ACIT, PONDICHERRY vs. CHEMFAB ALKALIS LTD., PONDICHERRY

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

Accordingly we hereby condone the delay of 111 days in filing the appeal by the Revenue and proceed to hear the case on merits.

3. The Revenue has raised several grounds in its appeal, however the crux of the issue is that the Ld.CIT(A) has erred in deleting the disallowance made by the Ld.AO towards sales commission of Rs.2,57,30,495/- (Rs.2,66,03,538-Rs.8,73,043) out of the total disallowance of Rs.2,66,03,538/-.

4. The assessee has raised several grounds in its cross objection however the cruxes of the issues are as follows:-

(i) The Revenue has filed the appeal before the Tribunal belatedly by 111 days without reasonable cause and therefore liable to be dismissed.

(ii) The Ld.CIT(A) has erred in partly confirming the disallowance of sales commission made by the Ld.AO.

Thereafter the case was selected for scrutiny and finally assessment was completed vide order dated 20.03.2013 wherein the Ld.AO made several additions amongst which one of the addition was towards disallowance of sales commission amounting to Rs.2,93,25,806/-.

6. During the course of scrutiny assessment it was observed by the Ld.AO that the assessee has claimed sum of Rs.2,93,25,806/- as expenditure incurred towards sales commission. The assessee company furnished the names and addresses of nine persons as its sales agent. Thereafter the Ld.AO issued notice to those sales agent U/s.133(6) of the Act.

Replies were received from some of the agents. From those replies, it was revealed that those sales agents were only proprietary concerns engaged in business only with the assessee company. Further the Ld.AO on examining the financial statements submitted by those commission agents opined that they are not capable of earning commission income as disclosed by them. Therefore the Ld.AO directed the assessee to produce the sales commission agents before him for further verification. However the assessee company could not produce many of the sales commission agents. Some of the sales commission agents also turned hostile. Few sales commission agents could only furnish their income tax returns for establishing the commission received by them. Some of the sales commission agents examined by the Ld.AO did not know the basic details of the produce sold by the assessee company.

The sales commission agents examined by the Ld.AO also did not know the details of the companies to whom they have claimed to have supplied the goods. The simple reply of those commission agents was that the entire work was carried out by their employees acting on their behalf. The sales commission agents were also disclosing in their financial statements substantial amount of commission disbursed to sub-agents thereby reducing their tax liability. The sales commission agents were also not able to furnish the details of their sub-agents. After further examining few sales commission agents the Ld.AO made the following observations: “1.The sales agents have not been chosen for their expertise in the field of sales or knowledge in the products of the company. They are selected since they are reliable persons, known already to the company/ directors.

2. The documents he witnesses carried relate only to previous year 2009-10. They are uniformly prepared to meet the requirements of accounting and income-tax. They are not supported by bills and vouchers. No witness has claimed to have similar documents for earlier years or even the current year.

The financial statements produced are not supported by the basic materials. It is to be noted that they are claimed to be regular tax payers.

5. The MOU's produced are only for the previous year 2009- 10. They are uniform and stereo type. The witnesses do not have any MOU's for earlier or even current year. The clauses of the MOU are the same but the execution of work is claimed to be different from witness to witness. But the rate of commission is on the sales and is uniform. Where Smt. Anuradha only carries out the transportation of goods Smt. Hemalatha executes sales. Both are paid the same rate of commission.

10. The witnesses have been proved not to have the basic knowledge about the products of CAL, their hazards, legal implications and the utility on the part of the buyer concerns.

11. Many of the witnesses do not have any business premises. They claim to operate from residences. But, this claim cannot hold water where the electricity tariff is paid for only domestic consumption. The very claim of running a business concern to execute services is not proved.

12. The assessee company has not produced any record to show that the sale agents have carried out certain services to them by way of documents, records, correspondences, minutes or the like. They do not exist anywhere other than in the books of account.

claimed to have served for such companies in particular. These denials show the actual picture of not operating through agents.”

7. Thereafter the Ld.AO arrived at the following conclusions by relying on various decisions of higher judiciary:-

(i) The assessee company has been in the business of sales of chemicals for over 25 years and therefore they do not need the services of novices to canvass orders for them.

(ii) The assessee company had made arrangements with certain individuals for disbursing their income in the form of sales commission and thereby claiming deduction.

(iii) Those individuals in turn passed on the sales commission to sub-dealers in order to reduce their tax liability.

(iv) The transactions are documented in meticulous manners which are all dubious.

(v) Therefore the sales commission payments are disproved to a reasonable and logical extent.

(vi) There is no necessity for the Revenue to prove the case against the assessee company beyond doubt unlike a criminal proceeding.

(vii) Reliance was placed in the case Sai Industries Limited vs.

ACIT reported in 70 taxmann.com 161, wherein the Delhi

Tribunal after examining the factual matrix on preponderance of probabilities held that the assessee was not the owner of the asset and therefore was justified in not allowing the assessee’s claim of depreciation.

(viii) Reliance was also placed in the case A. Rajendran vs.

