U Square Lifescience Pvt. Ltd., Ahmedabad V. The DCIT, Circle-4(1)(1), Ahmedabad

ITA 241/AHD/2019

AI Insights

The case involves two appeals by U-Square Lifescience P. Ltd. against orders passed by the CIT(A) concerning the assessment year 2010-11. The first appeal contested the disallowance of interest payments on loans from directors, which was partially allowed by the CIT(A), reducing the allowable interest rate from 18% to 15%. The second appeal challenged the disallowance of commission expenses claimed on sales to foreign agents, which was entirely disallowed due to insufficient evidence of the genuineness of the claims. The Tribunal found that the CIT(A) and AO had not adequately justified their decisions to disallow the expenses and interest payments, leading to the allowance of both appeals.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135552 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-11-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 17-02-2019
• Other Referred Cases: CIT vs NEPC India Ltd., CIT vs Forbes Tea Brokers
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROHIT ASASUDANI
• Keywords: Business income; Maximum Marginal Rate; Additional evidence; Fair market value; Onus to prove
• Section: 271(1)(c); 143(3)

Judgement Text

आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ ‘B’ अहमदाबाद।अहमदाबाद।अहमदाबाद।अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND MISS SUCHITRA RAGHUNATH KAMBLE, JUDICIAL MEMBER ITA No.1236/Ahd/2015 AND 241/Ahd/2019 Assessment Year :2010-11 U-Square Lifescience P. Ltd. 34, Sharman-7 Ramdevnagar Road Satellite Ahmedabad 380 015. PAN :AAACU 8986 A Vs. The DCIT, Cir.8 Ahmedabad. अपीलाथ / (Appellant) यथ /(Respondent) Assessee by : Shri M.K. Patel, Adocate Revenue by : Shri Rohit Asasudani, Sr.DR सुनवाई क तार ख/Date of Hearing : 06/11/2023 घोषणा क तार ख /Date of Pronouncement: 10 /11/2023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER These are two appeals by the assessee both against orders passed by the Ld.CIT(A) u/s 250(6) of the Act, one confirming additions made by the AO to the income of the assessee in order passed u/s 143(3) of the Act and the other confirming levy of penalty under section 271(1)(c) of the Act on the additions confirmed by the Ld.CIT(A). The ld.CIT(A)’s orders are dated 25.3.2015 and 4.1.2019 respectively and pertain to assessment year 2010-11. Both the appeals being connected were heard together and are being disposed of by this common order. ITA No.1236/Ahd/2015& 241/Ahd/2019 2 2. First we take up the assessee’s appeal in quantum proceedings in ITA No.1236/Ahd/2015. 3. Ground no.1 raised by the assessee reads as under: (1) That on facts and in law, the ld.CIT(A) has grievously erred in partly confirming he disallowance of interest payment u/s.40A(2)(b) of the Act, by allowing the interest @15%instead of the claimed amount @18%. 4. The grievance of the assessee pertains to the disallowance of interest paid on loans taken, under section 40A(2)(b) of the Act allowing interest at the rate of 15% instead of 18% charged and claimed by the assessee. 5. The facts, as emanate from orders of the Revenue authorities, are that the assessee had taken loan from one of its directors and paid interest at the rate of 18%. The AO held that since the assessee was not able to justify the payment of interest at the rate of 18%, he treated 12% as the reasonable rate of interest and disallowed the balance interest claimed by the assessee. The ld.CIT(A), however found 15% tobe reasonable rate of interest, and accordingly, disallowance made by the AO restricted to Rs.1.12,300/-. The finding of the ld.CIT(A) restricting the reasonable rate of interest to 15% as against 18% claimed by the assessee is at para-4.2.1, which reads as under: “4.2.1 The appellant has taken loan from one of its directors and paid interest at the rate of 18%. When AO asked the appellant to justify the higher rate of interest paid to the director, it was explained that as no bank was ready to provide finances to the appellant being new in business, loan was taken from the director at higher rate of interest. The same explanation has been given during appeal proceedings as well. This explanation is not fully justifiable. Firstly, now-a-days, getting Joan from bank is not at ail difficult. From the balance sheet of the company it is noticed that there were sufficient cash in the current account ITA No.1236/Ahd/2015& 241/Ahd/2019 3 (Rs.26,63,262/- as on 31/3/2009 and Rs.32,39,785/- as on 31/03/2010). Further, these are debtors of crores of rupees. This shows that there was no urgent need with the appellant to take loan from the director at a higher rate of interest. Further, the appellant has not been able to justify the payment of interest at 18% by giving comparable instances. At the same time, even the AO has also not given any comparable instances to justify the rate of interest taken by him at 12%. Looking to the above facts, in my considered view, interest payment at the rate of 15% can be held as reasonable and would meet the ends of justice. Accordingly AO is directed to allow the interest payment at 15% and the disallowance is worked out at 3%. This ground is partly allowed.” 