Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs Mohan Exports Pvt. Ltd., New Delhi on 22 March, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'E' : NEW DELHI)
BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER
and
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No.503/Del./2011
(ASSESSMENT YEAR : 2006-07)
ACIT, Circle 5 (1), vs. M/s. Mohan Exports Pvt. Ltd.,
New Delhi. 7, Mohan House,
Zamrudpur Community Centre,
Kailash Colony Extension,
New Delhi.
(PAN : AAACM4168J)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri V.K. Aggarwal, AR
REVENUE BY : Shri Rajesh Kumar, Senior DR
Date of Hearing : 30.01.2017
Date of Order : 22.03.2017
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Assistant Commissioner of Income-tax, Circle 5 (1), New Delhi (hereinafter referred to as 'the Revenue') by filing the aforesaid appeal sought to set aside the order dated 19.11.2010 passed by the Commissioner of Income-tax (Appeals)- VIII, New Delhi qua the assessment year 2006-07 on the grounds inter alia that :-
2 ITA No.503/Del./2011
"1. The order of the learned CIT (Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstance of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs.7,33,09,398/- made by the A.O. by disallowing the commission.
2.1 The Ld. CIT (A) ignored the finding recorded by the AO and the fact that the assessee did not file the necessary evidence / documents to substantiate its claim during the course of assessment proceedings."
2. Briefly stated facts of this case are : assessee company is into the export business and during 1980's, it started international merchant trading by procuring export order from foreign buyers generally foreign sovereign governments and departments- undertaking and export the same to them. The company has supplied plant and machinery, agriculture equipments and consumables. During scrutiny proceedings, certain claims made by the assessee in the return of income could not be substantiated i.e. commission paid to the service agents.
3. During the year under assessment, the assessee claimed to have paid an amount of Rs.7,33,09,398.93 to different service agents as commission. To verify the genuineness of the services rendered, assessee was called upon to produce the copy of agreement entered with the service agents as well as invoice raised by the service agents with the details of the nature of transaction 3 ITA No.503/Del./2011 entered between them. Assessee furnished statement showing the FOB value of the exports to the parties where agency commission is payable along with statement of commission showing commission paid/payable during AY 2006-07 in respect of the exports made and the outstanding commission payable continued to be shown in the liability of the books of account. Finding the explanation furnished by the assessee not tenable, AO came to the conclusion that this explanation is not acceptable because such commission cannot remain unpaid even after lapse of three years and as such, genuineness of the business transaction and payment made to the service agents is not proved and as such, amount of Rs.7,33,09,398.93 is added back to the total income of the assessee.
4. Assessee carried the matter before the ld. CIT (A) by filing the appeal who has deleted the addition of Rs.7,33,09,398/- made by the AO. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
5. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
4 ITA No.503/Del./2011
6. Undisputed facts of this case are inter alia that the assessee being a merchant exporter earned export turnover of Rs.167.68 crores with taxable profit of Rs.28.56 crores having net profit rate of 17% of the export turnover for the year under assessment i.e. 2006-07; that during the earlier Financial Years, the assessee has paid commission to the agents for the services rendered by them to carry out execution of export which is tabulated as under :-
Financial Turnover Agency Commission Year Cr/Rs Lac/Rs 2000-01 69.29 119.41 2001-02 60.16 154.37 2002-03 26.67 269.48 2003-04 55.47 303.99 2004-05 78.39 422.75 2005-06 167.68 708.59 that no prior approval of the Reserve Bank of India is required for payment of agency commission and these powers are being exercised by bank designated as authorized dealers; that out of the total commission of Rs.7,08,59,575/- debited by the assessee to the P&L account, the position of payment is tabulated as under :-
"(a) Out of the total commission of Rs.7,08,59,575/-, the position of payments is as under :
Commission paid during the year Rs.3,37,84,634 Commission paid after 31.03.06 to the date of assessment Rs.2,78,86,183 Total paid Rs.6,16,70,817 Outstanding as on date Rs. 91,88,758 Total Commission Rs.7,08,59,575 5 ITA No.503/Del./2011 that the assessee has debited a sum of Rs.7,33,09,398/- in the profit & loss account as commission paid to the different services agents, details thereof is as under :-