ACIT reported in 127 ITD 361 and the decision of the case

CIT vs. P. Mohanakala reported in 291 ITR 278 wherein based on the various surrounding circumstances relied by the Ld.AO the explanation offered by the assessee for having received the gift which was upheld was rejected.

(ix) The basic evidence for carrying out services by the sales commission agents were absent in the case of the assessee.

(x) Since the companies / clients who have purchased goods from the assessee company have denied the existence of any commission agents between them, the test of preponderance of probabilities holds against the assessee.

(xi) From the above facts it was evident that the assessee company did not sell the produce through sales commission agents and the sales commission agents listed by the assessee are not genuine and therefore the claim of sales commission of Rs.2,95,25,806/- is not allowable as deduction.

8. The assessee carried the matter before the Ld.CIT(A).

The Ld.CIT(A) after examining the replies received from the Commission agents, statement recorded by the Ld.AO while examining the witnesses and cross examination and the findings stated in the assessment order arrived at the following conclusion:-

(i) The assessee company had established the identity of the commission agents.

(ii) The assessee company had also submitted the confirmation statements, income tax returns, bank statements, profit & loss account and balance sheet of the commission agents along with the details of the tax deducted at source on the payment made to the commission agents.

(iii) All the payments to the commission agents were made through account payee cheques after deducting tax at source which was prominently deposited in the Government exchequer.

(iv) All the commission agents were income tax payees with proper PAN numbers and have filed the income tax returns disclosing the commission receipts in their respective returns.

(v) It is an established fact that none of the sales commission agents are related to the assessee company.

(vi) Similar commissions were paid to all the commission agents in the earlier assessment years which were accepted by the department.

(vii) The assessee was maintaining the books of account following the mercantile system of accounting and accordingly was crediting the commission agents account for their entitled commission on account of sales made by them with respect to the assessee’s produce.

(viii) There were material evidences to establish that the commission agents were genuine by virtue of the sales invoices raised by the commission agents, contractual agreements for the work performed by them and cheque payments made to the commission agents for disbursement of commission.

(ix) The statement recorded by the Ld.AO establishes the fact that the commission agents confirmed the service rendered by them and the receipt of commission.

(x) Some of the commission agents had employed sub- agents in order to supplement their service of selling the product of the assessee and their details such as profit & loss account, bank statement, etc., were also furnished, which establishes the genuineness of the transactions.

(xi) All the commission agents had also affirmed in their sworn statements that they do not reveal their independent identity to the customers of the assessee and function only as the representative of the assessee company in the normal course of business.

(xii) The explanation of the assessee company that it is necessary to select reliable persons in order to maintain confidentiality for ensuring the orders are not diverted to competitors of the assessee company is acceptable because it is a prudent business practice in the trade.

(xiii) The explanation of the assessee company that the agents work under the supervision and guidance of the marketing department of the assessee company is also acceptable because such practice is generally followed in the trade.

8.1 The Ld.CIT(A) thereafter relied in the decision of the Delhi Bench of the Tribunal in the case ITO vs. Shakti Cables reported in 50 taxmann 329, wherein it was held that when the appellant was able to prove the identity of the commission agents, the details of services rendered by them, confirmation of work carried out by the commission agents and the proof of payment to commission agents by banking channels, then deduction cannot be denied. Based on the ratio laid down by the above mentioned case decided by the Delhi bench of the Tribunal and the above mentioned conclusions arrived at on examining the facts of the case and materials on record, the Ld.CIT(A) granted relief to the assessee to the extent of Rs.2,57,30,490/- and sustained the addition of Rs.8,73,043/- being the commission paid to Sri Agencies because the assessee had not obtained the confirmation statement from that commission agent and established the genuineness of the commission agent.

9. Before us the Ld.DR vehemently argued by reiterating the findings made by the Ld.AO in his order while as the Ld.AR argued in support of the order of the Ld.CIT(A) with respect to the relief granted by the Ld.CIT(A) for Rs.2,57,30,490/-, however strongly object for sustaining the addition on the commission paid of Rs.8,73,043/- by stating that the assessee had produced the confirmation statement of all the commission agents except only that of M/s. Sri Agencies which could be ignored. The Ld.AR further submitted that the details of the commission agent M/s. Sri Agencies were produced before the Ld.AO thus the onus has shifted on the Revenue. It was therefore pleaded that deduction may be also granted for the commission paid to M/s. Sri Agencies by way of cheque amounting to Rs.8,73,043/-.

(i) The Ld.AO had questioned the genuineness of the sales agents because they were not appointed on merits but on reliability and known acquaintance. We are of the view that appointing sales agents based on their reliability and acquaintance more than their merit is acceptable because in such case the scope of diverting the customers of the assessee company to their competitors will be remote which is very important in highly competitive business. Therefore the doubt in the mind of Ld.AO on this issue has no merit.

(ii) The Ld.AO had doubted the transaction because the documents were prepared uniformly to meet the requirements of accounting and income tax. We do not find any reason to doubt the documents when they are prepared uniformly to meet the requirements of accounting and income tax because the transaction with respect to sales commission with all the sales agents are identical.

