STELMET MARKETING,MUMBAI vs. ASST CIT 12(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order 30.09.2013 of CIT(A)-13,Mumbai the assessee has filed the present appeal. Assessee-firm,engaged in the business of indenting agency,filed its return of income on 30. 09. 2008,declaring income at Rs.74.20 lakhs.Subsequently,a revised return of income was filed on 27.03.2010 at total income of Rs.30.96 lakhs.The the Assessing Officer(AO)completed the assessment on 27.12.2010,u/s.143(3) of the Act,determining the income of the assessee at Rs. 3. 01Crores. 2.First effective ground of appeal is about sustaining partial disallowance of Rs.1.60 Cores u/s.40 A(2)of the Act.During the assessment proceedings,the AO found that out of total receipt of Rs. 5.92 Crores the assessee had claimed commission expenses of Rs.4.41 Crores,that it had paid Rs. 2.53 Crores to Remco Enterprises(RE),that RE was covered by the provisions of section 40A(2)(b)of the Act.He directed the assessee to prove the genuineness and the reasonableness of the payment made to RE along with the details of services rendered and market rate of services rendered.After considering the submissions of the assessee,the AO held that out of the three partners of RE two partners were common in the assessee-firm and RE,that it had made substantial payment to sister concern,that it had failed to provide cogent documentary evidence like third party confirmation to prove that RE had rendered services to it,that there was no evidence to prove outsourcing of work to RE,that submission of the assesseeand confirmation by sister concern alone was not sufficient to prove that services were rendered by RE and to justify the payment of huge commission by the assessee,that two of the partners of the assessee-firm were partners of RE,that if the assessee wanted to outsource some work it would have been accomplished by the common partners within the assessee-firm without paying any commission, that there was no legitimate business need to outsource the work to RE,that out of total commission of Rs.2.63 crores the assessee had credited Rs.1.03 crores to RE on 27.03.2008,and Rs.1.60 crores was credited on 31.03.2008,that the assessee deducted TDS in the month of October,2008 for the said payment,that additional amount of commission paid to RE was an afterthought,that RE had shown commission receipt of Rs.1.03crores for the year under appeal,

8599/11Stelmet-08-09 that out of the total commission received i.e.Rs.5.92 crores the assessee had paid Rs.2.63 crores to RE, that the commission paid to RE was 45% of the total receipts,that it had paid 30% commission to two of its partners,that payment of roughly half of its gross receipt to one party was not reasonable.Out of the total payment of Rs.2.63crores,the AO disallowed Rs.1.60 crores treating it excessive and unreasonable,invoing the provisions of section 40A(2)(b)of the Act. 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that the assessee transaction between the assessee and RE were genuine and bonafide,that both the entities were taxable in same tax bracket.It referred to the CBDT circular dated 06.07.1968 and stated that the provisions of section were meant to check evasion of tax,that reasonableness of the expenditure for the purpose of the business had to be judged from the point of the view of the businessman,that there was division of work between the RE and the assessee,that the division satisfied legitimate needs of the assessee,that the AO had partly allowed the exependiture,that there was no finding that the payment of commission was excessive or unreasonable,that commission paid to RE was allowed in earlier years by the AO while passing order u/s.143(3)of the Act. After considering the submission of the assessee and assessment order the FAA held that the AO had brought on record the facts to show that the assessee had RE had two common partners,that no third party confirmation by way of documentary evidence was produced,that that rendering of services by RE was not proved,that other two partners were paid commission @30%,that the AO had rightly allowed commission to RE at same rate.Finally,he upheld the order of the AO. 2.2.Before us,the Authorised Representative(AR) stated that RE was appointed outsourcing agents for the steel products,that RE was looking after clients of Belgium and France,that RE had basic infrastructure to develop sales plans,that it furnished names of the customers,that RE followed instructions given by the assessee and conducted negotiations with potential customers,that people from RE would visit the customers regularly,that the assessee was not able to perform all the contractual obligations of its principals it would outsource part of the job to RE,that the both the firms were paying tax at the same rate,that CBDT circular had laid down the condition for making disallowance u/s.40A(2)of the Act,that the assessee was covered by the circular.He relied upon the case of V S Dempo & Co.P.Ltd.(336ITR209),Hive Communication Pvt.Ltd.(ITA/306 of 2011 dtd.08.07. 2011 of Hon’ble Delhi High Court),Gujarat Gas Financial services(60taxmann.com.483) and Expo Mechanique P.Ltd.