DAGA GLOBAL CHEMICALS LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-12(2)(1), MUMBAI

Per Shamim Yahya, AM

These cross appeals have been filed by the assessee and Revenue

against the order of the CIT(A)-20, Mumbai dated 21.06.2017 for A.Y.

2014-15.

2 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd “DISALLOWANCE OF COMMISSION EXPENSES OF RS 6,67,03,097/-U/S 40A(2) 1. The learned CIT(A) erred in disallowing commission expenses paid to Daga Life Sciences DMCC to the extent of Rs 6,67,03,097/-u/s 40A(2) on the ground that expense of commission to related party is unreasonable and excessive without appreciating a fact that section 40A(2) is not applicable in our case as Daga life Sciences DMCC, Dubai is not a related party as per section 40A(2)(b) and definition of Associated Enterprises u/s. 92E cannot be resorted to for invoking Sec. 40A(2) and hence, the disallowance of Rs 6,67,03,097/- ought to be deleted. 2. The learned CIT(A) erred in disallowing commission expenses paid to Daga Life Sciences DMCC to the extent of Rs 6,67,03,097/- u/s 40A(2) on the ground that expense of commission to related party is unreasonable and excessive without taking into account that commission expenses incurred by Assesse is reasonable and not excessive and that the Ld. AO has not discharged his onus of bringing on record the fair market value of services as required u/s 40A(2)(a) and that the Ld. CIT(A) wrongly interpreted RBF's Exchange Control Manual for Import and export and Customs circular No. 64/2003 dated 21.7.2003 for benchmarking rate of commission and hence, the disallowance of Rs 6,67,03,097/- ought to be deleted. 3. The learned CIT(A) failed to appreciate that identical commission was paid to Daga Life Sciences DMCC, Dubai in earlier assessment year and there is no change in facts in the current year and hence, on the ground of consistency, entire foreign commission paid to Daga Life Sciences DMCC, Dubai ought to be allowed. DISALLOWANCE OF COMMISSION EXPENSES OF RS 7,38,05,757/-U/S 40(a)(i) 4. The learned CIT(A) erred in alternatively confirming disallowance of commission expenses of Rs 7,38,05,757/- u/s 40(a)(i) without appreciating a fact that as per India- UAE treaty, foreign Agent has no permanent establishment in India and commission is paid to this foreign Agent for services rendered outside India, and hence, disallowance u/s 40(a)(i) ought to be deleted. DISALLOWANCE OF SERVICE TAX 5. The learned CIT(A) while computing commission to be disallowed erred in reducing purported reasonable commission allowable of Rs 1,06,53,990/- being 3% of export turnover from Rs.7,73,57,087/- and thereby disallowing service tax paid which is an allowable expense u/s 37 r.w.s 43B.”

3 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd appreciating the findings of the A.O who restricted the commission paid without appreciating the findings of the A.O. who restricted the commission on the basis of that the such commission is unreasonable and excessive paid to overseas party who is very closed and related to assessee company which clearly attract the provision of section 40A(2)(b) of the Act. 2. “Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the appeal of assessee on account of disallowance made for non deduction of tax at source on the payment of commission of Rs.7,38,05,757/- paid to overseas party without appreciating the fact that the Assessing Officer has established during the assessment proceedings that the payment of commission to Agent (relative) has accrued and arised in India and is subject to TDS under section 195. In absence of TDS, entire amount of commission paid is disallowed under section 40(a)(i). 3. “Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the appeal of the assessee to carry forward of long term capital loss of Rs.84,46,103/- on account of loss arose merely investment in Shares without appreciating the facts that the during the assessment proceedings, the Assessing Officer has done depth scrutiny and came to conclusion that such gain or loss is not computed in absence of transfer of capital assets. Apropos the issue of reasonableness of commission paid:

(Cross appeal by Revenue & assessee)

proceedings, on perusal of the Profit and Loss Account, it was observed by

the AO that the assessee had shown sales of `2,77,28,35,881/- and

corresponding purchases were at `2,35,96,27,687/- and had debited

`8,47,56,071/- as commission and brokerage paid under the head "Other

expenses". Further it was observed by the AO that Sales Commission of

`7,47,82,152/- was paid to M/s. Daga Life Science DMCC (DLS), Dubai.

