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Income Tax Appellate Tribunal, E Bench, Mumbai
Before: Shri R.C. Sharma & Shri Sandeep GosainShri Shiv Sai Construction Co.
Revenue by: Shri V. Justin Assessee by: Shri Mayur Kisnadwala Date of Hearing: 24.07.2018 Date of Pronouncement: 26.09.2018 O R D E R
Per Sandeep Gosain, Judicial Member
This appeal has been filed by the Revenue against the order passed by the CIT(A)-27, Mumbai dated 05.03.2012 for A.Y. 2007-08. Assessee has also filed a cross objection against the order of the CIT(A).
The brief facts are that the assessee is a partnership firm engaged in the business of civil construction. For the year under consideration the assessee filed return of income declaring Nil income on the ground that they are following project completion method for realizing the income and Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. the project on hand was not completed during the year since “Occupation Certificate” was yet to be obtained and a few civil construction works were still not completed. The AO in his assessment order under Section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act") examined the facts of the case and held that the project was substantially completed during the year and the realisation of income cannot be postponed any further. Secondly, the AO estimated the income at 8% of the work-in-progress as at the end of the year and further made certain disallowance under Section 40(a)(ia) of the Act.
Aggrieved by the order of assessment the assessee preferred appeal before the CIT(A). After considering the case of both parties the CIT(A) partly allowed the appeal of the assessee.
Aggrieved by the order of the CIT(A) the Revenue is in appeal before us. The assessee has also filed a cross objection against the order of the CIT(A).
Firstly, we shall take up the appeal of the Revenue. Through the sole Ground raised the Revenue is challenging the order of the learned CIT(A) in holding that an amount of `77,02,757/- paid by the assessee to M/s. Sharpmind Marketing Pvt. Ltd. in terms of the supplementary agreement dated 16.02.2004 is not liable for TDS and hence does not call for disallowance under Section 40(a)(ia) of the Act.
We have heard the counsels of both the parties and also perused the material placed on record as well as the judgements cited by the parties and orders of the Authorities below. Before we decide the merits of the case it is necessary to evaluate the orders of the Authorities below. The learned CIT(A) dealt with this ground in para 14.3 of his order. After going through the order passed by the CIT(A) and after having heard both the parties at length we find that the learned CIT(A) has appreciated the facts of the present case and also sought a remand report while deciding the appeal. The learned CIT(A) had also admitted the additional evidence for the Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. purpose of deciding the controversy in question. In para 8.4, the learned CIT(A) has discussed the nature of payment made to Sharpmind Marketing Pvt. Ltd. as a sole selling agent and in para 8.1 the payment made to Sharpmind Marketing Pvt. Ltd. as additional incentive/benefit has already been discussed. The CIT(A), after considering the facts, has passed a detailed order containing from para 9 to para 17 of his order. The operative part of the order in para 14.3 is extracted below: - “14.3 The next payment considered under this head is the payments made to Sharpmind towards brokerage and commission for acting as a sole selling agent on behalf of the appellant amounting to Rs.7168375 discussed at paras 5.4 &12.1 and payment of Rs.7702757 towards additional benefit/ incentive discussed at paras 5.7 & 12.2. As stated already, out of the sole selling agency commission paid, tax was deducted on an amount of Rs.2334887, whereas no tax was deducted on payment of the additional incentive. Appellant submitted that impugned agreements dated 21/5/1997and 16/2/2004, giving rise to the aforesaid liabilities, were in the nature of principal - to - principal agreements and therefore tax is not deductible on the aforesaid payments and accordingly no disallowance is warranted u/s 40(a)(ia) of the Act.”
From the record as well as the facts we find that the learned CIT(A) had divided the payments made to Sharpmind Marketing Pvt. Ltd. into two parts, i.e. (i) payment made to Sharpmind Marketing Pvt. Ltd. as sole selling agent; and (ii) payments made to Sharpmind Marketing Pvt. Ltd. as additional incentive/benefit. While reaching to the said conclusion the learned CIT(A) had concluded that the payments which were made to Sharpmind Marketing Pvt. Ltd. as sole selling agent was in Principal to Agent basis while the payment made as additional incentive/benefit to Sharpmind Marketing Pvt. Ltd. is on Principal to Principal basis and while reaching the said conclusion, the learned CIT(A) has stated that the payment made to Sharpmind Marketing Pvt. Ltd. as additional incentive/benefit do not attract provisions of Section 194H of the Act and thus not liable to deduct TDS.
After considering the facts we find that to reach this conclusion, although the CIT(A) has mentioned that the payments were made by the assessee to Sharpmind Marketing Pvt. Ltd. in respect of brokerage and Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. commission towards sole selling agent services up to A.Y. 2005-06 and till that time the assessee has duly deducted the tax thereon and paid it to the government account and also filed the TDS returns. However, only during the year under consideration the assessee has taken a U turn and denied the liability of deducting TDS as per the agreement dated 21.05.1997, which was executed between the assessee and Sharpmind Marketing Pvt. Ltd., which has categorically been mentioned that the assessee is owner of the property and Sharpmind Marketing Pvt. Ltd. has been referred as agent therein and since Sharpmind Marketing Pvt. Ltd. was appointed a sole selling agency of all premises becoming available in the free sale component of the project and the assessee agreed not to enter any other agreement and not to create third party rights in the sale building as per clause 4 of the said agreement. It was expressly declared that the sale price of the flats shall not be less than `1651 per sq.ft. and the remuneration to the sole selling agent is `151 per sq.ft. which was agreed to be paid at the end of every quarter proportionate to the sale consideration received.
