IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER I.T.A.Nos.2259,2260 & 2261/Mds./2015 Assessment years : 2010-11,2011-12 & 2012-13 M/s.Madras Engineering Vs. Deputy Commissioner of Industries Pvt Ltd., Income Tax, 14,Sathyanarayana Avenue, Circle-4(1), R.A Puram, Chennai 600 028. Chennai 600 034. [PAN AAACM 4509 P ] (Appellant) (Respondent) I.T.A.Nos.126,125 & 130/Mds./2016 Assessment years : 2010-11,2011-12 & 2012-13 Deputy Commissioner of Vs. M/s.Madras Engineering Income Tax, Industries Pvt Ltd., Circle-4(1), 14,Sathyanarayana Avenue, Chennai 600 034. R.A Puram, Chennai 600 028. [PAN AAACM 4509 P ] (Appellant) (Respondent) Revenue by : Mr.Shiva Srinivas, JCIT,DR Assessee by : Mr. S. Sundaraman, C.A Date of Hearing : 27 -07-2016 Date of Pronouncement : 21-09-2016 :- 2 -: Madras Engineering Industries Pvt. Ltd. ORDER PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER These three cross appeals are filed by Assessee in ITA Nos. 2259, 2260 & 2261/Mds./2015 & Revenue in ITA Nos. 126, 125 & 130/Mds./2016 are directed against common order of Learned Commissioner of Income Tax(A)-8, Chennai dated 30.10.2015 pertaining to assessment years 2010-11,2011-12 & 2012-13. Since issues involved in all these Revenue s appeals as well as assessee s appeal are common in nature, these appeals are clubbed together, heard together, disposed off by this common order for sake of convenience. Revenue Appeals: (i) ITA No.126/Mds./12(Revenue s Appeal: 2010-11) (ii) ITA No.125/Mds./12(Revenue s Appeal: 2011-12) (iii)ITA No.130/Mds./12(Revenue s Appeal: 2012-13) 2. Revenue has taken altogether three grounds of which Ground Nos.1 & 3 are general in nature, requiring no specific adjudication. 3. common ground in all these Revenue s appeal are related to disallowance made by AO U/s.40A(2) of Act as payments of commission were considered excessive, which were deleted by Ld.CIT(A). :- 3 -: Madras Engineering Industries Pvt. Ltd. 4.0 Profit commission to Shri E.K. Pathasarathy: learned Assessing Officer found that assessee company has paid profit commission to Shri E.K. Pathasarathy, Chairman & Managing Director(CMD) apart from payment of fixed salary as follows: Assessment year Commission Salary 2011-11 Rs.349.37 lacs 32.00 lacs 2011-12 Rs.371.86 lacs 60.00 lacs 2012-13 Rs.347.01 lakhs 60.00 lacs (being 20% of Profit Before Tax) AO found that amount paid to Shri E.K. Pathasarathy falls under ambit of section 40A(2) of Act, since he is holding substantial interest in company. It was submitted that Shri E.K. Pathasarathy was founder director of company ,with his high educational qualification, experience and leadership qualities he made company as pioneer in auto ancillary industry and achieved sales of 237.81 crores of turnover and profit of 23.27 crores for A.Y 2012-13. But for committed and untiring efforts of Mr.Parthasarathy company would not have achieved said business goals. Further, assessee also stated before AO that commission is being paid to Managing Director from assessment year 2003-04, which was accepted by Department. From assessment years 2003-04 to 2004-05, commission was :- 4 -: Madras Engineering Industries Pvt. Ltd. paid @ 11% of profit, from assessment year 2004-05 to 2009- 10, commission was paid @ 20% and from assessment year 2011- 12 onwards @ it was paid 15%. In earlier years, payment of commission was not disputed by Department. AO, though appreciated efforts made by Managing Director, but not convinced with argument of assessee and disallowed amount of Rs.3,49,37,597/- for A.Y.2010-11,Rs. 371.86.Lacs for A.Y2011-12 and Rs.347.01 Lacs for A.Y.2012-13 as per provisions of section U/s.40A(2)(a) of Act. Aggrieved, assessee went on appeal before Ld.CIT(A). 4.1 On appeal, Ld.CIT(A) deleted addition holding that profit commission paid to Shri E.K. Pathasarathy was reasonable and paid keeping in view of legitimate needs of company and benefits derived by company. Further Ld.CIT (A) observed that Shri E.K. Pathasarathy is assessed to tax and commission paid by company was admitted as income in his Income tax Returns for relevant assessment years and paid resultant taxes. Consequently there is no revenue loss. Aggrieved with order of Ld.CIT(A), Department is in appeal before Tribunal. 4.2. Before us, Ld.D.R argued that Shri E.K. Pathasarathy and family are holding shares of 60.4% in company s equity and services rendered by him were compensated by remuneration paid to him and :- 5 -: Madras Engineering Industries Pvt. Ltd. there is no need to make further payment in form of profit commission since no such commission was paid to any of employees or staff members who are working in company. Since it is private limited company, Ld.D.R has argued that profit of company is distributed among family members depriving other shareholders of their share in kitty. 