The AO also noted management of the DLS Dubai, the recipient of

commission was having close relationship with the directors of the

assessee company and the commission payment transaction was between

related parties. The director of DLS, Shri Kirti Krishna Daga is the brother

4 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd of director Shri Satyen Daga of the assessee company. During the course

of hearing for assessment proceedings, the assessee was asked by the AO

to produce the breakup along with supporting details and also further

required to provide information and justify the payment of commission to

related party. The assessee was asked to file details of basis of commission

paid to relatives of `7,47,82,152/- along with copy of ledger account, form

15CA and 15CB. In response to the query the assessee had furnished

"Contract for payment of Commission", Table of Export Trading Sales

indicating Sale Price, Cost of Purchase, Freight Charges, C & F Charges,

Incentives received, commission paid, service tax on commission paid and

profit to the assessee company. The said working was supported by few

Debit notes (and also a Credit Note) from the agent. From the working

submitted by the assessee, it was observed by the AO that the commission

paid to relative party was unreasonable and excessive. The AO observed

that the contract of commission between assessee and DLS, which acted

as agent are related parties and the contract was not a comprehensive

contract. In fact it was only a two page contract. The AO noted that

normally the Arm's Length contract contains many clauses to make

contract complete. However, the agreement in the present case defined the

rate of commission @ 5% to 50%. Further the basis on which the rate of

commission was to be decided was not specified in the contract. It was

observed by the AO that this two page "Contract" between the related

parties was executed in Mumbai - India dated 1st Day of April 2012, and

was not a comprehensive contract. The AO noted that no two professional

parties will enter into contract so vaguely worded. The terms of contract

5 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd implies that the commission should be paid at a rate of 5% to 50%. The

basis of differential rate (i.e. 5% to 50%) of commission be calculated was

not mentioned. The AO also observed that the there was no mention of

products, value of sale, geographical territories, credit / payment terms by

customers, responsibility for payment from parties, warehousing of goods,

follow up of delivery schedule, terms of the contract (time for renewal or

termination), reimbursement of expenses to agent, compensation for

breach of contract etc, service tax liability, income tax liability, arbitration

clause in case of dispute (Dispute Resolution Clause) and Legal

Enforceability (applicable contract Act India or Dubai). All these important

issues, normally find place in any valid contract between two professional

parties were NOT mentioned in the contract. Thus contract was silent on

almost all these important and basic issues. The AO further observed that

the contract was silent on the expected services to be received and

provided by the agent situated at Dubai. The contract was absolutely

silent on the nature of services to be provided by the Agent i.e. DLS at

Dubai or in any other country for international marketing of products for

a consideration of 5% to 50% of commission, in value of `7.47 crores for

the year under consideration. It is also a matter of fact that the parties to

contract were resident of two different countries. The transactions were

involving cross border transaction which demand strict compliance of

domestic law on respective countries and international laws. The AO

found that the contract placed on record in support of payment of

commission was not up to the mark and it was too vague and general.

Therefore, the AO found it to be not a reliable piece of evidence. The

6 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd assessee had no explanation to offer on the subject matter. Hence, the AO

restricted the commission to 1% of turnover (i.e. 35,51,33,000 x 1% =

35,51,330) and balance commission expenses of `7,73,57,087/- (i.e.