Name of the commission agent Amount ESBJ Trading & Invt., Singapore 6425066.97 Kwame Okyere Akosa, Ghana 5163118 Solis Intertrade Inc 2449824 Trans Engg. Co., Sudan 37489183.96 TEODA Engg. Ghana 17055087 Mamoom Gamal Sudan 1248338 Soils Inter Trade Inc. B. Faso 2449824 Amount paid below 5 lacs 1028957 Total 733093398 that the services agents to whom the commission was allegedly paid have not raised any invoice for the services rendered by them; that in the Volkar Committee Report in connection with UN Oil- for-Food Programme for Iraq, the name of M/s. Mohan Exports India Limited, the assessee in this case, figured as a contractor for supply of humanitarian goods to Iraq; that as per agreement, the export proceeds were to be realized in 36 monthly installments starting after 12 months form the mean date of ship of the goods, meaning thereby the realization of installments would become effective in May 2007 onwards; that the assessee brought on record 6 ITA No.503/Del./2011 statement showing FOB value of exports to the parties where agency commission is payable along with statement showing commission paid / payable during AY 2006-07 qua the exports made and the outstanding commission payable continues to be shown as the liability in the books of account; that assessee has not made any export during the year under assessment directly or indirectly to Iraq nor received payment from Iraq; that the exports were made by the assessee to the countries other than Iraq; that by way of additional evidence, the assessee has brought on record details of commission payment below Rs.5,00,000/- as per order passed by CIT (A) after procuring the remand report from the AO; that during the proceedings of AYs 2003-04, 2004-05 and 2005-06.
7. Ld. DR for the Revenue challenging the impugned order contended inter alia that the assessee has failed to substantiate the genuine business transactions and the expenditure incurred for procuring services of the service agents; that the assessee has only filed copy of agreement which does not suggest any specific reference to any specific services rendered by the agent; that assessee has failed to bring on record any invoice raised by the assessee to prove the genuineness of the services rendered to it.
8. However, on the other hand, ld. AR for the assessee relied upon the order passed by the CIT (A).
7 ITA No.503/Del./2011
9. Keeping in view the aforesaid undisputed facts brought on record by the parties to the appeal, arguments addressed and order passed by the lower authorities, we are of the considered view that the impugned order passed by the ld. CIT (A) does not suffer from any illegality or perversity for the reasons inter alia :-
(i) that the first ground for disallowance of the claim of payment of commission made by the assessee company to the service agent by AO is that, "part of the commission is still payable", is not tenable for the reasons that AO has lost sight of the fact that as per terms and conditions of the agreement entered into between assessee and the agent commission is to be paid after receipt of payment by the assessee for the goods exported"
(ii) that moreover the provision of commission expenses payable were to be made under the mercantile system of accounting as the assessee had accounted for export sales and corresponding expenditure had to be provided to match cost with revenue in order to arrive at the actual commercial profit;8 ITA No.503/Del./2011
(iii) that even otherwise, the export proceeds were to be realized in 36 monthly installments starting after 12 months from the mean date of shipment i.e. May 2007 onwards and in these circumstances, the part of the commission payment had to remain payable at the time of assessment proceedings or thereafter;
(iv) that as per RBI Guidelines, the payment of commission has to be allowed by the designated bank either way of remittance or by deduction from invoice value on the application of the exporter. This condition laid down by RBI is to check the genuineness of the business transactions and payment made to the service agent;
(v) that the second ground for disallowing the claim of payment of commission to the service agent that the agreement does not suggest any specific reference to any specific service rendered to the agent to the assessee company is, "also not tenable for the reasons inter alia that in each agreement, the services to be rendered by the commission agents are extensively elaborated, which are as under :-9 ITA No.503/Del./2011
Sl. Name & Address of Clause Services to be No. Agents No. rendered 1 ESBJ Trading & 1 To introduce the Investments Pvt. Ltd., assessee to buying 42 B Home Road, organizations in Singapore 209066 Ghana, Angola, Nigeria (Agreement dt. 18.06.99 & Congo and assist in Renewed on 02.06.2003) promoting business 5 To do effective liaison to obtain enquires from various buyers 6 To follow up all connected matters with buyers and provide continuous support 7 To ensure timely payments 2 E.I. Capital Ltd. / 3 To procure or cause to Kwame Okyere Akosa procure export orders P.O. Box 1082, Accra from Ghana Cocoa Ghana. Board for supply of (Agreement dt. 25.11.04) tarpaulins, ensure establishment of satisfactory letter of credit and effective liaison with Ghana Cocoa Board till orders have been completely executed.
