IN INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA.No.1707/Ahd/2012 Asstt. Year: 2009-2010 ACIT, Navsari Circle M/s.Desai Fruits & Navsari. Vs Vegitales Pvt.Ltd. At & Post Amadpore Ta. Dist. Navsari. PAN : AABCD 0223 G (Appellant) (Respondent) Revenue by : Shri James Kurian, Sr.DR Assessee by : Shri Bhavin Shah, AR Date of Hearing : 26/09/2016 Date of Pronouncement: 18/10/2016 ORDER PER RAJPAL YADAV, JUDICIAL MEMBER Revenue is in appeal before Tribunal against order of ld.CIT(A), Valsad dated 23.5.2012 passed for Asstt.Year 2009-10. 2. Ground nos.1 and 2 are inter-connected with each other. In these grounds, grievance of Revenue is that ld.CIT(A) has erred in deleting addition of Rs.35,71,622/-. 3. Brief facts of case are that assessee at relevant time was engaged in business of running cold chain project, mainly, trading and processing of fresh fruits and vegetables in cold storage unit. It has filed its return of income on 13.9.2009 electronically declaring total income at ITA No.1707/Ahd/2012 2 Rs.NIL. On scrutiny of accounts, it revealed to AO that assessee has claimed deduction of Rs.35,71,622/- on account of commission expenses paid to two five foreign agents. ld.AO has confronted assessee to show requisite details as to how this commission payment can be allowed. In response to query of AO, assessee has filed letter through its authorized representative on 16.12.20112. explanation of assessee has been reproduced by AO on page nos.2 to 5 of assessment order. Relevant part of explanation reads as under: [5.1] Shri 3. M. Naik, C.A., A.R. of assessee vide letter dtd'. 16.12.2011 furnished detailed explanation which is reproduced hereunder: S. No. Name of foreign agent Amount of commission 1 Contract farming India AG 2,366,785/- 2 Carl Trading Ltd 56,329/- 3. MAP Hypermarket LLC 348508/- Carrefour 4 Fresh Fruit company 100000/- 5 Peter Van Ouwerkerk 7,00,000/- "Your assessee is exporter of bulk drugs and fine chemicals which are sold/ exported in foreign countries. During previous year your assessee engaged several commission agents, who procure business for assessee by booking orders for assessee. Total amount of commission paid to agents aggregates to Rs. 35,71,622/- remittance of which has been sent to them during year. In other words, agents have brought business to assessee and on which commission is paid to them. These orders were sent directly by foreign purchasers remitted to assessee in India and even payments for export were received by /Assessee in foreign currency directly from foreign purchasers. For procuring export Orders assessee has used ITA No.1707/Ahd/2012 3 services of Overseas Commission Agents who provided confirmed export orders and they rendered their services abroad. Commission Agents, rendered services outside India and which has been utilised also outside India. All these commission agents do not have any place or permanent establishment in India. They while working abroad have procured orders. commission is paid to them in proportion to quantity of material sold through them and as percentage of sales in foreign currency. While making payments of commission to them no TDS liability arises as it is not required to be deducted as services are rendered abroad. Since overseas Agents earned commission income not on account of business .connection and in absence of permanent establishment (PE) in India, these payments cannot be subject to tax in India as per relevant DTAA. Since these agents do not carry on business through PE situated in India commission payment is not taxable in India as no operation being carried out in India no income has accrued or arose in India. 4. After making analysis of explanation, ld.AO has disallowed claim of assessee by observing as under: [5.1] explanation offered by assessee is carefully considered but same is not acceptable. assessee did not produce any evidence with respect to services rendered by foreign agents to whom assessee claimed to have engaged to procure business for assessee company by booking orders for assessee company. assessee furnished list of foreign agents, commission paid to him and given sales invoice number for which commission paid. These details are not sufficient to justify assessee's claim. There is no registered written agreement between assessee company and foreign agent. Even if it is presumed that there is agreement then also onus rests on assessee to prove beyond doubt that services have been rendered by foreign agents to make him eligible for commission. assessee company does not have any procurement order or indent placed by foreign agents for supply of good to concerned