4.3. On other hand, Ld.A.R submitted that Shri E.K. Parthasarathy was Chairman and Managing Director(CMD) of company and was responsible for leading company for long term strategy with view to creating share holder value. His leadership role is responsible for all management decisions for implementing assessee company s long term/short term plans. Because of his continuous efforts and dedicated services, experience and marketing strategies and liaison with other organizations, company has achieved total sales of 142.25 crores for year ended 31.03.2010. Further, ld.A.R has highlighted that company is one of leading company for production of slack adjusters. Further, ld.A.R also submitted that it is not new phenomena for payment of salary and profit commission in industry. It is very common practice to make payment of salary and performance based commission to managerial staff of companies in both :- 6 -: Madras Engineering Industries Pvt. Ltd. private limited and public limited companies Further, ld.A.R relied on following decisions in support of his argument. i) In case of Abbas Wazir (P) Ltd. Vs. CIT reported in 265 ITR 77(Allahabad). ii) In case of CIT Vs. Computer Graphics Ltd., reported in 285 ITR 84(Madras.) iii) In case of CIT Vs. Edward Keventer (Private) Ltd., reported in 86 ITR 370. iv) In case of CIT Vs. Career Luncher India Ltd. reported in 358 ITR 179(Del.) v) In case of New Silk Route Advisors (P) Ltd. Vs. DCIT reported in 55 Taxmann.com 540(Mum. Trib). A.R also argued that AO disallowed expenditure u/s 40A(2) of income tax Act which clearly specifies that expenses incurred by assessee in respect of specified person which are not directly proportionate to services rendered /goods offered, attract provisions to find out whether such expenditure was reasonable in relation to fair market value of goods/services offered were incurred for legitimate needs of assessee. AO can disallow so much expenditure which is excessive or unreasonable. AR contenended that in present case there is nothing to suggest that AO found payment of remuneration/commission to director was excessive having regard to fair market value of :- 7 -: Madras Engineering Industries Pvt. Ltd. services or facilities rendered by him. Therefore AR vehemently opposed disallowance made u/s 40A(2) of Income tax Act. 4.4. We have heard both parties and perused material placed on record. AO disallowed commission u/s.40A(2)(a) of Act holding that commission paid was in excess or unreasonable having regard to market value of goods/services. In process, AO has disallowed entire commission paid to Shri E.K. Parthasarathy, Managing Director. However, AO has not brought on record any comparable cases and quantified reasonable amount. AO has not disputed fact that Shri E.K. Parthasarathy, Managing Director was rendering valuable services and because of all his efforts, company has progressed in it s ventures and gained profits made it s image in business. AO is not disputing fact that expenditure was laid out for purpose of business and not doubted genuineness of payment. As per section 40A(2) of income tax Act expenditure in excess of fair market value of services rendered by specified person comes under scanner. In this case AO has disallowed entire commission paid to Mr. Parthasarathy without bringing any tangible evidence to suggest that commission paid was in excess of services rendered by him. Therefore is no case for making any addition u/s 40A(2) of Income tax act. :- 8 -: Madras Engineering Industries Pvt. Ltd. 4.5 assessee company is making payment of commission to Shri E.K. Parthasarathy, right from assessment year 2002-03 onwards, which was accepted by Department. Though rule of Res judicata is not applicable to Income Tax proceedings but rule of consistency does applicable to tax assessment as referred by Ld.A.R in case of CIT Vs. LG Ramamurthy reported in 110 ITR 453(Mad.) & Radhasoami Satsang Vs CIT. In case of same assessee for different assessment years, contradictory decisions cannot be taken on same set of facts. 4.6 Ld.CIT (A) has referred decisions of Mumbal High Court in case of Karondas Ranchhoddass vs. Commissioner of Income Tax (83 ITR 1), Calcutta High Court in case of Smt Sakti Rani Roy vs. Commissioner of Income Tax (115 ITR 722), Allahabad High Court in case of Commissioner of Income Tax vs. Kamala Town Trust (198 ITR 191), Kerala High Court in case of P.Krishna Warner (208 ITR 823) and Delhi High Court in case of CIT vs Neo Polypack (P) Ltd., (245 ITR 492) where in it was consistently held that judicial propriety requires consistency and as long as finding of fact is not disputed and there are no fresh material or other circumstances demonstrating or demanding fresh look into matter, there can be no inhibition relying on earlier decision. :- 9 -: Madras Engineering Industries Pvt. Ltd. 4.7 jurisdictional Madras High Court in case of Commissioner of Income Tax vs. LG Ramamurthy (110 ITR 453) held that doctrine of resjudicata can be invoked in tax proceedings which have binding effect on revenue, if facts between two assessment years are same. In other words, it is not correct for Assessing Officer to begin fresh litigation in absence of any new material or change in circumstances on premise that there are new views, closer and more intelligent analysis. ld. Assessing Officer had not doubted genuineness of payment and Shri E.K. Parthasarathy, Managing Director has admitted receipt as his income in his return of income and paid relevant taxes. Therefore, we do not find any infirmity in order of Ld.CIT(A) and order of Ld.CIT(A) is upheld and ground raised by revenue on addition of profit commission to Mr. E.K. Parthasarathy stands dismissed. 