As per clause 7 of the said agreement, the agent, i.e. Sharpmind Marketing Pvt. Ltd. was required to furnish periodical statement of all sale transactions once in six months to enable the assessee to file its income tax returns (clause 9(d) at page 24). Thereafter the supplementary agreement dated 16.02.2014 was executed by which the remuneration of `151/- was not disturbed rather Sharpmind Marketing Pvt. Ltd. was also made entitled to receive additional incentive/benefit. The learned CIT(A), while interpreting the clauses of supplementary agreement, had reached to the conclusion that though the said agreement is part of the earlier agreement but the conditions contained in the supplementary agreement are to be read independently to that of the earlier agreement and since in the supplementary agreement the Sharpmind Marketing Pvt. Ltd. had safeguarded its money which they had invested, therefore Sharpmind Marketing Pvt. Ltd. was assigned with additional powers to deal solely with Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. all matters relating to construction of free-sale component and the expenses required to be paid, after the date of commencement certificate on the free sale component land, if any, in respect of ground rent, penalty, premium, costs related to change of approved plans, etc. shall be paid by Sharpmind Marketing Pvt. Ltd. out of its remuneration. Sharpmind Marketing Pvt. Ltd. shall continue to be primarily liable to complete the construction of free sale component and indemnify the assessee in this regard. As per the terms and conditions the responsibility for getting the building plans approved for sale component building, constructing tenements, recreation ground and play ground, etc. remained with the assessee. As per the terms of supplementary agreement, separate Powers of Attorney (POA) shall be executed by the assessee in favour of Sharpmind Marketing Pvt. Ltd. for entering into sale agreement with prospective buyers, for granting all powers and authorities to complete the construction of the rehabilitation component and rehabilitating the existing slum dwellers therein., but those powers itself do not confer any substantive right on the Sharpmind Marketing Pvt. Ltd. and the relationship between the assessee and Sharpmind Marketing Pvt. Ltd. was only remained as Principal and agent. The learned CIT(A) rightly concluded that qua the payment made to Sharpmind Marketing Pvt. Ltd. as sole selling agent there was a relationship of Principal and agent between the assessee and Sharpmind Marketing Pvt. Ltd. but the learned CIT(A) fell in error to conclude that the relationship between assessee and Sharpmind Marketing Pvt. Ltd. was of Principal to Principal only on the basis of receiving additional incentives.
The learned CIT(A) had wrongly concluded that Sharpmind Marketing Pvt. Ltd. got overriding title to receive the sale proceeds in excess of average sale price of `2300/- per sq.ft. of sale building sole, as an additional benefit/incentive towards its effort in completing the project. We cannot lost sight of the fact that the supplementary agreement dated 16,02.2004 was not in connection with any condition of the earlier agreement and is a part and parcel of the earlier agreement. Therefore in Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. this way the „supplementary agreement‟ cannot be read in isolation and merely the assessee had given extra assignments/responsibilities to Sharpmind Marketing Pvt. Ltd., but that did not automatically means that the relationship of assessee and Sharpmind Marketing Pvt. Ltd. of that of Principal and agent has ceased to exist. All the functions which were discharged by Sharpmind Marketing Pvt. Ltd. by virtue of the supplementary agreement dated 16.02.2004 were being discharged on behalf of the assessee and the additional incentive/benefit given to Sharpmind Marketing Pvt. Ltd. were given under the terms of the contract. Therefore the basic relationship between the assessee as well as Sharpmind Marketing Pvt. Ltd. remains that of Principal and agent. The learned CIT(A) had wrongly bifurcated both payments, i.e. payment made as sole selling agent to Sharpmind Marketing Pvt. Ltd. and payment made as additional incentive/benefit to Sharpmind Marketing Pvt. Ltd. as both the payments did arises out of the same project and out of the same agreement and both the agreements, i.e. the initial one dated 21.05.1997 and the supplementary agreement dated 16.02.2004 are to be read in continuation and in connection with each other and not in isolation. Therefore, we are of the considered view that that merely because additional benefit/incentive was given to Sharpmind Marketing Pvt. Ltd. that cannot be the ground for change in relationship of Principal to agent which existed between the assessee and Sharpmind Marketing Pvt. Ltd. Even as the learned CIT(A) has categorically mentioned that the assessee was furnished with the account of cost incurred by Sharpmind Marketing Pvt. Ltd. on assessee‟s behalf and details of sales and deducting the amounts due to them, Sharpmind Marketing Pvt. Ltd. remitted the balance amount to the assessee. These facts goes to show that whatever actions were being carried out by Sharpmind Marketing Pvt. Ltd. were on behalf of the assessee and Sharpmind Marketing Pvt. Ltd. was acting as an agent of its Principal, i.e. the assessee. As per the terms Sharpmind Marketing Pvt. Ltd. was not given any independent power to carry out any act without the knowledge of the assessee or outside the terms contained in the agreement. Therefore the conclusion drawn by the CIT(A) that the Income Tax Officer-16(1)94)/Shri Shiv Sai Construction Co. additional incentives were not in the nature of contract payment is factually incorrect. Therefore, in view of our above findings we set aside the order of the CIT(A) and restore that of the Assessing Officer. In this way the ground raised by the Revenue is allowed.
In the result, appeal filed by the Revenue is allowed.
CO No. 153/Mum/2013 10. There is a delay of 4 days in filing the cross objection by the assessee. Considering the smallness of time the delay is condoned and the appeal is admitted to decide on merits.
We have already considered the issues raised by the assessee in the cross objection while adjudicating the appeal of the Revenue. For the reasons recorded in the earlier paragraphs, we do not find any reason to interfere in the order of the CIT(A) on these issues.
In the result, the cross objection filed by the assessee is dismissed.
In the nutshell, the appeal filed by the Revenue is allowed and the corss objection of the assessee is dismissed.
Order pronounced in the open court on 26th September, 2018.