`8,09,08,417 – `35,51,330) was disallowed by the AO.

informing that the assessee has engaged in the business of trading in

chemicals/petro products and allied products and export its products to

Iran. During the year assessee has entered into a contract with DLS,

Dubai, which is a company controlled by Shri Kriti Krishan Daga, brother

of the Director of the assessee company Shri Satyen Daga. The learned

CIT(A) opined that due to family relation between the Director of the

assessee company and the Director of the agent in Dubai this concern

cannot be said to be independent and these are controlled by the same

family members therefore the Dubai agent cannot be seen as an

independent agent, since it is an associate concern of the assessee. The

learned CIT(A) also rejected assessee’s contention that the agent company

DLS Dubai is not covered under the definition of related parties as per

Section 40A(2)(b). He noted that the term related party has different

meaning in different laws. He referred to the Companies Act, 1956,

Accounting Standard and Income Tax. He observed that in the present

case the commission is paid by the appellant to the agent DLS in Dubai

which was company owned by Shri Kirti Krishna Daga who was the

brother of Director Shri Satyen Daga of the assessee company. These facts

clearly establish that DLS Dubai is a related party of the appellant as per

7 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd provisions of section 40A(2)(b) and also an Associated Enterprise of the

appellant as per provisions of section 92A, clause (j) of the Income Tax

Act. Hence, the ld. Commissioner of Income Tax (Appeals) opined that in

view of this discussion the claim of the appellant that DLS Dubai is not a

related party of appellant is found to be devoid of any merit and this claim

is rejected and the stand of the AO in treating the DLS Dubai as a related

party of appellant is upheld. He observed that related party transaction

required to be made while filing the return of income but the same was

never done. He referred to section 40A(2)(b) of the Income Tax Act, 1961

(hereinafter “the Act”) and observed that the assessee has not

benchmarked its international transactions of payment of commission to

DLS Dubai with any other comparable instance. He observed that it is not

established through cogent evidence that the rate of commission paid to

DLS Dubai was fair and reasonable having regard to the fair market value

of services provided by the agent to the assessee. He observed that the AO

has rejected the assessee’s claim of commission @22.78% being fair and

reasonable after noting that the commission paid to DLS Dubai has no

connection with the nature of goods supplied, value of sales made,

services rendered in connection with sales made in Iran and service tax,

income tax and other tax liability of agent in India, etc. The learned CIT(A)

further noted that the RBI in its Exchange Control Manual for Import and

Export has set an upper ceiling of 12.5% for agent commission on exports.

He further stated that the CBEC has issued a Customs Circular wherein it

has been directed that RBI ha not revised its earlier instructions as

regards the limit of payment of agency commission and it was clarified

8 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd that the field formations may continue to permit export benefits on FOB

value without deducting agency commission if such commission is up to

the limit of FOB value. From these RBI Manual and CBEC circular the

learned CIT(A) opined that these authorities have held that the ceiling of

12.5% for agency commission on export is applicable. Against this, in the

present case the payment of commission by the assessee to DLS Dubai

varied between 5 to 50% of sales value and the average rate was worked

out @22.78% of the sales. Thereafter the learned CIT(A) observed that

there is no direct comparable commission payment made by the assessee

which could justify the payment of commission varying between 5 to 50%

of the sales value paid to DLS Dubai. He found that since the DLS Dubai

is a registered party, one has to look into the facts of the case to arrive at

a reasonable percentage of commission that can be treated as genuine

business expenses having regard to the fair market value of the services

received by the assessee from DLS. The learned CIT(A) referred to the

decision of M/s. Diamond Tool Industries wherein commission @3% to

related party was held to be reasonable as against 2.5% allowed by the

AO. The relevant portion of the learned CIT(A)’s concluding remarks is

extracted as under: -

“It is well-settled law that the A.O. can scrutinise the reasonableness of the expenditure with reference to the criteria mentioned in the section 40A(2)(b). The A.O. is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. The reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession or the benefit derived by, or accruing to, the