5.0. second common issue in all Revenue s appeal is related to disallowance made by AO U/s.40A(2)(a) of Act as guarantee commission paid Shri E.K. Parthasarathy, Chairman and Managing Director and Smt Radha Partha Sarathy,Director @ `41,20,000/- each. :- 10 -: Madras Engineering Industries Pvt. Ltd. 6. During assessment year 2010-11, assessee claimed guarantee commission paid to directors, Mr.E.K.Parthasarathy, `41,20,000/- and Mrs. Radha Parthasarathy `41,20,000/- aggregating to `82,40,000/- towards personal guarantees given by directors for Bank loans as expenditure. commission was paid @ 2% on sanctioned limit by SBI. Both Mr.Parthasarathy and Mrs.Radha Parthasarathy are directors of company holding 45.78% of shares in company, apart from shares held by HUF and family Members in assessee s company. During assessment proceedings, AO held that expenditure falls under ambit of Sec.40A(2)(a) of Act. AO disallowed guarantee commission holding that company has not availed any additional services from Directors more than what is expected of from Directors and expenditure was not incurred wholly and exclusively for purpose of business and it was paid for benefit of Directors. On appeal, Ld.CIT(A) allowed expenditure holding that guarantee commission paid to directors was reasonable. While deleting addition Ld.CIT(A) relied on decision of Hon ble Supreme Court in case of Addl CIT Vs. Akkamamba Textiles Ltd., reported in (1998) 144 CTR (SC) 172 and in case of Mahalakshmi Sugar Mills Co. Ltd. Vs. CIT in 252 ITR 0691(Del.). :- 11 -: Madras Engineering Industries Pvt. Ltd. 6.1 Before us, ld.D.R argued that guarantee commission paid to directors was in no way connection with service rendered by Directors. Ld.D.R placed reliance on assessment order and also relied on decision of Hon ble Karnataka High Court in case of CIT Vs. United Breweries reported in 204 Taxman 244 (2012) and also decision of Hon ble Gujarat High Court in case of Coronation Flour Mills Vs. ACIT reported in 314 ITR 1(2009). 6.2 On other hand ld.A.R argued that directors have no personal responsibility to stand as surety for credit facilities granted by banks. By standing as creditors for purpose of loan granted by banks, liability of directors increases and it is co-terminus with that of borrower. Therefore, compensation is paid for risks and responsibilities taken by Directors which is normal practice in this line of business. Further, he argued that even income tax amendment was brought by Finance Act, 2012 with retrospective effect from 01.04.2012 by way of Explanation to Sec.92B, giving of guarantees as international transaction. Further, Ministry of Finance vide its office Memorandum dated 24.10.1993 has itself presented rate of guarantee commission to be paid by public sector institutions for which it had guaranteed loans taken from banks or finance institutions, owner of which is government :- 12 -: Madras Engineering Industries Pvt. Ltd. itself. He further stated that company has phased out payment of commission over years. In earlier financial years keeping in view of business risk, commission was paid @ 2% directly linked to credit facilities sanctioned. Subsequently, when assessee s products became accepted in markets, from financial years 2007-08 to 2009-10, even though sanctioned limit is enhanced, guarantee commission was restricted to 2% of `20.60 crores only. Further, he submitted that from F.Y. 2010-11 onwards, paying guarantee commission was completely stopped. assessee also relied on decision of Hon ble Calcutta High Court in case of India Jute Co. Ltd., Vs. CIT (178 ITR 649) wherein it was held that payment of guarantee commission is normal and accepted practice and Delhi High Court in case of Controls & Switchgear Contractors Ltd. Vs. DCIT (W.P.(C) 2845/2014/CM APPL 5898/2014) wherein it was held that act of directors in providing their personal guarantees and undertaking attendant risks is clearly beyond scope of their services as directors and that transactions in consideration for which commissions were paid by assessee to it s Directors are real. It further stated that directors having provided their personal guarantee have acted beyond call duty and fact that assessee in its commercial wisdom has agreed to pay commission for furnishing of such guarantees :- 13 -: Madras Engineering Industries Pvt. Ltd. cannot be flawed, as it is well settled that it is assessee s discretion as to which expenditure is necessary and to what extent and it is not within jurisdiction of AO to impose his views with regard to necessity or quantum of expenditure undertaken by assessee for AO has only to determine whether transactions are genuine and real. Authorised Representative of assessee also furnished copy of sanction advice of SBI dated 19.01.2007. 7. We have heard both parties and perused material on record. assessee company has paid 2% of guarantee commission on `20.60 crores credit limits sanctioned by SBI to both Mr.Parthasarathy & Mrs. Radha Parthasarathy, Directors, aggregating payment of `82.40 lacs. assessee submitted that guarantee commission was paid in earlier years also i.e. F.Y 2001-02 onwards which was accepted by Department. There is no change in facts as submitted by assessee. AO disallowed commission holding that payment was made for personal benefit of Directors without rendering any additional services. We have gone through sanction advice of SBI dated 19.01.2007. sanction order submitted by assessee was relevant to F.Y 2006-07 relating to assessment year 2007-08 but not to assessment year under dispute which is 2010-11. As per sanction :- 14 -: Madras Engineering Industries Pvt. Ltd. memo existing credit limits under various heads were `15.91 crores and revised limit was `20.91 crores. primary security of loans was first charge on entire current assets such as stocks, stores and consumables, documents of title to goods for FBDN limits, Goods covered under LC for limits sanctioned under LC limits, counter guarantee and charge over current assets for LG limits and for Term loan first charge on Fixed assets of company and Equitable mortgage of factory lands. value of