THE ACIT, 4(1), INDORE vs. M/S. AGRO EQUIPMENT CO. PVT. LTD., INDORE

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ITA 49/IND/2013Status: DisposedITAT Indore05 January 2017AY 2009-1018 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the commission expenses were justified as they were incurred for business expediency. The CIT(A) had correctly allowed the claim, considering the services rendered by the commission agents in pre-tender and post-tender activities, and the consistency in allowing such expenses in earlier years.

What were the facts?

The Assessing Officer disallowed commission expenses claimed by the assessee, M/s Agro Equipment Co. Pvt. Ltd., on the grounds that middlemen are not welcomed in government transactions. The assessee had paid commission to Madhya Pradesh Laghu Udyog Nigam Limited and other individuals for facilitating sales of submersible pumps to government departments.

What were the issues?

Whether commission expenses paid for securing government contracts are allowable as a business expenditure, and if the role of commission agents in government transactions is permissible.

Which sections of the Income-tax Act were involved?

Section 37(1)

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Cases cited in this judgment(6)Show list

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Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SHRI D.T. GARASIA & SHRI O.P. MEENA

For Appellant: Shri Sudhir Padlia
For Respondent: Shri Sudhir Padlia
Hearing: 5.1.2017

Heard together (2 matters)

ITA Nos. 49/Ind/2013
I.T.A. No. 803/Ind/2014

Read from the judgment's own cause title. This page is filed under one of them.

आदेश /O R D E R PER SHRI D.T. GARASIA, JM

These appeals have been filed by the revenue against

the orders of the learned CIT(A)-II, Indore, dated

27.11.2012 and 30.9.2014.

2.

The common issue involved in these appeals is

whether the learned CIT(A) was justified in allowing the

commission expenses disallowed by the Assessing Officer.

3.

The brief facts of the case are that the assessee filed

its return of income electronically on 29.9.2009 declaring

total income at Rs.27,09,870/- for the assessment year

2009-10 and Rs.7,40,450/- for the assessment year 2010-

11.

The Assessing Officer found that in the profit and loss

account a sum of Rs.14,15,925/- has been shown as

commission paid to Madhya Pradesh Laghu Udyog Nigam

Limited. Simultaneously, commission amounting to

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Rs.66,00,024/- has been debited as paid to other persons.

The assessee was asked by the Assessing Officer to

establish the genuineness as well as reasonableness of

expenditure in question. The assessee was further required

to explain the services rendered against which the

commission has been claimed as expenditure. The A.O.,

after considering the submissions of the assessee, observed

that “presence of middlemen in Government transaction is

not welcomed by the Government. Thus no Government

Officer would dare to propagate and allow presence of

middlemen. That is why the Government is following the

method and practice of assigning the task to Madhya

Pradesh Laghu Udyog Nigam. The Government departments

constitute a purchase committee for bulk purchases and

seek the services of Madhya Pradesh Laghu Udhog Nigam.

Thus there is no scope for entry of any middlemen”. In this

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 view of the matter, the Assessing Officer disallowed the

commission claimed to have been paid by the assessee.

4.

On appeal, the learned CIT(A) allowed the claim of

commission payment by the assessee with the following

observations :-

“ I have gone through the assessment order and also

seen the submission of appellant. Appellant is into the

business of supply and installation of submersible

pumps which are purchased by Government

departments mainly by Public Health Engineering Deptt.

For this purpose services services of commission agent

are required in order to gather the quantity and type of

submersible pumps needed by various Government

departments. After persuing various Govt. agencies, the

commission agent works for issuing of indents from

such Govt. Offices, quoting requirment of pumps. Such

indents are then submitted by commission agents to

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Madhya Pradesh Laghu Udyog Nigam Ltd. (MPLUN).

Thereafter commission agents pursue MPLUN to get the

tendering process done on such indent and there

liasoning and persuasion is required for getting the

purchase order for such pumps being placed in name of

appellant. After getting purchase orders in favour of

appellant, commission agents are required to ensuren

supply of pumps in time, getting them properly installed

and get a favourable inspection report from resective

government deptt. so that the payment is released by

that deptt in favour of the appellant.

Hence the role of MPLUN in Government contract is

limited to job of calling tenders for every purchase order

and finalisation of tender process by placing order in

name of one of the parties. The commission agents are

involved in pre-tender and post tender work.

Considering the description given MPLUN and

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Commission agents are working towards same goal of

placing Government work orders, but they have

separate and independent areas of work which are not

overlapping. The A.O.’s view that in Government

contracts there is no space for commission agents, is not

a correct view and facts narrated above disprove such

view.