9 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd taxpayer from the expenditure. In this light the payment of commission to DLS Dubai by the appellant is to be evaluated. It is seen that commission payment of Rs. 8.09 crores was made to DLS on total sale of Rs. 35.51 crores which comes to a rate of 22.78% which is definitely excessive and in violation of RBI and CBEC guidelines in this regard. Accordingly this payment attracts disallowance under section 40A(2)(b). After carefully considering the appellants contentions and the documents filed before me, I find that the A.O. has rightly held that the commission rate of 22.78% paid to the DLS is far in excess of the prevailing market rate of 2-3% in such cases. The appellant has not filed evidence to justify the excessive claim of commission payment through cogent evidence such as nature of any special services rendered by DLS, expenses incurred by the DLS, and other transaction related facts and circumstances which could justify the payment of commission at a much higher rate to DLS. It is noted that in a similar case of M/s Diamond Tool Industries, 108, Udyog Bhavan, Sonawala Road, Gorregaon (East), Mumbai 400 051. PAN NO. AAAFD4673L Vs J.C.I.T. Circle 24(3), Pratyaksha Kar Bhavan, C-11 Bandra Kurla Complex, Bandra (East), Mumbai 400 051, the INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘D’ BENCH in ITA No. 136/Mum/2009, A.Yr. 2005—6 vide order dated 14.12.2011 has held that the payment of commission @3% to the related party as against 2.5% allowed by the A.O. is reasonable and will meet the ends of justice. The A.O. has adopted the rate of 1% commission being reasonable and thereby 'holding that the payment of commission @ 21.78% is excessive having regards to the nature and quantum of services received by the appellant. In view of this discussion and having regard to full facts of the case and order of the Hon'ble Mumabi Tribunal in the case of M/s Diamond Tool Industries it would be fair and reasonable if instead of the rate of commission of 1% as taken by the A.O., the allowable commission rate is taken @ 3% of turnover of `35,51,33,000/-which comes to `1,06,53,990/- as the commission to be allowed as business expenditure to the appellant for the year. In view of this discussion the addition made by the A.O. on this issue is directed to be restricted to `6,67,03,097/- (`7,73,57,087/- - `l,06,53,990/-).”

appeal before us.

Counsel of the assessee submitted that the DLS Dubai is not a related

party as per section 40A(2)(b). He submitted that the ld. CIT(A) has wrongly

10 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd invoked section 40A(2)(b). He pleaded that the assessee cannot be said to

be a related party u/s. 40A(2)(b). He further submitted that the payment of

commission is duly justified. He submitted that the payment is made

through banking channels, commission payments is disclosed in shipping

bills, commission is paid pursuant to written agreement, the third party

has confirmed the role of the agent. Further, the ld. Counsel of the

assessee submitted that the rate of commission is duly justified by the

nature of services rendered by the Agent. Further, the ld. Counsel of the

assessee submitted that the Assessing Officer has not brought on record

the fair market value of the services as required u/s.40A(2)(b) for

computing the disallowance. The ld. Counsel of the assessee further

submitted that the ld. CIT(A) is wrong and there is no violation of RBI

Manual and CBEC circular. He further submitted that the profit for the

year has decreased primarily because of foreign exchange losses and not

because of payment to foreign agent. He further submitted that the

contract between the parties is to be understood and the Assessing Officer

cannot give his opinion and interpretation to the contract. The ld. Counsel

of the assessee further submitted that in the earlier assessment years, in

the scrutiny assessment, the payment of commission has been allowed.

Hence, he submitted that for the current year on the same facts, it cannot

be said that the commission paid is unreasonable and excessive. In this

regard, the ld. Counsel of the assessee placed reliance upon the decision of

the Hon'ble Apex Court in the case of Radhasoami Satsang Vs. CIT 193 ITR

321 (SC) and CIT Vs Excel Industries Ltd [2013] 358 ITR 295 (SC).

11 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd 8. Per contra, the ld. Departmental Representative submitted that the

assessee has not provided relevant details before the authorities below. He

submitted that no document relating to the services provided and how the

rates of commission were fixed were submitted before the Assessing

Officer. Hence, the ld. Counsel of the assessee submitted that the assessee

has not provided all the relevant details. He further submitted that the

nature of the services has not been properly explained. He submitted that

the Revenue is very much justified in examining the nature of the services.

