ACIT 18(1), MUMBAI vs. DEZENS PRODUCTS, MUMBAI

O R D E R Per B.R. Baskaran (AM) :-

The appeal filed by the Revenue is directed against the order dated 29.6.2012 passed by the learned CIT(A)-29, Mumbai and it relates to A.Y. 2007-08. The Revenue is aggrieved by the decision rendered by the learned CIT(A) on following issues :- (a) Disallowance of commission expenses : ` 48.94 lakhs (b) Disallowance of legal expenses u/s. 40(a)(ia) of the Act : ` 45.97 lakhs

2. We heard the parties and perused the record. The assessee is engaged in the business of advertising agency. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has paid commission to a concern named M/s Inorbit Advertising to the tune of ` 48.94 lakhs. The Assessing Officer noticed that above said concern belonged to one Mr. Sandeep Sitani in whose hands search was taken u/s. 132 of the Act. During the course of search proceedings, Mr. Sandeep Sitani had admitted that he is not doing any real business in his concerns and was providing only accommodation entries. Accordingly, the Assessing Officer took the view that commission expenditure claimed to have been paid to Inorbit Advertising is bogus and accordingly disallowed the same.

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3. Before the learned CIT(A), the assessee contended that it has discharged its onus to prove the genuineness of the payment of commission by furnishing all the required details. The assessee further submitted that Inorbit Advertising has procured business to the tune of ` 290.70 lakhs and the assessee has paid commission @ 15% as per trade practice. It was submitted that the assessee has collected service tax on such commission and has also deducted tax at source. It was further argued that Inorbit Advertising was not operating from the address belonging to Mr. Sandeep Sitani, from where he was operating several concerns. In the statement given by Mr. Sandeep Sitani, there was no specific allegation against the assessee. The assessee has also submitted before the learned CIT(A) that it had asked for cross examining Mr. Sandeep Sitani, since the Assessing Officer had placed his reliance on the statement given by him, but the Assessing Officer did not provide for the same.

4. The learned CIT(A) during the course of appellate proceedings directed the Assessing Officer to allow the assessee to cross examine the director of Inorbit Advertising. The Assessing Officer replied that the assessee was provided opportunity to cross examine on a particular date, but on that date Mr. Sandeep Sitani did not appear and hence opportunity for cross examination could not be given. The learned CIT(A), after considering the facts and circumstances of the case, deleted the addition.

5. Learned Departmental Representative submitted that the assessee has failed to discharge the onus placed upon him to prove the genuineness of the expenditure. He submitted that the director of Inorbit Advertising has categorically admitted before the tax authorities that he has provided only accommodation entries in the form of commission expenditure. He further submitted that Inorbit Advertising is also engaged in the same line of business of advertising and hence it defies the logic that the assessee could have obtained business from its competitor. He further submitted that the assessee failed to explain the nature of service provided by Inorbit Advertising. Learned Departmental Representative also submitted that the Assessing Officer had 3 M/s. Dezens Products issued notice u/s. 143(2) and 142(1) of the Act way back in 2008, but the assessee sought for the cross examination only in the month of December 2009 i.e. at the fag end of the assessment proceedings. Learned Departmental Representative further submitted that the Coordinate Bench has considered an identical issue in the case of R.W. Promotions Pvt. Ltd. Vs. ACIT (2013) 35 CCH 0491 (Mum) and has confirmed the disallowance of commission expenditure made to very same party, viz., M/s Inorbit Advertising.

6. On the contrary, learned AR submitted that the assessee in the case of R.W. Promotions Pvt. Ltd. (supra) has failed to discharge the onus placed upon it to prove the genuineness of the expenditure and hence disallowance was confirmed by the Coordinate Bench on this legal ground. Learned AR submitted that the assessee had set up sign boards at various places in Mumbai and the parties were introduced for those sign boards by M/s Inorbit Advertising. He submitted that the assessee has given all the details to the AO in order to prove the genuineness of the commission expenditure. The assessee had generated income of ` 290.70 lakhs from out of the sign boards and the assessee paid commission to M/s Inorbit @ 15%. He submitted that the assessee has collected service tax from Inorbit Advertising and has also deducted tax at source from the commission payment. Learned AR further submitted that the assessee has furnished copies of bills raised upon the assessee by Inorbit Advertising and also furnished details of payment made to them, copy of TDS certificates. Learned AR further submitted that Inorbit Advertising has filed return of income for the year under consideration duly disclosing payments received from the assessee and has also claimed TDS deducted by the assessee. The learned AR further submitted that the Assessing Officer has placed reliance on the general statement given by Mr. Sandeep Sitani. He submitted that Mr. Sandeep Sitani did not specifically implicate the assessee. He submitted that the Assessing Officer has not brought any material on the record to disprove the claim of commission payment. Further submitted that the assessee had asked for the opportunity of cross examination, but the same was not given by the Assessing Officer during

4 M/s. Dezens Products the course of assessment proceedings. During the course of appellate proceedings, the learned CIT(A) directed the Assessing Officer to afford opportunity to cross examine but the Assessing Officer could not provide the same as Mr. Sandeep Sitani failed to appear before him on the appointed date. Accordingly, the learned AR submitted that the assessee has discharged onus placed upon it to prove the genuineness of the commission payment and hence the learned CIT(A) was justified in deleting the disallowance made by the Assessing Officer.

