Sumitomo Corporation v. Commissioner of Income-tax
[Citation -2017-LL-0825-2]

Citation 2017-LL-0825-2
Appellant Name Sumitomo Corporation
Respondent Name Commissioner of Income-tax
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 25/08/2017
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags commercial expediency • ad hoc disallowance • double taxation • sub-contractors • revised return • book entry
Bot Summary: In the Statement of Facts filed before the Commissioner of Income Tax CIT , the Assessee pointed out that the services provided by SCIPL included intermediating between ITA 283 of 2017 Page 3 of 7 Consultants/Engineers of the APGPCL Project local lawyers and accountants in India and the Assessee General Electric and the Assessee sub-contractors and the Assessee. The services provided by SCIPL included following up on the collection of payments from APGPCL. On the above SOF, a remand report was called from the AO by the CIT. However, the AO defended the disallowance stating that the method followed by the Assessee prima facie appeared to have been employed for evasion of tax. The CIT noted that the payments made to SCIPL were in line with the agreements and were for the business requirement of the Assessee. The Revenue then went in appeal before the ITAT. Relevant to the above issue, the only ground raised was that no part of the commission of ITA 283 of 2017 Page 4 of 7 Rs. 49,53,244/- paid by the Assessee to SCIPL was allowable as deduction. In the present case, both the AO and the ITAT appeared to have proceeded only on surmises and conjectures while holding that 50 of the commission paid by the Assessee to SCIPL should be disallowed. In the present case, the payment of commission by the Assessee to SCIPL pursuant to the contract was never in doubt. Accordingly Question is answered in the negative i.e. in favour of the Assessee and against the Revenue by holding that the ITAT was not justified in reversing the order of the CIT as regards the disallowance of Rs. 49,53,244/- made by the AO in respect of the commission paid to SCIPL for the services rendered.


IN HIGH COURT OF DELHI AT NEW DELHI 3 ITA No. 283 of 2017 SUMITOMO CORPORATION ...Appellant Through: Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Advocate. versus COMMISSIONER OF INCOME TAX ...Respondent Through: Mr. Sanjay Kumar, Junior standing Counsel. CORAM: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH ORDER % 25.08.2017 1.This is appeal by Assessee under Section 260A(1) of Income Tax Act, 1961 ( Act ) against order dated 30th November 2016 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No. 2661/Del/2003 for Assessment Year ( AY ) 1998-99. 2. While admitting this appeal, by order dated 8th May 2017, this Court framed following questions of law for consideration: (i) Whether ITAT was justified in remanding matter to Assessing Officer ( AO ) for verification of tax already paid by M/s. G.E. International, US for amount received from Assessee despite categorical finding by Commissioner of Income Tax (Appeals) [ CIT(A) ] that while considering allowability of claim of deduction of Rs. 9.10 crores on which there was no obligation by Assessee ITA 283 of 2017 Page 1 of 7 applicable as per provisions of Article 26 (3) of India Japan Double Taxation Avoidance Agreement (DTAA)? (ii) Whether ITAT was justified in reversing order of CIT (A) as regards disallowance of Rs. 49,53,244 made by AO in respect of expenditure of Rs. 99,06,488 on commission paid to subsidiary for services rendered? 3. As far as Question (i) above is concerned, by same order dated 8th May 2017, this Court answered said question in negative, i.e. in favour of Assessee and against Revenue and set aside impugned order of ITAT on that aspect. appeal was set down for hearing today on Question (ii) above. 4. This Court has heard submissions of Mr. C.S. Aggarwal, learned Senior counsel appearing for Assessee, and Mr. Sanjay Kumar, learned Standing counsel for Revenue. 5. facts in brief relevant to issue are that Appellant-Assessee is company incorporated in Japan. It is tax resident of Japan. On 30th November 1998, Assessee filed its return of income for AY 1998-99, declaring income of Rs. 11,69,57,478/-. Subsequently, Assessee filed its revised return of income on 30th December 1999 whereby declared income was reduced to Rs. 6,25,46,805/-. 6. return was picked up for scrutiny. By assessment order dated 20th February 2000, AO disallowed Rs. 49,53,244/- out of claim of Rs. 99,06,488/- being expenditure incurred on account of commission ITA 283 of 2017 Page 2 of 7 paid to Sumitomo Corporation India Private Limited ( SCIPL ). Before AO, Assessee furnished details of services provided by SCIPL which was incorporated in January, 1997 and became operational in April, 1997. Copies of two service contracts entered into by Assessee with SCIPL were produced. One was dated 1st April 1997 and contemplated payment of commission at 1.3% of work done. commission was payable after completion of services specified therein. second contract was of same date. It specified that commission will be payable at 0.9% for local procurement contract from 1st April 1997 onwards. This was payable pro-rata after each invoice. AO, however, took view that since Assessee had already entered into agreements with local sub contractors, in relation to execution of Andhra Pradesh Gas Power Corporation Ltd. ( APGPCL Project ) there was apparently no business necessity for intermediately [sic 'intermediating'] at later stage of this project. It was held that Assessee had failed to prove that payment to group entity was wholly and exclusively for purpose of assessee s business. AO further noted that portion of income has been passed on to group concern which was not liable to pay any tax during year. Considering said facts, portion of claim is not considered wholly and exclusively for purposes of business. Accordingly, 50% of claimed deduction in sum of Rs. 49,53,244/- was disallowed and added to income of Assessee. 