VENUS INDUSTRIAL CORPORATION vs. ASST COMMISSIONER OF INCOME TAX

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ITA/222/2001HC Punjab & HaryanaPHHC01042061200110 February 2020Author: MR. JUSTICE AJAY TEWARI,MR. JUSTICE AVNEESH JHINGAN4 pages
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What did the High Court hold?

The High Court held that the interpretation of the Tribunal was incorrect. The Court found that the agreement clauses, particularly Clause 4, did not stipulate that the assessee was not bound to report all enquiries received directly or indirectly to the agent. The Court reasoned that it was clear from the agreement that no order could be processed by the assessee without the services of the agent. Therefore, the assessee was obligated to pay commission on any sale that took place within the territory of an agent, provided the condition of total payment receipt (as per Clause 6) was met. The Court concluded that Clause 4 of the agreement had been wrongly interpreted by the Tribunal. Consequently, the appeals were allowed, and the ITAT's order was set aside. The operative direction was to allow the petitions, implying relief to the assessee regarding the disallowed commission.

What were the facts?

The assessee, Venus Industrial Corporation, an exporter of hand-tools and engineering tools, filed appeals against the order of the Income Tax Appellate Tribunal (ITAT) dated 22.11.2000. The ITAT had declined relief regarding commission paid to Indian residents for booking export orders, under Section 37(1) of the Income Tax Act, 1961. The assessee had appointed agents in various parts of the world, with agreements stipulating commission rates based on FOB value for territories like the UK and South East Asia. A key clause (Clause 4) stated that the Principal would redirect all enquiries received directly or indirectly from buyers within the agent's territory to the agent. The dispute arose from the ITAT's conclusion that the assessee needed to prove in every case that an order was obtained through the agent, whereas the assessee contended commission was due on all sales generated within the agent's territory.

What were the issues?

1. Whether in the facts and circumstances of the case the orders Annexure P-2 & P-4 are legally sustainable? (Mixed law and fact, concerning the validity of the ITAT's orders under Section 37(1) of the Income Tax Act, 1961). 2. Whether in the facts and circumstances of the case the order disallowing the commission paid to the agents is legally sustainable, the same being based on mere conjectures, presumptions and surmises and misinterpretation of the provisions of the agreement? (Mixed law and fact, concerning the ITAT's disallowance of commission under Section 37(1) of the Income Tax Act, 1961). 3. Whether the commercial aspect and the undisputed transactions including payments could be legally excluded while interpreting the terms of the agreement? (Mixed law and fact, concerning the interpretation of the agency agreement under Section 37(1) of the Income Tax Act, 1961). Assessee's contentions: The assessee argued that as per the agreement, commission was payable on whatever sales were generated within the agent's territory. Clause 4 of the agreement, which stated that the Principal would redirect all enquiries to the agent, implied that the assessee was bound to pay commission on any sale within an agent's territory, subject to payment receipt conditions. Revenue's contentions: The revenue's position, as reflected in the ITAT's conclusion, was that the assessee had to prove in every instance that the order was obtained through the agent to justify the commission payment.

Which sections of the Income-tax Act were involved?

Section 37(1)

AI-generated summary — verify with the full judgment below

ITA-222-2001 (O&M) and ITA-223-2001 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision : 10.2.2020 ITA-222-2001 (O&M) Venus Industrial Corporation

...... Appellant Versus Asst. Commissioner of Income Tax ...... Respondent ITA-223-2001 (O&M) Venus Industrial Corporation

...... Appellant Versus Asst. Commissioner of Income Tax ...... Respondent CORAM : HON'BLE MR.JUSTICE AJAY TEWARI : HON'BLE MR.JUSTICE AVNEESH JHINGAN *** Present : Ms. Manveen Narang, Advocate for the appellant. Mr. Rajesh Katoch, Sr. Standing counsel with Ms. Pridhi Jaswinder Sandhu, Jr. Standing counsel for the respondent. *** AJAY TEWARI, J. (Oral)

1.