properties offered as collateral security was not furnished by ld.A.R. There is mere mention of personal guarantees of Mr.Parthasarathy & Mrs. Radha Parthasarathy, but no personal assets were required to be mortgaged or given as security for credit facilities granted to company. Though liability of Directors was co-terminus with that of borrower, there is the complete coverage of security in form of assets of company. company has huge factory land of 24010 Sq.ft in prime Ambattur Industrial Estate, 0.5672 acres of land with building in Industrial Estate, Maraimalai nagar, and leasehold rights on SEZ factory Land admeasuring 5.25 acres in SEZ(Mahindra world city) which was offered as security by way of mortgage. market value of above securities offered was not furnished by assessee and in any case securities cover entire credit limits satisfactorily. As per balance sheet against sanctioned limits of `20.60 crores by :- 15 -: Madras Engineering Industries Pvt. Ltd. banks, outstanding loans were `7,83,34,832/- and company s reserves and surplus was `39.85 crores and book value of current and fixed assets offered as security was `58.73 crores which clearly shows financial soundness of company against which banks have granted credit facilities. In this financial background of company and value of assets offered as primary and collateral security to loans, it is only mere formality to give personal guarantee of directors. In case of default though liability of guarantor coterminus with that of borrower banks proceed to recover from primary and collateral securities first instead of proceeding on guarantors. Though ld. Counsel argued vehemently that there was personal risk on assets of directors and joint liability for repayment of loan there was no evidence produced regarding any personal assets given as security. assessee also has not furnished evidence of wealth tax returns submitted to Bank. case Laws relied up on by Ld CIT(A) as well as Ld.A.R relates to question whether guarantee commission is allowable expenditure or not for which Hon ble courts have answered affirmatively. But in case of appellant as discussed above loans were granted on strength of financial soundness and value of assets of company and there is no risk involved/foreseen to directors. Therefore, case :- 16 -: Madras Engineering Industries Pvt. Ltd. laws relied by assessee are not applicable in assessee s case and there is no risk involvement to compensate personal guarantee. company has chosen to make payment of guarantee commission as source of income to directors and facts of Hon ble Karnataka High court in case of United Breweries reported in 204 Taxman 244 are clearly applicable in assessee s case. Accordingly, we hold that payment of commission to guarantors is not wholly and exclusively incurred for purpose of business and is not allowable deduction u/s. 37(1) of income tax act. Accordingly, addition made by AO is confirmed and Revenue s appeal on this ground is allowed. 8.0 third issue is related to disallowance made by AO on account of commission paid to John Bruce (UK) Ltd. AO invoked provisions section 40A(2)(a) and also held that expenditure was not incurred wholly and exclusively for purpose of business. 8.1 assessee company has paid commission to M/s JBUK for A.Y 2010- 11 to 2012-13 as follows: Sl. Additions A.Y 2010- A.Y 2011- A.Y 2012- No. 11 12 13 1 Sales Commission paid to 97,42,673 130,80,795 1,94,97,197 M/s.Johan Brue(UK) Ltd. :- 17 -: Madras Engineering Industries Pvt. Ltd. 8.2 Mr. John Bruce is holding 22.22% of shares in assessee s company and he is substantially owning JBUK ltd. commission was being paid @5% of FOB value of sales. AO disallowed commission paid to John Bruce (UK) Ltd., on following grounds. i) As Mr.Sergey Prokhorov was already being paid commission for sales to Russia thereby making commission paid to JBUK-through Mr.John Bruce, shareholder with shareholding of 22.22%-highly questionable. ii) It is also questionable as to why Mr.John Bruce was paid commission when assessee company claims to be beneficiary of JBUK Ltd., company in which he is interested in. iii) It was also noted that huge commissions were paid to both Mr.John Bruce and Mr.Parthasarathy who hold substantive stake in assessee company and nothing prevented them from gaining personal benefits from assessee. iv) assessee failed to produce details with regard to copies of agreement and correspondence between assessee and JBUK Ltd.,/ Mr.John Bruce, approval of Board/shareholders, financial interest of Mr.John Bruce in JBUK Ltd., and share of sale to KAMAZ, Russia, of JBUK Ltd., along with purchase and sale price of JBUK to KAMAZ of theproducts supplied bythe assessee. v) Without prejudice to above commission paid to JBUK Ltd., falls under definition of Fees for technical services. 