DCIT, CIRCLE - 10(2) , KOLKATA vs. RELIANCE CHEMOTEX INDUSTRIES LTD.,, KOLKATA

Date of concluding the hearing : January 13th, 2020 Date of pronouncing the order : January 22nd, 2020 ORDER Per J. Sudhakar Reddy, AM :- This is an appeal filed by the Revenue directed against the order of the Commissioner of Income Tax (Appeals)-4, Kolkata [‘CIT(A)’ for short] dated 08.08.2018 u/s 250 of the Income Tax Act, 1961 (‘the Act’ for short) for AY 2012-13.

Assessment Year: 2012-13 Reliance Chemotex Industries Ltd. “1) That on the facts and circumstances of the case, the Ld.CIT(A)-4,Kolkata erred in deleting the addition Rs. 2,82,91,625/- on account of commission to foreign & Indian agent without appreciating the fact that the assessor hail failed completely to substantiate that the said commission agents are instrumental in procuring fresh sale avenue or clients to the assessee. That the basic principle of allowing any expenditure as business expenditure u/s. 37 of Income tax Act 1961 has been followed in the order of the Ld. C1T(A). 2) That on the facts and circumstances of the case, the Ld. ClT(A)-4,Kolkata erred in holding that the disallowance u/s. 14A should be restricted to the dividend amount without considering the applicability of Rule 8D. That he was correct in observing that the excess disallowance made u/s. 14A read with Rule 8D should be deleted.”

3.2 I have perused the assessment order and the submission of the Ld. A/R. (a) It is seen that the identical issue came up for appeal in A.Y. 2011-12 where my predecessor has decided the issue in favour of the assessee. The matter went to tribunal and tribunal also vide their order in order datedl6.08.2017 has decided the issue in favour of the assessee. (b) The assessee has produced documents during the course of appellate proceedings which evidences that the agents have rendered services in respect to the exports sales. (c) As far as rate of commission is concerned the A.O. has not brought on records any evidence to prove that the rates are fixed in collusion with the foreign agents. Therefore, the business decision of the assessee for 3% commission can’t be challenged. As per various courts that the Assessing Officer can’t step into the shoes of businessman to decide what commission the assessee has to pay to foreign agents. (d) As far as payment to Indian agents for exports sale is concerned Hon’ble Tribunal have given a findings on the issue while deciding the issue in favour of the assessee. The A.O. has failed to establish that these agents with surname Mandhania have not rendered any service related to exports. In view of the above discussion, ground no.1 is allowed.