Therefore the documents prepared for such transactions will obviously have to be similar. Further such document should also take in to account of the requirements of accounting and income tax matters which are mandatory.

(iii) The Ld.AO has observed that the commission agents do not have any books of accounts, rough books, diaries, noting, bills & vouchers to substantial their financial statements, however no such allegations are brought to our notice from their assessments made by the Revenue authorities.

(iv) The Ld.AO has further observed that the commission agents do not possess any evidence for carrying out services to their principal the assessee company such as details of orders secured, sales effected, dispatch of goods, delivery of goods, transport details, debit/credit notes, etc. It is pertinent to mention that most of the above mentioned documents are to be maintained by the assessee company and not by their commission agents.

(v) The Ld.AO even questions the uniform rate of commission paid for transportation of goods and execution of sales which are the mandate of the assessee company and cannot be questioned.

(vi) The Ld.AO has also questioned the necessity for appointing sub-agents. It is pertinent to mention that the Ld.AO cannot sit on judgment with respect to the commercial decisions of the assessee. Further the Ld.A.O has stated that no details of the transactions between the sales commission agent and their sub-agents were produced, however such details could have been called for from the commission agents/sub agents of the assessee U/s. 133(6) of the Act which is not attempted by the Ld.A.O.

(vii) The Ld.AO’s further grievance is that the commission agents have only disclosed minimum profit in their return of income. In such circumstances, we are of the opinion that the Revenue ought to have exposed the commission agents after calling for details from them U/s 133(6) of the Act and thereafter made a concrete finding on the issue before inflicting damage on the assessee.

(viii) It is not necessary for the commission agents to know personally the geographical position of their clients, infrastructure, products, purpose of purchase, name and telephone numbers of key person of their clients because it is only their representatives who deal with the clients on day to day basis.

(ix) It is also not mandatory for the commission agents to have complete knowledge about the products of their clients though it may help them in soliciting the clients.

(x) It is also not necessary to have separate business premises for the commission agents to perform their work.

(xi) The Ld.CIT(A) has made a categorical finding that commission agents have established to have carried out services to their principal contrary to the finding of Ld.AO.

10.1 Further, we are of the view that the conclusion arrived at by the Ld.AO do not have any merits because of the following reasons:-

1) The Ld.AO was of the view that since the assessee was in the business for over 25 years, they do not need services for canvassing sales order. Such opinion of the Ld.A.O does not carry much weight because when the assessee company is in the habit of engaging sales commission agents for effecting its sales, business prudence mandates not to bypass the sales commission agents in order to avoid diverting the clients of the assessee company to other competitive companies.

2) The allegation of the Ld.AO that the expenditure towards sales commission incurred by the assessee company was a deliberate attempt to reduce the profits of the assessee company does not appear to be correct because the assessee company was consistently employing the sales commission agents year after year and it was accepted by the Revenue.

3) Engaging sales commission agents is a normal practice in any business therefore the matrix of preponderance of probabilities relied by the Ld.AO does not carry much weight.

4) The very existence of the sales made by the assessee itself is an evidence for carrying out services by the sales commission agents. Further documentary evidence cannot be generated for proving the same because sales orders are generally obtained orally and executed in the normal course of the business.

10.2 Further the Ld.CIT(A) after deliberating the issue in detail has also arrived at a conclusion that the identity of the commission agents is established. The Ld.CIT(A) has also made a finding that most of the sales commission agents and sub- agents are assessees recognized by the Revenue and have complied their statutory obligations. The Ld.CIT(A) has further observed that the assessee had made cheque payments to all the sales commission agents after deducting tax at source and remitted the same in the Government treasury. It was also established before the Ld.CIT(A) that none of the commission agents are related to the assessee company and the assessee company is maintaining proper books of accounts following the mercantile system of accounting. The Ld.CIT(A) has also relied on the documentary evidences generated for establishing the genuineness of the sales commission agents. The Ld.CIT(A) has also taken into account with respect to the confirmation statement of the sales commission agent which was supplemented by their statement of accounts, bank statements, income tax returns etc.

Further the Ld.CIT(A) has rightly placed reliance in the decision of the Delhi Bench of the Tribunal in the case Shakti Cables supra wherein it was held that when the appellant is able to prove the identity of the commission agents, the details of the services rendered by them, confirmation of work carried out by the commission agents and the proof of payment to commission agents by banking channels then deduction cannot be denied. In this situation considering the facts of the case and the findings of the Ld.CIT(A), we do not find it necessary to interfere in his order on the issue. Therefore the Revenue’s appeal is devoid of merits.

With respect to the Cross objection of the assessee for belated filing of the appeal by the Revenue, we have condoned the delay herein above while hearing the appeal. Therefore this ground raised by the assessee is decided against it. Further the cross objection of the assessee with respect to the disallowance of sales commission of Rs.8,73,043/- being the amount paid to Sri Agencies which is sustained by the Ld. CIT(A), we do not find any merit in the argument advanced by the Ld.AR because even before us at this stage, neither the assessee nor the Ld.AR has produced any evidence to substantiate their claim. Therefore this issue is also decided against the assessee.

Order pronounced on the 20th November, 2017 at Chennai.