7. In Statement of Facts ( SOF ) filed before Commissioner of Income Tax (Appeals) [ CIT (A) ], Assessee pointed out that services provided by SCIPL included intermediating between ITA 283 of 2017 Page 3 of 7 (i) Consultants/Engineers of APGPCL Project (ii) local lawyers and accountants in India and Assessee (iii) General Electric and Assessee (iv) sub-contractors and Assessee. 8. services provided by SCIPL included following up on collection of payments from APGPCL. On above SOF, remand report was called from AO by CIT (A). However, AO defended disallowance stating that method followed by Assessee prima facie appeared to have been employed for evasion of tax. 9. CIT (A), by order dated 27th January 2003, allowed Assessee s appeal. CIT (A) noted that payments made to SCIPL were in line with agreements and were for business requirement of Assessee. It was noted that wisdom of any payment by company cannot be challenged by AO and cannot form basis of ad hoc disallowance of expense claimed by company, unless evidence was brought on record to show that expenses were either only book entry and actual payments were not made, or that there was collusive arrangement with intention of evading tax." On facts, CIT (A) noted that "Except for doubting this to be so, no case has been made out by AO to establish his suspicion. Consequently, disallowance of Rs. 49,53,244/- made by AO was ordered to be deleted. 10. Revenue then went in appeal before ITAT. Relevant to above issue, only ground raised was that no part of commission of ITA 283 of 2017 Page 4 of 7 Rs. 49,53,244/- paid by Assessee to SCIPL was allowable as deduction. Assessee pointed out that AO disallowed expenditure wholly on conjectures and surmises. 11. In impugned order, ITAT noted as under: 80. We have perused contentions raised in light of records placed before us. It is observed that assessing officer has disallowed portion of expenditure paid by Assessee to Sumitomo Corporation India Private Limited by way of commission. agreement relied upon by Ld. CIT (A) has been entered into between Assessee and another company, for purposes of recruitment. It is further it is observed that in most of projects Assessee has been directly in touch with companies and there is no mention of involvement by Sumitomo Corporation India private limited. All agreements entered into by Assessee with various companies for implementation of projects are direct without there being any role played by Sumitomo Corporation India Private Limited. We are therefore in agreement with disallowance made by assessing officer and uphold same. 12. Court finds that ITAT has not bothered to discuss actual facts of case relevant to issues at hand. observation that all agreements entered into by Assessee with various companies for implementation of projects were "direct without there being any role played" by SCIPL was factually incorrect and in teeth of two contracts entered into by Assessee with SCIPL, details of which formed part of record. It is not at all clear on what basis AO disallowed 50% of expenditure. If AO was of view that expenditure incurred was not for business purposes of Assessee, he should have disallowed it in ITA 283 of 2017 Page 5 of 7 toto. However, there had to be some objective basis for deciding that expenditure incurred was not wholly and exclusively for purposes of business. As explained by Supreme Court in CIT v. Walchand and Co. P. Ltd. [1967] 65 ITR 381 (SC): ..In applying test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be adjudged from point of view of businessman and not of revenue. 13. In present case, both AO and ITAT appeared to have proceeded only on surmises and conjectures while holding that 50% of commission paid by Assessee to SCIPL should be disallowed. Again, in CIT v. Hero Cycles (P) Ltd. [2015] 379 ITR 347 (SC), it was cautioned that: ...once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of of board of directors and assume role to decide how much is reasonably expenditure having regard to circumstances of case. 14. In present case, payment of commission by Assessee to SCIPL pursuant to contract was never in doubt. There was no basis on which AO could have simply decided that said expenditure was unnecessary or unreasonable. Merely because two contracts were of same date did not mean that they were not wholly and exclusively for purposes of business of Assessee. While commission under one contract was payable only upon rendering of services in their entirety, ITA 283 of 2017 Page 6 of 7 commission in other, which was at different rate, was for local purchases and payable as and when invoice was raised. It was not for Revenue to decide whether such expense was in fact necessary. 15. Accordingly Question (ii) is answered in negative i.e. in favour of Assessee and against Revenue by holding that ITAT was not justified in reversing order of CIT (A) as regards disallowance of Rs. 49,53,244/- made by AO in respect of commission paid to SCIPL for services rendered. Resultantly, order of CIT(A) on this issue is restored, allowing deduction of entire expenditure of Rs. 99,06,488/- on account of commission paid by Assessee to SCIPL. 16. appeal is accordingly allowed in above terms but, in circumstances, with no orders as to costs. S. MURALIDHAR, J. PRATHIBA M. SINGH, J. AUGUST 25, 2017 rd ITA 283 of 2017 Page 7 of 7 Sumitomo Corporation v. Commissioner of Income-tax
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