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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
Date of Hearing : 06.02.2017. Date of Pronouncement : 08.02.2017. ORDER Per V.V.Vasudevan, JM
Both these appeals filed by the Assessee are against common orders dated 23.12.2015 of CIT(A)-22, Kolkata relating to A.Y 2010-11 and 2011-12.
2. The common issue that arises for consideration in these two appeals is as to whether CIT(A) was justified in deleting the addition made by the AO by disallowing the claim of the assessee for deduction of commission paid to M/s. Atirath Commercial (P)Ltd. (ACPL) and M/s. IMACO Projektentwicklungs GmbH, Austria (IMACO). The issue arises for consideration under identical facts and circumstances for both the assessment years. We therefore deem it convenient to pass a common order.
The Assessee is a company incorporated in Germany. The Assessee is mainly engaged in activities of Rehabilitation of Sewer Lines by Lining/Coating Method within the Civil Engineering and Construction segment. The Company was awarded a contract by the Kolkata Municipal Corporation (KMC) for construction work of Up gradation
2 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 (Refurbishment & Rehabilitation) of Man Entry Sewer along Lenin Sarani and additional contract for construction work of Up gradation (Refurbishment & Rehabilitation) of Man Entry Sewer along Nimtola Ghat under Jawaharlal Nehru National urban Renewal Mission (JNNURM) of the Government of India in the Ministry of Urban Development. The Assessee commenced the performance and execution of the work under the said contracts during the fiscal year 2008-09 and fiscal year 2009-10 by establishing a Project Office at Kolkata.
For A.Y.2010-11 and 2011-12 the assessee while computing its income from business had claimed as a deduction expenditure on account of agency commission as follows : Assessment Atirath Commercial M/s. IMACO Total (Rs.) Year Pvt. Ltd. (Rs.) Projektentwicklungs Gmbh,Austria(Rs.) 2010-11 3,90,80,776/- 49,54,838/- 4,40,35,614/- 2011-12 3,23,56,510/- 36,66,875/- 3,60,23,385/-
The Assessee to substantiate its claim that the commission in question was paid for services rendered by the recipients filed the following documents :- Commission paid to ACPL:
1. 1. Agreement between the assessee and Atirath Commercial Pvt. Ltd. Dt. 21.09.2007 2. Bank statement evidencing payment to Atirath Commercial Pvt. Ltd.
3. Ledger of Atirath Commercial Pvt. Ltd in the books of assessee 4. Invoices raised by Atirath Commercial Pvt. Ltd. On the assessee” The nature of services provided by M/s. Atirath Commercial Pvt. Ltd. As follows :- a) Assistance and personal advice in all stages of the offer, the contract negotiations and in completion of all formalities prior to signature of the contract and during the performance of the work upto the final completion of the project. b) Assistance and personal advice in securing and arranging of the necessary import licences, visas, working and residence permits or any other local permit required for the personnel of Michel Bau 2 c) Providing all necessary assistance required to fulfill all governmental formalities during negotiations, at signature of contract, during the execution and up to the final completion of the project. d) To assist to follow up and to arrange with the KMC all contractual documents like Inspection reports, Acceptance Certificates, progress reports etc which are to be lawfully and contractually provided by KMC. e) To assist MB for setting up of a local office as may be required by Indian law and to arrange for all the formalities as may be required. All expenses for the same would be borne by MB. f) Assistance in securing the payment from KMC/finance bank, until receipt to the final payment and release of the corresponding bank guarantees. g) Assisting MB in having a smooth relationship with KMC.
As far as the payment made to IMACO is concerned the assessee provided the following documents to substantiate its claim for deduction:-
1. 1. Agreement between the assessee and IMACO Projecktentwicklungs GmbH dt. 28.01.2008 together with invoices raised by the agent on the assessee.
2. Ledger of IMACO and journal vouchers in the books of assessee 3. Evidence of payment made to IMACO” In the invoices raised by IMACO on the Assessee the description of the amount payable by the Assessee are described as “consultancy services” and is also described as payable based on the payments received by the assessee from KMC.