“5.3. We have heard the rival submissions and perused the materials available on record including the relevant pages of the paper book submitted by the assessee comprising of (i) copy of ITAT order for Asst Year 2008-09 (enclosed in pages 1 to 9 of PB) ; (ii) copy of notice u/s 142(1) dated 3.5.2013 (enclosed in pages 51 to 57 of PB) ; (iii) copy of notice dated 29.11.2013 by the Id AO (enclosed in pages 58 to 59 of PB) ; (iv) copy of letter dated 10.12.2013 of assessee (enclosed in pages 60 to 61 of PB) ; (v) copy of letter dated 16.12.2013 of assessee (enclosed in pages 62 to 66 of PB) ; (vi) copy of letter dated 27.12.2013 of assessee (enclosed in pages 69 to 75 of PB); (vii) copy of letter dated 17.1.2014 of assessee (enclosed in pages 76 to 79 of PB); Assessment Year: 2012-13 Reliance Chemotex Industries Ltd. (viii) details of commission and brokerage along with agreements with the agents (enclosed in pages 82 to 108 of PB) ; (ix) various payment advices to State Bank of India for payment of Commission along with debit note and details of commission paid on export (enclosed in pages 109 to 141 of PB) and (x) details of commission and brokerage on export sales along with details and their debit notes and proforma invoices (enclosed in pages 142 to 279 of PB) . The Id DR argued that the services rendered by the so called commission agents (both Indian and foreign) were not proved conclusively by the assessee warranting payment of commission to them. Moreover, the agreements entered into with various agents (domestic and foreign) contained differential terms and assessee had agreed with foreign agents very liberally whereas the Indian agents agreements were very rigorous in nature. The Id AR argued that 75% of production of the assessee company is exported outside India and it is imperative on the part of the assessee to engage commission agents overseas for procurement of business outside India and to promote the products of the assessee outside India. He argued that assessee do not have any other establishment in any other country such as sales office, liaison office etc and was wholly dependent on the services rendered by the commission agents for procuring business and promoting the products thereon. He argued that but for the commission agents, the products of the assessee could not have been sold in the export market and local market and the services rendered by the respective agents are proved beyond doubt. He argued that no such disallowance was made by the Id AO in Asst Years 2009-10, 2010-11, 2013-14 and 2014- 15 in respect of the said commission payments. He furnished a chart at the instance of the bench referring to services rendered by each of the foreign agents with specific reference to the relevant pages of the paper book already on record in the paper book . The details of overseas commission are as under: - IPON Textile Dis Ticaret Ltd, Turkey Rs.73,32,477 Folex BVBA, Belgium Rs.77,18,980 Suha Kutal Mustafa Gullbaran, Turkey Rs.40,257 Excel Global, Dubai, UAE Rs.1,92,42,677 __________________ Rs 3,43,34,391 5.3.1. With respect to commission paid to IPON Textile Dis Ticaret Ltd, Turkey, we find that in page 147 of the Paper book, a certificate issued by the said party that they are acting as selling agent of the assessee in Turkey and that they do not have any permanent establishment in India. They have further certified that they had not rendered any services to the assessee in India and that the entire services were rendered only outside India. We also find from pages 103 & 104 of the paper book, the commission agreement entered into by the assessee with the said party defining the scope of services to be rendered by them outside India and the commission compensation they are entitled from the assessee. We find from page 206 of the paper book containing sample sales contract raised by the assessee on the foreign buyer in Turkey, the name of the said commission agent and email dated 10.12.2010 is referred to. Apart from this, we also find lot of email correspondences between the assessee and the said commission agent enclosed in pages 207 to 241 of the paper book defining the various sizes and specifications required by the foreign buyer for export of the products from India. These documents conclusively prove that the said commission agent had indeed rendered services to the assessee outside India for which commission is paid to them. 5.3.2. With regard to commission paid to Fotex BVBA, Belgium, we find that in page 145 of the Paper book, a certificate issued by the said party that they are acting as selling agent of the assessee in Belgium and that they do not have any permanent establishment in India. They have further certified that they had not rendered any services to the assessee in India and that the entire services were rendered only outside India. We also find from pages 101 & 102 of the paper book, the commission agreement entered into by the assessee with the said party defining the scope of services to be rendered by them outside India and the commission compensation they are entitled from the assessee. We find from page 176 of the paper book containing email correspondence of commission agent with the assessee mentioning the name Assessment Year: 2012-13 Reliance Chemotex Industries Ltd. of the foreign buyer ‘vanden berghe’ duly specifying the specifications of quantity and quality of yarn required together with pricing terms and conditions and in page 177 of the paper book, we find the copy of the sale invoice raised by the assessee on the said foreign buyer for the very same quantity with the required quality. Similar documents are enclosed from pages 178 to 204 of the paper book. These documents conclusively prove that the said commission agent had indeed rendered services to the assessee outside India for which commission is paid to them. 5.3.3. With regard to commission paid to Excel Global FZE, UAE, we find that in page 146 of the Paper book, a certificate issued by the said party that they are acting as selling agent of the assessee in Belgium and that they do not have any permanent establishment in India. They have further certified that they had not rendered any services to the assessee in India and that the entire services were rendered only outside India. We also find from page 105 of the paper book, the commission agreement entered into by the assessee with the said party defining the scope