8.3 Aggrieved by order of AO, Department carried appeal before Ld.CIT(A). On appeal, Ld.CIT(A) deleted addition. Ld.CIT(A) in his order observed that assessee produced copies of agreement with M/s.John Bruce (UK) Ltd. JBUK :- 18 -: Madras Engineering Industries Pvt. Ltd. Ltd. was appointed as authorized agent of assessee for sale of its products to KAMAZ,Russia and BOOWAN, South Korea, as per agreements dated 09.02.2008 and 01.10.2008 respectively. commission was paid for promotion of sales to above mentioned companies and commission was payable to JBUK Ltd., after full realization of export proceeds by assessee as spelt out in these contracts. Sample details of export proceeds received and payments of commission made thereafter were furnished by assessee in support of its contention before Ld.CIT(A) and being satisfied with explanation, deleted disallowance made by AO. 8.4 Being aggrieved by order of ld. CIT(A) revenue filed appeal before us. Ld.D.R has argued that JBUK ltd is foreign company in which Mr.John Bruce is holding substantially. Mr. John Bruce is holding 22.22% stake in assessee company and paid commission without rendering any services. Further DR also stated that assessee company has not furnished any details called for by AO to support or substantiate services rendered by JBUK. Mere agreements and details of export commission are not conclusive proof of services rendered by JBUK without supporting documents. DR further argued that there was no evidence to support whether sales were made through JBUK Ltd or not? DR argued that assessee is paying commission :- 19 -: Madras Engineering Industries Pvt. Ltd. on entire export sales as if same were result of efforts of JBUK without any documentary proof. 8.5 On other hand, Ld.A.R argued that assessee pays John Bruce (UK) Ltd., in relation to KAMAZ,Russia, commission @ 5%, which was based on FOB value of sales directly done by assessee. Reserve Bank of India had previously limited commission payable to overseas agents @ 12.5% to overseas agents. This was also maintained by customs authorities as reasonable. assessee submitted that payment of commission is much lower than Government approved rate. Further, he argued that payment of commission was to company, but not to individual as contended by AO. Substantial work was done by John Bruce (UK) Ltd in respect of export sales made by assessee. A.R submitted that detailed submissions were made by assessee before AO to justify payment of commission including workings thereof, copies of invoices and proof of payment and submitted Board resolutions evidencing payment. JBUK has also researched all markets for ASAs outside India, both after market and Original Equipment (OE), and developed necessary marketing material including, but not limited to, website, catalogue, brochures, fitting and servicing instructions. JBUK exhibited ASAs at :- 20 -: Madras Engineering Industries Pvt. Ltd. appropriate international trade fairs all around world and continues to do so. In international trade fairs JBUK provides printed brochures, price list, new product briefings, etc. JBUK maintains communication with existing arid potential customers to explain product and also check customer s future requirements and gathers market intelligence for future products. JBUK also offers full product liability insurance and flexible banking arrangements to all its customers. Although these can now be provided by assessee themselves, they were not available in India until relatively recently. Thus JBUK factually has shaped overall direction of assessee with regard to exports - from making recommendations helping in further technological advances, suggesting new products, proposing new market/marketing initiatives and counselling. 8.6 A.R stated that as far as Russia and Kamaz are concerned, JBUK exhibits assessee s products at trade fairs in St.Petersburg and Moscow developed appropriate marketing literature in Russian for those fairs. assessee s current business in Russia was built on contacts of JBUK made at those exhibitions. A.R brought our notice that Specifically JBUK does following to propel assessee s business with Kamaz: (i) schedules regular visits to Kamaz; (ii) schedules regular training for local team to deal with Kamaz; (iii) :- 21 -: Madras Engineering Industries Pvt. Ltd. has timetable for regular reviews with assessee in relation to Kamaz s business and in light of discussions with Kamaz in such reviews, JBUK sets product performance standards/revise them regularly when market conditions change; (iv) provided back-up service to Kamaz (v) gets useful feedback and relevant information. 8.7 A.R further stated that JBUK has invested (and continues to invest) great deal of time and resources to develop maintain strong relationships with Kamaz which results in stable contract and beneficial pricing for assessee. It should be noted that since JBUK is European company, Kamaz tends to trust JBUK because of trust that Russian companies have towards European companies as compared to small Indian companies like assessee. It should also be noted that assessee does not have in-house language capability or cultural knowledge to do business with Russian company like Kamaz i.e. dealing with suppliers who only speak Russian language and also deal with foreign culture which is totally different from dealing with domestic suppliers (which assessee is used to). Further, JBUK does above work only with limited operational support from assessee. A.R has filed detailed written submissions and brought to our notice advantages to :- 22 -: Madras Engineering Industries Pvt. Ltd. assessee with JBUK in relation to Kamaz business as follows: (I) assessee has avoided recruitment, training and payroll costs of using assessee s own employees in Russian Market; (ii) JBUK market research, price negotiation, quality assurance and product pre- positioning; (iii) assessee took advantage of JBUK s well placed position of solid relationships with potential buyers in European market- it would have taken assessee years to build-up its own contacts. 