Just because commission has been allowed in the earlier year, cannot

justify the payment in subsequent years without any examination. Hence,

he submitted that the nature of the commission and the rates thereof has

not been properly explained. Hence, the authorities have rightly considered

it as excessive.

records. We note that the assessee has paid commission to the Daga Life

Sciences DMCC, Dubai, which is controlled and managed by brother in law

of the Managing Director of the assessee company. We find that it is the

settled issue that the Revenue cannot seat into the businessman’s shoes

and decide what is reasonable. However, when the explanations given are

not cogent and proper, the Revenue authorities are not supposed to put on

blinkers. In this case, we note that for the payment of the afore-said

commission, the assessee has referred to a contract in this regard. The

said contract may be gainfully reproduced as under:

12 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd CONTRACT FOR PAYMENT OF COMMISSION

THIS CONTRACT made at MUMBAI on this 1st day of April, 2012 between M/S DAGA GLOBAL CHEMICALS LTD., 112, Dattani Trade Center, Chandavarkar Road, Borivali (West), Mumbai - 400 092 through its Director Ms. Kokila A. Gadhiya Age 48 years, Occupation Professional, hereinafter called and referred to as "THE PRINCIPAL" and M/S. DAGA LIFE SCIENCES DMCC , having office at 2208, 1- Lake Plaza, Jumeirah Lakes Towers, P.B.No.309045, Dubai, UAE , through its Director Shri Kirti Krishna Daga, Aged -40 yrs, hereinafter called the referred to as the 'AGENT".

The Principal is in the business of export of goods/chemicals from India to various parts of the world and the Agent, who is situated out of India, helps the Principal in sale of such goods/chemicals in international market. The Principal intends to pay the Agent and the Agent intends toVecelve from the Principal a commission on such sale of goods/chemicals of the Principal, on the following terms and conditions:-

M/S DAGA GLOBAL CHEMICALS LTD M/S DAGA LIFE SCIENCES DMCC

Sd/- Sd/- (KOKILA A. GADHIYA) (KIRTI KRISHNA DAGA) Director Managing Director

13 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd 10. The above agreement has been found by the Assessing Officer as to

be not comprehensive warranting the commission of payment as excessive.

We find that in the above contract, the range of commission has been

mentioned from 5% to 50%. However, it has been mentioned that the

commission @ 5% to 50%, as may be fixed by mutual consent between the

Principal and the Agent at the time of undertaking the export, transaction.

In this regard, we note that no detail/correspondence/agreement regarding

the fixation of individual rates in particular invoice has been produced

before the authorities below. To examine the payment of commission, in

accordance with the above contract, it is necessary to go into the

correspondence wherein a particular rate of commission was fixed. In this

regard, the assessee has submitted before the ld. Commissioner of Income

Tax (Appeals) that during the course of assessment proceedings, the

Assessing Officer has not asked for any explanation regarding the

transaction wise rate of commission. We find that despite the above

submissions before the ld. Commissioner of Income Tax (Appeals), no

submission is on record as to how a particular rate has been fixed in the

individual contracts. To get this clarification, the Bench has specifically

asked the ld. Counsel of the assessee to provide the necessary details, but

the same has not been provided.

of relationship between the assessee company and the payee and a very

short contract for agreement of commission and lack of necessary details

of rate of commission, the authorities below have concluded that the

14 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd excessive commission payment was not justified. The A.O. has held that

1% commission was justified. However, the ld. CIT(A) has held that 2.5%

commission was justified. In our considered opinion, such subjective

decision of the authorities below is not correct. In this regard, the ld.

Counsel of the assessee’s submission that the authorities below cannot sit

in judgment on the length of the contract, is sustainable. More so, since on

the basis of the same contract, earlier assessments were completed.