of services to be rendered by them outside India and the commission compensation they are entitled from the assessee. We find from page 242 of the paper book containing the debit note raised by the said commission agent on the assessee claiming the commission as per the agreement together with the list of foreign buyers sourced through the said commission agent and value of invoice raised by the assessee on them. From pages 245 to 275 of the paper book, we also find similar correspondences together with the bank remittance letters for payment of commission to the said agent month wise for the export sales made to foreign buyers sourced through the said commission agent. These documents conclusively prove that the said commission agent had indeed rendered services to the assessee outside India for which commission is paid to them. 5.3.4. With regard to commission paid to Suha Kutal Mustafa Gullbaran, Turkey in the sum of Rs 40,257/-, we find from page 100 of the paper book, the commission agreement entered into by the assessee with the said party defining the scope of services to be rendered by them outside India and the commission compensation they are entitled from the assessee. We find from page 107 of the paper book containing the debit note raised by the said commission agent on the assessee claiming the commission as per the agreement together with the bank remittance documents thereon. These documents conclusively prove that the said commission agent had indeed rendered services to the assessee outside India for which commission is paid to them. 5.3.5. In view of the aforesaid facts and findings, we are convinced of the fact that the aforesaid overseas commission agents had indeed rendered due services to the assessee for which commission had been paid to them and the same requires to be allowed in full. It is well settled that the said commission payments would not fall under the ambit of disallowance u/s 40(a)(i) of the Act and hence we find that the Id CITA had rightly deleted the same. 5.3.6. The assessee had paid commission to Indian agents for export sales made by the assessee to the tune of Rs 25,28,271/- and the Id AO had disallowed a sum of Rs 22,39,082/- out of the same. We find that the said commission had been paid after due deduction of tax at source except in respect of payment made to Mr Amit Mandhania amounting to Rs 2,00,000/- which has been rightly confirmed by the Id CITA in his order and against which, the assessee is not in appeal before us. With regard to other payments to Indian agents for procuring export orders, we find that the same is duly backed by the commission agreements which are enclosed in pages 96 to 99 of the paper book clearly defining the scope of services to be rendered by the said agents and their commission compensation entitlement. We find that the Id AO had disallowed the commission paid to these agents on the ground that they are similar to services that are to be rendered by the foreign agents as could be seen from the agreements entered into with Indian agents and foreign agents, and that predominant portion of the said commission has been paid to the same family members having surname ‘Mandhania’ at 631, Laxmi Plaza, New Link Road, Andheri (W), Mumbai. The Id AO nowhere stated that these agents had not rendered any services to the assessee for payment of commission. We find that the Id AR argued that the parties having surname ‘Mandhania’ are not related to the assessee or its directors in any manner whatsoever, nor there is any contrary finding to that effect in the order of the Id AO. Hence it could be safely concluded that the commission is not paid to any related party of the assessee or its directors. We hold that once the rendering of services by Assessment Year: 2012-13 Reliance Chemotex Industries Ltd. these commission agents are not in dispute, there is no reason to disallow the same in the assessment. Incidentally, we find that the said commission payments have been duly subjected to deduction of tax at source as per the Indian laws, though that may not be the criterion for allowability of an expenditure. We find in the instant case, the assessee had indeed made payment of commission to Indian agents for procuring export orders and the said agents had indeed rendered services to the assessee, which is not in dispute, and hence the same has been rightly allowed by the Id CITA. 5.3.7. We find that the assessee had paid commission and brokerage to Indian agents for procuring sales in India to various parties that are listed in page 82 of the paper book after due deduction of tax at source which are also backed by the commission agreements entered into by them which are enclosed in pages 85 to 95 of the paper book, stipulating the scope of services to be rendered and compensation eligible for them. The Id AO nowhere stated that these agents had not rendered any services to the assessee for payment of commission. We hold that once the rendering of services by these commission agents are not in dispute, there is no reason to disallow the same in the assessment. Incidentally, we find that the said commission and brokerage payments have been duly subjected to deduction of tax at source as per the Indian laws, though that may not be the criterion for allowability of an expenditure. We find in the instant case, the assessee had indeed made payment of commission and brokerage to Indian agents for procuring export orders and the said agents had indeed rendered services to the assessee, which is not in dispute, and hence the same has been rightly allowed by the Id CITA. 5.3.8. In view of the aforesaid findings, we hold that the Id CITA had rightly deleted the disallowance of commission paid in the sum of Rs 3,73,78,133/- and his order in this regard does not call for any interference. Accordingly, the Ground No.1 raised by the revenue is dismissed.”

5. Ground No.3 is regarding disallowance u/s. 14A made by the A.O. of Rs. 1,12,800/- under rule 8D(2)(iii). The Ld. A/R stated that the disallowance should be restricted to the dividend amount which is Rs.66,379/-. I agree with the contention of the Ld. A/R in view of the decision of Delhi High Court in the case of Joint Investment Ltd. in 372 ITR 394. Therefore, ground no.3 is partly allowed.

Assessment Year: 2012-13 Reliance Chemotex Industries Ltd. In the result, the appeal of the Revenue is dismissed. 11. Kolkata, the 22nd January, 2020.