3 Trans Engineering Co. In respect of bid for
Horia Street 220 KV Khartoum Ring
Taha Babiker Building, Main Project to
Kartoum National Electricity
P.O. Box 11037 Corp., Sudan
Sudan
(Agreement dt. 16.09.03 1 Assistance in building
and finalizing the
contract
1.2 Maintain close and
constant Liaison with
NEC
1.3 Advise the assessee of
important
developments
1.4 Help to finalise the
offer and sign the
contract
1.5 Procure documents
requested by assessee
and courier them
10 ITA No.503/Del./2011
2.1 After signing of
contract arrange for all
approvals in Sudan
2.2 Get approval of all
drawings.
2.3 Pursue establishment
of L/c. Advance
payment & other
Financial matters
2.4 Pursue amendments
to contracts
2.5 Arrange for getting
technical details /
drawings samples
approved by NEC
2.6 Keep the assessee
informed of all
relevant developments
2.7 Organise and plan the
visit of NEC Technical
personnel to India for
discussion
2.8 Visit India for
discussion
2.9 Coordinate clearance
of goods at the Port
and their
transportation to site.
2.10 Arrange for receipts of
goods by NEC and
formalities for
insurance / claim if
any.
2.11 Pursue with NEC for
release and
cancellation of
performance and
advance guarantees
2.12 To arrange for local
services like Visa, Govt.
Clearances, formalities
in Banks etc.
2.13 Assist site office like
arranging local
transport,
accommodation etc.
2.14 Co-ordination with
local sub-contractors
2.15 Provide services during
warranty period etc.
2.16 Any other assistance
11 ITA No.503/Del./2011
including after sales
services
4 Teoda Ltd. In respect of Ministry
P.O. Box ct 4884 of Energy, Ghana
Cantonments, Accra
Ghana.
(Agreement dt. 02.03.04) 1 Assistance in bidding
for and finalizing
contract
1.1 Maintain close and
constant liaison
1.2 Advise assessee of
important
developments
1.3 Help to finalise the
offer and sign
contracts
1.4 Procure documents &
Couriers them
1.5 Obtain technical
information and
Clarifications as asked
by the assessee
2.1 Arrange for approvals
in Ghana
2.2 Follow up for approval
of all drawings and
documents
2.3 Pursue establishment
of L/c, Advance
payments etc.
2.4 Pursue amendments
to contracts
2.5 Arrange for getting
technical details /
drawings and samples
approved by MOE.
2.6 To keep the assessee
informed of
developments
2.7 Organise and plan visit
of MOE Technical
personnel to India
2.8 To visit India for
discussion
2.9 Coordinate clearance
of goods at the Port
and their
transportation to
warehouse
2.10 Arrange for receipt of
12 ITA No.503/Del./2011
goods and other
formalities
2.11 Purse release and
cancellation of
performance and
advance guarantees
2.12 Arrange for local
services like Visa, Govt.
Clearances etc.
2.13 Assist in arranging
local Transport,
accommodation, etc.