8.8 following annexure were filed by A.R before us (i) Some of marketing literature developed by John Bruce (UK) Ltd (JBUK) in Russian language for Russian Market. (ii) copy of product brochure displaying assessee s products. (iii) sample e-mail to assessee which is typical of kind of input and support JBUK offered during negotiations. (iv) Sample copies of assessee s invoices to JBUK for original patterns and tooling. (v) print-out of JBUK s website in Russian http://www.slacks.ru/ (vi) Sales Invoice wise details of commission paid to JBUK. In view of above submission ld.A.R. contended that payment of commission to JBUK is justified and ld.CIT(A) orders be up held. 9. We have heard both parties and perused material on record. commission was paid for sale of its products to KAMAZ, Russia and BOOWAN, South Korea. As per agreements dated 09.02.2008 and 01.10.2008, services rendered by John Bruce (UK) Ltd., to promote sale of assessee company s products. assessee company has paid commission to JBUK Ltd. assessee has supplied these products directly to its customers in :- 23 -: Madras Engineering Industries Pvt. Ltd. Russia and South Korea. assessee also furnished details of sales made to KAMAZ Russia and Boowan South Korea. assessee also submitted that M/s.John Bruce (UK) Ltd., has promoted sales of company by arranging in trade fairs at Russia. details of sales made were furnished by assessee. However as per assessment order assessee company has not furnished information called for by AO. Even agreements were not furnished before AO . paper book submitted by AR is not certified by either assessee or AR. Therefore, we are of opinion that material placed before Bench is not made available to AO. assessee had submitted details of commission paid, and invoice amounts, but not placed copies of invoices to verify whether sales were made through JBUK or not? Ld.CIT(A) examined agreements and came to conclusion that expenditure was incurred for purpose of business but he has not given any opportunity to AO. Therefore we are of considered opinion that this issue requires further verification to examine genuiness of expenditure. Therefore we deem it fit to remit matter back to AO. Accordingly we direct AO to examine issue decide issue as per law and merits. :- 24 -: Madras Engineering Industries Pvt. Ltd. 10. Profit commission paid to Priya Sriram :The next issue is related to disallowance made by AO U/s.40A(2)(a) of Act as payment of profit commission to Ms.Priya Sriram, D/o. Mr.Parthasarathy. 10.1 assessee company has paid salary and profit commission to Priya Sriraman daughter of E.K.parthasarathy for assessment year 2012-13 amounting to `1,15,67,203/-. profit commission was paid in addition to regular fixed salary of `60,01,644/-. Mr. E.K.parthasarathy and family is having 60.48% of share holding in company and Mr.Parthasarathy was Chairman and Managing Director of company who has been paid salary and profit commission. entire Board of Directors of company are family members of Mr.Parthasarathy. Mrs.Priya Sriram is new to company and she is daughter of Parhasarathy who was having controlling stake in company and can influence business and entire decision making of company. No other employee except Mr. Parthasarathy CMD of company was paid profit commission in company, though number of employees are working in company for years to gether in various senior capacities. Therefore AO viewed that only reason for payment of commission was she is being daughter of CMD and there was no business expediency. Further AO observed that she has not done any special :- 25 -: Madras Engineering Industries Pvt. Ltd. services to company and accordingly disallowed expenditure of `1,15,67,203/- commission paid to Mrs. Priya Sriraman. 10.2 Assessee went on appeal before CIT(A) and ld. CIT (A) deleted addition holding that AO can make disallowances under section 40A(2)only when warranted and when conditions of section are satisfied. ld.CIT(A) viewed that payments made to her are to be seen from prudent business man s view point and case does not warrant any such disallowance and Ld. CIT(A) held that commission expenditure incurred by appellant is reasonable and allowed assessee s appeal. Aggrieved by order of Ld.CIT(A) Department is in appeal before us. 11. Ld. DR supported assessment order and argued that company has engaged services of Priya Sriraman(PS) from A.Y 2008-09 onwards and first time commission was paid in 2011- 12.Prior to A.Y 2011-12 Mrs.PS was paid only salary. Though salary has been increased from `35.50 lacs to `60.01 lacs in A.Y 2011-12 on wards commission was paid additionally without giving any valid reason and additional responsibility. Though there were several employees working in company in various senior capacities no commission or incentive was paid to any of staff. Therefore AR argued that there is no business need for payment of commission :- 26 -: Madras Engineering Industries Pvt. Ltd. to Mrs P.S and expenditure was not wholly and exclusively incurred for purpose of business. 