However, it is certainly necessary to examine whether the payments are in

accordance with the contract. The actual commission paid if the same is in

accordance with the terms of the contract has to be allowed. However, in

the present case, it is not established that the rate of commission paid is

as per the contract. The main contract shows a range of commission and it

mentions that the individual rates will be fixed as per the mutual consent.

No detail whatsoever as to how the mutual consent have been arrived at

for a particular rate in a particular invoice has been submitted before the

authorities below. If any rate can be mentioned in the invoice and the

payment can be done, without any reference to any document relating to

consent of parties in an international transaction, such a proposition can

by no stretch of imagination be considered to be genuine. In the absence of

necessary details, adverse inference drawn cannot be said to be devoid of

cogency. By no stretch of imagination, it can be said that because

commission has been allowed in earlier year, the Revenue authorities need

not examine the correctness of the commission paid for this year in

accordance with the relevant consent. Hence, in our considered opinion,

the interest of justice will be served if the issue is remitted to the file of the

15 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd A.O. The A.O. is directed to examine the documents by which the mutual

consent was arrived at for individual invoices of commission. If the rates

fixed are in accordance with the relevant documents, the commission

payment will need to be allowed. The assessee is also directed to cooperate

with the Assessing Officer and provide the necessary details.

Other ground in Assessee’s appeal Apropos the issue of disallowance of commission expenditure u/s.40(a)(i): 12. The brief facts of the case are that the A.O. in the assessment order

has noted that the right to receive commission income arises in India,

since the source of Income is in India. Further he noted that the assessee

itself paid service tax in India on this commission. The A.O. noted that

Indian Service Tax is payable in India for availing and utilizing services of

foreign concern in India. The A.O. has observed in its order that it would

not be out of place to mention that the Agent was having a business

connection in India. The Agent was a close relative of assessee company

(he is brother of director of assessee- company). The assessee had not

provided sufficient information on the nature of service that so called

Agent had provided to the assessee company before the A.O. No particular

rate of commission is elaborated. Hence, the Assessing Officer opined that

whether the payment to Agent was pure commission or managerial service

or technical service was not clear. Therefore, on facts and under these

circumstances, it was concluded that the payment of commission to Agent

(relative) had accrued and arisen in India and was required to be subjected

to TDS under section 195. In absence of TDS, entire amount of

commission paid of `7,38,05,757/- was disallowed by the A.O.

16 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd

ld. Counsel of the assessee submitted that no disallowance can be made

u/s.40(a)(i). He submitted that the agent has no business connection in

India and the commission paid for the services rendered by the foreign

agent outside India and further as per India- UAE treaty, foreign Agent

has no permanent establishment. He further submitted that the

services rendered by the Agent outside India is not liable for deduction

of tax at source.

orders of the authorities below.

this issue has noted that the contract between the parties was executed in

India. He has further noted that the right to receive commission income

arises in India since the source of income is in India. Further, it has been

noted that the assessee itself has paid service tax in India on this

17 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd commission. The Assessing Officer further observed that the agent is close

relative of the director of the assessee company, it did not provided

sufficient information on the nature of service that so called agent has

provided to the assessee company before the Assessing Officer. The rate of

commission was varying. Hence, whether the payments are for services or

managerial or technical services was not clear. In this regard, we note that

in its submissions before the ld. CIT(A), the assessee has himself

submitted that the agent has incurred expenses of audit by Iran Ministry

of Health officials, which required payment of first/business class air

tickets and hotel expenses for officials visiting supplier’s factory for

inspection, etc. We note that bearing of such expenditure is not rising out

of the contract for payment. Hence, in which capacity such payments were

done by the Agent, has not been brought on record. The contract for

payment at any point never envisages such a payment by the Agent.

