M/S PARAG FANS & COOLING SYSTEMS LTD.,DEWAS vs. THE ACIT 1(1), UJJAIN

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 1 of 12

आयकर अपील�य अ�धकरण, इंदौर �यायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE �ी सी.एम.गग�,�या�यक सद�यतथा�ी ओ.पी.मीना,लेखा सद�यके सम� BEFORE SHRI C.M. GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER

आ.अ.सं./ I.T.A. No.372/Ind/2016 �नधा�रणवष� /Assessment Year: 2011-12

M/s. Parag Fans & Cooling Income Tax Officer, 1(3), Systems Ltd, v. IndorACIT-1(1), Ujjain ½ B Industrial Area No.1 , A.B. Road, Dewas अपीलाथ� /Appellant ��यथ� /Respondent �था.ले.सं./PAN: AACCP1895K

Shri S.S. Deshpande, CA अपीलाथ�क�ओरसे/Appellant by Shri R.P. Mourya, Sr. DR ��यथ�क�ओरसे/Respondent by

8.08.2017 सुनवाईक�तार�ख/Date of hearing 11.08.2017 उ�घोषणाक�तार�ख/Date of pronouncement

ORDER PER O.P. MEENA, AM.

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 2 of 12

to as the CIT (A)] dated 16.02.2015 pertaining to Assessment Year

2011-12. 2. Ground No.1 & 2 relates to addition of Rs.59,90,620/- being

the sales commission payment to sister concern even though

complete details were filed before the lower authorities and it was

proved before the CIT(A) that the selling agents have rendered the

services for effecting the sale of the assessee company. 3. Succinctly, the facts brought out to from the orders of lower

authorities are that the assessee has deducted commission of

Rs.64,16,013/- paid to the sister concern i.e. M/s. B3 Projects and

Consultants Private Limited, 102, Omshri Apartment, 264,

Dharmpeth Extension, Shivaji Nagar, Nagpur which is also a share

holder of the company having 399035 shares. It was noticed by the

AO that there was no trend to pay commission in earlier years. This

expenditure incurred by the assessee only in the year under

consideration whereas the assessee company is doing this business

since long where such practice was not in existence, therefore, the

assessee company was asked to justify the payment of commission

made to its sister concern in which Shri Sandeep Barjatya is a

Director and also he is Director in the assessee company. The reply

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 3 of 12

was received through e-mail dated 20.03.2014. It was stated that

M/s. B3 Projects & Consultants Pvt. Ltd was taken sole and

exclusive distributor of the products of the assessee in the Asia

including whole of India for sale and promotion of products vide

agreement dated 9th February, 2008. Therefore the expenditure

incurred for the purpose of marketing and business promotion is

liable as deduction u/s 37 of the Income Tax Act, 1961. However

this submission of the asseessee was not found acceptable by the

AO on the ground that there was no such practice to pay the

commission in earlier years, therefore, the assessee company failed

to establish the commercial expediency and the expenditure was

incurred wholly and exclusively for business purposes is terms of

ratio laid down in the case of Goodlas Nerolac Paints Ltd. V/s CIT

(Bom)s 137 ITR 53 and Assam Pesticides & Agro Chemicals Vs. CIT

(Gau) 227 ITR 846 and from mere making an agreement and

debiting an expenditure on which the assessee has failed to

establish the business compulsion, hence, expenditure is not

allowable. Therefore the AO concluded that the assessee has

adopted a modus operandi to reduce its profitability by way of

making an agreement with the Director’s company in which no

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 4 of 12

business completion is found and the expenditure shown to be

incurred is coming back in the hands of the company as Director

Shri Sandeep Badjatia being the owner of M/s B3 Projects and

Consultants Pvt. Ltd, Nagpur. Therefore the entire commission of

Rs.64,16,013/- was disallowed. 4. Aggrieved with the assessment order the assessee filed an

appeal before CIT(A) wherein it was claimed that M/s B3 Projects

and Consultants Pvt. Ltd. company was incorporated on 6th August,

2007 the details of the turnover from second year and the Income

tax returns for the Assessment Year 2009-10 to 2013-14 were filed.

It was claimed that the commission was paid to increase the

turnover of the company in the earlier years and the appellant

himself was doing marketing and not incurred any expenditure in

this regard. The turnover for the preceding year was Rs. 5.11 crores

which has increased in the year under consideration to Rs.7.23

crores, thus the turnover has been increased to Rs.2.12 crores.

