067/-. Along with the return of income, t Along with the return of income, the assessee also filed audit report in Form 3C assessee also filed audit report in Form 3CEAC and and International/ domestic transactions report transactions report in Form number 3CEB. in Form number 3CEB. The assessee also filed report for deduction under section 10A also filed report for deduction under section 10AA in Form number in Form number 56F in respect of undertaking 56F in respect of undertakings located at SEZ Visakhapatnam. The Z Visakhapatnam. The return of income filed by the assessee was processed under section return of income filed by the assessee was processed under s return of income filed by the assessee was processed under s 143(1) of the Income Tax Act, 143(1) of the Income Tax Act, 1961 (in short in short ‘the Act’) on 5/11/2019 wherein the current year loss was 2019 wherein the current year loss was computed at computed at Rs.(-) 2,63,89,316/-. Thereafter, t Thereafter, the return of income was selected for he return of income was selected for scrutiny and notice under section 143(2) was issued on scrutiny and notice under section 143(2) was issued on scrutiny and notice under section 143(2) was issued on 22/09/2019.

During the course of During the course of the assessment proceedings the Assessing the assessment proceedings the Assessing Officer observed that assessee paid commission of Rs. assessee paid commission of Rs.1,17,08,355/- for procuring sales order. The A for procuring sales order. The Assessing officer based on the cost ssessing officer based on the cost audit report noted that export of the assessee audit report noted that export of the assessee was re was restricted to its Associated Enterprises nterprises having related party transaction. However related party transaction. However, in a clarification dated 03 dated 03/04/2021, the assessee explained the assessee explained that for the majority of the expor the majority of the export was directed to the entities, o t was directed to the entities, other than he

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Associated Enterprises nterprises. Further, the Assessing officer observed ssessing officer observed that assessee could not justify as why the commission was paid to that assessee could not justify as why the commission was paid to that assessee could not justify as why the commission was paid to the customers who were having regular transaction with the the customers who were having regular transaction with the the customers who were having regular transaction with the assessee. According to him the entities which were ccording to him the entities which were ccording to him the entities which were not new, were not warranted the commission of sal not warranted the commission of sales, accordingly he was of the accordingly he was of the opinion that assessee could not justify the commission expenditure opinion that assessee could not justify the commission expenditure opinion that assessee could not justify the commission expenditure paid outside India or paid in India. The A de India or paid in India. The Assessing officer in the ssessing officer in the assessment order passed on assessment order passed on 17/04/2021 made disall 2021 made disallowances of the commission of Rs the commission of Rs1,17,08,355/-, in invoking section 37(1) of the n invoking section 37(1) of the Act and reduced the claim of the current year loss reduced the claim of the current year loss to Rs (-) reduced the claim of the current year loss 34,88,9712/-.

2.1 On further appeal On further appeal, the learned CIT(A) noted that commission the learned CIT(A) noted that commission expenses were not incurred wholly and incurred wholly and exclusively for exclusively for purpose of the business and nature and extent to the services rendered was the business and nature and extent to the services rendered was the business and nature and extent to the services rendered was not established. The relevant finding of the learned CIT(A) is not established. The relevant finding of the learned CIT(A) is not established. The relevant finding of the learned CIT(A) is reproduced as under: :