Hence, admittedly the agent is providing services which are outside the

purview of contract of payment for commission. Hence, the inference by

the Assessing Officer is not unjustified that the assessee has not properly

disclosed the nature of the payment whether it is pure commission or

managerial services or technical services. In the absence of necessary

details from the assessee, the authorities below have drawn adverse

inference. In this regard, we note that the Assessing Officer in his order

has observed that the assessee has not provided any details of the

correspondence, etc. between the assessee and the agent in justification of

the transaction. The assessee has not provided the details, rather it has

been contended that the Assessing Officer has not called for

18 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd communication between the assessee and the agent as emanating out of

the ground raised before the ld. CIT(A). We find that the position taken by

the Assessing Officer and the assessee are contradictory. In our considered

opinion, the interest of justice will be served if the issue is remitted to the

file of the Assessing Officer. The Assessing Officer shall examine the

correspondence between the assessee and the Agent and thereafter decide

the issue regarding the nature of the services rendered. Furthermore, the

claim that the payee is a resident of UAE also needs to be established by

reference to the relevant documents, regulations and treaty. Needless to

add, the assessee should be granted adequate opportunity of being heard.

Apropos ground no. 5 – regarding the disallowance of service tax :

authorities below. However, since we have already remitted the issue of

examination of commission paid to the file of the Assessing Officer, the

Assessing Officer shall examine this issue also. Furthermore, it is noted

here that the said service tax has been paid by the assessee on the services

rendered by the Dubai based agent. Firstly, how can the service tax arises

when the services has been rendered outside India and secondly, under

what limb of contract the assessee was to incur the said expenses instead

19 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd of the agent, also needs to be examined. The Assessing Officer while

examining this issue shall bear in mind our above observations.

Other ground in Revenue’s appeal: Apropos the issue of allowing of carry forward of long term capital loss:

had claimed Long Term Capital Loss in the return of income. The same

was claimed on write off of investment in Foreign Subsidiary Company.

However, the AO noted that since it was not a case of Transfer of Capital

Asset but a write off, under the circumstances, section 48 will not come

into play. Therefore, to examine this claim, the A.O. issued a show cause

vide order sheet noting dated 18.11.2016 to the assessee. The assessee in

its reply at point number 5 had stated as follows:

"...5. Hence, this is not sale of shares, hence it is not speculation loss and not to be treated as speculation Loss under section 73 of the Act and we would humbly request you to allow it to Carry Forward as Long Term Capital Loss...."

assessee that the assessee had claimed Long Term Capital Loss of

`84,46,013/- on write off of investment in Wholly Owned Subsidiary (WOS)

Company at China. The claim of assessee and reply was closely scrutinized

by the A.O. The assessee company replied that the assessee company had

not sold these shares. The assessee company had invested in its WOS at

China. The WOS had incurred losses since inception in year 2009 till the

previous year. Losses of the company had wiped out investment of

assessee company and in June 2014, the assessee company passed a

resolution for closure of the company. The claim of the assessee that the

20 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd investment in WOS was written off in the previous year be allowed as Long

Term Capital Gain (Loss), was not found acceptable by the AO. The AO

noted that the assessee company had not transferred any of its capital

asset during the impugned year under consideration. The condition under

section 48 for calculation of Capital Gain arises only on Transfer of Capital

Asset. The AO observed that there were no new arguments furnished by

the assessee company. The assessee reiterated its stand that the loss was

not due to sale of shares of wholly owned subsidiary but on account of

write off of share investment from books of accounts, therefore in the

absence of Transfer of Capital Asset and for reasons mentioned in the

show cause, Capital Loss on share investment written off was not found to

be allowable by the AO. Hence, in view of the same, the claim of assessee

to allowing carry forward of Long Term Capital Loss of `84,46,013/- was

rejected by the A.O. and the same was added to the total income.

assessee’s claim of carry forward of capital loss was found to be in order.