6. The arguments of the ld.counsel for the assessee before us was that: • In terms of section 40A(2) of the Act the onus to prove that the interest claimed by the assessee was excessive was on the Revenue and neither the AO nor the ld.CIT(A) had established this fact before restricting the interest paid by the assessee from 18% to 15%; • that in any case the Directors had paid taxes on the interest income earned at the maximum marginal rate, and therefore, it was a tax neutral exercise warranting no disallowance in the case of the assessee. 7. The ld.DR, however, relied on the order of the ld.CIT(A), though he was unable to controvert the contention of the ld.counsel for the assessee that neither the AO nor the ld.CIT(A) had established in any way that the interest paid by the assessee to the directors at the rate of 18% was excessive. 8. We have heard both the parties. The issue before us relates to the disallowance of interest expenditure paid to the directors in terms of section 40A(2)(b) of the Act. As per the provisions of section 40A(2), the expenses ITA No.1236/Ahd/2015& 241/Ahd/2019 4 incurred in relation to parties which are closely related are liable to be disallowed which are found to be excessive in relation to their fair market value by the AO. The provisions of section 40A(2) are reproduced hereunder for clarity: 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any 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 opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or 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 : Provided that for an assessment year commencing on or before the 1st day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F. (b) The persons referred to in clause (a) are the following, namely :— (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, firm, association of persons or Hindu undivided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,— (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or ITA No.1236/Ahd/2015& 241/Ahd/2019 5 (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. 9. In the facts of the present case, as rightly pointed out by the ld.counsel for the assessee that there has been no basis given by the AO or by the ld.CIT(A) for holding that the rate of interest paid by the assessee to directors on loan taken from it at the rate of 18% was excessive. In fact, we note that even the ld.CIT(A) has noted neither the assessee has justified the rate of interest at the rate of 18% nor the AO has justified the rate of interest of 12% applied by him. Clearly, it shows that even the ld.CIT(A) found that there is no basis given by the AO for finding the rate of interest paid by the assessee has been excessive. The ld.CIT(A) has also, we find , not given any basis for finding the rate adopted by the assessee as excessive or the rate applied by him of 15% as reasonable. Without establishing with cogent basis as to what was the reasonable /fair market value of rate of interest on loan, the entire exercise of the Revenue authorities below, we hold, fails. Neither the AO nor the Ld.CIT(A) have demonstrated as to how the rate of interest applied by them was the fair rate , nor have they demonstrated as to how the rate applied by the assessee was unreasonable. 10. The Hon’ble Madras High Court in the case of CIT vs NEPC India Ltd. 303 ITR 271 (Mad) has held that there should be some material available for the assessing officer for invoking section 40A(2)(a) to initiate action to disallow excessive or unreasonable expenditure. That before taking any final decision by invoking ITA No.1236/Ahd/2015& 241/Ahd/2019 6 the power u/s 40A(2)(a) such decision should be based on reasons well founded which are judiciously acceptable. This proposition was reiterated in another decision of the Hon’ble Madras High Court in the case of CIT vs Forbes Tea Brokers (2009) 315 ITR 404(Mad). The conditions to be fulfilled for applying the provisions of section 40A(2) of the Act were clearly not satisfied in the present case. 11. In the light of the above the disallowance, therefore, made in the case of the assessee by treating 15% rate of interest as the reasonable rate of interest, as opposed to 18% claimed by the assessee is, we hold not tenable in law. The AO is directed to delete the disallowance made on interest paid to directors under section40A(2)(b) of the Act. Ground no.1 raised by the assessee is allowed. 12. Ground no.2 and 3, it was pointed out, related to the issue of commission paid on sale of goods disallowed to the tune of Rs.50,64,385/- for want of evidence. These grounds therefore are being dealt with by us together as under. 13. The grounds read as under: 2) That on facts and in law, the learned CIT(A) has grievously erred in confirming the disallowance of commission expenses of Rs. 50,64,385/-. 3) That on facts, in law, and on the evidence on record, the entire commission payment ought to have been allowed as a ITA No.1236/Ahd/2015& 241/Ahd/2019 7 necessary business expenditure and the entire disallowance ought to have been deleted as prayed for. 14. Facts relating to the issue being that an amount of Rs.50,64,385/- was claimed by the assessee as commission paid to foreign nationals on sales. During assessment proceedings, since the assessee was unable to substantiate the genuineness of the claim, the AO disallowed the entire expenditure incurred by the assessee. 15. During appellate proceedings the assessee submitted additional evidence by way of confirmation of the said parties, and other details, which were admitted by the ld.CIT(A), noting that the assessee had sought time from the AO to procure these confirmations from the non-resident parties, but the AO had passed the order even before the assessee could submit the same. The additional evidence submitted by the assessee were sent to the AO for his report, and on the report of the AO, comments of the assessee was sought for by the ld.CIT(A). After considering entire conspectus of the case, the ld.CIT(A) found that the assessee was unable to establish genuineness of its claim, since no evidence of any work done by the commission agents was filed by the assessee. Accordingly, he confirmed the order of the AO disallowing the entire commission expenses of Rs.50,64,385/-. The relevant finding of theld.CIT(A) at para 5.5 to 5.5.4 is as under: “5. I have considered the facts recorded in the assessment order, submissions of the appellant, remand report and rejoinder to the remand report. 5.5.1 Undoubtedly, appellant has submitted confirmation letters from various agents. I have examined these confirmation letters. There are total six foreign agents to whom commission has been claimed to be ITA No.1236/Ahd/2015& 241/Ahd/2019 8 paid. In all these confirmation letters only receipt of payment by the appellant has been acknowledged. On some confirmation letters even the purpose of payment is not mentioned, for example in the case of A.P.Tec (Thailand). Further, in some oases, signature is different like in the case of BETTY MADRID, LIMA, PERU, signature on letter dated 26/2/2013 is different from the signature on letter dated 16/03/2015. Further, as noted by the AO, appellant has not been able to give the details of agent wise turnover i.e. names of parties from whom business was procured by a particular agent. Normally, in case of foreign agents, the name of the agent is always mentioned on the invoice which is not the case with the appellant. No details of country wise sale of products through different agents have been given. 5.5.2 It is claimed by the appellant that agents were necessary to provide help to both the parties in terms of pricing, order, shipment and payments. If this was the case, there should have been continuous correspondence/communication between the appellant, agent and the foreign party. It if claimed that in most of the places the payment term was on DA term and therefore a lot of follow-up with the accounts department was required to release the payment and this role was played by the agents. Again, in such cases, there are voluminous correspondences through email in order to decide the price and also regarding the follow-up of payment. Appellant has claimed that the agents would get the information about the possibility of next order and would check the stock level of product Again such kind of work requires exchange of lots of emails so as to check the availability of stock, possibility of future order etc. It was claimed in the rejoinder, that AO has not given an opportunity during remand report proceedings. In view of natural Justice, by order sheet noting dated 4/03/15 the AR of the appellant was directed to submit the evidences to prove that actual services were rendered by the foreign agents. On 17/03/15 the AR again filed confirmation letters from two of the agents. No documents regarding correspondence or communication between appellant and the agent were filed. No copies of emails exchanged between the two parties have been submitted. In a nutshell, appellant could not provide a single document to prove that actual services were rendered by the agents benefiting the business of the appellant. This fact is also recorded by order sheet entry dated 24/03/15. 5.5.3 Just payment of some amount to a foreign party does not prove that such amount represented commission payment to an agent for the purpose of business activity of the appellant. The onus was on the appellant to prove that payments were made for actual services rendered by the agents and such services were necessary/beneficial for the business of the appellant. As clear from the above observations, appellant has not been able to discharge this onus. As rightly noted by the AO, mere payment of amount would not entitle the appellant to claim deduction of such expenditure unless it was proved to be paid for commercial considerations. It was for the appellant to establish that the ITA No.1236/Ahd/2015& 241/Ahd/2019 9 services were actually rendered and were necessary for the purpose of business. 5.5.4 In view of above, it is held that appellant could neither prove the genuineness of commission payment of Rs.50,64,385/- to foreign parties nor the necessity of making such payments for business purpose. Therefore, such expenditure cannot be treated as incurred for the purpose of business and cannot be allowed as deduction against business income. Accordingly, the disallowance made by the AO of Rs. 50,64,385/- is hereby confirmed. Ground number 4 is dismissed. 16. The arguments of the ld.counsel for the assessee before us was that the ld.CIT(A)’s finding of the fact was incorrect which had lead to an adverse conclusion drawn against the assessee that the assessee was unable to establish genuineness of its claim. Drawing our attention to para 5.5.1 of the ld.CIT(A)’s order, the ld.counsel for the assessee pointed out that the ld.CIT(A), though admitted to the fact that the assessee had filed confirmation from all six foreign agents to whom commission had been paid by the assessee, yet found no details of country-wise sale of produce through different agents had been given. The ld.counsel for the assessee contended that this finding of the Ld.CIT(A) was grossly incorrect as the assessee had in fact submitted the details of country-wise sale of products through different agents. He drew our attention in this regard to the submissions made before the ld.CIT(A) reproduced at para 5.3 of his order at page no.6. Drawing our attention to para 4.4, he pointed out that details of country-wise sales along with copy of debit notes, copy of invoices, and copy of swift code of payment by the bank was filed by the assessee to theld.CIT(A). He pointed out that even copy of the contract entered into with the agents was filed. He pointed out that the besides the above details and documents the assessee had also filed the explanationfor making the commission payment that it was in the business of ITA No.1236/Ahd/2015& 241/Ahd/2019 10 manufacturing pharmaceutical drugs; that its entire sale was through export outside the country and it had no presence outside the country; that the pharmaceutical drugs required approval of concerned authorities of the country where sold , for which purpose and alsofor the purpose of procuring contracts and facilitating business with the foreign parties, these foreign agents were appointed in the absence of any presence of the assessee outside the country,. The quantum of work generated by them was pointed out to the ld.CIT(A) and these parties had filed their confirmation mentioning the invoice against which the commissions had been paid. He pointed out that it had been explained to theld.CIT(A) that even shipping bills, which were made as per the RBI guidelines, showed the payment of commission. It was also pointed out that no such disallowance was made by the Revenue in scrutiny assessment for A.Y 2011-12 & 2014-15. Copies of the orders were placed before us. Our attention as drawn to the explanation of the assessee in this regard filed to the ld.CIT(A) in his order i.e. 5.4 as under: ITA No.1236/Ahd/2015& 241/Ahd/2019 11 17. The ld.CIT(A) contended that having explained the purpose for making the commission payment duly explaining the necessity for the same and evidencing it by way of furnishing copy of contract entered into with the agents, their confirmations ITA No.1236/Ahd/2015& 241/Ahd/2019 