Summary and Review of Case Laws Decided by Income Tax Appellate Tribunals
Tuesday, 10 January 2017 15:29

Restricting Commission Payments to 3% without Comparative Tabulation with Market Rate is Untenable - Ahmedabad Tribunal

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Disallowance of Commission Payment Disallowance of Commission Payment

Can Commission be Disallowed on Estimated Percentage Without Comparison - Held No 


CIT(A) had not been careful before disallowing the impugned payments wherein the assessee has placed on record all possible details in order to discharge its onus on the one hand whereas the commission payments have been held to be excessive without any such comparison on the other. 


Facts of the case - Commission Disallowed 1. The assessee and Revenue have instituted instant cross appeals for assessment year 2011-12 against the CIT(A)-9, Ahmedabad’s order dated 29.05.2015, in appeal no. CIT(A)-9/374/Wd.8(2)/14-15, deleting disallowance of commission payments of Rs.67,77,001/- as made by the Assessing Officer in assessment order dated 20.03.2014 with a direction to first verify the rate of the above commission payment and restrict the same to that @ 3%, in proceedings under section 143(3) of the Income Tax Act, 1961

2. The assessee’s sole substantive ground pleads that the CIT(A) has erred in directing the Assessing Officer to verify its above commission payments and hold the same as allowable @ 3%. The Revenue’s grievance on the other hand is that the CIT(A) ought not to have deleted the above commission payments disallowance as made by the Assessing Officer

3. The assessee/a company is engaged in pharmaceutical business. It made commission payments to 13 parties totaling to Rs.67,77,001/-

4. The Assessing Officer disallowed the same in assessment order after holding that although the assessee has filed all the relevant details alongwith confirmations, PAN particulars, TDS deductions, commission/liasoning agreements of the above payees who had also filed their responses in furtherance to scrutiny notices, there was no proof of the payees services rendered to the assessee

5. He further observed that mere payment and furnishing of the above particulars would not render the impugned commission payments as allowable in absence of actual proof of the marketing /liasoning services rendered

6. The assessee preferred appeal. The CIT(A) partly accepts its contentions as under -

I have gone through the assessment records and it is seen that though the appellant has filed requisite details but the A.O. has failed to take cognizance of the same and treated them unverified, which is not justified on the part of AO, as all the confirmations are part of assessment records. The AO needs to be more care full in this regard. However, after perusal of the documents .furnished by the appellant's A.R. I am of the opinion that appellant has not discharged its onus fully in respect of commission payment made to the above mentioned parties. In the agreement entered with the parties, the rate of commission payable is not specifically mentioned. The appellant has also not produced either in the assessment proceedings or in the appellate proceedings details of sales made through these parties showing name of parties, area, city, country, qty. rate of commission etc. for the purpose of authenticity of such commission payments. The appellant has also failed to produce any evidence in the shape of documents, such as letter or email written by these persons to whom commission have been paid, that too on such a high rate, to the concerned parties in connection of procuring orders on behalf of appellant.

The appellant has also failed to produce the bills of concerned parties confirming that these persons were agents of appellant and liable for payment of commission. Moreover, while going through the assessment records, it is observed that rate of commission payment is ranging from 2% to 24% which seems to be on extremely higher side. There is no uniformity and basis for paying such commission to these persons. Moreover, the commission payment is also made to closely related party, viz. Shri Vijay J. Shah who is director in the appellant company. I have also observed that that every year major portion of commission, which is more than 50% of total commission payment made by appellant, has been paid to Shri Vijay J Shah, who is the director of the appellant company and he has been earning salary and interest income from the appellant company apart from commission. Generally, in this trade 2% to 3% commission is normal, whereas it is seen that the appellant has paid exorbitantly high commission to different persons particularly to its director Shri Vijay J Shah without any valid reason

Accordingly following the appellate orders passed by ld.CIT(A) for A.Y. 2009-10 & 2010-11 in the case of appellant the addition made against commission payment of Rs.67,77,001/- is deleted with following remark. However in view of observation made by me, wrt to rate of commission paid by appellant company, the A.O. is directed to allow the claim of appellant after verifying the rate of commission payment and restricting the rate of commission payment @ 3%. Subject to this condition, this ground of appeal is partly allowed.”

7. Assessee moved to Tribunal which was decided in favour

Assessee's Arguments

Learned Authorized Representative first of all invites our attention to the fact that the very issue had arisen in the preceding two assessment orders as well wherein a co-ordinate bench of this tribunal in Revenue’s appeal ITA Nos. 1162 & 2145/Ahd/2013 decided on 02.03.2013 accepted assessee’s contentions to hold that such commission expenses are a routine practice in pharmaceutical business in order to boost the sales. He then states that neither the Assessing Officer nor the CIT(A) have given any cogent reason to adopt a different approach in the impugned assessment order.

Revenue's Arguments

Ld. Departmental Representative at this stage strongly support Assessing Officer’s action in order to restore the entire disallowance figure.


Judgement on CommissionWe make it clear that there is not dispute that the assessee has actually made the impugned commission payments after deducting TDS thereupon at the prescribed rates in furtherance to various agreements with its payees for marketing and other alike services. It has further placed on record their confirmations by way of contra accounts and debit notes. The same is nowhere doubted before both the lower authorities since the Assessing Officer is of the view that there is no evidence of the actual services rendered followed by CIT(A)’s opinion that there is not prescribed rate of the commission payments in agreement concerned and further that these payments ranging between 2% to 24% are on extremely higher side.

We further find that there is no distinction drawn between facts of the impugned assessment year vis-à-vis those in earlier years hereinabove. Coming to the CIT(A)’s observation terming the assessee’s commission payments to be excessive, we notice that there is no comparative tabulation with market rate of such payments; if any before arriving at the said conclusion. We accordingly observe that the ld. CIT(A) has erred in directing the Assessing Officer to restrict assessee’s commission payments @3% after observing that the said authority had not been careful before disallowing the impugned payments wherein the assessee has placed on record all possible details in order to discharge its onus on the one hand whereas the commission payments have been held to be excessive without any such comparison on the other. We thus accept assessee’s arguments supporting its sole substantive ground and to direct the Assessing Officer to allow its entire claim of commission payments amounting to Rs.67,77,001/-.

The Revenue’s contentions seeking to restore entire disallowance amount are accordingly rejected.

Cases Referred to

1. Assam Pesticides Vs. CIT [227 ITR 846], Gauhati HC

2. CIT Vs. Premier Breweries Ltd. [279 ITR 51 (Ker.)]

3. ITO Vs. Maddi Laxmaiah & Co. (P) Ltd. [31 ITJ 71 (Hyd)]

4. Swadeshi Cotton Mills Co. Ltd. reported at [63 ITR 57 (SC)]

5. Orissa Corporation [159 ITR 78 (SC)]

6. Bharat Bijli Ltd. [71 ITD 412 (Mum.)]

7. Rohini Builders [256 ITR 360 (Guj.)]

8. DCIT Vs. Tyco Valves & Control India (P) Ltd. [(2013) 81 DTR (Ahd) (Trib) 48]


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Read 2684 times Last modified on Monday, 06 February 2017 21:20

Amit is a Chartered Accountant and a part of Taxpundit's Support Team. He has experience in various industry sectors including manufacturing, power and utilities, financial services, alternative investments etc. He is a passionate blogger and keep writing articles on Income Tax for various publications.

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