The learned CIT(A) observed in this regard as under: -

“I have gone through the assessment order of the A.O. and the submissions made by the assessee. It seen that the AO observed from the submissions made by the assessee that the assessee had claimed Long Term Capital Loss of `84,46,013/- on write off of investment in Wholly Owned Subsidiary Company at China. The claim of assessee and reply was closely scrutinized by the A.O. The assessee company replied that the assessee company had not sold these shares. The assessee company had invested in its WOS at China. The WOS had incurred losses since inception in year 2009 till the previous year. Losses of the company had wiped out investment of assessee company and in June 2014, the assessee company passed a resolution for closure of the company. The claim of the assessee that the investment in WOS was written off in the previous year be allowed as Long Term Capital Gain (Loss), was not found

21 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd acceptable by the A.O. The appellant has vehemently opposed the additions made and submitted that the Learned AO erred in not allowing carry forward of long term capital loss of Rs 84,46,013/- being loss arising on account of investment in wholly owned subsidiary in China, which went under winding up during the assessment year, and thus, said loss was real and allowable to be carried forward as capital loss. It is noted that the appellant had claimed Long Term Capital Loss of `84,46,013/- on write off of investment in Wholly Owned Subsidiary Company at China and has claimed carry forward of this loss in books as capital loss. It is not in dispute that the loss was on account of write of investment in subsidiary company of appellant. It is noted that once these facts are appreciated it is difficult to sustain the disallowance made by the A.O. Having regard to the facts of the case and submissions made by the appellant the claim of the carry forward of capital loss is found to be in order and the same is allowed to be carried forward as per provisions of the Income Tax Act, 1961.”

Counsel of the assessee in this regard placed reliance upon the order of the

ld. CIT(A). He submitted that the assessee had claimed long term capital

loss of Rs.84,46,013/- on write off of investment in Wholly Owned

Susidiary (WOS) Company at China. Hence, in view of the above, the

assessee is entitled to carry forward loss of Rs.84,46,013/-. Without

prejudice, he submitted that there is a capital loss of Rs.84,46,013/- as

the entire investment is wiped off and the assessee is entitled to carry

forward the capital loss. He further submitted that the assessee has not

claimed the Revenue losses. The ld. Counsel of the assessee placed

reliance upon the decision of the Hon'ble Bombay High Court in the case of

CIT vs. Wackhardt International Ltd. [2009] 314 ITR 11 (Bom).

orders of the Assessing Officer.

22 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd 26. Upon careful consideration, we note that the assessee in this case

has written off its investment in its wholly owned subsidiary in China as

there was persistent loss and the net worth was eroded. The assessee has

claimed this to be allowed as long term capital loss to be carried forward.

We find that the Assessing Officer is quite correct in holding that the long

term capital loss can arise only as per the mode of computation as

specified in section 48 of the I. T. Act. Since in the present case, the claim

of long term capital loss does not arise by way of computation as per the

mode prescribed in section 48 of the I. T. Act, the same cannot be allowed

as long term capital loss. In this regard, we find that the ld. CIT(A) has

erred in appreciating the relevant provisions. Furthermore, we note that

this loss is in the nature of capital field; hence it is the capital loss. There

is no provision in Income Tax law regarding the carry forward of loss in

capital field. Furthermore, we note that the ld. CIT(A) has relied upon the

decision of the Wackhardt International Ltd (supra). We find that the same

is not at all applicable on the facts of the case, as the same was with

reference to the non refund of custom duty which was treated as business

loss/expenditure. Here as clearly brought out by the Assessing Officer, the

loss has not been incurred on any transfer of capital asset; hence, there is

no question of any long term capital loss arising to be carried forward.

Furthermore, the wholly own subsidiary of the assessee was the

investment in the capital field and hence there is no provision in Income

Tax law regarding the carry forward of losses in capital field. Hence, we set

aside the order of the ld. CIT(A) and restore that of the Assessing Officer.

23 ITA Nos. 5296 & 5889/Mum/2017 M/s. Daga Global Chemicals P. Ltd 27. In the result, the appeal filed by the assessee and the Revenue are

allowed for statistical purposes.

Order pronounced in the open court on 2nd May, 2018.

Sd/- Sd/- (Amarjit Singh) (Shamim Yahya) Judicial Member Accountant Member

Mumbai, Dated: 2nd May, 2018

Copy to:

//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai