ITO, NEW DELHI vs. M/S. ALPASSO INDUSTRIES PVT. LTD., NEW DELHI

The facts in brief of the case are that the assessee company was engaged in providing various services which includes counseltancy services, commission services and agency services in Power sector. For the year under consideration, the assessee filed return of income on 05/10/2010 declaring total taxable income of Rs.13,79,62,090/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short “the Act”) was issued and complied with. The assessment under section 143(3) of the Act was completed on 12/03/2013 after making certain additions/disallowances and total income was assessed at Rs.14,79,62,090/-. Aggrieved, the assessee filed appeal before the Ld. CIT-(A), who partly allowed the appeal in favour of the assessee. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

The ground No. 2 of the appeal is general in nature, hence, we are not required to adjudicate upon and accordingly dismissed as infructuous. 4. In ground No. 1, the Revenue has challenged deletion of the addition of Rs.1,00,00,000/- made by the Assessing Officer for disallowing commission paid to sub-agent. 4.1 The facts in respect of issue in dispute are that in the year under consideration, the assessee acted as an agent of M/s. Hyosung Corporation Power and Industrial Systems PG Korea (in short ‘M/s Hyosung Corporation, Korea’). M/s Hyosung Corporation, Korea was awarded a purchase order worth US dollar 16,73,76,986/- (equivalent to Rs. 803 crores with US dollar exchange rate of Rs. 48 per US dollar) by M/s. Power Grid Corporation of India Ltd. (PGCIL) for supply of transformers. The assessee has shown commission income during the year from M/s. Hyosung Corporation, Korea. The Assessing Officer observed that assessee has also incurred commission expenditure of Rs.1 crore to “M/s. AGR Steel Strips Private Limited”. The Assessing Officer issued notice under section 133(6) of the Act calling for information from the said party containing details of services rendered and documentary evidence supporting the services rendered, services rendered to any other parties etc. “M/s AGR Steel Strips Private Limited” replied to the Assessing Officer that it provided requisites services to procure purchase order for supply of power transformers from “PGCIL” and incurred necessary expenses of travelling, conveyance, telephone etc. for providing the services, as reflected in the profit and loss account. 4.2 The Assessing Officer was not satisfied with the reply furnished by the said party. The Assessing Officer observed that said party had not provided detail of services rendered to the assessee and no supporting documentary evidence which could prove the fact of having expert technical staff and field experience in providing services in the Power sector by the said party. 4.3 In view of the above observation, the Assessing Officer asked the assessee to justify the allowability of commission paid. The submission of assessee company in respect of technical expertise and services rendered, are summarized as under: (i) said party had knowledge of bidding process and contacted the assessee and offered their services and in view of the past experience the assessee engaged them for rendering coordination and follow-up services in respect of bid submitted by M/s Hyosung Corporation, Korea to the Power Grid Corporation of India Ltd. (ii) The said company was engaged in manufacturing and counseltancy and commission business and board of directors of the company at the time consisted of Sh. Ram Kumar Aggarwal, Sh. Pradeep Aggarwal and Sh. Vikas Aggarwal, who were supported by a team of dedicated qualified technical and commercial professionals. (iii) The said company rendered coordination and follow of services and for rendering such services, only communication facility was required as most of the work was done telephonically or verbally and sometimes might have to visit various offices and expenses for which were accounted in the respective head in the profit and loss account of said company. No expenses on purchase of material was required. (iv) The commission expenses incurred by the assessee neither are personal nor are of capital nature and being incurred wholly and exclusive for the purpose of business, same are allowable. 4.4 The Assessing Officer rejected the submission of the assessee observing that: (i) The agreements entered into with subagent “M/s AGR Steels Strips Private Limited” were dated 14/04/2008 and 08/09/2008, whereas the “PGCIL” awarded the contract to M/s Hyosung Corporation, Korea only on 29/12/2008 and 05/03/2009 i.e. much after the date of the agreement with subagent. (ii) In the contract agreement with subagent , there was no mention of a specific services to be provided by the sub- agent and the percentage of commission of payment on the basis of the services was also not provided. (iii) The assessee as well as the subagent failed to give the date wise details of services provided by the sub-agent and expenses incurred, person contacted, report submitted by the sub-agent. 4.5 The Assessing Officer concluded that merely deduction of TDS and giving payment by cheque did not prove the genuineness of the transaction and accordingly, disallowed the commission payment of Rs.1 crore to sub-agent M/s AGR steels strips private limited. 4.6 Before the first appellate authority, the assessee elaborated the submissions which were made before the Assessing Officer. On the issue of proof of services rendered, the Ld. CIT-(A) has reproduced the submission of the assessee as under: “xv) That the AO has alleged in the order that the sub-agent and the assessee has failed to give date wise details of services and person contacted etc. Attention drawn to assessee's letter dated 6/3/2013, whereby it has been clarified that in the present high- tech business environment for rendering such services one need communication facility as most of the work is done telephonically or verbally and sometimes the agent has to visit various offices leaving behind almost no paper work. That in such a business scenario, it is not necessary that always reports are prepared and submitted by the agents to earn income. The business of coordination and follow- up is done through communication channels like telephones/mail/etc., which does not require maintenance of detailed physical documents /demonstrative evidence and date wise details of services etc., except the happening of the end result. This fact was elaborately brought to the notice of the AO and in view of practical position prevailing in the present business environment such an objection is irrelevant and claim of the assessee cannot be rejected on the superficial stand of the AO. There may not be any demonstrative evidence except the happening of end result in certain circumstances but that does not mean that expenditure has not been incurred. The assessee has secured orders with the services of sub-agent which clearly establishes that such business has been carried on.”

Before us, the Ld. Sr. DR submitted that assessee has not furnished any documentary evidence in support of the services rendered by the sub-agent. He submitted that assessee has not given specific of the services rendered except the general description of coordination and follow up services. The Ld. Sr. DR submitted that assessee has not given evidence of any interaction of the sub-agent with the authorities of the ‘PCGIL’ in the process of coordination and follow-up services, despite specifically being asked for furnishing such evidence. He further submitted that preparing agreements for commission payment, raising of bills by the sub-agent and charging service tax in the bills, deducting TDS by the assessee on such payment etc. are merely paper formalities and cannot justify the factum of the services rendered by the sub-agent. According to him, it cannot be established that the expenditure was incurred wholly and exclusively for the purpose of business of the assessee and therefore, the action of the Assessing Officer in disallowing the commission payment was justified.

On the other hand, Ld. counsel submitted a paper book containing pages 1 to 170 and supported the order of the Ld. CIT-(A). The Ld. counsel further submitted that the assessee took services of the sub- agent in immediately preceding year i.e. assessment year 2009-10 and the commission expenses amounting to Rs.1,25,00,000/- has been allowed. According to the learned counsel submitted that in view of the principle of consistency, the commission payment during the year should also be allowed. In support of the contention, he relied on the decision of the Hon’ble Supreme Court in the case of Radha Swami Satsang Vs. CIT 193 ITR 321 (SC).

The Ld. counsel further submitted that it is well settled law that Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. Income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. In support of the contention, the learned counsel relied on following decisions:

In our opinion, the learned CIT-(A) has committed error in appreciating the facts of the case. One of the important requirement to examine, whether the expenses were incurred wholly and exclusively for the purpose of business, it was required for the assessee to furnish necessary documentary evidence in support of services rendered by the sub-agent. The Assessing Officer has specifically held that assessee failed in submitting: (a) the details of services rendered by the sub-agent; (b) the details of expenses incurred in relation to rendering such services; (c) the persons contacted in the process of rendering services; and (d) the report submitted by the subagent in the process of rendering services etc. 9.1 But neither the assessee nor the sub-agent submitted these crucial evidences in support of their claim of services rendered by the sub-agent before the lower authorities. Before us, also, the learned counsel of the assessee, failed to submit any evidence in support of services rendered except the claim that services were rendered telephonically. The documents submitted by the assessee are merely in the nature of paperwork. No documentary evidence supporting the expertise of the sub-agent in bidding process was filed either before the lower authorities or before us. No detail of the person(s), who on behalf of the sub-agent company interacted with M/s PCGIL, was given either before the lower authorities or before us. The assessee has not furnished any confirmation either from the principal company M/s Hyosung Corporation, Korea or from M/s PCGIL that the sub-agent provided the services of coordination and follow-up in the process of bidding of tenders for contracts. The assessee has merely submitted that coordination and follow-up services only required use of telephone or email or personal interaction, but it has not provided any documentary evidence before us, which could establish that the sub-agent followed with M/s ‘PCGIL’. The assessee has submitted that due to services of the sub-agent, the supplier got contract for supply of transformer, but the assessee has not given any detail what kind of services actually helped the supplier in getting the contract. In our opinion, the Ld. CIT-(A) is not correct in concluding that the assessee established the fact of rendering services by the subagent.

The reliance placed by the Ld. counsel of the assessee on the decision in the case of Radha Swami Satsang (supra) citing the rule of consistency, is of no assistance, as the fact of services rendered need to be examined in each year and merely following the rule of consistency it cannot be presumed that the subagent might have rendered the services in the year under consideration also.

Further, the reliance placed by the assessee on the decisions in the case of SA Builders Ltd. Vs. CIT (Supra), Hero Cycles Private Limited Vs. CIT (supra) and CIT vs. Dalmia Cement (P) Ltd. (supra) are also of no assistance as in those decisions, it is held that once nexus is established between the expenditure and the purpose of business, then Revenue cannot justifiably claim to put itself in the armchair of the businessman and disallow the expense. But in the instant case the prerequisite of establishing services rendered by the sub-agent, has not been fulfilled by way of producing relevant documentary evidences. Accordingly, the ratio of the decisions in those cases, cannot be applied over the facts of the instant case.

In view of above discussion, we set aside the order of the Ld. CIT- (A) on the issue in dispute and restore that of the Assessing Officer. Accordingly, the ground of appeal