12. On other hand, Ld A.R submitted that salary compensation of Mrs.P.S consists of (a) fixed portion of monthly salary and (b) variable portion (profit commission )@5% of profits from A.Y 2011-12 and 10% from Assessment year 2013-14 on wards annually. variable portion is linked to overall performance of company computed with reference to profits reflected in audited accounts of assessee. This variable portion varies from year to year depending on performance of assessee. A.R. further submitted that Mrs.Priya Sriraman is highly educated having MBA degree and having vast experience and worked with various other companies and undertaken responsibility of operations of company and execution of company s long term strategy with view to creating shareholder value. Her role also entails being responsible for all management decisions and for implementing assessee company s short term plans. He further explained that she plays vital role in production, planning operations domestic and export market. Further A.R made written submissions in great detail regarding services rendered by her to company along with copy of Board resolution dated 01/02/2011. :- 27 -: Madras Engineering Industries Pvt. Ltd. 13. We heard rival submissions and perused materials placed before us. Ld.CIT(A)held that expenditure was disallowed u/s 40A(2) of Income tax act and held payment of expenditure was reasonable. Ld.A.R argued that AO has not made out case for excessive payment with regard to either fair market value of services or facilities or legitimate needs of business of company or benefits derived or accruing to assessee on receipt of such services or facilities. Further A.R has explained in great detail professional qualifications and contribution made by director Priya Sriram(PS) in managing affairs successfully of appellant company. explanation submitted by A.R is in general in nature but not specific, how company got incremental benefit. AO disallowed expenditure holding that commission was paid because she is daughter of Managing Director E.K.Parthasarathy and she has not rendered any special services to company which require payment of profit commission. Board has passed resolution on 01/02/2011 just before completion of year ending. In Board resolution there was no mention of additional responsibilities given to her or rendered by her. A.R has not furnished appointment order of Mrs.Priya Sriram specifying job given to her and responsibilities entrusted to her for payment of commission. Even Paper book filed by A.R does :- 28 -: Madras Engineering Industries Pvt. Ltd. not specify extra services rendered by her. She is employed in company from A.Y 2008-09 and paid fixed salary and commission as follows: A.Y salary Commission 2008-09 17.00 lacs nil 2009-10 18.00 lacs Nil 2010-11 35.00 lacs Nil 2011-12 60.01 lacs 123.95 lacs 2012-13 60.01.00 lacs 115.67 lacs For A.Y 2011-12 though assessee has paid commission A.O has not made any discussion and allowed payment of commission. It appears that AO has not examined issue. For A.Y year under consideration A.O has made elaborate discussion and disallowed payment of commission. Therefore facts of A.Y 2011-12 cannot be made applicable for A.Y 2012-13. Though she is working in company from 2008-09, for first time commission was paid to her from A.Y.2011-12 despite salary has increased from `35.00 lacs to `60.00 lacs .The reasons for payment of commission was not explained by A.R in spite of huge increase in salary. company was already paying commission to Mr.E.K.Parthasarathy for overall management and improvement and growth of company. In earlier paragraphs AR has explained in great detail how Mr. Parthasarathy has taken company to new heights. Any additional payment of performance based commission should be supported by additional :- 29 -: Madras Engineering Industries Pvt. Ltd. services rendered by new recipient and improvement in performance and incremental benefit derived by company but not at whims and fancies of management of company. Though A.R. argued that there is no tax avoidance and it was tax neutral it is also incumbent upon assessee to explain payment was in business interest of company. As per information furnished by A.R. trading results of company before payment of commission to Mrs.Priya Sriram and after payment of commission is as follows: Total sales Export Profit before A.Y. Rs.in sales tax crores Rs.in Rs.in crores crores 2010-11 143.18 37.50 17.47 2011-12 206.31 68.11 24.72 2012-13 237.81 75.73 23.27 13.1 Careful analysis of information shows that though there was increase in sales during A.Y 2011-12 to extent of 63.13 crores increase manly due to jump in export sales from `37.50 crores to `68.11 crores which was mainly due to foreign agents i.e JBUK and Mr. Sergey Prokhorov who were compensated separately. There was marginal increase in domestic sales front which can be attributed to general business trend, and increase in price rise. Similarly for A.Y :- 30 -: Madras Engineering Industries Pvt. Ltd. under consideration sales have increased from `206.31 crores to `237.81 crores giving rise to increase in sales to extent of 7.62 crores in export sales and 23.88 crores in domestic sales aggregating to `31.50 crores and profit before tax has reduced from `24.72 crores to `23.27 crores. In circumstances it is evident from above trading results that there were no additional efforts or services rendered by Mrs.Priya Sriram to make payment of profit commission over and above fixed salary. Since fixed was already increased from `35.50 lacs in 2010-11 to `60.01 lacs there was no reason for payment of commission on overall profit of company without incremental benefit. Though there are three whole time Directors and senior officers working in company only Mrs. Priya Sriram was paid profit commission on total profit without considering and evaluating incremental benefit derived by company. A.R has not substantiated additional responsibilities or services given to her and discharged by her with terms and conditions of employment. Therefore we are in agreement with AO that no additional services were rendered by Mrs. Priya Sriram for payment of profit commission and payment was not in business interest. Accordingly we set aside order of CIT(A) and restore order of AO. revenue s appeal on this ground is allowed. :- 31 -: Madras Engineering Industries Pvt. Ltd. Assessee s Appeals in ITA No. 2259,2260 & 2261/Mds./2015 14. common ground in all these three Assessee s appeal are related to disallowance made by AO U/s.40A(2)(a) of Act as payments of rent in respect of accommodation leased from Mr.Sriram Sivaram son in Law of Mr.E.K.Parthasarathy CMD of company amounting to `40,16,160 for A.Y. 2010-11, `40,16,160 for A.Y. 2011- 12 & `45,18,180 for A.Y. 2012-13, , which was confirmed by Ld.CIT(A). 