7. Having heard the rival submissions, we are of the view that the order passed by the learned CIT(A) on this issue does not call for any interference. For the sake of convenience, we extract below the operative portion of the order passed by the learned CIT(A) on this issue.

“3.8 I have considered the facts of the case the arguments of the authorised representative and the reasoning of the Assessing Officer. However I find that on the given facts the addition made by the Assessing Officer cannot be sustained for the following reasons.

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9. On the other hand the appellant has submitted all possible evidence in support of its claim. The appellant has filed copy of confirmation from Inorbit Advertising certifying the receipt of commission. There is payment through bank, to an assessable entity, deduction of tax, reflection of the amount by the recipient in its return of income, confirmation by the party, absence of any direct incriminating material regarding bogus nature of the bill, evidence of services rendered, inability of the Assessing Officer to allow cross examination, and finally reasonableness of the payment of commission against business procured.

Hence on the basis of given facts the disallowance made by the Assessing Officer cannot be sustained. As there is no other adverse evidence the disallowance of Rs 48, 94,225 is deleted.”

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8. We noticed that the assessee has furnished all the details relating to the claim of commission expenditure, viz., bills raised by Inorbit Advertising, details of payment made to them, copy of TDS certificates, copy of return of income filed by Inorbit Advertising, details of advertising orders procured by Inorbit Advertising and details of sign boards against which order was procured by Inorbit Advertising. We noticed that the Assessing Officer did not find fault with the documents filed by the assessee. Hence we are of the view that it cannot said that the assessee has failed to prove the genuineness of the commission expenditure. On the contrary, Assessing Officer has placed on the general statement given by Mr. Sandeep Sitani. We also noticed that Mr. Sandeep Sitani did not implicate the assessee specifically in his statement. Further, the cross examination asked for by the assessee could not be provided by the AO. We noticed that the learned CIT(A) has addressed all the points raised by the Assessing Officer while disallowing this expenditure. No other material was placed before us by the Revenue to contradict the findings given by the learned CIT(A). The decision relied upon by learned Departmental Representative namely R.W. Promoters Pvt. Ltd. (supra)have been rendered on the basis of facts available in that case and hence it is distinguishable. Accordingly, we are of the view that the order passed by the learned CIT(A) on this issue does not call for any interference.

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“5.3 I have carefully considered the facts of the case, arguments of the Assessing Officer and the written submissions of the Authorised Representative of the appellant. The disallowance made by the Assessing Officer cannot be sustained for the following reasons.

(i) The professional services by M/s Cordato Partners have been rendered in Australia. The entity does not have a permanent establishment in India. India and Australia have Double Taxation Avoidance Agreement between themselves. According to Article XIV of DTAA between India and Australia the professional fee paid will not taxable in India.

(ii) The decision relied upon by the Assessing Officer i.e, SRK Consulting Engineers 230 ITR 206(AAR) is not applicable to the case of the appellant. In the cited case the services of SRK Consulting Engineers were utilised in India by TISCO in a business or profession carried on by the payer in India for the purpose of earning any income from a source in India. However in the present case the services of the non-resident entity are utilized outside India for fighting a legal battle.

(iii) The Assessing Officer has relied upon CIT Vs. Samsung Electronics (Karnataka) where it was held that only way to escape the liability by the payer was to make an application to the Assessing Officer under section 195(2) for non-deduction of tax or for deduction at a lower rate. However this decision has been overruled by the Supreme Court in the case of GE (India) Technology Centre 327 ITR 456 (SC). It has been held that where a person responsible for deduction is fairly certain then, he can make his own determination as to whether tax is deductible at source. Hence Samsung Electronics is no more good law.

(iv) Similar issues have been considered recently by Kolkata ITAT in the case of Andaman Sea Food Pvt. Ltd. in ITA

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No.1412/Kol/2011 dated 19.6.2012. In this case Tribunal examined the issue that consultancy fees paid to a Singapore based foreign company were not chargeable to tax in India. The ITAT also examined applicability of section 40(a)(ia) for failure to deduct tax u/s.195. Under similar circumstances the Tribunal held that when recipient of income does not have primary tax liability in respect of an income the payer cannot have vicarious tax withholding liability either. In view of the above the payment of Rs.45,97,135/- made to Coredato Partners cannot be disallowed under 40(a)a). The disallowance is deleted.”

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Order has been pronounced in the Court on 05.10.2017.