The AO examined Shri Aditya Marda, one of the directors of ACPL. The AO had also issued a questionnaire along with summons u/s 131 of the Income Tax Act, 1961 (Act) calling upon ACPL to produce several documents. In the examination of Shri Aditya Mard he confirmed the fact that he received commission from the assessee for services rendered and also explained the nature of services rendered by him. The AO however was of the view that ACPL did not have any specific power to represent or negotiate on behalf of the assessee. With reference to ACPL having rendered help to the 3
4 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 assessee from time to time when tenders are published till the end of the contract, the AO was of the view that there was no evidence of the Assessee having rendered any such at the tendering stage produced. Similarly the AO was also of the view that the services rendered by ACPL of doing survey of rates prevailing for similar contract in the country, was not substantiated by any documentary evidence. The AO also held that no evidence was filed to prove coordination by Shri Aditya Mard with KMC. The AO was also of the view that ACPL did not have sufficient work force to carry out the job liaison. The AO also went through various e-mail exchanged between ACPL and the assessee and was of the view that the assessee was providing only menial service of transferring information from KMC to the Assessee. The AO was also of the view that ACPL did not have any technical person on its roll and therefore it was impossible for them to provide any assistance on matters of tendering which requires technical expertise. The AO also referred to the inspectors report deputed by him to verify the credentials of ACPL in which the inspector had reported that the main premises of the assessee was hardly 100sq.ft and that on enquiry it transpired that the office remained open once in a few days and only for the purpose of collecting mails.
After making all the above observations, the AO finally concluded as follows :- “Considering the above facts and discussion, it is abundantly clear that Atirath possessed no special expertise and Michel Bau was, and is still, its first such client. The number of employees and the nature of minimal services rendered, all point to the inference that there was nothing that entitled Atirath to an agency commission of 8% of contract value. Thus the whole transaction is either sham or bogus or is undertaken to camouflage some such expenses which are not legally admissible being in contravention of the laws of the land. Hence the entire amount of agency commission paid to Atirath is being disallowed as not being genuine in nature and added back to the total income of the assessee. Total income as shown in return: 4,46,40,970/- Add:- Agency Commission as discussed above 4,40,35,614/- Total Taxable Income 8,86,76,584/-“
It can be seen from the above observations of the AO and from a reading of the entire order of AO the AO has not made any enquiries with regard to the payment of 4
5 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 commission to IMACO. Nevertheless the commission paid to IMACO has also been disallowed by the AO. As far as A.Y.2011-12 is concerned the facts are almost identical and for almost identical reasons the AO disallowed the claim of the assessee for deduction on account of commission expenses.
Before CIT(A) the assessee pointed out that in respect of identical payments made to ACPL the AO had disallowed commission expenses for A.Y.2009-10 for almost identical reasons as were given in the order of assessment for A.Y.2010-11 and 2011- 11. The CIT(A) in the appellate order for A.Y.2009-10 after considering all the evidence on record deleted the addition made by AO observing as follows :- “4.4. I have carefully considered the facts of the case. The appellant is a foreign company without any permanent establishment in India. It bid for and secured civil engineering contract from Kolkata Municipal Corporation. The agency commission paid to Atirath Commercial Pvt Ltd is stated to be for comprehensive local support such as administrative, liaison, technical, regulatory etc. in Kolkata. It has been stated that without such local support, it would have been very difficult for a foreign company to bid, secure and execute a complicated Govt. project especially because the appellant was entering in India for the first time for carrying out such business. Copy of agreement with Atirath Commercial Pvt. Ltd was also produced in this regard. The assessing officer was, however, of the view that Atirath Commercial Pvt. Ltd had not provided any real services to the appellant. In this regard, the appellant has produced a series of correspondence, mostly through e-mail, between Atirath Commercial Pvt. Ltd and itself. In his comments on the same, the assessing officer has however stated that these were mostly regarding stay arrangement for the executives, hotel booking etc. and do not point out any substantial work. After considering the facts and surrounding circumstances, I am inclined to agree with the appellant, that normally a foreign Company would need substantial local assistance to conduct the kind of business the Appellant has done. It is common knowledge that bidding for and execution of contract With a municipal body in India would require a lot of procedural and liaison work at local level. It is undisputed that the appellant is a foreign company without any establishment in India. Therefore, it is quite understandable that it required assistance from a local party in order to carry out its work and the appellant had to pay some charges for the same. The correspondence produced by the appellant shows that at least some services were being rendered by the Atirath Commercial Pvt. Ltd to the appellant. The assessing officer has also, albeit in an indirect way, accepted this, though he is of opinion that the services were minor ones which did not call for payment of such substantial amount. However, it is well settled that IT authorities are not supposed to sit over judgment regarding the quantum of payment made by an assessee in course of his business. A business man is generally presumed to be the best judge of his business affairs. As long as it is established, that some services were 5