15. During assessment proceedings, AO found that assessee company paid rent to its executive Director Mr.Sriram Sivaram for providing Rent Free Accommodation as per agreement with Mr.Sriram Sivaram, who happens to be son-in-law of Mr.Parthasarathy,M.D. AO was of view that rent paid by assessee company is nothing but salarry/compensation paid in another form of distributing profits. Mr.Sriram Sivaram has already been duly compensated with fixed salary besides perquisites, which are much higher in comparison to what has been paid to Mr.Parthasarathy, who had put in decades of service with all his expertise to run business. Mr.Sriram Sivaram would be residing in same house even if he were not Director in assessee company. Further, ld. Assessing Officer observed that :- 32 -: Madras Engineering Industries Pvt. Ltd. Mr.Parthasarathy, having substantive voting rights in assessee company along with his family members, has only made assessee to incur this expenditure. AO pointed out that assessee failed to produce necessary evidence that expenditure was incurred wholly and exclusively for purpose of business. Thus, AO disallowed rent paid to Mr.Sriram Sivaram in respective assessment years mentioned herein above. Aggrieved by order of ld. Assessing Officer, assessee carried appeal before Ld.CIT(A). 16. On appeal, Ld.CIT(A) observed that assessee company has taken on rent, residential premises owned by Mr.Sriram Sivaram, Director of company at 1,Parthasaathy Garden, Kasturi Rangan Road, Alwarpet, Chennai-18, which is in prime area of Chennai having built-up area of 7,500 sq.ft. Ld.CIT(A) observed that rent works out to `46 per sq. ft. Ld.CIT(A) observed that Mr.Sriram Sivaram has been provided with company leased accommodation as per terms of contract with Mr.Sriram Sivaram. According to Ld.CIT(A), AO was of opinion that there is no business exigency or necessity to hire house of Mr.Sriram Sivaram and again let same to be used by him as company leased accommodation. Ld.CIT(A) observed that this transaction involves leakage of revenue as company leased accommodation is taxed as perquisite in hands of Mr.Sriram Sivaram at lower rate. Further, :- 33 -: Madras Engineering Industries Pvt. Ltd. Ld.CIT(A) observed that entire transaction is nothing but arrangement wherein benefit is being bestowed upon director rather than assessee company deriving any benefit. provisions of section 40A(2) have been enacted with purpose of curbing such practices only. Hence, Ld.CIT(A) upheld disallowance made by AO. 17. Before us, ld.A.R argued that company has provided leased accommodation to Director. It is necessary in interest of company to provide leased accommodation to director. rent payable is comparable with market rent and it is much lower than comparable buildings in vicinity. Therefore, ld.A.R vehemently argued that Ld.CIT(A) has erred in sustaining addition made by AO. 18. On other hand, ld.D.R advanced argument that in company, no other employee was paid such rent by taking leased accommodation. Even otherwise, director would reside in same house, which was taken on lease. Since company is family run unit and directors are family members, payment was made in form of rent and rent paid is taxable perquisite in hands of Mr.Sriram Sivaram at lower rates. Therefore, ld.D.R argued that Ld.CIT(A) has rightly confirmed addition. :- 34 -: Madras Engineering Industries Pvt. Ltd. 19. We have heard both parties and perused material on record. Though assessee has argued that rent paid is reasonable comparing other residential premises assessee has not made out case for taking accommodation on lease from Director and leasing out to him. There is no other person, who has been paid rent in similar manner in company. Mr.Sriram Sivaram is whole time director and there are other directors but no such facility was extended to any of other directors. leased accommodation is taxable perquisite in hands of Mr.Sriram Sivaram, which is much lower in rate. Mr.Sriram Sivaram is Director of company and drawing salary. Section 40A(2) was brought into Act to curb incidence of tax evasion, curbing such practice of distributing profits without making payment of legitimate tax. Therefore, we agree with CIT(A) s order and entire transaction is nothing but arrangement wherein benefit is bestowed upon individual of family rather than company deriving any benefit. Therefore, AO has rightly disallowed expenditure as unreasonable and we upheld order of Ld.CIT(A) and dismiss assessees ground on this issue for all assessment years. :- 35 -: Madras Engineering Industries Pvt. Ltd. 20. In result, appeals of Revenue are partly allowed and all appeals of assessee are dismissed. Order pronounced on 21st September, 2016, at Chennai. Sd/- Sd/- (N.R.S. GANESAN) (D.S.SUNDER SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 21st September, 2016 K S Sundaram Copy to: 1. Appellant 3. CIT(A) 5. DR 2. Respondent 4. CIT 6. GF M/s.Madras Engineering Industries Pvt Ltd. v. Deputy Commissioner of Income-tax, Circle-4(1), Chennai