ACIT, NEW DELHI vs. M/S MOHAN EXPORTS PVT. LTD., NEW DELHI

provided to match cost with revenue in order to arrive at the actual commercial profit; (iii) that even otherwise, the export proceeds were to be realized in 36 monthly installments starting after 12 months from the mean date of shipment i.e. May 2007 onwards and in these circumstances, the part of the commission payment had to remain payable at the time of assessment proceedings or thereafter; (iv) that as per RBI Guidelines, the payment of commission has to be allowed by the designated bank either way of remittance or by deduction from invoice value on the application of the exporter. This condition laid down by RBI is to check the genuineness of the business transactions and payment made to the service agent; (v) that the second ground for disallowing the claim of payment of commission to the service agent that the agreement does not suggest any specific reference to any specific service rendered to the agent to the assessee company is, “also not tenable for the reasons inter alia that in each agreement, the services to be rendered by the commission agents are extensively elaborated, which are as under :-

Sl. Name & Address of Clause Services to be No. Agents No. rendered 1 ESBJ Trading & 1 To introduce the Investments Pvt. Ltd., assessee to buying 42 B Home Road, organizations in Singapore 209066 Ghana, Angola, Nigeria (Agreement dt. 18.06.99 & Congo and assist in Renewed on 02.06.2003) promoting business 5 To do effective liaison to obtain enquires from various buyers 6 To follow up all connected matters with buyers and provide continuous support 7 To ensure timely payments 2 E.I. Capital Ltd. / 3 To procure or cause to Kwame Okyere Akosa procure export orders P.O. Box 1082, Accra from Ghana Cocoa Ghana. Board for supply of (Agreement dt. 25.11.04) tarpaulins, ensure establishment of satisfactory letter of credit and effective liaison with Ghana Cocoa Board till orders have been completely executed. 3 Trans Engineering Co. In respect of bid for Horia Street 220 KV Khartoum Ring Taha Babiker Building, Main Project to Kartoum National Electricity P.O. Box 11037 Corp., Sudan Sudan (Agreement dt. 16.09.03 1 Assistance in building and finalizing the contract 1.2 Maintain close and constant Liaison with NEC 1.3 Advise the assessee of important developments 1.4 Help to finalise the offer and sign the contract 1.5 Procure documents requested by assessee and courier them

2.1 After signing of contract arrange for all approvals in Sudan 2.2 Get approval of all drawings. 2.3 Pursue establishment of L/c. Advance payment & other Financial matters 2.4 Pursue amendments to contracts 2.5 Arrange for getting technical details / drawings samples approved by NEC 2.6 Keep the assessee informed of all relevant developments 2.7 Organise and plan the visit of NEC Technical personnel to India for discussion 2.8 Visit India for discussion 2.9 Coordinate clearance of goods at the Port and their transportation to site. 2.10 Arrange for receipts of goods by NEC and formalities for insurance / claim if any. 2.11 Pursue with NEC for release and cancellation of performance and advance guarantees 2.12 To arrange for local services like Visa, Govt. Clearances, formalities in Banks etc. 2.13 Assist site office like arranging local transport, accommodation etc. 2.14 Co-ordination with local sub-contractors 2.15 Provide services during warranty period etc. 2.16 Any other assistance including after sales services 4 Teoda Ltd. In respect of Ministry P.O. Box ct 4884 of Energy, Ghana Cantonments, Accra Ghana. (Agreement dt. 02.03.04) 1 Assistance in bidding for and finalizing contract 1.1 Maintain close and constant liaison 1.2 Advise assessee of important developments 1.3 Help to finalise the offer and sign contracts 1.4 Procure documents & Couriers them 1.5 Obtain technical information and Clarifications as asked by the assessee 2.1 Arrange for approvals in Ghana 2.2 Follow up for approval of all drawings and documents 2.3 Pursue establishment of L/c, Advance payments etc. 2.4 Pursue amendments to contracts 2.5 Arrange for getting technical details / drawings and samples approved by MOE. 2.6 To keep the assessee informed of developments 2.7 Organise and plan visit of MOE Technical personnel to India 2.8 To visit India for discussion 2.9 Coordinate clearance of goods at the Port and their transportation to warehouse 2.10 Arrange for receipt of goods and other formalities 2.11 Purse release and cancellation of performance and advance guarantees 2.12 Arrange for local services like Visa, Govt. Clearances etc. 2.13 Assist in arranging local Transport, accommodation, etc. 2.14 Co-ordination with local Sub-contractors 2.15 Provide services during warranty period 2.16 Assistance in executing contract and after sales services. 5 Mamoun Gamal For Ministry of Science M/s. Medicana for and Technology Investment and Services, P.O. Box 1443 Khartoum North, Sudan (Agreement dt. 02.03.04) ( a) Maintain close and 2 constant liaison (b) Advise assessee of all new tenders and business opportunities (c) Procure tender documents and courier them (d) Obtain technical information & clarification, to receive bids form assessee and submit than (e) Follow up of offers submitted by assessee (f) Pursue establishment of L/c and amendments (g) Pursue amendments to contracts (h) Arrange to get details / drawings and samples of items (i) Advise the assessee of all relevant developments 6 Solis Inter Trade Inc. 1 & 4 Promote and sell the 01 B.P 6972 products exported by Ouagadougou 01, Burkina assessee to Govt. Faso Bodies or Private (Agreement dt. 27.06.05) Companies. 5 To do effective liaison to obtain enquires from Govt. / Pvt. Co. and communicate the details to assessee 6 To lodge offers approved by the Co. 7 To follow up all connected matter and provide continuous information regarding such offer. 8 To secure timely payments (vi) that the statement furnished by the assessee company shows that the FOB value of export to the parties where agency commission is payable along with updated statement of commission agent/payable during AY 2006-07 in respect of the export made and as such, the outstanding commission payable continues to be shown as liable in the books of account which have never been rejected by the AO.