2.14 Co-ordination with
local Sub-contractors
2.15 Provide services during
warranty period
2.16 Assistance in executing
contract and after
sales services.
5 Mamoun Gamal For Ministry of Science
M/s. Medicana for and Technology
Investment and Services,
P.O. Box 1443
Khartoum North, Sudan
(Agreement dt. 02.03.04)
( a) Maintain close and
2 constant liaison
(b) Advise assessee of all
new tenders and
business opportunities
(c) Procure tender
documents and courier
them
(d) Obtain technical
information &
clarification, to receive
bids form assessee and
submit than
(e) Follow up of offers
submitted by assessee
(f) Pursue establishment
of L/c and
amendments
(g) Pursue amendments
to contracts
(h) Arrange to get details /
drawings and samples
of items
(i) Advise the assessee of
all relevant
developments
13 ITA No.503/Del./2011
6 Solis Inter Trade Inc. 1&4 Promote and sell the
01 B.P 6972 products exported by
Ouagadougou 01, Burkina assessee to Govt.
Faso Bodies or Private
(Agreement dt. 27.06.05) Companies.
5 To do effective liaison
to obtain enquires
from Govt. / Pvt. Co.
and communicate the
details to assessee
6 To lodge offers
approved by the Co.
7 To follow up all
connected matter and
provide continuous
information regarding
such offer.
8 To secure timely
payments
(vi) that the statement furnished by the assessee company shows that the FOB value of export to the parties where agency commission is payable along with updated statement of commission agent/payable during AY 2006-07 in respect of the export made and as such, the outstanding commission payable continues to be shown as liable in the books of account which have never been rejected by the AO.
In these circumstances, genuineness of the business transaction and payment made to the service agent cannot be disputed;
(vii) that the observation made by the AO that keeping the commission unpaid even after a lapse of 3 years is not 14 ITA No.503/Del./2011 acceptable to the prudent person is also not sustainable when this fact is examined in the light of the fact that export proceeds were to be realized in 36 installments starting from May 2007 onwards and mercantile system of accounting is being adopted by the assessee company. When the assessee company is to get the export proceeds up to 2010 the spreading of payment of agency commission up to 2010 would be the natural consequence;
(viii) that agency agreement entered into between assessee company and Trans Engineering Company of Sudan, available at pages 68 to 73 of the paper book, is categoric enough to elaborate the services to be rendered by the service agent to the assessee company in order to execute the export order;
(ix) that ld. CIT (A) has discussed the issue threadbare as to the services rendered by the service agent to the assessee company without which the service order would not have been completed / executed;
(x) that the assessee company has been making payment of such agency commission in the preceding years right form FY 2000-01 to FY 2004-05, as is tabulated 15 ITA No.503/Del./2011 in para 6, which have been allowed by the Revenue and the agency commission paid during the year is commensurate to the turnover of the year under assessment when compared with the preceding years;
(xi) that undisputedly, there is no change in the agreement entered into between assessee company and service agents and since, in the earlier years, such agency commission has been allowed by the Revenue, the rule of consistency is also to be applied;
(xii) that since the assessee company is executing various projects overseas and not into trading, the same cannot be executed except with the constant services to be provided by the local agents by making liaison with the overseas Government Departments / Agencies / undertakings;
(xiii) that even otherwise, as per RBI Guidelines, commission cannot be remitted in any circumstance before shipment of the case which are subject matter of the export, that too through the authorized bank;
(xiv) that it is a matter of record that out of total payment of Rs.7,08,59,575/- on account of commission payment, an amount of Rs.3,37,84,634/- was paid during 16 ITA No.503/Del./2011 financial year under consideration and thereafter, payment of Rs.,2,78,86,183/- was made by the assessee company between 01.04.2006 and the date of assessment 31.12.2008 and thereby made total payment of Rs.6,16,70,817/- up till 31.12.2008. The remaining payment of Rs.91,88,758/- was to be paid in phased manner as per terms and conditions contained in agreement (supra). All these facts exclude the possibility of making the business transaction in-genuine;