foreign companies. ITA No.1707/Ahd/2012 4 In case of Lachminarayan Modan Lal v. CIT (1972) 86 ITR 439 9 (SC), Hon'ble Apex Court held that even if there is agreement between assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, that does not bind Income Tax Officer to hold that payment was made exclusively and wholly for purposes of Assessee's business. Supreme Court observed as follows: ".... Although there might be such agreement in existence and payments might have been made, it is still open to Income-tax Officer to considered relevant factors and determine for himself whether commission paid to have been paid to selling agents or any part thereof is properly deductible under section 37 of Act." In case of Scheneider Electric India Ltd. V. CIT 304 ITR 360, Hon'ble Delhi High Court relying on decision of Apex Court as discussed above held that onus is on assessee to prove that services were rendered by commission agents and amount of commission paid was exclusively and wholly for purpose of assessee's business. In present case, assessee company failed to bring necessary material on record as to how foreign agents corresponded with assessee company regarding requirement of material and other things for foreign buyer and accordingly placed procurement order on Assessee Company on behalf of foreign company. In view of above facts and circumstances of case, payment of Rs. 35,71,622/- on account of export commission is disallowed as .non-business expenditure. While disallowing this claim, principal of res judicata is duly considered, which do not apply to Income tax Proceedings. penalty proceeding u/s. 271(l)(c) of the'l.T. Act is initiated separately for furnishing inaccurate particulars of income. 5. On appeal, ld.CIT(A) has deleted addition: DECISION :- I have considered facts of case, material on record as well as contentions of appellant as well as observation of AO in assessment order. There is no plausible reason to even doubt genuineness of commission paid to five non-resident agents, as appellant has filed sufficient documentary evidences in support of claim and expenditure on this front is inevitable and has been incurred year after year. Since commission ITA No.1707/Ahd/2012 5 has been paid to those five foreign agents through banking channel, their identity is proved and confirmations have been obtained from them, I am inclined to accept that said expense is genuine business expenditure. Secondly I find that nothing has been brought on record by revenue to show that commission of Rs.35,71,622/-paid to five different non-resident agents had any operation carried out in India as per provisions of Section 9(i)(i) of Income tax Act, 1961. On identical issue, jurisdictional ITAT Ahmedabad, in case of AIA Engineering Ltd. V/s. Addl.CIT (ITA No.580/Ahd/2011) has held that income of non-resident is deemed to accrue or arise in India only if any part of income is reasonably attributable to operation carried out by non-resident in India and if no operation is carried out in India by non-resident, there would be no income deemed to accrue or arise in India. Under this factual and legal position, I am of considered opinion that no tax is deductible from payment made to non-resident agents and hence, disallowance as envisaged in provisions of Section 40(a)(ia) are not applicable with regard to captioned payment to five non-resident agents referred to in assessment order. Since appellant has filed sufficient material including confirmation that foreign agents are non-resident and they have neither carried out any operation in India nor have rendered any services in India, no tax is deductible from payment made to them and hence, provisions of Section 195 r.w.s. 40(a)(ia) are not applicable. I, therefore, delete this addition of Rs.35,71,622/- made by AO. appellant's contention in Grounds No. 1 and 2 are Allowed. 6. With assistance of ld.representaties, we have gone through record carefully. perusal of assessment order would indicate that ld.AO has assigned two reasons for disallowing claim of assessee. In first fold of reasoning, he observed that assessee failed to submit any evidence exhibiting services rendered by alleged foreign agents. In second fold of reasoning, ld.AO has observed that assessee failed to deduct TDS while making payment to foreign agent. Before ld.CIT(A), assessee has demonstrated as to how alleged commission agent has no business establishment in India and how remittances given to them are not taxable in India. ld.CIT(A) has accepted contentions of assessee on both folds. It is pertinent to observe that for allowance of any ITA No.1707/Ahd/2012 