JUDGMENT
1. All these appeals are disposed of by this common order.
ITA 63/2000 is filed by the revenue. Assessing authority passed an assessment order for the assessment year 1996-97 and in so concluding the assessment, the assessing authority, by applying the provisions of Section 40A(2) of the Act, held that the commission paid by the respondent – assessee company to its sister concern is unreasonable and therefore, the provisions of Section 40A(2) of the Act were attracted. He restricted the payment of commission to 6%. While passing the assessment order, the assessing authority noticed that the commission of 10% on the sales of respondent -assessee company has been paid to the sister concern namely M/S Accumulator Fabrics. It was noticed that in earlier years the payment of commission made by the assessee – company to its sister or concern has been held to be highly excessive and unreasonable when compared to the meager services rendered by the said sister concern. Taking into consideration all these aspects, the assessing authority passed the assessment order by disallowing the payment in excess of 6%. Aggrieved by the said order, assessee filed an appeal before the Assistant Commissioner. He confirmed the assessment order by his order dtd 10-11-1998. Assessee thereafter filed an appeal before the tribunal. The Tribunal by its order allowed the appeal by holding that it cannot be said that the payment of the commission by the appellant- company would attract the provisions of Section 40A(2) of the Act. It is further held that the disallowance of 48 is not proper and justified and the commission as claimed at 10% requires to be allowed. Revenue in these circumstances is before us in ITA 63/2000 raising the following two questions of law;
1. Whether on the facts mud circumstances of the, the tribunal is correct in law in holding that the provisions of Section 40A(2) of the Income Tax Act, 1961 is not attracted in respect of the payment of commission made by the respondent-assessee to its own sister concern?
2. Whether on the facts and circumstances of the case whether there is evidence on material to hold that the payment of commission made by the respondent company to its sister concern is not excessive or disproportionate to attract the provisions of Section 40A(2) of the Income Tax Act, 1961?
ITA No. 66/2000
2. Revenue is before us aggrieved by the order of the tribunal for the assessment year 1991-92 and 1992-93.
In the respondent-assessee’ a case, in relation to the assessment year 1991-92, 1992-93, the commissioner took up revisional proceedings under Section 263 of the Act on the ground that the assessments made by the assessing authority were erroneous and prejudicial to the interest of revenue, in that, the assessing authority had erroneously allowed a commission at the rate of 10%. The Commissioner had set aside the assessment and withdrew the allowance of commission as made at 10%. The assessing authority thereafter passed an order allowing the claim of the respondent assessee relating to commission payment made to its sister concern at 5%. The assessee filed an appeal before the commissioner. Commissioner allowed the commission at 6% and disallowed 4%. A second appeal was filed before the tribunal. The tribunal by its order dtd 7-3-2000 allowed the appeals holding that 10% commission paid by the respondent company to its sister concern M/S Accumulator Fabrics is not executive and quite reasonable. Aggrieved by the order of the tribunal, revenue is before in this appeal. The following questions of law are raised.
1. Whether on the facts and circumstances of the case, there is material and evidence for the tribunal to hold that the commission paid by the respondent-assessee company to its sister concern at 10% on its sales turnover is reasonable?
2. Whether on the facts and circumstances of the case, the tribunal is correct in law in reversing the assessment and appellate order as passed in the respondent -assessee’s case by invoicing the provisions of Section 40A(2) of the Income tax Act, 1961, in respect of the commission paid by the assessee to its sister concern?
ITA 64/2000
3. This appeal is again at the instance of the revenue. The assessing authority took up the assessment proceedings for the assessment year 1993-94 and 1994-95. Commission was made over by the assessee. The assessee company paid commission at 10%. According to the assessing officer the said payment is excessive. He allowed the commission at 5%. Appeals were filed before the commissioner. Commissioner increased the commission to 6% but disallowed 44. Second appeal was filed before the tribunal. The tribunal accepted the case of the assessee. Revenue in these circumstances is before us. The following questions of law are raised before us.
1. Whether on the facts and circumstances of the case, there is material and evidence for the tribunal to hold that the commission paid by the respondent-assessee company to its sister concern at 10% on its sales turnover is reasonable?
2. Whether on the facts and circumstances of the case, the tribunal is correct in law in reversing the assessment and appellate order as passed in the respondent -assessee’s case by invoking the provisions of Section 40A(2) of the Income-tax Act, 1961, in respect of the commission paid by the assessee to its sister concern?