There is no bar on commission agents in getting

pre-tender and post tender work done in Government

contracts. Their use of persuasive skills in garnering

government orders, their involvement in getting all the

conditions of contract properly complied and their help

in getting the inspection report of such work signed are

all parts of commercial expediency.Payment to

commission agents in Government contract is

consistently held as an allowable expense by various

courts namely Bharat Medical Stores (2009) 308 ITR

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 373(P&H), Laxmi Engineering Industries (2008) 298 ITR

203 (Raj.), Nestor Pharmaceuticals (P) Ltd. (2000) 33

DTR (Del) etc. The only prohibition is on gaining

Government contracts through illegal gratification or

commission payment to Government or its

representation as that is against the public policy and

that is disallowable under explanation to section 37(1)

of IT Act. But in present case neither there is any

allegation of such payment, nor there is any proof of the

same.

There is no restriction on person of Ratlam working

as commission agent in Indore and vice versa. It is

basically a liason work and can be done by person

acquainted with officers of Govt. Deptt. Depending on

quantum of work, more than one commission agents

could be deployed.

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 There is also no bar on payment of commission to

relatives if services are rendered by them as held in

Computor Graphics Ltd. (2006) 235 ITR 84(Mad) and

Microtex Separators Ltd. (2007) 293 ITR 451(Kar.).

Payment of commission is made to only one related

person namely Shri Rajesh Gadia who is instrumental

in organising entire work of appellant company and as

a result of such commission payment the turnover of

appellant has substantially improved over the years as

shown in table given above.

After the appellant filed details of services

rendered by commission agents, copy of their ledger

accounts, copy of bills, details of cheque payments to

such agents, the onus shifted on A.O. to disprove such

facts. But A.O. did not conduct any enquiries and no

evidence was gathered to disprove the evidences

produced by appellant.

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 On this issue of commission payment, rule of

consistency has to be followed. It is seen from

submission of appellant dated 23.11.2012 that

appellant has claimed such commission expenses in at

least 4 earlier years i.e. in A.Y. 2005-06 to 2008-09 and

commission expenses have been allowed to appellant in

all 4 years, even when scrutiny assessments were

conducted in A.Y.2005-06 and A.Y. 2006-07. Following

the rule of consistency, such commission expenses has

to be allowed to appellant in A.Y. 2009-10 also. For

such decision reliance is placed on the caase of

Mandeep Singh (2010) 328 ITR 169 (P&H).

Appellant has filed copy of acknowledgement for

filing return and computation of income for A.Y. 2005-06

of all its commission agents. It is seen from the same

that entire commission receipt is reflected by them in

their return of income and after claiming only minor

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 expenses from it, substantial part is shown in their net

income. For example a commission of Rs. 2,05,912/-

was paid to Shri Mukesh Ratanlal Khaniwal HUF, who

has reflected this receipt in return and after claiming

expenses of Rs.30912 has offered net income on this

transaction at Rs.1,75,000/- in his return. Similar facts

are found in returns of other commission agents.

Considering all the factors mentioned above, the

claim of commission expenses of Rs.66,00,024/- are

held as expenditure incurred for business and same is

held allowable expense. As a result Ground no. 2 of the

appeal is allowed.”

Against the above findings of the learned CIT(A), the

revenue is in appeal before the Tribunal.

5.

The learned DR submitted that in the case of

Nathulal & Sons, ITA No. 78/Ind/2013 the Tribunal

has decided the commission expenditure relating to

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Government supplier wherein the Tribunal has

discussed various issues wherein it was held that

the assessee should produce the evidence for

services rendered by the commission agent who were

closely related with the assessee. The commission

payment made only through cheque is not sufficient

to prove the services rendered by the commission

agent, therefore, the issue was restored to the file of

the Assessing Officer regarding the same. Therefore,

on this issue, the file must be restored to the

Assessing Officer and the learned CIT(A) is not

justified in allowing the claim.

6.

On the other hand, the learned AR objected to

the submissions of the learned DR on the ground

that in this case the facts are entirely different

whereas in this case the assessee was never asked to

prove the genuineness of expenses claimed by him

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 but the same was disallowed as thumb rule that in

case of Government supplies, no middleman is

required. Moreover, in this case the assessee has

paid liasoning charges to various persons in

connection with the services rendered by these

persons relating to contract arrangement made with

State Government through MPLUN. In this case the

assessee has made supplies against the annual rate

system and those supplier who is qualified in

financial bid and technical bid on tender system

during the year the assessee was qualified to supply

the goods at the rates approved by various

Government departments. The department has

liberty to choice to distribute the order considering

the production capacity of unit, past performance of

vendor and location of the vendor. All this procedure

was given to the department. The assessee has to

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 convince the department for the assessee’s items

and after obtaining the rate contract, the assessee

has to attain their individual requirement.

Therefore, after considering this, the learned CIT(A)

has allowed the claim. Moreover, in the assessment

years 2005-06 to 2008-09 commission has been

allowed, therefore, following the rule of consistency,

the claim has been allowed. Moreover, he relied

upon the decision of the Hon'ble M.P. High Court in

the case of CIT vs Pure Pharma; 144 taxmann.364

(MP).

7.