12 along with details of sales generated by them in respect of which the commission was paid, the assessee had duly discharged its onus of proving the genuineness of the commission paid. The ld.counsel for the assessee pointed out that the only reason for denying the claim of the assessee was that it could not produce any correspondence byway of email or otherwise demonstrating rendering of services by the commission agents. The ld.counsel for the assessee contended, in the light of voluminous evidences submitted by the assessee in which no infirmity has been pointed out by the Revenue ,denial of claim of the assessee for want of correspondences between the assessee and its agents was highly unjustified. He therefore pleaded that thedisallowance made of commission expenses to the tune of Rs.50,64,385/- be deleted. On the other hand, theld.DR heavily relied on the order of the ld.CIT(A). 18. We have heard both the parties. The issue relates to disallowance of commission expenses paid to foreign agents. Perusal of the order of theld.CIT(A) reveals that the same has been denied holding that the assessee has been unable to prove genuinenessof the same, and the basis for holding so being that the assessee was unable to establish the factum of rendering of any services by these commission agents, justifying the commission payment to them. The ld.AO and theld.CIT(A) arrived at this conclusion on the basis that the assessee was unable to file any detail,showing country-wise sales made and being unable to file documentary evidences of ITA No.1236/Ahd/2015& 241/Ahd/2019 13 exchange of communication between the assessee and its agents, proving the rendering of service by the agents to the assessee. 19. We have noted that it is facton record, which has not been controverted by the Revenue, that the assessee is into business of manufacturing of pharmaceutical drugs and it is a hundred percent export-unit making all sales outside the country. It is also not denied that it has no persons outside the country to manage its sales. The fact that the sale of pharmaceutical drugs to any other jurisdiction requires necessary approvals and compliances is also not denied. In thelight of these facts, it is not improbable but in fact is quite normal and necessary for any entity to engage services of certain persons to ensure uninterrupted sale of its products outside the country. Besides, we have noted that the assessee has filed all details of sales made to different countries. The assessee has also filed confirmation from all six agents who in some cases have mentioned invoices against which the commission has been paid. The assessee has also filed copies of shipping bills mentioning the fact of commission paid to the assessee. 20. In the light of the above facts, in which no infirmity worth its name has been pointed out by the ld.CIT(A), we fail to understand how any person of reasonable mind could arrive at a finding that the genuineness of the expenditure has not been established. It is not the case of the Revenue that the parties to whom the payment has been made and who have confirmed the same also, in any case denied thesaid facts in any inquiry conducted by the Revenue. Merely because, certain evidences indicating exchange between the assessee and its agents were ITA No.1236/Ahd/2015& 241/Ahd/2019 14 not filed by the assessee, it does not take away the weight of all other voluminous evidences filed by the assessee to establish genuineness of the transactions. Moreover, we find that in the preceding, i.e A.Y 2011-12 and succeeding year , A.Y 2014-15, identical commission paid by the assessee has been accepted by the Revenue in scrutiny assessment. In the light of the above, we hold that the assessee has established the genuinenessof the claim of commission expenses and denial of the same is uncalled for, and therefore, the AO is directed to allow the claim of commission expenditure to the tune of Rs.50,64,385/-. The ground nos.2 and 3 raised by the assessee are allowed. 21. In the result, the appeal of the assessee is allowed. 22. Since we have allowed the quantum appeal of the assessee, the penalty imposed by the Revenue authorities under section 271(1)(c) of the Act on the additions confirmed by the Ld.CIT(A) have no legs to stand on. The penalty confirmed by the Ld.CIT(A) is therefore deleted. The appeal of the assessee, in ITA No. 241/Ahd/19 thus, stands allowed. 23. In the result, both the appeals of the assessee are allowed. Order pronounced in the Court on 10th November, 2023 at Ahmedabad. Sd/- Sd/- (SUCHITRA R. KAMBLE) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad,dated 10/11/2023