6 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 being rendered and the payment was being made fully and responsively for purpose of business, the same is to be allowed as deduction. The ratio of the Supreme Court's decision in the case of Sassoon J. David & Co. P. Ltd. v CIT 118 ITR 261 cited by the appellant also supports this proposition. In fact, there is a plethora of judgments with ratio. that once the fact of the expenditure having been incurred for business purpose is established, the revenue can not assume the role of ascertaining how much is is the reasonable expenditure having regard to the circumstances of the case. Some such decisions are in the cases of Bengal Enamel Works Ltd. v. CIT 77 ITR 119 (SC), CIT v. Raman & Raman Ltd. 71 ITR 345 (Mad.), CIT v. Vijayalakshmi Mills Ltd.94 ITR 173 (Mad.), Subodhchandra Popatlal v. CIT 24 ITR 566 (Born.) etc. It is also not the case of the assessing officer, that the appellant and Atirath Commercial Pvt. Ltd are related in any manner or there is some non- business association or nexus between them. The assessing officer has, in his order, also observed that Atirath Commercial Pvt. Ltd had, after receiving agency commission from the appellant, debited huge payments, purpose for which has not been clarified. A doubt has been raised that such payments might be for such purpose which otherwise would have been an offence prohibited by law. First and foremost, such allegation is based on mere suspicion because no material has been brought on record to indicate, much less establish, that any payment for such purpose had actually been made by Atirath Commercial P'vt.. Ltd. It is just a guess work based on conjecture and surmise. As held in the decision in the case of CIT vs. Ram Narain Goel 224 ITR 180 (P&H) and various other cases, suspicion, however strong, cannot substitute for evidence for making addition. As held in the cases of Jindal Saw Pipes Ltd. (supra), Surya Foods & Agro Ltd. (supra), Dresser Valve India (P) Ltd. (supra) etc. cited by the appellant, merely because the order is from a govt./ semi- government body, it does not follow, that any payment to agent in connection to the same is against public policy. Secondly, even if this were indeed the case, that would attract disallowance in the hands of Atirath Commercial Pvt. Ltd which presumably made such payments. So far as the payment made by the appellant is concerned, there is no material, whatsoever, to suggest that payment to Atirath Commercial Pvt. Ltd was for some such nefarious purpose. SO' far as the appellant is concerned, it has paid agency commission to Atirath Commercial Pvt. Ltd. on the basis of a written agreement for the services rendered in relation to contract work carried out by it. The payment had been made through banking channel after deducting tax at source. Material has also been brought on record by the appellant to indicate that Atirath Commercial Pvt. Ltd had indeed rendered some services to it. On the other hand, no material, whatsoever, has been brought on record by the assessing officer to, suggest that to establish that payment was not for the purpose as stated by the' appellant. In my opinion, the appellant had discharged its onus to claim agency commission as business expenditure. Considering all these facts, I delete the disallowance of Rs.47,26,352/-.”
In A.Y.2009-10 there was no payment of commission to IMACO and the commission was paid only to ACPL. In A.Y.201-11 and 2011-12 the Assessee drew attention to the conclusions of CIT(A) in his for A.Y.2009-10. The CIT(A) was of the 7 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 view that the AO had not given any reasons for disallowing commission payment to IMACO and therefore the disallowance of commission paid to IMACO cannot be sustained. However in the remand report filed before CIT(A) the AO had sought to raise dispute regarding the genuineness of the agreement between the assessee and IMACO. The CIT(A) was of the view that the agreement between the assessee and IMACO which was an Austrian company had been made in Germany and was in german language which was duly translated into English language by a competent person and produced before him. He therefore was of the view that genuineness of the agreement cannot be disputed. Apart from the above the CIT(A) also held that the assessee and IMACO were unrelated parties and evidence of IMACO having rendered consultancy services was laid before AO but the same has not been rejected by the AO on any sound basis or cogent material. The CIT(A) therefore held that the disallowance of commission paid to IMACO cannot be sustained. In this regard CIT(A) also referred to the fact that tax had been deducted at source and paid to the credit of Govt. of India.
