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Facts
The assessee claimed expenditure on commission paid for export sales. The AO disallowed a portion of this commission, and also made an addition for household expenses due to alleged low withdrawals. The CIT(A) confirmed these additions to some extent.
Held
The Tribunal held that the commission paid to foreign agents was for procurement and did not involve technical or managerial services, thus no TDS was required, leading to the deletion of the addition. The addition for household expenses was deleted as it was based on presumption and lack of evidence.
Key Issues
Whether commission paid to foreign agents for export procurement attracts TDS provisions, and whether an addition for household expenses based on low withdrawals is justifiable without concrete evidence.
Sections Cited
143(3), 195, 40(a)(ia)
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Income Tax Appellate Tribunal, LUCKNOW ‘A’ BENCH, LUCKNOW
A.Y. 2013-14 Mohd Asfand Akhtar, vs. Assistant Commissioner of Plot No.2, Block-B, Scheme-39, Ram Income-tax, Range-1, Kanpur, Rai Ki Sarai, Jajmau, Kanpur, U.P. U.P. PAN:AEMPA0823R (Appellant) (Respondent) Assessee by: Sh. Ashish Jaiswal, Advocate Revenue by: Sh. R.K. Agarwal, CIT DR Date of hearing: 29.04.2025 Date of pronouncement: 09.07.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the assessee against the order of the ld. CIT(A) under section 250 of the Income Tax Act, 1961 dated 18.04.2022 in which the ld. CIT(A) has confirmed certain additions made by the ld. AO in his order under section 143(3) passed on 31.03.2016. The grounds of appeal are as under: -
1. That the ld. CIT(A) has erred in confirming commission of Rs.13,33,152/- on account of commission to agent on export sale.
2. That the ld. AO as well as ld. CIT(A) has erred in confirming addition of Rs.6,00,000/- on account of household expenses.
3. That the order passed by ld. AO is bad on facts as well as on law resulting in arbitrary and unlawful additions / disallowances.
4. That the appellant craves leave to introduce, withdraw or modify any ground of appeal with your honours kind permission.”
2. The facts of the case are that the assessee filed a return of income on 26.09.2013 declaring a total income of Rs.1,00,00,690/-. Subsequently, the case was picked up for scrutiny. The ld. AO observed that the assessee had claimed an expenditure of Rs.1,53,41,110/- under the commission paid on export sales. This 1 Mohd Asfand Akhtar A.Y. 2013-14 commission had been paid for procurement of export orders by foreign agents of the assessee. The ld. AO noted that the assessee was following a mercantile system of the company but some of the export bills against which the commission had been paid did not pertain to the year under consideration but to a previous year. He, therefore, asked the assessee to show cause as to why they should not be disallowed. In response, the assessee claimed the expenses on payment basis but the ld. AO held that the expenditure in respect of the said commission relates to sales of the previous year i.e. F.Y. 2011-12, where the income against those sales has been accounted for. Therefore, any expenditures relating to those particular sales had to be allowed only in the year in which the sales had been shown, since the assessee had adopted a mercantile system of accounting. The ld. AO therefore, disallowed export commission amounting to Rs. 57,16,106/- on this account. The assessee went in appeal before the ld. CIT(A) who confirmed the disallowance by holding that the assessee had not deducted tax on source which was required to be deducted. Aggrieved with the same, the assessee came before the ITAT and the ITAT observed that the ld. CIT(A) had travelled on a different footing, by mentioning the provisions of section 195 of the Act for deduction of tax at source on commission paid to the agents, which was not at all the case before him. The Hon’ble ITAT held that the ld. CIT(A) had not made proper application of mind and not dealt with the issues in the right perspective. Therefore, the Hon’ble ITAT restored the matter to the file of the ld. CIT(A) for re-adjudication on the issue. Similarly, during the course of assessment proceedings, the ld. AO observed that the assessee had credited Rs.1,20,000/- to his proprietors capital account by depositing Rs.10,000/- each month and this amount has been shown as withdrawals for household expenses. Other than that, no cash withdrawal has been shown in the capital account of the assessee. He accordingly asked the assessee to show cause as to why an addition ought not to be made on account of low cash withdrawals. In response, the assessee submitted that this was because major payments had been made by credit card and therefore, there was no need to withdraw cash. However, the ld. AO did not accept this explanation. He recorded the fact that the assessee had a family consisting 2 Mohd Asfand Akhtar A.Y. 2013-14 of his mother, wife and two school going children and the amount withdrawn was inadequate to cover their expenses therefore, he concluded that the assessee had at least Rs.50,000/- per month extra income and on this assumption, he made an addition of Rs. 6,00,000/- to the income of the assessee. This issue was also set aside back to the file of the ld. CIT(A) on the grounds that since the major issue had been remitted to the file of the ld. CIT(A), the Tribunal felt it appropriate to remit this issue back also. Accordingly, the ld. CIT(A) took up the matter for consideration afresh.
