DCIT 1(1), INDORE vs. M/S ALPHA LABORITIES PVT. LTD., INDORE

अपील�य अ�धकरण, इ�दौर �यायपीठ, इ�दौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE

BEFORE MS. SUCHITRA R. KAMBLE, JUDICIAL MEMBER AND SHRI BHAGIRATH MAL BIYANI, ACCOUNTANT MEMBER Virtual Hearing

ITA No.547 & 548/Ind/2018 Assessment Years: 2009-10 & 2010-11 DCIT 1(1) M/s. Alpha Laborities Pvt. Indore Ltd. बनाम/ Indore Vs. (Appellant) (Respondent ) P.A. No.AACCA8437C Appellant by Shri Puneet Kumar, CIT-DR Revenue by Shri S.C. Padliya, AR Date of Hearing: 01.02.2022 Date of Pronouncement: 21.02.2022 आदेश / O R D E R PER BHAGIRATH MAL BIYANI, A.M:

These two captioned appeals have been filed by the Revenue against the appeal-orders dated 20.03.2018 and 27.03.2018 passed by Ld. CIT(A)-1, Indore for the Assessment Year 2009-10 and Assessment Year 2010-11 respectively, arising out of the respective assessment-orders passed by Ld. AO u/s 147 read with section 143(3) of Income-tax Act, 1961.

Alpa Laboratories Ltd.

“1. Whether on the facts and in the circumstances of the case and in the law, whether the Ld. CIT(A) is justified in deleting disallowance made by the AO on account of payment of commission of Rs. 44,34,403/- for obtaining supply order from government agencies without considering the fact that assessee had shown commission expenditure to only increase expenditure for reducing the actual profit of the assessee & it is not allowable as per Income-tax Act.”

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commission paid and explanation for the same asked by the concerned AO. The submission furnished on 11.08.2010 is reproduced below:-

“Your honour has required the assessee to submit the details of commission paid and the explanation for the same. As desired by your honour the assessee is submitting the details of the same for your kind perusal and consideration Marked as page no. 305-308. Further, the assessee offers his explanation for the same that that the assessee has appointed various consignment Agents to whom commission on their sales is required to be paid by the assessee, similarly the assessee use to make the supply to the various Government Department of Southern and Northern India for which the assessee has engaged the service of various persons for liasioning to be done with these Government Department to whom the commission on the supplies made to respective Department is to be paid by the assessee.”

4.6 It is worthwhile to mention that the case has been reopened for the payment made to various consignment agents for obtaining supply order from various government departments. It is settled law that no middle-men or agent is allowed and permitted to do liasioning for obtaining government contracts. In fact there is an established procedure of bidding by which the government contracts are obtained by the bidders. Since there is no requirement of middle men in the whole process of obtaining contract/making supplies to the government department the expenses incurred connot be claimed to be genuine hence disallowed.

4.7. Therefore, in view of above discussion and discussion made in order rejecting objection dated 04.07.2016 the so called commission payment of Rs.44,34,403/ is disallowed being non-genuine and added back to the income of the assessee. Penalty proceedings u/s 271(1)(c) is also hereby initiated on this issue for furnishing of inaccurate particular and concealment of income.” 8. The Ld. CIT(A) has deleted the disallowance vide Para No. 4.3.1 to 4.3.8 of his order, by observing as under:

“4.3.1 I have gone through the assessment order and also seen the submission of appellant. Appellant is into the business of supply of Patented Medicines to the Government Departments mainly to Medical Department. For this purpose services of commission agents are required in order to gather the quantity and type of Patented Medicines needed by various Government departments. After pursuing various Govt. agencies, the commission agent works for issuing of indents from such Govt. Offices quoting requirement of Patented Medicines. Such indents are then

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submitted by commission agents to the Government Department. Thereafter commission agents pursue the Government Department to get the tendering process done on such indent and there liasoning and persuasion is required for getting the purchase order for such Patented Medicines being placed in name of appellant. After getting purchase orders in favour of appellant, commission agents are required to ensure supply of Patented Medicines in time, getting them properly supplied to the Government Department, so that the payment is released by that deptt in favour of the appellant.

4.3.2 Hence the role Government contract is limited to job of calling tenders for every purchase order and finalisation of tender process by placing order in name of one of the parties. The commission agents are involved in pre-tender and post tender work. Considering the description given Government Departments and commission agents are working towards same goal of' placing Government work orders, but they have separate and independent areas of work which are not overlapping. The A.O’s view that in Government contracts there is no space for commission agents, is not a correct view and facts narrated above disprove such view.

4.3.3 There is no bar on commission agents in getting pre-tender and post tender work done in Government contracts. Their use of persuasive skills in garnering government orders, their involvement in getting all the conditions of contract properly complied and their help in getting the work order of such work signed are all parts of commercial expediency.

4.3.4 Payment to commission agents in Government contract is consistently held as an allowable expense by various courts namely Bharat Medical Stores (2009) 308 ITR. 373(P&H). Laxmi Engineering Industries (2008) 298 ITR 203 (Raj.). Nestor Pharmaceuticals (P) Ltd. (2000) 33 DTR (Del) etc. The only, prohibition is on gaining Government contracts through illegal gratification or commission payment to Government or its representation as that is against the public policy and that is disallowable under explanation to section 37(2) of IT Act. But in present case neither there is any allegation of such payment nor there is any proof of the same.

4.3.5 There is also no bar on payment of commission to relatives if services are rendered by them as held in Computer Graphics Ltd. (2006) 235 ITR 84(Mad) and Microtex S eparators Ltd. (2007) 293 ITR 451(Kar).

4.3.6 After the appellant filed details of services rendered by, commission agents, copy of their ledger accounts, copy of bills, details of cheque payments to such agents, the onus shifted on A.O to disprove such facts. But A.O. did not conduct any enquiries and no evidence was gathered to disprove the evidences produced by appellant. The commission paid to 5

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various representatives before the various Govt. Departments in connection with pre supplies information and post supplies services to all the Department of the Government who are the regular agents of the appellant company and who represents the Govt. departments as a representative of the appellant with the knowledge of the concern Govt. Department as appellant’s representative rather than a mediator in procuring the contract. On a specific query raised by the A.O. at the time of assessment proceedings the appellant explained the role of these representative and nature of services rendered by these representative as under:- (1) These persons are appointed as Consignees to whom goods are transferred on consignment basis, who sales the products of the appellant in the local market on behalf of the appellant. After making sale of the goods statement of sale are being sent to the appellant on the basis of which the appellant allows commission on predetermined rates. (2) Some persons are appointed to assist the appellant in connection with Export Sales. For which they arrange the Export Sales of the appellant’s Products by introducing the foreign buyers. The appellant after obtaining the Export orders manufactures the required goods and dispatches the same for Export authorizing the Agents to represent the appellant for Custom clearance. The Agents renders all the services in connection with the custom clearance at the Port and shipment of the goods to the designated Country. After receiving the payment form the foreign buyer the appellant use to compensate the Agents by paying commission for their liasioning in connection with Export. (3) The appellant participates in Tenders of the various customers spread over the Country. For participating in Tenders various information of the appellant is required by the Customers before permitting the assessee to participate in tender. For which a local authorized person is required to be deputed to represent the appellant with such Customers before obtaining the authorization letter to participate in tender in order to qualify the appellant for participation in various tenders as per the norms fixed by the respective customers for the prospective supplies. (4) To follow up with the customers after submitted the tenders by the appellant either online or physically as per the requirements of the respective customer. Then before scrutinizing the terms of tender as submitted by the appellant any further clarification or information is required are being submitted by the Agents on the basis of the

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Authorization issued by the appellant to the Customer in favor of the Agents. (5) After completing the formalities as per the directions of the Customers the terms and conditions are opened on a stipulated date and after discussions the order is confirmed by the customer. These orders are collected by the Agents and sent to the appellant. (6) The appellant after obtaining the orders manufactures the required goods and dispatches the same for delivery. Agents represent the appellant for various post tender services required to be rendered by the supplier. The Agents renders all the services in connection with these post supply services on behalf of the appellant. (7) After receiving the payment form the Respective Customer the appellant use to compensate the Agents by paying commission for their services in connection with such supply. Thus for all types of pre supply and post supply services are being rendered by these persons. The appellant has already submitted the sample copies of the authorization letters issued of various Customers for your kind perusal and consideration. 4.3.8 Considering all the factors mentioned above the claim of commission expenses of Rs. 44,34,403/- are held as expense. Therefore, the addition made by the AO amounting to Rs. 44,34,403/- is Deleted. Therefore, the appeal on this ground is Allowed.” 9. Before us, the Ld. D/R supported the assessment-order passed by Ld. AO. The Ld. D/R placed heavy emphasis on the observation of Ld. AO that the assessee has made supply to Government Departments and there is no middleman or agent required or permitted to act for such supply and therefore the assessee has claimed deduction without incurring any expenditure just to reduce taxable income. With this, the Ld. D/R submitted that the Ld. AO has rightly made disallowance which must be upheld.

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the assessee was making supply to various Government Departments of Southern and Northern India and the assessee needed manpower or agents for various activities associated with the supply and such activities have been elaborately noted by Ld. CIT(A) in Para No. 4.3.1 to 4.3.8 of his order. It is the submission of Ld. A/R that the assessee has paid commission to agents for various legitimate services rendered by them and not for procuring the supply-orders from Government Departments as perceived by Ld. AO. The Ld. A/R also made a categorical submission that the assessee has not incurred any kind of illegal expenditure or expenditure for ulterior objective. Finally, the Ld. A/R also drew our attention to the following decision given by this Bench of ITAT itself in ACIT 4(1), Indore Vs. M/s Agro Equipment Co. Pvt. Ltd, Indore, ITA No. 49/Ind/2013 order dated 05.01.2017 wherein the assessee made supply to Govt. departments and paid commission to agents, which the Ld. AO disallowed on the same reasoning as in the present appeal. On appeal, this Bench has allowed deduction of commission expenditure by holding as under:

“7. We have considered the submissions of both the sides. Looking to the facts and circumstances of the case, we find that in this case the Assessing Officer has disallowed the commission expenses including commission paid to MPLUN of Rs. 14,15,925/-, a Corporation of M.P. State Government enjoying the sole right to convert the intend of purchases. The assessee has shown the commission ranging from 7% to 9% above the commission to MPLUN. The expenditure is supported by the bills raised by the payee. The assessee has given PAN mentioning the bill. The commission has been paid for collecting the requirement from the Government offices located at Indore, Khargone, Mandla, Balaghat, Chhindwara and Dewas. The assessee is engaged in manufacture of sub- mersible pumps and during the year the assessee has supplied the product of the assessee to Public Health Engineering Department, Govt. of 8

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M.P. and many other Government departments. Therefore, the assessee has to identify various places, thereafter for getting the orders the assessee has to make installation of submersible pumps at the various sites identified by Public Health Department and liasoning charges have been paid by the commission account. Thus, the assessee has made payment for the services rendered. Moreover, the assessee has explained the nature of services rendered. Therefore, we are of the view that the learned CIT(A) is justified in allowing the claim. The same kind of commission was allowed in four earlier assessment years 2005-06 to 2008-09 and it was allowed in scrutiny assessments for the assessment years 2005-06 and 2006-07. Therefore, rule of consistency is followed by the learned CIT(A). We are of the view that the learned CIT(A) is justified. Moreover, the assessee has given sufficient evidence to prove the same. Therefore, we do not find any discrepancy in the order of the learned CIT(A).

This view is also supported by the decision of the Jurisdictional High Court as relied upon by the ld. Authorized Representative of the assessee, the Hon'ble High Court in the case of CIT vs. Pure Pharma, (2005) 144 Taxman 364 (MP) in para 3 & 4 held as under:- “3. A few facts material for deciding the said appeal, in short, may be mentioned as under : The Respondent/assessee company is engaged in manufacturing and sale of pharmaceutical formulations. During the previous financial year, the assessee had paid total commission of Rs. 13,35,336/-. Out of this, a sum of Rs. 10,24,290/- was paid as commission on sales made to the Government and its agencies and a sum of Rs. 3,11,046/- was paid as commission to non-Government purchases. Since, a doubt was raised with regard to the payments made to various parties as commission, enquiry was held. It was found that all the payments have been made as commission to various parties by demand drafts, wherein the identity of each of the agents was also established. It has also been found that the commission was paid exclusively for business purposes only.

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interfere with the findings of the ld. CIT(A). Accordingly, the appeal of the Revenue is dismissed. ” The Ld. A/R further submitted that the above decision of ITAT has already been confirmed by the Hon’ble Jurisdictional High Court of M.P., Bench at Indore, in ITA No. 94/2017 Judgement dated 13.04.2018. A copy of the judgement is also placed at Page No. 55 of the Paper-Book. Thus, it is the submission of Ld. A/R that the issue of allowability of commission payment in the business of Govt. supply is already held by Hon’ble Courts in favour of assessee. With these submissions, the Ld. A/R argued that the assessee has rightly claimed the deduction of commission expenditure on facts and in law and the Ld. AO has wrongly disallowed the same.

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disallowance made by Ld. AO. We do not find any infirmity in the order of Ld. CIT(A). Having regard to these facts and following our own decision in ACIT 4(1), Indore Vs. M/s Agro Equipment Co. Pvt. Ltd, Indore, ITA No. 49/Ind/2013 (supra), we hold that the CIT(A) has rightly deleted the disallowance made by Ld. AO. Hence we do not interfere with the order of Ld. CIT(A).

Order was pronounced as per Rule 34 of I.T.A.T. Rules 1963 on 21.02.2022.

Sd/- Sd/- (SUCHITRA R. KAMBLE) (BHAGIRATH MAL BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore; �दनांक Dated : 21/02/2022 Patel/Sr. PS Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file. By order Assistant Registrar, Indore 11