As far as commission paid to ACPL is concerned, the CIT(A) was of the view that the facts in A.Y.2010-11 and 2011-12 were identical to the facts as it prevailed in A.Y.2009-10. He also found that the reasons for disallowing commission was also identical in all the assessment years. In these circumstances, he was of the view that the conclusion drawn by the CIT(A) and while deciding the appeal of the assessee for A.Y.2009-10 were proper and acceptable. The CIT(A) held that the disallowance of commission paid to ACPL cannot also be sustained. Aggrieved by the aforesaid orders of CIT(A) the revenue has preferred the present appeals before the Tribunal.
The ld. DR filed an application praying for an adjournment. The ld. Counsel for the assessee brought to our notice that order of CIT(A) for A.Y.2009-10 has been accepted by the revenue. In this regard our attention was drawn to page 170 for 8 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 A.Y.2010-11 wherein the AO has recommended that order of CIT(A) had to be accepted. The following were the relevant recommendations of the AO :- “To The JDIT (Intl.Taxn.) range-2, Kolkata Aayakar Bhawan, Poorva, Kolkaya. Sir, Sub : Recommendation of the Range head on the scrutiny report of the AO in the Case of M/s. Michel Bau GmbH & Co. KG, in Appeal No.04/CIT(A)-VI/ADIT(IT) -2(1)/12-13/Kol dated 27.11.2013 in relation to A.Y.2009-10 re. Kindly refer to the above.
The Ld. DIT(IT &TP) , Kolkata suggested as follows : “Perused We have not been able to adduce adequate evidence. In view of this, gracefully, we accept order of CIT(A). No further appeal. 3.The file sent is returned herewith.”
It was submitted by him that though the principle of res judicata is not applicable in income tax proceedings, but the rule of consistency has to be followed. It was his submission that when the facts and circumstances that prevailed in 2009-10 as well as A.Y.2010-11 and 2011-12 are identical and when the reasons adduced for making the disallowance of commission were also identical, it would not be proper to allow the revenue to challenge the order of CIT(A) for A.Y.2010-11 and 2011-12. According to him since the issue is squarely covered by CIT(A) for A.Y.2009-10 the appeal should be taken up for hearing as a settled issue.
We have given a very careful consideration to the submissions of the ld.counsel for the assessee and are of the view that the issue now in so far as it relates to the payment of commission is settled in the case of the assessee by the revenue’s action in not filing the appeal on an identical issue arising on identical facts and circumstances in A.Y.2009-10. It is also pertinent to mention that the non filing of appeal for A.Y.2009-
9 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 10 was not due to any orders or instructions or directions issued u/s 119 of the Act r.w.s. 268A(1) of the Act. Therefore it is open to the assessee to contend in terms of section 268A (3) of the Act that the income tax authority has acquiesced in the decisions on the disputed issue by not filing an appeal. We therefore reject the request for adjournment and proceed to decide the appeal after hearing the submissions of the ld. Counsel for the assessee.
From the evidence on record and the order of CIT(A) it is clear that the assessee has established that the payment of commission was for services rendered by ACPL as well as IMACO. No contrary evidence has been brought on record by the AO to disallow the expenditure on account of commission. The observations of the AO in the order of assessment that the transactions is bogus or sham and was undertaken to camouflage some expenses which are not legally admissible being in contravention of the laws of the land, is purely a surmise. There is no evidence brought on record to come to this conclusion. On the other hand, the evidence on record as noticed by the AO in the order of assessment itself clearly goes to prove that the liaison activities were in fact rendered by ACPL. As rightly held by CIT(A) in his appellate order for A.Y.2009-10, the AO seems to have proceeded on the basis that the payment of commission was not commensurate with the services rendered by the recipients. The CIT(A) has rightly placed reliance on the decision of the Hon’ble Supreme court in the case of Sassoon J.David & Co.P.Ltd. vs CIT. (supra) to come to the conclusion that the revenue cannot assume the role of ascertaining how much the is reasonable expenditure having regard the circumstances of the case. The CIT(A) has also duly taken note of the fact that ACPL and the assessee were not related parties and that all the payment have been made through banking channels after due deduction of tax at source. In our view these conclusions are proper and applicable to A.Y.2010-11 and 2011-12 as well. We are also of the view that the rule of consistency is applicable and the revenue should not be allowed to take a diagonally opposite stand on issues arising in identical facts and 9
10 M/s.Michel Bau GmbH & Co.KG A.Yr.2010-11 & 2011-12 circumstances. We therefore find no grounds to interfere with the order of CIT(A). Consequently both the appeals of the revenue are dismissed.
In the result both the appeals by the revenue are dismissed. Order pronounced in the Court on 08.02.2017.