3. In the matter of commission paid to foreign agents, the assessee submitted before the ld. CIT(A), that the commission paid to foreign agents had been debited during the year under consideration on the basis of agreement between the assessee and the foreign agents. The assessee quoted from Clause 4 of the agreement between the assessee and the commission agent which read that the Commission Agent would be entitled to payment of commission only upon realization of sales bills and issuance of commission bills. The ld. CIT(A) recorded that he had perused the copies of bills raised by the Commission Agents and the agreements placed on record by the assessee and observed that the said bills had been raised by the Commission Agents during the year under consideration, against export done by the assessee earlier. The commission related to those bills was invoiced subsequently by the Commission Agents, as per the terms of agreement between the Assessee and the Commission Agents. Therefore, he concluded that it was clear from the same that the expenditure on account of commission paid was correctly debited in the P & L account on accrual basis as and when these commission bills were raised. He relied upon the decision of the ITAT Kolkata in the case of Shalimar Impex Limited vs. ITO (1982) 1 ITD 799 (Cal) which he quoted in his assessment order. He held that, from the same it could be inferred that the liability of commission arises only when the entire responsibility of commission agents were fulfilled by them and payments from the buyers had been received by the supplier. Since in the present case that had been done, there was no irregularity in the debiting of expenses on account of commission to foreign agents after the receipts of 3 Mohd Asfand Akhtar A.Y. 2013-14 sales and after invoices against the same were raised. The ld. CIT(A) also drew reference to the order of the CIT-1, Kanpur in Appeal Nos. KNP/10048/2017-18/283 dated 5.12.2017 and CIT(A)-1, KNP/10271/2016-17/286 dated 7.12.2017 and he pointed out, that in the course of these two appeals, certain new facts have been brought on record relating to two representatives of TPL and Company Mr. Andre Tall and Mr. Ada Sri; that they had visited Kanpur one or two times and the assessee had met them for about an hour at his factory. From the same, the ld. CIT(A) had concluded that these agents rendered services in India which were not limited to the procurement of export orders but more and more in the nature of supervision and management resources therefore TDS was required to be deducted, as the non- resident through his agents was acting as supervisor and controlling the policies in connection with maintenance of EU standards and scrutinizing the effectiveness of the policies. However, TDS was not deducted in accordance with the provisions of law and therefore, the ld. CIT(A) had confirmed the disallowances made by the ld. AO with respect to commission paid to agents for foreign export. However, the current ld. CIT(A) held that the facts relating to M/s TPL and Company could not be extrapolated to the other foreign agents, because no such facts had been brought on record in those cases and therefore, he only confirmed the addition to the extent of commissions related to M/s TPL and Company of Rs.13,33,152/- and granted relief in respect of the balance amount of Rs.43,82,954/-. In the matter of addition of Rs.6,00,000/- on account of household expenditure, the ld. CIT(A) considered the submissions of the assessee that the addition was highly excessive and without corroborative evidences and that he had made most of his expenses through banking channels and past savings. Furthermore, his mother was a taxpayer and it has been held in various Court decisions namely CIT-2, Cochin vs. Lakshmi Hospital (2011) 13 taxman.com 33 (Kerela) and CIT vs. Lubtec India Limited (2009) 311 ITR 175 (Delhi), that no additions can be made until the incurrence of expenditure is established by the ld. AO and in the absence of any evidence to show that such expenditure had been incurred, no addition could be made. The ld. CIT(A) however, held that the assessee had not provided 4 Mohd Asfand Akhtar A.Y. 2013-14 sufficient evidences to confirm that the assessee’s mother was a taxpayer and that the sources of credit of Rs.1,20,000/- to the capital account also could not be explained by the assessee. In view of the fact that the assessee had not submitted any evidence as to how his personal expenditures were met, he confirmed the addition of Rs.6,00,000/-.
