ITO 16(3)(4), MUMBAI vs. SUCHETA BAKUL PATKAR, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order,dtd.28.01.2013,of the CIT(A)-27,Mumbai,the Assessing Officer(AO)has filed the present appeal.Assessee,an individual,is engaged in the business of distribution and marketing of liquor products,filed her return of income on 24.09.2009,declaring income of Rs.9.05 lakhs.The AO completed the assessment,u/s.143 (3) of the Act,on 27.12.2011,determining her income at Rs.73.36 lakhs.

2.First ground of appeal is about deleting the disallowance made u/s. 40(a)(ia) of the Act,amounting Rs. 55.45 lakhs.During the assessment proceedings, the AO found that the assessee was proprietor of the business concern namely Advait Enterprises that was engaged in marketing of consumer and liquor products through its agents.While scrutinising the profit and loss account,he found that she had received commission of Rs. 93.80 lakhs, that she had paid commission amounting to Rs. 61. 82 lakhs to various parties/agents, that she did not deduct tax on such payments,that she had claimed that the payment of 2602/M/13 Smt.Sucheta Bakul commission agents included reimbursement expenses.The AO issued notices u/s. 133 (6) of the Act seeking information from the three parties/agents. After considering the submissions of those parties,he held that the assessee had paid to her agent commission.He made further enquiries and before him the assessee admitted that out of the total payment Rs.55.45 lakhs was towards reimbursement expenses incurred by the agents,that Rs.6.73 lakhs was towards payment of commission.She submitted a copy of the appointment letter which proved that she had entered into an agreement with her principle and it was agreed that travelling expenses would be reimbursed.The AO held that the assessee was functioning as a wholesaler/dealer,that agents were functioning as local agents,that the local agents were more in the nature of retail traders who had to incur expenses on travel,that she had not submitted any evidence to show that the amounts of commission paid included the amount reimbursement to the extent of Rs.55, 45, 054/-,that she did not furnish documents to prove that the expenses were incurred in connection with the sale of liquor and she had reimbursed the expenses incurred by the agents,that the reimbursement being incidental to the payment of agency commission would partake the character of commission payment only, that substance of the transaction was more important than the form,that the entire payment was to be treated as commission payment,that the payment of commission was subject to deduction of TDS u/s.194H of the Act,that she had failed to deduct tax at source,that the expenditure shown by her towards commission payment was liable to be disallowed u/s.40(a)(ia)of the Act.Accordingly,a sum of Rs. 61.82 lakhs,paid as commission,was added back to her income.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,she submitted that as per the clause 11 of the agreement with M/s. ABD Pvt.Ltd.(ABDPL),It was agreed upon between the assessee and the company that on submitting the monthly travel 2

2602/M/13 Smt.Sucheta Bakul bills of the field formation/agents employed by her travel expenses would be reimbursed to a maximum amount being Rs. 43.50 per case of liquor sold, that the agreement provided that reimbursement would not attract any service tax or would not be liable for TDS,that it was the primary responsibility of ABDPL to reimbursed the expenses to the sub-agents,that only for the sake of convenience the amounts were routed through the account of the assessee,that she had also entered into similar agreement with her agents according to which ABDPL was responsible for reimbursing expenses incurred by the agents, that the reimbursements were made against the actual bill for expenses submitted by the agents,that the impugned payment could not be considered as commission paid to the agents,that the parties,from whom enquiries were made by the AO, had confirmed in writing that payments received by them included reimbursement of travel and other expenses, that the AO had ignored the submission made by them,that the expenses reimbursed to the agents could not be treated as income in the hands of the assessee, that the payment would not partake the character of commission,that there was no liability on part of the assessee to deduct tax on such amount paid.A reference was made to the case of the husband of the assessee for the AY.2002-03,wherein the FAA, based on the similar facts,had held that amounts received on behalf of sub-agents did not constitute the turnover and after excluding such amounts the net commission received by the assessee being less than Rs. 40 lakhs the assessee was not required to get their accounts audited. After considering the submission of the assessee and the assessment order, the FAA held that she was appointed as promoter of the liquor brands manufactured by ABDPL and to be supplied to the Canteen Stores Department of the Armed Forces across the country.He referred to the agreement dated 01/04/2008 entered into by her with the company.After analysing the various clauses of the agreement, including clause 11, 12 and 13 of the agreement,he held that the assessee was required to appoint subagents to market the liquor products of its 3

