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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: Sh. Kul BharatDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of ld. PCIT-12, New Delhi dated 04.03.2020.
2. The assessee is engaged in the business of Exporting & Trading of Aluminum Foil and Service proving to its foreign clients in China for exporting their bulk drug to customer in India and filed return of income on 27.08.2015 declaring total income of Rs.17,09,730/-. The case has been assessed u/s 143(3) vide order dated 19.12.2017 making disallowance of 40% of the Diwali expenses and interest on late deposit of service tax.
2 ZME Global India LLP 3. The case has been reviewed in accordance with the provisions of Section 263.
4. The ld. PCIT made the following observations:
1. The assesses has also claimed payment of China Tax of Rs.5,74,183/-. The AO has not made any enquiry about the nature of China Tax whether the same is like TDS or Service Tax etc. Without specifying the nature of China Tax, AO has allowed same.
The assessee has also claimed Diwali Expenses of Rs.5,29,500/-. On perusal of the same, it has been found that the assessee has purchased 150 wall clock @ 1000 per watch from M/s Global Impex, and Executive dairy 200 pcs @ 320 per from M/s Global Impex. The AO has not enquired about utilization of these items whether these were purchased for business purpose.
The assessee has claimed exhibition expenses of Rs.3,41,250/-. These expenses relates to purchase of 1500 pcs of calendar @ 150 per pcs from M/s Global Impex and 1000 pcs of notepad @ 100 per pcs from M/s Global Impex. The AO has not enquired about utilization of huge quantity of these Items for business purpose. AO has also not verified the genuine of purchase.
4. The assessee has incurred the business promotion expenses of Rs.1,02,980/- but AO has not enquired about nature of these expenses with bills and vouchers.
3 ZME Global India LLP 5. The assessee has paid commission to 6 persons. The AO has not made any enquiry about justification and genuineness from the parties on behalf of which the commission was paid. Some of the parties on behalf of whom the commission was paid, is well known company in the business of pharmaceuticals like M/s Morepan Laboratories Pvt. Ltd., M/s Ind. Swift Laboratories Ltd., M/s Hetro Drugs Ld., M/s C. J. Shah and Company.
6. The assessee claimed payment of Rs.29,00,037/- on account of salary for which the AO has not made any enquiry to establish the linkage of salary expense with the business.
The ld. PCIT issued notice to the assessee on 07.02.2020 confronting the above issues to the assessee. The assessee replied vide letter dated 18.02.2020. With regard to the 154 wall clocks and 200 executive diaries claimed by the assessee under Diwali expenses, the ld. PCIT held that the assessee is having less than 15 customers and 13 vendors and hence the 150 items of wall clocks could not have been distributed.
Before the ld. PCIT, the assessee argued mainly on the basis of the legal principles.
The ld. PCIT held that the AO has not applied his mind and not conducted proper enquiries and verification. The ld. PCIT passed order u/s 263 on 04.03.2020 annulling the assessment with direction to the AO that the assessment be made de novo after conducting appropriate enquiries.
4 ZME Global India LLP 8. Heard the arguments of both the parties and perused the material available on record.
From the records, we find, a. With regard to China Tax- The assessee has replied vide letter dated 18.08.2017. China Tax is paid by the Chinese manufacturers which is deducted from the commission paid to the assessee. The gross commission is credited and the Chinese Tax paid by the manufacturer is debited. b. With regard to commission- It was explained before the AO that the commission has been paid to various persons namely, Sh. Rajesh Jain, Sh. Rajat Singhal, Sh. Vijayanat Jain, Ms. Roopa Malhotra for obtaining orders from different companies and for different products. The invoices issued by the agents have been submitted and TDS has been duly deducted. Vide letter dated 20.11.2017, copies of the agreements, contracts for receipt of commission from Chinese Companies were submitted before the AO. The details of the commission have been duly explained in detail vide reply dated 28.11.2017 submitted before the AO. For the sake of ready reference, the reply given by the assessee to the AO is reproduced as under:
“Sub.: Assessment Proceedings u/s 143/2) and 142(1) of the Income Tax Act, 1961.
Respected Sir, With reference to your notice for the above captioned subject and in furtherance to our earlier submission, we
5 ZME Global India LLP hereby submit the following information and documents as under:
1. The assessee is a Limited Liability Partnership incorporated under LLP Act 2008. It is a Separate Legal Entity and is a Body Corporate.
2. It is a part of Shah TC Group. During the year assessee LLP started the business on commission basis as it was not achieving adequate Profits in its Trading Activities in Previous Years.
3. Note on Commission Income:
3.1 The Assessee LLP is engaged into providing services for procurement of API and Intermediates products for the manufacture of Pharma Medicine in India from China Manufacturers.
3.2. The Assessee LLP has its own clients over the years and also used various services of Agents from time to time who introduce the Indian Pharma Manufacturers Customers to Assessee LLP.
3.3. On the request of Agents as well as our Sale Team, request of procurement of Products come to the notice of the assesse LLP team. The same team negotiates with those customers as well as China Manufacturers regarding the product, quantity, quality and price. Upon the negotiation, a sales confirmation is obtained by Sales Team from Indian Customers. Copy of a Sales Confirmation Letter is enclosed as per Annexure 1.
3.4 Thereafter the Assessee LLP enters into the sales contract with Chinese Company, wherein terms arly states that a commission would be paid on the full contract amount to Assessee LLP as per sed Annexure 2 highlighting in yellow. As per this annexure, the Commission to be received by sse LLP was 3%.
3.5. The Assessee LLP’s employees coordinate with Indian Manufacturers Customers to open LC on the Chinese Suppliers. The Indian Customers sent the LC’s copies to Assessee LLP for checking the Terns & Conditions as per Sales Agreement. On the Assessee’s LLP approval the LC is opened on the Chinese Manufacturers directly by Indian Customers. A copy of LC related documents is enclosed as per Annexure 3.
3.6. The Chinese Manufacturer then issue the Commercial Invoice to Indian Customers along with Batch Release Certificate and Certificate of Analysis of products. The same also contain Label Marking along with Packing List. Our Sales Team follows with Chinese Manufacturers for the preparation dispatch of said Material. Copies of related documents enclosed are enclosed as per Annexure 4.
3.7 The Chinese Supplier books the shipment of Product in favor of Indian Manufacturers Customers sends the original Bill of Lading along with shipment documents to Indian Customers Bank and sends the copy of same to Assessee LLP. The copy related documents are enclosed as per Annexure 5.
3.8 Upon the arrival of Goods in India, Indian Customers get the same cleared from Custom Authorities, employees of Assessee LLP coordinates with Clearing House Agent for clearance of any doubts as products are related to Pharma Industry.
3.9 Assessee LLP then issued Commission Note on Chinese Manufacturers that our Commission would be due within 90 days. Copy of Commission Note is enclosed as per Annexure 6.
3.10 On the Completion of 90 days the Invoice is raised on the Chinese Manufacturers Companies for Commission due. Copy of invoice is enclosed as per Annexure 7.
3.11 Thereafter the employees of Assessee LLP follow up for the payment of dues. The payment is received directly in Bank through banking channels i.e. Swift Transfer. Few Copies of Foreign Inward Remittance Certificate (FIRC) is enclosed as per Annexure 8.
4. Note on expenses incurred to earn Commission Income 4.1 The assessee LLP uses its manpower and also services of various outsiders to earn the commission income.
4.2. Major expenses incurred by the assesse LLP include Salary, Commission, Exhibition Expenses, Diwali expenses and China Tax.
8 ZME Global India LLP 4.3. Salary is paid to employees of the assesse LLP details of which along with ledger accounts and appointment letters has already been submitted vide our submission dated 15th September 2017.
4.4. Details of commission paid along with confirmations have already been submitted vide our submission dated 18th August 2017. TDS deducted from their payments reflected through TDS certificates have also been submitted vide our submission dated 20th November 2017.
4.5. Detail of exhibition expenses and Diwali expenses has also been submitted vide our submission dated 3 8th August 2017. These are being incurred to maintain good business relationships with existing customers and have new customers.
4.6. China tax is paid by Chinese manufacturers which is deducted from the commission paid to the assesse LLP, the detail of which has been has already been submitted vide our submission dated 18th August 2017.
4.7. It is pertinent to note that though the assesse LLP earned commission of Rs. 96 Lakhs approx, only, yet it effect sales of Rs. 44.22 Crores. The commission earned is just akin to gross margin here. A detail of voucher no. wise sales, related buyer, sales effected and commission earned is enclosed as Annexure 9.
9 ZME Global India LLP 4.8 The process of continuously finding buyers and sellers, liaison work, follow-ups, documentation, etc. requires adequate manpower.
4.9. For finding buyers, liaison work, follow-ups, documentation, maintaining business relationship, etc. expenses on salary, exhibition, Diwali has to be incurred, which are all related to business only and allowable u/s 37 of the Income Tax Act, 1961.
4.10. Commission is paid to agents who provide requisite clients, based on which further working is done by the employees of the assesse LLP to generate income. Had these agents not procured the clients, the assesse LLP would not have earned that income at all. It is pertinent to note that commission is no paid, on total commission income earned by the assesse LLP but only on the portion of sales and related commission effected by these agents.
4.11. Details of the four agents, which your good-self specifically asked for are as under:
4.11.1 Rajan Jain is a graduate having 10 years of experience having PAN as AANPJ3470G and is associated with shah TC group since FY 2009-10. Customers for relevant products provided by him were Morepan Laboratories Ltd. and Sarca Laboratories Ltd. He is not a party u/s 40A2(b) of the assesse LLP. Related documents of commission to him has already been submitted to your office as per para 4.4 above.
10 ZME Global India LLP 4.11.2 Rajat Singhal is a graduate having 10 years of experience having PAN as BCTPS6986B and is associated with shah TC group since FY 2014-15. Customer for relevant products provided by him was MSN Laboratories Ltd. He is not a party u/s 40A2(b) of the assesse LLP. Related documents of commission to him has already been submitted to your office as per para 4.4 above.
4.11.3. Vijayant Jain is a graduate having 10 years of experience having PAN as AANPJ3471H and is associated with shah TC group since FY 2009-10. Customers for relevant products provided by him were Hetero Labs Ltd., C J Shah & Co. and Kantilal Manilal & Co. Pvt. Ltd. He is not a party u/s 40A2(b) of the assesse LLP. Related documents of commission to him has already been submitted to your office as per para 4.4 above.
4.11.4. Roopa Malhotra is a graduate having 7 years of experience having PAN as AHEPM4088P and is associated with shah TC group since FY 2010-11, Customers for relevant products provided by her were Ind Swift Laboratories Ltd., MSN Organics Pvt. Ltd., Sagar Rubber Products Pvt. Ltd. She is not a party u/s 40A2(b) of the assesse LLP. Related documents of commission to her has already been submitted to your office as per para 4.4 above.
4.12. From the above discussions, it is amply clear that all expenses were incurred only for the business purposes and are allowable under relevant provisions including section 37 of the Income Tax Act, 1961.” c. With regard to salaries- The same has been requisitioned vide order sheet noting dated 07.09.2017. The assessee filed complete details along with the appointment letters of the employees vide reply dated 15.09.2017. d. With regard to Diwali, Exhibition & business promotion expenses- The replies have been given vide letter dated 18.08.2017 at point no. 1 and 28.11.2017 at point no. 4.5. The observation of the ld. PCIT that the assessee has got only 15 customers and 13 vendors and hence and the requirements of the gifts cannot be more than the customers and vendors is an antithesis for development of any business. The assessee distributes diaries, calendars and total gifts during the exhibition participated so as to attract wider customer base is also not out of contest to mention that the Assessing Officer has already disallowed 40% of the Diwali expenses in the order u/s 143(3).
Thus, we find that the AO has duly examined the issues raised by the ld. PCIT. Further, we find that the conclusion para 13 of the ld. PCIT in the order passed u/s 263,
“13. Thus, the assessment order passed u/s 143(3) dated 19.12.2017 for A.Y 2015-16 is both erroneous & prejudicial to the interest of revenue. It is absolutely clear that during the assessment proceedings for AY 2015-16, AO has not made proper enquiry and verification of the issue mentioned above. There was no application of mind on issues in hand as narrated above. This has rendered assessment order “erroneous”. If due to an erroneous order of the AO the revenue is losing tax lawfully payable by a person, it would be certainly prejudicial to the interest of revenue. In case of Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 87 (SC)
12 ZME Global India LLP Hon’ble Apex Court held that there was no material to support the claim of appellant & yet AO accepted the entry in the statement of account in absence of any supporting material and without making any inquiry. It is incumbent on the officer to investigate the facts stated in the return. The order becomes erroneous if such as enquiry has not been made as held in case of Duggal & Co. Vs. CIT (1998) 220 ITR 458 (Del.).
13.1 Where the Assessing Officer keeps a letter on record and does not carry out necessary investigations which are per se required to verify the correctness of the averments, there being an error in the sense that he has failed to carry out the requisite enquiry which can be rectified in a revision. Thus the Commissioner was to pass a fresh order under Section 283 after hearing the assesses [CIT vs. DLF Power Ltd., (2012) 345 ITR 448(Del.)].
13.2 The Hon’ble Delhi High court in the case of CIT Vs. Shri Braham Dev Gupta in and 1162/2017 has clearly decided that Pr. Commissioner of Income Tax can invoke the provision of section 263 of income Tax Act where AO has not made adequate enquiry and verification. In this matter, SLP of the assessee has also been dismissed by Hon’ble Apex Court.
13.3 Further, section 263 of the Act and amendment made in explanation 2 to section 263 states that “The Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify,
13 ZME Global India LLP including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation 1.-.........
Explanation 2.- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,-
the order is passed without making inquiries or verification, which should have been made;
2. the order is passed allowing any relief without inquiring into the claim;
3. the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
can be held to be misplaced in the face of the facts narrated above and against the provisions of Section 263 as neither what is prejudicial to the interest of revenue nor error in the assessment has been brought to the fore by the ld. PCIT. Even the observation of the ld. PCIT that there was no material to support the claim of the appellant and at AO accepted without verification is found to be contrary to the material available on record. The AO is not expected to examine minutely the utilization of 150 wall clocks, 200 diaries and the calendars to whom they have been given and whether it is for business
14 ZME Global India LLP purpose or not, if so, what is the benefits derived thereof. The ld. PCIT has also not brought anything on record with regard to the prejudice or error in the assessment which led or indicate to loss of revenue by the way of bringing any cogent material on record. No material whatsoever has been brought on record by the Commissioner which shows that there was any discrepancy for falsity in submissions furnished by the assessee, the order of the Assessing Officer cannot be set aside for making deep enquiry in a heuristic way only on the presumption and assumption that something new may come out.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 07/09/2021.