“7. It is noted that the principal reason for the addition w.r.t. the commission 7. It is noted that the principal reason for the addition w.r.t. the commission 7. It is noted that the principal reason for the addition w.r.t. the commission expenses has been recorded as the majority of exports of the appellant has been been recorded as the majority of exports of the appellant has been been recorded as the majority of exports of the appellant has been made to associated enterprises of the appellant and not to independent parties. It made to associated enterprises of the appellant and not to independent parties. It made to associated enterprises of the appellant and not to independent parties. It makes sense to question the appropriateness of such expenses in the event of makes sense to question the appropriateness of such expenses in the event of makes sense to question the appropriateness of such expenses in the event of major exports being made to t major exports being made to the related parties or associated ones. It was he related parties or associated ones. It was incumbent on the appellant to establish not only the business exigencies and incumbent on the appellant to establish not only the business exigencies and incumbent on the appellant to establish not only the business exigencies and rationale behind such payments but also establish that the expenses have been rationale behind such payments but also establish that the expenses have been rationale behind such payments but also establish that the expenses have been made wholly and exclusively for the purposes of busines made wholly and exclusively for the purposes of business. It is recorded in the s. It is recorded in the assessment order that the same has not been done. It is also noted that vide assessment order that the same has not been done. It is also noted that vide assessment order that the same has not been done. It is also noted that vide query no. 6 of the notice issued u/s 142(1) on 27.12.2020, various details were query no. 6 of the notice issued u/s 142(1) on 27.12.2020, various details were query no. 6 of the notice issued u/s 142(1) on 27.12.2020, various details were inter alia requisitioned by the AO during the assessment proceedings. inter alia requisitioned by the AO during the assessment proceedings. inter alia requisitioned by the AO during the assessment proceedings. 8.1. On the other hand, the appellant argues that it is a subsidiary company of On the other hand, the appellant argues that it is a subsidiary company of On the other hand, the appellant argues that it is a subsidiary company of M/s Sequent Scientific Ltd and orders placed by it with/for the appellant and it M/s Sequent Scientific Ltd and orders placed by it with/for the appellant and it M/s Sequent Scientific Ltd and orders placed by it with/for the appellant and it submitted party wise details of the agents along with other documents before the submitted party wise details of the agents along with other documents before the submitted party wise details of the agents along with other documents before the