Vide this common order we shall dispose of above said two appeals as the common question of law and facts are involved therein. For the sake of convenience, facts are being taken from ITA No.223- 2001. 2. This appeal has been filed by the assessee against the order dated 22.11.2000 of the Income Tax Appellate Tribunal (for short 'the ANURADHA 2020.02.18 16:37 integrity of this document

ITA-222-2001 (O&M) and ITA-223-2001 (O&M) 2 Tribunal) declining a relief in respect of commission allegedly paid to Indian resident for booking orders for export under Section 37 (1) of the Income Tax Act, 1961 (for short 'the Act'). The following substantial questions of law have been raised :- “(i) Whether in the facts and circumstances of the case the orders Annexure P-2 & P-4 are legally sustainable ? (ii) Whether in the facts and circumstances of the case the order disallowing the commission paid to the agents is legally sustainable, the same being based on mere conjectures,

presumptions

and surmises

and misinterpretation of the provisions of the agreement? (iii) Whether the commercial aspect and the undisputed transactions including payments could be legally excluded while interpreting the terms of the agreement ?”

3.

Brief facts of the case are that the assessee was an exporter of hand-tools, fastener and other engineering tools. It had appointed agents in different parts of the world and all of those agencies had entered into an agreement with the asseessee-appellant which had the following clauses :- “1. That the Agent will book orders for the Products offered for sale by the Principal in the territories of UK and South East Asia.

2.

That the Agent shall be responsible for getting the Letters of Credit opened by the Buyers in favour of the Principal for the orders booked by the Agent and Accepted by the Principal.

3.

That the Agent shall be responsible for all payments and also getting the bills honoured, in time, as may be drawn by the Principal on the buyers.

4.

That the Principal will redirect all enquiries received directly indirectly from the Buyers within territory referred ANURADHA 2020.02.18 16:37 integrity of this document

ITA-222-2001 (O&M) and ITA-223-2001 (O&M) 3 to hereinabove, to the Agent.

5.

That the Agent shall be entitled to receive the commission etc. from the Principal, as stipulated hereunder:- (a) For U.K.:- (i) Commission @7% on the F.O.B., value of the goods supplied upto the F.O.B., value of Rs 7 lacs. In addition, a sum of Rs. 25,000/- will be paid by the Principal to the Agent to defray the first tour expenses of the Agent for UK. (ii) Conmission @5% on the F.O.B. value of the goods supplied by the Principal to U.K. over and above the F.O.B., value of Rs 7 Lacs. NOTE:- All kinds of tour expenses will, henceforth be borne by the Agent. (b) At 3% of the F.O.B., value of the goods supplied to the buyers in the territory of South East Asia, namely:- Thailand Indonesia Malaysia Singapore and Philippines etc. NOTE:- All kinds of tour expenses will be borne by the Agent himself.

6.

That commission as stipulated in Para 5 above, will be paid only on the orders executed by the Principal for which total payment has been received by the Principal. No commission on unexecuted orders, or payment not received will be paid to the Agent.

7.

That the account of commission will be settled by the Principal every year or earlier if required.

8.

That this agreement is valid for a period of three years, from date hereof whereafter, it maybe extended for a further period as may be agreed upon between the parties hereto.

9.

In case of any dispute touching this agreement, the same will be referred to arbitration under the Indian Arbitration Act, then inforce and a decision of such of the arbitration will be binding on the parties hereto. ANURADHA 2020.02.18 16:37 integrity of this document

ITA-222-2001 (O&M) and ITA-223-2001 (O&M) 4

4.

The conclusion of the Tribunal is that to justify the payment of commission the assessee had to prove in every case that the order had been obtained from the agent. While the contention of the assessee was that as per the agreement, the assessee was to pay commission on whatever sale was generated within the territory of the agent. The crucial clause in this regard is Clause 4 (supra). The Tribunal held that this clause would not supersede Clauses 1 to 3 and 5. 5. In our opinion, the interpretation of the Tribunal is incorrect. Those clauses nowhere stipulates that the assessee is not bound to report to the agent any enquiry which may have received directly or indirectly. From reading of the agreement it is clear that no order can be processed by assessee without services the agent and if that is so, the assessee was bound to pay commission on any sale which was taken place in the territory of an agent (subject to condition 7 supra). In these circumstances, we hold that Clause (4) of the said agreement has wrongly been interpreted by the Tribunal in the facts and circumstances of the case.

6.

Resultanly, the petitions are allowed.

7.

Since the main cases have been decided, the pending application, if any, also stands disposed of.

(AJAY TEWARI)

JUDGE (AVNEESH JHINGAN) JUDGE 10.2.2020 anuradha

Whether speaking/reasoned - Yes/No Whether reportable - Yes/No ANURADHA 2020.02.18 16:37 integrity of this document

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