3. Whether on the facts and circumstances of the case, the tribunal is correct in law in holding that the appeals preferred by the respondent before the tribunal are maintainable in law?”
ITA 82/2001
4. This appeal is also at the instance of the revenue. In the course of assessment proceedings, the assessing authority noticed that the respondent assessee had claimed commission payable to its sole selling agent, namely M/S Accumulator Fabrics, Bangalore, a sister concern at the rate of 109 on the gross turnover of sales. He was of the view that the commission paid at 10% is unreasonable and excessive. He therefore concluded by adding back the sum of Rs. 4,54,991/- under Section 40(A)(2) of the Act. Further appeal filed was partly allowed directing deletion of the aunt of Rs. 4,54,999/-. Revenue aggrieved by the order of the Commissioner preferred an appeal. Appeal stood rejected. Revenue is therefore before us raising the following questions of law.
5. Heard Sri Indra Kumar, learned senior counsel for the revenue. He would invite our attention to Section 40(A)(2) to say that the assessing authority was justified in restricting the trade discount. He took us through the material on record to say that the commission is excessive and unreasonable. He would refer to us the finding of the assessing authority. He would also rely on a few judgments.
6. Per contra, Sri. Sarangan learned senior counsel would support the order. According to him, material documents would warrant no interference in the in the light of the case laws. He would say that 10% commission cannot said to be unreasonable or excessive as sought to be argued by the revenue. He would also refer to us the agreement to say that the tribunal was justified in granting the relief.
7. After hearing, we have carefully perused the material on record.
8. Material on record would reveal that tribunal has accepted 10% commission relying on the agreement in the case on hand. The sole selling agency agreement is dtd 1-7-1990. The said agreement would show that the assesses are manufacturers of PVC Battery Separators, had engaged M/S Accumulator Fabrics as their sole selling and canvassing agent for marketing their product throughout India in terms of an agreement dtd 1-7-1985. Thereafter in the light of expiry of the earlier agreement, they were desirous of renewing the appointment of the aforesaid agent, for a further period of five years on certain conditions. In the terms and conditions of the agreement it is mentioned that the principals will manufacture/produce and supply PVC separators under the brand name ‘Microtex’ according to the specifications and order issued by the Sole Selling Agent at such prices as may be fixed by the principals in consultation with the agent from time to time. They would also say in terms of Clause-8 that in consideration of the services to be rendered by the agent, the agent will be paid a commission of 10% on the sales turnover of the battery separators. The term ‘Sales Turnover’ will mean the sales turnover after deduction of the turnover of rate contracts, trade discounts, sales returns, sales tax, and central excise duty if say included therein. The Commission, if any, payable to the Sub -agents/distributors will be paid by the agent out of their commission received from the principals.
9. Noticing this agreement, the assessing authority has chosen to hold in the order that the statement of Sri Bavedkar, would show that no advertisement has been made to the Commission Agent in the matter. According to the assessing officer the commission paid at the rate of 10% is highly excessive and unreasonable in comparison to the meagre services rendered by the commission agents. Thereafter the assessing authority disallowed the commission to the extent of 5% and allowed only 5% commission paid on sales. When the same was challenged before the appellate commissioner, the appellate commissioner has chosen to say that over a period of five years the price of articles have increased and that the demand for batteries have increased. It is not the case of the appellant that the number of customers have increased drastically during the period as a result of the work of the agent. In these circumstances, the Commissioner was of the view that there is justification in finding that the fair market value of the services and facilities procured from the agent cannot be much higher than the cost of the agent and a reasonable profit margin. This would be served by a commission at 6% on the sales turnover. This order was challenged before the tribunal. The tribunal after noticing the material on record has chosen to accept 10% in its order.
10. Let us see as to whether 10% so granted was reasonable in the given circumstances.
11. Revenue strongly relies on a judgment of the Supreme Court reported in 78 ITR 268. In the said case, the Supreme Court has ruled that in an enquiry, under Section 10(4A) of the Income Tax Act, 1922, into the excessiveness or unreasonableness of an allowance resulting in the provision of any remuneration or benefit or amenity to a director or a person who has substantial interest in the assessee company, it is for the tax payer to establish the evidence that the particular allowance is justifiable. If the tax payer does not produce any evidence in support of the claim for allowance, the Income-Tax Officer is not bound independently to collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee-company. In the absence of any evidence in support of the claim for deduction of remuneration so provided, the Income Tax Officer is justified in refusing the same.