(ITA/243&3376/Del/2010 dtd.21. 04.2011).He also referred to the assessment order for the AY.2007-08.Departmental Represen - tative(DR) supported the order of the FAA and argued that there was no evidence of rendering of services by RE to the assessee,that AO had made part disallowance. 2.3.We have heard the rival submissions and perused the material before us.We find that the assessee had paid commission to RE-its sister concern,that the commission payment was 45% of its gross receipts,that AO had directed it to produce evidence of rendering of services by the assessee,that after considering the material available he held that the payment made to RE was not reasonable and was excessive,that invoking the provisions of section 40A(2b)of the Act he made part disallowance out of the commission payment. In our opinion,before proceedings further,it would be useful to consider the basics of section 40A (2)(b)of the Act and discuss some of the cases dealing with it. In the case of Keltron Component

8599/11Stelmet-08-09 Complex Ltd.(264 ITR 352)the Hon’ble Kerala High Court had occasion to deal with the provisions of section 40A(2)of the Act and had held that section 40A(2)(b) of the Act clearly provided for disallowance of amounts which the AO considered to be in excess of the requirements of the business.In the matter of Shatrunjay Diamonds(261ITR 258)the Hon’ble Bombay High Court has held that once purchases were made by the assessee from the persons falling under the category under section 40A(2)(b) of the Act,the burden was upon the assessee to establish that the price paid by it is not excessive or unreasonable. In cases falling under section 40A(2)(b) it is the duty of the assessee to prove and discharge its burden by leading proper evidence. From the above it can safely be said that as per the settled principles of taxation jurisprudence provisions of section 40A(2)(b) of the Act can be invoked in special circumstances where considering the market rate of goods/services,the AO arrives at a conclusion that the price charged by the assessee was at variance to the market rate.In the case before us, the AO has given a finding of fact,after considering the material that there was no evidence of rendering of services by the sister concern to the assessee and the payment of 45% of the gross receipt to RE was excessive and not reasonable.He had compared the commission paid to two of the partners.We find that while filing the appeal the assessee had claimed that RE was in the same tax bracket as of the assessee.Similar argument was advanced before us also. Before us,cases were relied upon wherein same principle has been supported.But,principles are general guidelines-unless and until basic fact are not produced and proved principles have no application. In the case before two of the partners of the assessee-firm are also partners of RE even than it had not produced the basic evidence of RE being taxed at the rate at which it is being assessed. Only the assessee knows the reasons for making a claim that was never supported by it even though it had filed a paper book.We find that in the case of Expo Mechanique P.Ltd.(supra)the Tribunal had in a tabular form compared the figures of payments made to the Directors and rates of taxes along with the taxes paid.In the matter of Gujarat Gas Financial services(supra)the Hon’ble Court has laid down the principle.As stated earlier,principle is not in dispute.But,in absence of facts backing the assertion made by the assessee,it is of no use.In the case of V S Dempo Co.P.Ltd. (supra)the court had held that a subsidiary company was not a related person within the meaning of section 40A(2)of the Act.It had further dealt with the facts of case.In our opinion,facts of the case under consideration are distinguishable.In the matter of Hive Communication Pvt.Ltd. (supra) the court had held that in bonafide cases the provisions of section 40A(2) should not be invoked.Nobody can have any difference of opinion about the said principle.But,bonafide had to be proved by the assessee.The AO had at the time of assessment proceedings had directed the assessee to prove the reasonableness of the payment made to RE along with the details of services rendered and market rate of services rendered.As we are not dealing with section 37 of the Act therefore would not deal with the issue of rendering of services.But,reasonableness of the payment made to a related person has to be proved by the assessee,as it had never disputed the fact the commission was paid to a person covered by the provisions of section 40A(2).We find that market rate of services rendered were also not furnished at any stage.Thus,the onus was never discharged by the assessee.The AO had a prima facie case and the FAA had compared the commission paid to the two of the partners as the benchmark and had restricted it to 30%.In our opinion,in absence of any other basis the working adopted by the FAA was justifiable and convincing.Therefore,considering the peculiar facts and circumstances of the case,we are of the opinion that the order of the FAA does not suffer from 8599/11Stelmet-08-09