6 expenditure under section 37(1), following conditions are to be satisfied i.e. (i) there must be expenditure, (b) such expenditure must not be of nature described in sections 30 to 36, (c) expenditure must not be in nature of capital expenditure or personal expenses of assessee, and (d) expenditure must have been laid down or expended wholly and exclusively for purpose of business or profession. expression wholly refers to quantum of expenditure, while expression exclusively refers to motive, object and purpose of expenditure. In present case, we find that assessee has quantified expenditure, hence, to some extent fulfill expression wholly , but it fail to demonstrate how expenditure was incurred for purpose of business. This limb could be fulfilled, if assessee had produced evidence of services rendered by alleged commission agent. ld.AO has recorded specific finding that except producing certain invoices, assessee failed to produce any other evidence. payment through banking channel or raising of invoices are not only requirement. assessee should have produced some correspondence with agents or how agents have helped assessee to procure orders. There is no such material in paper book. We have specifically perused page nos.9 to 29 of paper book, wherein alleged supporting documents in case of export commission has been placed. These documents are only invoices ledger or details of payment. At page no.15 assessee has filed copy of service agreement between Contract Farming India AG and Desai fruits and Vegetables P.Ltd. assessee has paid commission of Rs.23,66,785/- to this concern i.e. Contract Farming India AG, but this agreement does not contain any date, complete name of signatory, any stamp. It was not registered. It appears to be prepared in format style. Therefore, we are of view that ld.CIT(A) has erred in deleting disallowance made by AO. We allow ground no.1 raised by Revenue. ITA No.1707/Ahd/2012 7 7. As far as ground no.2 is concerned, it is second fold of reasoning given by AO for making disallowance. Since, we have confirmed disallowance on basic premises that evidences demonstrating rendering of services was not submitted by assessee, therefore, we do not deem it necessary to consider other fold of reasoning. Addition of Rs.35,71,622/- is confirmed. 8. In next ground of appeal, grievance of Revenue is that ld.CIT(A) has erred in deleting addition of Rs.13,38,915/-. While making addition, ld.AO has recorded following finding: [7] From Schedule 12 of P & L accounts of assessee it is seen that assessee claimed to have incurred commission expenses of Rs70,42,232/-, but assessee furnished details of commission expenses of Rs.57,03,317/- only. During course of assessment assessee was asked to produce details remaining expenses but assessee did not produced details of Rs. 13,38,915/- only. As die assessee failed to furnish remaining details, so addition of Rs. 13,38,915/- is made to total income in absence of evidence in support of me claim made for expenses. . 9. On appeal, ld.CIT(A) has deleted this addition. 10. With assistance of ld.representatives, we have gone through record carefully. We find that assessee has incurred commission expenses of Rs.70,42,232/-. It was paid to Indian agents. According to AO, assessee could not file details qua four agents viz. P.D. Khedekar, Shaikh Moinuddin, Kumar Baban Borate and R.K. Fruit Supplier. ld.CIT(A) has recorded finding of fact that assessee has supplied their complete details, their PANs. It has also deducted tax under section194H. Accordingly, ld.CIT(A) has deleted disallowance on commission expenses paid to these four concerns. ITA No.1707/Ahd/2012 8 11. On due consideration of facts and circumstances, we are of view that ld.AO has not doubted rendering of services by these concerns. He simply observed that assessee failed to submit details. That observation was found to be incorrect by ld.CIT(A). reason assigned by ld.CIT(A) is that books of accounts of assessee are audited. Details of agents were very much available, and assessee has provided PANs. of these four agents. In view of above findings of ld.CIT(A), we do not see any reasons to interfere in it. Accordingly, ground no.3 raised by Revenue is rejected. 12. Ground nos.4 and 5 are general in nature. They do not call for recording of any finding, hence, they are rejected. 13. In result, appeal of Revenue is partly allowed. Order pronounced in Court on 18th October, 2016 at Ahmedabad. Sd/- Sd/- (MANISH BORAD) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 18/10/2016 ACIT, Navsari Circle, Navsari v. M/s.Desai Fruits & Vegitales Pvt.Ltd