We have considered the submissions of both

the sides. Looking to the facts and circumstances of

the case, we find that in this case the Assessing

Officer has disallowed the commission expenses

including commission paid to MPLUN of

Rs.14,15,925/-, a Corporation of M.P. State

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Government enjoying the sole right to convert the

intend of purchases. The assessee has shown the

commission ranging from 7% to 9% above the

commission to MPLUN. The expenditure is supported

by the bills raised by the payee. The assessee has

given PAN mentioning the bill. The commission has

been paid for collecting the requirement from the

Government offices located at Indore, Khargone,

Mandla, Balaghat, Chhindwara and Dewas. The

assessee is engaged in manufacture of sub-mersible

pumps and during the year the assessee has

supplied the product of the assessee to Public

Health Engineering Department, Govt. of M.P. and

many other Government departments. Therefore, the

assessee has to identify various places, thereafter

for getting the orders the assessee has to make

installation of submersible pumps at the various

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 sites identified by Public Health Department and

liasoning charges have been paid by the commission

account. Thus, the assessee has made payment for

the services rendered. Moreover, the assessee has

explained the nature of services rendered. Therefore,

we are of the view that the learned CIT(A) is

justified in allowing the claim. The same kind of

commission was allowed in four earlier assessment

years 2005-06 to 2008-09 and it was allowed in

scrutiny assessments for the assessment years

2005-06 and 2006-07. Therefore, rule of consistency

is followed by the learned CIT(A). We are of the view

that the learned CIT(A) is justified. Moreover, the

assessee has given sufficient evidence to prove the

same. Therefore, we do not find any discrepancy in

the order of the learned CIT(A). We also get support

from the decision of the Hon'ble High Court in the case

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 of CIT vs. Pure Pharma, (2005) 144 Taxman 364 (MP) in

which in para 3 & 4 it was held as under :-

“3, A few facts material for deciding the said appeal, in short, may be mentioned as under : The Respondent/assessee company is engaged in manufacturing and sale of pharmaceutical formulations. During the previous financial year, the assessee had paid total commission of Rs. 13,35,336/-. Out of this, a sum of Rs. 10,24,290/- was paid as commission on sales made to the Government and its agencies and a sum of Rs. 3,11,046/- was paid as commission to non- Government purchases. Since, a doubt was raised with regard to the payments made to various parties as commission, enquiry was held. It was found that all the payments have been made as commission to various parties by demand drafts, wherein the identity of each of the agents was also established. It has also been found that the commission was paid exclusively for business purposes only. 4. All these are findings of fact and no substantial question of law, as is required to be formulated for deciding the appeal, arises in the same. The Tribunal has also placed reliance on a judgment of the Delhi High Court reported in CIT vs. Electric Construction Equipment Co. Ltd., [1990] 182 ITR 510, wherein the Delhi High Court dealing with identical question has already decided the matter against the present appellant-Revenue.”

5.

Therefore, considering the totality of the facts and respectfully following the decision of Jurisdictional High Court, we are not inclined to interfere with the findings of the ld. CIT(A). Accordingly, the appeal of the Revenue in respect of above three grounds is dismissed.”

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 This view is also supported by the decision of the

Jurisdictional High Court as relied upon by the ld.

Authorized Representative of the assessee, the Hon'ble

High Court in the case of CIT vs. Pure Pharma, (2005) 144

Taxman 364 (MP) in para 3 & 4 held as under :- “3, A few facts material for deciding the said appeal, in short, may be mentioned as under : The Respondent/assessee company is engaged in manufacturing and sale of pharmaceutical formulations. During the previous financial year, the assessee had paid total commission of Rs. 13,35,336/-. Out of this, a sum of Rs. 10,24,290/- was paid as commission on sales made to the Government and its agencies and a sum of Rs. 3,11,046/- was paid as commission to non-Government purchases. Since, a doubt was raised with regard to the payments made to various parties as commission, enquiry was held. It was found that all the payments have been made as commission to various parties by demand drafts, wherein the identity of each of the agents was also established. It has also been found that the commission was paid exclusively for business purposes only. 4. All these are findings of fact and no substantial question of law, as is required to be formulated for deciding the appeal, arises in the same. The Tribunal has also placed reliance on a judgment of the Delhi High Court reported in CIT vs. Electric Construction Equipment Co. Ltd., [1990] 182 ITR 510, wherein the Delhi High 17

ACIT vs. Agro Equipment ITA Nos. 49/Ind/2013 & 803/Ind/2014 Court dealing with identical question has already decided the matter against the present appellant-Revenue.”

8 Therefore, considering the totality of the facts and

respectfully following the decision of Jurisdictional High

Court, we are not inclined to interfere with the findings of

the ld. CIT(A). Accordingly, the appeal of the Revenue is

dismissed.

6.

The CO filed by the assessee is of supportive

nature, therefore, same is also dismissed.

7.

In the result, the appeal of the Revenue and CO

filed by the assessee are dismissed.

The order has been pronounced in open court on

5.1.2017.

Sd/- sd/- (O.P. MEENA) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 5.1.2017

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