2602/M/13 Smt.Sucheta Bakul principal, that accordingly she entered into agreements with various subagents- numbering 29,located and spread across the length and breadth of the country,that the agreements entered with the subagents provided for services to be rendered by them.The FAA analysed agreement between the assessee and her agents and held that it was mutually agreed that subagents would incur all necessary expenses for obtaining orders and that the expenses would be reimbursed on submission of monthly statement of accounts,that the principal was responsible for reimbursing the actual expenses incurred by the subagents through the assessee subject to a maximum of Rs.43.50 per case,that any expenditure in excess of the specified limit was to be reimbursed by the subagent,that it was also agreed that reimbursement would not attract any service tax nor would it be liable for deduction at source, that for rendering the services to her principle the assessee had received a commission of Rs.38.35 lakhs and reimbursement of expenses incurred by the subagents of Rs.55.45 lakhs from ABDPL for the year under consideration,that she had,in turn,paid a commission of Rs.6.27 lakhs to the subagents for the services rendered by them that further she passed on the amount of Rs.55.45 lakhs received towards the reimbursement of expenses incurred,that the amount of Rs.55.45 lakhs was paid by the principal towards reimbursement of expenses incurred by the agents of the assessee, that the said fact was confirmed by way of a letter dated 30/06/2009 issued by the Asst.VP of the sales division of ABDPL.The FAA further held that the AO had made enquiries by issuing notices u/s. 133 (6) of the Act, that in response to the notices three parties had admitted of receiving reimbursement from the assessee, that the AO had not taken the confirmation filed by the three parties into consideration while determining the tax library of the assessee,that the service agreements entered by the assessee with the principal and the subagents specifically mentioned that the services were to be rendered by the assessee with the help of its subagents was to be reimbursed by the principal, that the agreements clearly mentioned that reimbursement would 4

2602/M/13 Smt.Sucheta Bakul be made on submission of the monthly travel bills by the field force of the assessee,that an upper limit to the reimbursement was also provided in order to ensure that no access claim was made, that the agents appointed by the assessee were not in the nature of retail shop owners, as stated by the AO in his order,that the Canteen stores Depots of the Armed Forces were located across the India, that the assessee was required to promote the sales of the principal in all the outlets,that the said fact stood confirmed by the list of agents appointed by her,that she was expected to carry out lot of services as per the agreement entered with the principal, that rendering of such services required a lot of travel and other expenses, that the subagents were interned expected to carry out all the services that were agreed upon by the assessee with the principal, that monthly travel bills were furnished by the agents, that assessee would forward the bills to the principal as required by the agreement, that the reimbursement were made by the principal on being satisfied with such bills, that it was not the case of the AO that expenditure was inflated or doubtful, that the reimbursement of expenses received by the assessee from her principle and passed onto the subagents was a separate item of payment by itself and it could not be treated on par with the commission.Relying upon the certain case laws,he held that the reimbursement of expenses did not constitute income in the hands of the recipient,that such reimbursement was not liable for deduction of tax in the hands of the persons making the payment,that reimbursement of expenses could not be subject matter of disallow -ance u/s.40(a)(ia).He further mentioned that total payment received by the assessee during the year from its principal was of Rs. 93.80 lakhs, that out of it and amount of Rs.55.45 lakhs was towards reimbursement of expenses incurred by subagents and routed through the assessee’s books in the terms of the agreement, that in other words commission received by the assessee in the terms of the agreement was of Rs.38.35 lakhs, that the said amount was below the limit of Rs. 40 lakhs laid down u/s. 44AB of the Act. Finally,he held that the payment of Rs.55.45 lakhs, made towards 5

2602/M/13 Smt.Sucheta Bakul reimbursement of expenses to the subagents, was not liable for deduction of tax u/s.194H of the act capitalise that, that the payment of Rs.6.37 lakhs towards payment of commission was liable for deduction, that assessee had not deducted tax on the payment of Rs.6,37,363/-, that the AO had rightly disallowed the said amount u/s. 40(a)(ia). Thus,he deleted the disallowance of Rs. 55.45 lakhs and confirmed the disallowance of Rs.6.37 lakhs.

4.During the course of hearing before us the Departmental Representative(DR) stated that the payment in question was not reimbursement,that it was commissions payment,that the AO had rightly invoked the provisions of section 194H of the Act.The Authorised Representative(AR) referred to the pages 2, 5, 11 – 13 of the paper book. He relied upon the cases of Modicon Network(P) Ltd.(14 SOT 204), Willmar Schwabe India (P) Ltd.(95 TTJ 53), Nathpa Jhakri Joint Venture (37 SOT 160), Lazard India (P) Ltd. (41 SOT 72), Siemens Aktiongesellschaft (177 Taxman 81), M/s. J.B. Boda & Brothers Pvt. Ltd.(ITA/No.4252/Mum/2009 dt.21.05.2010 AY.2006-07),Karma Energy Ltd. (19 ITR (Trib.)552), Lehman Brothers & Advisors (P) Ltd.(157 ITD 1003) and Om India Trading Co.(P) Ltd.(58 taxmann.com325).

5.We have heard the rival submissions and perused the material before us. We find that the assessee had entered into an agreement with the principal on one hand and on the other hand agreements were signed with the subagents, that the subagents were to file monthly bills of travel expenses to the assessee, that she had to submit the bills to the principal, that the principal, on being satisfied about the genuineness of the expenditure, had to make a payment to the assessee, that assessee would be making the payments to the subagents as per the agreements entered into with them,that the AO had made some independent enquiries, that the subagents had admitted to have received the reimbursement, that the AO did not consider the said fact while passing the assessment 6