In these circumstances, genuineness of the business transaction and payment made to the service agent cannot be disputed; (vii) that the observation made by the AO that keeping the commission unpaid even after a lapse of 3 years is not acceptable to the prudent person is also not sustainable when this fact is examined in the light of the fact that export proceeds were to be realized in 36 installments starting from May 2007 onwards and mercantile system of accounting is being adopted by the assessee company. When the assessee company is to get the export proceeds up to 2010 the spreading of payment of agency commission up to 2010 would be the natural consequence; (viii) that agency agreement entered into between assessee company and Trans Engineering Company of Sudan, available at pages 68 to 73 of the paper book, is categoric enough to elaborate the services to be rendered by the service agent to the assessee company in order to execute the export order; (ix) that ld. CIT (A) has discussed the issue threadbare as to the services rendered by the service agent to the assessee company without which the service order would not have been completed / executed; (x) that the assessee company has been making payment of such agency commission in the preceding years right form FY 2000-01 to FY 2004-05, as is tabulated in para 6, which have been allowed by the Revenue and the agency commission paid during the year is commensurate to the turnover of the year under assessment when compared with the preceding years; (xi) that undisputedly, there is no change in the agreement entered into between assessee company and service agents and since, in the earlier years, such agency commission has been allowed by the Revenue, the rule of consistency is also to be applied; (xii) that since the assessee company is executing various projects overseas and not into trading, the same cannot be executed except with the constant services to be provided by the local agents by making liaison with the overseas Government Departments / Agencies / undertakings; (xiii) that even otherwise, as per RBI Guidelines, commission cannot be remitted in any circumstance before shipment of the case which are subject matter of the export, that too through the authorized bank; (xiv) that it is a matter of record that out of total payment of Rs.7,08,59,575/- on account of commission payment, an amount of Rs.3,37,84,634/- was paid during financial year under consideration and thereafter, payment of Rs.,2,78,86,183/- was made by the assessee company between 01.04.2006 and the date of assessment 31.12.2008 and thereby made total payment of Rs.6,16,70,817/- up till 31.12.2008. The remaining payment of Rs.91,88,758/- was to be paid in phased manner as per terms and conditions contained in agreement (supra). All these facts exclude the possibility of making the business transaction in-genuine; (xv) that the next ground for disallowance of claim of payment of commission made by the assessee company, “that the assessee was one of the contractor who were making payment of kick backs / illegal payments to Saddam Hussain and his close associates”, is also not tenable for the reasons inter alia that when Saddam Hussain and his associates removed from the Government in April 2003, the question of making payment of kick backs / illegal payments to them in FY 2005-06 does not arise; (xvi) that from the detail given by the assessee regarding country-wise export during the FY ending 31.03.2006, available at page 388 of the paper book tabulated as under :-

“Countrywise Sales / Export during the Financial Year ending 31.03.2006

1 GHANA 37,70,34,608.89 2 MAURITIUS 3,45,245.00 3 SIERRA LEONE 4,68,888.33 4 ANGOLA 4,92,45,541.70 5 MOZAMBIQUE 1,58,84,976.00 6 SUDAN 1,10,40,87,264.86 7 AFGHANISTAN 9,51,62,275.40 8 ALGERIA 4,54,696.00 9 BURKINA FASO 1,92,31,350.00 10 NIGERIA 12,78,465.00 11 ZAMBIA 91,32,373.00 TOTAL 1,67,23,25,684.18 LOCAL SALES 2,57,500.00 EXCHANGE FLUCTUATION ag. 42,82,881.07 EXPORTS TOTAL SALES 1,67,68,66,065.25 It is apparently clear that no export whatsoever has been made by the assessee company to Iraq and in these circumstances, the question of making payment of illegal gratification to Saddam Hussain and his close associates does not arise; (xvii) that when the assessee has made export to the countries other than Iraq “Volkar Committee Report” has no bearing whatsoever qua the assessee company pertaining to the year under assessment; (xviii) that when no export during the year under assessment has been made by the assessee to Iraq, the reliance by the AO on Volkar Committee Report which undisputedly contains the name of the assessee company, is highly misconceived and misplaced; (xix) that so far as disallowance of amount of Rs.10,28,957/- by the AO on account of commission expenses below Rs.5,00,000/- is concerned during appellate proceedings, the ld. CIT (A) has entertained additional evidence by calling remand report from the AO and came to the conclusion that disallowance cannot be made and we find no illegality or perversity in the findings returned by ld. CIT (A); (xx) that the observation made by the AO that no invoice below has been raised by the service agents which makes the business transaction doubtful is not tenable because when as per agreement, commission @ 4% or 10% in case of different agents, as the case may be, is already agreed upon between the parties on the goods exported and services have been rendered and export contracts stands executed, we do not find any reason to disallow the claim only because of the fact that invoices have not been raised by the service agents; (xxi) that even otherwise, when assessee company has categorically spread its income into 3 years then expenditure have also to be spread in 3 years and the disallowance cannot be made on the ground that the amount of agency commission was payable even during 2010; (xxii) that the contention of the ld. DR that no document / correspondence is there on record to prove that as to what services have been rendered by the service agents, is again not tenable for the reason that when intricate projects have been executed by the assessee company as per terms and conditions of the agreement, which could not have been completed without local assistance and only thereafter assessee company has earned turnover of Rs.167 crores with net profit of 17%, the ld. CIT (A) has rightly concluded that the services have been rendered for a genuine business transaction and payment for the agency services is allowable.