(xv) that the next ground for disallowance of claim of payment of commission made by the assessee company, "that the assessee was one of the contractor who were making payment of kick backs / illegal payments to Saddam Hussain and his close associates", is also not tenable for the reasons inter alia that when Saddam Hussain and his associates removed from the Government in April 2003, the question of making payment of kick backs / illegal payments to them in FY 2005-06 does not arise; (xvi) that from the detail given by the assessee regarding country-wise export during the FY ending 31.03.2006, 17 ITA No.503/Del./2011 available at page 388 of the paper book tabulated as under :-
"Countrywise Sales / Export during the Financial Year ending 31.03.2006 1 GHANA 37,70,34,608.89 2 MAURITIUS 3,45,245.00 3 SIERRA LEONE 4,68,888.33 4 ANGOLA 4,92,45,541.70 5 MOZAMBIQUE 1,58,84,976.00 6 SUDAN 1,10,40,87,264.86 7 AFGHANISTAN 9,51,62,275.40 8 ALGERIA 4,54,696.00 9 BURKINA FASO 1,92,31,350.00 10 NIGERIA 12,78,465.00 11 ZAMBIA 91,32,373.00 TOTAL 1,67,23,25,684.18 LOCAL SALES 2,57,500.00 EXCHANGE FLUCTUATION ag. 42,82,881.07 EXPORTS TOTAL SALES 1,67,68,66,065.25 It is apparently clear that no export whatsoever has been made by the assessee company to Iraq and in these circumstances, the question of making payment of illegal gratification to Saddam Hussain and his close associates does not arise;18 ITA No.503/Del./2011
(xvii) that when the assessee has made export to the countries other than Iraq "Volkar Committee Report"
has no bearing whatsoever qua the assessee company pertaining to the year under assessment;
(xviii) that when no export during the year under assessment has been made by the assessee to Iraq, the reliance by the AO on Volkar Committee Report which undisputedly contains the name of the assessee company, is highly misconceived and misplaced; (xix) that so far as disallowance of amount of Rs.10,28,957/- by the AO on account of commission expenses below Rs.5,00,000/- is concerned during appellate proceedings, the ld. CIT (A) has entertained additional evidence by calling remand report from the AO and came to the conclusion that disallowance cannot be made and we find no illegality or perversity in the findings returned by ld. CIT (A);
(xx) that the observation made by the AO that no invoice below has been raised by the service agents which makes the business transaction doubtful is not tenable because when as per agreement, commission @ 4% or 10% in case of different agents, as the case 19 ITA No.503/Del./2011 may be, is already agreed upon between the parties on the goods exported and services have been rendered and export contracts stands executed, we do not find any reason to disallow the claim only because of the fact that invoices have not been raised by the service agents;
(xxi) that even otherwise, when assessee company has categorically spread its income into 3 years then expenditure have also to be spread in 3 years and the disallowance cannot be made on the ground that the amount of agency commission was payable even during 2010;
(xxii) that the contention of the ld. DR that no document / correspondence is there on record to prove that as to what services have been rendered by the service agents, is again not tenable for the reason that when intricate projects have been executed by the assessee company as per terms and conditions of the agreement, which could not have been completed without local assistance and only thereafter assessee company has earned turnover of Rs.167 crores with net profit of 17%, the ld. CIT (A) has rightly 20 ITA No.503/Del./2011 concluded that the services have been rendered for a genuine business transaction and payment for the agency services is allowable.
10. In view of what has been discussed above, finding no illegality or perversity in the findings returned by the ld. CIT (A), the present appeal filed by the Revenue is hereby dismissed. Order pronounced in open court on this 22nd day of March, 2017.
Sd/- sd/- (PRASHANT MAHARISHI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 22nd day of March, 2017 TS Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-VIII, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.