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AO. With regard to the argument of requirement of commission expenses to the the argument of requirement of commission expenses to the related parties/associate enterprises, the appellant argued that the agents are related parties/associate enterprises, the appellant argued that the agents are related parties/associate enterprises, the appellant argued that the agents are required as commercial expediency for getting sales orders and therefore, the required as commercial expediency for getting sales orders and therefore, the required as commercial expediency for getting sales orders and therefore, the conclusion of the AO is contrary to the conclusion of the AO is contrary to the facts. 8.2. The appellant, further, argues that overall commission expenses are below 8.2. The appellant, further, argues that overall commission expenses are below 8.2. The appellant, further, argues that overall commission expenses are below 1% of the sales and therefore, the same cannot be stated to be against the market 1% of the sales and therefore, the same cannot be stated to be against the market 1% of the sales and therefore, the same cannot be stated to be against the market practice. The appellant, relying on various judicial precedents argued that the AO practice. The appellant, relying on various judicial precedents argued that the AO practice. The appellant, relying on various judicial precedents argued that the AO cannot disallow expenditure merely for the reason that the expenses were not ot disallow expenditure merely for the reason that the expenses were not ot disallow expenditure merely for the reason that the expenses were not warranted. 8.3. Having considered the rival arguments at length, I am unable to convince 8.3. Having considered the rival arguments at length, I am unable to convince 8.3. Having considered the rival arguments at length, I am unable to convince myself with the defense extended by the appellant. If the myself with the defense extended by the appellant. If the business promotion expenses have been claimed by the appellant, the onus rests on it to establish the n claimed by the appellant, the onus rests on it to establish the n claimed by the appellant, the onus rests on it to establish the nature and extent of services obtained, as well as the impact or benefit derived nature and extent of services obtained, as well as the impact or benefit derived nature and extent of services obtained, as well as the impact or benefit derived from such services of the alleged commission agents. Not having done so during from such services of the alleged commission agents. Not having done so during from such services of the alleged commission agents. Not having done so during the assessment proceedings, de the assessment proceedings, despite being questioned, leaves limited scope at spite being questioned, leaves limited scope at the appellate level to elicit relief. the appellate level to elicit relief. 8.4. As regards the judicial pronouncements cited by the appellant, it is noted 8.4. As regards the judicial pronouncements cited by the appellant, it is noted 8.4. As regards the judicial pronouncements cited by the appellant, it is noted that the facts of the case at hand are quite distinct. While the judgments cited by that the facts of the case at hand are quite distinct. While the judgments cited by that the facts of the case at hand are quite distinct. While the judgments cited by the Appellant do bear some thematic relevance to the issues involved; particularly pellant do bear some thematic relevance to the issues involved; particularly pellant do bear some thematic relevance to the issues involved; particularly on the aspect of business expediency; their applicability to the present case on the aspect of business expediency; their applicability to the present case on the aspect of business expediency; their applicability to the present case stands materially diluted in view of the specific factual matrix brought out by the stands materially diluted in view of the specific factual matrix brought out by the stands materially diluted in view of the specific factual matrix brought out by the Assessing Officer on page 4 of the order. Therefore, the legal propositions on page 4 of the order. Therefore, the legal propositions on page 4 of the order. Therefore, the legal propositions advanced by the Appellant, though not without academic merit, do not sufficiently advanced by the Appellant, though not without academic merit, do not sufficiently advanced by the Appellant, though not without academic merit, do not sufficiently dislodge the cogent findings recorded in the assessment order based on a dislodge the cogent findings recorded in the assessment order based on a dislodge the cogent findings recorded in the assessment order based on a broader conceptual foundation and commerci broader conceptual foundation and commercial principles. Accordingly, I find that al principles. Accordingly, I find that the case laws are not able to assist the appellant. the case laws are not able to assist the appellant. 9. In view of the aforementioned observations and discussions, I am constrained 9. In view of the aforementioned observations and discussions, I am constrained 9. In view of the aforementioned observations and discussions, I am constrained to confirm the addition and to dispose of the ground of appeal. In result, the to confirm the addition and to dispose of the ground of appeal. In result, the to confirm the addition and to dispose of the ground of appeal. In result, the appeal is dismissed” ”. 3. We have heard rival submissions of the parties and perused e have heard rival submissions of the parties and perused e have heard rival submissions of the parties and perused the relevant material on record. The sole issue and dispute in the the relevant material on record. The sole issue and dispute in the the relevant material on record. The sole issue and dispute in the case case is is disallowance disallowance of of the the commission commission expenditure expenditure of of Rs1,17,08,355/-. Before us efore us, the learned counsel for the assessee the learned counsel for the assessee referred to paper book containing pages 1 to 125. He referred to the referred to paper book containing pages 1 to 125. He referred to the referred to paper book containing pages 1 to 125. He referred to the paper book page 58 and submitted that out of total commission paper book page 58 and submitted that out of total commission paper book page 58 and submitted that out of total commission expenses Rs. 35,68,075 075/- was paid to the Indian nationals whereas he Indian nationals whereas

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Rs. 81,40,280/- was p was paid to the foreign nationals. The learned aid to the foreign nationals. The learned counsel for the assessee submitt counsel for the assessee submitted that assessee could not file ed that assessee could not file evidence in support of services rendered by those commission evidence in support of services rendered by those commission evidence in support of services rendered by those commission agents and co-relate their corresponding sales invoices. The learned relate their corresponding sales invoices. The learned relate their corresponding sales invoices. The learned counsel for the assessee submitted that assessee is ssee submitted that assessee is ssee submitted that assessee is seeking to file all all all necessary necessary necessary documentary documentary documentary evidences evidences evidences including including including the the the e-mail correspondence during year under consideration to demonstrate during year under consideration to demonstrate during year under consideration to demonstrate that actual service were were rendered by those commiss rendered by those commission agent for obtaining orders and peru nd perusing recovery of sale proceeds of sale proceeds from the importers

Sd/- Sd/- (SIDDHARTHA NAUTIYAL SIDDHARTHA NAUTIYAL) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 24/09/2026 /2026 Kunal Kr. P.S.

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Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.

BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai