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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the Revenue challenging the impugned order dated 28/02/2019, passed under section 250, of the Income Tax Act, 1961 (‘the Act’) by the learned Commissioner of Income Tax (Appeals)–21, Mumbai [‘learned CIT(A)’], for the assessment year 2014–15.
In its appeal, Revenue has raised following grounds:
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 “1. On the facts and in the circumstances of the case and in Law, the Ld.CITA) erred in deleting the disallowance of commission expenses. though the assessee had not been able to substantiate that the same has been incurred for the business of the assessee.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of commission expenses paid to M/s. MCPL without appreciating the fact that M/s. MCPL is related party within the meaning of sec.40A(2)(b) and nothing on record to conclusively prove that services has been rendered by M/s. MCPL."
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of commission expenses paid to M/s. MCPL without appreciating the fact that there is no commensurate increase in Revenue of the assessee company which warrants payment of commission to M/s. MCPL.
4. The appellant prays that the order of the Ld. CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.”
The only grievance of the Revenue in the present appeal is against deletion of disallowance of commission expenses paid by the assessee to its related concern.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing of printed labels for liquor industry and production of cartons. For the year under consideration, the assessee filed its return of income on 27/09/2014, declaring total income at Rs. 4,83,61,620. During the course of assessment proceedings, it was observed that assessee has debited an amount of Rs. 2,39,45,501, in its profit and loss account towards commission payment. Upon enquiry, assessee submitted that the said commission payment has been made to Manohar Canisters Private Ltd (‘MCPL’) on sales at 2.5%, i.e. on a total turnover of Rs. 85.24 crore.
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 It was further submitted that MCPL is in business of manufacturer of labels at Mumbai and during assessment year 2012–13 it suspended its manufacturing activities and decided to concentrate on marketing activities. The assessee further submitted that the Directors of MCPL have a long association with the assessee company and they could concentrate on various pricing and technical issues of the main customer M/s United Spirits Ltd. and its subsidiaries spread all over India. The Assessing Officer vide order dated 30/12/2016, passed under section 143(3) of the Act noted that MCPL and the assessee company are related parties within the meaning of section 40A(2)(b) of the Act. The Assessing Officer further noted that commission was paid to MCPL for the first time in the relevant assessment year. The Assessing Officer observed that during the assessment year when the commission was not paid to MCPL sales of cartons of the assessee increased by 50%. Accordingly, assessee was asked to provide copy of agreement entered into with its customers, list of services provided by MCPL, list of persons of MCPL who are engaged in activity of specific services provided to the assessee. In reply, assessee submitted that MCPL provided following services to the assessee:
“i. Negotiating prices for various cartons and labels for the following reason; ii. Discussing the escalation in prices of various raw materials which has direct bearing on the sales prices; iii. Discussing technical issues regarding quality, statutory requirements, designs, sizes etc. iv. Tentative finalization of delivery period and locations;
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 v. Any other issues on the clients technical/ financial managers may desire; vi. Setting the credit period, bill discounting etc. vii. Follow up of sales recovery from the vatious manufacturing units of United Spirits Ltd. Elite Distilleries Pvt Ltd. SNJ Distilleries Pvt Ltd.”
The Assessing Officer did not agree with the assessee’s submissions and vide aforesaid order passed under section 143(3) of the Act noted that there is no basis whatsoever for paying anything to MCPL, especially in view of the fact that even without the payment of such commission the assessee company was showing a healthy growth and no documentary or even circumstantial evidence has been produced to prove that any service was rendered by MCPL. Accordingly, the Assessing Officer made addition of entire commission expenses of Rs. 2,39,45,501.
In appeal, learned CIT(A) vide impugned order allowed the appeal filed by the assessee, by observing as under:
“6. Decision: I have considered the facts of the case and submissions made by the appellant. The appellant company has submitted copy of agreement for commission agency with MCPL as also a copy of the Board resolution dated 26th March 2013 appointing MCPL as their marketing and commission agent. It is submitted that the diversion of business from label marketing to carton manufacturing involved a lot of efforts and time and energy to increase the rapport with various customers from different industries. It is brought to my notice that the AO has referred that the only customer was United Spirits Ltd. It is true that USL was the main customer for label manufacturing which also required lot of interaction, discussions with vanous functioning units of USL and these were handled by MCPL. It is submitted that as regards carton business the customers were from various diverse units of different types of industries including Pharma, consumer products etc. It is submitted that the appellant company did not Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 have any sales or marketing force and it is difficult to carry on its activities of marketing without the help of some experienced and senior personnel It is a fact that the group has been led by Mr. Nishkant Shirodkar a director MCPL, and Mrs. Aparna Patwardhan a technical director of MCPL Further it was brought to my notice that all the sales activities including responding to technical issues, realizing the dues and overdues from the customers and negotiations for prices were all conducted by MCPL and its employees. It is also submitted that merely because MCPL is a related person within the meaning of section 40A(2)(b) should not lead to the hasty conclusion that it is only an arrangement. No marketing activities could be carried out without the help of those personnel of MCPL. For all the activities, it is submitted, the commission of 2.5% was not only reasonable but also prevailing in many industries. Further, the AR has filed copies of final accounts and tax computation of HPCL, which the AR submits that commission received has been admitted as income Hence it is revenue neutral. Therefore the transaction/payment cannot be considered as leading to tax evasion. 6.2 It is also brought to my notice that the entire commission of Rs 2,39,45,501/ has been disallowed. However, the commission paid to MCPL is Rs.2,13,10,818/ and the balance Rs.26,34,683/- was paid to one Mr. Jeenay Kamdar @5% on imports of raw materials from China. 6.3 I have considered all the above submissions and considering the fact that the appellant company does not have a separate sales and marketing department and no sales can take place without marketing activities, the above submission made by the appellant appears to be reasonable. Simply because the party to whom commission was paid happened to be related party, it should not be presumed that the amount paid to such party is unreasonable resulting in disallowance of expenditure. It has also been stated that the recipient company has been in business for the last 40 years and had the reputation of being an expert in the field. Further, the recipient company has declared the commission amount in its Return of Income and paid taxes and both the companies are paying taxes at maximum marginal rate. The department also accepted the income disclosed by the recipient company. Similar issue was dealt by the Hon'ble High Court of Delhi in the case of CIT vs. Hind Proteins (P) Ltd. 91 Taxmann.43 and considered in favour of the assessee. In view of the above, I direct the AO to allow the commission of Rs. 2,13,10,818/- paid. The balance commission of Rs.26.34.683/- was paid on import purchase and paid to one Mr. Kamdar for arranging import of cheap raw material from China Same also being a legitimate expenditure and is wholly and exclusively laid out for the business of the company. I direct the AO to allow the same. Thus, this ground of appeal is allowed.”
Being aggrieved, the Revenue is in appeal before us.
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019
During the course of hearing, learned Departmental Representative submitted that no evidence of rendition of service was filed by the assessee before any of the lower authorities and mere fact that the payment has been made under contract or agreement is not conclusive.
On the other hand, learned Authorised Representative (‘learned AR’) by vehemently relying upon the impugned order submitted that both the parties are paying taxes at the maximum marginal rate and TDS was deducted by the assessee before making the impugned commission payment. The learned AR further submitted that for invoking the provisions of section 40A(2)(b) of the Act, the expenditure incurred should be held to be excessive or unreasonable by the Assessing Officer, which has not been done in the present case.
We have considered the rival submissions and perused the material available on record. The Assessing Officer analysed the turnover of the assessee company in respect of carton manufacturing and noted as under:
Cartons Labels A.Y. (Rs. in crores) (Rs. in crores) 36.90 23.31 2012–13 55.35 23.93 2013–14 60.34 24.90 2014–15 65.92 21.81 2015–16 81.23 20.21 2016–17
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019
Accordingly, the Assessing Officer was of the view that when the commission amount was not paid to MCPL (i.e. prior to assessment year under consideration), assessee’s turnover in respect of carton manufacturing increased by 50%. The Assessing Officer further observed that the assessee has not been able to submit details and documentary proofs of rendering of services by MCPL in respect of commission received by them. Even during the hearing before us no such details were filed by the assessee. The assessee only filed a chart showing the details of commission paid for the year under consideration. During assessment proceedings, assessee merely mentioned the services in respect of which commission was paid by the assessee, without filing any evidence/document to substantiate its claim. In appeal before the learned CIT(A), the assessee submitted that since it has recently entered into field of carton manufacturing, therefore, services of MCPL were required regarding quality, production and dispatch schedules, pricing, follow up recoveries and various after sales services. The learned CIT(A) vide impugned order after going through the agreement and also copy of the board resolution appointing MCPL as assessee’s marketing and commission agent, agreed with the submission of the assessee. The learned CIT(A) after noting that since the recipient company has been in the business for the last 40 years and had the reputation of being an expert in the field held the payment of commission by the assessee as justified.
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019
In the present case, it has not been denied by the assessee that MCPL is a related entity. The assessee has only claimed that the commission payment to MCPL is not excessive and unreasonable and tax was deducted at source as well as both the companies are falling under maximum marginal rate of tax, thus there is no tax evasion. It is pertinent to note that as per the provision of section 40A(2), if the Assessing Officer is of the opinion that payment made by the assessee to its related entity is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom, so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as a deduction to the assessee. As per section 40A(2) of the Act, excessiveness or unreasonableness of the expenditure incurred by the assessee is to be examined vis-à-vis the goods, services or facilities for which the payment is made. However, as noted above evidence in respect of rendition of service was neither produced by the assessee before the lower authorities nor before us. In the present case, we find that the Assessing Officer did not summon the Directors of MCPL despite the fact that their identity was known to the Assessing Officer. We also find that the Assessing Officer has also not examined whether MCPL was rendering similar services to entities other than the assessee and the commission charged from such entities. From the record, it is also evident
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 that the Assessing Officer treated the entire commission expenditure of Rs. 2,39,45,501, as commission paid to MCPL, on the other hand, assessee’s claim is that only Rs. 2,13,10,818, is commission paid to MCPL and the balance is 26,34,683, was paid to an individual (Mr. J. Kamdar), thus, in view of the above, the transaction with Mr. J. Kamdar was neither examined by the Assessing Officer nor the details pertaining to same are available on record. It is also pertinent to note that though MCPL has claimed to be having experience of 40 years, however, it cannot be denied that till assessment year 2012–13 the said entity was engaged in manufacturing activities and the said activity was discontinued thereafter. Therefore, we are of the considered view that it is also to be examined as to how an entity who has been in manufacturing business till assessment year 2012–13 became experienced in rendering marketing activities of the nature mentioned by the assessee before the Assessing Officer. Further, the fact that the assessee deducted tax at source and both the companies are falling under maximum marginal rate of tax, does not satisfy the requirement of reasonableness of expenditure qua the services alleged to be received by the assessee. All the above aspects were neither examined by the Assessing Officer nor by the learned CIT(A) and appeal filed by the assessee was allowed vide impugned order without even calling for any remand report, in this regard, from the Assessing Officer. In view of the above, the impugned order passed by the learned CIT(A) is set aside and matter is remanded to the Assessing Officer for de novo adjudication after
Manohar Packaging Pvt. Ltd. ITA no.4331/Mum./2019 examination of all the aspects as highlighted above. The assessee is directed to produce all the documents/details necessary to prove rendition of service for which commission expenditure is incurred. Accordingly, grounds raised by the Revenue are allowed for statistical purpose.