12. The Madras High Court has considered in 240 ITR 810 with regard to commission paid to relatives. The Madras High Court has held that the records disclosed that M was psychology graduate with no technical qualification or training. Though it was claimed that M had been employed in the Bend weld Industries and acquired some training no certificate had been produced to prove it. V bad passed only SSLC and had been doing commission business for the past three years. The turnover of the assessee during 1975-76 was Rs. 4,28,170/- as against Rs. 3,90,530/- the turnover of the previous assessment year. The tribunal had considered the three condition* specified in Section 40A(2)(a) of the Act while confirming the order of the Assistant Commissioner regarding the excessiveness or unreasonableness of the remuneration and commission alleged to have been paid by the assessee to his brothers, M and V. Hence, the tribunal was justified in disallowing partly the remuneration paid by the assessee to his two brothers.
13. The Madras High Court again in 260 ITR 440 considered the scope of Section 40A(2) and ruled that as the partners of the firm were admittedly the director, spouses of two of the directors and the son of a director, Section 40A was clearly attracted as all these persons were covered by one or the other Sub-clause of Section 40A(2)(b). The disallowance made on the ground that the expenditure was excessive and unreasonable was justified.
14. From the case laws what is clear to us is that the department would be justified in interfering with the claim of commission in the event of no evidence or in the event of the said commission being made over just to benefit the kith and kin in terms of Section 40 of the Act.
15. In the case on hand, it is seen that the Manager Sri. Bavdekar, has chosen to say that some of the Directors are related to the company. However, he has expressed his ignorance with regard to marketing, commission rates etc., The Assessing authority has chosen to rely on the statement and the agency agreement.
16. The Supreme Court in 201 ITR 1063 has considered that the brand name carried significant business value. Payments were made in consideration of a valuable right parted with by the firm in favour of the company.
17. The Andhra Pradesh High Court in 219 ITR 6 has considered the revenue expenditure. In the said judgment it was noticed that there was no finding that it was a colourable device solely for the purpose of diverting the income of the firm to another body without payment of tax or that there was no prudent business consideration for the arrangement.
18. The Madras High Court in 218 ITR 427 has accepted that royalty payments were revenue expenditure.
19. In the case on hand, it is seen that the sister company was the sole selling agent for several years and it had earned the reputation of sole selling agent of the assessee-company. Clause 8 also provides for payment of commission at 10% not on the entire amount but after giving deductions. Taking into consideration all these aspects of the matter, the tribunal has chosen to accept the same in the case on hand. At this at age, we must also notice Section 40A(2) of the Act. The said section has provided for provision of expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of this sub-section, and the assessing officer is of the opinion that such expenditure is unreasonable or excessive having regard to the fair market value of the goods, services and the facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
19. As mentioned earlier, disallowance is only 4%. 10% commission in terms of clause-8 as mentioned earlier is not absolute. It provides for various discounts. In these circumstances, we are of the view that there cannot be any microscopic consideration and a broader view has to be taken, taking into consideration the business intention and business consideration. So long as there is no intention to evade tax and so long as the commission is not shocking, the said commission has to be accepted particularly in the light of the wordings of Section 40A(2) of the Act. It is not the quantum alone that governs in such cases. Fair market value of the goods, services, legitimate needs of the business or profession of the assessee, would be the guiding factor in terms of Section 40A(2) of the Act. In the case on hand, though the assessing officer has chosen to give 5%, the commissioner himself has chosen to increase the same to 6% and only 4% is disallowed. Even that 4% is not absolute and it is after deductions in terms of agreement. Taking in to consideration the long standing relationship and also taking into consideration the reputation of the brand and the agent and also taking into consideration that there is no intention to avoid tax, the tribunal rightly in our view has chosen to accept the case of the assessee with regard to 4% commission. We therefore do not find any unreasonableness in the given circumstances. In fact this bench recently has chosen to consider some what a similar case in and thereafter this Court has chosen to hold that reduction from 5% to 2% is an arbitrary reduction. An over all view of the matter would compel us to confirm the order of the tribunal in the given circumstances.
20. In the result, the questions of law are answered in favour of the assessee and against the revenue.
No costs.