4. Aggrieved with these orders of the ld. CIT(A), the assessee is in appeal before us. Sh. Ashish Jaiswal, Advocate (hereinafter referred to as the ld. AR) invited our attention to the order of the ITAT in the assessee’s own case for the assessment year 2011-12 in ITA No.317/LKW/2016. It was submitted that as in the present year, a disallowance of Rs.64,63,543/- had been made in assessment year 2011-12 under section 40(a)(ia) of the Income Tax Act on account of the failure to deduct tax at source on payment to agents who had supposedly rendered services in India. It was pointed out that, as was in the case of M/s Andre Tall and Sh. Ada Sri, it had been pointed out to the Tribunal that the visits by the agents in India was strictly inlying with their limited role as selling agents. Therefore, the provisions of section 195 of the Act were not attracted. It had also been submitted in that case that as per the tax avoidance treaties, fees for technical services paid to non-residents were chargeable to tax in India only in the event that technical skill / know how or process was transferred or developed or, ‘made available’ in India. Therefore, going by the definition, commission paid by the assessee to the agents, can by no stretch of imagination be included in the category of technical services. The Tribunal after considering such arguments relied upon the case of ACIT vs. Northern Tannery in in which it was categorically held that since the non-resident had never rendered any technical services or consultancy services or managerial services, disallowance could not be made on account of non-deduction of tax. Accordingly, in that year, the ITAT had pointed out that since nothing had been brought on record by Revenue that non- resident had ever rendered any technical services or consultancy services or managerial services, the assessee was not required to deduct tax at source on commission paid to foreign agents on procurement of export orders from them. Ld. AR 5 Mohd Asfand Akhtar A.Y. 2013-14 argued that in the present year also, the ld. AO or the ld. CIT(A) had not been able to show that Mr. Andre Tall and Mr. Ada Sri of TPL and Company had rendered any technical services, or consultancy services or managerial services to the assessee and that their services were anything more than limited to procurement of export orders. Therefore, it was prayed that the addition of Rs.13,33,152/- was without basis. Furthermore, the ld. AR pointed out that the matter had been restored by the Tribunal to the file of the ld. CIT(A) by pointing out that the ld. CIT(A) had crossed outside the boundaries of the issues that had been referred to him and therefore also it was submitted that there was no basis for sustaining the additions. On the issue of sustenance of disallowance of Rs. 6,00,000/-, it was submitted that the ld. AO had not brought on record any instance of expenditure which the assessee had incurred and was unable to explain. Therefore, the addition could not be made merely on surmises and conjectures.
5. On the other hand, Sh. R.K. Agarwal, ld. CIT DR pointed out that the ld. CIT(A) had referred to the earlier order of the CIT(A) in which ld. CIT(A) had recorded findings that the agent had to monitor that the quality, colour, texture, quality of accessories of supplied goods should be the same as depicted at the time of procuring the order and since export to EU Territory was circumscribed by very stringent laws and certification in respect of labour, child labour, ethical treatment of animals, pollution and effluent management laws, the job of the agent was to ensure that these certification and standards were met. The ld. CIT(A) concluded from the same that the services rendered by these agents were not limited to the procurement of export orders but were more than that and more in the nature of supervision and management services provided by the non-resident to the assessee and the non- resident was acting as a supervisor and controlling policies in connection with maintenance of these EU standards and scrutinizing the effectiveness of the policies. Therefore, he had held that TDS was liable to be deducted, and since it had not been deducted, he had confirmed the addition. The present CIT(A) had relied upon these 6 Mohd Asfand Akhtar A.Y. 2013-14 findings and it was for this reason that he had confirmed the addition. It was also submitted that the ld. CIT(A) as the first Appellate authority was within his powers to vary the issues upon which an addition could be sustained. Accordingly, it was prayed that no interference was called for in this regard. With regard to the addition of Rs.6,00,000/- on account of low withdrawals, it was submitted that the assessee had to support a large family and could not explain as to where he had got the money to take care of them. Accordingly, the ld. AO was correct in assuming that there was undisclosed income that had not been brought into the books and estimating an addition on this account. He, therefore, prayed that it may be confirmed.
6. We have duly considered the facts and circumstances of the case. On the issue of deduction of tax at source and consequent disallowance of payments made by the assessee to M/s TPL and Company, we find that nothing has been brought on record by the ld. AO to suggest that either of the two agents in question were rendering managerial or technical or consultancy services to the assessee. As a procurement agent, for foreign entities, it is incumbent upon the agent to ensure that the goods being manufactured are to the specifications required by the purchaser and that all other conditions that facilitate the easy marketing of those goods are fulfilled by the manufacturing / exporting agency. Visiting the factory for verification of these aspects cannot be equated to rendering managerial or technical or consultancy services as they would be part of the intrinsic duties of a purchasing agent. In the circumstances, we feel that the inference drawn by the ld. CIT(A) that visits to the factory on two occasions for such work, rendered the assessee liable to deduct tax at source is unwarranted unless some evidence could be produced with regard to the managerial or technical services rendered by these persons. We observe that the matter has been examined in detail by the Tribunal in the case of ACIT vs. M/s Northern Tannery (supra) and in the assessee’s own case for the assessment year 2011-12 and based on these and our observations, we feel there is no justification for the ld. CIT(A) to sustain an addition of Rs. 13,33,152/- on this account. Accordingly, the same is deleted and 7