However, the CIT(A) did not convince with the explanation of the

assessee and observed that the payment of commission vis-à-vis

also increased in turnover @32% which is exorbitantly higher

whereas normal payment of commission is about 2%. Further the

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 5 of 12

assessee failed to establish the commercial expediency for

justification for payment of very high commission. In the earlier

years the appellant has not engaged any outside agency and no

such commission was paid in earlier years, considering these facts

the CIT(A) considered allowable commission at 2% on the increased

turnover of Rs.2,12,69,656/- and computed the relief of

Rs.4,25,393/- and confirmed the balance addition of

Rs.59,90,620/- i.e. (64,16,013 – 4,25,393).

this appeal before us. The Ld. Counsel for the assessee submitted

that the assessee company was started in the year 1991. However,

there was huge losses because of the market constraint in the sales.

The company entered into a sale agreement dated 09.02.2008 with

M/s. B3 Projects & Consultants, Nagpur and appointed them as

sole and exclusive distributor in Asia (Page 30 of PB). As per the

terms of the agreement the distributor have to achieve a minimum

target of sale of Rs.550 lakhs exclusive of taxes. It was also

stipulated that as per para 3.4 that the assessee shall obtain orders

in the name of the distributor. Clause at 4.1 provided that the

orders would be booked at the list price of the Principal which may

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 6 of 12

be revised after every six months and the distributor was required

to furnish weekly reports and not indulge in the sale promotion of

similar items and deposit Rs.20 lakhs with the company. It was

submitted that Shri Sandeep Barjatya joined the principal company

as Director from 10.12.2008 putting up with the financial holdidng

of 15% shares. However, since in the intial period the minimum

guaranteed sale of Rs. 5.5 crores was not achieved, therefore, no

commission was paid upto the Financial Year 2009-10. It is only

during the financial year 2010-11 relevant to the assessment year

under consideration sales went to the tune of Rs.7.23 crores and

from this year the assessee started paying the commission to the

distributor. However, the AO disregarded these submissions on the

ground that no commission was paid in earlier years which is not

correct as the distributor has not achieved the target of Rs. 5.5

crores in the earlier years, hence no commission was paid to them.

Further the assessee company accumulated huge loss of Rs.3.07

crores and it is only because of the efforts of the sole distributor the

sale has increased and the asseessee started making profit from

this year. It was also pointed out that at the time of entering the

agreement, the distributor was altogether a different entity and was

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 7 of 12

no way connected with the assessee. It was only because of the

need of the assessee, the distributor joined hands and invested the

money and took active participation in the management of the

company which improved the results of the assessee company.

Therefore the contention of the AO that it is a sister concern and no

business activity is provided is contrary to the facts on the record

and without any basis. The distributors have rendered the services

to the assessee and because of their efforts, the sales have

increased nearly 50% and as such, the appointment was a business

expediency, therefore, no disallowance should have been made. In

support of this contention Ld. Counsel also placed reliance in the

case of CIT v/s Pure Pharma Pvt. Ltd 270 ITR 382 (MP), 144

Taxman 364 MP, M/s. Prochem Laboratories Pvt. Ltd, Indore V/s

ACIT 3(1), Indore ITA No.86/Ind/2010 dated 28.4.2011 of Indore

Tribunal. ITO V/s New Era Switch Gears, Ujjain 2 ITJ 418 , Bharat

Medical Stores V/s CIT 308 ITR 373 (P&H), CIT V/s Goodlass

Nerolac Paints Ltd. 188 ITR, M/s. Kriti Industries India Ltd, Indore

V/s ACIT 4(1), Indore ITA No.268/Ind/2016 dated 27.10.2016.

lower authorities and pointed out that the contention of CIT(A) on

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 8 of 12

para 4.2 finding that the payment of commission vis-à-vis increase

in turnover is above 32% which is very high on which the CIT(A)

has allowed commission @2% on enhanced rates is reasonable.

Therefore, the order of the lower authority may be sustained.

and find that the assessee company is doing manufacturing of

various kinds of industrial products such as FRP Axial Flow Fans,

FRP Seal Disc, FRP Fan Stacks, FRE Fill Hangers which are being

used in various power plants, steel plant, coal mines and other

heavy industries. The company has started in the year 1991

however it has been incurring heavy loss during the earlier years. It

is seen that the company entered into sale agreement on February,

9, 2008 with M/s B-3 Projects & Consultants, Nagpur with the

condition that if the sales/turnover of the assessee company is

achieved the minimum target of 5.50 crores, then the sole

distributor shall be eligible for commission. Since, during the

assessment year under consideration, sales have increased to

Rs.7.23 crores, therefore the assessee company had paid the

commission of Rs.64,16,013/- during the year to M/s B-3 Projects

& Consultants, Nagpur. It is also noticed that Shri Sandeep

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 9 of 12

Barjatya, Director of the distributor company M/s B-3 Projects &

Consultants, Nagpur has appointed as Director from 10.12.2008 of

the assessee company with share holding of 15%. After

appointment of the sole distributor the sales of the assessee

company were increased from 5.11 crores to 7.23 crores during the

current year giving rise to 41% and in terms of amount of 2.12

crores. This is because of the services entered by M/s B-3 Projects

& Consultants, Nagpur the turnover of the company raised to 2.12

crores as compared to preceding year. Therefore, commission sof

Rs.64.16 lakhs paid on total turnover which comes to 8.8% cannot

be treated as excessive. The disallowance the payment of

commission on the ground that no such commission was paid in

earlier years, cannot be considered as valid basis, as we find from

the details submitted and agreement dated 9.2.2008 that the sales

target assigned to the distributor of Rs.5.5 crores was not achieved

in earlier years in terms of agreement, therefore there was no

payment of commission in the earlier years. The AO has over

looked this aspect of the agreement , therefore the disallowance of

commission made by the AO is not justified. It is also not the case

of the AO that the commission payment was not genuine and there

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 10 of 12

was diversion of profit. As we find from the paper book page No.42

to 43 which are the copies of the profit and loss account and

income tax computation of income of M/s B3 Projects and

Consultants Pvt. Ltd, according to which the agent company had

shown income of Rs. 20,60,850/-. Therefore it is clear that the

commission agent is assessed to tax and shown such business

income, therefore the identity of the commission agent is also

proved. In such circumstances as stated above, the increase in

turnover of the assessee company and the agreement was existed

from 2008, we are of the considered view that the payment of

commission on account of sales promotion of business is allowable

as held by the Hon’ble Rajasthan High Court in the case of ITO V/s

Laxmi Engineering Industries 298 ITC 203 (Raj.). The Ld. Counsel

also placed reliance in the case of DCIT V/s Microtex Seperators

Ltd. 293 ITR 451(Kar.) wherein the tribunal found that the sister

company was the sole distributor agent for several years and had

sole selling agent of the assessee company provided for payment of

commission at 10% not on the net entire amount after giving

deductions. Taking into consideration of these aspects of the

matter allowed entire 10% of bill the appeal before Hon’ble High

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 11 of 12

Court while dismissing the appeal that taking into consideration the

long standing relationship and also taking into consideration the

reputation of the assessee and the agent also in consideration there

was no intention to evade the tax rightly allowed to taken of entire

commission. Seeing to the facts of the present case, we are of the

view that even though it was not a sister concern at the time of

entering in to the agreement, has paid commission for rendering

services which has resulted in increase of turnover by 2.12 crores.

Similarly in the case of Pure Pharma Pvt. Ltd V/s CIT (supra)

wherein the commission was paid to government and its agencies

and all the payment were made to the various parties through

cheques/demand draft and the expenditure was found incurred for

business purposes it was held that such expenditure were allowable

and consequently the addition was deleted. Thus on the facts and

circumstances and the tribunal pronouncements as cited by the

assessee, we did not find any justification for disallowance of

commission which was wholly and exclusively for business

purposes is allowed as deduction of Rs.59,90,620/- towards

commission payment. Accordingly the ground of appeal is allowed.

M/s. Parag Fans & Cooling Systems Ltd. V ACIT 1(1) Ujjain, ITA No.372/Ind/2015 A. Y 2011-12 Page 12 of 12

The order pronounced in the open Court on 11.08.2017

Sd/- Sd/-

( C.M. GARG) (O.P. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 11th August, 2017 Dev/

Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file. By order

Assistant Registrar, Indore